Supreme Court New South Wales Medium Neutral Citation: Kerr v Australian Executor Trustees (SA) Ltd; Australian Executor Trustees (SA) Ltd v Fuller and others trading as Sparke Helmore Lawyers [2019] NSWSC 1279 Hearing dates: 1-3 and 8-10 July 2019; further submissions 12 and 23 July and 13 September 2019 Decision date: 26 September 2019 Jurisdiction: Equity - Commercial List Before: Stevenson J Decision: Plaintiff entitled to equitable compensation from the first defendant for breach of trust. First defendant's cross claim against second to sixty-first defendants to be dismissed. Catchwords: EQUITY – trusts and trustees – breaches of trust –professional trustee – pine plantation investment scheme – whether trustee acted in breach of trust by surrendering security without receiving amount due to covenantholders or alternative security – what equitable compensation should be awarded EQUITY – equitable remedies – equitable compensation – causation – whether retainer of solicitors by trustee an answer to claim for breach of trust – nature of advice given to trustee by solicitors – whether a reasonable trustee would have relied on the advice given CONTRACTS – solicitors – retained by trustee to advise whether transaction documents contained onerous or unusual provisions and whether documents in order for execution – whether such advice was an adequate response to the retainer – whether trustee would have entered transaction in any event Legislation Cited: Civil Liability Act 2002 (NSW) Corporations Act 2001 (Cth) Law Reform (Contributory Negligence and Apportionment of Liability) Act 2001 (SA) Real Property Act 1886 (SA) Transfer of Land Act 1958 (Vic) Trustee Act 1925 (NSW) Trustee Act 1936 (SA) Cases Cited: Ahrkalimpa Pty Ltd v Schmidt (No 3) [2019] VSC 197 Ancient Order of Foresters in Victoria Friendly Society Ltd v Lifeplan Australia Friendly Society Ltd [2018] HCA 43; (2018) 360 ALR 1 Armory v Delamirie (1722) 1 Stra 505; (1722) 93 ER 664 Australian Securities Commission v AS Nominees Ltd (1995) 62 FCR 504; [1995] FCA 1663 AVWest Aircraft Pty Ltd as trustee for AVWest Aircraft Trust v Clayton UTZ (A firm) (No 2) [2019] WASC 306 Bank of New Zealand v New Zealand Guardian Trust Co Ltd [1999] 1 NZLR 664 Breen v Williams (1996) 186 CLR 71; [1996] HCA 57 Bristol and West Building Society v Mothew [1998] Ch 1 Brogue Tableau Pty Ltd v Binningup Nominees Pty Ltd (2007) 35 WAR 27; [2007] WASCA 179 CGU Insurance Ltd v One.Tel Ltd (in liq) (2010) 242 CLR 174; [2010] HCA 26 Citicorp Australia Ltd v O'Brien (1996) 40 NSWLR 398 Dalleagles Pty Ltd v Australian Securities Commission (1991) 4 WAR 325 Dominic v Riz [2009] NSWCA 216 Elder's Trustee & Executor Co Ltd v Higgins (1963) 113 CLR 426; [1963] HCA 48 Fischer v Nemeske Pty Ltd (2016) 257 CLR 615; [2016] HCA 11 Houghton v Immer (No 155) Pty Ltd (1997) 44 NSWLR 46 Howe v Earl of Dartmouth (1802) 32 ER 56 John Pfeiffer Pty Ltd v Rogerson (2000) 203 CLR 503; [2000] HCA 36 Keddie v Stacks/Goudkamp Pty Ltd [2012] NSWCA 254 Kingsgrove RSL v Spasevski [2002] NSWCA 342 Korda v Australian Executor Trustees (SA) Ltd (2015) 255 CLR 62; [2015] HCA 6 Kowalczuk v Accom Finance Pty Ltd (2008) 77 NSWLR 205; [2008] NSWCA 343 Maxitherm Boilers Pty Ltd v Pacific Dunlop Insurances Pte Ltd [1998] 4 VR 559 National Trustees Executors & Agency Co of Australasia Ltd v Dwyer (1940) 63 CLR 1 O'Halloran v RT Thomas & Family Pty Ltd (1998) 45 NSWLR 262 Oztech Pty Ltd v Public Trustee of Queensland (No 15) [2018] FCA 819 Partridge v Equity Trustees Executors & Agency Co Ltd (1947) 75 CLR 149; [1947] HCA 42 Polkinghorne v Holland (1934) 51 CLR 143; [1934] HCA 28 Provident Capital Ltd v Papa (2013) 84 NSWLR 231; [2013] NSWCA 36 Rahme v Benjamin & Khoury Pty Ltd [2019] NSWCA 211 Surfstone Pty Ltd v Morgan Consulting Engineers Pty Ltd [2017] 2 Qd R 66; [2016] QCA 213 The Australian Special Opportunity Fund LP v Equity Trustees Wealth Services Ltd [2015] NSWCA 225 Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165; [2004] HCA 52 Waimond Pty Ltd v Byrne (1989) 18 NSWLR 642 Youyang Pty Ltd v Minter Ellison Morris Fletcher (2003) 212 CLR 484; [2003] HCA 15 Texts Cited: E Sykes and S Walker, The Law of Securities, (5th ed, 1993, Law Book Co) J D Heydon, M J Leeming and P G Turner, Meagher, Gummow & Lehane's Equity: Doctrines & Remedies (5th ed, 2015, LexisNexis Butterworths) M Davies, A Bell and P Brereton, Nygh's Conflict of Laws in Australia (9th ed, 2013, LexisNexis Butterworths) Category: Principal judgment Parties: David Kerr as additional trustee for the S.E.A.S Sapfor Forests Pty Ltd scheme (Plaintiff) Australian Executor Trustees (SA) Limited (First Defendant/Cross-Claimant) Adam John Fuller and others trading as Sparke Helmore Lawyers (Second to sixty-first Defendants/Cross-Defendants) Representation: Counsel: A J Sullivan QC with D Sulan and S Hartford-Davis (Plaintiff) J R J Lockhart SC with C McMeniman (First Defendant/Cross-Claimant) S R Donaldson SC with A R Zahra (Second to sixty-first Defendants/Cross-Defendants) Solicitors: Piper Alderman (Plaintiff) Gilchrist Connell (First Defendant/Cross-Claimants) YPOL Lawyers (Second to sixty-first Defendants/Cross-Defendants) File Number(s): SC 2017/164674 TABLE of contents The issues Mr Kerr's case AET's position Decision The scheme The Trust Deed The Tripartite Agreement The Encumbrances The events leading to the Tree Sale Agreement Gunns' first proposal The Deed of Variation Gunns' revised proposal First retainer of Sparke Helmore Sparke Helmore 17 August 2011 Certification Events leading to Sparke Helmore's 22 December 2011 advices The 22 December 2011 "Certification" and "Confirmation" The transaction Completion Events after completion The Covenantholders' loss The context of the breach of trust The breaches of trust alleged by Mr Kerr AET's release of the Encumbrances AET's failure to discover the ANZ Charge Payment of the purchase money into Gunns' overdraft account What was Mr Howard's understanding of the nature of the Encumbrances? AET's retainer of Sparke Helmore The retainers and advice The 17 August Certification not relied on in final submissions The scope of the 5 December 2011 retainer Unusual or onerous provisions Advice about risk mitigants The 22 December 2011 Certification The 22 December 2011 Document Confirmation Advice Was Sparke Helmore's advice adequate? What would AET have done if Sparke Helmore had advised it appropriately? Did AET's breach of trust cause the Covenantholders' loss? The Payout Counterfactual (a) No contemplation by Gunns that proceeds of Covenantholders' assets be used to reduce Gunns' debts (b) ANZ contemplated payout to the Covenantholders (c) Gunns' financial imperative (d) Gunns was powerfully motivated to avoid a "no transaction" scenario (e) Gunns willing to sell at undervalue AET's response to the Payout Counterfactual (a) Would ANZ only have agreed to release $16 million? (b) Would Gunns have responded to a refusal to release the Encumbrances by excising the Scheme Land from the sale? (c) Would Gunns have required retention of the amounts on account of its Covenantholder subsidiaries? (d) Would Gunns have refused to release the 2011 and 2012 Harvest Proceeds? (e) The 2011 Harvest Proceeds received by AET Conclusion on the Payout Counterfactual Quantum Deductions contended for by AET (a) Post Tree Sale Agreement settlement deductions (b) Commissions payable to the Milling Company and the Forest Company The Receiver Costs The Appointment Costs The Judicial Advice Costs Apportionment issue Exoneration under the Trustee Act Conclusion Judgment 1. The first defendant, Australian Executor Trustees (SA) Ltd ("AET"), is a professional trustee company. 2. AET was the trustee of a trust established on 6 March 1964 by a document called "1964 Trust Deed" made between AET and S.E.A.S Sapfor Forests Pty Ltd (the "Forest Company"). By the Trust Deed, AET agreed to be trustee of a forestry scheme concerning pine forests growing on land owned by the Forest Company in an area in Victoria and South Australia known as the "Green Triangle". I will call the land owned by the Forest Company on which the trees were planted the "Scheme Land". I will call the trees planted on the Scheme Land the "Scheme Trees". The beneficiaries of the trust were investors in the scheme, known as "Covenantholders". 3. On 7 April 2017, the plaintiff, Mr David Kerr, was appointed by this Court as additional trustee of the trust for the purpose of bringing these proceedings, for the benefit of the Covenantholders, against AET alleging a breach of its duties as trustee arising out of the sale in 2012 of the Scheme Land and the Scheme Trees. 4. The scheme established by the Trust Deed predated managed investment schemes now governed by the provisions of Ch 5C of the Corporations Act 2001 (Cth). Schemes such as that in this case were regulated by state legislation requiring an approved deed which was to contain a number of statutory covenants. The Trust Deed was such an approved deed. 5. Under the scheme established by the Trust Deed, Covenantholders acquired "Covenants" in return for capital investment in the scheme. The Covenants entitled Covenantholders to a payment from the Forest Company in the event that Scheme Trees were logged, milled and sold by an associated company, S.E.A.S Sapfor Harvesting Pty Ltd (the "Milling Company"), and the proceeds paid by the Milling Company to the Forest Company. 6. Each Covenantholder was entitled to a rateable share of the net proceeds of the sale of timber referrable to the relevant planting year. Some Covenants also contained an additional entitlement to receive a rateable share of any appreciation in the value of land between the time of planting and the time at which timber was felled or the land ceased to be the subject of the Covenant. 7. Also on 6 March 1964, AET, the Forest Company and the Milling Company entered into a "Tripartite Agreement" pursuant to which the Milling Company agreed to: 1. fell and remove trees from the Scheme Land as directed by the Forest Company; and 2. market and sell the timber. 1. The Tripartite Agreement specified how the proceeds of sale of the timber were to be dealt with. I describe that process below at [54] to [56]. In effect, the Milling Company was entitled to retain a commission of 20%, pay a commission of 5% to the Forest Company and retain the balance until well into the year following receipt. The parties referred to this as the "Proceeds Distribution Process". 2. Covenantholders' interests were protected by a requirement in the Trust Deed that AET register "Encumbrances" on the title of the Scheme Land which, as I have said, was owned by the Forest Company. The Covenantholders had no security from the Milling Company. 3. In 1964, the Forest Company and the Milling Company were subsidiaries of Auspine Ltd. In 2008, Gunns Ltd acquired Auspine. The Forest Company and the Milling Company thereby became subsidiaries of Gunns. 4. On 8 February 2010, Gunns, the Forest Company and the Milling Company granted a fixed and floating charge to ANZ Capel Court Ltd (the "ANZ Charge") over their assets as security for repayment of money lent by ANZ to the Gunns Group. The Forest Company thereby acted in breach of an express requirement of the Trust Deed that it not encumber the Scheme Land without AET's consent. 5. In early 2011, Gunns decided to sell the Scheme Land and, ultimately, the Scheme Trees (the "Proposal"). 6. Sale of the Scheme Land required AET's consent under the Trust Deed. AET gave such consent in the circumstances I describe below. AET retained Sparke Helmore to provide advice about the transaction. The nature of the advice sought and given and its consequences so far as concerns AET are matters of contention. 7. Ultimately, on 15 March 2012, AET, the Forest Company and the Milling Company entered into contracts with a third party to sell the Scheme Land and the Scheme Trees. The relevant contract was called the "Tree Sale Agreement". There were also various contracts in relation to the sale of the Scheme Land. 8. The consideration to be paid by the purchaser referrable to the Covenantholders' interest in the Scheme Trees was $33,999,999 (the "Tree Sale Proceeds"). The consideration to be paid by the purchaser referrable to the Covenantholders' interest in the Scheme Land was $4,882,380.58 (the "Land Sale Proceeds"). 9. AET was a party to the Tree Sale Agreement. The Tree Sale Agreement included provisions that: 1. on completion, AET discharge the Encumbrances it held over the Scheme Land; and 2. the proceeds of sale of the Scheme Land and the Scheme Trees, save for $1, be paid to the Milling Company. 1. The transaction completed on that basis. AET discharged the Encumbrances and, apart from $1, received nothing on completion. 2. The result was that the proceeds were to be dealt with by the Milling Company, and then the Forest Company, in accordance with the Proceeds Distributions Process; that is, held by the Milling Company until the following year, and only then paid to the Forest Company and thereafter to AET. 3. In fact, evidently because the Milling Company did not hold a separate bank account, the Tree Sale Proceeds and the Land Sale Proceeds were paid into Gunns' overdrawn account with ANZ Banking Corporation Ltd. 4. At the time the sale was settled, there were amounts that the Forest Company was obliged to pay AET from the 2011 and 2012 harvest years. These amounts were payable around mid-2012, in the case of the 2011 harvest year, and around mid-2013, in the case of the 2012 harvest year. The parties referred these amounts as the "2011 Harvest Proceeds" and the "2012 Harvest Proceeds". 5. The 2011 Harvest Proceeds totalled $11,051,041.49, of which $4,952,579.60 was received by AET. My attention as not been directed to evidence as to when this money was received. Evidently it was before completion of the Tree Sale Agreement. 6. The 2012 Harvest Proceeds totalled $5,148,552.31, none of which was received by AET. 7. Gunns and its subsidiaries, including the Milling Company and Forest Company, were placed into external administration on 25 September 2011; long before the Milling Company was obliged, under the Proceeds Distribution Process to make any payment to the Forest Company. The Land Sale Proceeds and the Tree Sale Proceeds were thereby lost. Neither AET, nor the Covenantholders, received a cent. 8. AET instituted proceedings against the receivers of the Forest Company and the Milling Company. AET alleged that the Forest Company and the Milling Company held the Tree Sale Proceeds and the Land Sale Proceeds on trust for the Covenantholders. That claim was upheld in the Supreme of Victoria and in the Victorian Court of Appeal, but ultimately dismissed by the High Court of Australia: Korda v Australian Executor Trustees (SA) Ltd (2015) 255 CLR 62; [2015] HCA 6. The issues 1. The following issues arise: 1. Did AET breach its duty as trustee to vindicate and protect trust property? 2. Is AET liable to pay equitable compensation to Mr Kerr by reason of its breaches of duty? 3. What is the quantum of any such compensation? 4. Is AET able to avoid liability by reason of its reliance upon the advice of Sparke Helmore? 5. What liability does Sparke Helmore have to AET in relation to the advice sought and obtained about the Proposal generally and the Tree Sale Agreement in particular? 6. Is AET entitled to exoneration under s 85 of the Trustee Act 1925 (NSW) or s 56 of the Trustee Act 1936 (SA)? 7. Did Sparke Helmore fail adequately to advise AET and, if so, are they liable to pay damages to AET? 8. Are the claims brought by Mr Kerr against AET apportionable such that the relevant provisions of either the Law Reform (Contributory Negligence and Apportionment of Liability) Act 2001 (SA) or the Civil Liability Act 2002 (NSW) apply? If so, what is a just and equitable apportionment? Mr Kerr's case 1. Mr Kerr contends that AET acted in breach of its duties as trustee under the Trust Deed by agreeing to the sale of the Covenantholders' interest in the Scheme Trees and the Scheme Land on the basis that the Encumbrances were discharged without ensuring that: 1. the Tree Sale Proceeds and the Land Sale Proceeds be paid to it, rather than the Milling Company; 2. the 2011 Harvest Proceeds and 2012 Harvest Proceeds be paid to it; 3. alternatively, the Covenantholders' interest be adequately secured. 1. Mr Kerr also contends that AET acted in breach of its duties as trustee by: 1. failing to discover the existence of the ANZ Charge, or if it did discover it, failing to act with proper vigilance in light of that discovery; and 2. allowing the Tree Sale Proceeds and the Land Sale Proceeds to be paid into Gunns' overdraft account. 1. Mr Kerr contends that AET thereby acted in breach of its duty: 1. to protect and vindicate the rights attaching to trust property, namely the Encumbrances: CGU Insurance Ltd v One.Tel Ltd (in liq) (2010) 242 CLR 174; [2010] HCA 26 at [36]; Fischer v Nemeske Pty Ltd (2016) 257 CLR 615; [2016] HCA 11 at [111]; 2. to "exercise all due diligence in carrying out its functions and duties and in watching the rights and interests of the Covenantholders"; a duty expressly imposed under cl 21 of the Trust Deed; and 3. in equity, to exercise the same care as an ordinary prudent business person would exercise in conducting the business as if it was his or her own: Oztech Pty Ltd v Public Trustee of Queensland (No 15) [2018] FCA 819 at [342], citing Breen v Williams (1996) 186 CLR 71 at 137; [1996] HCA 57; Australian Securities Commission v AS Nominees Ltd (1995) 62 FCR 504 at 516; [1995] FCA 1663 (Finn J). 1. Mr Kerr seeks to recover the following amounts on behalf of the Covenantholders: 1. the Tree Sale Proceeds not paid to AET: $33,999,998; 2. the Land Sale Proceeds: $4,882,380.58; 3. the 2011 Harvest Proceeds: $11,051,041.49, including the $4,952,579.60 actually received by AET; 4. the 2012 Harvest Proceeds: $5,148,552.31; 5. the costs incurred by AET in the Korda litigation (the "Receiver Costs"): $1,664,500.41; 6. costs associated with the appointment of Mr Kerr as additional trustee (the "Appointment Costs"): $371,976.90; 7. costs associated with judicial advice sought and obtained by Mr Kerr pursuant to s 63 of the Trustee Act 1925 (NSW) (the "Judicial Advice Costs"): $270,757.94; and 8. interest at court rates from the date of breach, said to be 16 March 2012, on the lost Tree Sale Proceeds, Land Sale Proceeds, 2011 Harvest Proceeds and 2012 Harvest Proceeds. 1. With interest, the amount claimed by Mr Kerr was, at the conclusion of the hearing, in the order of $82.46 million. 2. Mr Kerr, alternatively to his claim against AET, makes a claim against Sparke Helmore that in effect adopts AET's claim (see [35] below). AET's position 1. AET now accepts that, leaving aside the advice it sought and obtained from Sparke Helmore, by acting as I have set out, it acted in breach of its duty to exercise due care and diligence, and thus in breach of trust. 2. Thus, in final submissions, Mr Lockhart SC, who appeared with Mr McMeniman for AET, accepted that AET's conduct "fell below the standard required by the contractual arrangements which imposed obligations of care, vigilance, matters of that sort". 3. AET disputes that the Encumbrances were trust property and thus disputes it acted in breach of a duty to protect and vindicate such property. 4. AET contends that by seeking, obtaining and relying on advice from Sparke Helmore about the Proposal and the transactions I have described it either: 1. did not breach its duty to Covenantholders at all; or 2. should be exonerated for such breach or relieved from liability for under s 85 of the Trustee Act 1925 (NSW) or s 56 of the Trustee Act 1936 (SA). 1. Alternatively, AET seeks to have its liability apportioned between Sparke Helmore (and other parties) and, by its cross claim, seeks damages from Sparke Helmore. Decision 1. The Encumbrances were trust property. By agreeing to release the Encumbrances without receiving payment of the Tree Sale Proceeds, or security equivalent in value to the Encumbrances, AET acted in breach of its duty as trustee, including its duty to vindicate and protect that trust property. 2. The fact that AET sought Sparke Helmore's advice does not, without more, exonerate it from the consequences of that breach. 3. The advice that Sparke Helmore gave AET was not adequate and was not advice that any reasonable trustee would have relied on. 4. AET would have proceeded to complete the Tree Sale Agreement even if it had received adequate advice from Sparke Helmore. Accordingly, AET's cross claim against Sparke Helmore fails. 5. Mr Kerr's claims are governed by the law of South Australia and are therefore, as Mr Lockhart accepted in final submissions, not apportionable. 6. AET is not entitled to exoneration under s 56 of the Trustee Act 1936 (SA) or s 85 of the Trustee Act 1925 (NSW). 7. Mr Kerr is entitled to recover equitable compensation from AET in the amounts sought by him, except for the Receiver Costs. 8. As the Receiver Costs were paid out of the 2011 Harvest Proceeds and Mr Kerr is entitled to recover the 2011 Harvest Proceeds, Mr Kerr is not entitled also to recover the Receiver Costs. The scheme 1. The scheme was governed by: 1. the Trust Deed; 2. the Covenants, which appeared as a schedule to the Trust Deed; 3. the Tripartite Agreement; and 4. a Settlement Deed made between AET, the Forest Company and the Milling Company in October 1999. The Trust Deed 1. The Trust Deed recited that the Forest Company was "formed for the purpose of…acquiring lands and planting the same with pine trees and preserving the forests so planted until such time as [they] should become marketable". It also stated that the Forest Company proposed to raise funds for that purpose by inviting the public to subscribe for covenants of a kind to be described in prospectuses. 2. By the Trust Deed, the Forest Company appointed AET to act as trustee for the Covenantholders (cl 1). The Forest Company also promised AET that it would observe and perform the terms, conditions, agreements and obligations contained or implied in the Covenants (cl 2). In order "to secure due compliance by [it] with the terms and conditions hereof…that until the timber growing on the [Scheme Land] is…cut and milled and disposed of and the proper proceeds paid to [AET]", the Forest Company and AET agreed that: 1. the Forest Company would not sell or encumber the Scheme Land without AET's consent (cl 2(d)(i)); 2. AET's consent "shall not be unreasonably withheld subject always to [AET] being reasonably satisfied that…the Forest Company is able to continue to observe and perform its obligations pursuant to the [Trust Deed] and that there being no material prejudice to the interests of the Covenantholders or any reduction in the protected [sic] afford [sic] to them pursuant to the Deed" (cl 2(d)(i)); 3. the Forest Company would deposit all certificates of title to land on which timber was to be grown in a nominated bank safe deposit, or as otherwise mutually agreed, in the joint names of the Forest Company and AET (cl 2(d)(v)); and 4. AET would prepare, and AET and the Forest Company would execute, "encumbrances" of the kind set out in the Sch 10 of the Real Property Act 1886 (SA) prohibiting any dealings with the land without AET's consent "to secure the performance and observance" by the Forest Company of its obligations under the Trust Deed (cl 2(d)(v)); and 5. AET and the Forest Company would cause the Encumbrances to be registered on the title of the Scheme Land (cl 2(d)(v)). 1. Finally, by the Trust Deed, the Forest Company promised to pay AET monies it received from the Milling Company pursuant to the Tripartite Agreement, less a commission of 5%, within 30 days of receipt (cl 12(d)). 2. By the Trust Deed, AET agreed that, on receipt of monies from the Forest Company, it would "hold same in the interests of the respective Covenantholders" (cl 12(e)). 3. AET promised to hold various assets on trust for the Covenantholders including: 1. a "Maintenance Fund" and "Covenantholders' Distribution Accounts" into which monies paid to AET by the Forest Company would be deposited (cl 20A(a) and (b)); and 2. the "Titles to Planted Land" being the certificates of title deposited in the joint names of the Forest Company and AET (cl 20A(c)). 1. Clause 20A(c) repeated, as part of the description of the assets that AET held on trust for the Covenantholders, the provision in cl 2(d)(v) that AET would prepare, and that it and the Forest Company would execute, and that AET would then register, Encumbrances on the title of the land described in the certificates of title. 2. AET also promised to "exercise all due diligence and vigilance in carrying out its functions and duties and in watching the rights and interests of the Covenantholders" (cl 21A(a)). 3. For their part, by cl 14 of the Covenants, the Covenantholders agreed that they: "…shall accept [their] due proportion of the benefits from the sale of timber under the scheme laid down in the said Tripartite Agreement…in full satisfaction and discharge of all and singular the obligations of the [Forest] Company and the Covenantholder shall have no further claim whatever on the [Forest] Company." The Tripartite Agreement 1. By the Tripartite Agreement, the Forest Company appointed the Milling Company to "fell and remove from [its] plantations all trees then growing thereon as the Forest Company shall specify" (cl 3). The Forest Company also granted the Milling Company the "sole and exclusive right to sell…standing timber or timber felled and sold in log (peeled or unpeeled) or chip form from [the] plantations subject to covenant" (cl 14(a)). 2. The Tripartite Agreement set out the Proceeds Distribution Process. 3. It thus provided that the "monies received by the Milling Company from the sale of such logs or milled and manufactured timber shall be retained by the Milling Company" and would be applied in the following manner: 1. 20% of gross proceeds would be paid to the Milling Company (cl 9(a)); 2. 5% of the balance would be paid immediately to the Forest Company (cl 9(d)); and 3. the balance would be paid to the Forest Company "by five instalments on the last days of April, June, July and August then next following" the September by which the Milling Company received the monies (that is in the next year) (cl 9(f)). The Encumbrances 1. The Encumbrances established Covenants between AET and the Forest Company that stipulated that the Forest Company, as "encumbrancer", would "observe and perform all and singular the terms conditions and provisions contained and comprised in" the Trust Deed. 2. The Encumbrances were statutory instruments under the Real Property Act 1886 (SA) and the Transfer of Land Act 1958 (Vic). Once registered, the Encumbrances were recorded on the certificate of title of the land in question. A transfer of that land was subject to the Encumbrances. Both the Real Property Act and the Transfer of Land Act provided that the secured party had a power of sale in the event of default. 3. In E Sykes and S Walker, The Law of Securities, (5th ed, 1993, Law Book Co) it was stated: "The statutes confer on the charge much the same rights and remedies as in the case of the mortgage. Thus, he or she is given a right of sale on default in payment of the annuity or in the observance of any other covenant". 1. The Encumbrances were in the name of AET and provided security for the performance of the Forest Company's obligations under the Trust Deed. The registration of the Encumbrances thus prevented the Forest Company from dealing with the Scheme Land without the consent of AET. The events leading to the Tree Sale Agreement Gunns' first proposal 1. On 14 January 2011, Gunns issued an Information Memorandum concerning the possible sale by it of its "Auspine Land Estate and Plantations". The Information Memorandum stated: "Gunns is seeking to sell the land and plantations that comprise the former Auspine portfolio. The Auspine Land Estate includes 64 pine plantation sites totalling 46,252 hectares in the [Green Triangle], of which 27,966 hectares is in Victoria and 18,286 hectares is in South Australia. The net planted area is approximately 41,500 hectares comprising 90% of the gross land area. The remaining 10% is comprised of approximately 2,000 hectares of native vegetation and planation infrastructure such as gravel pits, fire breaks and roads. The majority of the standing timber on the plantations is owned by a third party under a Forest Property Agreement with the balance of the standing timber owned by Gunns or subject to Covenant Holder, Trust or Investor by Contract ownership. Gunns proposes to sell the entire estate with the prospective purchaser enjoying all of the benefits attributable to owning a high quality pine estate in Australia's premier plantation region." 1. Under the heading "Covenant Holders", the Information Memorandum stated: "The Covenant Holder scheme was operated for many years by [the Forest Company]. The last plantings occurred under the Covenant Holder scheme in 1985. Investors in Covenants hold an interest in the stumpage cash flows from the forest but do not hold any formal forest property ownership or lease over the Auspine Land Estate. As security the Trustee (Australian Executor Trustee) for the Covenant Holder Scheme holds an encumbrance charge and/or caveat (together 'Encumbrance') over the entire land title that includes any current Covenants. Encumbrances are removed as each title is clear felled." 1. On 8 February 2011, Gunns' General Counsel, Mr Tri Nguyen wrote to Mr Stuart Howard at AET. 2. Mr Howard was then the Senior Relationship Manager Corporate Trust at AET. He was the only lay witness AET called in the proceedings. 3. Mr Nguyen said that Gunns was considering selling the Auspine Estate noting that, under the Trust Deed, AET's consent was required. Mr Nguyen noted: "Obviously covenant holders' interests remain protected under the trust deeds and the various registered encumbrances and whoever buys the land will take it subject to those interest [sic]." 1. On 4 March 2011, Mr Nguyen wrote to AET, formally seeking AET's consent to the proposed sale. Mr Nguyen said: "…Gunns is considering the sale of its 64 pine plantation sites in the Green Triangle ('Softwood Estates'), including: ● The outright sale of the Softwood Estates; and ● The sale of Gunns' interest in the plantation timber, including its interests in and pursuant to the covenant holder scheme and other third party investors. Pursuant to the Trust Deed your consent is required in respect of any land that contains covenant holder interests. We therefore seek your consent. As stated previously, covenant holders' interests remain protected under the trust deeds and the various registered encumbrances and whoever buys the land will take it subject to those interests. On a related issue, as we are selling the land and our own plantation, there is a strong likelihood that whoever the purchaser may be, may want to enquire about purchasing the entire plantation on our land. This transaction may involve an offer by a third party for all covenant holder interests as well. I will notify you if an offer is forthcoming." 1. Thus, at this stage, Gunns' proposal involved the possible sale of the Scheme Land, subject to the Encumbrances, but not the Scheme Trees. However, in his last paragraph, Mr Nguyen foreshadowed the possibility of a sale of "all covenant holder interests as well" and thus, in effect, the winding up of the scheme. This was the Proposal (see [12] above). 2. AET, through Mr Howard, responded on 16 March 2011: "Clause 2(d)(i) of the Trust Deed states that 'the Forest Company will not sell land of which it is the proprietor nor without the consent of the Trustee encumber such land'. This undertaking by the Forest Company remains in force until the timber on the land has been harvested and the proceeds distributed. As there is still unharvested timber on this land, it would appear that the Trust Deed would need to be amended before the sale of the land could take place. The Trust Deed may be varied with the consent of the Forest Company and the Trustee in accordance with Clause 20(D)(b) [sic: 20E(b)] which stipulates that 'no alteration, variation or amendment shall be made which will materially prejudice or minimise the measure of protection of the holders of the said Covenants by these presents.' The second item in your letter relates to the possibility of a third party purchasing the land, as well as purchasing the covenant holder interests as well. This would result in all covenant holder interests being held by one entity. The Trust Deed does not appear to deal directly with the possibility of all covenants being transferred from one party to another. If this offer was to eventuate it would be prudent to call a meeting of covenant holders to consider the offer and if thought reasonable, to accept it. You have mentioned that this option may not be desirable due to the costs associated with calling a meeting of covenant holders. As discussed previously, the Trustee agrees in principle with what is being proposed in your letter, however, consent is dependent on covenant holders not being materially prejudiced and their interests not being diminished Having regard to what you have proposed it may be appropriate that the Trustee seeks independent advice in relation to consenting to you the proposals." 1. At that time, cl 2(d)(i) of the Trust Deed prohibited the Forest Company from selling the Scheme Land. Thus, Mr Howard's point was that if the Scheme Land were to be sold, the Trust Deed would need to be amended and that, by reason of cl 20E(b) of the Trust Deed, such amendment could not "materially prejudice or minimise the measures of protection" of the Covenantholders. This led to cl 2(d)(i) being amended by the Deed of Variation, made on 14 April 2011, to the effect set out at [47(b)] above. I set out the terms of the amendment below. 2. Nonetheless, Mr Howard expressed AET's agreement in principle to Gunns' proposal, subject to the interests of Covenantholders not being materially prejudiced or diminished and to the possibility of AET obtaining independent advice. Such advice was not sought for several months. The Deed of Variation 1. Later on 16 March 2011, Mr Nguyen sent Mr Howard a proposed Deed of Variation of the Trust "to enable to the proposed transaction to proceed". 2. Mr Howard responded on 17 March 2011 asking, amongst other things: "Can you please characterise the nature of the encumbrances (easements, charges, profits a prendre etc.) and explain in more detail if the sale of the land will alter the ability of the Forest Company to fulfil its obligations under the Trust Deed. Suitable wording in this regard should also be included in the Deed." 1. In response to Mr Howard's inquiry about the "nature of the encumbrances", Mr Nguyen responded the same day: "The registered encumbrances basically says [sic] that the Forest Company agrees to observe and perform its obligations under the Trust Deed. An incoming purchaser is also bound by this meaning they have to allow access to the trees to be maintained and eventually harvested, etc…". 1. On 25 March 2011, Mr Howard wrote to Mr Nguyen stating: "In order for the Trustee to form the opinion that the variation to the Deed is appropriate and that the sale of land is not materially prejudicial to the interests of the covenant holders we require the following: - A letter from the lawyers who have drafted the contract of sale, addressed to the Trustee, stating that the conveyance of the encumbrances from the vendor to the purchaser does in fact transfer all rights and obligations contained in the encumbrances and will bind the purchaser". 1. In response, Gunns arranged for letters to be written by lawyers in Victoria and South Australia and addressed to Mr Howard which stated, in the case of the Victorian lawyers, that: "The end result is that the Encumbrances remain registered on the title of the Land and the purchaser, as registered proprietor of the Land, assumes the rights and obligations of [the Forest Company] contained in the Encumbrances". And, in the case of the South Australian lawyers, that: "Upon registration at the Land Titles Office of a transfer of the Land to the purchaser of the Land, the purchaser will hold the Land subject to the Encumbrances." 1. On 30 March 2011, the Forest Company wrote to Mr Howard at AET giving this assurance: "As per the terms of the [proposed] Deed of Variation that Mr Nguyen has provided to you I confirm that the sale of the Auspine land is not and will not be materially prejudicial to the interests of the covenant holders. The primary reasons being: 1. There is no material change (if any) in the way in which the covenant holders' interests are managed; 2. Their interests, currently protected via the terms of the [Trust] Deed and the related Tripartite Agreement, which are further enhanced via validly registered encumbrances will remain." 1. These exchanges are relevant to Mr Howard's understanding of the effect of the Encumbrances. I return to this below. 2. On 14 April 2011, AET, the Forest Company and the Milling Company executed the Deed of Variation which had the effect of varying cl 2(d)(i) of the Trust Deed to read as I have set out at [47(b)] above. It thus read: "The Forest Company will not: 1. sell land of which it is the registered proprietor; or 2. encumber such land without the consent of the Trustee, which consent shall not be unreasonably withheld subject always to the Trustee being reasonably satisfied that the Forest Company is able to continue to observe and perform its obligations pursuant to the Deed and that there being no material prejudice to the interests of the Covenantholders or any reduction in the protected [sic] afford [sic] to them pursuant to the Deed". Gunns' revised proposal 1. On 1 June 2011, Gunns provided the ASX with a "Market Update". In that update Gunns stated that it was "managing the exit from a number of businesses deemed non-core" and that its board had agreed to achieve "the sale of the Green Triangle softwood planation estate in SE Australia". 2. By 24 June 2011, Gunns had evidently reached an agreement in principle to sell its plantation estate. Thus on 24 June 2011 Gunns wrote to AET: "I refer to your recent discussions with Tri Nguyen and confirm that as a result of a competitive bidding process conducted by us and our financial advisor ANZ Corporate Advisory, we have reached an agreement in principle with a U.S.-based timber investment management organization [sic] on the purchase of Gunns' softwood plantation estate in the Green Triangle including the standing timber and land the subject of the Covenant Holder schemes. The agreement is subject to the buyer securing financing and other customary conditions, and the sale would be expected to close no later than 31 October 2011. Subject to completion adjustments including adjustments for any harvesting of standing timber carried out prior to completion of the sale we expect a net return to Covenant Holders of approximately $45.7M. As mentioned, this offer was as a result of a competitive bidding process and we believe this is the best price that we are able to secure from the process. In our view this represents a good opportunity for Covenant Holders to realise a timely return for their investments, particularly given the current state of the market and the industry as a whole." First retainer of Sparke Helmore 1. This led Mr Howard to write to Mr Adam Fuller at Sparke Helmore on 27 June 2011: "Gunns have put forward a proposal for the sale of standing timber that relates to covenant holder interests (please refer to the proposal at the bottom of this email). I attach the following documents in relation to this transaction: - 1964 Trust Deed; - 1694 Tripartite Agreement; and - 1999 Deed of Settlement. Could you please provide a quote for providing advice on whether: (a) the proposal complies with the Trust Deed and associated documents; (b) it is detrimental or materially prejudicial to the Covenant Holders; (c) the Trustee's position is satisfactorily protected; (d) there are any other issues you feel are relevant to this matter." 1. On 14 July 2011, Gunns wrote to AET stating that "only two offers were received for the Covenant Holder Standing Timber" and that the proposed purchaser: "…is currently conducting further due diligence but are not willing to proceed further until they can get assurances from you on: 1. You will not object to the sale of the standing timber; and 2. You will execute the necessary releases so that the legal and beneficial interest in both the land and the trees passes to [the proposed purchaser] free of any interest by the covenant holders." 1. On 15 July 2011, Mr Howard sent an email to his superior, Mr Philip Joseph: "I spoke to Adam Fuller from Sparke Helmore yesterday and they have completed most of their review of the proposal for the sale of the standing timber and the trust documentation. [Mr Fuller] should be sending an email today summarising their view and he commented that, subject to receiving some more information in a couple of areas, the proposal looks to be in line with the terms of the trust documents. We should receive the final advice early next week. [Mr Nguyen] also rang yesterday to gauge our response to the queries in the email below and to advise that he will be in Sydney next Wednesday, so we may need to discuss this matter. On the basis that our legal advice is that the proposal is allowed under the documents and we are happy to proceed, we would not object to the sale of the timber and would execute the necessary releases to transfer the interests to the purchaser." (Emphasis added.) 1. The emphasised passage suggests that Mr Howard's state of mind, at this stage, was that the advice being sought from Sparke Helmore was as to whether Gunns' proposal was "allowed" under the Trust Deed and that AET's consent to the Proposal was also contingent on it being "happy to proceed". This becomes relevant to the question of the extent to which AET relied on the advice ultimately given by Sparke Helmore. 2. On 20 July 2011, Mr Nguyen advised Mr Johnston by email (with a copy to Mr Howard) that: "Completion is anticipated to be at the end of October 2011. We then require from the Trustee information on opening balances of undistributed amounts carried forward (if any). Once this information is available we expect to be able to, within a 2-3 weeks [sic] period, prepare relevant schedules for review and audit. Please note that we have been experience 5-6 weeks [sic] time frame with the audit so that will need to be taken into consideration. Distribution to the Trustee for subsequent distribution to covenant holders can proceed soon after that." 1. On 29 July 2011, Mr Andrew Johnston from Sparke Helmore sent Mr Joseph a "draft sign-off" from Sparke Helmore "for your review and comment". The "draft sign-off" was substantially in the same terms as that ultimately provided on 17 August 2011 (see [94]-[100] below). 2. On 2 August 2011, Mr Howard sent Mr Johnston an email that Mr Nguyen had received from the solicitors for the then proposed purchaser of the Scheme Land, who stated that one document the purchaser would require "from the Trustee on completion" was: "Release in registrable form by Trustee of all encumbrances registered by the Trustee on the titles to the land". 1. Mr Howard must have understood from this that it was likely, as must have been obvious in any event, that any purchaser of the Scheme Land would want clear title on completion, and thus that the Encumbrances would then need to be released. 2. On 3 August 2011, Mr Howard sent a further email to Mr Joseph referring to the advice sought from Sparke Helmore and stating: "The purpose of the advice was to ensure that Gunns' proposal to sell the standing timber was in accordance with the transaction [sic: trust] documents. Assuming it is, the valuation would then be reviewed against [the proposed purchaser's] offer and if competitive, we would consent to the proposal." (Emphasis added.) 1. Mr Howard agreed in cross-examination that he intended to say "trust documents" rather than "transaction documents". 2. The words I have emphasised in this email suggest, once again, that Mr Howard's state of mind at this stage was that Sparke Helmore's advice was being sought as to whether Gunns' proposal was permissible under the Trust Deed. 3. Thus Mr Howard gave this evidence in answer to questions from Mr Donaldson SC who appeared with Mr Zahra for Sparke Helmore: "Q. … So, at least by 3 August 2011 you'd arrived at the view, hadn't you, that provided it was permitted under the scheme documents and provided the valuation stacked up with the offer, you should go ahead and consent to the proposal? A. That's what that says, yes." 1. On 12 August 2011, Mr Johnston caused an ASIC search to be undertaken of the Forest Company, the Milling Company, Auspine and Gunns. Those searches revealed the existence of the ANZ Charge. Sparke Helmore 17 August 2011 Certification 1. On 17 August 2011, Sparke Helmore sent AET a letter of "certification". I will call this document "the 17 August 2011 Certification". 2. The letter stated: "3.2 We have been advised by the Forest Company that: (a) the Covenantholders have purchased Covenants under which they are entitled to, amongst other things: (1) certain net proceeds from the sale of Standing Timber in respect of the planting year for which a Covenant was purchased; and/or (2) a percentage of the value (determined at the time when all of the Standing Timber is sold in accordance with the Trust Documents) of certain freehold land on which the Forest Company has planted Standing Timber in respect of a Covenant; and (b) the Forest Company and the Milling Company propose to sell all of the Standing Timber and the real property on which the Standing Timber is located to [the proposed purchaser] in accordance with the Documents (Proposal)." 1. "Documents" was defined to mean those listed in Schedule 2 to the letter, and included the Trust Deed. 2. Under the heading "Certification", Sparke Helmore said: "Based on our review of the Documents and subject to the assumptions and qualifications set out in this letter, we are of the opinion that: … (c) if the Forest Company proceeds with the Proposal, this would not of itself be materially prejudicial to the Covenantholders' interests under the Trust Documents; and (d) on the basis of (a), (b) and (c) above, the Trustee is able to provide its consent to the Proposal." 1. Included in the "assumptions" to which this certification was said to be subject were that: "(jj) the Forest Company: (1) has done and will do everything in its power to inquire into and investigate measures calculated to secure reasonable financial returns to the Covenantholders; (2) has inquired into the best method of cutting and felling the Standing Timber; and (3) has used and will use its best endeavours to obtain reasonable returns for each Covenantholder". And: "(mm) the sale of any Standing Timber and any real property on which Standing Timber is located (and any amendment of any Trust Documents to allow for the sale of any Standing Timber and any real property on which Standing Timber is located) will not: (1) affect or impact in any way the Forest Company's ability to observe and perform its obligations under the Trust Documents; (2) materially prejudice the interests of any Covenantholders; or (3) reduce any protections, rights or benefits afforded to any Covenantholders pursuant to the Trust Documents". 1. The "qualifications" included that: "(k) on and after the date of this letter, all parties' obligations under or in connection with the Trust Documents, the Covenants and the Proposal (including any Environmental Law) will be strictly complied with, including that: (1) each Covenantholder will receive his or her due proportion of the benefit in respect of the relevant Covenant in accordance with the Trust Documents; and (2) all moneys due to a Covenantholder in respect of the relevant Covenant will be paid to that Covenantholder in accordance with the Trust Documents; and (3) the Forest Company will: (A) comply with all of its obligations in connection with distributing proceeds to the Covenantholders…". 1. These assumptions and qualifications were repeated in a further advice given by Sparke Helmore to AET on 22 December 2011. As I discuss below, AET's attention in final submissions ultimately focused on 22 December 2011 advice. Events leading to Sparke Helmore's 22 December 2011 advices 1. On 4 November 2011, Mr Nguyen wrote to Mr Howard: "Just to give you an update, we are still negotiating with [the proposed purchaser] as well as a third party… It is likely that instead of being the purchaser, [the proposed purchaser] will sell their trees as a part of the transaction with [the third party] being the ultimate purchaser of the…Auspine and Covenant Holder Trees. This does not affect the work that has been done with respect to the Covenant Holder trees as [the proposed purchaser] is simply being replaced by [the third party]." 1. On 22 November 2011, Mr Nguyen sent Mr Howard a draft of the Tree Sale Agreement. 2. That prompted Mr Howard to send Mr Nguyen an email on 23 November 2011: "Please provide the details of the purchaser. The opinion from Spark[e] Helmore and the Letter of Undertaking from the Gunns entities will both need to be amended to reflect the correct details of the purchaser and then re-executed. At present, both these documents specifically state that [the proposed purchaser is] the purchaser and the representations and warranties also refer to [the proposed purchaser]". 1. On 28 November 2011, Mr Nguyen sent Mr Howard a draft of a proposed Put & Call Option which, he said, "allows for [the purchaser] to nominate an eventual purchasing entity". Mr Nguyen said that the matter about which Mr Howard had enquired on 23 November 2011 was "a mechanical exercise" and that "you can simply refer [to] the Purchaser as the entity…under the Put & Call Option". 2. On 29 November 2011, Mr Howard wrote to Mr Johnston of Sparke Helmore: "As discussed last week, we have advised that [the proposed purchaser] is no longer the purchaser of the standing timber relating to covenant holders. There is a Put & Call Option Deed to be entered into by the sellers and purchaser, as attached. Under this document, the purchaser may appoint a nominee to enter into the sale contracts. As the letter of undertaking previously provided by the Auspine companies and your legal opinion to AETSA in relation to this matter specifically name the purchaser as [the proposed purchaser], could you please amend these documents to reflect the details of the new purchaser, or their appointed nominee in accordance with the Put & Call Option Deed?" 1. On 3 December 2011, Mr Nguyen sent Mr Howard the "final version of the Tree Sale Agreement for review". 2. Schedule 3 of that document contained an "Apportionment between Sellers" of the "Initial Purchase Price". It showed AET as one of the "Tree Owners" but that its "Portion of Initial Purchase Price" was "$0"; whereas the Forest Company's "Portion of Initial Purchase Price" for South Australia was $20,216,073 and for Victoria was $31,783,927. 3. This matter did not escape Mr Howard's attention. On 5 December 2011, Mr Howard wrote to Mr Nguyen: "…has the purchase price that is applicable to covenantholders interests been finalised? In Schedule 3 of the Tree Sale Agreement it appears to be zero". 1. Mr Nguyen replied within minutes, stating that the consideration under the Tree Sale Agreement referable to Covenantholders' interests was to be paid to the Forest Company; $20,216,073 in respect of the South Australian assets and $13,783,927 in respect of the Victorian assets. 2. That prompted Mr Howard to write to Mr Nguyen on 7 December 2011. First, Mr Howard observed: "The Tripartite Agreement and the Deed of Settlement contemplate the marketing/sale of the standing timber by the [Milling] Company, however, the Tree Sale Agreement sets out the Forest Company as the entity receiving the sale proceeds that relate to covenantholder interests." 1. Mr Nguyen replied by email later that day: "You are correct, it should be [the Milling Company] that is doing the selling pursuant to the powers given to it in the Deed of Settlement. We will amend the agreement to reflect this". 1. In his email, Mr Howard posed the following question: "Also, if [AET] is a party to the Tree Sale Agreement as one of the Sellers, rather than just consenting to the sale, why aren't the proceeds coming directly to [AET]?" (Emphasis added.) 1. Mr Nguyen replied: "The Trustee holds the beneficial interest and thus is the party required by the Purchaser to legally effect the sale. We are adopting a similar process to a harvesting and distribution event hence the proceeds, given the process is being managed by the [Milling] Company, needs to first go to the [Milling] Company for processing and the usual auditing to take place along with existing distribution going to the Trustee for final distribution to [the Covenantholders]." (Emphasis added.) 1. In effect, Mr Nguyen told Mr Howard that the money payable under the Tree Sale Agreement was to be dealt with as if the Proceeds Distribution Process was applicable. That is, the funds would be paid to the Milling Company, which would deal with funds in accordance with the regime specified in the Tripartite Agreement. 2. None of this caused any concern to Mr Howard. In his affidavit he said: "My understanding of Mr Nguyen's above response, at the time of receiving it, was that covenantholders' share of the proceeds from the Third Proposal would be distributed in accordance with the process for distributions outlined in the Tripartite Agreement... This did not raise any alarm with me at the time because: (a) if it was in accordance with the terms of the Trust Deed, I believed it was appropriate, particularly as it was my understanding that there was no other process for distribution of proceeds permitted under the Trust Documents; and (b) the Forest Company had never previously defaulted on any of its obligations under the Trust Documents since my involvement with the Trust from 2006." 1. Although an affidavit of Mr Johnston was served and was included in the Court Book, Mr Donaldson did not call Mr Johnston. Nonetheless, a number of Mr Johnston's file notes are in evidence. 2. One is dated 7 December 2011, and records an attendance of 20 minutes from 4.20 pm to 4.40 pm between Mr Johnston, Mr Howard and "Annette"; evidently Ms Annette Strickland from AET, who was copied in to the email exchange between Mr Howard and Mr Nguyen earlier in the day. 3. In setting out the terms of that file note, I have expanded some obviously abbreviated terms thus "[ ]" and have emphasised some entries with underlining. 4. So expanded, the note reads: "Covenantholder = Gross $34 M[illion] – Forest Co distributes to AET • when thinnings/harvest – P[ut and] C[all Option] transfers the net proceeds • 20% to Milling Co. • 5% commission. • I just thought we were consenting • Purchaser wants us to sign I think. It's fine though. Were also asking for: - We get instructions from trust manager. We get them to say all the R[epresentions] + W[arrantie]s from them are correct ----> back to back S.E.A.S. gives that to us. [AJ or AS]: We'll look into getting security from Gunns as well. - back to back rep[resentations] - letter of U[ndertaking] - valuation – been updated net 33 M[illion] = 34 M[illion]. I'm happy w[ith] that. • They'll do an ASX notice once docs signed. - Covenantholders will be advised (T[rust]ee will be told). Done by 31 Jan. • I'm away tomorrow arvo + Friday - take the doc as final • I'm reas[onably] comfortable w[ith] the R[epresentations] + W[warranties] + U[ndertaking]s • Not too concerned w[ith] the commercials • No real constraint to us to pay the $ to covenantholders. Just subject to the Trust docs." (Emphasis added.) 1. I think it likely that Mr Howard made the remarks that I have underlined. It is not clear who said something to the effect "[w]e'll look into getting security from Gunns as well". The note could read "AJ" (Mr Johnston of Sparke Helmore) or "AS" (Ms Strickland of AET). 2. The note shows that: 1. Mr Howard understood that the effect of activation of the Put & Call Option Deed would be that proceeds of the sale of the Scheme Land and the Scheme Trees – that is "$34 M" – would be "transferred to" the Milling Company and then the Forest Company and be subject to deduction of their commissions of 20% and 5%; that is be dealt with in accordance with the Proceeds Distribution Process; 2. Mr Howard knew the Encumbrances were to be discharged on settlement; hence Mr Johnston or Ms Strickland spoke of "getting security from Gunns as well"; 3. Mr Howard was comfortable to give certain representations, warranties and undertakings (evidently those called for in the Tree Sale Agreement) and was not concerned with "the commercials"; that is, I would infer, the potential risk of selling Scheme Land and Scheme Trees and waiting for the Proceeds Distribution Process to be applied to the proceeds of those sales, rather than retaining the Scheme Land and Scheme Trees and continuing the current arrangements, which included Covenantholders having the security from the Forest Company of the Encumbrances; 4. Mr Howard saw there being no "constraint" on AET requiring it to ensure that the Land Sale Proceeds and Tree Sale Proceeds be paid to Covenantholders; and 5. it was satisfactory to Mr Howard that payment of those proceeds be "just subject to the Trust Docs"; that is, in accordance with Proceeds Distribution Process. 1. Consistently with those conclusions, at 4.47 pm, some three minutes later, Mr Howard forwarded to Mr Johnston his email exchange with Mr Nguyen and said: "As discussed, here is the email that I sent to [Mr Nguyen] today and his responses. Please disregard his response in relation to the letter of undertaking. [Mr Nguyen] was referring to the letter provided back in March 2011 from the Forest Company that the proposal to sell the timber was a good thing, rather than the August 2011 letter of undertaking. Attached is the form of instruction that we will receive from [the Forest Company]. I'll send the updated valuation information in a separate email. Please let me know if you have any queries." 1. The only reference in this email to the discussion minutes before about the proposed flow of funds payable under the Tree Sale Agreement is the first sentence. Evidently, Mr Howard was content with what Mr Nguyen had told him, and with his discussion with Mr Johnston and Ms Strickland about that matter. He did not ask Mr Johnston anything further and was, in effect, sending Mr Johnston his email exchange with Mr Nguyen for information and because he had told Mr Johnston about it; hence the words "as discussed". 2. In the meantime, on 5 December 2011, Mr Howard had sent Mr Johnston a copy of the draft Tree Sale Agreement and asked: "Could you please provide a quote to review this document and the Put and Call Option Deed (sent last week) and to provide a legal signoff to [AET] in the attached format?" 1. Mr Howard's reference to the "attached format" was to a pro forma letter addressed to AET enquiring: "1. Details of document(s); 2. Confirmation that the document reflects the instructions from the Manager; 3. Any unusual or onerous provisions in the document(s); 4. Confirmation that the document includes the Trustee's limitation of liability clause; and 5. Confirmation that the document is in order for execution". 1. On the following day, 6 December 2011, Mr Johnston wrote to Mr Howard: "Thanks for asking for an estimate on this. We estimate that our costs will be $4-5K (excl. GST and disb.) to review the Put & Call Option Deed and Tree Sale Agreement (Documents) and provide a sign-off on them. Our estimate is on the basis that: ● our scope remains as above; ● the only new documents we're required to review are the Documents (and these are in substantially final form); ● our sign-off is limited to the matters contained in the form provided; ● there are no material issues, requiring further work, identified in our review of the Documents; ● we're not required to advise on any regulatory (including taxation) issues; and ● the matter completes before Christmas." 1. On 8 December 2011, Mr Johnston sent an email to Mr Nguyen: "As discussed with Ben, we've completed our preliminary review of the Tree Sale Agreement and the Put and Call Option Deed (Documents) on behalf of AET. At the moment, AET is simply included as a 'Seller' in both Documents. Consequently, AET is making various reps, warranties and undertakings and subjecting itself to a number of obligations (including a broad indemnity for the Tree Buyer's Loss following the breach of any Warranty by any Seller) which go over and above its role and are extraneous to the purposes of it being a party to the Documents. Those main purposes, as we understand it, being: ● consenting to the sale of the Covenant Holder Standing Timber pursuant to the Trust Documents; and ● providing reps and warranties re. its power to consent to the arrangements and its indemnification from trust assets (as set out in clause 3.7 of the Schedule 4 of the Tree Sale Agreement). Having regard to the above, could we ask that the Documents are amended to reflect this?" 1. In his closing submissions, Mr Lockhart submitted that this email was a reply to Mr Nguyen's email of 7 December 2011 to Mr Howard, which contained the responses I have set out above at [111] and [113]. I do not think this is correct. 2. Mr Howard's email to Mr Johnston of 7 December 2011, following the 20 minute conference that day, did not suggest that there was anything that Mr Howard wanted Mr Johnston to do about his exchange with Mr Nguyen. 3. Mr Johnston's 8 December 2011 email to Mr Nguyen was dealing with a different subject; namely whether AET should, in the Tree Sale Agreement, make representations and/or give undertakings. In the 7 December 2011 conference Mr Howard had expressed reasonable comfort with so doing. 4. On 9 December 2011, Mr Nguyen replied to Mr Johnston's 8 December 2011 email: "The Purchaser's view is that the Trustee under the Trust holds beneficial title and is required as the seller and it is appropriate that it provides such warranties as a seller. From our perspective, given that we have been managing the Trees we are prepared to provide the Trustee with the indemnities to cover any of the warranties required by the Purchaser. Please let us know urgently if this would be suitable and if so please provide us with a draft for review as soon as possible." 1. Sparke Helmore replied the same day: "We're taking instructions from AET re. your further indemnification offer. That aside, we note that the documents are drafted with AET as a Seller on a joint and several basis (clause 13.10 of the [Tree Sale Agreement]). At the very least this (along with clause 7.6) needs amendment to have AET as a Seller on a several basis from the other Sellers. Please revert to the Purchasers to confirm this is acceptable and in the meantime we will draft an indemnity into the Gunns group undertaking for consideration by AET." 1. Mr Johnston thereafter drafted undertakings which were ultimately given to AET by Gunns, Auspine, the Forest Company and the Milling Company on 15 December 2011. Sparke Helmore referred to these undertakings in its 22 December 2011 advice, with which I deal below. 2. On 20 December 2011, Mr Johnston arranged for further ASIC searches of the Forest Company, the Milling Company, Auspine Ltd and Gunns Ltd to be undertaken. Those searches revealed the ANZ Charge. 3. On 20 December 2011, Mr Nguyen wrote to Mr Johnston about a proposed "GST side letter". He wrote: "As discussed, the purchase of the [formerly proposed purchaser's] Trees may attract GST, which [the purchaser] has not contemplated. So that we can facilitate the transaction (for the benefit of all parties involved), we have agreed to use the proceeds from our own [Tree Sale Agreement] with [the purchaser] (including [Covenantholders'] interest) to assist [the purchaser] in funding the GST but only as a loan and [the purchaser] will have to repay that when they get their GST refund. Subject of course to the Trustee being comfortable." 1. On 21 December 2011, Mr Howard sent an email to Mr Johnston: "Have you spoken to [Mr Nguyen] following our phone call this morning? If the [Covenantholders'] proceeds are not affected, can we not be involved in the side letter?" (Emphasis in original.) 1. Later on 21 December 2011, Mr Johnston wrote to Mr Nguyen: "Further to your emails since yesterday, we have now discussed the issues with AET and respond as follows: ● on the basis of your correspondence and the information provided (noting that we have not seen/reviewed the 'Relevant Agreements' other than the Tree Sale Agreement), it is not clear that the proposed loan of the GST liability (Proposed Loan) would not affect the Covenantholders' sale proceeds; ● the Proposed Loan is not contemplated by the procedure for distributing sale proceeds of Covenantholder timber under the Trust Documents. It's therefore also not clear that any party is able, under the terms of the Trust Documents, to use proceeds in this way (irrespective of whether the Proposed Loan may only affect Gunns' proceeds as a Covenantholder); … ● if, as set out in your last email, the land proceeds of sale (under the docs that we haven't yet seen/reviewed) are enough to cover the GST, then presumably the loan can be done without the need for any side letter from AET. Given the above, a Side Letter in the form provided is not acceptable to AET. The Proposed Loan should rather be dealt with by Gunns (or [the originally proposed purchaser]) funding or making provision for the GST liability separately." 1. This email exchange is relevant to the question of Gunns' anxiety to ensure that the sale of the Scheme Trees and Scheme Land proceeded. I return to this below. The 22 December 2011 "Certification" and "Confirmation" 1. On 22 December 2011, Sparke Helmore sent to AET (Mr Howard) two documents. The first was a certification in similar terms to the 17 August 2011 Certification. I will call this document the "22 December 2011 Certification". 2. In the 22 December 2011 Certification, Sparke Helmore's recitation of the "Proposal" was the same as in its letter of 17 August 2011. 3. Under the heading "Certification" Sparke Helmore repeated what was said in the 17 August 2011 Certification (set out at [97] above) and, in addition, certified that based on their review of the "Documents" and subject to the assumptions and qualifications set out in the letter (which were the same as in the 17 August 2011 letter) that: "Based on our review of the Documents and subject to the assumptions and qualifications set out in this letter, we are of the opinion that: … (c) if the Forest Company proceeds with the Proposal, this would not of itself be materially prejudicial to the Covenantholders' interests under the Trust Documents; and (d) on the basis of (a), (b) and (c) above, the Trustee is able to provide its consent to the Proposal. (e) in order to facilitate the Proposal, the Trustee has the power to enter into the following documents: (1) a Put and call option deed to be entered into between, among others, the Trustee, the Forest Company and the Milling Company; (2) a Tree Sale Agreement to be entered into between, among others, the Trustee, the Forest Company and the Milling Company; and (3) a Side Letter Agreement to be entered into between, among others, the Trustee, the Forest Company and the Milling Company." This, relevantly, did no more than add subpar (e) to the corresponding Certification in the 17 August 2011 Certification (see [97] above). 1. It is on the second document sent by Sparke Helmore to AET on 22 December 2011 that, in final submissions, Mr Lockhart placed most reliance. 2. I will call this document the "22 December 2011 Document Confirmation Advice". 3. That document was headed "Tree sale documents to be entered into by [AET]" and recited that: "[The Forest Company] and [the Milling Company] propose to sell all of the Covenant Holder Standing Timber and the real property in which the Covenant Holder Standing Timber is located in accordance with the Trust Documents". 1. The expression "Trust Documents" was defined by reference to the definition in the Tree Sale Agreement, and therefore included the Trust Deed, the Tripartite Agreement, the Settlement Deed and the Covenants. 2. The letter recorded that: "We have acted as your legal advisors in connection with reviewing the following documents on your behalf: (a) a Put and call option to be entered into between, amongst others, [AET], the [purchaser], the Forest Company, the Milling Company, Auspine Limited…and Gunns Limited…; (b) a Tree Sale Agreement to be entered into between, among others, [AET], the Forest Company, the Milling Company, Auspine and Gunns...; and (c) a Side Letter Agreement to be entered between, among others, [AET], the Forest Company, the Milling Company, Auspine and Gunns. (the Documents)." 1. The letter continued: "5 Confirmation in relation to the Documents: We confirm that: (a) the Documents have been reviewed and settled in accordance with the instructions given by Stuart Howard; (b) the Trustee proposes to enter into the Documents as part of the 'Seller' group, which is the group of entities selling the Covenantholder Standing Timber and certain other assets…(Other Assets). The Documents contain various obligations, liabilities, representations, warranties and undertakings of, or given by, the Trustee in relation to the Sellers (other than the Trustee), the Other Assets and matters or things in connection with the Sellers (other than the Trustee) and the Other Assets. In accordance with your instructions, such provisions in the Documents are acceptable to the Trustee on the basis that it has received the benefit of the representations, warranties, undertakings and indemnities from the Forest Company, the Milling Company, Auspine and Gunns which are contained in the Undertaking Letter and the Milling Company Sign Off; (c) each Document includes a limitation of liability clause for the Trustee, that was provided and approved by the Trustee; and (d) on the basis of: (1) (a), (b) and (c) above, and (2) the Proposal being acceptable to the Trustee, we confirm that the Documents are in order for execution by the Trustee." (Emphasis added.) 1. The letter then stated that it was subject to the assumptions and qualifications thereafter set out which included the assumptions and qualifications which relevantly reflect assumptions (jj), (mm) and qualification (k) in the 17 August 2011 Certification that I have set out above at [98] and [99]. 2. To repeat, those assumptions and that qualification were: "(jj) the Forest Company: (1) has done and will do everything in its power to inquire into and investigate measures calculated to secure reasonable financial returns to the Covenantholders; (2) has inquired into the best method of cutting and felling the Standing Timber; and (3) has used and will use its best endeavours to obtain reasonable returns for each Covenantholder; … (mm) the sale of any Standing Timber and any real property on which Standing Timber is located (and any amendment of any Trust Documents to allow for the sale of any Standing Timber and any real property on which Standing Timber is located) will not: (1) affect or impact in any way the Forest Company's ability to observe and perform its obligations under the Trust Documents; (2) materially prejudice the interests of any Covenantholders; or (3) reduce any protections, rights or benefits afforded to any Covenantholders pursuant to the Trust Documents; … (k) on and after the date of this letter, all parties' obligations under or in connection with the Trust Documents, the Covenants and the Proposal (including any Environmental Law) will be strictly complied with, including that: (1) each Covenantholder will receive his or her due proportion of the benefit in respect of the relevant Covenant in accordance with the Trust Documents; and (2) all moneys due to a Covenantholder in respect of the relevant Covenant will be paid to that Covenantholder in accordance with the Trust Documents; and (3) the Forest Company will: (A) comply with all of its obligations in connection with distributing proceeds to the Covenantholders…". 1. Mr Lockhart's case was that the 22 December 2011 Document Confirmation Advice incorrectly certified that the Tree Sale Agreement was "in order for execution" by AET, and that it should have drawn attention to, as "unusual or onerous provisions", the provisions in the Tree Sale Agreement that: 1. the Encumbrances were to be discharged on completion; and 2. the relevant proceeds were to be paid to the Milling Company and not to AET. The transaction 1. Mr Nguyen was anxious that AET execute the Put & Call Option prior to Christmas. On 22 December 2011, he sent an email to Mr Howard and Mr Stewart: "Please urgently advise on the status of signing." 1. Mr Howard responded that the document should be executed "shortly", to which Mr Nguyen replied: "Anything to get me away from the cliff face would be gratefully accepted." 1. On 22 December 2011, the purchaser, Gunns, the Forest Company, the Milling Company, AET and various other Gunns' subsidiaries executed the Put & Call Option which, as the name suggests, gave the purchaser the right to call for, and the Gunns interests a right to put to the purchaser the obligation to purchase the Scheme Land and Scheme Trees. 2. On 22 December 2011, Gunns announced to the market: "The company has a heads of agreement with a purchaser for the MIS loan book. The purchaser is currently finalising transaction due diligence with completion scheduled in January 2012. This transaction is expected to reduce debt by approximately $85 million through cash received and the retirement of securitisation facilities." 1. On 15 February 2012, the Forest Company wrote to AET, enclosing discharges of the Encumbrances and stating: "We would be pleased if the attached documents could be executed and once signed could you please post them to Tri Nguyen…and he will hold them in escrow until completion of the transaction". 1. On 8 March 2012, at Mr Nguyen's request, AET forwarded the discharges of the Encumbrances to the purchaser's solicitor. 2. In the meantime, on 24 February 2012, Mr Nguyen wrote to Mr Howard and Mr Stewart: "One of the [purchaser's] investors has withdrawn from the transaction due to their exposure to the European financial situation. [The purchaser] is in the process of securing two more investors but those investors will not be able to complete their investment approval process until late May/June. The remaining investor in the [purchaser's] pool of fund[s] has agreed to proceed with the current transaction albeit in a varied form. In order to proceed with Completion and keep the structure of the Purchaser …in place Gunns has agreed to take the place of the investor that withdrew by becoming a member of the two…established trusts (Staple Fund) that will own and operate the assets. Once [the purchaser] has finalised the arrangement with the new investors they will come into the Staple Fund and Gunns will exit the Staple Fund. This is expected to be done by late May/June. This allows the transaction to Complete (anticipated for 16/03/12), rather than having to wait until [the purchaser] and the new investor complete their investment approval process and settle then, which will be late May/June. Gunns by agreeing to this also meant that it will be difficult for [the purchaser] to withdraw from the transaction altogether for lack of fund[s], which they currently can due to it being one of the conditions precedent, thus ensuring the sale will proceed." 1. By agreeing temporarily to become a member of the Staple Fund that would own and operate the various assets after the purchase, Gunns was in effect providing vendor finance. 2. Again, this is said by Mr Kerr to bespeak Gunns' anxiety to ensure that the transaction completed. 3. On 9 March 2012, Gunns wrote to ASX requesting a trading halt: "The Company requests a trading halt effective immediately for two business days. The Company has been advised that the Richard Chandler Corporation does not intend to proceed with its participation in the proposed Company equity raising as outlined to the market on 8 February 2012. The Company is in discussions with equity investors in respect of the raising. Further information will be provided in respect of the recapitalisation when these discussions are concluded." 1. On 13 March 2012, Mr Johnston and Mr Howard had a telephone call which Mr Johnston recorded in these terms, again expanding some obviously abbreviated terms thus "[ ]": "● Gunns issues – it is what it is ◦ [Undertaking] from all parties. That's the risk we're taking ◦ I don't know what alternatives we can take ◦ I don't think there's anything else we can do ◦ I'll let you know if there is but all we can do [at the moment] is just sit [and] hope/wait it's fine I understand the [Undertaking]/indemnity is only as good as the parties backing it (i.e. Gunns)". 1. The note appears to set out comments made by Mr Howard. Mr Lockhart submitted that those comments should have alerted Mr Johnston, and thus Sparke Helmore, that Mr Howard did not know what alternatives were available to or that there was anything that AET could do. 2. I do not agree. By now AET was committed to the transaction. The note does not suggest that Mr Howard was seeking any advice. Rather, Mr Howard was acknowledging the problematic position AET was then in. He knew Gunns was in trouble: it had just requested a trading halt. He knew the Tree Sale Proceeds were not to be paid to AET, but rather to the Milling Company. This had been discussed at some length with Mr Johnston on 7 December 2011. Mr Howard was simply acknowledging the commercial reality of the position AET was then in. 3. These matters caused some amendments to the Tree Sale Agreement to be made. 4. On 15 March 2012, Mr Howard wrote to Mr Johnston: "Given the recent amendments to the Tree Sale Agreement…could you please confirm that your signoff dated 22 December 2011 is still current?" 1. Mr Howard was referring to the 22 December 2011 Document Confirmation Advice. 2. On 14 March 2012, Sparke Helmore gave this "Confirmation": "Confirmation We confirm that: (a) the Amending Deed has been reviewed and settled in accordance with the instructions given by Stuart Howard; (b) the Amending Deed includes a limitation of liability clause for the Trustee, that was provided and approved by the Trustee; and (c) on the basis of: (1) (a) and (b) above; and (2) the Proposal being acceptable to the Trustee, we confirm that the Amending Deed is in order for execution by the Trustees." 1. Sparke Helmore added the following qualification, arising out of Gunns' trading halt: "(g) The shares of Gunns Limited (the ultimate holding company of the Gunns Group Parties and listed on the Australian Securities Exchange) were recently placed in a trading halt and there has also recently been a reduction in the share price and the total market capitalisation value of Gunns Limited. As a result, the value and utility of the indemnities and other benefits provided to the Trustee under [various letters of undertaking given by Gunns] (including the ability of the parties to the [letters of undertaking] to make payment under any indemnities) may have been adversely affected. Notwithstanding this, we confirm the trustee's instructions that the proposal, the [letters of undertaking] are acceptable to it from a commercial perspective." Completion 1. The Tree Sale Agreement was executed on 15 March 2012. As I have mentioned, the consideration payable by the purchase for the Scheme Trees was $33,999,999. Of that, only $1 was payable to AET. The balance, $33,999,998 was payable to the Milling Company. In return, AET agreed that the Discharges of Encumbrances delivered to the purchaser's solicitor on 8 March 2012, would no longer be held in escrow. 2. In effect, AET agreed to discharge the Encumbrances on completion in exchange for the payment of $1. 3. Completion of the Tree Sale Agreement occurred on 16 March 2012. 4. The $39,999,998 due to be paid to the Milling Company was not paid to the Milling Company. It was paid into Gunns' overdrawn account with the ANZ and partially repaid the amount owing by Gunns to ANZ. 5. On 14 March 2012, AET provided its consent under cl 2(d)(i) of the Trust Deed to the sale of the Scheme Land. AET was not a party to the land sale contracts, which completed on 19 March 2012. As mentioned, the Land Sale Proceeds referable to the Covenantholders' interest was $4,882,380.58. 6. That amount was not paid to AET on completion of the sale of the Scheme Land. It has not been paid since. Events after completion 1. Almost two months after completion, Mr Nguyen wrote to Mr Howard stating that "we have been receiving a number of enquiries about the sale of the [Covenantholders'] standing timber as a result of our update in the annual report". 2. On 7 May 2012, Mr Nguyen sent out a "proposed update letter" to be sent to Covenantholders. The proposed letter set out "an estimated time table as to when [Covenantholders] can expect to receive their final distribution" under the Trust Deed. The draft concluded: "Upon receipt of the full proceeds, the Trustee will then make the appropriate distribution to all [Covenantholders] in accordance with the established time table for all distributions, which is expected in September 2013". 1. That prompted Mr Howard to write to Mr Nguyen on 8 May 2012: "While the timelines set out in the letter are useful, the letter should also deal with potential questions that [Covenantholders] may raise. We too have received a number of enquiries from [Covenantholders] regarding the sale and distribution of proceeds and the theme of these enquiries, other than how much the [Covenantholders] will receive, is around the timing of the final distribution. As the distribution will be the final one, we feel there should be a more detailed explanation of each step of the process and to also answer the following questions: - If the sale was completed in March 2012, why will it take until September 2013 to pay the distributions? What has been the timeframe for previous sales of timber and subsequent distributions? - Who is currently holding the sale proceeds? - If the sale proceeds are held by Gunns (or a subsidiary), are they quarantined from company monies? - Who is entitled to interest earned on the sale proceeds?" 1. Mr Howard's first question ("why will it take until September 2013 to pay the distributions?") appears to show that, notwithstanding the 20 minute discussion on 7 December 2011 with Mr Johnston (see [117] to [121] above), Mr Howard had forgotten Mr Nguyen's 7 December 2011 explanation that the reason the Tree Sale Proceeds were to be paid to the Milling Company, rather than AET, was because "we are adopting a similar process to a harvesting and distribution event" (see [113] above); that is, adopting the Proceeds Distribution Process. 2. Mr Howard's second question ("who is currently holding the sale proceeds?") shows that he, and thus it seems AET, did not know where the Tree Sale Proceeds and the Land Sale Proceeds were; let alone that the Tree Sale Proceeds had been paid into an overdraft account in the name of Gunns. 3. On 23 May 2012, the Forest Company and the Milling Company sent to the Covenantholders a pro forma letter which stated: "…we advise that the sale of all Covenantholder standing timber (including relevant land interest covenants) by [the Milling Company] was completed on 16 March 2012 and we are in the process of carrying out post completion adjustments with the purchaser. We set out below an estimated time table as to when Covenantholders can expect to receive their final distribution in accordance with the Trust Deed, the Tripartite Agreement and the 1999 Settlement Deed ('Trust documentations'). … As the sale is in the year ending 30 September 2012, in accordance with the Trust documentations, the proceeds will be held by the Milling Company for payment to [the Forest Company] in five instalments on the last day of the month of April, May, June, July and August 2013. Within 30 days of receipt of this money the Forest Company will pay that money to the Trustee for distribution to Covenantholders. We set out below in further detail the following process that will be applied (as has been applied with previous distributions): … September 2013 - Distribution Upon receipt of the full proceeds, the Trustee will then make the appropriate distribution (including interests earned whilst in the Trustee's possession) to all Covenantholders in accordance with the established time table for all distributions, which is expected in September 2013." 1. On 10 July 2012, AET's auditors, KPMG, advised AET that the amounts due to Covenantholders should be booked in AET's accounts as deferred consideration. KPMG said this was so because, at the date of entry into the Tree Sale Agreement: "…the standing timber was sold at an agreed price (subject to completion adjustments) and those monies became payable to the Covenant Holders at that date. There were no further ongoing obligations on behalf of either party that would mean that the Covenant Holders would not be entitled to the sale proceeds, all that remained to be agreed was the final quantum of the proceeds (due to the completion adjustments). This differs from the usual situation as the timber is required to grow to a determined size, felled and sold before monies become payable to the Covenant Holders each year." 1. On 18 July 2012, Mr Howard wrote to Mr Nguyen: "There have been a number of media reports in recent months regarding the financial position of [Gunns] and its shares have been suspended from trading on the ASX for the past 4 months. Given that the sale proceeds are likely to be held by a subsidiary of Gunns for a substantial period of time prior to distribution to the Trustee, we are concerned those funds will not be quarantined and protected for the benefit of covenant holders' interests. It follows that if Gunns' financial position should worsen, the funds could potentially be distributed to creditors in the event of insolvency. If the funds are not quarantined, we believe it would be prudent for Gunns to either grant security over those funds, or if that is not an option, have them paid to the Trustee. In light of the above, could you please confirm the following: - The amount of the sale proceeds that are held by the Milling Company in relation to covenant holders' interests; - Whether these funds are held separately from any monies associated with the Milling Company, Gunns or any of its subsidiaries; - In the event of insolvency of Gunns or any of its subsidiaries, that the sale proceeds relating to the covenant holders' interests would be quarantined and not be available for a receiver or administrator to distribute to creditors of the Gunns entity." 1. On 1 August 2012, Gunns wrote to ANZ seeking ANZ's consent to the retention by Gunns of $15 million from "Tranche 2" of the proceeds of sale of its assets "to provide adequate funding in relation to its $15 million mandatory obligations to growers under the Great Southern Managed investment scheme". Evidently this was a different scheme than that the subject of these proceedings. ANZ replied on 9 August 2012 (see [186] below). 2. AET sent a further letter to Gunns on 2 August 2012, seeking a response to its letter of 18 July 2012. 3. Ultimately, Mr Nguyen wrote to AET on 2 August 2012: "We understand the concerns raised and thank you for bringing it to our attention. We confirm that the amount of the sale proceeds that are held by the Milling Company in relation to [Covenantholder] interests is approximately $27.6M. Please note that internal review is still ongoing (involving for example a review of our harvesting up to Completion and cross referencing against [Covenantholders] planting years and reallocation where required) and we will let you know as soon as we have finalised this figure. This amount will be held separately. That is, it will be quarantined. As the proceeds are [Covenantholders'] proceeds (the Trust documentations makes this very clear), we see no basis for any party to access this sum other than the Trustee for distribution to [Covenantholders] in accordance with the Trust documentations." 1. On 9 August 2012, ANZ replied to Gunns' letter of 1 August 2012 stating that: "…the lenders remain to be convinced that the Covenant Holders have any direct entitlement (in trust or otherwise) to the net proceeds of unit redemptions that ranks ahead of the lenders." 1. ANZ continued that, nonetheless, it would direct that the relevant funds be paid to Gunns for distribution to Covenantholders: "…if [Gunns] can satisfy the majority of lenders in their absolute discretion that the Redemption Proceeds are monies held on trust, or otherwise properly belonging to, the Covenant Holders". 1. On 16 August 2012, Mr Nguyen wrote to Mr Howard, in effect repeating what he had said in his email of 2 August 2012. 2. On 17 August 2012, Mr Howard replied: "As discussed in our phone call yesterday, one of our main concerns is what would happen to the sale proceeds relating to [Covenantholders'] interests if there was an event of insolvency in [Gunns] or any of its subsidiaries. If security has been granted by Gunns entities, in particular, the Milling Company and the Forest Company, as part of cross guarantees to secured creditors, we are concerned that a receiver may seek to take control of the assets of those entities, notwithstanding that funds held have been accounted for as a liability to a third party and held in a separate account." 1. Mr Howard's expression of concern "[i]f security has been granted by Gunns entities", particularly the Milling Company and the Forest Company, may suggest that Mr Howard did not know of, or had forgotten about, the existence of the ANZ Charge which, as I have set out above, was created on 8 February 2010. I will return to this. 2. In the meantime, on 10 August 2012, Mr Howard wrote to Mr Johnston of Sparke Helmore seeking: "…a quote for providing advice on the Trustee's position in relation to the sale proceeds if Gunns or its subsidiaries were to become insolvent". 1. On 24 August 2012, Mr Johnston wrote to Mr Nguyen asking Gunns to provide him with a series of documents including "each security granted by the Milling Company and/or the Forest Company in favour of ANZ Capel Court Ltd". 2. On 29 August 2012, Mr Howard wrote an internal email reporting that: "- Sparke have drafted initial advice - Sparke have made a strong argument that the trust structure is a constructive trust under common law - Sparke will draft a letter to the Forest and Milling Companies stating the intention of the parties and demanding immediate payment of trust assets. Given that Gunns have complied with the trust documents this may not work. - Sparke will also request Gunns to sign a declaration of Trust in regards to the trust assets - This letter will be sent this afternoon along with preliminary advice to AET." 1. On 29 August 2012, Sparke Helmore wrote to Mr Nguyen requesting that the Forest Company and the Milling Company execute an enclosed declaration of trust and stating: "In light of recent speculation regarding the financial position of [Gunns], our client requests the immediate payment of all of the Proceeds (which the Milling Company and Forest Company hold on trust for the Covenant Holders) to AET for the benefit of Covenant Holders". 1. The declaration of trust was never signed and the proceeds were never paid. 2. On 25 September 2012, voluntary administrators and receivers were appointed to Gunns and its subsidiaries, including the Forest Company and the Milling Company. 3. Thereafter, as I have mentioned, AET commenced proceedings in the Supreme Court of Victoria claiming that the receivers held the relevant proceeds on trust for AET. The proceedings were ultimately dismissed by the High Court: Korda (see [24] above). The Covenantholders' loss 1. The result is that the Covenantholders have received no payment for their investments since 2011. 2. The Tree Sale Proceeds, the Land Sale Proceeds, part of the proceeds for the 2011 and all of the proceeds of the 2012 Harvest Years have been lost. The context of the breach of trust 1. AET did not seek Sparke Helmore's advice as to whether it should consent to the Gunns' proposal to sell the Scheme Land and the Scheme Trees. Thus Mr Howard agreed in cross-examination that "we weren't asking them to opine on the windup of the scheme". 2. By the time AET committed itself to the transaction by executing the Put & Call Option Deed on 22 December 2011, AET knew two things about the consequences of it consenting to the Proposal. 3. The first was that no money would be paid to Covenantholders on completion of the proposed transactions. Thus: 1. as early as 20 July 2011, Mr Nguyen had foreshadowed to Mr Howard that the distribution from the Forest Company to AET would not occur until approximately seven to nine weeks after completion (see [85] above); 2. on 5 December 2011, by which time the form of the transaction documents was known, Mr Nguyen told Mr Howard that, on settlement, the consideration totalling $34 million would be paid directly to the Forest Company (see [109]); 3. on 7 December 2011: 1. Mr Howard asked Mr Nguyen why the proceeds were not being paid to AET on completion (see [112] above); 2. Mr Nguyen replied saying "we are adopting a similar process to a harvesting and distribution event"; that is Gunns proposed that the proceeds of the sale of the Scheme Trees and Scheme Land be dealt with in accordance with the Proceeds Distribution Process (see [113] above); 3. almost immediately thereafter, Mr Howard spent 20 minutes discussing the question with Mr Johnston from Sparke Helmore or Ms Strickland and concluded the conference by saying that he was "not too concerned with the commercials" and that there was "no real constraint to us to pay the money to Covenantholders" and that the proceeds would be "just subject to the Trust docs" (see [119] above); and 1. Mr Howard had the understanding about this matter that he set out in his affidavit (see [115] above). 1. The second was that the Encumbrances would be discharged on completion. Thus: 1. on 14 July 2011, Mr Nguyen told Mr Howard that the prospective purchaser was not willing to proceed without an assurance from AET that it would not object to the sale of the Scheme Trees and that it would "execute the necessary releases so that the legal and beneficial interest in both the land and the trees passes to [the proposed purchaser] free of any interest by the covenant holders" (see [82] above); 2. on 2 August 2011, Mr Nguyen forwarded to Mr Howard an email from the solicitors for the purchaser stating that included in the documents required from the Trustee on completion was a "[r]elease in registrable form by Trustee of all encumbrances registered by the Trustee on the titles to the land" (see [87] above); 3. in answer to questions from me, Mr Howard said that "from the broader transaction being the sale of the timber I could understand that the purchaser would want to be purchasing that timber unencumbered"; 4. in answer to questions from Mr Sullivan QC, who appeared with Mr Sulan and Mr Hartford-Davis for Mr Kerr, Mr Howard agreed that it was "very clear" that the purchasers of the Scheme Land the Scheme Trees were insisting on "release of the securities". 1. Mr Howard said that he did not regard the release of the Encumbrances as being particularly significant as he understood that they were no more than water rights or rights of way. I will return to this below. The breaches of trust alleged by Mr Kerr 1. Mr Lockhart did not dispute that AET owed the Covenantholders duties to: 1. protect and vindicate the rights to trust property; 2. exercise due diligence; and 3. exercise the care an ordinary prudent businessperson would exercise in the circumstances. AET's release of the Encumbrances 1. Mr Sullivan submitted, on behalf of Mr Kerr, that AET acted in breach of its duty as trustee by discharging the Encumbrances without first either procuring payment of the amounts owing or substitute security. 2. In effect, Mr Kerr's case was that, unless AET could procure payment of the amount due to Covenantholders on completion, or substituted security, it should have refused to consent to the Proposal. 3. In final submissions, Mr Lockhart accepted that AET's decision to release the Encumbrances fell "below the standard of a prudent trustee" (see [32] to [31] above). 4. Mr Lockhart said: "…we accept that we fell below the standard of care required by the contractual arrangements under the trust deed which imposed obligations of care, vigilance, matters of that sort". And: "If AET had not sought the advice [from Sparke Helmore] and consented to this transaction then, yes, we accept that it would be liable for breach of its duties of care and vigilance under the contract documents". 1. Mr Lockhart and I had this exchange: "HIS HONOUR: Is this right then: do you say that Sparke Helmore is your only answer to the breach of trust case? LOCKHART: Yes." 1. Mr Lockhart submitted, however, that AET's breach was confined to failing to exercise due care and vigilance and did not amount to a failure by AET to get in, protect and vindicate trust property. That was because, Mr Lockhart submitted, there was "no trust property to 'get in' or 'protect'". In making that submission, Mr Lockhart relied upon the decision of the High Court in Korda. 2. In my opinion, Mr Lockhart's reliance on Korda was misplaced. As Mr Sullivan submitted, the dispute in Korda was whether the Forest Company and the Milling Company were trustees of the fund comprising the Tree Sale Proceeds and the Land Sale Proceeds. Korda was not concerned with the relationship between AET as trustee and the Covenantholders as beneficiaries. 3. The nature of the Encumbrances was not explored in argument before the High Court. Thus French CJ observed, at [35], that: "The precise nature of the 'security interest' was not explained in argument. It seems to have been used in the sense of anything that entitles an obligee to resort to a fund or property to ensure performance of an obligation." 1. As I have set out above at [50], under cl 20A of the Trust Deed, AET promised to hold the "Titles to Planted Land" in trust for the Covenantholders. By the same clause, AET agreed to prepare and register the Encumbrances on those titles. AET thereby agreed to hold the Encumbrances on trust for the Covenantholders. 2. The Encumbrances were registered in AET's name but AET could not deal with them as if they were its own. As Mr Lockhart accepted, the Encumbrances were "there for the benefit of AET and the Covenantholders". 3. I think it clear that the Encumbrances were trust property. 4. Mr Lockhart did not dispute that, if that were so, any loss suffered by Covenantholders by reason of AET's release of the Encumbrances constituted a failure on its part to "protect" that trust asset and to "vindicate" the rights attaching to that trust asset. AET's failure to discover the ANZ Charge 1. Mr Kerr contends that: "AET also acted in breach of its duties by failing to discover the existence of the ANZ charge or, if it did discover it, failing to act with proper vigilance in consequence of that discovery. … The existence of the ANZ charge, about which AET knew or ought to have known, should have heightened AET's vigilance in consenting to any sale amounting to the winding up of the scheme, and discharging its security." 1. It seems likely that AET was aware of the ANZ Charge. 2. On 7 November 1996, AET appointed Mr Robert Graham as its nominated director to the board of the Milling Company. Mr Graham was a director of the Milling Company at all material times, and particularly during 2010 when the ANZ Charge was taken over the assets of the Milling Company and the other entities in the Gunns Group. It seems highly unlikely that that occurred without board approval. I would infer that AET's nominated director, specifically appointed in accordance with the Trust Deed for the purpose of monitoring the affairs of the Milling Company in the interests of Covenantholders, was aware of the existence of the ANZ Charge. His knowledge should be attributed to AET. 3. Mr Howard accepted in cross-examination that it was very likely that he read Gunns' financial statements for the year ended 30 June 2011, and that it was highly likely that he read the notes to those statements. Those notes disclosed that there was a fixed and floating charge over the assets of Gunns and its subsidiaries. 4. But Mr Howard said, in his affidavit, that: "191. I did not become aware of the ANZ Charge until after the completion of the transaction on 15 March 2012. I was not ever informed of the ANZ Charge's existence by the Forest Company, the Milling Company, Gunns or any other Gunns related entity. I was not, prior to 15 March 2012, informed of the existence of the ANZ Charge by any person from Sparke Helmore." 1. Mr Sullivan asked Mr Howard questions about that evidence: "Q. Could I just ask you please to have a look at paragraph 191, of your affidavit, there you say that you weren't aware of the ANZ charge until after the sale had been completed, do you see that? A. Correct, yes. Q. If you had been aware of that charge, prior to the transaction being completed, it would've heightened your vigilance would it not, about the protections which you needed to build into any agreement to the transaction in order to protect the covenant holder's interests? A. I don't know what it would've done specifically, but it would've been an item to have been considered in light of the transaction itself, yes. Q. Yes, and it would've been an item to be considered, if you had been aware of the true nature of the encumbrances and the protections they afforded to the covenantholders, you would have been aware would you not that if in fact the ANZ had a charge then by giving up such securities you were placing any rights of the covenantholders would otherwise have behind the interests of the ANZ when it came to recovery of moneys? A. Yes. Q. And that would have been something which you would have been extremely keen to have resisted I take it? A. Yes. Q. Would it not? A. Yes. Q. That's why I put to you that if you had been aware of that charge, it would've heightened your vigilance about the protections to be afforded to the covenantholders as part of your agreement to consent to the Tree Sale Agreement? A. Yes. Q. You would've at least have ensured if you could not have achieved the proceeds of sale being paid to you, that there was adequate substitute security put in place, which had least which [outranked] if you like, the security from the ANZ? A. Some[thing] of that nature, yes." 1. Later Mr Howard gave this evidence in response to questions from me: "Q. Mr Howard, you knew that Gunns had a $340 million facility? A. Yes. Q. You knew that that was with ANZ, did you? A. I don't know what-- Q. Did you know with whom that facility was? A. I - I don't know when I became aware that it was ANZ. Q. But did you not assume that whoever had lent Gunns $340 million would have a charge over its assets and those of its subsidiaries? A. I honestly don't recall." 1. A short time later I had this exchange with Mr Howard: "Q. I think the submission is going to be put to me that you must have understood at the time that whoever lent Gunns $340 million will have as security a charge. What do you say about that? A. It's a fair assumption, but I just - I just don't know whether, at that time, I thought that it was secured or not secured or - I just don't know what I thought at that time." 1. My conclusion in these circumstances is that, although he may not able to recall this now, and had perhaps forgotten it by 17 August 2012 (see [190] above), Mr Howard did know of the ANZ Charge in 2011 and early 2012. I also conclude that, by reason of Mr Graham's seat on the board of the Milling Company, AET as a whole knew of the ANZ Charge. 2. This is significant as AET was aware that Gunns was in financial distress at the time of the transaction. AET has admitted on the pleadings that it knew Gunns was seeking to extend the repayment of its facilities and was undertaking asset sales to reduce its debt. Mr Howard also accepted in cross-examination that he was aware of Gunns' financial difficulties and its need to refinance its facilities. 3. In these circumstances, I accept Mr Kerr's submission that AET acted in breach of its duties concerning the ANZ Charge. Where this takes Mr Kerr's case is a matter that I shall return to below. Payment of the purchase money into Gunns' overdraft account 1. Mr Kerr also contends that AET breached its duties by allowing the Tree Sale Proceeds to be paid into Gunns' overdraft account. 2. The Tree Sale Agreement required that the proceeds be paid to the Milling Company. 3. The Milling Company did not receive the money. The proceeds were paid into the Gunns' overdraft account, which operated to discharge the indebtedness of Gunns to ANZ. 4. As was submitted on behalf of Mr Kerr, Gunns had no role in the scheme. It was the parent company of the Milling Company and the Forest Company. But it was not a party to the Trust Deed nor to the Tripartite Agreement, nor any other constituent trust document. 5. Mr Howard's email of 8 May 2012, set out at [177] above, reveals that AET did not know that Gunns had received payment until well after the transaction had settled. 6. As was submitted on behalf of Mr Kerr: "A prudent trustee would not have been ignorant of the whereabouts of the money, the rights to which represented the majority of the trust estate. Worse, a prudent trustee would not have tolerated a situation where Gunns, which was known to be in financial distress and whose assets AET at least ought to have known were charged to the ANZ, who was not in any way entitled to the proceeds, was nonetheless permitted to receive the proceeds into its overdraft account." 1. However, it was not submitted on behalf of Mr Kerr that Covenantholders suffered any loss by reason of the Tree Sale Proceeds being paid into Gunns' overdraft account, beyond that they would have suffered had the Tree Sale Proceeds been paid to the Milling Company, as called for by the Tree Sale Agreement. 2. There is no evidence they did. What was Mr Howard's understanding of the nature of the Encumbrances? 1. There is an issue as to what Mr Howard understood to be the nature of the Encumbrances. As this is relevant to the consequences of Sparke Helmore's involvement in the matter, I will deal with it here. 2. As I have set out above at [72], on 17 March 2011, Mr Howard wrote to Mr Nguyen asking him to "characterise the nature of the encumbrances (easements, charges, profits a prendre etc.) and explain in more detail if the sale of the land will alter the ability of the Forest Company to fulfil its obligations under the Trust Deed". 3. On the same day, Mr Nguyen replied: "The registered encumbrances basically says [sic] that the Forest Company agrees to observe and perform its obligations under the Trust Deed. An incoming purchaser is also bound by this meaning they have to allow access to the trees to be maintained and eventually harvested, etc…". 1. Mr Howard said that at the time he received the email from Mr Nguyen: "(a) my understanding of the term 'covenantholders' interests' was that it was a reference to covenantholders' entitlement to being paid their due share of proceeds in accordance with the interests set out in their Covenants; (b) my understanding of the term 'encumbrance' was that it referred to either water rights or a right of way over the land that had the trees on it which was the subject of the covenantholders' interests. I was not aware, at that time, that the encumbrances were in the nature of security and were charges in their own right securing the performance of the obligations under certain Trust Documents." 1. Mr Donaldson asked Mr Howard these questions about his 17 March 2011 email exchange with Mr Nguyen: "Q. That's something you wrote? A. I certainly typed that email, yes. Q. And you had an understanding at the time what an easement was? A. What I understood an easement to be, yes. Q. And you had an understanding at the time of what a charge was? A. Yes. Q. And you even had an understanding at the time of what a profit á prendre was? A. I presumably did at that time, yes. Q. And you understood that a charge involved the provision of an asset as security for the performance of an undertaking? A. Yes. Q. So that if an asset was charged with the performance of an undertaking in the nature of a payment of money, then the person with the benefit of the charge could have access to the asset to enforce that obligation to pay money? A. Yes. Q. And [by Mr Nguyen's email], you received a response from Mr Nguyen to your inquiry and at point 4, 'The registered encumbrances basically say the forest company agrees to observe and perform its obligations under the trust deed.' A. Yes. Q. You certainly understood at the time that the obligations under the trust deed included the payment of money that the forest company received from the milling company? A. Yes. Q. And you understood when you read this document that the encumbrance provided security for the performance of that obligation? A. Yes, to the extent that it was to secure the obligation to pay those funds, yes. Q. Yes. So you knew that, turning back to your inquiry at page 316, that the encumbrance was in the nature of a charge; it wasn't an easement or a profit á prendre, nor was it an et cetera? A. I don't know. Q. Well, it's obvious, isn't it? A. At that time I don't know whether it was obvious or not. Q. If you'd read the - well, you certainly read the email you sent to Mr Nguyen? A. Yes. Q. You tell us in your affidavit that you read his response? A. Yes. Q. And if you had read his response, you would have understood that the encumbrances secured the payment by the forest company of the moneys that it was obliged to pay under the trust deed? A. Yes, but I didn't at that time think that that meant there was a charge over the assets of the Forest Company. Q. No, you knew there was a charge over the real estate? A. No. Q. That's what these communications plainly disclose, Mr Howard. A. It says the Forest Company agrees to perform its obligations under the trust deed. Q. Yes, and you agreed with me a moment ago those obligations include the payment of money? A. That's right. But the payment of money rather than there being some sort of security to ensure the payment of money. Q. Well, a charge over an asset as security for the payment of money is security for the payment of money, isn't it? A. Yes." 1. It is hard to know what to make of this evidence. 2. On the one hand, Mr Howard acknowledged understanding Mr Nguyen's email to mean that the Encumbrances "provided security for the performance" of the obligation of the Forest Company to make payments under the Trust Deed. On the other hand, he denied knowing that the Encumbrances constituted a "charge over the real estate" and said that he thought that the Encumbrances constituted a document whereby the Forest Company "agrees to perform its obligations under the Trust Deed" as opposed to being "some sort of security to ensure the payment of money". 3. Mr Howard's answers certainly suggest he was confused as to the precise nature of the Encumbrances. He may have been misled by Mr Nguyen's statement that one effect of the Encumbrances was that an incoming purchaser would "have to allow access to the trees to be maintained and eventually harvested". But his answers to Mr Donaldson's cross-examination suggest that he did understand that the Encumbrances were more than merely "water rights or a right of way over the land". 4. On 30 March 2011, a few weeks after his 17 March 2011 email exchange with Mr Nguyen, Mr Howard received the letter from the Forest Company that I referred to at [76] above. In that letter, the Forest Company argued that any sale of the Scheme Land would not be materially prejudicial to the interests of Covenantholders because, amongst other things: "Their interests, currently protected via the terms of the [Trust] Deed and the related Tripartite Agreement, which are further enhanced via validly registered encumbrances will remain. As already explained [in the letters from the Victorian and South Australian lawyers set out at [75] above], the incoming purchaser takes the land subject to all those encumbrances." 1. If Mr Howard had read this letter with any care, he would have understood from it that the Encumbrances were not merely water rights or rights of way. The Forest Company was saying that Covenantholders' interests, "currently protected" by the Trust Deed, were "further enhanced" by the Encumbrances and that (as the Proposal then was) the purchaser of the Scheme Land would take the land subject to the Encumbrances. 2. Unfortunately, Mr Howard was not taken to this letter in cross-examination. 3. Of course, Mr Howard should have understood the true nature of Encumbrances, as he acknowledged. Thus, in answer to questions from Mr Sullivan, Mr Howard gave evidence to this effect: 1. as a careful and competent manager of a professional trustee he would want to ensure that he understood all the constituent documents of the trust at the time he took over the management of the trust; 2. in order to discharge AET's duty, it was important to understand the protections that had been afforded to the Covenantholders under the constituent trust documents and that, in his fiduciary capacity, he had to understand exactly what protection the Encumbrances gave them; 3. when conducting his first review of the trust documents, he would have asked someone what the most current documents were that he needed to look at; 4. he had no recollection about which documents he read when he first sought to familiarise himself with them; 5. he did not recall whether he read any document which purported to amend the version of the Trust Deed; 6. he believed he read the 1988 amendment, but has no recollection of doing so; 7. he believed that he knew that the trust documents provided for Encumbrances (of the kind described in the 1988 amendment) to be placed on the title to secure performance and that those Encumbrances had indeed been placed on the title; and 8. he did not personally examine the Encumbrances, but in hindsight he should have. 1. Mr Sullivan submitted, correctly in my opinion, that Mr Howard's misunderstanding reflected a lack of vigilance and diligence on AET's part. 2. Further, as Mr Sullivan pointed out, Mr Howard admitted that he failed to make any effort to seek to understand the protections afforded by the Encumbrances. 3. He gave this evidence: "Q. And you made no effort, did you, to ascertain what protections, what powers, what rights, these encumbrances gave to you or to the covenantholders you represented prior to at least at the earliest, 2013, did you? A. I don't know about 2013 but at this time, no, I didn't. Q. No, when did you first make any effort to try to understand what protections were afforded by the encumbrances which were lodged Mr Howard? A. I don't recall. Q. It was well and truly after you had committed the covenantholders to the Tree Sale Agreement wasn't it? A. It would've been, yes. Q. Up to and including the time of the completion of the Tree Sale Agreement, in March 2012, you had no idea whatsoever of what protections were afforded to the covenantholders by reason of the existence of the encumbrances did you? A. My belief of what the encumbrances were, were not what they actually were. Q. You sought no advice as to what the encumbrances, what protection the encumbrances gave to you or the covenantholders, did you? A. No. Q. You didn't bother to read the legislation, did you, pursuant to which the encumbrances were created and registered? A. I didn't read the legislation, no. Q. You didn't bother to read the encumbrances themselves to see what they purported to protect, did you? A. Correct. Q. Do you think that each of those three matters I just put to you are matters which a prudent trustee ought to have done? A. In hindsight, yes. Q. What explanation have you got for not doing it? A. I don't have an explanation." 1. If Mr Howard had the misapprehension he asserted, that was an astounding state of affairs. Mr Howard was the Senior Relationship Manager Corporate Trust at AET. He had the day to day management and oversight of this transaction and made the decisions on behalf of AET in relation to it. 2. However, it does seem unlikely that he would falsely assert ignorance about such a fundamental matter. As Mr Lockhart submitted, Mr Howard gave the impression of being professionally embarrassed by what he said was his error. 3. I think it more likely than not that Mr Howard did have a less than perfect understanding of the nature of the Encumbrances. Mr Howard's misunderstanding of the nature of the Encumbrances appears to be the explanation for his evident lack of concern about their release on completion. Thus, the complete exchange between Mr Howard and me, an extract of which I have set out [203(c)] above, was: "Q. And believing that encumbrance meant what you've said, at 43A, you didn't think, it was very significant whether the encumbrances were released without payment being made? A. Well, no, from the broader transaction being the sale of the timber I could understand that the purchaser would want to be purchasing that timber unencumbered, given what I believed to be the encumbrances so the right of the third party to access the land to maintain the trees or harvest them or what have you. … Q. You thought the encumbrances were what, water rights or rights of way? A. Exactly, yes." 1. Matters to which I will return below are whether other officers at AET, in particular Mr Howard's superior Mr Phillip Joseph, shared Mr Howard's misapprehension; the consequences if they did not; and whether Sparke Helmore should have known of Mr Howard's misapprehension and advised him as to the true nature of the Encumbrances. AET's retainer of Sparke Helmore 1. The expert corporate trustees engaged by Mr Kerr and AET, Mr Clynton Hardy and Mr David Church, agreed that it was appropriate for AET to seek advice from firm of lawyers, such as Sparke Helmore, and that AET asked that firm the appropriate questions. 2. Nonetheless, I do not accept that the mere fact that AET retained Sparke Helmore to give advice in respect of the "Proposal" is, itself, an answer to the breach of trust claim. 3. The retainer by a trustee of lawyers to advise it in relation to a particular transaction might entitle a trustee to relief from liability under provisions such as s 56 of the Trustee Act 1836 (SA) or s 85 of the Trustee Act 1925 (NSW). A breach of the duties imposed on a lawyer retained by a trustee in those circumstances might also give a trustee an entitlement to damages against that lawyer. 4. But the mere retainer by a trustee of a lawyer to advise it in relation to a transaction cannot, itself, exonerate the trustee. Mr Lockhart did not cite any authority to establish any such proposition. 5. The question of whether retaining lawyers negates a breach of trust must, as Mr Lockhart accepted in final submissions, depend on all the circumstances including the nature of the advice given and whether it was relied on. The retainers and advice The 17 August Certification not relied on in final submissions 1. AET first retained Sparke Helmore on 27 June 2011, when Mr Howard asked for a quote to provide advice as to whether the Proposal: 1. complied with the "Trust Deed and associated documents"; and 2. was "detrimental or materially prejudicial" to the Covenantholders. 1. In response to that retainer, Sparke Helmore gave the 17 August 2011 Certification. Such advice as was given in the 17 August 2011 Certification was given before the creation of any transaction documents in respect of the Proposal. 2. For that reason, in final submissions, Mr Lockhart eschewed any reliance on the 17 August 2011 Certification. Thus Mr Lockhart said in final submissions: "…the first request is made [on 27 June 2011] and the sign off letter is provided in August [the 17 August 2011 Certification], and that's in relation to the proposal, and the proposal is not by reference to the transaction documents that eventually emerged, because they emerged from December, the proposal is whether or not the scheme documents permit the sale that Mr Nguyen identifies in his 8 June email, essentially the sale of the timber in that fashion as opposed to harvesting, filling and processing in the usual, and by that point in time, the course that had been followed. So that's the proposal advice, and the answer is in the August sign off letter. We don't say that as a proposal it couldn't be done." 1. Mr Lockhart continued: "LOCKHART: No, no. We don't make any complaint about the August proposal sign off [i.e. the 17 August 2011 Certification], because we don't say there's anything wrong in the advice as to whether or not, under the trust documents, the trees can be sold in this fashion, in the shape of standing timber, rather than what has happened in the past, that being they fell them, harvest them, et cetera, et cetera. And accompanied with that is the land sale. HIS HONOUR: No complaint about the 17 August certification? LOCKHART: Correct. HIS HONOUR: Because - is this right - you accept that it did no more than say to proceed with the proposal would not itself be a problem? LOCKHART: Correct." The scope of the 5 December 2011 retainer 1. The second retainer was constituted by Mr Howard's email to Mr Johnston of 5 December 2011 (referred to at [124] above) in which Mr Howard asked Sparke Helmore to provide a quote to review the Tree Sale Agreement and the Put & Call Option Deed to "provide a legal signoff…in the attached format". 2. The "attached format" required, among other things, identification of any "unusual or onerous provisions in the document(s)" and confirmation that the documents were "in order for execution" (see [125] above). 3. Mr Donaldson, for Sparke Helmore, submitted that: "Sparke Helmore's role was limited to the provision of legal advice as to whether the Proposal was permissible under the trust documents in circumstances where AET had satisfied itself as to the commercial aspects of the Proposal." (Emphasis added.) 1. I do not think this characterisation of Sparke Helmore's role is correct. Leaving aside for the moment the retainer to identify "unusual or onerous" provisions, Sparke Helmore's retainer to confirm that the documents were in "in order for execution" required more than confirmation that the Proposal was "permissible". 2. This retainer did not require Sparke Helmore to advise AET whether or not it should consent to the Proposal. As I have said, Mr Howard agreed that "we weren't asking them to opine on the windup of the scheme" (see [200] above). By the time of the 5 December 2011 retainer, AET had, in effect, conveyed to Gunns its agreement in principle to the winding up of the scheme. 3. As Mr Donaldson submitted, AET was faced with a difficult commercial decision. Under the terms of the trust documents, the Forest Company could not sell or encumber the Scheme Land without the consent of AET. By 5 December 2011, the Forest Company, through Gunns, had sought a consent which AET had, in principle, granted. Mr Howard and AET were aware of Gunns' problematic financial position. Were AET to refuse to give the consent sought, Mr Howard and AET must have understood that Covenantholders would remain vulnerable to Gunns', and thus the Milling Company's and the Forest Company's, financial future. Approval of the Proposal involved disposing of the land which secured the obligations of the Forest Company and, in so doing, exposing Covenantholders to such risks inherent in what would then be their status as unsecured creditors. 4. I think Mr Donaldson was correct to submit that: "Whatever course was adopted, the primary risk to which Covenantholders were exposed was the risk of Gunns failing. The question that AET needed to address was how to best address that risk. Of course, an agreement whereby the whole amount owed to the Covenantholders was to be paid on settlement of the sale would have eliminated the risk. That involved a considerable benefit to Covenantholders not provided under the Scheme documents and a corresponding detriment to Gunns and, indirectly, to Gunns' bankers. The Scheme contemplated the use by Gunns of the fruits of the scheme for a significant period of time, and it was in acute need of funds." 1. In response to Mr Howard's letter of 5 December 2011, Mr Johnston provided an estimate of fees in the range of $4,000 to $5,000 and stated that such estimate was on the basis that: 1. "our sign off is limited to the matters contained in the form provided", being the pro forma document referred to at [125] above; and 2. "there are no material issues, requiring further work, identified in our review of the Documents". 1. As I have mentioned, in answer to the retainer of 5 December 2011, Sparke Helmore produced two letters. The first was the 22 December 2011 Certification. The second was the 22 December 2011 Document Confirmation Advice. Unusual or onerous provisions 1. In neither the 22 December 2011 Document Confirmation Advice nor the 22 December 2011 Certification did Sparke Helmore advise whether there were any provisions in the transaction documents which were onerous or unusual. 2. Implicitly, Sparke Helmore's advice was that there were no such provisions. 3. Mr Lockhart submitted that Sparke Helmore should have expressed the opinion in the 22 December 2011 Document Confirmation Advice that the provisions in the Tree Sale Agreement providing for release of the Encumbrances without payment of any of the Tree Sale Proceeds or Land Sale Proceeds to the Covenantholders were onerous or unusual. 4. I do not accept that submission. 5. The expression "unusual or onerous terms" is usually used in the context of ticket cases or contracts for the sale of goods where the incorporation of terms are in issue. In such cases, it is well established that if there is an "unusual or onerous term" it is necessary to prove that an alleged party to that unsigned contract was aware, or ought to have been aware, of that term: Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165; [2004] HCA 52 at [54]-[55]. 6. The High Court has observed that "the criterion by which a court might declare a contractual provision to be unusual or onerous" is not always easy to identify: Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd at [54]. A term may be unusual or onerous where: 1. it might not reasonably be expected to be part of the terms of the contract: Maxitherm Boilers Pty Ltd v Pacific Dunlop Insurances Pte Ltd [1998] 4 VR 559 at 561 (Ormiston JA); 2. it is one "which no one would anticipate in a contract of the type in question": Maxitherm at 568 (Buchanan JA); 3. it "is more than ordinarily onerous": Maxitherm at 569 (Buchanan JA). 1. In Surfstone Pty Ltd v Morgan Consulting Engineers Pty Ltd [2017] 2 Qd R 66; [2016] QCA 213, Morrison JA, with whom McMurdo P and Atkinson J agreed, held that a term was not unusual or onerous because it was "part of a standard set of terms that have been promoted for use by structural and civil engineers for many years, and adopted by many such engineers over the years": at [72]. 2. Thus, the question of whether a provision in a contract is unusual or onerous must depend upon all the circumstances known to the party to whom the advice is directed. A provision will only be onerous or unusual so far as concerns that party if it is a provision that that party would not reasonably expect to be included in the document in question. 3. Accordingly, the reference in Sparke Helmore's retainer to "unusual or onerous provisions" should be taken to be a reference to provisions in the documents that AET would not reasonably expect to exist and which were out of the ordinary or burdensome. 4. Here, AET, through Mr Howard, was well aware and evidently accepted that the effect of the Tree Sale Agreement was that the Encumbrances would be released on completion and that the proceeds of the transaction would be paid to either the Forest Company or the Milling Company. 5. AET should not be taken to have been asking Sparke Helmore to advise it in relation to provisions which it expected would exist in the transaction documents. 6. Those provisions were exactly what Mr Howard was expecting. So far as Mr Howard, and thus AET, was concerned there was nothing unusual or onerous about them. Advice about risk mitigants 1. Mr John Schembri, a solicitor, was called as an expert witness on behalf of AET. 2. Mr Schembri expressed the opinion that, to ensure the transaction documents complied with the terms of the Trust Deed and to minimise risk to AET and the Covenantholders, Sparke Helmore should have proposed to AET "one of the following potential risk mitigants in relation to the payment to AET of the Covenantholder Proceeds": 1. a requirement for AET to receive the Tree and Land Sale Proceeds directly from the vendor on completion; 2. the taking of security by AET, including security over the bank accounts into which those proceeds were to be placed; 3. if it was a requirement that the total sale proceeds had to be paid to the Milling Company or the Forest Company a "side letter" noting that, notwithstanding the provisions of the Trust Deed, the payment of the Tree and Land Sale Proceeds would be paid simultaneously on completion. 1. Mr Schembri opined that if there were to be: "…no appetite for one or more of the above mitigants, a solicitor in the role of Sparke Helmore ought to have advised AET of the consequences of not having such protections in place." 1. In effect, Mr Schembri's opinion was that Sparke Helmore should have advised AET to seek to negotiate a better deal than had been negotiated between Gunns and the purchaser. 2. However, as Mr Schembri agreed in cross-examination, AET had not retained Sparke Helmore to negotiate the terms of the transaction. AET was not seeking Sparke Helmore's advice about this. As I have said, Mr Howard agreed that "we weren't asking them to opine on the windup of the scheme". Sparke Helmore's retainer was to review the documents and give the advice sought in AET's 5 December 2011 retainer. 3. Sparke Helmore stated in its email of 6 December 2011 that its cost estimate was to review the Tree Sale Agreement and the Put & Call Option Deed, and provide a sign off on them and that that "sign off is limited to the matters contained in the form provided" being the attachment to AET's 5 December 2011 retainer. 4. I see nothing in the circumstances to justify the conclusion that Sparke Helmore had a duty to give advice beyond its retainer. 5. The question was considered by Macfarlan JA, with whom Allsop P and Sackville AJA agreed, in Provident Capital Ltd v Papa (2013) 84 NSWLR 231; [2013] NSWCA 36 at [75]: "It is well established that solicitors are not ordinarily required to advise upon the wisdom of transactions in relation to which they act (Polkinghorne v Holland [1934] HCA 28; 51 CLR 143 at 158; Citicorp Australia Ltd v O'Brien (1996) 40 NSWLR 398 at 418). Further, the correctness of the view expressed in Waimond Pty Ltd v Byrne (1989) 18 NSWLR 642 that a solicitor may have a duty of care extending beyond the ambit of the solicitor's retainer (a so-called penumbral duty) remains a matter of debate (Kowalczuk v Accom Finance [2008] NSWCA 343; 77 NSWLR 205 at [267] - [294]; Dominic v Riz [2009] NSWCA 216 at [89] - [90]; Keddie v Stacks/Goudkamp Pty Ltd [2012] NSWCA 254 at [86] - [104]). However proper execution of a retainer to give independent legal advice concerning a loan and mortgage transaction may, depending upon the circumstances known to the solicitor, require more than an explanation of the legal effect of the documents to be executed." 1. More recently, Macfarlan JA, with whom Bathurst CJ and McCallum JA agreed, said in Rahme v Benjamin & Khoury Pty Ltd [2019] NSWCA 211 at [108]: "This conclusion is not contradicted by authorities that state that a lawyer does not ordinarily have an obligation to advise his or her client as to the wisdom of a transaction (Polkinghorne v Holland (1934) 51 CLR 143 at 158; [1934] HCA 28; Citicorp Australia Ltd v O'Brien (1996) 40 NSWLR 398 at 418). Here the issue which needed to be the subject of advice was not of that character but one well within the ordinary purview of a lawyer, namely the prospects of particular litigation succeeding. I note in passing that, even if the relevant issue is as to the commerciality of a transaction, it may in some circumstances be a solicitor's obligation to advise his or her client to obtain commercial advice to ensure that the client is aware of the practical implications of entering into the transaction (Provident Capital Ltd v Papa (2013) 84 NSWLR 231; [2013] NSWCA 36 at [80])." 1. Similarly, in AVWest Aircraft Pty Ltd as trustee for AVWest Aircraft Trust v Clayton UTZ (A firm) (No 2) [2019] WASC 306, Vaughan J said at [396]: "However, Brogue Tableau Pty Ltd v Binningup Nominees Pty Ltd [(2007) 35 WAR 27; [2007] WASCA 179] recognises that, in determining the scope of the solicitor's retainer, it may be the case ‑ as discussed in Dalleagles Pty Ltd [v Australian Securities Commission (1991) 4 WAR 325] ‑ that the solicitor's retainer extends to giving any advice reasonably necessary to protect the client's interests in the transaction even where that has not been expressly requested." 1. AET is a professional trustee. It sought advice from Sparke Helmore about particular matters. I am not able to conclude that proper discharge of that retainer required that Sparke Helmore do more than respond to it; particularly in circumstances where Mr Howard was clear that AET was not asking Sparke Helmore to "opine on the winding up of the scheme". 2. Thus, Sparke Helmore's duty here was limited to advising on the matters specified in the retainer and in particular to the five matters listed in the "attached format", which I have outlined at [125] above. The 22 December 2011 Certification 1. As I have mentioned, the 22 December 2011 Certification in effect repeated what Sparke Helmore had stated in the 17 August 2011 Certification, save that it also confirmed that AET, under the trust documents, had power to enter into the relevant transaction documents (see [141] above). 2. That led to me having this exchange with Mr Lockhart: "HIS HONOUR: So if you don't complain about the first [the 17 August Certification], why are you complaining about the second [the 22 December 2011 Certification]? LOCKHART: Because by the time we get to December there are now two complaints. Firstly, the major complaint is about the [22 December 2011 Document Confirmation Advice] and we say that on its own is enough." 1. Mr Lockhart continued: "LOCKHART: Yes. But by this point in time they know with precision how the client intends to facilitate that proposal. So if that on its own [i.e. the 22 December 2011 Certification] was all that was sought, we would say that's problematic. But, your Honour, we say that ultimately doesn't matter, because if one goes to the other December advice, [i.e. the 22 December 2011 Document Confirmation Advice] that is the advice provided in response to the very specific retainer, the very clear retainer, to advise upon the transaction documents themselves, and that is the focus of Mr Schembri's opinion and that is the primary focus of our case. But we do say, just for completeness, that by the time the proposal advice [22 December 2011 Certification] is given…because everything was known about the way in which that proposal was to be facilitated, in addition, that also triggered an obligation to advise upon the risk created by the transaction. But fundamentally we say -- HIS HONOUR: So is the document in which they should have said there is something unusual [is the 22 Document 2011 Confirmation Advice]? LOCKHART: Yes, [the 22 December 2011 Document Confirmation Advice] is our primary December complaint." (Emphasis added) 1. I have set out terms of the 22 December 2011 Certification at [140] to [141]. 2. Under the heading "Certification" it stated that "based on our review of the Documents and subject to the assumptions and qualifications set out in this letter" Sparke Helmore were of the opinion that: 1. AET was "entitled" to take steps, not relevant here, to appoint a valuer; 2. the Forest Company was "entitled" to proceed with the Proposal under the Trust Documents; 3. if the Forest Company proceeded with the Proposal that would not "by itself" be materially prejudicial to Covenantholders' interests; 4. for these reasons, the Trustee is "able" to consent to the Proposal; and 5. in order to facilitate the Proposal, AET had "the power" to enter into, relevantly, the Tree Sale Agreement and the Put & Call Option Deed. 1. In effect, the 22 December 2011 Certification repeated what Sparke Helmore had stated in the 17 August 2011 Certification, save that it also confirmed that AET, under the trust documents, had power to enter into the relevant transaction documents. 2. I think Mr Donaldson was correct to submit that this document did no more than advise that the Proposal was permissible under the trust documents. 3. Mr Lockhart did not suggest that this advice, so far as it went, was incorrect. The 22 December 2011 Document Confirmation Advice 1. Mr Lockhart's final submissions focussed of the 22 December 2011 Document Confirmation Advice. It is a very peculiar document. I have set out its terms at [144] to [149] above. 2. It is directed to the question of whether the "Documents" were "in order for execution" and thus to an aspect of the 5 December 2011 retainer. 3. The term "Documents" was defined to mean the Tree Sale Agreement, the Put & Call Option Deed as well as a document called "Side Letter Agreement" (see [146] above). The latter document has no separate significance in the proceedings. I will not refer to it again. 4. Sparke Helmore then confirmed that the Documents were "in order for execution" on the basis of four matters (see [147] above). 5. The first of those matters (referred to at par 5(a) of the letter) was that: "[T]he Documents have been reviewed and settled in accordance with the instructions given by Stuart Howard". 1. It seems that this is responsive to the second request in the 5 December 2011 retainer for "Confirmation that the document reflects the instructions from the Manager", being Mr Howard (see [125] above). 2. Thus the instructions referred to must have been those in Mr Howard's email of 5 December 2011. It is not clear why Sparke Helmore said that they had not only "reviewed" the Documents but also "settled" the Documents. This may be a reference to negotiations that Sparke Helmore engaged in to cause changes to be made to the Documents prior to their execution. However that may be, Sparke Helmore confirmed that the documents had been "reviewed". 3. The second matter was set out in par 5(b) of the letter. 4. Paragraph 5(b) recorded that AET proposed to enter into the Documents as part of the "'Seller' group", that the Documents imposed obligations on AET and provided for AET to make representations and give warranties and undertakings. Paragraph 5(b) then recorded that AET had instructed Sparke Helmore that those matters were "acceptable" on the basis of representations, warranties, undertakings and indemnities given to it by the Forest Company, the Milling Company, Auspine and Gunns. 5. This appears to reflect the statement that Mr Howard made at his 7 December 2011 meeting with Mr Johnston that he was "reasonably comfortable" with the representations, warranties and undertakings (see [119] above). 6. Mr Lockhart did not suggest that the matter recited in par 5(b) was incorrect. 7. The third matter, set out at par 5(c) of the letter, was that each Document included a limitation of liability clause for AET that AET had approved. This is responsive to the fourth request in the 5 December 2011 retainer for "Confirmation that the document includes the Trustee's limitation of liability clause" (see [125] above). 8. Again, Mr Lockhart did not suggest this was incorrect. 9. The fourth matter, set out at par 5(d) of the letter, was that, in addition to the first, second and third matters, the basis on which Sparke Helmore confirmed that the Documents were "in order for execution" by AET was: "…the Proposal being acceptable to [AET]". Was Sparke Helmore's advice adequate? 1. Sparke Helmore did not state why they understood that the Proposal was "acceptable" to AET. As Sparke Helmore must have known, having "reviewed" the Documents, the Proposal could only be "acceptable" to AET if it was one to which AET could consent. 2. AET's consent was required because the Forest Company could not sell the Scheme Land without it (see [47(a)] above). 3. AET's consent could not unreasonably be withheld. But that was subject to AET being reasonably satisfied that there was no material prejudice to the interests of the Covenantholders or "any reduction" in the protection afforded to them pursuant to the Trust Deed (see [47(b)] above). That is, AET could reasonably withhold its consent if the sale in question would materially prejudice the interests of Covenantholders, or cause "any" reduction in the protections afforded to them under the Trust Deed. 4. It is hard to contemplate a circumstance where AET could, consistently with its duties as trustee, consent to a sale of the Scheme Land by the Forest Company if to do so would materially prejudice the interests of Covenantholders. It may be, however, that there could be a circumstance where AET could give such consent if there was some reduction in the protection afforded to Covenantholders; for example where some countervailing benefit was simultaneously to be conferred on Covenantholders – such as prompt payment. 5. It may be that what Sparke Helmore was seeking to convey, by qualifying their advice on "the Proposal being acceptable" to AET, was no more than that, as matter of generality, the winding up of the trust was, at that high level, "acceptable" to Sparke Helmore. This is consistent with Mr Howard's statement during his conference with Mr Johnston on 7 December 2011 that he was "not too concerned with the commercials" (see [119] above). 6. The letter continued that it was "subject to the assumptions and qualifications" set out in the Schedule. There were 44 such assumptions or qualifications. 7. One was, as I have set out earlier, in sub-cl (mm): "(mm) the sale of any Assets and any real property on which any Assets is located will not: (1) materially prejudice the interests of any Covenantholders; or (2) reduce any protections, rights or benefits afforded to any Covenantholders pursuant to the Documents…". 1. Another was in cl 1.2 which stated: "In making each of the above assumptions, we assume that each matter the subject of each assumption is true, correct and complete in every particular". 1. Another, also set out earlier, was in qualification (k), which included that: "(1) each Covenantholder will receive his or her due proportion of the benefit in respect of the relevant Covenant in accordance with the Trust Documents; (2) all moneys due to a Covenantholder in respect of the relevant Covenant will be paid to that Covenantholder in accordance with the Trust Documents; (3) the Forest Company will comply with all of its obligations in connection with distributing proceeds to the Covenantholders…". 1. Assumption (mm)(1) and qualification (k) were essentially directed to whether implementation of the Proposal by way of the Tree Sale Agreement would affect the Covenantholders' prospects of recovering their investment. Sparke Helmore was stating that it assumed that Covenantholders would recover their investment, notwithstanding the winding up of the trust and, but only inferentially, the loss of the security comprised by the Encumbrances. 2. Assumption (mm)(2) was however directed to, amongst other things, the question of security. This assumption reflected the wording in cl 2(d)(i) of the Trust Deed that AET could withhold its consent to a sale of the Scheme Land by the Forest Company if reasonably satisfied that there was "any" reduction in the protections afforded to the Covenantholders. 3. The assumption was that there would be no reduction in such protections. 4. But Sparke Helmore knew that implementation of the Proposal by the Tree Sale Agreement would reduce the Covenantholders' protections. The Encumbrances were to be released on completion. And yet Covenantholders would be entitled to payment only in accordance with the Proceeds Distribution Process, and thus not until the following year. The protections afforded to Covenantholders would be reduced. 5. Sparke Helmore must therefore have known that assumption (mm)(2) was contrary to the true position and that, accordingly, so was the assumption in cl 1.2. 6. In effect, Sparke Helmore stated that assuming, contrary to the fact, that the transaction would not reduce any protections afforded to the Covenantholders, the documents were in order for execution. 7. This amounted to saying: "If there is no problem, then there is no problem". 8. What Sparke Helmore did not say was whether the documents were "in order for execution" when their effect would be to reduce the protections afforded to the Covenantholders. Sparke Helmore knew that AET had, by now, consented in principle to the Proposal. Sparke Helmore knew that AET could reasonably withhold its consent if the effect of the Proposal was to materially prejudice the interests of Covenantholders or to cause there to be any reduction in their protection. 9. The fact that Sparke Helmore's advice was conditional upon assumption (mm) and qualification (k) suggests that Sparke Helmore may have been meaning to convey that it assumed that AET had satisfied itself that its consent could properly be given under cl 2(d)(i) of the Trust Deed. That would be to say no more than: "If AET is able properly to consent to the transactions, the documents are suitable for execution." 1. However that may be, the assumptions and qualifications to which the 22 December 2011 Document Confirmation Advice was subject rendered it to be of little, if any, value. 2. Mr Sullivan put to Mr Howard that the advice Sparke Helmore gave to AET in this letter was "useless". Mr Howard responded that: "I didn't believe so at the time." 1. However, a short time later Mr Howard agreed that in light of its assumptions and qualifications, this advice was "useless and worthless". Mr Howard said: "A. Looking at that now, yes. Q. And that's obvious, isn't it? A. It is, yes. Q. Why didn't you regard it as useless and worthless at the time you read it? A. I don't know." 1. In these circumstances, my conclusion is that the "sign off" comprised by the 22 December 2011 Document Confirmation Advice was one no reasonable trustee could have relied on. 2. In my opinion, in response to the retainer to which this letter was directed, that is whether the relevant documents were "in order for execution", Sparke Helmore should have advised AET that: 1. the Tree Sale Agreement provided for the sale by the Forest Company of the Scheme Land; 2. under cl 2(d)(i) of the Trust Deed, the sale could not proceed without AET's consent; 3. by executing the Tree Sale Agreement, AET would consent to the sale; 4. under cl 2(d)(i) of the Trust Deed, AET could not unreasonably withhold its consent; 5. under cl 2(d)(i) AET could reasonably withhold its consent if the sale of the Scheme Land would cause the interests of Covenantholders to be materially prejudiced or cause any reduction in the protection afforded to the Covenantholders under the Trust Deed; 6. the effect of the Tree Sale Agreement would be to reduce the protection afforded to Covenantholders as the Encumbrances, which presently gave them security over the Scheme Land for the performance by the Forest Company of its obligations under the Trust Deed and the Tripartite Agreement, would be released on completion without any funds being paid to the Covenantholders; and 7. in those circumstances, the Tree Sale Agreement was in order for execution by AET only if AET has concluded that it should, in these circumstances, consent to the sale. 1. These conclusions are consistent with, although not completely congruent with this evidence of Mr Schembri: "…given that the AET Instructions requested a review of the various drafts of the Transaction Documents and the Transaction Documents contemplated the release of all Encumbrances, a solicitor in the position of Sparke Helmore could not have concluded that advice in respect of the Encumbrances (and therefore the unsecured position of AET post completion) was not expected or required by AET. That is because the AET Instructions were sufficiently wide enough to cover the Encumbrances on the basis that these ought to have been considered when advising on whether the Transaction Documents (and the transactions contemplated by them) were materially prejudicial to the interests of Covenantholders or contained unusual or onerous terms. On this basis, in my opinion, a failure to advise on AET's security position post completion of the Proposed Sale would not have been widely accepted in Australia as being competent professional practice." And: "…given the length of time the Covenantholder proceeds could have remained outstanding, a failure to discuss the risks associated with movement from a secured to an unsecured position would not have been widely accepted in Australia as being expected of a competent professional solicitor." 1. I have concluded that the advice that Sparke Helmore gave AET fell short of what was called for by the 5 December 2011 retainer. What would AET have done if Sparke Helmore had advised it appropriately? 1. By the retainer of 5 December 2011, AET sought from Sparke Helmore a "legal signoff" in respect of the Tree Sale Agreement and the Put & Call Option Deed. 2. In cross-examination, Mr Howard gave this evidence, which includes the passage referred to at [200] above: "Q. You didn't rely on Sparke Helmore to tell you whether or not it was in their interests or not? A. Well, we were relying on the signoff. We wouldn't have proceeded without a signoff. Q. You wouldn't have proceeded without a signoff because involving, as it did, a windup of the scheme early, you wanted to know that was permissible? A. We weren't asking them to opine on the windup of the scheme. We were asking for advice on the - the proposal that - ultimately, there may have been a windup of the scheme, but this was - at that time, it was the - yeah, the sale of the land and subsequently the sale of the timber. Q. The proposal involved selling all of the standing timber, which was manifestly different to what was contemplated in the usual course of the management of the scheme? A. Yes. Q. And you wanted to know that that was legally acceptable? A. Yes. Q. And what Sparke Helmore told you was that it provided the covenant holders' interests were adequately protected; it was legally acceptable? A. Yes." 1. In his affidavit, Mr Howard said that he "decided, on behalf of AET, to consent" to the Proposal based on the 17 August 2011 Certification. However that evidence must be seen in light of Mr Howard's email to Mr Joseph of 15 July 2011, set out at [83] above, where, to repeat, Mr Howard said: "On the basis that our legal advice is that the proposal is allowed under the documents and we are happy to proceed, we would not object to the sale of the timber and would execute the necessary releases to transfer the interests to the purchaser." 1. In effect, as Mr Lockhart accepted in final submissions, the 17 August 2011 Certification conveyed no more than that it was permissible for AET to enter into the Proposal involving, as it did, the winding up of the trust. In effect, to adopt Mr Howard's words in his 15 July 2011 email, the effect of the 17 August 2011 Certification was that "the proposal is allowed under the documents". 2. As Mr Howard's 15 July 2011 email stated, AET's consent to the Proposal was also contingent upon it being "happy to proceed". AET was happy to proceed, as indicated by Mr Howard's 7 December 2011 statement that he was "not too concerned with the commercials" (see [119] above). 3. Mr Howard made the same point in his email to Mr Joseph on 3 August 2011, that I have set out at [89] in which, to repeat, he said: ""The purpose of the advice was to ensure that Gunns' proposal to sell the standing timber was in accordance with the [trust] documents. Assuming it is, the valuation would then be reviewed against [the proposed purchaser's] offer and if competitive, we would consent to the proposal." (Emphasis added.) 1. The 17 August 2011 Certification was to the effect that the Proposal was "in accordance with the trust documents". 2. Some insight into Mr Howard's thought process is contained in this passage of his affidavit: "However, I recall thinking at this time [on 13 March 2012], although I cannot recall whether I communicated the thought to Sparke Helmore, that AET was willing to proceed with the transaction notwithstanding the decrease in Gunns' share price and the trading halt because: (a) I believed at the time that the transaction would not be materially prejudicial to covenantholders' interests… (b) my understanding from the Revised Tree Valuation was that the completion of the transaction would crystallise some value for covenantholders at the market rate in circumstances when the covenantholders' investment in the Trust had not been performing well over the preceding years; and (c) I recall thinking that, if the land and trees were sold, the part of the proceeds from the transaction that were to go to Gunns (i.e. the proceeds other than those related to the covenantholders' trees and land) would result in Gunns' debt being paid down and the financial issues Gunns was facing being alleviated somewhat." 1. Further, as I have set out at [161] to [162] above, on 13 March 2012, Mr Howard's position was to acknowledge the "risk we're taking", to doubt that there was "anything else we can do" and that "all we can do" was to sit and wait and hope it is fine. 2. It is true that these remarks were made after AET was committed to the transaction. But there is no other insight into Mr Howard's thought process, beyond what I have set out. 3. Neither Mr Howard, nor anyone else from AET, has said why AET decided to proceed. Mr Howard's evidence as to what motivated him to proceed was confined to the evidence he gave about the 17 August 2011 Certification; a document no longer relied on by AET. Mr Howard did not say what decision he would have made, had Sparke Helmore drawn his attention, in terms, to what he already knew, namely that the Encumbrances were to be released on completion, and that this involved Covenantholders moving from a secured position to an unsecured position. Nor did Mr Howard say what he would have done had Sparke Helmore spelled out what he should also have known, namely the true nature of the Encumbrances. 4. Nor does the evidence reveal what would have happened had Mr Howard shared such advice with others at AET, particularly his superior Mr Joseph. I see force in Mr Donaldson's submission that "[i]t is unthinkable that Mr Joseph was labouring under the same astonishing alleged misunderstanding of Mr Howard". We will never know. Mr Joseph was not called. No explanation is given for the failure to call Mr Joseph. 5. Sparke Helmore did not refer to the ANZ Charge in its advices. Sparke Helmore must be taken to have known of the ANZ Charge as Mr Johnston had ordered ASIC searches on 12 August 2011 and 20 December 2011 (see [93] and [134] above). 6. But, as I have found, AET must also be taken to have known of the ANZ Charge (see [219] to [226] above). 7. As I have set out, AET was faced with a difficult decision. In effect, as Mr Donaldson submitted, it was faced with the prospect of replacing one contingency, leaving Covenantholders with the status quo, with another, winding up the trust. And this against the background of Gunns' evidently deteriorating financial position. 8. In these circumstances, I am not able to come to any conclusion as to what AET would have done had Sparke Helmore given it the advice I have concluded was called for by the retainer. 9. My conclusion is that AET has failed to establish that Sparke Helmore's inadequate advice caused AET's breach of trust. Did AET's breach of trust cause the Covenantholders' loss? 1. I have found that AET acted in breach of its duty as trustee. I have found that that breach included a failure to protect and vindicate the trust property, the Encumbrances. 2. The question now arises as to the loss the Covenantholders have suffered by reason of AET's breach. Of course, Mr Kerr must show that the Covenantholders' loss was caused by AET's breach of duty. 3. In O'Halloran v RT Thomas & Family Pty Ltd (1998) 45 NSWLR 262 Spigelman CJ, with whom Priestley and Meagher JJA agreed, held that in a claim for equitable compensation concerning the improper application of trust money by the trustee of a traditional trust, the causal test will be satisfied "irrespective of the identification of a separate and concurrent cause, when the loss would not have occurred if there had been no breach of duty" (at 276-277). 4. In the same case, Spigelman CJ said at 272: "It has long been established that questions of causation of loss said to arise from breach of fiduciary obligation are to be determined in a different way from breach of common law obligations. Specifically, the remedy of equitable compensation differs from damages at common law." 1. Most recently, the position was summarised by Gageler J in Ancient Order of Foresters in Victoria Friendly Society Ltd v Lifeplan Australia Friendly Society Ltd [2018] HCA 43 at [88]; (2018) 360 ALR 1 as follows: "A causal connection between a fiduciary's breach of fiduciary obligation and a benefit or gain sufficient for the fiduciary or knowing participant to be liable to the equitable remedy of account will exist if the benefit or gain to the fiduciary or knowing participant would not have been obtained 'but for' the breach, in the same way as a causal connection sufficient for the fiduciary to be liable to the equitable remedy of compensation will exist if a loss to the person to whom the fiduciary obligation is owed would not have been sustained but for the breach. Because the concern of equity is to vindicate the equitable obligation that has been breached, the 'but for' connection will be sufficient even though other contributing causes might be in play." (Emphasis added.) 1. The relevant principles were recently and very helpfully discussed by Elliott J in Ahrkalimpa Pty Ltd v Schmidt (No 3) [2019] VSC 197: "[32] The obligation is on the plaintiff seeking equitable compensation to establish the breach has 'caused' the loss. However, 'causation' is not to be understood in the same way as that term is used at common law. In order to have a valid claim for loss, arising out of a breach of fiduciary duty, a plaintiff need only establish that the loss was caused 'by', 'by reason of', or 'as a result of' the wrongful conduct. … [33] As for the evidence that must be led by a plaintiff seeking to recover equitable compensation, again generally speaking, the position is not as onerous as that for a plaintiff at common law. Once a causal link to the loss claimed is established, the onus shifts to the defendant. Further, if a defendant has some proper basis for reducing the loss claimed because of the output of its skill, labour, investment and risk, then the onus is on the defendant to establish whether, and, if so, to what extent, these factors ought to be taken into account. [34] Loss claimed is not limited by issues of remoteness or foreseeability of loss. Once the causal link is established, equity does not enquire as to whether the loss was also caused by other acts or omissions. Further, when assessing quantum and considering what would or ought to have happened if no breach had occurred, the court should not speculate against the plaintiff, or assume something might have occurred when, in fact, it did not. Naturally, if there is direct evidence on an issue then that evidence must be taken into account. All of this said, the role of the court is not to penalise the errant fiduciary. Equally, the remedy is to properly compensate a plaintiff, not provide it with a windfall. [35] When dealing with a loss of an opportunity, a court is challenged with placing a monetary value on something that may be elusive and lacking precise measurement. In order to arrive at an appropriate award, the court is entitled to use common sense and general notions of justice and fairness. [36] On the facts of a particular case, a number of approaches to assessing loss may be appropriate. Further, the assessment may involve the balancing of factors, which is not purely a mathematical exercise, or strictly logical. However, at all times the approach to be adopted "should support and fortify the underlying principles being vindicated: fidelity, trust and honesty" to discourage fiduciaries from acting other than in accordance with their fiduciary duties. As to the precise path to be taken, it is possible that reasonable minds may differ on the correct approach. [37] Finally, until an errant fiduciary makes full restitution and pays any appropriate compensation, the fiduciary's breaches are presumed to continue." (Emphasis added. Citations omitted.) 1. Mr Lockhart cited the following passage from the decision of the High Court of Australia in Youyang Pty Ltd v Minter Ellison Morris Fletcher (2003) 212 CLR 484; [2003] HCA 15, evidently in support of the proposition that common law considerations of causation, foreseeability and remoteness are presently applicable: "As already indicated, this was a case of breach of duty by a trustee; the complaint was not one merely of the imprudent exercise of a power, for example of a power of investment, by failure to employ the care and diligence which equity requires. Where the complaint is of maladministration of this kind, then it has been said in the English Court of Appeal in Bristol and West Building Society v Mothew [[1998] Ch 1 at 17]: 'Equitable compensation for breach of the duty of skill and care resembles common law damages in that it is awarded by way of compensation to the plaintiff for his loss. There is no reason in principle why the common law rules of causation, remoteness of damage and measure of damages should not be applied by analogy in such a case. It should not be confused with equitable compensation for breach of fiduciary duty, which may be awarded in lieu of rescission or specific restitution.' This view of the matter has been approved by the New Zealand Court of Appeal in Bank of New Zealand v New Zealand Guardian Trust Co Ltd [[1999] 1 NZLR 664 at 681], on the footing that the stricter view of liability for breaches of trust causing loss to the trust estate and for breaches of the fiduciary duties of loyalty and fidelity is not required where the complaint concerns failure to exercise the necessary degree of care and diligence." (At [38].) 1. However, the immediately succeeding paragraph in Youyang shows that the cases cited by their Honours should not be seen as law in Australia. Thus their Honours said: "Given the nature of the present case, those questions do not arise on this appeal. However, there must be a real question whether the unique foundation and goals of equity, which has the institution of the trust at its heart, warrant any assimilation even in this limited way with the measure of compensatory damages in tort and contract. It may be thought strange to decide that the precept that trustees are to be kept by courts of equity up to their duty has an application limited to the observance by trustees of some only of their duties to beneficiaries in dealing with trust funds." (At [39].) 1. As the learned authors of Meagher, Gummow & Lehane's Equity: Doctrines & Remedies (5th ed, 2015, LexisNexis Butterworths) observed at [23-370]: "Lest the understatement of that passage mislead, there is no doubt that Australian law is contrary to the suggestions posed in the Mothew position and the New Zealand Guardian Trust case. Understatement was properly used in the Youyang decision because, as their Honours said, it was unnecessary to express an opinion on that subject in that case." 1. I accept the submission advanced on behalf of Mr Kerr that the applicable test is whether "but for" the breach of trust, the Covenantholders' loss would not have occurred. Once the "but for" test is satisfied, the onus shifts to AET. To repeat, as it was put by Elliott J in Ahrkalimpa at [33]: "Once a causal link to the loss claimed is established, the onus shifts to the defendant." 1. I should add that I do not see that anything that fell from Bathurst CJ in The Australian Special Opportunity Fund LP v Equity Trustees Wealth Services Ltd [2015] NSWCA 225 at [160] is inconsistent with what I have set out. Indeed, the Chief Justice did not question the principles earlier stated by the High Court in Youyang or by the Court of Appeal in O'Halloran. 2. Mr Sullivan put the "but for" point this way: "In this case, AET's breach of trust was to release its security without procuring that it receive payment (or alternative security) for the proper proceeds to which Covenantholders were entitled upon a wind up of the scheme. The 'but for' connection is obvious. If AET had received payment (or alternative security) prior to giving up its security, the Covenantholders' loss would not have occurred." 1. Mr Kerr's submission is that AET breached its duties as trustee by agreeing to discharge the Encumbrances without first ensuring that it received payment, or alternative security, and that "but for" that breach the Covenantholders would have suffered no loss. 2. But that case assumes that AET could have procured such a result; or, to adopt Mr Sullivan's language in oral submissions, that AET would successfully have "insisted" that this occur. The question is whether it is more probable than not that this would have occurred. 3. If the Encumbrances had remained in place following completion, they would have secured the obligations of the Forest Company to pass on to AET money it received from the Milling Company between completion in March 2012 and Gunns' collapse in September 2012. But there is no evidence enabling me to come any conclusion about what that amount might be. 4. In any event, that is the position that the Covenantholders would have been in had there been "no transaction". 5. As Mr Donaldson said in his closing submissions: "The obvious counterfactual raised by [AET's breach of trust] is that the land would not have been disposed of and the security would not have been discharged. But the Covenantholders' position in those circumstances would have been no better. The trees would largely have remained unharvested and any money received by the Milling Company in connection with trees that were harvested would not have found its way into the hands of the Covenantholders." 1. The critical question is what would have happened had AET insisted that the Encumbrances not be released without either: payment to the Covenantholders of the amount to which that they would ultimately be entitled; or the provision of alternative security. For Mr Kerr to show that the Covenantholders have suffered loss as a result of AET's breach, he must establish that the Covenantholders would probably have either been paid or given alternative security. 2. In this regard, Mr Sullivan directed his submissions to the proposition that it is likely, had AET so insisted, that the Covenantholders would have been paid out at settlement. I will call this the "Payout Counterfactual". The Payout Counterfactual 1. Mr Sullivan pointed to the following circumstances in support of the Payout Counterfactual. (a) No contemplation by Gunns that proceeds of Covenantholders' assets be used to reduce Gunns' debts 1. First, the Proposal involved the sale of all Gunns' interests in the Green Triangle. The Scheme Trees comprised only some 10% of that interest. 2. Gunns' original proposal, set out in its letter to AET of 4 March 2011 (see [66] above), was to sell the Scheme Land and the Scheme Trees subject to the Encumbrances. That suggested, Mr Sullivan submitted, that Gunns was not then contemplating using the Covenantholders' assets in reduction of its debts. 3. As I have described, the transaction then evolved into one which would effectively result in the winding up of the trust. (b) ANZ contemplated payout to the Covenantholders 1. There are a number of documents which suggest that in 2011 and early 2012 Gunns' lender, ANZ, was in what Mr Sullivan described as "work out mode", as opposed to "enforcement mode"; that is, ANZ was "urgently progressing a work out solution" to Gunns' financial difficulties, including an asset sale program. 2. In September 2011, ANZ prepared a presentation which recorded that Gunns' proposed sale included its freehold land in the Green Triangle and its interest in timber planted on that land including "Covenant holder trees on 3,200 ha". 3. The presentation recorded that Gunns had executed a "Heads of Agreement" with the proposed purchaser, "GMO", and that Gunns was also negotiating with an entity called "New Forests". 4. The ANZ presentation included a "Headline Offer Comparison" in the following form (footnotes omitted): GMO (A$ million) New Forests (A$ million) Comment Headline Purchaser Price 141.4 370.0 Less consideration for GMO Trees 207.0 Assumed consideration for GMO – currently being confirmed Sub-Total 141.4 163.0 Less consideration for Covenant holder interest (including land interest) 45.7 45.7 Based on Gunns discussions with Trustees Sub-Total 95.7 117.3 Add Gunns interest in Covenants 11.3 11.3 Based on Gunns estimate Total 107.0 128.6 Less adjustment (estimate) for harvesting 10.4 10.4 Based on Gunns estimate for harvesting from model date (Dec 2010) to estimated completion date (Oct 2011) Adjusted Total 96.6 118.2 1. The table records ANZ's estimate of the "Adjusted Total" net proceeds on the sale of Gunns' assets to GMO and New Forest. In both cases, ANZ has deducted from the likely "Adjusted Total" $45.7 million being "consideration for Covenant holder interest (including land interest)". That suggests, as Mr Sullivan submitted, that ANZ did not anticipate receiving on completion of the proposed sale the $45.7 million it understood was due to Covenantholders. 2. In an internal ANZ communication dated 12 October 2011, ANZ's Director of Mergers and Acquisitions, Mr Greg Dunstan, recorded that "New Forests have now entered a Heads of Agreement to acquire Gunns' land in the [G]reen Triangle" and that "[t]he total offer for the Gunns land and trees and GMO trees is A$370 million". 3. Mr Dunstan then set out the following "summary of the indicative flows from total consideration": "Consideration: A$370,000,000 Tree Covenants A$44,000,000 GMO US$212,000,000* Gunns Proceeds A$114,000,000 *Assumes A$/US$ parity". (Emphasis in original.) 1. Again, this document bespeaks a contemplation by ANZ that the Covenantholders will be paid $44 million before any "Gunns Proceeds" was available to reduce Gunns' indebtedness to ANZ. 2. On 21 February 2012, the Director of ANZ Lending Services, Mr Russell Smith wrote to Gunns' Company Secretary, Mr Wayne Chapman, stating that he was "still struggling with the numbers" and continuing: "As per your presentation, funding (net of Gunns) is being provided as follows: New Forests 122m Munich Re 60m Debt (NAB) 60m (net) Total 242m Payout of funds is: GMO 216m Covenant Holders 34m Deposit 6m Txn Costs XXXm Total 256m It appears 14m short. Have I missed something?" 1. Mr Chapman replied later that day: "Equity is 122 + 60 NAB debt is 80 Giving 262 available for tranche 1 Payout is: GMO 216 Covenant 34 Costs est. 12". 1. Mr Chapman thus confirmed, evidently to Mr Smith's satisfaction, that there would be a "payout" to Covenantholders in settlement of $34 million. 2. As Mr Sullivan submitted, these documents suggest that, prior to the transaction, and after entry into the transaction but before completion, neither Gunns nor its lenders had any anticipation of Covenantholders' entitlements being applied in reduction of Gunns' indebtedness. My attention has not been drawn to any evidence to the contrary. 3. Mr Lockhart submitted that the documents do no more than identify the amount that ANZ understood to be contractually due by Gunns to the Covenantholders. I do not accept that submission. The documents appear to me to be setting out what ANZ understood would be available to it on completion of the transaction and to bespeak an understanding by ANZ that Covenantholders would be paid first. 4. In oral submissions, Mr Lockhart drew attention to the more robust attitude shown by ANZ in August 2012. 5. As I have set out at [183] above, on 1 August 2012, Gunns wrote to ANZ suggesting that it retain $15 million from the proceeds of the sale "to provide adequate funding in relation to its $15 million mandatory obligations to growers under the Great Southern Managed investment scheme". In response, on 9 August 2012, ANZ stated that it remained "to be convinced that the Covenant Holders have any direct entitlement (in trust or otherwise) to the net proceeds of unit redemptions that ranks ahead of the lenders" (see [186] above). 6. The first point is that this exchange of correspondence appears to relate to a different investment scheme than the one the subject of these proceedings. Even if this exchange relates to the subject scheme, I do not see that it casts any light on ANZ's likely attitude prior to completion. By August 2012 the transaction had been completed. The Encumbrances had been released. ANZ was then clearly in "enforcement mode". (c) Gunns' financial imperative 1. In late June 2011, there were media reports that Gunns was "under pressure to relieve debt" and that the sale of its "Green Triangle pine plantations for about $107 million" was "less than half the listed value". 2. Consistently with those reports, on 30 June 2011, Gunns explained to a member of its lending syndicate that it was obliged to offer a prospective purchaser a "significant discount" to reflect "the encumbrance of the land by the existing equity interests", including the Covenantholders. 3. The media reports were also confirmed in Gunns' Consolidated Financial Statements for FY2011 which recorded an "Impairment of Auspine Assets" as follows: "This impairment included a write down of $162 million to reflect terms agreed for the sale of the residual land and forest assets in the Green Triangle and a value of $105 million". 1. The financial statements recorded that: "The Company's primary debt facility matures in January 2012. The Company is progressing a number of asset sale processes to significantly reduce core debt levels prior to this refinancing". 1. In the "Chairman's Review", Gunns' Chairman, Mr Chris Newman, recorded that: "The Company balance sheet at 30 June 2011 reflects the status of the asset sale program with significant asset values held as current pending sale. The asset sale program was initiated in the 2010 year. Completion of this program is important to the Company meeting its future financing requirements and creating the investment platform for the pulp mill project. … … The decisions implemented in the 2011 year are pivotal to the Company's future. The exit from native forest based operations in Tasmania, and focusing of operations, are fundamental initiatives to provide long term sustainable outcomes for all stakeholders". 1. Mr Newman's references to the "pulp mill project" was a reference to the Bell Bay pulp mill which Gunns was then constructing. 2. On 19 September 2011, Gunns delivered a "Market Update" to the Australian Securities Exchange in which it stated: "The company's primary debt facility matures in January 2012 and as a result the company will be required to retire $340 million of debt. The company has a range of asset sale processes in progress to meet this requirement. Completion of the pulp mill Project equity investment process is a material factor in determining the company's approach to meeting that obligation. If the investment negotiations are not concluded with required certainty in the timeframes outlined, the scope of the company's asset sales program will be expanded to enable it to reduce its core debt level. Completion of key components of the asset sale program will then be integral to the completion of debt retirement." 1. On 22 December 2011, Gunns published to the ASX a further Market Update: "Finance Facilities The company is in negotiation with its core debt facility providers to extend existing finance facilities until 31 December 2012. The company's senior debt facility matures on 31 January 2012. The balance of this facility is currently $340 million with approximately $216 million to be re-financed following repayments from asset sale transactions. Further information in respect of the facility extension will be provided when terms are finalised. Asset Sales Agreements for the sale of the Green Triangle forest estate have been executed, subject to conditions precedent including FIRB approval, with the transaction scheduled to settle prior to 31 January 2012. Net proceeds of the transaction of approximately $120 million will be applied to debt reduction." 1. On 30 January 2012, Gunns published a further statement to the ASX entitled "Extension of Financing Facilities" which confirmed that its debt facilities had been extended to 31 December 2012 and that: "The facility balance is expected to be progressively reduced in the course of the 2012 year, as the company completes asset sale process currently in progress and finalises the Bell Bay pulp mill project investment." 1. These matters suggest that Gunns was under financial stress and highly motivated to sell its assets in the Green Triangle. (d) Gunns was powerfully motivated to avoid a "no transaction" scenario 1. There is also evidence to suggest that Gunns was powerfully motivated, Mr Sullivan submitted "desperate", to ensure that the sale of its Green Triangle assets proceeded and to avoid a "no transaction" scenario. 2. Mr Nguyen was keen to see the Proposal go through, hence his email to Mr Howard immediately before execution of the Put & Call Option agreement that anything to get him away from "the cliff face" would be gratefully accepted (see [152] above). 3. I have referred to the exchange between Mr Nguyen and Mr Johnston on 20 and 21 December 2011 about the proposed "GST side letter" (see [135] to [138] above). 4. This exchange was born of the realisation around 20 December 2011 that the Tree Sale Agreement may attract a GST liability. Gunns proposed that one of its subsidiaries loan the purchaser, interest free, an amount equal to any GST liability. AET refused to participate in this transaction. When Sparke Helmore informed Gunns that the proposed side letter was not acceptable, Mr Nguyen's reply stating he had "intentionally CC'd our Managing Director" and asked AET to "urgently reconsider" stating that the transaction "is in real jeopardy otherwise". AET maintained its refusal to participate in the side letter. 5. As Mr Sullivan submitted that "this suggests Gunns, when pushed, would accommodate AET's position". It also shows how desperate Gunns was to get the transaction over the line. 6. A further indication of Gunns' anxiety to finalise the transaction is revealed in Mr Nguyen's email to Mr Howard on 24 February 2012, to which I have referred at [157] above. 7. As I have set out at [158], Gunns was in effect agreeing to provide vendor finance to "ensure the sale will proceed". 8. In these circumstances Mr Sullivan submitted: "Gunns [was] prepared to provide substantial vendor finance to the purchaser to bring this result about. Why would it jeopardise the transaction by resisting a demand by a competent Trustee to receive payment (or substitute security) for amounts which neither Gunns nor its lenders expected to receive?" (e) Gunns willing to sell at undervalue 1. Finally, as I have already set out, Gunns was proceeding with the Green Triangle sale at what it and the media regarded as a substantial undervalue. AET's response to the Payout Counterfactual 1. In final oral submissions, Mr Lockhart accepted that, had AET indicated a refusal to release the Encumbrances, there would have been a negotiation between AET, Gunns and Gunns' lenders. Thus, as Mr Sullivan submitted in reply, AET effectively admitted that causation was established. 2. Mr Lockhart said: "What this all shows is that at the time, in the hypothetical world with which the Court is confronted, what we say is, had AET come along and said, we are not happy, we are not prepared to release out security unless you give us moneys on completion; then a variety of factors to which we point would dictate - we say, the most probable outcome is the bank would have been prepared for some moneys to be released to AET, but not anything in excess of the value of its security, being 16 million; which is not terribly much less than what the covenantholders would be entitled to get, leaving aside the Gunns companies' covenantholders, in any event." (Emphasis added.) 1. Mr Lockhart's statement was made in the context of a submission that the most that ANZ was likely to permit be paid to Covenantholders was the value of the Scheme Land which, Mr Lockhart submitted was $16 million. I will turn to that submission shortly. 2. Subject to what follows, the matters I have set out from [381] to [422] point strongly to the conclusion that, had AET insisted that it would not discharge the Encumbrances without payment to it of the Covenantholders' entitlements, in effect the Tree Sale Proceeds, ANZ and Gunns would have acceded to AET's demands. 3. What follows is consideration of a number of arguments put by Mr Lockhart to the contrary effect. (a) Would ANZ only have agreed to release $16 million? 1. As set out at [421], Mr Lockhart submitted that, in any negotiation with ANZ, ANZ would only have agreed to release to AET, and thus to the Covenantholders, an amount equal to the value of the Scheme Land. 2. Mr Lockhart submitted that the evidence showed that the Scheme Land "had been independently value as being $16 million". Mr Lockhart submitted: "In the light of that valuation and Gunns' financial circumstances (which Gunns' secured lender, the ANZ, was acutely aware of and was pressuring Gunns to address by selling assets and paying down debt), it is likely that Gunns (and the ANZ) would only have agreed to: a. Release funds to AET, on completion, up to the value of the security represented by the Encumbrances i.e. $16 million (being the amount of the prior ranking security to that held by ANZ); or b. Provide substitute security for up to that value i.e. $16 million." 1. The valuation upon which Mr Lockhart relied was the "Abridged Land Valuation Results", which is an appendix to a valuation prepared by VDFC Forestry Consultants in July 2011. That valuation shows that the $16 million figure is one prepared by Colliers a year earlier, in June 2010. 2. Mr Sullivan submitted that a more reliable guide to the value of the Scheme Land at the relevant time was the amount that the purchaser had agreed to pay for the land under the land sale contracts. 3. Initially, Mr Sullivan submitted that the value attributed to Covenantholder lots in the land sale contracts was $24,934,000. Mr Lockhart submitted in reply that this calculation overlooked an earlier sale of Covenantholder land and that the true price of Covenantholder land in the land sale contracts was $18,320,000. I understand that this is now accepted by Mr Kerr. 4. However, the nature of the Encumbrances is that they do not secure only the value of the land. They secured "all and singular" the obligations of the Forest Company under the Trust Deed. Were the Covenantholders to exercise their power of sale under the Scheme Land they would, no doubt, only recover an amount equal to its value. But they were entitled to maintain the Encumbrances on the title of the Scheme Land until all monies due to them from the Forest Company were paid. 5. In those circumstances, I am not prepared to speculate that ANZ would only have agreed to release to AET the value of the Scheme Land. (b) Would Gunns have responded to a refusal to release the Encumbrances by excising the Scheme Land from the sale? 1. Mr Lockhart submitted, again in response to the Payout Counterfactual, that if payment to it of $16 million was not acceptable to AET: "…the likely response from Gunns/ANZ would have been to excise the sale of Covenantholder land from the transaction so that Gunns could still obtain the Tree Sale Proceeds (being about $34m, which was double the value of the Covenantholder land) without having to pay anything to AET on completion." And that: "Under that scenario: a. The proposed sale would probably have gone ahead with the Covenantholder trees being sold (either as standing timber or as felled and sold by Gunns) but not the land in respect of which there were Covenantholder Encumbrances; b. The Encumbrances would likely have remained in place; c. Gunns Limited, Auspine Limited, the Forest Company and the Milling Company would still have gone into administration in September 2012; and d. AET would have been left to enforce the Encumbrances." 1. Mr Lockhart did not point to any evidence which could justify that submission. It involves a high degree of speculation. 2. As Mr Sullivan submitted, it involves "precisely the kind of speculation, against a plaintiff and in favour of a defaulting trustee, which equity forbids in a claim for equitable compensation against a defaulting trustee". Mr Sullivan pointed to Elliott J's observations in Ahrkalimpa, at [34], which I set out earlier: "…when assessing quantum and considering what would or ought to have happened if no breach had occurred, the court should not speculate against the plaintiff, or assume something might have occurred when, in fact, it did not." 1. In any event, it appears to me unlikely that Gunns would have proceeded this way. As early as 14 January 2011 Gunns had stated in its Information Memorandum that it wished to "sell the entire estate" (see [61] above). 2. And, as I have set out at [405], Gunns' Chairman's report for FY2011 emphasised how "pivotal" the asset sale program was for Gunns' future financing requirements. 3. On 8 December 2011, an officer of ANZ wrote to Gunns' Company Secretary, Mr Chapman, enquiring: "…is it the entire estate that is being sold?" 1. Mr Chapman replied: "The sale comprises land and tree interests owned by the group in the Green Triangle region. Land area is approx. 42,000 ha all of which (apart from some minor equity interests (2,000 ha) held by Investors) is currently owned by the Company. The ownership of the trees is split between the Company (15%), GMO (75%) and Covenant Holders/Investors (10%). As part of the transaction the Company has agreed the purchase of the GMO and Covenant Holder trees from those parties to sell all land and tree [sic] to the purchaser. By doing this the estate could be sold on an unencumbered basis to the new owner and realise a better price. The group will not retain any of the estate following the sale." (Emphasis added.) 1. Thus Gunns emphasised to its lender that the sale of its entire interest in the Green Triangle had been effected to "realise a better price". In those circumstances, it seems unlikely that Gunns would have excised the Scheme Land. 2. Further, and as a practical matter, there is no evidence that the Scheme Land could be excised. Gunns' property interests were located on a large number of disparate sites to the east of South Australia and the west of Victoria. There was no evidence that the Scheme Land titles were contiguous or that non-Covenantholder titles could be sold independently of Covenantholders' titles. It may be that Covenantholders' interests were surrounded by non-Covenantholder interests in certain parts of the estate. There is no evidence either way. 3. I am not prepared to speculate that, had Gunns been faced with a refusal by AET to release the Encumbrances, Gunns would have sought to excise the Scheme Land from the sale. (c) Would Gunns have required retention of the amounts on account of its Covenantholder subsidiaries? 1. As at 30 June 2012, the Forest Company and Auspine were Covenantholders. Mr Lockhart produced a complicated series of calculations designed to show that the value of the Covenants owned by the Forest Company and Auspine was in the order of $5.17 million. In those circumstances, Mr Lockhart submitted, again in response to the Payout Counterfactual: "It is likely that had AET (contrary to our primary submission) been successful in negotiating the payment to it of the Tree Sale Proceeds…Gunns/ANZ would not have released [the value of Gunns' subsidiaries' covenants] to AET, but rather would have forgone any right to payment of those proceeds from AET so that it could hold on to them to immediately pay down Gunns' debt. The same approach would have been applied to the 2011 Harvest Proceeds and the 2012 Harvest Proceeds that Gunns would have been entitled to be paid as a Covenantholder." 1. In my opinion, this submission overlooks the point that, whatever Gunns might have proposed, AET as trustee had a duty to act impartially, and not to favour one beneficiary over others: Howe v Earl of Dartmouth (1802) 32 ER 56. 2. The counterfactual posed by Mr Lockhart assumes that AET would have acceded to a proposal by Gunns to prefer the interests of its subsidiary Covenantholders, who on this hypothesis would have been paid immediately, to the interests of all the other Covenantholders who would, on this hypothesis, have to await a distribution in due course. 3. Not only is it a matter of speculation as to whether Gunns would have adopted this position, AET could not have agreed to it without acting in breach of trust. (d) Would Gunns have refused to release the 2011 and 2012 Harvest Proceeds? 1. Included in the amounts that, under the Proceeds Distribution Process, would ultimately be paid to Covenantholders were the 2011 Harvest Proceeds and the 2012 Harvest Proceeds. 2. As I mentioned at [29]: 1. the 2011 Harvest Proceeds totalled $11,051,041.49 of which $4,952,579.60 was actually been received by AET; and 2. the 2012 Harvest Proceeds totalled $5,148,552.31. 1. In the ordinary course, the 2011 and 2012 Harvest Proceeds were payable in accordance with the Proceeds Distribution Process; that is, between April and August 2012 for the 2011 Harvest Proceeds, and between April and August 2013 for the 2012 Harvest Proceeds. 2. In those circumstances, Mr Lockhart submitted, again in response to the Payout Counterfactual: "In any scenario, Gunns would not have allowed the 2011 Harvest Proceeds and the 2012 Harvest Proceeds to leave Gunns' possession (particularly the portion of those proceeds referrable to the Covenants owned by Gunns) in circumstances where those proceeds were not yet due for payment and Gunns was facing significant liquidity problems." 1. This submission can only have application to that part of the 2011 Harvest Proceeds as was not paid to AET, and to the 2012 Harvest Proceeds. No question of what Gunns "would have allowed" can arise in relation to that part of the 2011 Harvest Proceeds as were actually paid to AET. 2. Under cl 2(d)(i) of the Trust Deed, AET could reasonably withhold its consent to the sale of the Scheme Land by the Forest Company in circumstances where there might be material prejudice to the interests of Covenantholders or a reduction in the protection afforded them. 3. As the Encumbrances secured "all and singular the terms, conditions, covenants and provisions" contained in the Trust Deed, they secured to the Covenantholders payment of the 2011 Harvest Proceeds and the 2012 Harvest Proceeds. While the Encumbrances only secured performance by the Forest Company of its obligations, AET was not obliged to release the Encumbrances until such time as all of its obligations, including passing on to AET the 2011 and 2012 Harvest Proceeds, had been completed. 4. Mr Howard gave no thought to the matter. Thus he gave this evidence: "Q. And you now know, although you were under a misapprehension at the time - when I say, "the time", I mean March 2012 - that the encumbrances which were registered on the various titles would have provided security for the unpaid amounts of those distributions, don't you? A. I know that now, yes. Q. But you never turned your mind, did you, to whether AET should seek to have those amounts paid to it at the time of discharging the security given in March 2012? A. Not at that time, no." 1. Mr Sullivan drew attention to the observations of Handley JA in Kingsgrove RSL v Spasevski [2002] NSWCA 342 at [42]: "The approach of Gaudron J and other High Court Judges, which has been referred to…places an evidentiary onus on the party in breach of duty. The breach of duty has created difficulties of proof which would not exist if the duty had been performed. Evidentiary presumptions are available against wrongdoers for other legal purposes (Armory v Delamirie (1722) 1 Stra 505 [(1722) 93 ER 664] and Houghton v Immer (No 155) Pty Ltd (1997) 44 NSWLR 46 at 49) and I see no reason why such a presumption should not be available in cases such as the present. This provides a further basis for finding that the club's breaches of duty caused or materially contributed to the respondent's injury." 1. I find his Honour's observations to be apposite here. 2. In those circumstances, I accept Mr Sullivan's submission that, as the party in breach, AET bears the onus to establish that the unpaid 2011 Harvest Proceeds and the 2012 Harvest Proceeds would not have been paid, had a demand been made. I am not prepared to speculate against Mr Kerr in favour of AET, the defaulting trustee, as Mr Lockhart has invited me to do; particularly as it is clear that AET, through Mr Howard, gave no thought to the matter at the time. (e) The 2011 Harvest Proceeds received by AET 1. It is common ground that AET received $4,952,579.60 of the 2011 Harvest Proceeds. My attention has not been directed to evidence indicating when AET received these funds. However the parties' submissions proceeded upon the basis that this sum was received prior to completion of the Tree Sale Agreement. 2. This amount was not distributed to Covenantholders in the ordinary course. Mr Lockhart submitted that the funds had been "appropriately held" and "are the only assets of the trust available for the trustees (including Mr Kerr) to have resort to in respect of any costs incurred in administrating the trust that they may be indemnified for. 3. Evidently, these funds were used to fund the Korda litigation and are thus included in the Receiver Costs that Mr Kerr seeks to recover. In those circumstances a question of double recovery arises, which I deal with below at [492]-[494]. 4. As Mr Sullivan submitted, had AET not breached its duties, this amount would have been distributed to Covenantholders in the ordinary course. AET does not suggest to the contrary. As Mr Sullivan put it: "There is no part of the counter-factual, on any issue of causation, which could impact on Mr Kerr's right to recover these amounts. The putative conduct or attitude of Gunns or its lenders is irrelevant to this particular loss". 1. Accordingly, subject to the question of double recovery, Mr Kerr is entitled to succeed on this issue. Conclusion on the Payout Counterfactual 1. None of the matters advanced by Mr Lockhart persuades me to depart from the preliminary conclusion I expressed above at [423]. Mr Kerr has established that, had AET insisted on receiving payment in exchange for discharging the Encumbrances, it is probable that it would have received the Tree Sale Proceeds. 2. It is, however, necessary to consider some further arguments developed by Mr Lockhart as to whether Gunns would have succeeded in negotiating certain deductions from the amount payable to AET from the Tree Sale Proceeds. 3. Mr Kerr and AET dealt with these questions under the heading "Quantum". Quantum 1. I have set out at [29] above the amounts claimed by Mr Kerr. To repeat, Mr Kerr claims: 1. the Tree Sale Proceeds: $33,999,998; 2. the Land Sale Proceeds: $4,882,380.58; 3. the 2011 Harvest Proceeds actually received by AET: $4,952,579.60; 4. the 2011 Harvest Proceeds not received by AET: $6,098,461.89; 5. the 2012 Harvest Proceeds: $5,148.552.31; 6. the Receiver Costs: $1,664,500.41; 7. the Appointment Costs: $371,976.90; 8. the Judicial Advice Costs: $270,757.94; and 9. interest from the date of breach on (a)-(e) above. Deductions contended for by AET (a) Post Tree Sale Agreement settlement deductions 1. The Tree Sale Agreement called for adjustments to be made, after settlement, to account for the difference between the harvesting areas referred to in the Tree Sale Agreement and the harvesting areas in fact transferred to the purchaser on completion; such difference being accounted for by ongoing harvesting of timber in the meantime. 2. Mr Lockhart calculated that the adjustment required in favour of the purchaser was $3,281,481.80. 3. Mr Sullivan criticised the basis upon which the figure of $3,281,481.80 was calculated but submitted that the larger point was that there was no evidence that any such adjustment had been made. Mr Sullivan repeated that submission orally in final address. 4. I gave Mr Lockhart leave to put in short submissions in reply. Mr Lockhart did not mention this matter in those submissions. 5. That, it seems to me, is the end of the matter. 6. However, for completeness, I should record that, in final submissions, Mr Sullivan accepted that if, as I have found, Mr Kerr was to recover the unpaid 2012 Harvest Proceedings, it would be reasonable to deduct the amount of $3,281,481.80. 7. Thus Mr Sullivan said: "The trees in question here that were culled were trees which would have produced what we call the 2012 harvest proceeds. So if this deduction was one which needs to be taken off, that's fair enough, in our respectful submission, if we were to get the 2012 harvest proceeds, that would be equitable. If, however, it was to be found that one wouldn't have done a deal whereby those proceeds were properly and adequately secured so that the covenantholders would get them when they came in, we would say as a matter of equity, it would be inequitable to reduce AET's liability by the post-settlement adjustment of the tree sale agreement in those circumstances". (b) Commissions payable to the Milling Company and the Forest Company 1. Mr Lockhart submitted that: "The Tree Sale Proceeds need to be reduced by the 5% commission that the Forest Company was entitled to and the 20% commission that the Milling Company was entitled to under the Trust Deed [and the] Tripartite [Agreement]". 1. Mr Lockhart's submissions continued: "Documents that have recently been produced by ANZ reflect the fact that the $34 million Tree Sale Proceeds did not include these commissions, which reflects the expectation that they were payable. In addition, it should be noted that the relevant timber valuation provided by VDFC Forest[ry] Consultants in November 2011 (which updated the July 2011 valuation relied on by the plaintiff), recommended a fair net value amount for the Tree Sale Proceeds of $33.105m that was not net of commissions (contrary to what the plaintiff contends)." (Emphasis in original.) 1. The "[d]ocuments that have recently been produced by ANZ" included a document dated 30 January 2012 called "Project Saturn Update". 2. Mr Lockhart did not refer to this document in oral address but it records ANZ's understanding that the amount to be distributed to Covenantholders following settlement was to be $26 million "over May-September 2012". I assume that the inference I am invited to draw is that the difference between that figure and the Tree Sale Proceeds of $33,999,998 was on account of commissions to be paid to the Milling Company and the Forest Company, which would have been in the order of $8 million. 3. This may be how ANZ saw things. But if the consideration that Gunns had negotiated be paid to it for the Scheme Trees, and thus the amount to be passed on to Covenantholders, took account of the commissions payable to the Milling Company and the Forest Company, there would be no basis for Gunns to argue that the amount payable to Covenantholders would be subject to deduction of those commissions. 4. On 19 August 2011, Gunns obtained a valuation of the Scheme Trees from VDFC Forestry Consultants. In that valuation, Mr Cross, of VDFC Forestry Consultants, opined that the net value of the Scheme Trees was $34,756,612. The schedules annexed to that valuation make clear that that figure is net of deductions for the 20% commission to which the Milling Company was entitled and the 5% commission to which the Forest Company was entitled. 5. On 23 November 2011, Mr Howard wrote to Mr Nguyen requesting a "letter from the valuer" confirming that AET could rely on the valuation as well as: "Confirmation that the purchase price is the best market price reasonably obtainable at this time and is in line with the valuation." 1. On 23 November 2011, Mr Nguyen replied saying that he would "liaise with the Valuer ASAP" and, a few minutes later, emailed Mr Howard: "Further to my last email, the Valuer's valuation was based on the standing timber as at June. Obviously there has been a further harvesting so we are asking him to provide an update valuation based on projected standing timber as at 24/1/2012 (the Completion/Settlement date)." 1. On 24 November 2011, VDFC Forestry Consultants produced a further valuation of the Scheme Trees of $33,105,149. 2. In his covering letter of 24 November 2011 addressed to AET, Mr Cross said: "It is my view that the recommended market price of $33,105,149 is a fair and reasonable estimate of the value of the resource according to industry market prices and is based on evaluation of current industry conditions and log purchase prices." 1. The second valuation is also dated July 2011 on its front cover but the disclaimer is dated 24 November 2011 and the valuation is expressed to be "based on inventory at 24 November 2011". Mr Cross opined: "…the use of the discounted value of $33,105,149 at Market price stumpages would represent a fair net value for the purchase of the Covenantholders' resource. This includes the benefit of potential growth at the end of the rotation, and takes account of all the reasonable expenses for both parties (buyer and seller) with a fair return to Covenantholders…". (Underlined emphasis added. Bold emphasis in original.) 1. As did the first valuation, the second valuation refers in terms to "expenses" which include the commissions payable to the Milling Company and the Forest Company. At par 7.2.3 of the valuation Mr Cross said that in calculating cash flows the "annual expenses per hectare" were calculated and that: "The expenses were planation insurance, annual maintenance costs of 5% of land value [it is common ground that this is not a reference to the Forest Company Commission] as land rental costs. This derived a net present value which can be regarded as the market value of the holding at this date". 1. Although I do not find the valuation to be pellucid on this point, it appears unlikely that this was intended by Mr Cross to be an exhaustive list of the "expenses" he included when determining the discounted value of $33,105,149. 2. It does appear, although he did not spell this out in this valuation, that the commissions payable to the Milling Company and the Forest Company were included in the expenses that Mr Cross took into account. The indication that this must be so is that Mr Cross's second valuation is only $1,650,851 less than his first valuation. It is likely that the difference is attributable to the "further harvesting" of timber, which Mr Nguyen referred in his 23 November 2011 email between June and November 2011. The first valuation was net of the Milling Company and Forest Company commissions. Those commissions amount to some $8 million and could not account for the relatively modest difference between Mr Cross's two valuations. 3. Overall, it appears probable that both of Mr Cross's valuations are net of commission. 4. Mr Lockhart submitted that it was unlikely that the Tree Sale Proceeds were net of commission because "the purchaser is an unrelated entity" and that "it wouldn't make sense for the figure of the actual sale to have taken from it what is to be paid to Milling and Forest". But that is not the point. The point is that if, as I have said at [477] above and as the valuations suggest, the negotiated price took account of the commissions otherwise payable to the Milling Company and the Forest Company, there would be no basis for Gunns to contend that those commissions be later paid out of the funds due to the Covenantholders. 5. Further, as was said on behalf of Mr Kerr in submissions in reply: 1. the sale of the Scheme Land remaining on the wind up of the trust was not a matter covered by the Trust Deed and Tripartite Agreement, which contemplated a long term scheme where the timber would be felled, milled and sold progressively rather than with the Scheme Land in a single transaction; 2. whether the Milling Company and the Forest Company would, in those circumstances, have been entitled to the commissions specified in the Trust Deed and Tripartite Agreement is by no means clear; and 3. in those circumstances, it may be that Gunns did not think the commissions were payable. 1. There is no direct evidence of what Gunns intended in relation to the commissions. The valuations suggest the purchase price for the Scheme Trees was negotiated taking into account commissions otherwise payable to the Milling Company and the Forest Company. 2. In those circumstances I am not prepared to infer, in AET's favour, that Gunns would in any negotiation, have insisted on a deduction on account of such commissions. The Receiver Costs 1. These are the costs incurred by AET in pursuing the Korda litigation. It is true, as Mr Kerr submits, that litigation would never have been necessary if AET had received payment or substitute security. 2. However, as I have mentioned, AET used part of the paid 2011 Harvest Proceeds to fund the Korda litigation. 3. In those circumstances, I think Mr Lockhart was correct to submit that if, as I found, Mr Kerr is entitled, as compensation, to payment of the full amount of the Paid 2011 Harvest Proceeds, it would be double counting to also receive the Receiver Costs in circumstances where those costs were paid from those proceeds. The Appointment Costs 1. These are the costs incurred to secure Mr Kerr's appointment as independent trustee to bring these proceedings. 2. AET denied, and in these proceedings continued to deny, the claims of Mr Kerr and had previously refused to investigate them. AET, through Sparke Helmore, denied liability and went so far as to assert that these proceedings had no prospects of success. 3. In his closing submissions, Mr Kerr summarised AET's conduct following the High Court's decision in Korda as follows: "Following the High Court's decision in Korda in March 2015, AET did not take any steps to investigate or to seek to recover the fund [sic] which had been lost. For example, there is no evidence that it independently investigated the reason why it had discharged the encumbrances, nor does it appear it considered whether it had a claim against Sparke Helmore in relation to the advice which it had received. From around 10 June 2015, a Covenantholder, Mr Armour, began writing to AET requesting documents and asking for information and explanations concerning the loss of the moneys due to Covenantholders. Sparke Helmore continued to act for AET. Sparke Helmore's responses, on behalf of its trustee client, to Mr Armour, denied liability, stated that any such proceedings had no prospects of success, and threatened Mr Armour with indemnity costs if he commenced proceedings. Part of Sparke Helmore's response on behalf of AET to requests for documents in respect of the encumbrances was that '[c]omplete records from that long ago are no longer available' and that Mr Armour should 'search the public record with respect to those matters'. On 28 January 2016, Mr Armour requested that AET cease acting as trustee or appoint an additional independent trustee to consider claims against AET. Mr Armour offered to fund any investigation. AET refused these requests. One apparent reason offered for the refusal was at best misguided: AET wrote that '[t]he enquiries which [AET] is undertaking in response to the matters raised in [Mr Armour's] correspondence do not involve a review of its conduct on behalf of Covenantholders, but on its own behalf'. Ultimately, Mr Armour commenced proceedings for the appointment of an additional trustee, which resulted in Mr Kerr being appointed as an additional trustee to pursue claims against AET and Sparke Helmore." 1. In final submissions, AET did not dispute any of these matters. In those circumstances, Mr Kerr is entitled to recover the Appointment Costs. The Judicial Advice Costs 1. These are the costs incurred by Mr Kerr in obtaining advice from this Court pursuant to s 63 of the Trustee Act 1925 (NSW) that he would be justified in bringing these proceedings. 2. AET did not dispute that if Mr Kerr was otherwise entitled to equitable compensation he should recover these costs. Apportionment issue 1. At the outset of the hearing, AET asserted that Mr Kerr's claim was apportionable under either ss 3 and 4 of the Law Reform (Contributory Negligence and Apportionment of Liability) Act 2001 (SA) or s 34 of the Civil Liability Act 2002 (NSW). 2. AET named Sparke Helmore and the Forest Company as concurrent wrongdoers. 3. The question arises as to whether the law of South Australia or New South Wales applies to this question. 4. Mr Lockhart accepted that if South Australian law applies, there can be no apportionment. 5. AET drew attention to the opinion expressed by the learned authors in Nygh's Conflict of Laws in Australia (9th ed, 2013, LexisNexis Butterworths) at [20.23] that: "Some of the legislative provisions are phrased in terms of what a Court should do, rather than in terms of the rights and obligations of the parties themselves. That makes them appear procedural in effect, operating as a directive to the Courts of the legislative jurisdiction. For example, all eight jurisdictions have modified the rules of joint and several liability by introducing proportionate liability for claims concerning economic loss or property damage". (Emphasis added.) 1. The learned authors of that text also make this observation at [16.32]: "Close attention must be paid to the form of the relevant rule when determining whether it is substantive or procedural. A legislative provision phrased in terms of what a court should do, rather than in terms of the rights and obligations of the parties, appears procedural in effect, operating as a directive 'governing or regulating the mode or conduct of court proceedings' in the legislating jurisdiction. For example, all eight Australian jurisdictions have modified the rules of joint and several liability by introducing proportionate liability for claims concerning economic loss or property damage. … Except in South Australia, the provisions in question are cast in terms of the matters the forum court must take into account in determining the defendant's liability… It would seem that this strong local policy should be applied even in cases where the lex loci delicti retains joint and several liability or has introduced proportionate liability in a different way. Conversely, it need not be applied in other jurisdictions that do not have comparable legislation, where courts are free to ignore the…instruction about what they must consider when reaching a decision." (Underlined emphasis added.) 1. In John Pfeiffer Pty Ltd v Rogerson (2000) 203 CLR 503; [2000] HCA 36 at [99], the High Court observed that a guiding principle in determining whether an issue is substantive or procedural is that: "…matters that affect the existence, extent or enforceability of the rights or duties of the parties to an action are matters that, on their face, appear to be concerned with issues of substance, not with issues of procedure." 1. The High Court also observed that "all questions about the kinds of damage, or amount of damages that may be recovered, would likewise be treated as substantive issues governed by the lex loci delicti": John Pfeiffer at [100]. 2. In my opinion, apportionment legislation is concerned with matters of substance, and not merely matters of procedure. It directly affects the extent of the parties' rights or duties, as well as any amount of damages that may be recovered. 3. As Mr Kerr submitted, that although the Trust Deed does not have a choice of law clause, the Trust has its most real and substantial connection with South Australia, and not New South Wales, as: 1. each of AET, from the date of its appointment until 2006, and the Forest Company, had their registered offices in South Australia; 2. the amendment to the Trust Deed made on 13 December 1998 was "authorised by the Corporate Affairs Commission of South Australia"; 3. the Scheme Land was predominately based in South Australia; 4. the Settlement Deed was expressed to be governed by the law of South Australia; and 5. each of the 17 August 2011 Certification, 22 December 2011 Certification, and 22 December 2011 Document Confirmation Advice assumed that "the Trust Deed and the Tripartite Agreement are governed by the laws of South Australia". 1. The lex loci delicti here is the law of South Australia. It thus follows from Mr Lockhart's concession that no question of apportionment arises. Exoneration under the Trustee Act 1. Finally, AET sought to be exonerated under either s 56 of the Trustee Act 1936 (SA) or s 85 of the Trustee Act 1925 (NSW) on the basis that it "acted honestly and reasonably, and ought fairly to be excused" for the breach of trust that I have found. 2. There is no basis to conclude that AET acted otherwise than honestly. 3. AET submitted that it had acted reasonably in that: "a. It was clear that AET entrusted Sparke Helmore to advise AET of any matter in relation to the sale proposal that was detrimental or materially prejudicial to the Covenantholders; b. That was an entirely reasonable and appropriate course of conduct given that Sparke Helmore held itself out as being a firm with the skill, expertise and experience in the relevant field of law and practice; c. Although AET were professional trustees, the subject matter – particularly the nature and effect of the Encumbrances – involved technical areas of the law; and d. AET relied on Sparke Helmore to provide advice in relation to such matters, but no advice was forthcoming on the nature of the Encumbrances that were required to be released under the Transaction Documents and the mitigating steps that could be taken to avoid material prejudice to the Covenantholders that may be occasioned by the release of the Encumbrances." 1. In my opinion, AET is not entitled to the benefit of either of the sections relied on. It did not act reasonably. It relied upon advice from Sparke Helmore that no reasonable trustee would have relied on. 2. In Elder's Trustee & Executor Co Ltd v Higgins (1963) 113 CLR 426; [1963] HCA 48, the High Court said, at [452]: "…although a professional trustee is not beyond the protection of the section, 'such a trustee would have to establish a strong case before the court would apply the section in its favour': Partridge v. Equity Trustees Executors and Agency Co. Ltd. [(1947) 75 CLR 149 at 165; [1947] HCA 42] and see National Trustees Executors and Agency Co. of Australasia v. Dwyer [(1940) 63 CLR 1 at 23]." 1. No such "strong case" has been made out here. Conclusion 1. I invite the parties to confer and agree on the orders necessary to give effect to these reasons. ********** Amendments 27 September 2019 - [498] - last words in sentence corrected from "Receiver Costs" to "Appointment Costs". DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 27 September 2019