More on Willmott Forests (VSCA) & Grimaldi (HCA special leave refusal), plus new edition Mortgagee’s Power of Sale out soon

First, further to my post on Wednesday discussing the Victorian Court of Appeal’s recent decision on disclaimer of leases by liquidators in Willmott Forests (link), my friend and colleague Sam Hopper has put an excellent analysis of the case on his blog here.

Secondly, I posted last month that the High Court of Australia had denied special leave to appeal to Mr Grimaldi, from the Full Federal Court’s important decision in Grimaldi v Chameleon Mining. That post can be viewed here and includes links to my article and other previous posts about this case. If you recall, key issues of equity and company law arose in the Full Federal Court’s decision, including de facto directors, Barnes v Addy (both limbs), secret commission/bribes, directors’ fiduciary duties and equitable remedies.

I had promised to return and post an update as to the High Court’s refusal of special leave to Mr Grimaldi. In short, the transcript (link) shows that the special leave application centred on the issue of de facto directors and officers, and that special leave was refused on grounds which included –

1. Even if Mr Grimaldi was not a director or officer, on his own case he acted as a third party consultant. Chameleon Mining had good prospects of demonstrating on the findings made that in that role he would have owed fiduciary duties to the company, and that he knowingly participated in a breach of duty by an appointed director (Mr Barnes) of the company. Thus Chameleon Mining had good prospects of demonstrating that the relief ordered by Jacobson J (and undisturbed on appeal) is supportable, even if Mr Grimaldi were not a director or officer. The contemplated appeal would therefore be futile;

2. Even if Mr Grimaldi were not a director, he was an officer. The Full Court’s reasoning is consistent with the more recent High Court decision in Shafron v ASIC [2012] HCA 18; (2012) 86 ALJR 584 (link );

3. Mr Grimaldi had insufficient prospects of demonstrating that the Full Court erred on the director issue. He had alleged that the Full Court failed to consider the governance structure of Chameleon Mining. As Heydon J observed, in fact it did.

Thirdly and finally, the third edition of Mortgagee’s Power of Sale will be released soon, written by Clyde Croft J and Robert Hay. The previous edition was released in 2004, so the updated edition will be an excellent and current resource for practitioners. For more details, see Robert’s post on his property law blog here.

Re Willmott Forests Ltd – Vic Court of Appeal pronounces on whether a disclaimer of lease contracts by liquidators also terminates the lessees’ proprietary interest

Last week the Victorian Court of Appeal (Warren CJ, Redlich JA and Sifris AJA) handed down judgment in the Willmott Forests Ltd appeal – Willmott Forests Ltd (Receivers and Managers appointed)(in liquidation) v Willmott Growers Group Inc and Willmott Action Group Inc [2012] VSCA 202. The judgment in full may be read here.

The question on appeal was whether or not a leasehold interest in land is extinguished by the disclaimer of the lease agreement by the liquidator of the lessor, pursuant to s 568(1) of the Corporations Act 2001 (Cth) (the Act). In short, the Court of Appeal held that it was. In February, Davies J of the Victorian Supreme Court had held that it was not. My earlier analysis of her Honour’s judgment may be read here.

[For completeness: Davies J subsequently handed down her judgment on the balance of the questions upon which judicial advice had been sought by the liquidators of Willmott Forests Ltd (WFL) pursuant to s 511 of the Act in April. That judgment was not part of this appeal, which concerned solely the preliminary question her Honour had decided  in February. However, should you wish to read my analysis of her Honour’s April judgment, it may be accessed here.  It includes an overview of the Willmott Forests managed investments schemes and how they were structured. Under sub-heading 3(a) “Allocation of Sale Proceeds”, there is also a useful sketch of the practical circumstances of the scheme plantations and how they were operated.]

Background

Broadly, WFL had leased certain properties to Growers (the investors in the schemes) on 25 year terms, upon which land the various Willmott Forests plantations were situated. WFL was the responsible entity and/or manager of the various forestry managed investment schemes. WFL’s liquidators wished to sell WFL’s interest in the properties, unencumbered by the leases. The liquidators proposed to disclaim the lease agreements in order to achieve and complete the sales, and sought court approval of such disclaimers and judicial advice as to certain questions that arose therefrom.

At First Instance

At first instance, before Davies J the Growers/lessees had argued that disclaimer of the lease contracts does not extinguish their proprietary interest in the land. Davies J agreed. Her Honour also held that the leasehold interests could not be characterised as liabilities or encumbrances upon the property of the lessor, and it was consequently not necessary to extinguish such interests.

For a more detailed understanding of how the lessees’ argument was mounted – and accepted – I refer you to my earlier post here. For present purposes, the judgment on appeal of Warren CJ and Sifris AJA  at [20] includes a very neat summary of the reasoning of Davies J’s first instance judgment as follows –

(a) A lease creates both contractual and proprietary rights;

(b) Under s 568D(1) of the Act, the effect of a disclaimer is to terminate ‘the company’s rights, interests, liabilities and property in or in respect of the disclaimer property, but does not affect any other person’s rights or liabilities except so far as necessary in order to release the company and its property from liability‘ [emphasis added],

(c) Although disclaimer of a lease agreement by the liquidator of a lessee would terminate all of the lessee‘s rights arising from that lease agreement, including by extinguishing the lessee‘s leasehold interest, this is not the case with the disclaimer of a lease contract by the liquidator of a lessor, [I note that the leading authority on point of Hindcastle Ltd v Barbara Attenborough Associates Ltd [1997] AC 70 was a case of disclaimer by a tenant. Her Honour held that it was expressly confined to the case of disclaimer by a tenant, and declined to apply it to the reverse position here, of disclaimer by a landlord. I note that their Honours on appeal took the opposite view, see below]

(d) A leasehold interest is the property of the lessee and disclaimer of the lease by the liquidator of the lessor only terminates the lessor‘s rights, interest and liabilities under that lease (and other persons’ rights and liabilities only to the extent necessary). Such a disclaimer would not bring the lease to an end for all purposes. Specifically, such a disclaimer ‘would not bring the tenant’s proprietary interest in the land to an end’,

(e) A leasehold interest cannot be described as a liability or encumbrance upon the property of the lessor and it is not necessary to extinguish such an interest to release the lessor or its property from a liability.

The Appeal

The liquidators appealed her Honour’s decision, arguing before the Court of Appeal that disclaimer of the lease agreements would have the effect of extinguishing the leasehold interest of the Growers, under s 568D, as this was “necessary to release the company and its property from liability“.

Counsel for the Growers argued that the rights of the Growers as lessees would have accrued or become vested at the time of any disclaimer and would therefore be preserved. However their Honours disagreed, saying at [32] that the continuing and prospective obligation on a lessor to provide possession and quiet enjoyment to a lessee is not a fully accrued obligation or liability that cannot be terminated. Counsel for the liquidators of WFL argued that the word liability in s 568D(1) was wide enough to embrace the continuing obligation on the part of WFL to provide quiet enjoyment; their Honours agreed (applying Hindcastle). At [37], their Honours said this –

“If WFL is to be relieved of its obligation to provide quiet enjoyment, clearly and in context a liability, the interest of the lessee so far as tenure is concerned is directly related to and underpins such liability. The tenure must go. It is necessary to affect the Growers’ rights (tenure) in order to release WFL from its liability (possession and quiet enjoyment). The cases where rights have been preserved usually involve claims against third parties unrelated to any liability of the company in liquidation.”

Their Honours then considered at [38] whether, notwithstanding the termination of the interests of the lessee under the disclaimed contract – as necessary to relieve WFL from liability – the asserted leasehold interest remains. The trial judge had held that it did. Their Honours held that it did not. Their Honours observed succinctly that, in their opinion, if the contract is disclaimed, the leasehold interest is also extinguished [at 39]. Their Honours Warren CJ and Sifris AJA then gave detailed consideration to authorities as to lease contracts and the rights that arise under them, including the doctrines of frustration and repudiation.

At [49-50] their Honours described the principle from  Hindcastle (disclaimer of lease by tenant extinguishing the tenant’s interest in the property) and noted that they did not understand Lord Nicholls to suggest that the same consequences – determination of the leasehold interest – would not apply in the case of the liquidation of the landlord. They concluded discussion of that authority with a rhetorical question: “Why should the consequences differ if the underlying event that informs the consequences, namely termination of the contract, is the same?” With that, their Honours clearly took the view that the principle in Hindcastle could and should be extended to the case of disclaimer of leases by the landlord.

Their Honours concluded [at 58] as follows –

“For the reasons given, any leasehold interest cannot survive the termination of the very contract that created it and regulated the tenure of the Grower. It is this tenure which creates, and is the basis of, the obligation or liability on the part of WFL to provide quiet enjoyment. Section 568D(1) allows the liquidator to terminate this obligation or liability despite its intrusion into the property rights of an innocent third party. The evident policy is to permit the loss of these rights in order to enable the company in liquidation to be free of obligations so that it can be wound up without delay for the benefit of its creditors. To compensate, the rights of the affected parties are transmuted into various statutory rights and claims.” His Honour Redlich JA wrote a separate judgment, but reached the same conclusion.

A notable and important point:  Warren CJ and Sifris AJA appeared to be supported in their conclusions by the fact that the leases where not simple, Blackacre leases, but were one part of a suite of inter-related documents regulating the rights and liabilities of the various parties in these tax-driven managed investment schemes. The Growers/investors’ resources were pooled and they permitted a manager to attend to all the necessary work. In this context as with shopping centre leases, so their Honours observed at [51], it is difficult to regard the Growers/investors as holding a leasehold interest or estate. “The better view is that there is no demise of the kind that would survive any termination of the very contract that created the tenure.” And at [52]: “The notion that a commercial lease is a demise that confers an interest in land and survives the termination of the contract creating the demise is to ignore recent, significant developments in the law that suggests otherwise.”

This then would suggest that the principle for which this decision will stand authority may not apply to more simple, straightforward leases of land, as opposed to shopping centre leases (as expressly cited by their Honours) or complex commercial lease agreements, particularly those forming part of broader commercial schemes or arrangements.

Some have said that this judgment represents new law. Others may take the view that it clarifies the correct position of the law on this issue. I will leave it for you to decide. Either way, it is an important decision for insolvency and property law practitioners to be aware of and appreciate. It will be interesting to see if the Growers seek special leave to appeal the decision.

Re Willmott Forests Ltd (No 2) – s 511 power to affect third party rights, scheme land not “scheme property” and liquidators of REs

In February I posted about the decision of Davies J of the Victorian Supreme Court of 9 February 2012 on a preliminary question raised by the liquidators of Willmott Forests Ltd (WFL). The preliminary question was as to whether the liquidators could disclaim the Growers’ leases under s 568 of the Corporations Act 2001 (Cth) (the Act) with the effect of extinguishing the Growers’ leasehold estate or interest in the subject land. Her Honour’s answer was “no”. You can read that post here.

This month, on 3 April 2012, Davies J of the Victorian Supreme Court handed down her decision on the balance of the questions she had been asked to decide under s 511 of the Corporations Act 2001 (Cth).  You can read the judgment in full here. There have been further developments in between, according to the website of one of the two grower groups, the Willmott Action Group Inc, including –

  • The Willmott Action Group Inc has issued an application in the Supreme Court to have receivers appointed to some of the schemes; and
  • The liquidators have appealed the decision of Davies J of 9 February 2012, discussed in my earlier post.
In addition, last week there was a further development –
  • The Willmott Action Group Inc has appealed this decision of Davies J of 3 April 2012.

The Willmott Action Group’s website reporting these developments can be viewed here.

Background Overview

As many of you will know, Willmott Forests is one of the more recent large agribusiness managed investment schemes to collapse, following in the steps of Great Southern, Timbercorp and Environinvest. Receivers and managers (KordaMentha) were appointed by the Willmott Group’s banking syndicate in September 2010, on the same day the Group was placed into administration. Since March 2011 the Group has been in liquidation with the former administrators, of PPB Advisory, appointed as liquidators.

WFL was the responsible entity (RE) and/or manager of 8 registered managed investment schemes (MIS), 6 unregistered “professional investor” MIS, 11 unregistered contractual MIS, and 5 unregistered partnership MIS. These MIS were forestry operations conducted on land either owned by WFL or leased by WFL from third parties. Across the schemes there were 6,329 members or “Growers”. Broadly, the Growers in each scheme held a lease (or sub-lease) from WFL with respect to the land. Growers had a right to grow, maintain and harvest trees on the parcels of land allotted to them, although the actual planting, maintaining and harvesting was the responsibility of WFL. WFL would perform these tasks under forestry management agreements, and in return Growers paid fees to WFL.

After their appointment, WFL’s liquidators were engaged in realising the assets of WFL in the course of winding up the company. After failing to attract interest from any party in acquiring the land subject to the schemes and taking over as RE and manager of the schemes, the liquidators entered into sale contracts for the sale of part of the freehold land, unencumbered by Growers’ rights, including Growers’ rights under leases and licences. A transfer of clear title to the land could not be effected unless Growers’ rights were terminated or extinguished.

On 29 June 2011, the liquidators of WFL had sought and obtained directions from Dodds-Streeton J of the Federal Court that they were justified in –

(a) amending the constitutions of the registered MIS and certain investment deeds to confer on WFL a power to terminate Growers’ rights, on condition that Court approval is obtained before doing so; and

(b) disclaiming the project documents of other MIS as onerous pursuant to s 568(1) of the Corporations Act 2001 (Cth), on condition that the Court’s consent is obtained before doing so.

Application under s 511 of the Act for Judicial Advice – Questions to be Decided 

The liquidators applied to the Court to obtain those orders and sought a range of directions under s 511 of the Act, including as to a proposed distribution of the proceeds of sale. The receivers of WFL and Growers were not joined as parties. However the receivers and two groups representing the interests of Growers – Willmott Growers Group Inc (WGG) and the Willmott Action Group Inc (WAG) – were given leave to intervene. The receivers supported the application; the Grower groups opposed it.

There were 10 questions identified for the Court’s consideration in order to determine the applications before the Court (see [34] and [129]). Those questions – together with the answers given – were –

1. Are the questions that arise for determination in the applications suitable for determination pursuant to s 511 of the Act?  Answer: Yes.

2. Are the liquidators able to disclaim the Growers’ leases with the effect of extinguishing the Growers’ leasehold estate or interest in the subject land? Answer: No.

*This was the preliminary question decided on 9 February 2012, with the answer given being “no” (see my previous post here). In view of that decision – now on appeal – the liquidators and purchaser GFP renegotiated the main sale contracts to exclude the land on which the contractual and partnership schemes are operated and hence did not seek a direction that they would be justified in disclaiming the leases relating to the contractual and partnership schemes. However they continued to seek orders that they would be justified in disclaiming the forestry management agreements relating to those schemes. (See [37])

3. Have the liquidators demonstrated on the material that they have acted reasonably and prudently in conducting the sale process and in entering into the main sale contracts and the HVP contract? Answer: Yes.

4. Is the allocation between land and trees justified having regard to the parties’ legal rights; specifically is any of the land owned by WFL “scheme property” in respect of the schemes? Answer: Yes and no; yes, the allocation is justified and it is correctly predicated on the basis that no, WFL does not hold its interest in the freehold and leasehold on which the schemes were conducted on trust for the members of the schemes, it is not “scheme property”.

5. Is the allocation of the sale proceeds from GFP (the main purchaser) between land and trees as proposed by the liquidators reasonable in the circumstances? Answer: Yes.

6. Having regard to the insolvency of the Willmott Group, the viaibility of the schemes and the existence of alternatives to the proposed sale, is the extinguishment of the Growers’ interests pursuant to the Liquidators’ powers under the relevant constitutions and their statutory power under s 568(1) of the Act, as the case may be, justified? Answer: Yes.

7. Is the apportionment between Growers of the sale proceeds from GFP and HVP (the purchasers), in respect of their interests in trees, as proposed by the liquidators, reasonable and justified having regard to the constituent documents of the various schemes? Answer: Yes.

8. Is the allocation of the sale proceeds of the HVP land between the liquidators’ portion (in respect of trees) and the receivers’ position (in respect of the surrender of the head lease) justified in the circumstances? Answer: Yes.

9. Is WFL’s leasehold interest in HVP land “scheme property” in respect of any of the schemes conducted upon the HVP land? Answer: No.

10. Are the liquidators justified in recovering their costs from the assets in the manner they propose? Not answered. This question was stood over for further argument.

Amongst the orders sought by the liquidators under s 511 of the Act were –

(a) a direction that the liquidators are justified in procuring WFL to enter into and perform the sale contracts;

(b) a direction that the liquidators are justified and otherwise are acting properly and reasonably in procuring WFL to terminate or surrender the project documents of the schemes, and to surrender, relinquish or release the rights of the Growers in the trees, the subject of the amended sale contracts, on the basis that the net proceeds of sale under those contracts are distributed in the manner proposed by the liquidators; and

(c) the Court’s consent to the disclaimer of the forestry management agreements of the contractual and partnership schemes (see [38]).

Her Honour observed that the effect of making these orders and taking the steps foreshadowed by them, would be to bring the schemes to an end and bring an end to all the rights of the Growers by and under the schemes, specifically their rights in relation to the trees, which are their assets (see [39]). To do that, her Honour noted the Court would need to be satisfied that the proposed allocation of sale proceeds to the Growers was appropriate (amongst other things).

I now turn to discuss several arguments advanced in the course of the application, and her Honour’s decision on those issues –

1.  Section 511 – Does it empower the Court to make orders directly affecting the rights and liabilities of third parties?

The short answer given was yes, even if those third parties are not joined, although they must have been given a property opportunity to be heard (see [56]).

Section 511 of the Act provides as follows –

“(1) The liquidator, or any contributory or creditor, may apply to the Court:

(a) to determine any question arising in the winding up of a company; or

(b) to exercise all or any of the powers that the Court might exercise if the company were being wound up by the Court….

(2) The Court, if satisfied that the determination of the question or the exercise of power will be just and beneficial, may accede wholly or partially to any such application on such terms and conditions as it thinks fit or may make such other order on the application as it thinks just.”

WAG submitted that the declarations and orders sought by the liquidators were not within the scope of the Court’s power under s 511. It argued that the Court was not empowered by s 511 to make orders directly affecting the rights and liabilities of third parties. However here, so WAG argued, the Court was being asked –

(a) to determine the rights of third parties (the Growers) to the land which is the subject of the sale contracts; and

(b) to sanction the end of the proprietary and personal rights of the Growers in these schemes (see [41]).

Her Honour considered that submission, reviewing the authorities (some concerning s 479(3) and sought to be applied by analogical reasoning), and rejected it (see [42-58]). Her Honour held (at [45]) that there was little doubt on the authorities on s 479(3) that the Court has power under that provision to make orders of a substantive nature affecting third parties. The question of whether it should exercise that power is a separate one, and is an issue of discretion, not of power. Her Honour observed that any doubt as to the Court’s power under s 511 to make orders affecting the substantive rights of third parties has been put to rest by the High Court in 2008 in Macedonian Orthodox Community Church of St Petka Inc v His Eminence Petar the Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand and the New South Sales Court of Appeal in 2009 in Hall v Poolman (see [48-53]).

Davies J held it was in the interests of the winding up of WFL to give judicial advice on –

  • the question of whether WFL’s freehold and leasehold interests are “scheme property” of the schemes,
  • the question of whether the liquidators are jusitifed in terminating and disclaiming the project documents of the schemes, and
  • the question of whether the proposed allocation of sale proceeds is justified.
Her Honour observed that the orders, if made, would enable the liquidators to complete the sale contracts in the process of realising WFL’s assets and to disclaim onerous contracts which WFL does not have the funds to perform. Obtaining the judicial advice would assist the liquidators to get on with the winding up of the company. And it was “well apparent” from the evidence that there was a need for urgency in dealing with the assets the subject of the sale contracts, because the plantations could not be maintained and the Growers could not presently exercise their rights to grow, maintain and harvest the trees on the plantations (see [57]).
2.  Was the Land on which the schemes were conducted “Scheme Property”?
The short answer was “no”. On one view, her Honour’s finding on this issue was a significant one, in terms of opening the door to permitting the sale contracts to proceed, with the proposed terms as to the distribution of sale proceeds.
The liquidators’ proposed allocation of sale proceeds was based on the premise that the land owned by or leased to WFL was not property of the various schemes, and hence was land covered by the charges under which the receivers were appointed. This question was left open in the reasons for decision given by Dodds-Streeton J in 2011, but now fell to be determined (see [59]).
Under Pt 5C.2 of the Act, property that is “scheme property” of a registered scheme is declared by s 601FC(2) to be held on trust by the RE of that registered scheme for the scheme members (Growers). For unregistered schemes, it is necessary to have regard to the terms of the schemes to ascertain the property interests held by the Growers.
Her Honour reviewed the authorities and then considered the position for each category of scheme.
For the registered schemes, Davies J considered the Product Disclosure Statements, the terms of the application forms and the nature of the Woodlots allocated and “Forestry Rights” accorded to each Grower. She concluded that while WFL contributed the use of its land for scheme purposes, it did not contribute its interest in the land. Instead, it made the land available to the Growers by way of lease and by granting “forestry rights” entitling Growers to establish, maintain and harvest a crop of trees on the land. This conclusion was supported by provisions in the constitution, which identified the land separately from the scheme property. (See [67-71])
For the professional investor schemes the conclusion was similar, the primary difference being that participants in those schemes were allocated “Hectares” on WFL’s land instead of “Woodlots” (see [72]).
For partnership schemes, again participants were required to enter into a lease agreement with WFL, and to engage WFL to undertake the actual forestry operations. The amount payable per Partnership Unit was for the rent payable under the lease and the fees due to WFL for its services. The partnership agreements defined the assets of the partnership to expressly exclude WFL’s interest in the land used by the schemes. (See [73-74]).
For contractual schemes, the contractual documents provided for what the Growers’ rights were to be, and none indicated that any rights with respect to the land were other than those conferred under the lease (see [75]).
In light of these, her Honour concluded that WFL did not contribute its interest in the land to the schemes, but simply the use of its land in accordance with the scheme documents (see [76]). Accordingly, the land did not constitute “scheme property”.
WAG submitted otherwise, arguing that the substance and effect of the scheme documents in all of the circumstances, make it demonstrably clear that WFL acquired the freehold land as scheme property, and held it beneficially as RE for the growers. Her Honour rejected this submissions (see [77-82]). This is likely to be a key point on appeal.
Her Honour also rejected an argument by WAG that the land was scheme property based on a tracing exercise (see [83-88]).
3. (a) Allocation of sale proceeds and (b) The position of liquidators of Responsible Entities – the primacy or otherwise of the best interests of Growers/investors as one of the considerations of liquidators of RE’s
(a) Allocation of Sale Proceeds
To follow the reasoning on this issue of the allocation of sale proceeds, it can be helpful to understand the practical circumstances of the scheme plantations. Liquidator Mr Crosbie gave evidence as to how they influenced why the liquidators, without available funding to continue to operate the plantations, concluded that absent a party willing to take over management and maintenance of the scheme plantations, the only available remedy was to sell the trees immediately.
Mr Crosbie gave evidence that it was in practical terms impossible for individual Growers themselves to undertake the ongoing maintenance and harvest on their own individual lots. The land owned or leased by WFL and used in the schemes had been divided into individual allocated lots, which appeared to have been done by overlaying a grid onto plantation maps. However trees were planted on a plantation-wide basis, rather than by individual lots. The lots were not delineated on the ground by access roads or other dividers or buffer zones. There were no markers to identify individual Growers’ lots or trees. GPS could not reliably assist due to the remote location of plantations and thick plantation canopies. Employing surveyors to peg out individual woodlots would be prohibitively expensive and might still not be accurate. Even if identified, a Grower whose lot was surrounding on all sides by other Growers’ lots could not access his/her/its own lot to commence harvesting individually without obtaining access across the surrounding lots for the necessary vehicles and equipment. Felling of an individual Growers’ lot would likely result in damage to trees on adjacent lots as trees fell. Outside of either thinning or harvesting, the trees needed to be maintained both to preserve the value of the trees and to prevent the risk of fire. Fire maintenance was a statutory requirement involving demanding obligations and significant expense. (See [18])
In the view of the liquidators, the Growers’ right to maintain and harvest their own trees was a theoretical right only, and could not be exercised in practice.
In terms of the allocation of sale proceeds here proposed by the liquidators, one approach was taken for the main sale contracts, another for the HVP sale contract. For the main sale contracts, the liquidators’ proposed allocation of sale proceeds to Growers was determined on the basis that the freehold and leasehold was not property of any of the schemes.
Whilst the Growers’ leases conferred proprietary rights on them as lessees, those rights were not practically capable of being exercised by individual Growers. Accordingly, the Growers’ leases did not have an independent commercial value, and the Growers should receive an amount out of the proceeds referable to the value of the trees (that are sold with the land) (see [93]).
The liquidators considered that the fairest method of apportionment amongst the Growers was to pool the proceeds and distribute them on a scheme by scheme basis. Davies J agreed that the liquidators were justified in taking this approach. (See [95])
(b) Duties owed by Liquidators of Responsible Entities (RE’s)
WAG argued that the liquidators were not acting in the Grower’s best interests in accepting the revised bid made by the purchaser GFP. They argued the trees have been sold at under market value. Her Honour noted the liquidators acknowledged the revised bid amounted to approximately 45-96% of the value set out in the Poyry trees valuation, however no party had been willing to take over the schemes, and the economic value of the trees could not be realised except as part of the land sales.
Her Honour remarked that WAG’s contention was premised on a fundamental misconception – that the liquidator of an RE owes fiduciary duties only to Growers as members of the schemes. (See [96]). On this issue, her Honour quoted a passage from the judgment of Finkelstein J in Timbercorp Securities Ltd v WA Chip & Pulp Co Pty Ltd [2009] FCA 901 and observed that the interests of Growers are a consideration of the liquidators; however they are not the only or primary consideration.
In Timbercorp at [8] Finkelstein J had observed that a liquidator of an RE which is being wound up is a fiduciary, and the principal beneficiaries of that liquidator’s fiduciary duties are those interested in the liquidation, namely the creditors and members. Sections 601FC and 601FD impose duties on an RE and its officers (which would include a liquidator of an RE) to act in the best interests of members of a managed investment scheme. At [11], his Honour remarked that ss 601FC and 601FD do not override a liquidator of an RE’s duty to those interested in the winding up, so as to require him or her to look after the interests of investors even if that be at the expense of other creditors, and that it would be quite extraordinary were that to be the case.
Davies J quoted those passages by Finkelstein J and observed that the liquidators have imposed on them the duty to act at all times with complete impartiality between the  various persons interested in the property and liabilities of the company, and that the interests of the Growers were not the only or primary consideration of the liquidators (see [96]).
For the HVP Sale contract, the receivers were a party because WFL’s rights and claims under the HVP leases fall within the scope of the charge and the receivers’ appointment, and releases from the receivers and secured creditors were a condition precedent of the sale contract. The receivers and secured creditors would not give their consent to the sale without upfront agreement with the liquidators as to the amount they would receive out of the sale proceeds. Negotiations resulted in a term of the HVP sale contract that 70% be allocated to the secured creditors, and the Growers would be entitled to 30% of the consideration referable to the trees grown on the HVP land (see [108]). Davies J reviewed the various bases upon which the liquidators concluded this was in the best interests of Growers, the receivers’ contentions, and the arguments advanced for WAG. Her Honour was satisfied there was a legal foundation supporting the proposed apportionment, and that the liquidators had acted reasonably in reaching the commercial compromise with the receivers as to the proposed allocation of sale proceeds. Her Honour also held that the liquidators were justified and acted reasonably in holding the proceeds on trust until they could be pooled and distributed to Growers with the other proceeds. (See [107-117]).
4. Challenge to sale process
Senior Counsel for WAG challenged the sale process and expression of interest campaign conducted by the liquidators, arguing that “all along” the liquidators wanted to sell the land unencumbered by the Growers’ rights. It was also argued for WAG that there was no real interest in replacing WFL as RE or in selling the land on an encumbered basis, as shown by the “rushed” expression of interest and sales campaign and the “arbitrary rejection” of those who expressed interest to assume the role of RE. However, Davies J noted that there was no evidentiary basis for making that submission, and Mr Crosbie was not cross-examined about it. Her Honour was satisfied on the basis of what was borne out by the evidence that the land was advertised for sale on both an encumbered as well as unencumbered basis, but in the context of the need for urgent funding in order to continue to maintain the plantations to prevent their wastage and the diminishment in value of the trees. Her Honour also took the view that the evidence bore out that the liquidators did not “arbitrarily” reject the expressions of interest to assume the role of RE. (See [119-121])
Her Honour concluded that the liquidators were justified in terminating the project agreements for the following reasons –
1. WFL was hoeplessly insolvent and incapable of continuing to manage the schemes,
2. The schemes themselves would not generate revenue until several years hence,
3. The land and tress were wasting and at risk of fire in the absence of adequate ongoing maintenance arrangements,
4. Davies J was satisfied that the liquidators and receivers had conducted robust sale processes and obtained the best prices reasonable available for the land and trees from financially able purchasers, and
5. No viable restructuring proposal had been advanced in relation to the schemes (other than one). There was no viable alternative that offered the prospect of comparable returns to Growers. (See [122])
For the same reasons the Court held the liquidators were justified in disclaiming the project documents of the contractual and partnership schemes. The forestry management agreements were onerous and unprofitable. (See [123])
5. Further Factors argued to militate against the Court making the directions and orders sought – see [124-128]
WAG raised three other matters it argued were against the Court making the directions and orders sought in these application –
(1) WAG was pursuing with Primary Securities Limited (PSL) the option to have PSL replace WFL as the RE of the unregistered professional investor schemes and the registered schemes. Heads of Agreement had been entered into between WAG and PSL and steps taken towards convening a meeting of Growers. However Davies J noted that PSL’s agreement was conditional, there was no actual restructuring proposal to be put at any meeting and there was no binding commitment on the part of PSL. Davies J held this did not provide justification to refuse the orders and directions sought.
(2) The termination of the project documents would amount to a default under the loan agreements some Growers had with an in-house financier of the schemes. This would bring forward the repayment date of the loans, which would produce a loss and inconvenience to the Growers, at the hand of WFL which as RE was under an obligation to act in the Growers’ best interests. WAG pointed out that the liquidators had failed to bring this matter to the attention of the Court. Again, her Honour held that this matter did not warrant the Court declining to make the orders and directions sought.
(3) WAG also argued that if the Court determined to approve the sale, the Court should direct that the proceeds be held on trust pending a further apportionment hearing, as occurred in the case of Timbercorp. However her Honour noted that (a) it was a term of the main sale contracts and the HVP sale contract that the liquidators allocate and distribute the proceeds of sale as between the Growers, the secured creditors and WFL’s unsecured creditors in the manner proposed and that the Court approve this, and (b)  she was satisified that it was just and beneficial that the Court approve the sale and approve the exercise by the liquidators of the power to terminate and disclaim the project agreements on the basis of the proposed allocations.
 Conclusion
This judgment of Davies J is a blow for Growers who had invested in the Willmott Forests schemes and, as noted above, has been appealed to the Court of Appeal of the Supreme Court of Victoria (leave was granted to appeal on 20 April 2012). We await with interest further developments in this case, including the hearing of WAG’s application for the appointment of receivers to the schemes, the appeal of Davies J’s decision of 9 February 2012 and in turn that of this judgment of 3 April 2012.

Equuscorp Pty Ltd v Haxton – High Court’s latest pronouncement on the law of restitution

Yesterday afternoon the High Court handed down its long-awaited restitution law judgment dealing with claims for money had and received for failure of consideration – and their assignability – in Equuscorp Pty Ltd v Haxton; Eqquascorp Pty Ltd v Bassat; Equuscorp Pty Ltd v Cunningham’s Warehouse Sales Pty Ltd [2012] HCA 7. The full judgment is now on Austlii and can be read here.

This case involved five appeals from the Victorian Court of Appeal. In the High Court three judgments were written – one by French CJ, Crennan and Kiefel JJ, one by Gummow and Bell JJ, and one by Heydon J. Their Honours dismissed the appeals, which had the effect that the respondent investors were not liable to repay funds advanced to them under loans which had been assigned to Equuscorp.

Facts

The respondents had invested in tax driven blueberry farming schemes conducted in the north-east of NSW in the mid to late 1980’s, promoted by two brothers Anthony and Francis Johnson. Investments were made in the schemes in five separate tranches. Under the schemes, investors could enter into a loan agreement with a company called Rural Finance Pty Ltd whereby Rural would advance funds payable by the investors to other companies in the scheme group, pursuant to the schemes. The schemes were designed so that investors obtained an interest in a farm and farming business with the hope of future profits and capital appreciation, together with the immediate benefit of a significant tax deduction claimable against non-farming income.

Equuscorp was an arms length financier of the group of companies controlled by the scheme promoters, the Johnson brothers. In 1997, after the scheme collapsed, the receivers and managers of Rural sold the loan agreements between Rural and the investors to Equuscorp, assigning its interests under the loan agreements and the amounts of debts owing thereunder. As a rather striking side-note, at first instance Byrne J had found that at around the time of their assignment, the 638 loan agreements were worth $52,584,005. The consideration given for the assignment was $500,000.

Contrary to s 170(1) of the then Companies Code, no prospectus or valid prospectus had been registered when the schemes were promoted, when investors were offered a “prescribed interest” and were offered loans on favourable terms to invest. After taking the assignment, Eqquscorp sued investors to recover payments due to it under the loans.

The loan agreements were found to be unenforceable for illegality. (So held Byrne J at first instance; this was not challenged in the Victorian Court of Appeal or the High Court.) This is somewhat curious, as the making of the loan agreements was not expressly prohibited by the Code; what was illegal was the offering or inviting the public to subscribe for or purchase a prescribed interest . However it appears that Byrne J held the loan agreements to be unenforceable on the common law ground of being associated with or made in furtherance of an illegal purpose (see [22-27]).

Equuscorp claimed in the alternative for restitution of the advances made under the agreements as money had and received, for failure of consideration. Essentially, the questions for the High Court were these –

  1. Did Rural have a right of restitution for money had and received (based upon a failure of consideration)?
  2. If yes, was such a right assignable (to Equuscorp)?
  3. If yes to both, was it assigned by Rural to Equuscorp?

The High Court answered those questions, broadly, as follows –

  1. No, 5:1. An entitlement to restitution here would stultify the policy and objects of the Companies Code, being the protection of investors in the position of the respondents. The investors would not be unjustly enriched if they were not compelled to make restitution. (So  held French CJ, Crennan and Kiefel JJ [45]; also Gummow and Bell JJ [99]. Heydon J dissented, making some thought-provoking remarks worth considering [126-133, 134-149]. Note that at [137], Heydon J comments that despite what the Court of Appeal had held, there is no requirement of total failure of consideration in every case.)
  2. Yes, assignable, 6:0. There was no cause of action available for Rural to assign to Equuscorp. But if there had been a right of restitution, such a right was capable of being assigned (Yes – French CJ, Crennan and Kiefel JJ [53]. Yes (tied up in yes to question 3) – Gummow & Bell JJ [74-5]. Yes – Heydon J [159])
  3. Evenly split, 3 yes:3 no. The High Court was evenly divided on the question of whether, if there had been a right to restitution in Rural, it would have been assigned under the Deed. (No – French CJ, Crennan and Kiefel JJ [64], though they left open one aspect at [66]; Yes – Gummow & Bell JJ [74-9]; Yes – Heydon J [160-161]. Note that at first instance Byrnes J had answered yes; on appeal to the Victorian Court of Appeal – their Honours had answered no.)

Before closing, I will briefly address two aspects of this decision – the apparent state of play of unjust enrichment and the nature of claims for money had and received in Australia, and the reason why the majority found that in this case, there was no such right to restitution.

The Nature of claims for money had and received – right to restitution

At [29] French CJ, Crennan and Kiefel JJ discuss the history of claims for money had and received. They note that it was an offshoot of the old form of action of indebitatus assumpsit, which by the 17th century, had superseded the action of debt. They summarise how it went through a period of being thought to rest upon a theory of implied contract. This theory was rejected in Australia in 1987 by the High Court in Pavey & Matthews Pty Ltd v Paul, and in the UK in 1996 by the House of Lords in Westdeutsche Landesbank Girozentrale v Islington London Borough Council.

They maintain our High Court’s position that unjust enrichment does not found or reflect any “all-embracing theory of restitutionary rights and remedies”. What it does, they said, is refer to or explain categories of cases where the law does not permit one person to keep a benefit obtained from another. The concept of unjust enrichment explains the claim for money had and received, so their Honours said, in this way –

An enrichment of a defendant may be treated by the law as unjust by reason of a qualifying or vitiating factor such as mistake, duress, illegality or failure of consideration, triggering a prima facie obligation to make restitution to the plaintiff, subject to any defences such as the change of position defence (which would make an order for restitution, in turn, unjust). See their discussion at [29-30].

At [114] Gummow and Bell JJ make an enlightening observation. They observe that an action for money had and received is a legal action not an equitable suit, however it is settled in Australia that the action is a liberal action in the nature of a bill in equity. They observe for example that in the present litigation, were Equuscorp to succeed, a question would arise as to the relevance and quantification of any offsetting “tax benefit” which the respondents had received before the investment scheme collapsed.

Rural had no right to restitution here

Essentially, the majority held that where a contract is rendered unforceable by a law, a restitutionary claim will not lie where the allowance of that claim would defeat the policy of the law which made the contract unenforceable. (See Gummow and Bell JJ at [104].)  To permit recovery on an action for money had and received in such a case would stultify the statutory policy of protecting investors by imposing onerous obligations upon scheme promoters to comply with statutory requirements. They held that this was the case here. Rural was not an arms length financier. It was part of the group of companies involved in promotion of the schemes. It offered loan agreements on favourable terms in furtherance of an illegal purpose (offers to take up prescribed interests without the benefit of the protections required by the Code).

In contrast, restitution can be allowed where a contract or transaction is made or a tax is paid which was rendered “illegal” by a law which, for example, requires formalities which were not met, or which restricts legal capacity, as does the doctrine of ultra vires.

At [103], the basis for the High Court majority’s view as to there being no right to restitution here, is particularly well explained by Gummow and Bell JJ. Their Honours note that the determinative issue is whether the policy of the statute law (here s 170 of the Code) denies any scope for an action for money had and received. They observe that guidance on this issue can be gained by a statement by Professor Palmer in his 1978 treatise The Law of Restitution where he says this:

“The illegality of the transaction will preclude recovery of damages for breach, or any other judgment aimed at enforcement of the contract, and the problem is whether the plaintiff can nonetheless obtain restitution of values transferred pursuant to the contract. The fact that public policy prohibits enforcement of the contract is not a sufficient reason for allowing one of the parties to retain an unjust enrichment at the expense of the other. Such a retention is warranted only when restitution is in conflict with overriding policies pursuant to which the transaction is made illegal.”

The best part

I would like to finish, admiringly, with the opening paragraph of Heydon J’s judgment. For its deft eloquence, I find it one of the most enjoyable opening passages of a judgment I have read in a while:

“The relevant transactions are set out in the preceding judgments. Those transactions are redolent of tax avoidance, suggest a preference for the beauty of the circle to the bluntness of the straight line, and indicate a single group of minds in control of superficially different entities. There is about them something of the night. However, it was not squarely suggested that the transactions were shams or that their somewhat murky atmosphere was relevant to the legal issues in these appeals. Those issues are four in number…”

Re Willmott Forests Ltd – Disclaimer of onerous property by liquidators – does the disclaimer of a lease by the landlord company’s liquidator extinguish the tenant’s proprietary interest in the land?

On Thursday (9 February), Davies J of the Victorian Supreme Court handed down her decision on a preliminary question which she was asked to decide on application by the liquidators of Willmott Forests Ltd (WFL), supported by the receivers and both Grower group intervenors.

The preliminary question was this:

Were the liquidators able to disclaim the Growers’ leases with the effect of extinguishing the Growers’ leasehold estate or interest in the subject land?

Her Honour Justice Davies concluded that the answer to the question was “No“.

As many of you will know, Willmott Forests is one of the more recent large agribusiness managed investment schemes to collapse, following in the steps of Great Southern, Timbercorp and Environinvest. Receivers and managers (Mark Korda, Mark Mentha and Bryan Webster of KordaMentha) were appointed by the Willmott Group’s banking syndicate on 6 September 2010, the same day the Willmott Group was placed into voluntary administration and Avitus Fernandez of Fernandez Partners was appointed administrator. Ian Carson and Craig Crosbie of PPB Advisory were appointed administrators of the Willmott Group by order of the Federal Court on 26 October 2010, replacing Mr Fernandez. Mr Carson and Mr Crosbie then became the liquidators of the Willmott Group when the companies were all placed into liquidation on 22 March 2011.

WFL was the responsible entity and/or manager of 8 registered MIS, 6 unregistered “professional investor” MIS, 11 unregistered contractual MIS, and 5 unregistered partnership MIS. These MIS were forestry operations conducted on land either owned by WFL or leased by WFL from third parties. The MIS members or “Growers” had rights to grow and harvest trees on that land under project documents that included lease and licence agreements with WFL for the use and occupation of the land.

After their appointment, WFL’s liquidators had entered into 6 sale contracts for the sale of part of the freehold land, unencumbered by Growers’ rights, including Growers’ rights under leases and licences. A transfer of clear title to the land could not be effected unless Growers’ rights were terminated or extinguished.

On 29 June 2011, the liquidators of WFL sought and obtained directions from Dodds-Streeton J of the Federal Court that they were justified in –

(a) amending the constitutions of the registered MIS and certain investment deeds to confer on WFL a power to terminate Growers’ rights, on condition that Court approval is obtained before doing so; and

(b) disclaiming the project documents of other MIS as onerous pursuant to s 568(1) of the Corporations Act 2001 (Cth), on condition that the Court’s consent is obtained before doing so.

The Federal Court had expressly left the above-described preliminary question open in making the orders and directions of 29 June 2011.

It was a condition precedent of the sale contracts that by 31 January 2012, the liquidators obtain that approval and consent from the Court. (That date was later extended to 15 February 2012.)

The liquidators applied to the Court to obtain those orders, directions under s 511, and approval of their entry into the sale contracts under s 477(2B). The receivers of WFL support the liquidators’ application for those orders, directions and approval, but the Willmott Growers Group Inc and the Willmott Action Group Inc – who both had leave to intervene as contradictors – oppose it. All parties did, however, support the hearing and determination of this preliminary question as to whether the liquidators can disclaim the Growers’ leases with the effect of extinguishing their leasehold estate or interest in the subject land.

Relevantly, s 568 of the Act gives liquidators power to disclaim certain “property of the company”, including land burdened with onerous covenants, shares, property that is difficult to sell, property where the costs of selling it would exceed the proceeds of sale, and contracts. S 568(1A) provides that a liquidator cannot disclaim a contract (other than an unprofitable contract or a lease of land)  except with leave of the Court. S 568(1B) provides for the Court’s power on such an application, and states that the Court may grant such leave subject to conditions, or may make orders about the contract as it considers to be just and equitable.

Section 568D(1) makes it clear that the effect of disclaimer is to terminate the company’s rights, interests, liabilities and property “for or in respect of” the disclaimed property, but that third party rights or liabilities are not affected by the disclaimer “except so far as is necessary in order to release the company or its property from liability”. Her Honour discussed the legislative intent and the authorities as to how the disclaimer provisions operate, including this remark by Lord Nicholls of Birkenhead in Hindcastle Ltd v Barbara Attenborough Associates Ltd [1997] AC 70 at 87 about the UK disclaimer provisions:.

“Disclaimer will, inevitably, have an adverse impact on others: those with whom the contracts were made, and those who have rights and liabilities in respect of the property. The rights and obligations of these other persons are to be affected as little as possible. They are to be affected only to the extent necessary to achieve the primary object: the release of the company from all liability. Those who are prejudiced by the loss of their rights are entitled to prove in the winding up of the company as though they were creditors.”

The liquidators submitted that as with the reverse position in Hindcastle Ltd v Barbara Attenborough Associates Ltd (disclaimer by the tenant) when a lease is disclaimed by the liquidator of the landlord, the leasehold estate also ceases to exist – the tenant’s rights are extinguished. Davies J disagreed.

Her Honour took the view that the tenant’s proprietary rights in the land will continue to subsist, even though the effect of the disclaimer is that the landlord’s interests and liabilities under the lease contract have been terminated [11]. She was supported in her conclusion by –

  • Re Bastable; Ex parte The Trustee [1901] 2 KB 518 – Romer LJ held that where a trustee in bankruptcy of the vendor of a contract of sale of land disclaims the contract, he does not put himself in the position of owner of the estate, freed altogether from the purchaser’s equitable interest in the land;
  • Dekala Pty Ltd (in liq) v Perth Land & Leisure Ltd (1987) 17 NSWLR 664 – Young J held that a disclaimer by a liquidator of an option agreement the company had entered into in respect of land it owned could not have the effect of divesting any equitable interest of the option holder, if held to exist (although the case was decided on the basis that the option holder did not hold any interest in the land).

Her Honour held that the statement of principle in Hindcastle Ltd v Barbara Attenborough Associates Ltd was expressly confined to disclaimer of a lease by the liquidator of the tenant, and the reasoning was inapposite to the disclaimer of a lease by the liquidator of the landlord, with respect to the impact on the tenant’s leasehold interest [13].

Davies J acknowledged that a disclaimer nonetheless will impact on the rights and liabilities of the tenant to the extent necessary to release the company or its property from liability. The liquidators pointed out that the Growers’ rights as lessees to occupy the land is interdependent with the rights and liabilities of the landlord to lease the land, such that a disclaimer of the lease by the landlord must mean the termination of the Growers’ leasehold estate in the leased property. Otherwise, so the liquidators argued, the disclaimer of the lease would be inutile. Her Honour said that this can be accepted, however it does not provide the answer.

Davies J returned attention to the language of the section (s 568D(1)): Is the termination of the Growers’ leasehold estates necessary to release WFL or its property from liability?

Her Honour held that it was not. Her Honour held that a tenant has different legal rights in the subject property than the rights attaching to the landlord’s reversionary interest. She noted that the property proposed to be disclaimed was the contract for lease, under which WFL had already leased the land to the Growers. Thus, so her Honour reasoned, it was unnecessary to interfere with the Growers’ property rights in order to release WFL from its liability to lease, because the leases had already been effected. The judgment can be read in full here.

An interesting conclusion. The Willmott Action Group have already reported the decision on their website and are understandably delighted. It would seem that the liquidators of Willmott Forests Ltd are in something of a pickle.  A transfer of clear title to the freehold land cannot be effected unless the Growers’ rights are terminated or extinguished. For the 16 contractual and partnership MIS at least, disclaiming the project documents has not been effective to achieve this. The application for the rest of the orders and directions will return to Court for further hearing on 27 February 2012, however the conditions precedent for the sale contracts were to be fulfilled by 15 February 2012 – in just 3 days time. We will await the next development with interest.