Today the Court of Appeal (Chief Justice Ferguson, Justice Santamaria and Justice McLeish) dismissed two appeals brought by former investors in managed investment schemes within the Timbercorp Group.
In each case, the applicants had sought to acquire interests in three schemes. They paid deposits and funded the balance of their investments by entering into loan agreements with Timbercorp Finance. Each loan agreement was to be satisfied by Timbercorp Finance making payment to Timbercorp Securities, the responsible entity of each scheme. Timbercorp Finance purported to make payment to Timbercorp Securities by the making of journal entries in each company’s books of account.
In June 2009, each of the members of the Timbercorp Group was placed in liquidation. Over time, Timbercorp Finance commenced recovery proceedings against borrowers who had failed to meet their repayment obligations under loan agreements with Timbercorp Finance, including the applicants.
At trial, the applicants claimed that the recording of journal entries in the books of account of Timbercorp Finance and Timbercorp Securities did not amount to performance of the loan agreement as it did not involve the payment of money. They claimed that, even if such payment could be made by journal entry, there had been no agreement between Timbercorp Finance and Timbercorp Securities that Timbercorp Finance could make a payment to Timbercorp Securities by way of journal entry in fulfilment of Timbercorp Finance’s obligations under the loan agreement. They also claimed that Timbercorp Finance had failed to prove the existence of any such journal entries. The trial judge rejected these contentions and entered judgment in favour of Timbercorp Finance.
The Court of Appeal dismissed both appeals. The Court held that the journal entries were effective payment under the loan agreement. Payment did not have to be made to Timbercorp Securities in its capacity as responsible entity of the relevant schemes. Nor did the loan amount have to possess a certain character at the time of payment. An agreement between the companies that payment may be made by way of journal entry could be inferred in the circumstances: the companies were in same corporate group; they had common directors; their financial statements were subject to annual directors’ declarations and an independent audit report; and the group had a single operating bank account. The Court also held that, even if there had been any irregularity in the mode of performance of the loan agreement, the applicants had ratified that irregularity on the basis of their knowledge that they had acquired an interest in the schemes, giving rise to a claim for tax deductions.
NOTE: This summary is necessarily incomplete. It is not intended as a substitute for the Court’s reasons or to be used in any later consideration of the Court’s reasons.