FEDERAL COURT OF AUSTRALIA Timbercorp Securities Limited (in liq) v Plantation Land Limited [2009] FCA 741 CORPORATIONS – insolvency – winding up – liquidator – expenses incurred in winding up – priority of payment – leases – rent accruing before and after winding up order – whether liquidator has retained possession of land for the purposes of liquidation – whether rent should be treated as an expense incurred by the liquidator – scope of the liquidation expenses principle Corporations Act 2001 (Cth), ss 446A, 601EB, 601FL, 556(1)(a), 556(1)(dd) ABC Coupler & Engineering Co Ltd (No 3), In re [1970] 1 WLR 703 Brash Holdings Ltd (Admr Appt) v Katile Pty Ltd (1994) 13 ACSR 504 Downer Enterprises Ltd, In re [1974] 1 WLR 1460 HH Realisations Ltd, Re (1975) 31 P&CR 249 Lundy Granite Co; Ex parte Heavan, In re [1871] LR 6 Ch App 462 New Oriental Bank Corporation, Re (No 2) [1895] 1 Ch 753 Oak Pits Colliery Company, In re (1882) 21 Ch D 322 Progress Assurance Co; Ex parte Liverpool Exchange Company, In re [1870] LR 9 Eq 370 Silkstone & Dodworth Coal and Iron Company, In re (1881) 17 Ch D 158 Toshoku Finance UK plc, In re [2002] 1 WLR 671 IN THE MATTER OF TIMBERCORP SECURITIES LIMITED (IN LIQUIDATION) AND IN THE MATTER OF TIMBERCORP LIMITED (IN LIQUIDATION) TIMBERCORP SECURITIES LIMITED (IN LIQUIDATION), TIMBERCORP LIMITED (IN LIQUIDATION), MARK ANTHONY KORDA, LEANNE CHESSER v PLANTATION LAND LIMITED VID 497 of 2009 FINKELSTEIN J 10 JULY 2009 MELBOURNE IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY VID 497 of 2009 GENERAL DIVISION IN THE MATTER OF TIMBERCORP SECURITIES LIMITED (IN LIQUIDATION) AND IN THE MATTER OF TIMBERCORP LIMITED (IN LIQUIDATION) BETWEEN: TIMBERCORP SECURITIES LIMITED (IN LIQUIDATION), TIMBERCORP LIMITED (IN LIQUIDATION), MARK ANTHONY KORDA and LEANNE CHESSER Plaintiffs AND: PLANTATION LAND LIMITED Defendant JUDGE: FINKELSTEIN J DATE OF ORDER: 10 JULY 2009 WHERE MADE: MELBOURNE THE COURT DECLARES THAT: 1. The rent that fell due for payment on 1 July 2009 under the lease between Timbercorp Limited (in liquidation) and Plantation Land Limited made on 15 April 2000 is not to be treated as a cost or expense of the liquidation or as an expense incurred by the liquidators. THE COURT ORDERS THAT: 2. The costs of this proceeding be reserved. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using eSearch on the Court's website. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY VID 497 of 2009 general division IN THE MATTER OF TIMBERCORP SECURITIES LIMITED (IN LIQUIDATION) AND IN THE MATTER OF TIMBERCORP LIMITED (IN LIQUIDATION) BETWEEN: TIMBERCORP SECURITIES LIMITED (IN LIQUIDATION), TIMBERCORP LIMITED (IN LIQUIDATION), MARK ANTHONY KORDA and LEANNE CHESSER Plaintiffs AND: PLANTATION LAND LIMITED Defendant JUDGE: FINKELSTEIN J DATE: 10 JULY 2009 PLACE: MELBOURNE REASONS FOR JUDGMENT 1 This case raises a short but important point arising in the liquidation of Timbercorp Limited. That company is one of a number comprising the Timbercorp group. The group promoted itself as Australia's leading plantation investment managers. It operated that business mostly through registered managed investment schemes. The Timbercorp group collapsed earlier this year and its operating companies were put into administration. Thereafter the creditors resolved that Timbercorp and several related companies be wound up. Mr Korda and Ms Chesser, who had been those companies' administrators, became their liquidators by virtue of s 446A of the Corporations Act 2001 (Cth). The point that has arisen in the liquidation is whether the so-called In Re Lundy Granite Co principle (sometimes known as the liquidation expenses principle) applies to rent which is accruing under a lease entered into before the liquidation. 2 The essential facts are these. In January 1999 a managed investment scheme known as the 1999 Timbercorp Eucalypts Project, the purpose of which was to conduct forestry operations, was registered pursuant to s 601EB. Timbercorp was appointed as the responsible entity of the scheme. In February 1999 Timbercorp issued a prospectus offering interested persons the opportunity to participate in the scheme. The minimum investment was $11,250. Approximately 3,243 persons took up the offer and became scheme members. (In the scheme documents the members are referred to as "Growers".) 3 The scheme's forestry operations were conducted on 28,545 hectares of land, most of which was leased from third parties (there are 98 third party leases) and the balance from other Timbercorp companies (there are 34 such leases). Several third party leases are with the defendant, Plantation Land Limited. Those leases are in common form. They contain the following provisions: Clause 2 – The owner [PLL] leases to the Lessee [Timbercorp] the Leased Area for the Term [12 years commencing on 15 April 2000 or the date of the first completed harvesting of the Plantation Crop, whichever is earliest] for the purpose of growing, tending and harvesting a plantation or plantations of eucalyptus trees. Clause 3.1 – The Lessee will pay to the Owner the Annual Rent in advance in equal successive quarterly instalments on or before the Rent Payment Dates [Rent Payment dates are defined in clause 1.1 to mean each 30 June, 30 September, 31 December and 31 March during the Term]. Clause 6.2 – The Lessee will be entitled to harvest the Plantation Crop and to remove and sell or otherwise deal in the products and any rights, benefits and credits derived from the Plantation Crop and to retain all income from such sale or dealing. Clause 8.1 – The Owner may terminate this Lease with immediate effect if the Lessee is in arrears in respect of one quarterly instalment of Annual Rent and such arrears are not paid in full within one month after the Owner has served a written notice on the Lessee requesting payment. Clause 10.1 – The Owner acknowledges and agrees with the Lessee that for so long as this Lease has not been terminated for non-payment of Annual Rent under clause 8.1 and the Lessee continues to pay the instalments of Annual Rent the Plantation Crop and any Carbon Credits will be and will remain the property of the Lessee (or any other person or entity deriving title to the Plantation Crop through the Lessee) for the period referred to in clause 10.3. Clause 11.2(a) – The Lessee may: (i) sub-lease or grant a licence to occupy the whole or any part of the Leased Area; or (ii) assign, transfer or deal with all or part of the Plantation Crop and all products, rights, benefits and credits derived from the Plantation Crop or its rights under the Forest Property Agreement constituted under clause 10.4, on such terms and conditions as the Lessee deems fit without having to obtain the consent of the Owner but no such sub-lease, licence or other dealing relieves the Lessee from any obligations under this Lease. 4 Each grower holds their investment in the scheme via a sub-lease. For the most part the sub-lease contains provisions that mirror those found in the head-lease. For present purposes it is necessary to note only that by cl 5 of the sub-lease each grower is required to pay annual rent on the first 31 May after the date of execution of the sub-lease and each 31 May thereafter during the term of the sub-lease. 5 By a management agreement dated 30 June 1999 each grower engaged Timbercorp first as an independent contractor to carry out plantation services in accordance with a management plan and, second, as an agent to harvest, sell or otherwise account for the wood derived from the trees produced as a result of the scheme's operation. In turn Timbercorp entered into agreements with several forestry contractors by which it contracted out the majority of its obligations under the management agreement. 6 On 4 December 2003 the Australian Securities and Investments Commission (ASIC) granted relief (under s 601FL) to permit Timbercorp to retire as responsible entity and appoint its wholly owned subsidiary, Timbercorp Securities Limited (TSL), in its place. The change of entity took effect on 23 March 2004. Following the change various agreements relating to the scheme, including the management agreement and some of the plantation services agreements, were "novated", with the consequence that TSL assumed the obligations that initially had reposed in Timbercorp. 7 The administrators were appointed to Timbercorp and TSL on 23 April 2009. At the time the rent due to PLL for the year ending 30 June 2009 was paid. But because Timbercorp was hopelessly insolvent it could not pay the instalment of rent that fell due on 1 July 2009. Accordingly the administrators wrote to PLL on 15 June 2009 seeking a "standstill" in relation to the rent. The letter stated: Since our appointment as Administrators of the Companies we have been faced with a number of difficulties including the significant issue that Timbercorp Securities Limited (Administrators Appointed) is hopelessly insolvent. Accordingly the Administrators now propose a "standstill" arrangement in relation to leases in relation to the properties listed in the enclosed Lessor Agreement ("the Leases"): (a) landlords will agree to a standstill on the payment of rent for the period from 1 July 2009 to 30 September 2009 ("September Quarter"); (b) existing arrangements under the Leases will be maintained and the Companies will continue to use, occupy and remain in possession of the leased properties; (c) the Administrators will not personally adopt any of the Leases and will not be personally liable for rent for the September Quarter; and (d) landlords' claims against the relevant Companies will not be affected – you will still be able to claim in the administration, or subsequent liquidation, of the relevant Company for rent payable for the September Quarter The proposed standstill arrangement will give the Administrators time to finalise their investigations into the Companies and examine whether there are ways for the various Timbercorp horticultural and forestry managed investment schemes ("Projects") to continue. This may benefit all stakeholders including the grower investors, landlords, trade creditors, shareholders and financiers of the Companies and the rural communities who are reliant on the continuation of the Projects. 8 PLL's solicitors replied on 24 June 2009. They wrote: Our clients do not agree to enter into unilateral "standstill" arrangements. Our clients are willing to consider any proposal put forward by the Administrators concerning forestry assets and will keep an open mind concerning alternate arrangements. However, our clients do intend to issue a notice of termination under the leases if rent due on 30 June 2009 is not paid. In this regard, we ask you to please note that there is a 30 day notice period under the leases with PLL and accordingly, there remains a period of approximately 5 weeks during which it would be open to the Administrators to resolve some alternate arrangements with our clients, should the preservation of the leases be an important element of any such arrangements. 9 By this time the administrators had forwarded invoices to the growers, both for the rent they were obliged under the sub-lease to pay on 1 July 2009 and for money payable under the management agreement in respect of work and services that in the past year had been performed. In due course, over half the growers paid the rent and the management fee. 10 Following their appointment, the liquidators wrote to PLL advising that they, the liquidators, did not intend to adopt or ratify the leases or use or occupy the leased land. The letter, which is dated 2 July 2009, stated: On 29 June 2009, the creditors of the Companies resolved to wind up the Companies and we have now been appointed the liquidators ("Liquidators"). As Administrators, we advised that we would not and did not adopt or ratify the Leases. As Liquidators, we again advise that we will not and do not adopt or ratify the Leases. As you also know, all the Leases were entered into by the Companies prior to our appointments. The Liquidators give you notice that, as and from 2 July 2009, the Liquidators will not use or occupy the property the subject of the Leases. The Liquidators will not enter onto the land or perform any of the obligations under the Leases. The Liquidators will allow all lessors to lodge proofs of debt for their losses (claims) in the liquidation of the companies. However, the Liquidators currently are of the view that they have not personally incurred any cost or expense in the liquidation for using or occupying the land. The Liquidators acknowledge that lessors may take a different view of the law. Mr Korda has confirmed that since their appointment the liquidators have not provided any services, exercised any rights or performed any obligations under the management agreement. They have, however, continued to collect the rent and management fees the growers had been requested to pay. 11 The liquidators have given consideration to disclaiming the PLL leases. They do, however, face a dilemma. No doubt it would be prudent to disclaim the PLL leases to stop the rent from accruing. But the growers may be adversely affected by a disclaimer. There is the possibility that the leases, along with other scheme assets, could be sold. It is also possible that another organisation will take over the management of the scheme. In either event the growers might salvage something out of the mess they are in. 12 Unsurprisingly then, there have been discussions with third parties about selling assets and finding an alternative scheme manager. Those discussions commenced well before the appointment of the administrators, were continued by the administrators and are ongoing. 13 Mr Korda explained that those discussions are still in their preliminary stages. He said they have not yet reached the status of "negotiations". Mr Korda put it this way: "We have a number of expressions of interest in relation to the forestry assets, be they maybe a purchase of all the assets, a reconstruction of MIS schemes, etcetera. So, we've been in contact with many of those parties, but we haven't commenced what I would say are our expression of interest campaign or negotiations". 14 While Mr Korda hopes soon to begin the process of seeking formal expressions of interest, no decision in that regard has been taken. Mr Korda said: "We haven't got to a final conclusion of where we should be, but I – sitting here today, I would think we would go with an expression of interest campaign … shortly, but that requires us to … understand where we are on the leases …". 15 Now, having set out the facts, I come to the question that was argued before me. The first instalment of rent under the PLL leases for the Annual Term ending on 30 June 2010 fell due on 1 July 2009 and has not been paid. The question is whether that rent should be treated as an expense incurred by the liquidator in carrying on Timbercorp's business (within the meaning given in s 556(1)(a)) or as an expense "properly incurred [by the liquidator]" (within s 556(1)(dd)) so as to give the landlord priority for the rent. 16 I should mention that it is not in dispute that if the rent had fallen due before liquidation, the landlord's only recourse would be to prove its debt like any other creditor. The proof might include a claim for the whole of the future rent: see the cases collected in Brash Holdings Ltd (Admr Appt) v Katile Pty Ltd (1994) 13 ACSR 504, 517; c/f Re New Oriental Bank Corporation (No 2) [1895] 1 Ch 753. 17 The position in relation to rent that has accrued after the commencement of the liquidation may be different. In several cases decided in the 19th century landlords were permitted to distrain for post liquidation rent. In In re Progress Assurance Co; ex parte Liverpool Exchange Company [1870] LR 9 Eq 370, 372-373, Lord Romilly MR said that a distress after the winding up would be allowed where the company "has retained, not merely formal, but actual possession of the property for the purpose of carrying on the business of the liquidation …". In In re Lundy Granite Co; ex parte Heavan [1871] LR 6 Ch App 462, 466, James LJ said : "In some cases between the landlord and the company, if the company, for its own purposes and with a view to the realisation of the property to better advantage, remains in possession of the estate, which the lessor is therefore not able to obtain possession of, common sense and ordinary justice requires the Court to see that the landlord receives the full value of the property. He must have the same rights as any other creditor, and if the company chooses to keep the estates for their own purposes, they ought to pay the full value to the landlord, as they ought to pay any other person for anything else, and the Court ought to take care that he receives it". 18 The applicable principles were rather more fully stated by Lindley LJ in In re Oak Pits Colliery Company (1882) 21 Ch D 322, 330. There he said: "1. If the liquidator has retained possession for the purposes of the winding-up, or if he has used the property for carrying on the company's business, or has kept the property in order to sell it or to do the best he can with it, the landlord will be allowed to distrain for rent which has become due since the winding up … But if he has kept possession by arrangement with the landlord and for his benefit as well as for the benefit of the company, and there is no agreement with the liquidator that he shall pay the rent, the landlord is not allowed to distrain …" [citations omitted]. 19 The point of these cases is that distress for rent is allowed when the liquidator has "elected" to retain possession of the leased land: In re Silkstone & Dodworth Coal and Iron Company (1881) 19 Ch D 158 at 161 per Fry J; see also In re ABC Coupler and Engineering Co Ltd (No 3) [1970] 1 WLR 702 per Plowman J. Whether or not the liquidator has elected to retain possession (ie whether or not he has decided to do so) may involve a subjective assessment of the state of mind of the liquidator but, more usually, will be determined objectively based on what the liquidator has said and done: In re Downer Enterprises Ltd [1974] 1 WLR 1460, 1466. 20 The principle (no longer confined to distress) was discussed at length by the House of Lords in In re Toshoku Finance UK plc [2002] 1 WLR 671. Lord Hoffman, with whom the other Law Lords agreed, said that the early cases establish that debts arising out of pre-liquidation contracts, such as leases, whether they accrue before or after the liquidation, should prima facie be proved in the liquidation. They are debts "crucially different" from normal liquidation expenses, which are incurred after the liquidation date and cannot be proved. But as Lord Hoffman explained (at 680) "on equitable grounds, the concept of a liability incurred as an expense of the liquidation [may] be expanded to include liabilities incurred before the liquidation in respect of property afterwards retained by the liquidator for the benefit of the insolvent estate". This was not to say that a liability has been incurred as an expense of the winding up. Lord Hoffman said (at 679) that in that circumstance it is "just and equitable … to treat the rent liability as if it were an expense of the winding up" and to accord it the same priority". 21 So, the issue comes down to this: Have the liquidators of Timbercorp since their appointment elected or chosen to retain possession of the leased land for the purposes of the liquidation. In my opinion they have not. What the liquidators are presently doing is considering whether such a decision should be made. Perhaps they will decide to retain the leased land. Or they may resolve to disclaim it. The decision will, no doubt, depend upon the attitude of the lessors, the views of the growers and the content of legal advice the liquidators are in the process of receiving. But at this point the liquidators' inquiries are incomplete and they are not in a position to make, and have not made, a decision. 22 If so minded, PLL could force the liquidators to hurry up. It could do that by serving a notice under s 568(8) requiring the liquidators to elect within 28 days (or any longer period allowed by the Court) whether or not to disclaim the leases. If they elect not to disclaim it is likely that the rent accruing thereafter will be an expense of the liquidation: see Re HH Realisations Ltd (1975) 31 P&CR 249. 23 In the meantime there will be a declaration that the rent that fell due for payment under the PLL leases on 1 July 2009 is not an expense incurred in the liquidation, or by the liquidators, of Timbercorp. I certify that the preceding twenty-three (23) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein. Associate: Dated: 10 July 2009 Counsel for the Plaintiffs: P Crutchfield L Zwier Solicitor for the Plaintiffs: Arnold Bloch Leibler Counsel for the Defendant: S Rubenstein Solicitor for the Defendant Maddocks Counsel for the Australian Securities & Investments Commission: J Peters SC S Hibble Solicitor for the Australian Securities & Investments Commission: Australian Securities & Investments Commission Date of Hearing: 6 July 2009 Date of Judgment: 10 July 2009