Second Plaintiffs v WA BLUE GUM LIMITED

Second Plaintiffs v WA BLUE GUM LIMITED - [2013] VSC 365 - VSC 2013 case summary — Zoe

[204]

As Keane JA pointed out in Mier v FN Management Pty Ltd [2005] QCA 408; [2006] 1 Qd R 339 at 350 [24] and [27] (McMurdo P and Douglas J agreeing) "scheme" is not defined in the Act. He said that, based on the definition of "managed investment scheme" in s 9, an essential feature of a scheme is that persons contribute money or money's worth to a "program or plan of action" constituted by the scheme and this property will be pooled to produce benefits for those who made contributions. He had drawn on what Mason J had said (Gibbs CJ and Stephen J agreeing) in Australian Softwood Forests Pty Ltd v Attorney-General (NSW); Ex rel Corporate Affairs Commission [1981] HCA 49; (1981) 148 CLR 121 at 129 that "... all that the word "scheme" requires is that there should be 'some programme or plan of action' (Clowes v Federal Commissioner of Taxation [1954] HCA 10; (1954) 91 CLR 209 at 225)".

Certainly, the concept of a managed investment scheme under the Act involves a program or plan of action directed at the achievement of a financially beneficial result for those who make contributions to it. And, under the Act, a responsible entity has a prime function of applying those contributions to the acquisition of property and its subsequent use with the purpose of achieving that result.

In addition, the parties to a contract can seek to identify the nature of their relationship or the capacity in which a party contracts. However, those characterisations are not determinative themselves, of the true nature of that relationship or capacity. The parties cannot deem their relationship, or the capacity in which a party contracts, to be something that it is not: Hollis v Vabu Pty Ltd [2001] HCA 44; (2001) 207 CLR 21 at 45 [58] per Gleeson CJ, Gaudron, Gummow, Kirby and Hayne JJ who approved what McKay J said in TNT Worldwide Express (No 2) Ltd v Cunningham [1993] 3 NZLR 681 at 699 namely:

"The proper classification of a contractual relationship must be determined by the rights and obligations which the contract creates, and not by the label the parties put on it."

The substance and effect of the documents, construed in their context, is the critical determinant of the true nature of the parties' relationship and the rights, obligations and liabilities it creates: cf Radaich v Smith [1959] HCA 45; (1959) 101 CLR 209 at 214 per McTiernan J, at 217 per Taylor J, at 220 per Menzies J, at 223 Windeyer J, Dixon CJ agreeing with the other Justices.

[286]

Misrepresentation concerning effect of s 601FS

1 It was misleading or deceptive for the explanatory memorandum to state (as it did at p 27) that "some of the rights, obligations and liabilities of the former responsible entity in relation to the Scheme may become rights, obligations and liabilities of the new responsible entity ".

This is a representation as to a future matter, and the plaintiffs contend it is without reasonable grounds. In doing so, the plaintiffs rely on s.4(1) and s.4(2) of the ACL.

Misrepresentation by Omission - Accrued Rent Liabilities

2 It was a misrepresentation by omission for WABG and Macquarie not to advise Growers: (1) that there was a substantial risk that liabilities for accrued rent would novate to WABG under s 601FS; (2) of the quantum of the liabilities with respect to accrued rent that would novate to WABG in the event that s.601FS had that effect.

These omissions are misleading or deceptive because the Growers were entitled to believe, in all the circumstances, that the risk of novation and the quantum of the scheme's liabilities with respect to accrued rent would be communicated to them. The circumstances are that: (1) it was represented to the Growers that the Schemes could be restructured by excluding the commercial leases; (2) that Macquarie represented that Growers would be better off if they voted in favour of the proposed restructure than under the Liquidators' alternative; (3) that the new responsible entity would be indemnified for these liabilities so as to potentially materially reduce the return to Growers; and (4) that Growers were told of the risk of a potential claim for rent arrears (at p 27). Having done so, it was misleading or deceptive not to inform Growers of the magnitude of this risk.

Misrepresentation by Omission - Effect of s 601FS/FT in relation to Ongoing Rent

3 It was a misrepresentation by omission for WABG and Macquarie not to advise Growers in the explanatory memorandum that the effect of s.601FS and/or s.601FT is to novate ongoing rent obligations to the new responsible entity .

This omission is misleading or deceptive because the Growers were entitled to believe, in all the circumstances, that the effect of s 601FS/FT in relation to ongoing rent obligations would be communicated to them. The circumstances are as follows: (1) it was represented to the Growers that the Schemes could be restructured by excluding the commercial leases; (2) that Macquarie represented that Growers would be better off if they voted in favour of the proposed restructure than under the Liquidators' alternative; (3) that the new responsible entity would be indemnified for these liabilities so as to potentially materially reduce the return to Growers; (4) the novation of ongoing liabilities may have the consequence of rendering the Schemes unviable thus leading to the winding up of the Schemes; and (5) the fact that the ongoing obligations would novate unless agreement could be reached with each of the third party landowners in respect of the commercial leases to terminate those leases and compromise any claim for ongoing rent or damages in respect thereto.

Misrepresentations by Omission - Quantum of Ongoing Liabilities

4 It was a misrepresentation by omission for WABG and Macquarie not to advise Growers of the quantum of the scheme's ongoing liabilities.

This omission is misleading or deceptive because the Growers were entitled to believe, in all the circumstances, that the quantum of the scheme's ongoing liabilities would be communicated to them. These circumstances are that: (1) Macquarie represented that Growers would be better off if they voted in favour of the proposed restructure than under the Liquidators' alternative; (2) the new responsible entity would be indemnified for these liabilities so as to potentially materially reduce the return to Growers; (3) the novation of ongoing liabilities may have the consequence of rendering the Schemes unviable thus leading to the winding up of the Schemes; (4) there will be a funding shortfall for the schemes; (5) the implications of the funding shortfall for Contributory Growers in the form of additional funding requirements; and (6) that it is meaningless to advise Growers of the effect of s.601FS without informing them of the magnitude of the liabilities which will or may novate to the new responsible entity .

[342]

2.7 Continued Area and your interest following implementation of the Restructure Proposal [pages 18-19]

When the Scheme was established, the original responsible entity held leases with a number of different landlords over 15,629 hectares of planted area and each Woodlot represented approximately 1.0 hectare of forestry plantation.

The Restructure Proposal you are being asked to vote on in the Resolutions do not envisage carrying forward all existing leases. Instead, the continuing land area will reduce to approximately 14,000 hectares (the Continued Area). Therefore, each Woodlot (or interest) will reflect an entitlement to proceeds referable to approximately 0.90 hectares of forestry plantation.

If you currently have a lease agreement on land that has not been classified as part of the Continued Area, then:

the new responsible entity will, on your behalf under power of attorney, terminate the existing management agreement in respect of that land and replace it with the Forestry Management and Off-take Agreement covering the Continued Area (and other relevant agreements), and terminate the lease agreement in respect of that land; and

on and from the date the new responsible entity becomes the responsible entity (Appointment Date), you will hold Contributory Interests and/or Deferred Interests in the Scheme referable to your proportional interest in the Continued Area.

If you have a lease agreement that is classified as Continued Area, then:

your lease agreement in respect of that Woodlot will remain in force; and

the new responsible entity will, on your behalf under power of attorney, terminate your existing management agreement and replace it with the Forestry Management and Off-take Agreement covering the Continued Area (and other relevant agreements); and

on and from the Appointment Date, you will hold Contributory Interests or Deferred Interests in the Project referable to your proportional interest in the Continued Area.

Why has the Continued Area reduced? [page 18]

Unfortunately, for a significant amount of the land underlying your Scheme, the Manager and the New responsible entity believe it is not practical or (in some cases) advantageous to continue growing timber for harvest. In many cases, leases have been terminated or GPL may have breached its obligations due to non-payment of rent or failure to conduct statutory maintenance.

The Manager has assessed the leases and identified those for which remediating breaches (if any) is economically attractive. The Manager and the New responsible entity have identified these leases which they expect to carry across into your Scheme following the restructure. Furthermore, the Manager and the New responsible entity are only prepared to fund rent on peppercorn and/or deferred rent leases. These leases will form the Continued Area of your Scheme.

[350]

Under the Corporations Act, if the responsible entity of a registered scheme changes, some of the rights, obligations and liabilities of the former responsible entity in relation to the Scheme may become rights, obligations and liabilities of the new responsible entity .

Under the Restructure Proposal, the New responsible entity will be indemnified for all liabilities it incurs in relation to the proper performance of its duties and such amounts will be reimbursable out of Scheme property. To the extent that insufficient funds are available, the New responsible entity may also seek Additional Contributions from investors to fund these liabilities.

These liabilities may include, but are not limited to:

Rental amounts, including damages, payable under lease arrangements, whether incurred prior to the New responsible entity being appointed or after;

Interest or other costs of borrowing for the Scheme;

Costs associated with court proceedings; and

All other reasonable expenses incurred by the New responsible entity in administering or protecting the assets of the Schemes.

It is not certain whether or not such liabilities will become liabilities of the New responsible entity . The New responsible entity expects to defend a number of these potential liabilities if claimed. In particular, the New responsible entity expects to defend claims over rent payable under lease arrangements that were entered into by GPL and claims by the Receivers and Managers of GPL for fees or costs they may seek to claim against Scheme assets whilst GPL was insolvent or arguably in breach of its obligations or duties. There is a risk that multiple claims on such liabilities could occur simultaneously.

A significant potential claim is for rent arrears and loss of bargain damages under certain leases. To the extent the New responsible entity becomes liable for any additional liabilities it will be entitled to seek recovery of those liabilities out of Scheme assets. If this occurs, the New responsible entity will be reimbursed for the payment of such liabilities plus interest, and prior to returns being paid to Members."

At a glance

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Judgment (455 paragraphs)

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Legislation Cited (3)

Cases Cited (35)