More than 1500 borrower-investors in the Timbercorp managed investment schemes are facing a bleak Christmas and bankruptcy actions in the new year after losing a crucial test case.
The Supreme Court dismissed challenges made by five investors over the loans they took out before 2009 to underpin their investments, with Justice James Judd describing the claims as "unpersuasive".
Timbercorp, a spruiker of managed investment schemes, went bust in 2009 owing creditors, including the ANZ, $750 million. More than 18,500 investors were caught out in the collapse.
The group of five investors participating in the court cases had argued the loans were unenforceable and unfair.
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The court decided to allow the test cases after liquidators to Timbercorp's financing arm, Timbercorp Finance, filed more than 1500 proceedings against investors to recover funds lent to them to invest in the scheme.
"The sums outstanding run to hundreds of millions of dollars. The recovery proceedings have been complex and protracted," Justice Judd said.
The investors involved in the case and other investors who have been waiting for the outcome of the court matter will now have to repay loans, some of which will be more than $200,000 and bearing interest as high as $16 a day over the past two years.
The test-case investors will also be required to pay the costs of the liquidators of Timbercorp at KordaMentha.
M+K Lawyers represented Douglas and Janet Collins and Peter White in their respective test cases, while Slater & Gordon represented Peter Gruyters and Morag Lowe in their test cases.
Mr Gruyters and Ms Lowe argued that Timbercorp Finance had assisted in a dishonest breach of trust by the responsible entity of the schemes Timbercorp Securities when it applied their money towards payment for management fees.
In their proceedings the Collins family and Mr White alleged Timbercorp Financial had failed to meet its contractual obligations to make a loan.
"The defendants sought to resist liability by advancing two distinct, and ultimately inconsistent, categories of defence," Justice Judd said.
"The court rejected the defences [of all parties]," Justice Judd said.
The court found Mr Gruyters and Ms Lowe did not establish a breach of trust.
"The conversion of their application money into management fees was a fundamental purpose of each scheme, which provided investors with tax deductions for the whole of the amount invested," Justice Judd said.
At the same time, Justice Judd found loans had been made to the Collins family and Mr White and they were liable for those loans.
"The plaintiff is entitled to judgment against each defendant, in each proceeding, for the unpaid balance of each loan, together with interest," Justice Judd said.
One of the liquidators to Timbercorp, Craig Shepard, said borrowers who failed or refused to repay their loans would be pursued through the courts. More than 6500 borrowers had already repaid their loans.
"Timbercorp Finance has given borrowers multiple opportunities to resolve their debts privately and informally – either through commercial settlement offers, or through the Timbercorp hardship scheme," Mr Shepard said.
Mr Shepard urged investors to consider applying for the hardship scheme.
Earlier this year, Fairfax Media revealed, a consumer advocate appointed by KordaMentha to vet the hardship scheme had resigned after a disagreement with the way the scheme was being run.
Slater & Gordon partner Mark Walter, said his team was carefully examining the judgment and what options the growers might have.
"It's too early to speculate on whether we will consider making an appeal," he said. M+K was contacted for comment.
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