1 IN THE COURT OF APPEAL IN THE SUPREME COURT OF VICTORIA AT MELBOURNE No. S APCI 2012 0026 IN THE MATTER OF WILLMOTT FORESTS LIMITED (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) (ACN 063 263 650) WILLMOTT FORESTS LIMITED (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) (ACN 063 263 650) IN ITS CAPACITY AS MANAGER OF THE UNREGISTERED SCHEMES LISTED IN SCHEDULE 2 AND ORS ACCORDING TO SCHEDULE 1 Appellants OUTLINE OF SUBMISSIONS OF THE WILMOTT GROWERS GROUP INC Date of document: 18 May 2012 Filed on behalf of: Willmott Growers Group Inc A0055077L Prepared by: Mills Oakley Lawyers Level 6 530 Collins Street MELBOURNE VIC 3000 Solicitor's Code: 103868 DX: 558 Tel: +61 3 9670 9111 Fax: +61 3 9605 0933 Ref: DJMM:5188344 Attention: Dan Mackay Email: dmackay@millsoakley.com.au 1. The Appellants have large land holdings in New South Wales and Victoria, on which tenants, represented by WGG, are midway through 25 year leases in respect of which all rent has been paid in advance at the beginning of the term. Unsurprisingly, the Appellants wish to rid the land of these leases, so they can realize the unencumbered freehold rather than the (far less valuable) reversion. 2. This appeal raises the question of whether a lessor, with no other basis for doing so, Hindcastle may destroy the proprietary interest of its commercially inconvenient tenant by embracing liquidation and (through its liquidator) deploying the disclaimer power conferred by s 568 of the Corporations Act 2001 ( the Act ). 3. The Appellants omit the first sentence of the passage from Hindcastle v Barbara Attenborough Associates Ltd 1 ( Hindcastle ) quoted at paragraph 4 of their submissions. The missing sentence identifies the very circumstance that Lord Nicholls of Birkenhead is addressing in the passage: The simplest case is of a landlord and an insolvent tenant. No third parties are involved. Disclaimer operates to determine all the tenant s obligations under the tenant s covenants, and all his rights under the landlord s covenants. (emphasis added) 1 [1997] AC 70, 87.
2 4. The learned primary judge cannot have failed to apply the passage, as the passage does not apply to the present circumstances. The passage applies to the inverse, and common, situation of disclaimer by an insolvent tenant of its leasehold. 5. An insolvent tenant (through its liquidator) can disclaim the tenant s leasehold under s 568(1)(c) - (f). Leave is not required; see s 568(1A). The disclaimer would consequently determine the tenant s estate in land; see s 568D(1). There is nothing surprising about this, as the leasehold is the tenant s own property, which the tenant is entitled to surrender. The landlord s reversion becomes freehold. It is a completely different proposition for an insolvent landlord to effect the determination of a tenant s estate in land by a disclaimer, as the leasehold is not the landlord s property. An insolvent landlord can disclaim the landlord s own property or in rem rights under s 568(1)(a), but it cannot disclaim a tenant s in rem rights. 6. In Hindcastle, Lord Nicholls of Birkenhead does not mention disclaimer by an insolvent landlord in his consideration of the application of disclaimer provisions to the principal types of landlord and tenant situations 2. It is not an oversight. Other than a decision of a Master of the Supreme Court of Queensland in Re Jandowae Estates Pty Ltd 3, no case nor commentary can be found where an insolvent landlord is said to be entitled to disclaim a tenant s lease. WGG submits that the decision in Re Jandowae Estates Pty Ltd is incorrect 4. 7. Her Honour rightly rejected the submission that Hindcastle is equally applicable to an insolvent landlord, as such a submission failed to acknowledge that a lease creates both contractual and proprietary rights 5. Her Honour s reliance on this principle is not inconsistent with Progressive Mailing House Pty Ltd v Tabali Pty Ltd 6 ( Tabali ). Rather, the discussion in Tabali is premised upon a lease being both a contract and an estate in land, owned by the tenant. As Mason J notes: 7 Repudiation or fundamental breach of a lease involves considerations which are not present in the case of an ordinary contract. First, the lease vests an estate or interest in land in the lessee and a complex relationship between the parties centres upon that interest in property. Secondly, this relationship has been shaped historically in very large measure by the law of property, though in recent times the relationship has been refined and developed by means of contractual arrangements. 8. Deane J also recognised the dual nature of leases: 8 2 [1997] AC 70, 87. 3 (1989) 7 ACLC 179. 4 There was no contradictor and Bastable (see paragraph 11 below) was not cited. 5 Reasons for Decision at [9], Appeal Book section F. 6 (1985) 157 CLR 17. 7 (1985) 157 CLR 17 at 33. 8 (1985) 157 CLR 17 at 51.
3 A lease for a term of years ordinarily possesses a duality of character which can give rise to conceptual difficulties. It is both an executory contract and an executed demise. Its origins lie in contract rather than real property in that the lessee s remedies were originally restricted to a personal action against the lessor on his covenant to give enjoyment of the land 9. Hill J in Kennedy Holdings & property Management Pty Ltd v Federal Commissioner of Taxation 9, referring to this very passage from Deane J, said at 499: This is, of course, true, although it is hardly an adequate description of a lease today to suggest that the benefits of a lessee depend solely upon contract and not upon the underlying estate in land which is demised. Nothing in Tabali suggests to the contrary. Indeed, immediately after the passage quoted by counsel for the applicant, Deane J points out that in time it had become accepted that a lessee had a right to possession which was an interest in the land that the lessee was entitled to protect against third parties. 10. Tabali concerned the application of contractual principles where there is repudiation and termination of a lease. The Appellants submissions require a leap of logic as there has been no repudiation or termination to which contractual principles might apply in the present case. There is simply a question as to whether the Appellants can disclaim leases. Tabali has no relevance to the passage from Hindcastle. Re Bastable 11. The Appellants claim that Re Bastable, Ex Parte the Trustee 10 ( Bastable ) and Dekala Pty Ltd (in liq) v Perth Land & Leisure Ltd 11 ( Dekala ) do not apply to a leasehold interest. In support of this submission, the Appellants refer to an article by Associate Professor David Brown, Disclaimer of land: seeing the wood through the trees 12. The article does not enhance the submissions of the Appellants and insofar as it relies upon Hindcastle, the author misunderstands that the example given by Lord Nicholls related only to an insolvent tenant. 12. In Bastable, the statutory regime (footnoted in the report) was relevantly indistinguishable from ss 568 and 568D of the Act. Romer LJ says: 13 It is in substance contended on behalf of the trustee that if a vendor of real estate, by contract entered into with a purchaser, becomes bankrupt, the trustee in the bankruptcy of the vendor, without disclaiming the land or the interest in the land which was the subject of the contract, can, by disclaiming the contract alone, put himself in the position of owner of the estate freed altogether from the purchaser s interest in the estate, leaving the purchaser only the remedy of proving in the bankruptcy for any loss he may have suffered by having his contract destroyed. That would indeed be a serious contention if it could be maintained.... 9 (1992) 39 FCR 495 at 499. 10 [1901] 2 KB 518. 11 (1987) 17 NSWLR 664. 12 Insolvency Law Bulletin, April 2012 at pp 162-164. 13 [1901] 2 KB 518 at 527-528.
4 It cannot, I think, be that such a result was ever intended by the Act. And indeed, when s. 55 is examined, it has, in my view, no such operation or effect. The fallacy of the argument for the appellant lies, I think, in ignoring the nature of the interest of the purchaser of real estate after a contract for its sale has been made between him and the owner of the estate. The purchaser has, then, something more than a pecuniary interest under his contract. He has an equitable interest in the land itself. 13. In both Bastable and Dekala, it was recognised that, insofar as the contract conferred an equitable interest in land, the interest cannot be disclaimed. A lease is both a contract and an estate in land. The finding in Bastable is just as applicable to an interest in land conferred by a lease. 14. If the Appellants are correct in claiming a liquidator can disclaim a contract and in the process extinguish the proprietary and equitable rights of others, then a liquidator can disclaim a contract creating a charge, with the effect of freeing land subject to that charge. Fortunately for banks and commercial stability, the Appellants are not correct. Bennett J said in National Australia Bank v Victoria 14 : As a matter of logic, a trustee in bankruptcy can only disclaim a bankrupt s interest in mortgaged properties. Such a disclaimer would not extend to the interests of a mortgagee. As applied to the present case, the vesting of the Properties occurred subject to the Bank s mortgages. 15. If the liquidator of an insolvent landlord does not want to be burdened with onerous covenants attached to land then it can disclaim the landlord s estate, that is, its freehold. Title escheats to the Crown subject to mortgages and charges 15. There can be no relevant distinction between a purchaser s lien, a charge or a lease. 16. The uncertainty the Appellants claim would occur in the event that a leasehold survives after a contract is disclaimed need not arise, as there is no utility in disclaiming the contract, because the leasehold survives. Section 568D of the Act 17. If the liquidator of an insolvent lessor disclaims under s 568(1)(a) or (c)-(e) or even (f) 16, the company s rights, interests and property affected by s 568D(1) can only be the reversion. There is a textual anomaly in the inclusion of the word liabilities in the expression company s rights, interests, liabilities and property. The Appellants wish to exploit this anomaly. They contend that the word, in that context, denotes every conceivable obligation of the company including a covenant of quiet enjoyment. They further contend that the word liability, when used at the 14 [2010] FCA 1230 at [13]. 15 National Australia Bank v New South Wales(2009) 182 FCR 52; Re Middle Harbour Investments Ltd (No 2) [1977] 2 NSWLR 652 at 660; National Australia Bank v Victoria [2010] FCA 1230 at [15]. 16 Here, the contract is not shown to be unprofitable so s 568(1)(f) may operate subject to s 568(1A).
5 end of s 568D(1), is wide enough to include another s proprietary rights (such as a leasehold) or an obligation not to interfere with the proprietary (or other accrued) rights of third parties. 18. In Sims and Anor (as liqs of Enron Australia Pty Ltd) v TXU Electricity Ltd 17, Spigelman CJ said he generally agreed with the following reasoning of Austin J: [23] Austin J accepted the force of s 568D(1) in the following passage (at Simms (as liq of Enron Australia Finance Pty Ltd (in liq)) v TXU Electricity Ltd (2003) 204 ALR 658 ; 48 ACSR 266 at [57] [60]): [57] There is, however, a provision which provides a context for s 568(1B) and an indication that the section was not intended to authorise the variation of contractual rights and obligations in the manner contended for by the plaintiffs. Under s 568D(1) a disclaimer terminates the company s rights and liabilities in respect of the disclaimed contract, while not affecting the counterparty s rights and liabilities except so far as necessary to release the company from liability. I agree with the defendants that under s 568D(1), in its application to an unperformed contract: disclaimer deprives the company of its right to future performance of the contract by the counterparty: see Hindcastle Ltd v Barbara Attenborough Ltd [1997] AC 70 at 87 per Lord Nicholls; Sandtara Pty Ltd v Abigroup Ltd (1996) 42 NSWLR 491 at 500 501 per Cole JA; and the counterparty s existing, vested contractual rights and benefits are, generally speaking, unaffected by the disclaimer: Capital Prime Properties Plc v Worthgate Ltd (in liq) [2000] 1 BCLC 647 at 654 per Neuberger J; Re Tulloch Ltd (in liq) (1977) 3 ACLR 808 at 813 per Needham J; Rothwells Ltd (in liq) v Spedley Securities Ltd (in liq) (1990) 20 NSWLR 417 at 422 per Hodgson J. (emphasis added) 19. The tenant s right to quiet enjoyment for the remainder of the term is an existing, vested contractual right and benefit. Further, it is a vested property right. The right to quiet enjoyment has already accrued, particularly given the tenants have paid the total rent for the 25 year term in advance. 20. The tenant s entitlement to exclusive possession and quiet enjoyment for the term of the lease is not dependent on the contract, but also arises from the interest in the land, running with the land, and is a property right arising from privity of estate. It is a different right from the landlord s reversionary interest. Lord Nicholls in Hindcastle noted: 18 The rights of the tenant under these covenants will be enforceable by him against the landlord, either by virtue of privity of contract, or privity of estate, or both. (emphasis added) 17 (2005) 53 ACSR 295 at [23]. 18 [1997] AC 70, at 85.
6 21. Accordingly, not only is the right to quiet enjoyment an accrued and vested right, it cannot be considered necessary to extinguish the lessee s in rem rights in order to release the insolvent landlord from covenants under the contract. Statutory interpretation 22. The reference to lease of land in s 568(1A) is a reference to the leasehold of a tenant 19. It should not be misconstrued as including the obligations of a lessor under a lease. The lessor does not hold a lease of land, but holds the reversion. 23. Section 568(1A) can be better understood by looking at the commentary introducing the precursor provision in the Bankruptcy Act, carried through to the Act. The Explanatory Memorandum for the Bankruptcy Amendment Bill 1979, in respect of clause 64 disclaimer of onerous property, states: 20 Amendments: The provisions relating to the disclaimer of onerous property will be amended (b) A notice to a lessor (and any sub-lessee or mortgagee) of intention to disclaim a lease must be given by prescribed form (emphasis added) 24. Further, Harmer s General Insolvency Inquiry Report No. 45 1988, Chapter 13 Insolvency administration, deals with disclaimer of leases 21 : Special provision is made in both individual and corporate insolvency for disclaimer of a lease Although it is essential that persons affected by the disclaimer of a lease, such as a lessor, a sub-lessee or a mortgagee of a lease be entitled to notice that the lease is being disclaimed, it does not appear justifiable to permit such persons alone to be able to require the insolvency administrator to seek leave of the court before disclaiming. (emphasis added) 25. The Explanatory Memorandum of the Corporate Law Reform Bill 1992, indicates s 568(1A) was introduced following the Harmer Report s consideration of the individual and corporate insolvency provisions, referred to in the preceding paragraph. 26. It is plain from the above extracts that there is no contemplation of disclaimer of a lease by a lessor. Dated: 18 May 2012 GARRY BIGMORE QC MATTHEW KENNEDY 19 Discussion of s 454(6) of the Companies (Queensland) Code in Re Jandowae Estates Pty Ltd (1989) 7 ACLC 179 at 180-181. 20 Explanatory Memorandum, Bankruptcy Amendment Bill 1979, paragraph 152. 21 Harmer s General Insolvency Inquiry Report No. 45 1988, Chap. 13 Insolvency administration, page 261 paragraph 619.