In a landmark decision on 1 September 2011, the Victorian Supreme Court dismissed a class action by Timbercorp investors. Justice Judd’s decision in Woodcroft-Brown v Timbercorp Securities Ltd & Ors  VSC 427, clarifies the disclosure obligations imposed upon companies and their directors when preparing and issuing product disclosure statements (PDS) for financial products. The decision also presents further implications for future actions of this nature.
Following the 2009 collapse of the Timbercorp Group, a group proceeding was brought in the Commercial Court of the Victorian Supreme Court. Mr Allen Woodcroft-Brown, the plaintiff, represented himself and the investors involved in managed investment schemes of which Timbercorp Securities Limited (Timbercorp) was the responsible entity during the relevant period of February 2007 to April 2009. The plaintiffs were seeking damages for the loss of their investments in the schemes and looking to avoid the recovery proceedings brought by liquidators on behalf of Timbercorp Finance Pty Ltd who had financed the investor loans.
The plaintiff alleged that Timbercorp failed to disclose information about ‘significant risks’ associated with the schemes, breaching their statutory obligations under the Corporations Act 2001 (Cth) (Corporations Act). It was further alleged that each of the PDSs prepared during the relevant period were defective within the meaning of s1022A(1). The plaintiff contended that Timbercorp should have disclosed:
Justice Judd’s description of the plaintiff’s case was highly critical. His Honour commented that the plaintiff’s attempt to widely cover every possible combination of fact and law relating to Timbercorp’s liability was “an elaborate and sometimes illusive web of allegations... compounded by the failure of the statement of claim to record a coherent narrative.”
The plaintiff’s case advanced at trial materially differed from the claim particularised on the statement of claim. Justice Judd determined that the plaintiff should be confined to the pleaded case that was particularised before the trial’s commencement. The plaintiff failed on this basis and his Honour found further that the plaintiff would have failed regardless of if he had been permitted to advance the case he sought to advance at trial due to a lack of evidence.
The Corporations Act s 1013C requires an issuer of a PDS to disclose 'significant risks' associated with a financial product to potential investors. In the context of the Timbercorp’s schemes, Justice Judd found that a significant risk was the performance risk, being the risk that the responsible entity may be unable to perform its contractual obligations relating to the schemes in the future. In relation to other types of risks requiring disclosure, his Honour found that the ability of a company to properly manage the risk is relevant to whether it is a 'significant' risk within the meaning of s1013C.
The group proceeding was unsuccessful in the claim that Timbercorp failed to disclose ‘significant risks’ associated with the schemes in PDSs, as required under the Corporations Act.
It was found that the PDSs issued by Timbercorp during the relevant period did include information regarding performance risk. Information relating to Timbercorp’s financial circumstance was also generally available and that this information was not required to be included in the PDSs .
Justice Judd held “the risk, identified by the plaintiff as requiring disclosure... is an element of the performance risk of the institution risk... I am not persuaded that the information about that risk... was required to be disclosed..., whether as a significant risk, under s 1013E or pursuant to its continuing disclosure obligation”.
His honour also found that the structural risk allegation was not supported by evidence. The evidence in relation to securing ongoing bank funding showed the banks were willing to support Timbercorp all the way to 2009, well after Timbercorp’s last issue of PDS.
His Honour found that the specific risks alleged would only require disclosure if they materially impacted on the performance risk by posing a real threat to the ability of Timbercorp to carry out the schemes.
Whether a risk constituted a ‘significant risk’ is dependent on the potential consequences occurring from materialisation of the risk and the probability that the risk may eventuate. Timbercorp was not required to disclose the information regarding adverse matters as alleged by the plaintiff. The adverse matters were not properly characterised as a risk, characteristic or feature under s 1013D(1) of the Corporations Act.
These matters constituted events that management is required to deal with on a day-to-day basis and management were to plan a strategy to address such risks. Disclosure of each such event, disregarding the capacity of the board to manage risk, and disregarding their successful management, does not fall under the disclosure obligation. It was also found that information regarding these adverse matters was generally available.
The Corporations Act sets out, in s 1013F, that information is not required to be placed in a PDS if it would not be reasonable for a person, considering whether to acquire a financial product, to expect it to be in the PDS. Timbercorp submitted that where the relevant information is generally available, within the meaning of s 675 of the Corporations Act, there is no requirement for disclosure in a PDS. The defendants also argued that information relating to the global financial crisis and the taxation announcement was also generally available and as such did not require disclosure.
Justice Judd concluded that this was the correct approach. His also held that the information disclosed in Timbercorp’s consolidated annual reports contained information regarding performance risk and consequently it was not reasonable to expect this information to be included in the PDS.
Justice Judd was highly critical of the form and content of the plaintiff’s evidence in relation to reliance. His honour referred to the prepared witness statements as “formulaic”, having “striking similarities” and observed that “where issues such as reliance are raised, witness statements are often an unsatisfactory form of evidence in chief.” His Honour found that the plaintiff had not relied on the PDS in making his investment decision. He placed emphasis on the fact that:
The decision of the Victorian Supreme Court is likely to have significant implications for those contemplating actions arising from the collapse of managed investment scheme operators.
The decision confirms that performance risks must be disclosed in a PDS, however the test to determine what constitutes a ‘significant risk’, pursuant to s 1013D of the Corporations Act, is an onerous one.
Section 1013F offers significant assistance to defendants where the performance risks are generally available. This may include being published within documents such as annual reports, consolidated accounts, the directors’ report, auditor’s report, or on company websites, whether in accordance with disclosure obligations or otherwise.
Investors will have difficulties pursuing claims founded on allegations of PDS non-disclosure where the evidence shows their investment decision was largely tax driven and not based on information contained in the PDS. A commercial approach has been adopted to questions of reliance and the scope of PDS disclosure requirements likely to create considerable difficulties for aggrieved investors.
Note: This decision may be subject to an appeal.