Seeing the Wood for the Trees — Finding the Intention to Create a Trust: Korda v Australian Executor Trustees (SA) Ltd

By Paul Collins

Korda Case Page


In a famous literary allusion, du Parcq LJ in Re Schebsman [1944] Ch 83 noted that an intention to create a trust can possibly be created by unguarded language, as in Molière’s Monsieur Jourdain who talked prose without knowing it, although he qualified this by saying that ‘unless an intention to create a trust is clearly to be collected from the language used and the circumstances of the case, I think that the court ought not to be astute to discover indications of such an intention’. In Jessup v Queensland Housing Commission [2001] QCA 312, McPherson JA added at [9] that if the purpose of the settlor was to inspire the poetry of trusts, it was odd that it chose to express itself in common law prose.

This very controversy often arises in the rather prosaic event of insolvency where a party contends that certain assets are not available to creditors because beneficial ownership is vested in a party other than the debtor by reason of a trust. Thus in Korda v Australian Executor Trustees (SA) Ltd [2015] HCA 6, the High Court of Australia examined the question whether a trust could be inferred from a contractual relationship. An insolvent management company in a forestry investment scheme sought to establish that assets and sale proceeds of the plantation land and timber were held on trust for investors, and were therefore not available for distribution to creditor banks.

In exploring this question the High Court revisited fundamental principles of trust law, and emphasised certainty of intention as an essential element in the creation of an express trust. It reversed the decision of the Victorian Court of Appeal (by majority) and the trial judge. The Court concluded in four concurring judgments (French CJ, Hayne and Kiefel JJ jointly, Gageler J and Keane J) that there was no intention to create a trust of the assets and sale proceeds in favour of the investors based on the proper construction of the underlying documents of the scheme. The judgment also disclosed a desire to prevent courts from imposing a retrospective express trust, and to clearly distinguish express trusts from constructive trusts (which are imposed absent any intention of the parties). It seems that the court considered that to impose an express trust for reasons of ‘commercial necessity’ where there was no genuine intention was tantamount to awarding a constructive trust masquerading as an express trust.

What was the nature of the investment scheme which gave rise to the dispute?

There were three companies in the scheme: SEAS Sapfor Forests Pty Ltd (Forest Co), Australian Executor Trustees (SA) Ltd (Trustee Co) and SEAS Sapfor Harvesting Pty Ltd (Milling Co). Milling Co was controlled by Forest Co. The scheme manager, Forest Co, planted and developed pine trees on land it owned or leased for eventual felling and sale of the logs. The scheme was financed by Forest Co issuing ‘interests other than shares’ and ‘prescribed interests’ to investors under various prospectuses over many years since 1964, each prospectus being authorised by the companies legislation then in force. As the legislation required, Forest Co executed a trust deed with Trustee Co as trustee for the investors. Under the trust deed Forest Co was obliged to perform all the terms and conditions of the issue of the interests, to maintain and supervise the plantation forests and indemnify Trustee Co and the investors from all claims in respect of the plantation land and trees. Significantly the trust deed did not expressly provide that Forest Co was to act as a trustee.

Forest Co and Trustee Co made a further written agreement (the tripartite agreement) with Milling Co whereby Milling Co agreed, when directed by Forest Co, to fell the plantation trees, mill the timber and sell it and pay the proceeds, net of specified deductions, to Forest Co. In turn Forest Co agreed to pay the proceeds, net of further deductions, to Trustee Co, which would then account to the investors by way of distributions. Thus each investor was entitled to an aliquot (fractional) share in the net proceeds of the sale of the timber products grown from trees planted in a specified year on an identified area of land and, in the case of some planting years, to a payment in respect of an aliquot share in any appreciation in the value of the plantation land. Hence, the proceeds only became assets of the trust for distribution to investors at the time of payment to Trustee Co.

Each prospectus issued a covenant in favour of the individual investors setting out their entitlements in return for their investment. The terms of each covenant broadly mirrored various obligations in the trust deed and the tripartite agreement. The High Court found that its provisions were concerned with the quantification of the amount of payments to the investors by way of a return on their investment, rather than any particular entitlement to assets. Thus, the covenant’s provision for payment to each investor of their ‘due proportion of the benefits obtained from the sale of the timber’ after specified deductions did not give the investor a direct right to the timber.

In 2008, following a takeover by Gunns Ltd, Forest Co and Milling Co gave a fixed and floating charge over their assets to financiers of the Gunns Group. By March 2012 the trees and land owned by Forest Co were sold, with Trustee Co’s consent, realising some $87 million. Some months later the Gunns group lenders appointed receivers and managers to Forest Co and Milling Co. Since the proceeds had not been paid to Trustee Co, the proceeds did not prima facie form part of the trust for distribution to investors. Hence the companies sought to establish that Forest Co held the proceeds on trust for the investors instead. The contractual documents did not explicitly create a trust. Instead, the companies argued that a trust could be inferred from the contractual documents and from the surrounding circumstances of the dealings of the company. However, to do this, the companies had to establish that there was an intention to create a trust evident from those documents and facts.

When will there be an intention to create a trust?

As restated by French CJ at [3], an express trust depends on a construction of the written instrument and does not, unlike a constructive trust, arise from any inference of the law imposing a trust upon the conscience. The very nature of an express trust means that the parties must intend it to arise. Consequently, certainty of intention is one of the three certainties necessary to create an express trust, together with certainty of subject matter and certainty of object. The process of construction includes an examination of the nature of the transaction and its circumstances, including commercial necessity. In each case it is a question of fact whether an intention to create a trust is sufficiently evinced. French CJ concluded, at [5] ‘In the present case, neither text nor context could elevate the propounded intention to the level of certainty.’

Importantly Keane J explained at [205] that clarity as to the intention to create a trust and its subject matter was of particular importance in a commercial context where acceptance of an assertion that assets are held in trust was apt to defeat the interests of the creditors of the putative trustee. Keane J’s statements point to the crux of the policy underlying the court’s decision. Korda shows a distinct reluctance to find that an express trust was created where this would prevent assets from being distributed to creditors, particularly where the surrounding circumstances and documents did not disclose a very clear intention to create such a trust. A variety of factors led the High Court to conclude on the contrary that there was no intention to create a trust.

What factors led the High Court to conclude that there was no intention to create a trust?

A number of factors led the High Court to conclude that there was no intention to create a trust on the facts of the present case:

  • The lack of segregation of funds;
  • The lack of any commercial necessity for a trust;
  • Legislative absence of a trust relationship;
  • The indemnities were inconsistent with a trust;
  • The prospectus did not indicate an intention to create a trust;
  • The depository and caveat provisions similarly did not indicate an intention to create a trust interest; and
  • A finding that the taxation advantages of the scheme were incompatible with the imposition of a trust.

I will not discuss all of these factors in detail, but I will focus on lack of commercial necessity, lack of segregation and legislative absence of intention.

Why did the Victorian Court of Appeal hold that ‘commercial necessity’ required a trust, and why did the High Court overrule this finding?

A significant reason why the majority of the Court of Appeal had imposed a trust was the ‘commercial necessity’ of protecting the investors from the risk of the operating companies. The Court of Appeal relied upon its own decision in Commissioner of State Revenue v Snowy Hydro Ltd [2012] VSCA 145, which at [83] cited an extract from the following passage from Trident General Insurance Co Ltd v McNiece Brothers Pty Ltd [1988] HCA 44 per Mason CJ and Wilson J (emphasis added):

This apparent uncertainty should be resolved by stating that the courts will recognize the existence of a trust when it appears from the language of the parties, construed in its context, including the matrix of circumstances, that the parties so intended. We are speaking of express trusts, the existence of which depends on intention. In divining intention from the language which the parties have employed the courts may look to the nature of the transaction and the circumstances, including commercial necessity, in order to infer or impute intention.

The Court of Appeal had considered that it was commercially necessary to impose a trust because investors would not be at risk by reason of extraneous activities of the operating companies. Had there been any suggestion of such risk, prospective investors would have been much less likely to invest. In the opinion of the majority of the Court of Appeal, at [33]–[35], the only risks to which the parties intended that the investors be exposed were risks intrinsic to the enterprise being funded by their investment funds, that is, the enterprise of acquiring, preparing and planting land, tending and maintaining the timber, and finally felling, milling and selling it. The subscription funds could only be used for the purposes of that enterprise. No investor would have imagined — and the prospectus did not suggest — that the investment returns could be put at risk by reason of any activity of the operating companies outside the scope of the timber production enterprise.

The High Court found that this conclusion overlooked the consequence that investors would be exposed to personal liability for the debts incurred by the Forest Co and Milling Co as if it were a trading trust. The High Court held that better view was the investment risk was addressed by the then regulatory framework that did not require investors’ funds to be held and preserved separately from the business of the Forest Co. In the opinion of Keane J, considerations of commercial necessity may afford assistance in discerning the objective intentions of the parties where the language of their written agreements is not explicit but the present case contained explicit language. As noted earlier, it seems that the High Court was keen to place limits on the imposition of a trust on the basis of ‘commercial necessity’. It seemed to consider that this was tantamount to imposing a constructive trust absent a clear intention, under cover of an express trust analysis.

Why was non-segregation of funds relevant to intention?

A duty to segregate trust money separate from one’s own was said to be a hallmark duty of a trustee. In the High Court’s analysis of the scheme documentation, it was significant that express provision of a trust was confined to the Trustee Co holding a trust of the receipt of maintenance contributions and a trust for receiving the end proceeds of sale for distribution to investors. In fact, the contractual provisions contemplated that the investors’ contributions would not be segregated from the general funds of the Forest Co and Milling Co but would be used in the companies’ business, subject to the legislative restriction against using investors’ funds to enhance their own equity (self-investment) or loan capital (onlending).

In his 2002 article in the Cambridge Law Journal, ‘Reconceptualising the Express Trust’, Patrick Parkinson notes that the issue of segregation frequently arises in insolvency. It is often claimed (as in Korda) that certain parts of the general assets of person or company are subject to a trust, and so unavailable to creditors (see eg, Re Australian Elizabethan Theatre Trust [1991] FCA 344). Usually there is a lack of clarity about the legal relationship. The purported trust will not fail for uncertainty of subject matter, but the lack of segregation goes rather to intention. A lack of segregation helps to determine debtor-creditor relationship intended rather than trusteeship (cf Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567). Parkinson goes on to note that the position will be different where the intention to create trust is clear. There will be a trust even though fund not held separately from general assets (see eg Associated Alloys v ACN 001 452 106 [2000] HCA 25 and Stephens Travel Service Pty Ltd v Qantas Airways (1988) 13 NSWLR 331, where it was sufficient that the obligation was clear despite the lack of segregation.) By contrast, in Korda, the lack of segregation was another piece of evidence used to suggest that no express trust was intended.

Coherence and the legislative absence of a trust relationship

In recognition of the entrepreneurial role of the manager of an investment scheme, the management company was not required by legislation at the time to assume the self-denying obligations of a trustee since it was contemplated that the manager would carry on business in pursuit of its own profit. The intention of the investor protection legislation was to moderate the investment risk by interposing a trustee company to protect the investors’ interests supported by covenants from the trustee and the manager, but without treating the manager as a fiduciary.

This reflects a broader trend in High Court judgments in recent years to ensure that findings in common law and equity are coherent with the legislative framework, as Elise Bant has noted in relation to Legal Services Board v Gillespie-Jones [2013] HCA 35 here.


The decision in Korda reaffirms the discipline of ascertaining an imputed intention to create a trust by construction of the relevant text or oral dealings in their context. Hence the High Court rejected an instrumentalist approach of inferring a trust simply in order to protect the interest of a party.

However the decision should be not treated as a definitive statement of the relationship between investors and scheme operators in a managed investment scheme. The legislation considered by the High Court underwent substantial changes in 1998 to achieve investor protection (see ch 5C of the Corporations Act 2001 (Cth)) by segregating assets, impressing a trust on investor contributions and property acquired with their proceeds and appointing the responsible entity as both scheme operator and trustee. The intention of this legislation was to resolve uncertainty about who was accountable to managed scheme investors, as a response to the 1995 ALRC Report, Collective Investments: Other People’s Money (see Summary, [9]–[11] and Scheme Operators [10.4]). Ironically, this was the very outcome that was sought by the unsuccessful respondent in Korda.

AGLC3 Citation: Paul Collins, ‘Seeing the Wood for the Trees — Finding the Intention to Create a Trust: Korda v Australian Executor Trustees (SA) Ltd‘ on Opinions on High (1 September 2015) <>.

Paul Collins is a senior financial services lawyer and recently completed an LLM (First Class Honours) at the Melbourne Law School.