Jurisdiction - Australia
Australia – “The Answer My Friend Is NOT Blowin’ In The Wind”: High Court Rules On Alleged Imputed Trust In Investment Scheme.

19 March, 2015


Legal News & Analysis – Asia Pacific – Australia –  Insolvency & Restructuring


Korda & Ors v Australian Executor Trustees (SA) Limited [2015] HCA 6


What You Need To Know


  • On 4 March 2015, the High Court handed down a unanimous judgment finding that no trust was to be imputed over timber and land sale proceeds arising out of the sale of certain Gunns forestry plantation assets.
  • The Court emphasised that the question of whether an express trust exists must be answered with reference to intention. In the absence of an explicit declaration of that intention, the process of ascertaining the parties’ intention involves construing relevant documents and other dealings in their regulatory and commercial context.
  • An express trust will not be imputed simply because a court considers that it is an appropriate means of protecting or creating an interest.




SEAS Sapfor Forests Pty Ltd (Forest Company) developed plantations of pine trees and SEAS Sapfor Harvesting Pty Ltd (the Milling Company) was engaged by the Forest Company to provide felling and milling services and to market and sell the timber from the plantations. The Forest Company raised funds from time to time by issuing covenants to investors (Covenantholders) under various prospectuses. The Respondent, Australian Executor Trustees (SA) Limited (AET) is the trustee for Covenantholders. The purchase of a covenant conferred upon Covenantholders the right to the net timber proceeds attributable to their interest in the particular planting year for which they applied. Some Covenantholders were also entitled to a payment in relation to the value of land upon clear felling of the timber or cessation of the covenant.


In 2008, Gunns Limited acquired the Forest Company and the Milling Company. In March 2012, the relevant plantations were sold in their entirety – in particular, AET, the Forest Company and the Milling Company (among others) entered into an agreement for the sale of trees, resulting in the payment of AUD 33,999,998 to the Milling Company (Tree Sale Proceeds) and two agreements for the sale of land, resulting in payment of the AUD 53,356,000 to the Forest Company (Land Sale Proceeds). In September 2012, receivers Mark Korda and Bryan Webster of KordaMentha (the Receivers) were appointed to Gunns Limited and each of the Forest Company and Milling Company.


AET filed an Originating Motion in the Supreme Court of Victoria on behalf of the Covenantholders, seeking declarations as to its rights to the Tree Sale Proceeds and Land Sale Proceeds. The key issue in the case was whether the Tree Sale Proceeds and Land Sale Proceeds were held on trust by the Forest Company and Milling Company for the Covenantholders, as AET contended.


Decisions Of The Trial Judge And The Court Of Appeal


AET was initially successful before the trial judge, Justice Sifris. His Honour found that, although the arguments of AET and the Receivers (advised by Ashurst Australia) were “finely balanced”, the Tree Sale Proceeds and Land Sale Proceeds were held on trust for the Covenantholders. The Receivers appealed the decision.


By majority (Maxwell P and Osborn JA), the Court of Appeal dismissed the Receivers’ appeal on grounds including that it was a matter of “commercial necessity” that the investments made by the Covenantholders not be at risk by reason of the extraneous (ie non-scheme) activities of the Forest and Milling Company and that the terms of the relevant scheme documents supported that analysis. Robson AJA dissented, holding that the Tree Sale Proceeds and Land Sale Proceeds were not held on trust before the net timber proceeds were actually paid across to AET.


The Receivers sought and were granted special leave to appeal to the High Court.


Unanimous Decision Of The High Court


The High Court (French CJ and Gageler, Hayne, Kiefel and Keane JJ) unanimously upheld the Receivers’ appeal. In doing so, it set aside the orders of the courts below and declared that AET was not entitled to any of the Tree Sale Proceeds and Land Sale Proceeds.


The High Court considered the parties’ submissions with respect to the construction of the scheme documents and the relevant commercial and regulatory framework. The key findings made by the High Court were as follows:


Imputing A Trust


The Court found that the question of whether an express trust should be imputed over the relevant proceeds must be answered with reference to the intention of the parties as evidenced chiefly by the scheme documents themselves. The Court rejected AET’s submissions that there was sufficient textual evidence in the scheme documents to support the existence of a trust with the certainty required by law.


No Requirement For Separate Fund


In particular, the Court found that the lack of any requirement for the Forest Company and Milling Company to maintain a separate fund for the relevant proceeds told against the existence of the propounded trust.


Legislative Framework


The Court agreed with the Receivers’ submissions that the historical legislative framework applicable to such schemes did not require the existence of the imputed trust.




Several members of the Court noted that the position with respect to indemnities between the parties to the scheme documents told against a trust, including:


(i) an indemnity provision in one of the relevant scheme documents (by which the Forest Company indemnified AET and Covenantholders) which was held to be inconsistent with the Forest Company acting as trustee; and


(ii) at general law, trustees (being the Forest Company and Milling Company, on AET’s submissions) are entitled to be indemnified for their properly incurred expenses from trust assets and/or by the beneficiaries (ie here the Covenantholders) – this potential personal liability for debts incurred by the trustee meant that the purported trust would not have the effect of protecting Covenantholders from risk as AET contended.


Tax Position


French CJ and Keane J accepted the Receivers’ submissions that, based on a proper interpretation of relevant legal authorities, the trust contended for by AET would have been at odds with the parties’ intention as to the tax benefits of the relevant schemes, by increasing the risk that income derived by Covenantholders from the schemes would have been assessable in their hands for income tax (in this respect, French CJ and Keane J rejected the analysis of the majority in the Court of Appeal).


Alleged Admissions


The Court did not consider that admissions allegedly made by a Gunns employee in 2012 as to the existence of a trust were relevant to ascertaining the parties’ intentions at the time the scheme documents were entered into.




The unanimous decision of the High Court emphasises that, while contractual and trust relationships can co-exist, the intention to create an express trust is paramount and must be evidenced in the agreements or oral dealings between the parties, construed in their context. As French CJ observed:


“AET submitted that this Court has recognised that there should be no reluctance in inferring the existence of an express trust…To eschew historical reluctance is one thing. To construct intention out of straws plucked from textual and contextual breezes, some blowing in different directions, is quite another.”


An express trust cannot be said to arise a matter of commercial necessity merely in order to protect one party (in this case, investors) from the inherent risks of their investment where there is no explicit or sufficient evidence of the parties’ joint objective intention that such a trust exists. The imposition of a trust in these circumstances would be to confuse the process of ascertaining an express trust based on intention on the one hand, with the imposition of a remedial trust which arises by operation of law on the other.


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For further information please contact:


Joseph Scarcella, Partner, Ashurst

[email protected]


Ross McClymont, Partner Ashurst

[email protected]


Natalie Talia, Ashurst

[email protected]


Jacqueline Chan, Ashurst

[email protected]


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