On 1 September 2011, Justice Judd of the Victorian Supreme Court
handed down judgment in the long-running class action issued by
investors against various companies in the failed Timbercorp group,
as well as directors of those companies. In the proceeding,
thousands of investors had sought to be released from their ongoing
liability to make loan repayments to Timbercorp Finance totalling
several hundred million dollars, and other compensation.
Although the judgment related only to a preliminary trial of
certain agreed common issues, His Honour's decision was so
adverse to the interests of the investors that it effectively
dismissed the claims of the class.
The representative plaintiff alleged that Timbercorp had failed
to disclose information about risks that it was required to
disclose in accordance with its statutory obligations. At trial,
his counsel sought to argue that the Timbercorp group had a
"fragile business model" which made its capital
management particularly sensitive to market conditions, including
the onset of the global financial crisis. This differed from his
pleaded case, which was that the group's business model had a
"structural risk" and that the group might fail because
of insufficient cash, with a consequential risk to the viability of
managed investment schemes.
His Honour ruled that the plaintiff should be confined to his
pleaded case, because evidence had been directed to the pleadings
rather than the new allegations raised at trial, and because
experts had not been briefed to express an opinion on whether
Timbercorp's business model was fragile, unusual or inherently
The central reasons for His Honour's judgment were as
Under the Corporations Act, Timbercorp was required to issue
Product Disclosure Statements (PDSs) to retail investors which
included information about any "significant" risks
associated with investing in Timbercorp products. It was also
required to provide retail investors with any up-to-date
information that might have a material influence on their decision
The pleaded "structural" risks of the Timbercorp
group were not significant so long as the group's financiers
supported it, as while they supported it there was no real threat
to its cashflow, and banks continued to support the group until
shortly prior to its collapse.
The only category of risk which was a "significant"
risk of the sort that must be disclosed by Timbercorp was its
so-called "performance risk", being that it may fail to
discharge its contractual obligations due to financial incapacity.
This was a risk that "went without saying" and was well
understood and accepted by business people. In any event, the PDSs
did include sufficient information about this performance risk by
referring to it in general terms.
The representative plaintiff failed in his personal claims,
His evidence was implausible, when he attempted to diminish the
importance of the tax benefits that he derived in favour of an
alleged long-term investment objective;
His Honour was not persuaded that the representative plaintiff
relied upon any PDS when deciding to make his investments, and
noted that a Court ought to be sceptical of protestations of
reliance on financial representations leading to an investment in a
In summary, Justice Judd applied a practical and commercial
approach in his judgment, exhibiting little sympathy for investors
in tax-driven schemes seeking to justify their investment motives
after the event.
The group members have appealed the decision to the Victorian
Court of Appeal.
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