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 risky.

The central reasons for His Honour's judgment were as follows:

  • 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 to invest.
  • 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, because:
    • 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 tax-driven scheme.

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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