Sims and Singleton as Liquidators of Enron Australia Pty Limited v TXU Electricity Limited & Anor [2005] NSWCA 12 (11 February 2005)

CITATION: Sims and Singleton as Liquidators of Enron Australia Pty Limited v TXU Electricity Limited & Anor [2005] NSWCA 12

FILE NUMBER(S):

40155/04

HEARING DATE(S): 7 December 2004

JUDGMENT DATE: 11/02/2005

PARTIES:

Anthony Milton SIMS and Neil John SINGLETON in their capacity as liquidators of Enron Australia Finance Pty Ltd (in liq) (Appellants)

TXU Electricity Ltd (First Respondent)

Yallourn Energy Pty Ltd (Second Respondent)

JUDGMENT OF: Spigelman CJ Sheller JA Brownie AJA

LOWER COURT JURISDICTION: Supreme Court - Equity Division

LOWER COURT FILE NUMBER(S): 4873 of 2002

LOWER COURT JUDICIAL OFFICER: Austin J

COUNSEL:

J Sheahan SC / V Kerr (Appellants)

A Archibald QC / S Horgan (Respondents)

SOLICITORS:

Blake Dawson Waldron (Appellants)

Baker & McKenzie (Respondents)

CATCHWORDS:

CORPORATIONS - liquidation - disclaimer of onerous property - whether s 568(1B) of the Corporations Act empowers the Court to make an order varying contractual rights and liabilities that is not necessary in order to release the company or its property from liability

LEGISLATION CITED:

Bankruptcy Act 1883, 46 & 47 Vict, c 52

Corporations Act 2001 (Cth): Pt 5.6 Div 7A; s568(1B)(b)

Insolvency Act 1986 (UK)

DECISION:

Appeal dismissed with costs

JUDGMENT:

- 11 -

IN THE SUPREME COURT

OF NEW SOUTH WALES

COURT OF APPEAL

CA 40155/04

SPIGELMAN CJ

SHELLER JA

BROWNIE AJA

Friday 11 February 2005

SIMS AND SINGLETON AS LIQUIDATORS OF ENRON AUSTRALIA FINANCE PTY LIMITED v TXU ELECTRICITY LIMITED & ANOR

The Appellants were first the voluntary administrators, and later liquidators, of Enron Australia Finance Pty Ltd (“Enron”), in which latter capacity the present appeal was brought.

Enron participated in the Australian electricity derivatives market by entering into “electricity swap contracts” with various counterparties, including the Respondents. A feature of these contracts was that counterparties agreed to pay one another either fixed or variable sums of money at the conclusion of a contracted time-period. At the time Enron entered voluntary administration, it was party to a number of swap contracts with the respondents that remained open. These contracts were of substantial value to Enron but, by reason of the particular terms of the contract, Enron could not enforce payment.

The appellants sought leave to disclaim the contracts, but only if the Court was to make certain orders, pursuant to s568(1B)(b) of the Corporations Act 2001 (Cth) (the “Act”), which orders were designed to ensure that Enron did not lose the advantage of the benefits accrued under the contracts. Austin J held that the power to make orders did not authorise the orders sought.

HELD per curiam

1. Although s568(1B)(b) is expressed in broad terms, the law of statutory interpretation requires that it be construed in its context. [12], [45], [46].

K&S Lake City Freighters Pty Ltd v Gordon & Gotch Limited [1985] HCA 48; (1985) 157 CLR 309, Project Blue Sky Inc v Australian Broadcasting Authority [1998] HCA 28; (1998) 194 CLR 355 referred to.

2. The relevant context is found in Part 5.6 Division 7A of the Act. [13], [45], [46].

3. The purpose of Division 7A is to facilitate the prompt and efficient liquidation of a company, but the means chosen to achieve that objective are not at large. [20], [45], [46].

Re Middle Harbour Investments Limited (in liq) (No 2) [1977] 2 NSWLR 652 considered; Global Television Pty Ltd v Sportsvision Australia Pty Ltd (in liq) (2000) 35 ACSR 48 considered; Re Park Air Services plc (2000) 2 AC 172 considered.

4. The statute provides that the actual act of disclaimer is to have a particular effect. The power to make orders under s568(1B)(b) should be read down to be subject to a similar restriction. [26], [45], [46].

Stradling v Morgan (1560) 1 Plowd 199; 75 ER 305; Bowtell v Goldsborough Mort [1905] HCA 60; (1905) 3 CLR 444; Re Yates; Ex parte Walsh & Johnson [1925] HCA 53; (1925) 37 CLR 36; Tokyo Mart Pty Ltd v Campbell (1988) 15 NSWLR 275; R v Young [1999] NSWCCA 166; (1999) 46 NSWLR 681; Anthony Hordern & Sons Ltd v Amalgamated Clothing & Allied Trades Union of Australia [1932] HCA 9; (1932) 47 CLR 1; R v Wallis; Ex parte Employers Association of Wool Selling Brokers & HV McKay Massey Harris Pty Ltd [1949] HCA 30; (1949) 78 CLR 529; Nintendo Co Ltd v Centronics Systems Pty Ltd (No 2) (1994) 181 CLR 13; Switz Pty Ltd v Glowbind Pty Ltd [2000] NSWCA 37; (2000) 48 NSWLR 661 referred to.

5. It would be anomalous if a liquidator, in any of the situations where no leave is required, could not receive advantages that a liquidator, in the case of a “profitable” contract where leave is required, could receive by order of the Court. [29], [45], [46].

Observations of Lord Nicholls of Birkenhead in Hindcastle Ltd v Barbara Attenborough Associates Ltd [1997] AC 70 approved.

6. The legislative history of Part 5.6 Division 7A is consistent with the principle that s568(1B)(b) does not authorise orders which alter an accrued contractual right of non-disclaiming partes, not being a right which it was necessary to affect in order to release the company or its property from liability. [43], [45], [46].

Re Moser (1884) 13 QBD 738 distinguished; Re Lavies; Ex parte Stephens (1877) 7 Ch D 127 cited.

IN THE SUPREME COURT

OF NEW SOUTH WALES

COURT OF APPEAL

CA 40155/04

SPIGELMAN CJ

SHELLER JA

BROWNIE AJA

Friday 11 February 2005

SIMS AND SINGLETON AS LIQUIDATORS OF ENRON AUSTRALIA FINANCE PTY LIMITED v TXU ELECTRICITY LIMITED & ANOR

Judgment

1 SPIGELMAN CJ: The Appellants were appointed as voluntary administrators of Enron Australia Finance Pty Ltd (In Liq) (“Enron”) on 3 December 2001. They were subsequently appointed, and remain, Enron’s liquidators.

2 The Appellants instituted proceedings for leave to disclaim certain contracts, but wished to do so only if the Court were to make certain orders pursuant to s568(1B)(b) of the Corporations Act 2001 (Cth) (“the Act”). The orders were designed to ensure that Enron did not lose the advantage of benefits that had accrued under the contracts.

3 Austin J heard a separate question concerning the power of the Court to make an order of the character sought by the Appellants. I will set out the relevant statutory provisions below.

4 Notwithstanding the scope of the power invoked by the Appellants – to “make such orders ... as the Court considers just and equitable” – his Honour held that the power did not extend to authorise orders of the kind sought by the Appellants.

5 The determination of the separate question resolved the proceedings adversely to the Appellants. The issue before this Court is whether his Honour erred with respect to the construction of the scope of the statutory power.

Background Facts

6 The case proceeded before Austin J on the basis of an Agreed Statement of Facts. His Honour made the following findings which were not contentious:

“[3] Prior to its liquidation, Enron traded in the Australian electricity derivatives market, by entering into electricity swap contracts with various counterparties. An electricity swap contract or ‘trade’ is for the notional sale and purchase of electricity to be delivered in the future. One party agrees to pay a fixed price for a nominated type and quantity of electricity or the other party agrees to pay a floating price for the same electricity. The terms of each trade include a start date and an end date, which define the period over which payments fall due under the swap contract. The contractual arrangements provide that payment obligations are set off and the counterparties settle up periodically by one of them paying a net amount to the other. Thus, if the fixed price exceeds the spot price then the fixed price payer is liable to pay the difference to the floating price payer, and vice versa.

[4] The Statement of Agreed Facts gives the following explanation:

‘The fixed price is the price which the payer agrees to pay and the payee (the floating price payer) agrees to receive, calculated by reference to the electricity referred to in the trade. The floating price is nominated as the spot price for the electricity referred to in the trade as determined under the National Electricity Code over the duration of the trade. The spot price for electricity is subject to market fluctuation.’

[5] One counterparty to electricity swap contracts entered into by Enron was the first defendant, TXU Electricity Ltd (‘TXU’). Another was the second defendant, Yallourn Energy Pty Ltd (‘Yallourn’). In each case, particular swap contracts were entered into pursuant to a master contract.

[6] TXU and Enron entered into a master contract on 15 December 2000 to govern trading between them (‘TXU Agreement’). It was the standard master agreement for multicurrency-crossborder transactions issued in 1992 by the International Swap Dealers Association, Inc, supplemented and modified by a Schedule and by ‘Australian Addendum No 13 - Electricity Transactions’. TXU and Enron then entered into particular electricity swap contracts with each other governed by the TXU Agreement. In some cases Enron took the fixed price position and TXU took the floating price position, and in others, the positions were reversed. When a swap contract was made, Enron issued a swap confirmation setting out the terms of the transaction, including the notional quantity of electricity measured in mega-watts per hour, the effective date and termination date, and the fixed price for each calculation period, stipulating which party was the fixed price payer and which was the floating price payer. Prior to the appointment of voluntary administrators to Enron, Enron and TXU settled the amounts which fell due under the trades by net payments on a weekly basis.

[7] Enron ceased to make new contracts with TXU prior to the commencement of its voluntary administration on 3 December 2001. However, 78 swap contracts between them remained ‘open’ as at that time, in the sense that the time for performing the contract by ascertaining and paying amounts due had not then arrived. In fact, the time for performance of some open swap contracts extends out to 31 December 2005. Since 3 December 2001 TXU has not made any payments to Enron.

[8] The plaintiffs contend (and TXU denies) that, as at 28 February 2003, the total present value of the TXU Agreement to Enron was approximately $3.3 million (plus interest, if interest is payable). That sum is said to comprise:

(a) out of all settlements which would have ‘accrued’ to that time:

(i) approximately $10.5 million payable by TXU to Enron; and

(ii) approximately $3.2 million payable by Enron to TXU;

(b) the present value of the open trades which were yet to accrue at that time, calculated at AFMA mid-point prices, which would be:

(i) approximately $1.1 million payable by TXU to Enron; and

(ii) approximately $5.1 million payable by Enron to TXU.

(AFMA mid-point prices are prices taken from the mid-point of the forward pricing curve produced daily by the Australian Financial Markets Association.)

[9] Yallourn's position is not conceptually different from the position of TXU. The Yallourn Agreement was dated 10 August 2000. Under that Agreement, as at 3 December 2001 33 swap contracts were open, extending out to 31 December 2003. The plaintiffs' calculation (denied by Yallourn) is that, as at 28 February 2003, the total present value of the Yallourn Agreement to Enron was approximately $2.9 million (plus interest if payable). That sum is said to comprise:

(a) out of all settlements which would have accrued:

(i) approximately $5.1 million payable by Yallourn to Enron; and

(ii) approximately $2.2 million payable by Enron to Yallourn;

(b) the present value of those trades which are yet to accrue calculated at AFMA mid-point prices, which would be:

(i) approximately nil payable by Yallourn to Enron; and

(ii) approximately $70,000 payable by Enron to Yallourn.”

7 The position of the two Respondents, TXU and Yallourn, was relevantly identical save that in the case of the TXU Agreement the last day for performance under the open trades was 31 December 2005. Under the Yallourn Agreement the last performance date was 31 December 2003. Accordingly, since the judgment of Austin J that date has passed in the case of Yallourn, but not TXU.

8 The Court was informed that in the case of Yallourn an issue has arisen as to what Enron has to do before it can ensure payment to it. However, no separate consideration is required for Yallourn.

9 It is unnecessary to set out in detail the contractual provisions. It is sufficient to note that the obligation of TXU to make payments is subject to two conditions precedent that (1) no Event of Default has occurred and (2) no Early Termination Date in respect of the relevant transaction has occurred or has been effectively designated. The appointment of voluntary administrators, and the subsequent appointment of liquidators, to Enron was an Event of Default. By force of the contract TXU had no obligation to make the payments under the open trades. TXU acquired a contractual right, but no obligation, to bring the relevant Agreement to an end by designating an Early Termination Date. It did not do so. Enron had no contractual entitlement to bring the Agreement to an end until the last date of performance under the open trades and then only on certain conditions.

10 The Appellants’ case is that Enron has a substantial asset in the open trades but it is unable to promptly realise that asset in the absence of a contractual right to designate, or to force TXU to designate, an Early Termination Date.

11 In order to achieve the early realisation of the assets of Enron the liquidators sought leave to disclaim, but only on the basis that the Court would make an order which had the effect that TXU was taken to have designated an Early Termination Date and, accordingly, would be obliged to pay to Enron the present value of the open trades as at the date of disclaimer.

The Legislative Scheme

12 As noted above, the issue before the Court is the proper construction of s568(1B)(b) of the Act which is expressed in broad terms but which, in accordance with the law of statutory interpretation, must be construed in its context. (See K&S Lake City Freighters Pty Ltd v Gordon & Gotch Limited [1985] HCA 48; (1985) 157 CLR 309 at 315; CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384 at 408; Project Blue Sky Inc v Australian Broadcasting Authority [1998] HCA 28; (1998) 194 CLR 355 at 381[69].)

13 The relevant context is found in the provisions (Part 5.6 Division 7A, ss568–568F) of the Act (entitled Disclaimer of Onerous Property), relevantly:

“568(1) Subject to this section, a liquidator of a company may at any time, on the company’s behalf, by signed writing disclaim property of the company that consists of:

(a) land burdened by onerous covenants; or

(b) shares; or

(c) property that is unsaleable or is not readily saleable; or

(d) property that may give rise to a liability to pay money or some other onerous obligation; or

(e) property where it is reasonable to expect that the costs, charges and expenses that would be incurred in realising the property would exceed the proceeds of realising the property; or

(f) a contract;

whether or not:

(g) except in the case of a contract – the liquidator has tried to sell the property, has taken possession of it or exercised an act of ownership in relation to it; or

(h) in the case of a contract – the company or liquidator has tried to assign, or has exercised rights in relation to, the contract or any property to which it relates.

568(1A) A liquidator cannot disclaim a contract (other than an unprofitable contract or a lease of land) except with the leave of the Court.

568(1B) On an application for leave under subsection (1A), the Court may:

(a) grant leave subject to conditions; and

(b) make such orders in connection with matters arising under, or relating to, the contract;

as the Court considers just and equitable.

568D(1) A disclaimer is taken to have terminated, as from the day on which it is taken because of subsection 568C(3) to take effect, 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.

(2) A person aggrieved by the operation of a disclaimer is taken to be a creditor of the company to the extent of any loss suffered by the person because of the disclaimer and may prove such a loss as a debt in the winding up.”

Construing the power

14 Mr J Sheahan SC, who appeared for the Appellants, relied upon a number of factors which, he submitted, were such as would lead the Court to give the power in s568(1B) a sufficiently broad construction to encompass an order which would alter the contractual rights of the other contracting party of the character sought by the Appellants. These were:

· The general legislative intent of Div 7A.

· The breadth of the language found in s568(1B).

· The structure of s568(1B).

15 The Appellants also relied on the history of disclaimer provisions in personal and corporate insolvency legislation both in the United Kingdom and in Australia, together with relevant case law.

16 The general legislative intent of Div 7A has been referred to in a number of authorities.

17 In Re Middle Harbour Investments Limited (in liq) (No 2) [1977] 2 NSWLR 652 at 657 Bowen CJ in Eq said:

“The purpose of providing for disclaimer by an official receiver or trustee in bankruptcy or by a liquidator in winding up seems clear enough. It is to enable him to rid himself or, in the case of liquidation, the company, of burdensome financial obligations which might otherwise continue to the detriment of those interested in the administration; it is given to enable the official receiver, or trustee, or the liquidator to advance the prompt, orderly and beneficial administration of the bankrupt estate or, in the case of a company, of the winding up of its affairs.”

18 To similar general effect are the observations of Santow J in Global Television Pty Ltd v Sportsvision Australia Pty Ltd (in liq) [2000] NSWSC 960; (2000) 35 ACSR 484 at 498[65]:

“... the disclaimer provisions are intended to enable insolvency administrators to relieve themselves of ongoing liabilities which so prolong the administration and delay the dividends.”

19 Finally, the Appellants referred to the observations of Lord Millett in Re Park Air Services plc (2000) 2 AC 172 at 184H:

“... the reason the liquidator is given the right to disclaim onerous property is in order to enable him to achieve an early closure of the liquidation.”

20 Although the purpose of Division 7A is to facilitate the prompt and efficient liquidation of a company, the means chosen to achieve that objective are not at large. Section 568 is concerned to identify circumstances in which a liquidator is entitled to cease performing obligations in various contexts, including, the case of a “profitable” contract. The essential feature of the scheme of disclaimers is to achieve a release of the company in liquidation from its obligations.

21 Mr A Archibald QC, who appeared for the Respondents, placed particular reliance on the terms of s568D which make express provision for the effect of a disclaimer. That section, as quoted above, states that a disclaimer does not affect another person’s rights or liabilities “except so far as necessary in order to release the company and its property from liability”.

22 The test for imposing consequential effects on the rights of the other party to the contract is expressed to be a test of “necessity”. It was not suggested that the orders sought by the Appellants in the present case were capable of falling within this test as orders needed to release Enron or its property from liability.

23 Austin J accepted the force of s568D(1) in the following passage:

“[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, 87 per Lord Nicholls; Sandtara Pty Ltd v Abigroup Ltd (1996) 42 NSWLR 491, 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, 654 per Neuberger J; Re Tulloch Ltd (in liq) (1977) 3 ACLR 808, 813 per Needham J; Rothwells Ltd (in liq) v Spedley Securities Ltd (in liq) (1990) 20 NSWLR 417, 422 per Hodgson J.

[58] The defendants submit that the orders proposed by the plaintiffs would have the effect of overriding the operation of s 568D(1), and cannot therefore be regarded as authorised by s 568(1B). I agree with this submission in part.

[59] The orders proposed by the plaintiff would countermand proposition a) because they would proceed on the basis that Enron would have the benefit of a final settlement made under the terms of section 6(e). Strictly, however, Enron's entitlement to final settlement would arise under the terms of the orders, rather than by way of future performance of the contracts by the counterparties, and so there would be no direct inconsistency between the orders and s 568D(1). However, I agree with the defendants that the orders would be directly inconsistent with proposition b), because they would deprive the defendants of their contractual rights, under contracts which expressly contemplate and deal with the consequences of liquidation, to decline to trigger early termination, and of the benefits they would derive from that course. It cannot be contended that such an outcome is ‘necessary in order to release the company and its property from liability’ within the wording of s 568D(1) - the very fact that the orders are sought in the exercise of the Court's discretion demonstrates that there is no necessity involved.

[60] In my opinion, the general, authorising words of s 568(1B) must be read subject to the specific, non-discretionary provisions of s 568D(1) with respect to the consequences of disclaimer, and those words are therefore not to be construed so as to authorise the Court to override the latter provisions.”

24 I generally agree with his Honour’s reasoning.

25 The breadth of the language used by the legislature is capable of extending as far as the Appellant seeks. The orders may be made “in connection with matters” which may be as wide ranging as those merely “relating to” the relevant contract. These are broad terms. However, the reading down of general words by reason of the context in which they appear is a ubiquitous technique in the law of statutory construction. (See, e.g., Stradling v Morgan (1560) 1 Plowd 199 at 203–204, 205–206; 75 ER 305 at 312, 315; Bowtell v Goldsborough Mort [1905] HCA 60; (1905) 3 CLR 444 at 457–458; Re Yates; Ex parte Walsh & Johnson [1925] HCA 53; (1925) 37 CLR 36 at 91–93; Tokyo Mart Pty Ltd v Campbell (1988) 15 NSWLR 275 at 279–282; R v Young [1999] NSWCCA 166; (1999) 46 NSWLR 681 at 689 [25]–[29].)

26 It would, in my opinion, be anomalous if an order could be made by the Court, in the context of an application for leave to disclaim, which could have an effect on the other party to the contract of a character broader than the effect which the statute itself provides the actual act of disclaimer may have upon that other party. The Parliament has expressly considered the extent to which third parties are to be affected by the exercise of the statutory right of disclaimer. The power to make orders under s568(1B)(b) should be read down to be subject to a similar restriction. Any effect on another person’s rights or liabilities should go no further than what is necessary to release the company or its property from liability. The broad language of s568(1B)(b) should be read down accordingly.

27 The position is similar to that which arises where two statutory powers apply in a particular situation, but one is subject to qualifications or restrictions to which the other is not expressly subject. Parliament intends that the qualification or restriction should be of practical significance and, accordingly, the general words of the unconfined power are read down. (See, e.g., Anthony Hordern & Sons Ltd v Amalgamated Clothing & Allied Trades Union of Australia [1932] HCA 9; (1932) 47 CLR 1 at 7; R v Wallis; Ex parte Employers Association of Wool Selling Brokers & HV McKay Massey Harris Pty Ltd [1949] HCA 30; (1949) 78 CLR 529 at 550; Nintendo Co Ltd v Centronics Systems Pty Ltd (No 2) (1994) 181 CLR 13 at 160; and other authorities set out in Switz Pty Ltd v Glowbind Pty Ltd [2000] NSWCA 37; (2000) 48 NSWLR 661 at 676 [69]–[73].) Similarly, where Parliament has specified the consequences of a regulatory scheme, as it has in s568D, an ancillary or adjectival power, such as s568(1B), should be read down to ensure that the actual consequences of the scheme are as Parliament intended.

28 My conclusion is reinforced by the fact that no order of the character sought can be made in the case of a disclaimer of other property to which s568 applies. A liquidator can disclaim, without the leave of the Court:

· Land burdened with “onerous covenants” (s568(1)(a)).

· Property that is unsaleable or not readily saleable (s568(1)(c)).

· Property that may give rise to a liability to pay money or some other onerous obligation (s568(1)(d)).

· An unprofitable contract (s568(1A)).

· A contract for the lease of land (s568(1A)).

29 In no such case is there power to make an order under s568(1B) to make orders in connection with matters arising under or relating to any such property or contract. This is because no leave is required. In each such situation, however, the liquidator could have a strong case for obtaining an order of a collateral character which would confer some advantage upon her or him by means of altering the vested contractual right of other parties to the contract or other persons with an interest in the relevant property. It would be, in my opinion, anomalous if a liquidator in any of the situations where no leave is required could not receive advantages which a liquidator in the case of a “profitable” contract, where leave is required, could receive by order of the Court.

30 In Hindcastle Ltd v Barbara Attenborough Associates Ltd [1997] AC 70, Lord Nicholls of Birkenhead expressed the purpose of a disclaimer under the Insolvency Act 1986 (UK) in a manner which took into account the express provision in that Act, which is in the same terms as s568D(1), when he said at 86–87:

“The fundamental purpose of these provisions is not in doubt. It is to facilitate the winding up of the insolvent’s affairs ...

Equally clear is the essential scheme by which the statute seeks to achieve these purposes. Unprofitable contracts can be ended, and property burdened with onerous obligations disowned. The company is to be freed from all liabilities in respect of the property. Conversely, and hardly surprisingly, the company is no longer to have any rights in respect of the property. The company could not fairly keep the property and yet be freed from its liabilities.

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.”

31 I agree with this passage.

32 The Appellants relied on the structure of s568(1B) for the proposition that par (b) of the subsection had to be able to do some work over and above matters that could be imposed by way of “condition” pursuant to par (a) of the subsection. However, there may be a need for facilitative orders which have an effect upon, or require ancillary acts by, other parties and, therefore, are not able to be imposed by way of condition. An order under s568(1B)(b) may fall within the final clause of s568D(1), i.e. being an order “necessary in order to release the company and its property from liability” and which could not have effect as a condition.

Legislative history

33 Part 5.6 Division 7A of the Act has a long history in bankruptcy and corporations legislation in the United Kingdom and Australia. The parties made detailed submissions on that history and the relevant case law.

34 Much of the case law involves orders or terms imposed on the disclaiming party and is of no direct relevance to the present case. The one case that is analogous is Re Moser (1884) 13 QBD 738.

35 The relevant legislative scheme was the Bankruptcy Act 1883 (46 & 47 Vict c 52) of which s55 relevantly provided:

“55(1) ...

(2) The disclaimer shall operate to determine, as from the date of disclaimer, the rights, interests, and liabilities of the bankrupt and his property in or in respect of the property disclaimed, and shall also charge the trustee from all personal liability in respect of the property disclaimed as from the date when the property vested in him, but shall not, except so far as is necessary for the purpose of releasing the bankrupt and his property and the trustee from liability, affect the rights or liabilities of any other person.

(3) A trustee shall not be entitled to disclaim a lease without the leave of the Court, except in any cases which may be prescribed by general rules, and the Court may, before or on granting such leave, require such notices to be given to persons interested, and impose such terms as a condition of granting leave, and make such orders with respect to fixtures, tenant’s improvements, and other matter arising out of the tenancy as the Court thinks just.”

36 As can be seen, s55(2) is the equivalent of s568D of the Act and s55(3) is closely analogous to s568(1B).

37 The judgment in Re Moser at 739 is brief and can be set out in full:

“I think the principles applicable to fixtures on the determination of a tenancy under ordinary circumstances should be applied when a lease is determined by the disclaimer of a trustee in bankruptcy. There will be leave to disclaim. The landlord is entitled to some compensation, and must be paid the rent accruing from the last quarter, down to the day on which the lease is disclaimed. He must, however, give the trustee an opportunity of removing the fixtures or take them over at a valuation. It will be better to fix a time, and in this case the order will be that the landlord have two days in which to decide whether he will take to the fixtures, in which case their value will be a set-off against the rent; if he declines the fixtures then the trustee must have two days in which to remove them.”

38 Austin J said:

“[70] ... It seems to me that the Moser decision does no more than recognise the rights of the parties under the lease while making ancillary orders to assist the implementation of those rights. It does not, as here, purport to alter contractual rights and liabilities which expressly govern the position of the parties after the commencement of liquidation of one of them.”

39 Section 55(2) of the 1883 Act, like our s568D, effects a termination of the lease as and from the date of disclaimer. That, of course, will occur after the order of the court, which order gives leave to disclaim.

40 Nothing in the judgment of Wills J suggests that his Lordship was exercising the power under s55(3) in a way which altered the contractual rights of the parties. The legislation in force before the 1883 Act backdated the disclaimer to when bankruptcy occurred. That had the effect of denying to the bankrupt tenant any right to remove fixtures, but only because, at common law, the tenant’s right to remove fixtures had to be exercised during the term or within a reasonable time after its expiration. (Re Lavies; Ex parte Stephens (1877) 7 Ch D 127 at 130.)

41 The effect of a disclaimer under the 1883 Act was not backdated in any way. The contractual position in Moser, it appears, was the normal situation in which a landlord must permit the tenant to remove fixtures. The landlord had not acquired any right to retain fixtures. What Wills J did in his order in Re Moser was to specify a timetable under which the contractual rights of the parties could be carried into effect. His Lordship did so by means of an order that is clearly adjectival or ancillary. Indeed, the sentence in which he proceeds to announce the order commences with the words: “It will be better to fix a time ...”.

42 An order of this character, even if it is an order that can be described as affecting the rights or liabilities of the lessor, can accurately be characterised as an order that is “necessary for the purpose of releasing the bankrupt and his property and the trustee from liability”. The condition of disclaimer imposed on the trustee – that he pay accrued rent – could not take effect until the landlord made his decision with respect to fixtures as, if they were to be acquired, their value would have to be set off against the rent. The disclaimer, which was subject to the condition to pay rent, could not take effect until this other contractual consequence of termination by disclaimer had been worked out.

43 I would reject the Appellants’ submission that Re Moser is authority for construing s568(1B)(b) as authorising an order that altered an accrued contractual right of the non disclaiming party, not being a right which it was “necessary” to affect in order to release the company or its property from liability.

Conclusion

44 The Appeal should be dismissed with costs.

45 SHELLER JA: I agree with the Chief Justice.

46 BROWNIE AJA: I agree with Spigelman CJ.

47 If a contract is to be disclaimed, the rights under that contract come to an end, but what the Appellants seek to do is to obtain leave to disclaim the contracts in question, on terms imposing on the Respondents liabilities that do not exist, and may never arise. In a practical sense the Appellants seek to bring to an end possibly disadvantageous aspects of the contracts, in the situation where the only circumstance possibly authorising such a change in the contractual relationship of the parties is that one of the parties is in liquidation. I do not accept that the general legislative intent of Division 7A, or the language or the structure of s568(1B), or the legislative history justifies the view that the section authorises the Court to change the contractual position of the parties so significantly.

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LAST UPDATED: 28/02/2005