KEANE J. For many years Southern Australia Perpetual Forests Limited ("the Forest Company") carried on business developing plantations of pine trees. To finance these operations, the Forest Company raised funds from investors ("Covenantholders") through the issue of interests ("Covenants") offered by prospectus.
Sapfor Timber Mills Limited ("the Milling Company"), a company related to the Forest Company, provided tree felling and milling services to the Forest Company, and sold the timber products from the Forest Company's plantations.
Australian Executor Trustees (SA) Limited ("AET") is the trustee of the Southern Australia Perpetual Forests Trust ("the SAPF Trust"), which was established by a trust deed made between the Forest Company and what is now AET on 6 March 1964 ("the Trust Deed"). AET represents the Covenantholders in the proceedings in this Court.
On the same day as the SAPF Trust was established, an agreement was made between the Forest Company, the Milling Company and AET ("the Tripartite Agreement") pursuant to which it was agreed that the Milling Company would pay the proceeds of its sale of timber products, net of specified deductions, to the Forest Company. The Forest Company agreed to pay those proceeds, net of further deductions, to AET, which would then account to the Covenantholders.
Each Covenantholder was entitled to an aliquot share in the net proceeds of the sale of the products of timber grown from trees planted in a specified year on an identified area of land. For some, but not all, planting years, a Covenantholder also became entitled to a payment in respect of an aliquot share in any appreciation in the value of the land on which the trees were planted during the term of the Covenant. The amount of the appreciation in value was calculated at the date of the clear felling of the trees, or termination of the Covenant.
In 2008, the Forest Company and the Milling Company were taken over by the fifth appellant, Gunns Limited. Subsequently, each of the Forest Company and the Milling Company encumbered its assets (by way of fixed and floating charge) to lenders to the companies of the Gunns Group to secure the repayment of moneys lent to the Gunns Group. No question has been raised in these proceedings as to the propriety of these loans or the granting of security to the lenders.
On 15 March 2012, the Forest Company, the Milling Company, AET and others entered into a Tree Sale Agreement for the sale of trees owned by the Forest Company ("the Tree Sale Agreement"). Some of these trees were from planting years in the early 1980s in respect of which Covenants had been issued by the Forest Company. The price payable under the Tree Sale Agreement to the Milling Company amounted to $33,999,998 ("the Tree Sale Proceeds"). On the same day, the Forest Company entered into contracts for the sale of identified land to The Trust Company (Australia) Limited ("the Land Sale Contracts") for a total consideration payable to the Forest Company of $53,356,000 ("the Land Sale Proceeds"). Thereafter, competing claims arose to the Tree Sale Proceeds and the Land Sale Proceeds (together, "the Relevant Proceeds").
On 25 September 2012, the lenders to the Gunns Group appointed the first and second appellants as the receivers and managers of the Forest Company and the Milling Company.
These proceedings concern competing claims to the Relevant Proceeds. AET instituted proceedings in the Supreme Court of Victoria claiming that the Forest Company and the Milling Company hold the Relevant Proceeds on trust for Covenantholders. The first and second appellants claimed the Relevant Proceeds on behalf of the Forest Company and the Milling Company.
The proceedings did not involve any suggestion that the making and completion of the Tree Sale Agreement and the Land Sale Contracts involved a breach by the Forest Company or the Milling Company of any provision of the Trust Deed or the Tripartite Agreement. It should also be noted that the litigation did not involve any contest of priority between the interests asserted by AET and the rights of secured creditors under their securities. It may also be noted that it was common ground between the parties that at the times the Covenantholders' moneys were subscribed, the trees to which the subscription related had been planted on land already acquired by the Forest Company.
AET's claim was upheld in the Supreme Court of Victoria. The primary judge declared that AET is beneficially entitled to the Tree Sale Proceeds, less the expenses payable to the Forest Company and the Milling Company in accordance with the Trust Deed and the Tripartite Agreement. The primary judge also declared that AET is beneficially entitled to the Land Sale Proceeds referable to the value of the land subject to the 1982 planting year, the 1983 planting year and the Supplementary Covenants (as defined in cl 30 of the Trust Deed) calculated in accordance with the Trust Deed.
The decision of the primary judge
The primary judge (Sifris J) held that the language used in the Trust Deed, the Tripartite Agreement and the Covenant:
"when assessed in the context and circumstances of the transaction, sufficiently indicates an intention to provide, at all stages, protection to the interests of the Covenantholders beyond a mere contractual obligation to account, despite the fact that the funds were not required to be placed in a separate account. The presumed intention of the parties was that the funds would not form part of the assets of either the Forest Company or the Milling Company. Rather, those companies were entrusted with looking after the funds of Covenantholders."
His Honour's conclusion was that, from the moment a Covenantholder's subscription money was received by the Forest Company, it was held beneficially for the Covenantholder, both by the Forest Company and by the Milling Company: "the entire process was to be individually and specifically recorded and accounted for" and so the absence of a separate fund was not material.
The decision of the Court of Appeal
The Court of Appeal, by majority (Maxwell P and Osborn JA), granted leave to appeal, but dismissed the appeal. While it is not entirely clear, it would seem that the majority in the Court of Appeal accepted the primary judge's all‑encompassing view of the subject matter of the trust.
Robson AJA, in dissent, held that the Forest Company and the Milling Company did not hold the Relevant Proceeds as trustees for the Covenantholders.
The majority in the Court of Appeal considered that, in the circumstances of the present case, considerations of "commercial necessity" warranted the inference that the objective intention of the parties was that the Covenantholders' investments "would be safe". Their Honours said that:
"it was a matter of commercial necessity that the investments made by covenantholders not be at risk by reason of extraneous activities of the operating companies. Had there been any suggestion that such a risk existed, prospective investors would have been much less likely to invest."
The majority in the Court of Appeal attributed particular significance to the language of the prospectus, which emphasised that the investment in the scheme was a secure one. Their Honours noted that a prospective investor was "invited to acquire 'an interest … in a pine plantation'." Their Honours also noted that "the language was simple and unambiguous, representing that an investor who purchased a covenant would acquire a beneficial interest in land."
No party suggested that there was any significant inconsistency between the terms of the prospectus and the operative provisions which established the Covenantholders' interests. It is to the latter that one must look in order to ascertain the objective expression of the parties' intentions, and, in particular, whether the security of the Covenantholders' investments was assured by contractual promises or the creation of proprietary rights. While the prospectus may indicate "the relevant circumstances attending the relationship between" the parties, the provisions which gave effect to the intentions of the parties as the "outward manifestation" of their promises and expectations in respect of the scheme are to be found in the Trust Deed, the Covenant, which expressly adopted the terms of the Trust Deed, and the Tripartite Agreement.
Referring to the provisions of the Trust Deed and the Tripartite Agreement, the majority in the Court of Appeal held that these instruments created "trust protection" for Covenantholders in respect of their interest in the timber "until the investment returns were paid out in full."
In relation to the land on which the trees were grown, the majority said:
"In substance, if not in form, these provisions imposed trust obligations on the Forest Company with respect to its freehold and leasehold interests in the land, obligations expressly imposed for the benefit of covenantholders."
The appeal to this Court
The appellants were granted special leave to appeal to this Court by Hayne and Crennan JJ on 15 August 2014.
In this Court, AET did not seek to support the conclusion that the trusts for which it contended were required as a matter of "commercial necessity". Nevertheless, AET did seek to support the conclusion of the Court of Appeal on the basis that the operative provisions of the relevant documents made manifest an intention to protect the Covenantholders' investments by keeping them separate from the general business of the Forest Company and the Milling Company. This protective intention was said to warrant the conclusion that the Covenantholders' entitlements under the relevant documents took effect, not merely as rights enforceable in contract, but as proprietary entitlements held for their benefit in trust by the Forest Company and the Milling Company.
The primary judge and, it would seem, the majority in the Court of Appeal discerned in the relevant documents an intention that Covenantholders' subscriptions would give rise "at all stages" to proprietary entitlements to be held by the Forest Company and the Milling Company on trust for the Covenantholders. In this Court, AET supported a more modest view to the effect that it was only from the moment when the net proceeds of timber sales for the relevant year of planting were held by the Milling Company that a trust fixed upon those proceeds, and then it operated subject to the deductions authorised by the relevant documents. It is difficult to see how that more modest claim could support AET's claim to the Land Sale Proceeds. With that difficulty in mind, perhaps, AET did not abandon the more ambitious claim that beneficial interests in the trees and land were held on trust at all times after the Covenantholders paid their subscriptions.
For the reasons which follow, the appeal should be allowed. Close consideration of the text of the relevant documents demonstrates that the conclusions of the primary judge and the majority in the Court of Appeal cannot be sustained. It is significant that the relevant documents, pursuant to which the Covenantholders made their investments, made no express provision for the trust relationships for which AET contends. The absence of such provision gains added significance from the circumstance that the Trust Deed did make express provision for certain funds to be held on trust. In addition, the relevant documents contained provisions predicated on an understanding that the contributions of the Covenantholders would not be segregated from the general funds of the Forest Company and the Milling Company but would be used in their businesses. The operation of the relevant documents may be summarised by reference to the conclusion of Kitto J in Clowes v Federal Commissioner of Taxation in relation to similar arrangements:
"Upon payment to the company, the lot‑holders' money was gone, and it was not repayable in any circumstances. … The essence of the matter simply was that the company bound itself to follow, over an indefinite period of years, a course of action which it expected would yield substantial net proceeds, and, in consideration of an immediate payment by the [lot-holder], it promised to pay him a proportion of those net proceeds if and when they should come in."
This understanding of the operation of the relevant documents is consistent with the statutory framework which regulated the investment. To the extent that Covenantholders were exposed to the risk of the failure of the Forest Company and the Milling Company, that was a risk which the regulatory framework sought to address by measures which did not require that moneys invested by members of the public should be held and preserved separately from the business of the Forest Company.
The conclusion of the majority in the Court of Appeal was based on the commercial consideration that Covenantholders' interests would be better protected if the obligations of the Forest Company and the Milling Company were held to give rise to obligations in trust rather than contract. Considerations of commercial necessity may afford assistance in discerning the objective intentions of the parties where the language of their written agreements is not explicit. Such considerations afford little assistance in cases where the language of the parties is explicit. The present is such a case.
But even if regard were to be had to considerations of "commercial necessity", those considerations would not support the conclusion of the primary judge and the majority in the Court of Appeal. While the creation of an all‑embracing trust relationship might have been better calculated to preserve the Covenantholders' investments, it might also have exposed them to personal liability to external creditors for the debts incurred by the Forest Company and the Milling Company as trustees of what, on the Court of Appeal's view, is a trading trust. Even if it were legitimate to construe the relevant documents to give effect to the supposed commercial preferences of Covenantholders, that speculation would not support the view of the majority in the Court of Appeal as to the "substance" of the provisions of the relevant documents.
The terms of the Covenantholders' investment
The parties' arguments in this Court focused closely upon the terms of the Trust Deed, the Tripartite Agreement, and the Covenant issued pursuant to the 1984 Prospectus. In order to appreciate the strength of those arguments, it is necessary to consider the terms of the relevant documents at length and in detail. This course is also necessary to avoid the misunderstandings which can occur when a word or a phrase is isolated from its context.
In order to put the provisions made by the relevant documents in context, it is desirable to refer first to the statutory framework within which they had their genesis.
The statutory framework
Schemes for the management of collective investments such as those undertaken by the Covenantholders have, since the Managed Investments Act 1998 (Cth), been operated by a single licensed "responsible entity". Prior to that time, the States regulated such schemes by legislation which operated through the mechanism of an "approved deed", which was required to contain a number of statutory covenants. These statutory covenants were intended to provide minimum standards of accountability to investors. The legislation also required the management company, as the entity issuing the interests to the public, to make disclosure of information pertaining to the scheme by a prospectus.
The covenants required by the legislation established, and distinguished between, the roles of the manager of the investment scheme (an entrepreneurial company which issued interests to investors) and a trustee (whose role was to protect investors). Consistently with the entrepreneurial role of the manager of an investment scheme, the management company was not required by the legislation to assume the self‑denying obligations of a trustee in that the legislation contemplated that it would carry on business in pursuit of its own profit.
At the date of the Trust Deed and the Tripartite Agreement in 1964, the governing legislation was the Companies Act 1962 (SA) ("the Companies Act"). Although the Relevant Proceeds related to trees and land relevant to Covenants for a number of planting years, the parties were content to treat the 1984 Prospectus and Covenant as containing the provisions relevant to the case. The Companies (South Australia) Code ("the Companies Code") provided the relevant statutory framework as at the date of the 1984 Prospectus and Covenant.
Consistently with the distinction drawn by the legislation between the functions and obligations of the "trustee for or representative of the holders of interests" and the functions and obligations of the "management company", the roles of the management company and trustee were not performed by the same entity. The Trust Deed conformed to these requirements.
The Forest Company was the management company "by or on behalf of which the interests have been or are proposed to be issued". The Companies Act and the Companies Code applied to the issue of "interests" and "prescribed interests", respectively, to members of the public. Under the legislation, an "interest" and a "prescribed interest" were defined to include a right to participate in any interest, whether enforceable or not, and whether actual, prospective or contingent, in profits or assets of an undertaking, or in a common enterprise. The statutory definition of "interest" and "prescribed interest" also included a right to participate in a contract, scheme or arrangement whereby the investor acquired an interest in property which would or might be used in common with rights of others acquired in like circumstances. The legislation thus contemplated that the issue of an "interest" or a "prescribed interest" might, or might not, involve the acquisition of an interest of a proprietary nature, as opposed to an interest in the nature of a contractual right. The nature of the "interest" or "prescribed interest" was left to be determined by the terms of the arrangements effected by the parties in any given case.
To the extent that investors in managed investment schemes were at risk of the failure of the management company, the Companies Act and the Companies Code sought to moderate those risks by the requirement of the interposition of a trustee to protect the interests of holders of interests or prescribed interests, and by the requirement of covenants from the trustee and the management company; but they did not require the segregation of investment moneys from the general funds of the management company.
Section 80(1)(a) of the Companies Act and s 168(1)(a) of the Companies Code proceeded on the assumption that such segregation would not occur, in that each required a covenant:
"binding the management company that it will use its best endeavours to carry on and conduct its business in a proper and efficient manner and to ensure that any undertaking, scheme or enterprise to which the deed relates is carried on and conducted in a proper and efficient manner".
The Companies Act, by s 80, and the Companies Code, by s 168, also required that an approved deed contain certain covenants. These provisions included a covenant by the management company that it would, within a specified time, pay to the trustee money which was payable to it. The trustee was required to covenant that it would exercise all due diligence and vigilance in carrying out its functions and in watching the rights and interests of holders of interests, and that it would keep proper books of account and cause those accounts to be audited annually.
Section 80(1)(d) of the Companies Act was relevantly re‑enacted by s 168(1)(d), which provided that an approved deed should contain a covenant:
"binding the management company and the trustee ... respectively, that no moneys available for investment under the deed will be invested in or lent to the management company [or] the trustee ... or any person … who is associated with the management company or with the trustee".
AET argued that these sections required a covenant obliging the Forest Company to segregate the investments of Covenantholders from the general conduct of its business. That argument mistakes the effect of the sections.
These provisions did not require a covenant from the management company that the moneys subscribed by investors not be mixed with the general funds of the management company. They did not seek to prevent the investment being mixed with the funds of the management company, or to quarantine the investment against the risk that the management company might fail because of risks of business not peculiar to the particular investment scheme. Rather, they were concerned to prevent the trustee or the management company from using subscriptions raised from the public in order to enhance its equity or loan capital.
Finally in relation to the statutory framework, it should be said that it was well known that the kind of investment presently in issue was risky. It is ironic that a consequence of the conclusion of the courts below is that the investments by the Covenantholders would now be afforded trust protection against risks which, at the time the investments were made, were sufficiently a matter of public knowledge that this kind of investment was not one which trustees were authorised to make under the Trustee Act 1936 (SA).
The Trust Deed
The Trust Deed recited that the Tripartite Agreement was made to ensure the performance by the Forest Company of its obligations to Covenantholders. It was readily apparent that the Milling Company was not a party to the Trust Deed, and that this was deliberate, given the Milling Company's role under the Tripartite Agreement. That there was no trust relationship between the Milling Company and Covenantholders under the Trust Deed was the conclusion which one would expect to be drawn.
Clause 1 of the Trust Deed provided that the Forest Company appointed AET as trustee, and AET agreed "to be and act as Trustee for the Covenantholders for the time being upon and subject to the trusts terms covenants and conditions hereinafter contained." Once again, given the express provision that AET is the trustee for the Covenantholders, the conclusion which one would ordinarily expect to be drawn is that the Forest Company is not. The question then becomes whether the detailed provisions of the Trust Deed and the associated instruments manifest a different intention.
Clause 2 of the Trust Deed contained covenants by the Forest Company to perform faithfully its obligations in relation to the maintenance of the plantations. On the face of things, the Forest Company's obligations to Covenantholders in this regard are matters of contract. An exception to that general observation is cl 2(d)(v) of the Trust Deed, which provided that, "in order to secure due compliance by the Forest Company with the terms and conditions" of the Trust Deed, the Forest Company would "cause to be deposited in [a bank] … in the joint names" of the Forest Company and AET "all Certificates of Title and Lessee's copies of all leases free from encumbrances" used in plantings and that the:
"Trustee shall cause a Caveat or Caveats to be registered in respect of such land prohibiting any dealings therewith except in the interests of the Covenantholders in such lands."
AET argued that because a caveat could only be lodged to protect a proprietary interest in land, cl 2(d)(v) must be taken to manifest an intention to create a proprietary interest in the land on which the trees were planted. That argument should not be accepted.
Clause 2(d)(v) was directed to preventing the Forest Company engaging in dealings with the land which might adversely affect the interests of Covenantholders. Contrary to AET's argument, however, it is apparent that cl 2(d)(v) did not confer upon Covenantholders an absolute beneficial interest in the land and trees growing thereon as distinct from a security interest the extent of which is commensurate with the Covenantholders' contractual entitlements.
It may be that the basis for the caveat was AET's interest by way of equitable charge created by the deposit of instruments of title, which, in turn, was expressly "to secure due compliance by the Forest Company with the terms and conditions" of the Trust Deed. Be that as it may, the express provision for security for the performance of the Forest Company's contractual obligations falls far short of the creation of a beneficial interest in the assets of the business of the Forest Company asserted by AET.
It was not suggested by AET that any contravention of the security provided by cl 2(d)(v) occurred in the making and completion of the Tree Sale Agreement and the Land Sale Contracts. It was not explained how the Tree Sale Agreement and the Land Sale Contracts were made and completed consistently with this security interest; but it would not be fair to assume that any such contravention occurred, especially given that AET was itself a party to the Tree Sale Agreement.
By cl 2(e) of the Trust Deed, the Forest Company covenanted to pay into:
"a fund to be called 'the Maintenance Fund' such amount … as agreed from time to time … and the Trustee shall credit such amount to the appropriate Maintenance Fund account in respect of each planting."
This provision, and cl 20A, expressly contemplated the keeping of the Maintenance Fund separately from the assets of the Forest Company. The significance of cl 2(e) is that this express provision sits ill with the broad contention that the Forest Company was generally obliged to keep Covenantholders' contributions separate from its own funds in trust for the benefit of Covenantholders.
By cl 3(a) of the Trust Deed, the Forest Company agreed to:
"[t]end maintain and supervise the said land and the trees planted thereon in accordance with the principles of afforestation approved by the officer of the Company for the time being responsible to the Board for forestry operations".
By cl 3(b) of the Trust Deed, the Forest Company covenanted to:
"[p]ay and discharge all rent rates taxes charges outgoings and impositions assessed imposed upon and payable in respect of the said land and in the case of Leased Land pay all or any further amounts as may be payable by the lessee pursuant to the terms of the lease".
By cl 3(c) of the Trust Deed, the Forest Company covenanted to:
"[i]ndemnify and keep indemnified the Trustee and the Covenantholders from and against all and all manner of claims demands actions proceedings in respect of the tending supervision protection and preservation of the said land and trees and in respect of all such rent rates taxes charges outgoings and impositions and further amounts aforesaid."
AET drew attention specifically to provisions of the Trust Deed which were said to oblige the Forest Company to account to AET and the Covenantholders. By cl 3(ca) of the Trust Deed, the Forest Company was obliged to:
"[f]urnish quarterly to the Trustee not later than the last days of April July October and January in every year a report in writing in respect of the period of three calendar months ended on the last day of the preceding month signed on behalf of the Board of Directors of the Forest Company by two Directors thereof:-
...
(ii) whether the Forest Company has observed and performed all the covenants and conditions binding on it pursuant to the terms of the said Covenants and the Trust Deed as amended from time to time;
(iii) whether any event which is or should be known to the Forest Company has happened which has caused or could cause the said Covenants or any of them or any provision of the Trust Deed as amended from time to time to become enforceable by reason of any breach or default by the Forest Company;
...
(iix) whether the Forest Company and, to the best of the knowledge, information and belief of its Directors, [the Milling Company] have each kept and performed all their covenants and agreements respectively to be kept and performed by them pursuant to the terms of the Tripartite Agreement."
Further, in this regard, by cl 3(d)(i) of the Trust Deed, the Forest Company was obliged to furnish to AET:
"upon request such information relative to the financial position and affairs generally of the Forest Company … as shall reasonably be required by the Trustee to enable the Trustee to accurately and adequately comprehend appreciate and ascertain the financial position of the Forest Company."
By cl 3(f) and (g) of the Trust Deed, the Forest Company covenanted to:
"(f) [b]etween the first day of October and the last day of November in each and every year cause to be made by its Forestry Superintendent ... having charge of the lands allocated to cover the obligations of the Forest Company to the Covenantholders, a report setting forth:-
(i) The extent to which the operations of the Forest Company in respect of the area so allocated have advanced.
(ii) Whether or not the Forest Company is discharging efficiently its obligations in respect of such area and in respect of the planting thereof and of the plantings thereupon.
(g) Prior to the thirty‑first day of December following the receipt of the report referred to in the preceding sub‑paragraph hereof (herein referred to as 'the said report') the Forest Company will at its own cost and expense deliver a copy thereof to the Trustee and will within six (6) weeks of receiving from the Trustee a copy of any report which the Trustee may wish to make to the holders of Covenants relating to the period covered by the said report ... at its own cost and expense cause the said report and the report of the Trustee (if any) to be printed and a copy thereof forwarded to each holder of Covenants."
The terms of cll 3(ca), 3(d)(i), 3(f) and 3(g) did not oblige the Forest Company to keep Covenantholders' contributions in accounts separate from its general accounts. Indeed, these provisions reflect an appreciation that the "financial position and affairs generally of the Forest Company" were matters of importance to AET and the Covenantholders because those matters affected the safety of the Covenantholders' investments, and that these undertakings were required precisely because the Covenantholders' contributions were not to be kept separately from the general funds of the Forest Company.
Clause 3(h) required that the Forest Company was to:
"[e]xecute and perform all such acts deeds matters and things as may be reasonably required by the Trustee for the purpose of giving full due and proper effect to these presents according to the true spirit intent and meaning thereof."
Clause 10 of the Trust Deed provided that the Forest Company "will do all in its power … to secure reasonable financial returns to the Covenantholders" and that:
"the Forest Company shall not be liable for any loss which may be sustained by the Covenantholder provided the Forest Company has used its best endeavours to obtain reasonable returns for the Covenantholders from such measures in accordance with the contract with the Covenantholder."
This provision is a significant indication, both that the Forest Company's obligations to the Covenantholders are a matter of contract, and that they do not extend to the stewardship of the timber and lands as assets held for the benefit of the Covenantholders.
That indication is confirmed by cl 12 of the Trust Deed, which contained the following undertakings on the part of the Forest Company:
"(a) The Forest Company undertakes to plant with pine trees ... the number of acres or hectares (as the case may require) of land cleared and fenced (where necessary) equal in each case to the total area comprised in the ... Covenants issued ... and to tend and supervise the trees in accordance with the principles of afforestation".
Clause 12 of the Trust Deed also provided:
"(b) Each Covenant in respect of which a Fully Paid Certificate has been issued will entitle the holder thereof to the net proceeds from the timber appropriate to [the] ... Covenant planted by the Forest Company with trees as stated in the application signed by the applicant. The Covenantholder will receive his due proportion of the benefits obtained from the sale of timber harvested from the planting in respect whereof his Covenant is issued in accordance with the terms and conditions set out in the Covenant and within recited Tripartite Agreement.
...
(d) The Forest Company shall be entitled to retain the amount of five per centum of the balance of the proceeds from the sale of timber as provided by Clause 9(d) of the Tripartite Agreement as amended for its commission and remuneration for its services."
These provisions cannot sensibly be read as declaring a trust "entitlement" to the "net proceeds from the timber". Rather, they state the content of the Forest Company's contractual obligations (and also its entitlements) in respect of the proceeds of the realisation of timber.
In contrast, cl 12 of the Trust Deed did make express provision for the creation of a second trust fund, providing relevantly:
"(e) The Trustee will, upon receipt of such net proceeds above described, hold the same in the interest of the respective Covenantholders and shall open accounts in the Trustee's ledger which shall be called 'Timber Proceeds Accounts', such accounts being kept separate to each planting. Details of such Timber Proceeds Accounts shall be shown on an audited statement which shall be attached to the Trustee's Balance Sheet at the end of the financial year.
(f) When the sum standing to the credit of any one of such Timber Proceeds Accounts becomes sufficiently large to render it, in the opinion of the Directors of the Forest Company, economically capable of distribution amongst the Covenantholders in whose interest such Account shall have been opened, the Forest Company shall recommend to the Trustee that a specified sum per covenant out of the moneys to the credit of such Timber Proceeds Account shall be distributed amongst the said Covenantholders. The Trustee shall thereupon notify the Forest Company the sum (not greater than the sum so recommended by the Forest Company) which the Trustee requires to be so distributed."
It is clear from cl 12(e) and (f) that AET's obligation to create and keep separate a fund for the benefit of Covenantholders arose only upon receipt of the net proceeds from the Forest Company and not otherwise. Once again, the limited scope of this obligation is inconsistent with a more expansive trust relationship attaching to the Forest Company's assets for the benefit of the Covenantholders at earlier points in the generation of the proceeds of the enterprise.
Clause 13 of the Trust Deed provided that, in the event of default on the part of the Forest Company in the observance of its obligations, AET could "take charge of and manage the business conducted by the Forest Company on the … land allocated to the … Covenants".
Clause 14 of the Trust Deed provided that, in the event of default by the Forest Company, the Maintenance Fund "shall … be applied by the Trustee … in the same manner as the Forest Company could have applied the same." By cl 20A, the Trust Deed made express provision declaring trusts in respect of the Maintenance Fund, the Covenantholders' Distribution Accounts and the security deposits:
"The Trustee declares that it will hold the following assets in trust for the Covenantholders that is to say -
(a) Maintenance Fund
From the purchase money received by the Forest Company from the Covenantholders a sum fixed by the Trustee as agreed from time to time shall in manner provided in Clause 2(e) hereof be deposited with the Trustee by the Forest Company as and when Covenants are paid in full as a form of guarantee or insurance that the Forest Company will carry out its maintenance commitment under the contract. …
(b) Covenantholders' Distribution Accounts
A separate banking account shall be maintained by the Trustee at ANZ Banking Group Ltd … for the Covenantholders of each planting year into which proceeds from the sale of timber and any other moneys to which the Covenantholders may be entitled shall be paid by the Forest Company. These funds shall be distributed by the Trustee to the Covenantholders from time to time pursuant to the terms of the relevant Covenants.
(c) Titles to Planted Land
All such Certificates of Title and Lessee's copies of leases for any land the subject of such plantings as shall pursuant to Clause 2(d) hereof have been deposited in the Savings Bank of South Australia Head Office Safe Deposit … and the Trustee will cause to be registered a Caveat or Caveats in respect of such lands prohibiting any dealings therewith except in the interests of the covenantholders in such lands."
It may be noted here that cl 16 of the Trust Deed provided that if a Covenantholder should default in his or her purchase obligations, he or she would "cease to be cestui que trust hereunder." It should be borne in mind that Covenantholders were "cestuis que trust" both of AET and of the trusts expressly declared by cl 20A. Clause 16 does not suggest that the rights of a Covenantholder as "cestui que trust", vis à vis the Forest Company, went beyond the trusts expressly declared by the Trust Deed.
Clause 27 of the Trust Deed stated the Covenantholders' rights with respect to the land on which trees were planted. It relevantly provided that:
"each Covenant in respect of which a Fully Paid Certificate has been issued will entitle the holder thereof to the value ... of the freehold land or land held under perpetual lease ... planted in respect of the Covenant and to the net proceeds from the timber in each case ... planted by the Forest Company with trees as stated in the application signed by the applicant."
This provision related to the value of the appreciation in the valuation of the land between the date of the planting to which the Covenant related and the clearing of timber from the land. The entitlement of the Covenantholder was to the payment of an amount being an increase in value of land to be determined by valuation; it was distinctly not an aliquot share in the land itself.
Clause 30 of the Trust Deed authorised the issue of Supplementary Covenants in respect of:
"any planting year prior to the 1982 planting year … which will entitle the holder thereof to an interest in the value of the land subject to the Covenant for such year."
The Trust Deed was amended by the addition on 26 August 1986 of cl 34, which purported to relieve a Covenantholder from personal liability to indemnify AET or the Forest Company for any debt incurred by either of them "in connection with [their] powers and obligations" under the Trust Deed. This provision was not operative in respect of Covenantholders under the 1984 Covenant or earlier Covenants. Accordingly, if the amendment were otherwise effective to exclude the liability of Covenantholders to indemnify the Forest Company for debts incurred in the course of the enterprise, it would not protect Covenantholders who acquired their interests before 26 August 1986 from any obligation which might arise under the general law to indemnify the Forest Company in respect of liabilities to third parties for such debts.
The Tripartite Agreement
The Tripartite Agreement provided for the proceeds of the milling of trees and manufacturing of timber products by the Milling Company, net of identified deductions, to be paid to the Forest Company to be dealt with in accordance with the Forest Company's covenants in the Trust Deed.
The lengthy preamble to the Tripartite Agreement contained the following recitals:
"WHEREAS the Forest Company was formed for the purpose (inter alia) of acquiring lands and planting the same with forest trees and preserving the forests so planted and tending and cultivating the same until such time as the same should become marketable AND WHEREAS for the purpose of acquiring the funds necessary for the carrying out of its purposes the Forest Company intends from time to time to issue prospectuses inviting the public to subscribe for and purchase the covenants referred to in such prospectuses on the terms and conditions in any such prospectus and in the printed form of Covenant more particularly set forth AND WHEREAS by … 'the Trust Deed' ... the Forest Company appointed the Trustee and the Trustee undertook … to be and act as Trustee for the holders for the time being of the said Covenants subject to the trusts terms and covenants and conditions in the Trust Deed contained and the Forest Company covenanted and agreed with the Trustee as in the Trust Deed is more particularly mentioned AND WHEREAS the Milling Company was duly incorporated having for its objects (inter alia) the felling, milling, manufacturing and marketing of grown timber and thinnings the property of Covenantholders of the Forest Company".
AET focused upon the last of these recitals as an indication of the proprietary nature of the interests of the Covenantholders. This recital relates, in terms, to the objects for which the Milling Company had been incorporated; whether or not its objects had been altered since its incorporation, the reference to the original objects of the Milling Company sheds little light on the terms of the relationship actually established between the Covenantholders and the Forest Company by the Trust Deed and the Covenant. It was to overstate the effect of the preamble to say, as the primary judge said: "The preamble records that the object [scil of the Tripartite Agreement] is to fell the trees 'the property of the Covenantholder'."
By cl 7 of the Tripartite Agreement, it was provided that:
"The Milling Company shall market and sell and at all time [sic] use its best endeavours to market and sell all logs or timber standing or milled and manufactured by the Milling Company … as soon as possible after the same shall have been cut or milled and manufactured and shall use its best endeavours to obtain the best market price from time to time obtainable for the said timber."
By cl 8, the Tripartite Agreement provided for the keeping of accounts by the Forest Company and the Milling Company but not for the keeping of separate accounts for the benefit of Covenantholders:
"The Milling Company and the Forest Company and each of them shall keep such books accounts vouchers and records as shall enable them at all times to ascertain and specify to which class of Covenantholders and in respect of which series of Covenants and in what proportions the balance of moneys referred to in Clause 10A shall be allocated and apportioned. The Milling Company shall also submit their books and annual accounts for audit or check audit by the Forest Company's Auditors."
The terms of cl 8 are inconsistent with the contention that Covenantholders' payments were not intended to be mixed with the funds of either the Forest Company or the Milling Company. Further, it is to be noted that the Milling Company's obligation to submit its accounts for audit was owed, not to AET on behalf of the Covenantholders, but to the Forest Company.
The Tripartite Agreement imposed obligations on the Milling Company in favour of the Forest Company, not in favour of AET, in respect of the payment of the net proceeds of the Milling Company's operations:
"9. All moneys received by the Milling Company from the sale of such logs or milled and manufactured timber shall be retained by the Milling Company and applied in manner following:-
(a) In recouping to the Milling Company all expenses of whatsoever nature necessarily incurred in connection with the felling cutting milling manufacturing and selling of the said thinnings and fully grown trees and the logs or timber milled and manufactured therefrom ...
...
(d) In payment immediately to the Forest Company of an amount equal to five per centum of the balance of such moneys, to be retained by the Forest Company for its commission and remuneration for its services herein specified.
(e) In payment to the Forest Company of the balance then remaining of such moneys.
(f) All moneys payable by the Milling Company to the Forest Company pursuant to Sub‑clause (e) of this Clause ... shall be payable by the Milling Company to the Forest Company by five instalments on the last days of the months of April, May, June, July and August then next following."
As an assurance of the performance by the Milling Company of its payment obligations, the Tripartite Agreement provided:
"10. The Milling Company shall not ... declare or pay any dividend to its shareholders unless all moneys which shall have become due and payable by the Milling Company to the Forest Company pursuant to sub‑clauses (d), (e) and (f) of Clause 9 ... have been fully paid."
Clause 10A provided for payment by the Forest Company to AET:
"The Forest Company upon receipt from the Milling [C]ompany of any moneys payable to it pursuant to sub‑clauses (e) and (f) of Clause 9 of this Agreement shall re‑imburse itself and retain all such expenses as it may be entitled to deduct in terms of the Trust Deed and shall within thirty days after the receipt of such moneys pay the balance to the Trustee for distribution amongst the Covenantholders entitled thereto in manner provided by the Trust Deed."
This provision speaks of an obligation to pay money generated by the activities of the Forest Company and the Milling Company, not of the realisation of assets held for the benefit of Covenantholders. This understanding is confirmed by cl 14 of the Tripartite Agreement.
Clause 14 provided relevantly that, during the currency of the Tripartite Agreement:
"The Milling Company shall … have the sole and exclusive right to … in conjunction with others … mill and process the thinnings and fully grown trees planted by the Forest Company … and sell the products therefrom".
This provision is noteworthy for the absence of any qualification upon the Milling Company's "sole and exclusive right" which might support the contention that it was operating for the exclusive benefit of the Covenantholders.
The provisions of cl 15 should also be noted:
"The Milling Company shall not during the currency of this agreement fell cut mill manufacture or sell any trees other than trees and timber planted or acquired by the Forest Company for the benefit of Covenantholders without the joint written consent of the Trustee and the Forest Company first had and obtained. Such consent may be refused without assigning any reason for such refusal."
It was not suggested that the Tree Sale Agreement was made or completed in breach of this provision. AET fastened upon the reference to the "benefit of Covenantholders", but that reference is consistent with benefits that are contractual in nature.
The Covenant
The 1984 Covenant by the Forest Company described, by cl 1, the "entitlement" of each Covenantholder in terms which reflected the obligations undertaken by the Forest Company under the Trust Deed.
Clause 4 of the Covenant was expressed in terms which identified the "entitlement" of a Covenantholder to the payment of money as a return upon the investment. Its provisions are concerned with the quantification of the amount of the payment to Covenantholders by way of return upon their investment rather than the realisation of their assets. That can be seen when it is set out at length.
"The Covenantholder will receive his due proportion of the benefits obtained from the sale of the timber harvested by the Milling Company from the planting in respect whereof his Covenant is issued in accordance with the terms and conditions set out in the Covenant and determined in manner following that is to say: All moneys received by the Milling Company from the sale of standing timber or timber felled, cut, milled and manufactured and sold pursuant to the Tripartite Agreement will be applied as follows:
(a) in recouping to the Milling Company all expenses of whatsoever nature necessarily incurred in connection with the felling, cutting, milling, manufacturing and selling of the thinnings and fully grown trees and the timber milled and manufactured therefrom, including rents, rates, taxes … and insurance, overhead charges and bad debts actually written off;
(b) in providing an annual amount for the depreciation of the Milling Company's buildings, plant and machinery and other deductions as specified in the Schedule to the Tripartite Agreement;
(c) in paying to the Milling Company a sum equal to $12 per centum per annum upon the issued and fully paid capital of the Milling Company;
(d) in paying immediately to the Company 5% of the net balance of such moneys, to be retained by it as its commission for its services, and in paying the balance then remaining of such moneys to the Company in accordance with the terms of the said Tripartite Agreement.
(e) The Company, after deducting from the said remaining balance of such moneys so received by it from the Milling Company
(i) the cost to the Company of labour and material involved in the spreading of further fertilizer …;
(ii) the cost of any other treatment carried out on the advice of the Company's Technical Superintendent with the approval of the Trustee …; and
(iii) the excess amount (if any) by which the total estimated expense to the Forest Company during the … period of twenty (20) years of maintaining and tending the trees in the plantation or plantations of the planting year to which the relevant covenants relate … shall exceed the total sum estimated by the Forest Company … for the purposes of sub‑paragraph (iii) of sub‑clause (a) of Clause 20D of the Trust Deed as amended;
will pay the balance to the Trustee for the Covenantholders for distribution by the Trustee amongst the Covenantholders entitled thereto in accordance with their respective holdings."
This provision does not speak of the realisation of assets held for the benefit of Covenantholders, but of a payment by way of return from the activities of the Forest Company and the Milling Company.
The 1984 Covenant provided, by cl 6, for the payment of a sum in respect of "the value" of land, calculated as the increase in the valuation of the land appropriated to a given year's planting and its valuation when the timber on the land is clear felled.
The Covenant also made provision, by cl 8, for the security of Covenantholders which adopted the substance of the provisions of cll 2(d) and 20A of the Trust Deed.
Textual considerations
Principles of construction
In Kauter v Hilton, Dixon CJ, Williams and Fullagar JJ referred to:
"the established rule that in order to constitute a trust the intention to do so must be clear and that it must also be clear what property is subject to the trust and reasonably certain who are the beneficiaries."
The need for clarity as to the intention to create a trust and its subject matter is of particular importance in a commercial context where acceptance of an assertion that assets are held in trust is apt to defeat the interests of creditors of the putative trustee. The traditional inclination of the courts is to protect creditors against the use of a straw company as a trading trustee.
AET placed considerable reliance upon the following observations of Bell, Gageler and Keane JJ in Legal Services Board v Gillespie‑Jones:
"'[U]nless there is something in the circumstances of the case to indicate otherwise, a person who has "the custody and administration of property on behalf of others" or who "has received, as and for the beneficial property of another, something which he is to hold, apply or account for specifically for his benefit" is a trustee in the ordinary sense' (footnotes omitted). A legal practitioner who receives money from a client to be held for and on behalf of the client or another person archetypally answers that description."
This passage identifies the nature of the inquiry which must occur in order to determine whether a person is a trustee; it does not suggest an affirmative answer to the critical questions in this case, namely whether the Forest Company or the Milling Company had "the custody and administration of property on behalf of" the Covenantholders, or had "received, as and for the beneficial property of [the Covenantholders], something which [they were] to hold, apply or account for specifically for [their] benefit". Indeed, the contrast between the receipt of moneys by a legal practitioner to be held specifically for the benefit of a client or a third party and the receipt of investment funds by the Forest Company tells against an affirmative answer.
The language of the relevant documents is not to be strained to discover an intention to create a trust of the broad scope for which AET contends. In Byrnes v Kendle, Gummow and Hayne JJ noted the approval by Mason CJ and Dawson J in Bahr v Nicolay [No 2] of the proposition stated earlier by du Parcq LJ that:
"unless an intention to create a trust is clearly to be collected from the language used and the circumstances of the case, I think that the court ought not to be astute to discover indications of such an intention."
"Interests" and "entitlements"
AET's argument fastened upon words and phrases in the relevant documents such as "interests" and "entitlements to proceeds", which were said to indicate an intention to vest in the Covenantholders a proprietary interest in the timber and land. AET argued that the relevant documents reveal a "painstaking attempt" to ensure that the Covenantholders' investments were at all times dealt with by the Forest Company and the Milling Company in the interests of the Covenantholders by creating a trust of assets held for the benefit of the Covenantholders.
As has been seen, the terms of the Trust Deed lend little support to the argument that it created any trusts of which the Forest Company was trustee for the Covenantholders. The Trust Deed, which does create express trusts of limited scope, nowhere expresses a trust of the broad scope for which AET contends.
In the relevant documents, references to the "interests" and "entitlements" of the Covenantholders are not to proprietary interests as opposed to contractual entitlements, any more than references in the Companies Act and the Companies Code to "interests" and "prescribed interests" were to proprietary interests rather than matters of contract. It is the context in which these terms are used which controls their meaning. It has long been recognised that, in the context of managed investment schemes similar to the present, these terms do not indicate an interest of a proprietary nature held on trust by the manager for the investor.
In Clowes, this Court was concerned with whether an investor, described as a "lot‑holder", who had entered into two agreements with a timber growing company, had a beneficial interest in the timber getting enterprise. The first of those agreements recited that:
"the lot‑holder is desirous of becoming possessed of a beneficial interest in the produce of one acre of timber lands (hereinafter referred to as a lot or lots) forming portion of four hundred and fifty acres of land … in South Australia".
The agreement provided that the lot‑holder pay to the company £25 per lot, and, in return, the timber growing company agreed to transfer the land into the name of a trustee company, which was to hold the land upon trust to "compel the company to fairly and faithfully carry out all the obligations entered into by it with respect to planting and maintaining the said land with pine trees". The trustee company was also obliged to:
"hold the whole of the said land as security for the performance … [of] the trust deed … and to hold the produce of the said land and net proceeds thereof in trust for the company and the lot-holders as to nine-tenths thereof for the lot-holders … and as to one-tenth thereof in trust for the company."
The timber growing company also agreed that it would:
"as soon as the forest or growing timber on the said land or any part of it has reached maturity or otherwise become marketable make such arrangements as it considers necessary or advisable for marketing the produce thereof either standing or cut and after deducting all costs and expenses and the company's one‑tenth share of the net proceeds … will distribute the remaining nine-tenths amongst the lot-holders in the proportion of one‑four hundred and fiftieth part for every fully paid up lot in full and final settlement of the claims of such lot-holders under this contract."
Dixon CJ explained the effect of the agreement in the following terms:
"[A lot‑holder] laid out a sum of money entitling him at the end of a protracted period of time to an uncertain return in a lump sum which he hoped might prove larger than his outlay though it might well prove smaller. In the event, when a period of fifteen to eighteen years had elapsed, he received back a sum equal to his outlay and an additional forty per cent. But [he] did nothing but lay out his money on the faith of the contract and await the result. The company was in no sense his agent. The money which he paid in pursuance of the contracts became part of the general funds of the company. Its obligations to him were simply contractual. It made the contract for its own advantage and in performing it acted independently of the direction or control of any lot-holders, whose relationship to the company was simply that of persons providing it with money on special terms."
Dixon CJ went on to make the point that the agreement did not have the effect that the business of planting and harvesting pine trees was carried on by the lot‑holder or on his or her behalf. His Honour said:
"[T]he operation giving rise to the profit … was the planting of pine trees, the cultivation of the plantation and the logging and disposal of timber. These appear to me to have been both in fact and in law the operations of the company conducted on its own behalf and not on behalf of the lot‑holders. True it is that the company had contracted with the lot‑holders to plant the trees, market the timber and pay over the stipulated portion of the proceeds. But these were contractual terms on which the money was raised by the company. From the [lot-holder's] standpoint the only profit in contemplation was an increase in the amount he invested with the company when the money became repayable as a result of the operations of the company, operations which as part of the terms of the investment the company became bound to carry out. To enter into a contract to provide a specified sum on such terms, to pay it and then to await results cannot in my opinion be properly described as 'carrying on or carrying out a scheme or undertaking'."
The point of this passage was that, notwithstanding the terms of the recital, which spoke of the lot‑holder "becoming possessed of a beneficial interest in the produce of one acre of timber lands", the lot‑holder acquired only contractual rights. Kitto J made the same point:
"The active duties to be performed by the company were laid down in cll 5 and 8. Without troubling to set out the detail of these provisions it may be said that, first, cl 5 bound the company to plant the land with pine trees in a proper and husband-like manner; and cl 8 obliged it, as soon as the forest or growing timber on the land or any part of it should have reached maturity or otherwise become marketable, to make arrangements for marketing the produce thereof, either standing or cut, and, after deducting all costs and expenses and its own one‑tenth of the net proceeds, to distribute the remaining nine‑tenths amongst the lot-holders in proportion to their lot-holdings, in full and final settlement of their claims under the agreement. It will be observed that what each lot-holder was to become entitled to ultimately was an aliquot share in nine-tenths of the net proceeds of marketing; and it is in this sense that the recital must be understood when it refers to a beneficial interest in 'the produce' of an acre, or two acres, forming portion, but an undivided portion, of the specified parcel of land."
These observations have particular relevance to cl 12(b) and (d) of the Trust Deed, cll 9 and 10A of the Tripartite Agreement and cl 4 of the Covenant.
Counsel for the appellants put these passages from Clowes, the force of which is evident, in the forefront of their argument in this Court. It is noteworthy that counsel for AET did not attempt any response directed to this important aspect of the appellants' argument.
The contemporaneous exposition in Clowes of the effect of an agreement cast in language with evident similarities to the arrangements effected by the relevant documents is significant. The reasons of Dixon CJ and Kitto J afford powerful guidance as to the correct interpretation of the relevant documents. Their Honours' exposition of the effect of similar language in a similar commercial context affords a compelling indication as to the contemporary understanding of the relevant documents.
In the Court of Appeal, the appellants argued that the investment scheme was promoted to investors on the basis that any return was not assessable for income tax. It was said that, having regard to the reasoning in Clowes, there was a significant risk that the relevant proceeds would in fact become assessable to income tax if a trust relationship were inferred because it might be said that the business was being conducted by the Covenantholders or on their behalf, so that the profits of the business were assessable in their hands. For that reason, so it was said, the Court of Appeal should be slow to accept the trust argument propounded by AET.
The majority in the Court of Appeal rejected the appellants' argument that the decision in Clowes supported an inference that it was the parties' "deliberate decision" not to impose trust obligations on the Forest Company or the Milling Company. Their Honours considered that "[t]he scheme … had all of the characteristics identified in Clowes as leading to the conclusion that the investment return in that case was non‑assessable." It may be observed that among those characteristics was that the holder of an interest in the enterprise was not the principal on whose behalf the enterprise was conducted by the management company. The majority in the Court of Appeal, in focusing upon the likely tax consequences for Covenantholders, did not fully acknowledge the significance for the interpretation of the relevant documents of the meaning assigned by Dixon CJ and Kitto J to similar language used in a context analogous to the present.
The majority in the Court of Appeal also referred to the observation of Barwick CJ, with whom Gibbs and Stephen JJ agreed, in Milne v Federal Commissioner of Taxation:
"Whether or not an acquisition of an interest in land be regarded as involved in the purchase of a bond, it seems to me that the [investors] had no scheme or plan other than to participate in the result of the company's covenanted activities on the land by way of capital increment to the amount invested in the bond."
That observation is consistent with the view that the "company's covenanted activities" were not conducted as agent or trustee for bondholders.
It is also noteworthy that Barwick CJ adverted to, and expressly rejected, an argument which sought to characterise the bondholders in that case as principals in relation to the timber growing company's profit‑making scheme rather than merely persons who provided the company with money albeit on "special terms". Barwick CJ said:
"I am unable to accept that the trustees' power to direct realization of the lands of the plantations involved the bondholders in any participation in the company's business."
Separate accounts
A significant textual consideration is that no provision in any of the relevant documents required either the Forest Company or the Milling Company to create and maintain an account separate from its general funds to safeguard the timber proceeds from the vicissitudes of their business.
AET argued that the protective intent of the relevant documents was manifested by cll 3(ca), 3(d)(i), 3(f) and 3(g) of the Trust Deed and cl 8 of the Tripartite Agreement. But these provisions fell far short of requiring that the moneys invested by Covenantholders not be used as part of the assets of the Forest Company.
In Jessup v Queensland Housing Commission, the Queensland Court of Appeal rejected a submission that a provision of an agreement which required that a recipient of funds keep an accounting system capable of identifying income emanating from the funds was indicative of a trust. Such a provision, said McPherson JA, with whom Davies JA and Philippides J agreed:
"ill accords with the notion that [the provider] was, from the beginning and throughout, the beneficial owner of the funds it supplied and that [the recipient] was simply the legal title holder of those funds for [the provider]."
The Tripartite Agreement provided, by cl 8, for the keeping of records by the Forest Company and the Milling Company to enable Covenantholders' entitlements to be identified. Jessup v Queensland Housing Commission is again of assistance. In that case, McPherson JA considered provisions, at least as rigorous as cl 8, for the keeping of records of moneys received by a putative trustee, and said:
"All of these are or resemble obligations like those imposed by equity on a trustee in similar circumstances. In the end, however, they tell against rather than in favour of the existence of a trust. If [the provider] as settler had intended to create a trust, it would have been simple to have said so, instead of descending to the detail it did in the Agreement; or, if the reason for including the detail was to point up the specific obligations of [the recipient] as trustee, it would have been cautionary to have done both. It is true, said du Parcq LJ in Re Schebsman, that:
'by the use possibly of unguarded language, a person may create a trust, as Monsieur Jourdain talked prose, without knowing it, but unless an intention to create a trust is clearly to be collected from the language used and the circumstances of the case, I think that the court ought not to be astute to discover indications of such an intention.'
If the purpose of [the provider] was to inspire the poetry of trusts, it is odd that it chose to express itself in common law prose."
Those observations apply with even greater force to the present case. In particular, cll 3(ca), 3(d)(i), 3(f) and 3(g) of the Trust Deed and cl 8 of the Tripartite Agreement all tell against, rather than in favour of, the existence of the trust for which AET contends. They provide necessary aid to the identification and enforcement of the contractual entitlements of the Covenantholders precisely because their investments were to be mixed with the general funds of the Forest Company when they were received by it.
Commercial considerations
The reasons of the majority in the Court of Appeal do not come to grips with two important commercial consequences of the conclusion that the Forest Company and the Milling Company are trustees for the Covenantholders. First, to declare the beneficial entitlement of AET as trustee for the Covenantholders in respect of the Relevant Proceeds may be of limited utility given the consequent entitlement of the Forest Company and the Milling Company, as newly declared trustees, to indemnity from the Relevant Proceeds in respect of liabilities properly incurred by them in carrying on the enterprise for the benefit of the Covenantholders.
In Octavo Investments Pty Ltd v Knight, Stephen, Mason, Aickin and Wilson JJ said:
"If the trustee has incurred liabilities in the performance of the trust then he is entitled to be indemnified against those liabilities out of the trust property and for that purpose he is entitled to retain possession of the property as against the beneficiaries. The trustee's interest in the trust property amounts to a proprietary interest, and is sufficient to render the bald description of the property as 'trust property' inadequate."
The second difficulty bears upon the perceived need for commercial protection of the Covenantholders as the basis for discerning a trust relationship. In this regard, the primary judge, and, it would seem, the majority in the Court of Appeal, came to a conclusion that the investments of the Covenantholders were trust property used in the conduct of the business of the plantation. Their Honours did not advert to the possibility that their conclusion as to what the parties intended might expose Covenantholders, as beneficiaries of a trading trust, to personal liability, beyond the amount of their investments, to the creditors of the Forest Company and the Milling Company for debts incurred by the Forest Company and the Milling Company in the course of their management of the enterprise for the benefit of the Covenantholders. Neither the primary judge nor the majority in the Court of Appeal took into account the personal right of a trustee to indemnity from the beneficiaries of a trading trust recognised in Hardoon v Belilios. As Lord Lindley said:
"The plainest principles of justice require that the cestui que trust who gets all the benefit of the property should bear its burden unless he can shew some good reason why his trustee should bear them himself."
In this regard, it is instructive that, in Clowes, Webb J, who dissented, holding that the receipt was assessable to income tax, took the view that the agreements there in question did create a trading trust. His Honour said that:
"there is enough on the face of the agreements to indicate that the [lot‑holder] acquired not choses in action but interests in particular timber in respect of which he was paid, on the basis of his lot‑holding, his due proportion of the profits from the timber grown on his lots and other lots, and thus to establish the necessary relationship between the [lot-holder] and the source of the income and to prevent the latter from being held to be a capital receipt. …
Here the source of the income in question is in the cultivation of the lots …
So regarded the [lot-holder] was as much a party to this profit‑making undertaking or scheme as was the company which operated on his lots. … As to nine‑tenths, the profits from his lots were made for him and not for the company. The company received the remaining one‑tenth as its share of the proceeds of the joint venture."
That passage echoes the view of the relevant documents taken by the majority in the Court of Appeal. On that view, the Forest Company and the Milling Company were trustees of a trading trust, and so would be entitled to be indemnified from the Covenantholders against their respective indebtedness to external creditors insofar as those liabilities were properly incurred in the course of the trust. Accordingly, to hold that the Forest Company and the Milling Company were acting as trustees for the Covenantholders because necessary protection of their commercial interests required that conclusion would be to expose them to a risk of personal liability to external creditors. It is far from self‑evident that Covenantholders would have welcomed such a risk.
In this Court, AET argued that cll 34 and 3(c) of the Trust Deed were sufficient to defeat any personal right of indemnity which the Forest Company might have asserted against the Covenantholders. That argument is not compelling. As noted above, cl 34 of the Trust Deed did not operate before 26 August 1986. Further, cl 3(c) of the Trust Deed, which was in operation earlier, was not cast in terms which were apt to exclude an equitable obligation which rests upon the "plainest principles of justice". And, in any event, these provisions could not affect the rights of the Milling Company because it was not a party to the Trust Deed.
In the end, speculation about the adequacy of the protection afforded to the Covenantholders by the relevant documents against the various commercial risks to which their investment exposed them cannot alter the substance of the terms of the investment upon which the parties agreed.
For the foregoing reasons, the provisions of the relevant documents did not warrant the conclusion that the Forest Company or the Milling Company owed obligations to Covenantholders beyond the contractual obligations undertaken by the Forest Company.
The notice of contention
In a notice of contention, AET argued that aspects of the recent conduct of the appellants should be regarded as admissions capable of establishing the trusts for which AET contends. AET relied upon correspondence involving the Company Secretary of the Forest Company and the Milling Company to suggest that those companies followed a practice of segregating and protecting the investment funds or their proceeds for the benefit of the Covenantholders. It was argued that this practice amounted to an admission of the existence of a trust relationship.
This contention was not accepted by either of the courts below. It should be noted that the appellants adduced evidence denying the existence of any such practice. That evidence was not contradicted or indeed challenged. It is simply not open to this Court to conclude that either the Forest Company or the Milling Company declared itself trustee by the adoption of a practice of keeping investment funds separately from its other assets.
In these circumstances, there is no reason to doubt that the primary judge was correct when he said that: "If I am wrong and there is no trust it is unlikely that the admissions, such as they are, would be capable of creating an express trust."
Conclusion
The appeal should be allowed with costs.
It should be ordered that paragraphs 1 and 2 of the orders of the Court of Appeal made on 10 April 2014 should be set aside. In their place, it should be ordered:
(a) the appeal to that Court is allowed;
(b) paragraphs 1, 2 and 3 of the orders of the Supreme Court of Victoria made on 1 March 2013 be set aside and, in their place, declare that:
(i) the respondent is not entitled to any of $33,999,998 payable to the fourth appellant pursuant to the Tree Sale Agreement, being the agreement dated 15 March 2012 to which the third appellant, the fourth appellant, the fifth appellant, and the respondent, amongst others, were parties; and
(ii) the respondent is not entitled to any of $53,356,000 payable to the third appellant under the Land Sale Contracts, being two contracts dated 15 March 2012 to which the third appellant, amongst others, was a party; and
(c) the respondent pay the appellants' costs of the proceedings before the primary judge and the Court of Appeal.