In Korda v Australian Executor Trustees (SA) Ltd [2015] HCA 6, the High Court unanimously allowed an appeal and overturned the Victorian Supreme Court of Appeal decision finding that it was not the joint intention of the parties to a forestry investment scheme agreement to create an express trust over the proceeds of the sale of timber and scheme land in favour of the scheme’s investors.

Background

In 2008, S.E.A.S. Sapfor Forests Pty Ltd (the Forest Company) and S.E.A.S. Sapfor Harvesting Pty Ltd (the Milling Company) were taken over by Gunns Limited. In September 2012, secured creditors of Gunns Limited appointed receivers and managers to (the Receivers) the Forest Company and the Milling Company.

Prior to September 2012, the Forest Company and the Milling Company carried on a forestry investment scheme. The Forest Company sought investors in the scheme whereby the investors would be entitled to “net proceeds from the timber apportionable” for a particular plantation area. The net proceeds less the Forest Company’s expenses would then be paid to Australian Executor Trustees (SA) Limited (the Trustee Company) for distribution to the investors.

There were numerous documents recording the agreement between the parties to the scheme (including an agreement called “The Tripartite Agreement”. Notably, however, the trust deed between the Trustee Company and the Forest Company did not contain a provision expressly declaring or providing that the Forest Company was, or was to act as, a trustee.

Victorian Court of Appeal

The Trustee Company commenced proceedings on behalf of the investors and succeeded in the Victorian Court of Appeal. The trial judge and the Court of Appeal declared that the Trustee Company was beneficially entitled to approximately $34 million in respect of the tree sale proceeds and approximately $53.4 million in respect of land value payments. This decision was based upon prior authorities including Bahr v Nicolay (No 2) (1988) 164 CLR 604 where Mason CJ and Dawson J stated at [23] that:

“If the inference to be drawn is that the parties intended to create or protect an interest in a third party and the trust relationship is the appropriate means of creating or protecting that interest or of giving effect to that intention, then there is no reason why in a given case an intention to create a trust should not be inferred”

High Court

The High Court overturned the Victorian Court of Appeal decision and ordered that the Trustee Company was not entitled to either the tree sale proceeds or the land value payments. A summary of their Honours’ substantive reasons for the decision are summarised below:

1. French CJ at [53] reasoned that despite the fact that the creation of a trust might have been commercially advantageous; it did not reflect the joint intention of the promisor and promisee.
2. Hayne and Kiefel JJ at [79-83] emphasised that the relationship was contractual rather than one encompassing elements of a trust. They questioned that if the relationship was to be deemed as a trust, then:

“why was Forest Co not bound to keep the whole of the net amount it received (or that amount less the further deductions contemplated by the Tripartite Agreement) separate from its own moneys?”

1. Gaegler J at [111] agreed with the conclusion drawn by Hayne and Kiefel JJ that an obligation of a company to hold the proceeds separate from their own is the ‘hallmark duty of a trustee’, and the failure to do so indicates a lack of intention to form a trust.
2. Keane J held at [136] that the failure of the documents to make an express provision for a trust over the investment money while to form a trust expressly providing for other funds to be held on trust was a clear sign that there was no intent present.

Implications

The High Court’s decision is relevant for the following reasons:

1. The Courts will not later infer a trust relationship exists simply to protect the interests of particular parties or by reference to the commercial context.
2. Parties to a managed investment scheme wishing to establish a trust must ensure all scheme documentation clearly identifies an intention to do so.

3. Secured creditors should take some comfort that their claims to the assets of a company (insolvent or otherwise) will unlikely be defeated by trusts inferred from a scheme arrangement, as opposed to being clearly expressed in scheme documentation.