Re Timbercorp Securities Limited (in liq) [2009] VSC 608 (17 December 2009)

1 The second and third plaintiffs, the liquidators of the first plaintiff ("TSL"), a member of the Timbercorp group of companies, seek a direction from the Court pursuant to s 511 of the Corporations Act 2001 ("the Act") regarding the disbursement of sale proceeds to members ("the Growers") of certain managed investment schemes ("the Forestry Schemes"), of which TSL is currently the responsible entity or manager. The sale proceeds are from the sale to Australian Blue Gum Plantation Pty Ltd ("ABP") of forestry assets that were used in the Forestry Schemes. The assets included trees of varying age located in different areas of Australia that were owned by the Growers, leasehold and freehold land in Victoria, South Australia and Western Australia, water licences, a forestry management business and shares in Plantation Pulpwood Terminals Pty Ltd. The assets were sold as part of the informal winding up of the Forestry Schemes and the liquidators had a direction from the Court, obtained before the sale contract was entered into with ABP, to the effect that that they were "acting reasonably and appropriately" in procuring TSL as the responsible entity or manager of the Forestry Schemes to enter into and perform the contract "in general".[1]

2 On 30 September 2009, a sale contract was entered into with ABP with a sale price of $345m (subject to certain adjustments), of which $197.7m was the price that ABP allocated to the cost of acquiring the Growers' trees ("the tree price"). On 2 November 2009, the contract was settled.

3 The Growers are entitled to share in the sale proceeds and receive payment for the sale of their trees ("the tree proceeds"), net of costs. Although a final reconciliation is yet to be done, the liquidators have estimated the balance of the tree proceeds, after costs, payable to the Growers. The liquidators believe that it is in the interests of the Growers to distribute 90% of the estimated balance prior to the Christmas vacation, rather than to wait until all amounts are finalised. The liquidators have prepared a spread sheet setting out the analysis of estimated balance. The spreadsheet is contained in exhibit MAK-14 to an affidavit of the second plaintiff ("Mr Korda") sworn 10 December 2009. The spreadsheet is subject to final reconciliations of all amounts but is the best estimate as at 4 December 2009.

4 The analysis in the spreadsheet has involved and been based on, decisions that the liquidators have made about the apportionment of the tree proceeds amongst the Growers, necessitated because the trees sold to ABP under the sale contract had been owned by Growers in different forestry schemes. The liquidators now seek a direction from the Court that they are justified in procuring TSL to apportion the tree proceeds in accordance with the spreadsheet.

5 There were appearances before me on the application on behalf of TSL, the liquidators and two grower groups, the Timbercorp Growers' Group and the Timbercorp Growers' Reference Group, which represented some of the 11,400 Growers in the Forestry Schemes. Mr Bigmore QC for the Growers' Groups did not oppose the proposed direction but, as Mr Korda pointed out to the Court, many Growers were not represented before me, although they have been kept fully apprised of the sale process. Also, ASIC was aware of the application before me and indicated that it did not propose to make any submissions.

6 Mr Korda raised with the Court a number of reasons why the proposed apportionment methodology may be considered controversial. They are:

(a) The liquidators have used ABP's allocation of purchase price between the trees and the other forestry scheme assets. They have not independently verified that $197.7m was a fair price for the trees.

(b) The liquidators have also used ABP's apportionment of the tree price between the different forestry schemes and projects within those schemes, without independent verification that the apportionment was fair.

(c) It was submitted that the forestry scheme documents do not deal with the possibility, which has now arisen, of a sale of the trees before the end of the forestry schemes' intended life spans. In apportioning the tree proceeds, the liquidators have therefore made the decision to treat the forestry schemes as if they had reached the end of their lives (even though they have not) and to apportion the tree proceeds amongst the Growers as if TSL had harvested and sold the wood on behalf of the Growers in the performance of their contractual duties under the management agreement that each grower made with TSL.

(d) For those Growers who are members of the 1997 to 2002 forestry scheme years, there is potentially an issue about the mechanism within each scheme for determining a grower's proportionate share of the proceeds. The issue arises because the management agreements arguably require TSL to pool the proceeds differently to what the Growers were told in the prospectuses. The liquidators have decided that where there is an apparent conflict they will pool the proceeds in accordance with the mechanism contained in the relevant scheme's prospectus.

(e) The liquidators must apportion costs between the forestry schemes fairly but it is not possible to quantify precisely what costs relate to which forestry scheme, particularly as some of the costs relate to work undertaken for the benefit of more than one forestry scheme. Thus the liquidators have had to make decisions regarding apportionment in circumstances where it has not been possible to calculate costs precisely on a scheme by scheme basis.

(f) As TSL owes a duty to the Growers of each scheme to act in their best interests, TSL's duty is to maximise the return to Growers in each forestry scheme. However, TSL cannot act to the detriment of any of the other forestry schemes and therefore the duties to Growers under each forestry scheme may conflict with one another.

7 In the spreadsheet, the liquidators have worked out an initial per lot distribution constituting 90% of the estimated balance of the tree proceeds. In the view of the liquidators, the proposed apportionment is "fair and equitable". Mr Korda has deposed that "where there are potential for controversies regarding the method of apportionment [the liquidators] have adopted the method [they] believe is in the best interests of the Growers of all the Forestry Schemes. When [they] have been unable to do so [they] have made full disclosure to the Court."[2]

8 I am satisfied on the basis of the material before me that the liquidators have undertaken a careful, considered and transparent approach to the allocation of the tree proceeds, which is intended to effect a fair and equitable distribution to each grower. I do not think that it is unreasonable or inappropriate for the liquidators to rely on ABP's tree price and apportionment of that tree price as between the individual schemes and projects within schemes, rather than to obtain an independent valuation for that purpose. The sale to ABP was the result of a competitive bidding process and reasonable reliance may be placed, in my view, on the amount that ABP was prepared to pay as representing the market value of those trees at the time of sale.

9 I consider that the decision to treat the schemes as if they had come to an end is also justifiable for the purposes of apportionment. But that decision begs the question as to whether the management agreements, nonetheless, govern how the tree proceeds are to be pooled amongst Growers within the individual schemes. This was not argued before me. Rather, I was simply told that the management agreements did not apply in that circumstance. Perhaps it may be obvious and certainly no submission was put to the contrary by Mr Bigmore QC for the Growers' Groups. Be that as it may, the direction sought requires the consideration of whether there is any binding obligation on the liquidators to pool the tree proceeds in the manner prescribed in the management agreements. Expressed differently, is there a legal impediment to the liquidators not using the management agreement mechanism? The question must be asked because of the apparent "conflict" issue affecting Growers in the 1997 to 2002 schemes.

10 The issue arises this way: Growers in the forestry schemes sub-leased land from TSL. TSL allocated a specific lot or lots to the grower on the sub-leased land for the cultivation of trees, which the grower owned. In some cases, Growers had more than one sub-lease and therefore lots were located on land leased to the grower under different sub-leases. Each grower entered into a management agreement, through TSL on behalf of the grower under a power of attorney granted by the grower on signing the application for woodlots in the prospectus, under which, in broad terms, TSL was appointed to cultivate and harvest the wood on behalf of the grower. The management agreement provided for TSL to sell the cultivated wood as the grower's agent, whether in a processed or unprocessed state and each grower's proceeds from the sale of their wood to be pooled with the proceeds of other Growers. The prospectus for each scheme set out how that pooling was to take place. For some schemes pooling was across all the Growers in the scheme. In other schemes which had one or more "projects" relating to the timing of plantings, pooling was across a specific project. For those schemes where there was more than one project, the Growers entered into separate management agreements for each project. The formula for pooling under some management agreements determined pooling by reference to the number of wood lots sub-leased to the relevant grower, with a consequence that pooling may only occur across a sub-lease rather than across the project. Under that formula, Growers who had been allocated lots on the land the subject of the sub-lease would only pool with the other Growers who had lots on that land and not pool with Growers across the entire project. It appears that management agreements did not expressly contemplate there being more than one sub-lease. From 2003 onwards, the formula in the management agreements was amended to avoid this problem so that from 2003 onwards both the scheme documents and the prospectuses refer to pooling across projects.

11 For the 1997 to 2002 schemes where this issues arises, the liquidators have decided to distribute the tree proceeds to Growers in accordance with the mechanism contained in the relevant prospectus, rather than the mechanism provided for in the relevant management agreement. Mr Korda has stated in his affidavit dated 4 December 2009 that the liquidators decided to adopt this method because:

37(a) I have been told by Timbercorp management that before the Timbercorp Group went into administration, TSL had distributed Wood sale proceeds in accordance with the mechanism contained in the relevant Disclosure Document rather than the Forestry Scheme Documents to the extent that the mechanisms conflicted;

(b) The Growers invested in the Forestry Schemes on the basis of the information contained in the Disclosure Document and we are therefore of the view that it is appropriate for the Net Sale Proceeds to be distributed in accordance with the mechanism set out in the Disclosure Document.

The evidence is that the figure calculated for each forestry scheme or project shown in the spreadsheet is calculated according to the mechanism in the applicable prospectus document so that the tree proceeds will be allocated to Growers according to either:

(a) their membership of a Project where the [prospectus] states that the proceeds will be allocated by Project; or

(b) their membership of a Scheme where there is only one Project in the Scheme.[3]

12 The management agreement for the 2002 scheme was put before the Court as containing an example of the type of clause that appears in the management agreements for each forestry scheme. That agreement provided as follows:

7(a) Subject to paragraph (b), the Grower engages the Responsible Entity to sell as agent for the Grower the Wood grown or growing on the relevant Woodlots to any bona fide purchaser, whether in a processed or unprocessed state for as high a price as it can reasonably achieve for the Wood taking into account all relevant factors including

...

(b) For the purposes of complying with clause 7(a) the Grower appoints the Responsible Entity to be the Grower's attorney and in the Grower's name and on the Grower's behalf to:

(i) enter into any agreement for the sale and/or processing and sale of the Grower's Wood at any time during the Term PROVIDED THAT in any such agreement the Responsible Entity discloses that:

1. the Responsible Entity is a party to the agreement as agent and attorney for the Grower; and
2. the liability of the Grower is limited in the manner set out in clause 26(a); and

(ii) vary, replace or cancel any agreement referred to in paragraph (i).

...

(d) The parties agree that the relevant Grower is entitled to receive a proportion of the aggregate purchase price payable to all relevant Growers for all of the Wood sold under this clause (after deduction of: the amounts referred to in Part 1(vi) and (vii)) of the Schedule, the amounts referred to in clause 5(c) and any amounts under the Project Deed) as is calculated in accordance with the following formula:

GS = GW/TW;

where:

GS is the relevant Grower's share of the purchase price;

GW is the number of relevant Woodlots leased to the relevant Grower under the Sub-Lease; and

TW is the total number of Woodlots leased to all of the Growers under the Sub-Lease.

13 Relevantly "Wood" is defined in cl 1 as meaning:

"Wood" means any saleable wood derived from Trees on the relevant Woodlots, or on the relevant Plantation, whichever is applicable, whether in a processed or unprocessed state and whether in the form of trees, logs, timber, woodchips or otherwise, and includes Carbon Credits.

The definition connotes the extraction of "wood" from the trees themselves, although such wood may be "in the form of trees".

14 Although it cannot be said that the clause is free from ambiguity, I am satisfied from a consideration of the terms of cl 7 and the contract as a whole[4] that it can reasonably be argued that the pooling clause applies only to proceeds derived from wood that has been harvested, in the sense of cut down, felled or logged[5] and thus that the pooling provisions in the management agreements have no application on a sale of the trees themselves, as distinct from the wood harvested. Accordingly I do not think that the management agreements necessarily provide a legal impediment to pooling differently to the manner prescribed in those agreements.

15 I am also satisfied that it is not unreasonable or inappropriate for the liquidators to use the management agreement mechanism where there is no disconformity between the representations in the prospectuses about pooling and the terms of the management agreement relevant to the scheme. The mechanism is supportable by the terms of those agreements as giving effect to the intention of the parties.

16 I am also satisfied that it is not unreasonable or inappropriate for the liquidators to pool in the manner propounded in the prospectus, if and where there is a conflict between pooling provisions within management agreements and the relevant prospectus to which such management agreements relate, also supportable as giving effect to the intention of the parties.

17 Finally, nothing has been brought to my attention which would cause me to form the view that the method of apportionment of costs is one that is not justifiable. The apportionment is set out in paragraphs 55 to 70 of Mr Korda's affidavit dated 4 December 2009. I am satisfied that the liquidators have given proper consideration to the allocation of those costs. I accept that there may be some debate down the track about the level of some of those costs but the method of apportionment has not been shown to be arbitrary.

18 Accordingly I am prepared to make appropriate orders.

1. 1997 Timbercorp Eucalypts Project (ARSN 112 309 234);

2. 1998 Timbercorp Eucalypts Project (ARSN 112 309 216);

3. 1999 Timbercorp Eucalypts Project (ARSN 085 827 872);

4. 2000 Timbercorp Eucalypts Project (ARSN 091 172 093);

5. 2001 Timbercorp Eucalypts Project (ARSN 094 382 000);

6. 2002 Timbercorp Eucalypts Project (ARSN 098 233 571);

7. 2003 Timbercorp Eucalypts Project (ARSN 103 183 446);

8. 2004 Timbercorp Eucalypts Project (ARSN 108 099 645);

9. 2004 Timbercorp (Single Payment) Timberlot Project (ARSN 108 336 830);

10. 2005 Timbercorp (Single Payment) Timberlot Project (ARSN 111 683 491); and

11. 2007/2008 Timbercorp (Single Payment) Timberlot Project (ARSN 122 510 981).

1. 1999 Timbercorp Eucalypts Double Rotation Project (Private Offer)(Unregistered).

[1] Orders of Pagone J made on 29 September 2009 in Proceeding No 9299 of 2009.

[2] Affidavit of Mark Anthony Korda dated 4 December 2009 [75].

[4] Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165.

[5] See cl 1 of the management agreement definition of "harvest".