Trust isn’t easy – the High Court confirms that a trust will not be readily inferred in contractual commercial arrangements

Secured creditors and liquidators are often met with the assertion that funds or property owned by a company that would otherwise be available for distribution to secured or unsecured creditors, are actually held on trust for someone else. If the property is held on trust, it cannot be realised for the benefit of creditors.

The High Court in Korda v Australian Executor Trustees (SA) Limited1 has recently confirmed that the intention to create a trust will not be readily inferred, particularly in a commercial context. A copy of the decision is available here.

The result of the case is that approximately $87 million is available to secured creditors and not to investors in a timber plantation investment scheme managed by the Gunns Group.


The first and second appellants are the receivers and managers of the third appellant, the (Forest Company), and the fourth appellant (Milling Company). The two companies operated a timber plantation investment scheme.2

In accordance with the legislation in place at the relevant time (the ‘prescribed interest’ structure that preceded managed investment schemes), the respondent, Australian Executor Trustees (SA) Limited (Trustee Co) was appointed by trust deed as the trustee whose role was to protect the interests of investors in the timber scheme. Unlike modern managed investment schemes, the functions of management and trusteeship were split between different entities in prescribed interest schemes, whereas the responsible entity of current managed investment schemes has an obligation to perform both functions.

In summary, the scheme operated as follows:

  1. the Forest Company planted trees on land it owned or leased;
  2. the trees were felled and sold by the Milling Company (which was entitled to make certain deductions);
  3. the Milling Company paid the remaining funds to the Forest Company (which was also entitled to make certain deductions); and
  4. the net proceeds would be paid to Trustee Co for distribution to the investors.

In 2008, Forest Company and Milling Company were purchased by the fifth appellant, Gunns Limited. As part of the takeover, both the Forest Company and Milling Company granted a fixed and floating charge to the Gunns Group’s lenders.

On 15 March 2012, the Forest Company, Milling Company, Trustee Co and others agreed to sell trees, which resulted in $33,999,998 being paid to Milling Company (Timber Proceeds). Also on that day, Forest Company sold land which resulted in proceeds of $53,356,000 being paid to it (Land Proceeds).

On 25 September 2012, the secured lenders to the Gunns Group appointed the first and second appellants as the receivers and managers of the Forest Company and the Milling Company.

Trustee Co successfully argued both at trial3 and by majority in the Court of Appeal of the Supreme Court of Victoria4 that the Timber Proceeds and the Land Proceeds were held on an express trust by Forest Company and Milling Company for Trustee Co, on behalf of investors. This trust was in addition to the trust that existed between Trustee Co and the investors.

The High Court overturned these decisions and held that Trustee Co, and therefore the investors, were not entitled to any of the Proceeds with the result that the Proceeds are available to the Gunns Group’s secured creditors.


The issue for decision was summarised as follows:5

Are the proceeds of a sale of timber made in March 2012 … and the proceeds of a sale of land on which timber was grown assets which are subject to the receivership? Or are those proceeds held by Forest Co or Milling Co on trust for the [investors]?

The relevant trust was said to arise from the investment scheme documents and the commercial circumstances. The documents comprised individual agreements between the investors and Forest Company, the trust deed establishing Trustee Co as trustee, and a tripartite agreement between Forest Company, Milling Company and Trustee Co.

The Court made it clear that “whether an express trust exists must always be answered by reference to intention” and that an “express trust cannot be created unless the person or persons creating it can be taken to have intended to do so”.6

Importantly, the scheme documents did not expressly state that Forest Company and Milling Company were trustees for the investors, so if a trust was to be found, it needed to be inferred.

Trustee Co raised a series of arguments based both on the wording of the scheme documents and the context in which they were entered into to support the proposition that a trust was created. These were soundly rejected by the Court. In doing so, French CJ said:7

[t]o eschew a historical reluctance [to infer the existence of an express trust] is one thing. To construct intention out of straws plucked from textual and contextual breezes, some blowing in different directions, is quite another

In addition to the absence of intention for an express trust in the scheme documents, key reasons for the Court’s finding that no trust existed were:

  1. the inability of Trustee Co to identify the precise nature and subject matter of the alleged trust;8
  2. that there was no obligation on Forest Company or Milling Company to hold any particular “trust” funds separately to other funds used in its business – the separation of funds being a crucial characteristic of a trust;9
  3. the trust deed expressly stated that Trustee Co held all moneys and securities received by it on trust for the investors. The absence of any such language in the tripartite agreement between Trustee Co, the Milling Company and Forest Company was significant.10
  4. to characterise the relationship as a trust, rather than merely contractual, may have put at risk the tax benefits of the investment scheme (although this was not determinative);11
  5. that even if the investors had a security interest in the trees, land, and their proceeds (which was not decided) the existence of any security interest does not import the creation of a trust;12
  6. to characterise the relationship as a trust would also put the investors at risk of being required to indemnify the Forest Company and Milling Company for costs and expenses properly incurred and being personally liable beyond the amount of their investments to the creditors of Forest Company and Milling Company – risks they would have been unlikely to have willingly accepted.13

The Court also rejected the finding by the Court of Appeal that the trust was a commercial necessity. French CJ said in relation to this point “[n]o doubt the creation of a trust would have been favoured by the [investors] if they had been asked about it. So too would the creation of a trust in favour of many investors in commercial undertakings”.14

Key Messages

The High Court has made it clear that an express trust will not be read into documents in which the intention to create the trust does not exist.

Secured creditors and liquidators should keep this in mind when considering arguments that company assets are held on trust for others.

On the other hand, parties who believe they have a beneficial interest under a trust should be ready to back this up with clearly drafted agreements that demonstrate an intention to create an express trust.

1[2015] HCA 6.
2The investment scheme was regulated by South Australian legislation that has since been superseded by the Managed Investments Act 1998 (Cth) and now the managed investment scheme provisions of the Corporations Act 2001 (Cth).
3Australian Executor Trustees (SA) Ltd v Korda (2013) 8 ASTLR 454.
4Korda v Australian Executor Trustees (SA) Ltd [2014] VSCA 65
5Korda v Australian Executor Trustees (SA) Limited [2015] HCA 6 at [68] per Hayne and Kiefel JJ.
6[2015] HCA 6 at [3] per French CJ.
7[2015] HCA 6 at [49] per French CJ.
8[2015] HCA 6 at [74]-[75] per Hayne and Kiefel JJ.
9[2015] HCA 6 at [110] per Gageler J.
10[2015] HCA 6 at [40] per French CJ.
11[2015] HCA 6 at [29] per French CJ; [88]-[90] per Hayne and Kiefel J.J
12[2015] HCA 6 at [36] per French CJ.
13[2015] HCA 6 at [230]-[234] per Keane J.
14[2015] HCA 6 at [53] per French CJ


David Dickens

David is a leading dispute resolution lawyer providing expertise in restructuring, property and general disputes.

David Markham

David is a commercial litigator with a broad practice in commercial disputes and insolvency matters.

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