FEA Plantations Limited (Subject to Deed of Company Arrangement) (Receivers Appointed) v Norman & Ors

[2012] HCATrans 71

[2012] HCATrans 071

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Melbourne  No M123 of 2011

B e t w e e n -

FEA PLANTATIONS LIMITED ACN 055 969 429 (SUBJECT TO DEED OF COMPANY ARRANGEMENT) (RECEIVERS APPOINTED)

Applicant

and

TIMOTHY BRYCE NORMAN AND SALVATORE ALGERI IN THEIR CAPACITY AS RECEIVERS AND MANAGERS OF FOREST ENTERPRISES AUSTRALIA LTD ACN 009 553 548 (SUBJECT TO DEED OF COMPANY ARRANGEMENT) (RECEIVERS AND MANAGERS APPOINTED) AND OF FEA CARBON PTY LTD ACN 009 505 195 (SUBJECT TO DEED OF COMPANY ARRANGEMENT) (RECEIVERS AND MANAGERS APPOINTED) AND TASMANIA PLANTATION PTY LTD ACN 009 560 463 (SUBJECT TO DEED OR COMPANY ARRANGEMENT) (CONTROLLERS ACTING)

First and Second Respondents

FOREST ENTERPRISES AUSTRALIA LTD ACN 009 553 548 (SUBJECT TO DEED OF COMPANY ARRANGEMENT) (RECEIVERS AND MANAGERS APPOINTED)

Third Respondent

TASMANIAN PLANTATION PTY LTD ACN 009 560 463 (SUBJECT TO DEED OF COMPANY ARRANGEMENT) (CONTROLLERS ACTING)

Fourth Respondent

FEA CARBON PTY LTD ACN 009 505 195 (SUBJECT TO DEED OF COMPANY ARRANGEMENT) (RECEIVERS AND MANAGERS APPOINTED)

Fifth Respondent

FEA GROWERS GROUP INC. A0054610B

Sixth Respondent

Application for special leave to appeal

CRENNAN J
KIEFEL J

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 9 MARCH 2012, AT 12.25 PM

Copyright in the High Court of Australia

MR A.P. YOUNG:   May it please the Court, I appear with my learned friend, MR V.M. PRISKICH, for the applicant.  (instructed by DLA Piper Australia)

MR P.D. CRUTCHFIELD, SC:   If the Court pleases, I appear with MR O. BIGOS for the first to fifth respondents.  (instructed by Maddocks)

CRENNAN J:   Yes, Mr Young.

MR YOUNG:   If the Court pleases, there is a preliminary matter.  The applicant seeks dispensation from compliance with the time limit specified in paragraph 41.02.1 of the Rules.

CRENNAN J:   Is there any objection to that?

MR CRUTCHFIELD:   No, your Honour.

CRENNAN J:   Yes, very well.  You have that dispensation.

MR YOUNG:   If your Honour pleases.  Your Honour, in our submission, the application raises in substance two questions of principle of public importance because of their general application.  The first of the two questions which is described in the summary of argument as questions 1 and 2 concerns the test of equitable set‑off.  The component parts of the question are:  in Australia, what is the proper test for determining the availability of equitable set‑off?  Is it the so‑called impeachment test, which may be traced back to the judgment of Lord Cottenham in Rawson v Samuel, and if so, what is the proper formulation of or content or elements of that test, and if it is not that test, what other test is it?  The second of the two questions described in the summary as question 3 concerns what is required to exclude by agreement equitable set‑off.

KIEFEL J:   You do not get to that question though if you fail on the first question.

MR YOUNG:   Correct, your Honour.

CRENNAN J:   What do the words, “the evident purpose”, mean in 2(a) in your statement of the special leave questions said to arise?

MR YOUNG:   I am sorry, your Honour, I cannot find it.

CRENNAN J:   It is at page 192 of the application book.  I just wonder what force you were giving them in that formulation of a special leave question.

MR YOUNG:   Yes.  It is because what was argued and what was found by the trial judge was that the purpose of the funding commitment given by the parent company, FEA, to its subsidiary, the applicant, and the responsible entity, was to ensure that the applicant met the requirements or the conditions of its Australian Financial Services licence.  So, on the evidence, the purpose which was found was to ensure that the applicant would be in a position to satisfy, among other things, the claim for rent.

CRENNAN J:   Yes, thank you.

MR YOUNG:   The second of the two questions I mentioned arises in this way.  In short, is a covenant in a lease that requires payment of rent without any deductions whatsoever effective to exclude an equitable set‑off?  Turning first to the first question, at first instance and on appeal, both the applicant and the respondents referred to the so‑called impeachment test as the requirement for equitable set‑off, and at first instance Justice Finkelstein observed at paragraph 43 of his reasons for judgment, which appears at page 17 of the application book, that:

At the heart of the ability to set‑off in equity is the requirement that the title to the plaintiff’s legal demand must be “impeached” ‑ ‑ ‑

KIEFEL J:   But I do not think here there was any disagreement between the Full Court and the primary judge that the claim by FEAP under the letter of commitment was capable of impeaching a demand.  The question was whether or not there was evidence sufficient to show an impeachment of the claim.

MR YOUNG:   Indeed.

KIEFEL J:   That is your difficulty really, for special leave, is it not?  This is a question of the facts of this particular case and the evidence that was ‑ ‑ ‑

MR YOUNG:   Well, partly the facts and partly content of the test.  In the court below, as your Honour has pointed out, Justices Jacobson, Nicholas and Yates did say, at paragraph 164 of their joint judgment that:

In coming to the view that equitable set‑off could be maintained in the present case, the learned primary judge correctly described the relevant test –

They agreed, as your Honour has said, that:

as a matter of principle, a claim made by FEAP under the letter of commitment could be capable of impeaching –

That was at paragraph 166 of their joint judgment.

CRENNAN J:   But that is your complaint really, is it not, about the way in which the principles were applied to the particular circumstances here?

MR YOUNG:   Yes.  If one comes to paragraph 173 of the joint judgment, which is reproduced at page 67 of the application book, their Honours held that:

It seems to us to be clear that these claims made by FEAP under the letter of commitment did not go to the root of, were not essentially bound up with, and did not impeach the title of FEA to make its legal demand for rent for the month of August 2010.

KIEFEL J:   That is because of the problem in the evidence identified at paragraph 174.

MR YOUNG:   Yes, your Honour, that is the only explanation we find for the conclusion drawn in paragraph 173.  It should be noted that here the proceeding before the primary judge had been commenced by originating process filed on 17 August.  The demand for the payment of the rent for that month of August was given on 7 September.  That is recorded in paragraph 82 of the Full Court’s judgment.  On 21 September, within two weeks, one of the administrators of the applicant, FEAP, swore that the obligations owed by FEA to FEAP consequent upon the requests under the commitment, provided:

“more than sufficient funds to set off any obligation which FEAP may owe to FEA”.

The substance of that evidence is recorded in paragraph 81 of the judgment of the Full Court.  At the time this was happening the administrators were mindful of the six‑month rent moratorium which was provided for in what was said to be the relevant lease document.  So, in substance, from 14 April, the date of the appointment of the administrators, through to mid‑October, 14 October, or thereabouts, the landlord, FEA, could not have taken possession because there was a moratorium provision.

So, in the context in which these events took place and the argument took place, the principal argument was, there has been no default which justifies the landlord taking possession because the landlord cannot do so by reason of the moratorium, but even if there were a failure to pay rent there is a countervailing or offsetting claim of much greater magnitude.  In any event, as the primary judge found, in our respectful submission, correctly, at paragraph 45 of his judgment which appears at page 18 of the application book:

The consequence of the breach of the commitment undertaking is that FEAP has failed to pay its rent.

In our respectful submission, the reasons for judgment of the court below shed no light on the content, elements or formulation of the impeachment test which was applied.  It is simply not made plain.  What does happen in the conclusory paragraph, paragraph 173, is that the court recorded a conclusion which must have been reached on other grounds which are not made plain. 

Now, this question of what is or what is not a requirement for impeachment has bedevilled the courts in Australia for some time.  Back in 1992 in James v Commonwealth Bank, which is in our list of authorities at tab 2, Justice Gummow observed that decisions in England, New South Wales and New Zealand have accepted a dilution of the impeachment requirement in similar but varying formulations.

A few weeks earlier in that year, a Full Court of the Australian Capital Territory comprising Chief Justice Miles and Justices Gallop and Higgins considered the requirement of equitable set‑off at length.  They refer to Lord Cottenham’s judgment in Rawson v Samuel as the seminal authority, but they concluded at page 138 of the report of their joint judgment that:

if there is a “close connection” between claim and cross‑claim and it appears that there would be “manifest injustice” if set‑off was to be denied, set‑off should be permitted ‑ ‑ ‑

KIEFEL J:   I realise that you are attempting to construct a legal argument which might found the grant of special leave but bringing the matter back to the facts of this case, the effect of paragraphs 173 and 174 of the Court of Appeal is that, in effect, their Honours are saying that the principle in equity operates here such that your client might have been able to say to FEA, “You cannot make your claim for rent if you have not met our request for funds under the letter of commitment”.  That is the justice or the injustice, the unfairness which equity would operate upon and the problem identified by the court was that there was fundamentally no way in which the request for funds identified was connected with the claim for rent.

MR YOUNG:   With respect, that is what I had endeavoured to address by pointing out the evidence that the administrator gave on 21 September to say the intention was to apply the funding due to all of the outgoings, whatever rent there might be which is due and payable.  That was what the evidence was and it was on that basis that the learned trial judge held that there was a sufficient connection and there would be manifest injustice if the set‑off were denied. 

So, on the same facts, purportedly applying the same test, although we are not told what the elements or parts of the test were, the Full Court arrived at a conclusion and no more.  The difficulty is identifying the elements of this test, which we looked for and cannot find and when one looks at the authorities at intermediate appellate level in Australia, there have been a variety of formulations and there seems to be confusion.

KIEFEL J:   But it is not completely correct to say that there was no further consideration given.  The court at paragraphs 175 and 176 accept that Justice Finkelstein regarded it as one of the recurring obligations, but they said that was not sufficient.

CRENNAN J:   I mean, there is the time gap, is there not, to think about in relation to the letter of commitment?

MR YOUNG:   The request for funding.

CRENNAN J:   The request for funding under the letter of commitment, yes, and the rent default.

MR YOUNG:   It is true that they were made in April and May.  But the requests were made when it became plain that there would be a need for funding and it was proper for those requests to be made because the licence requirements required foresight as to when funding would be necessary to meet obligations which would be due to be met.  So, there can be no criticism and there was no criticism about the time limit of the requests for funding and then in paragraph 178, following from the passages that Justice Kiefel has just referred to, the Full Court curiously observed:

that there was no direct evidence that even if the $5.5 million were paid –

it would have been paid as rent.  With respect, it leaves one to wonder whether they really were having regard to appropriate elements or parts of the impeachment test.  How could it matter what might have happened if the commitment had been met?  What the evidence showed here is the commitment had not been met and the consequence of it not being met was that the rent could not be paid and had not been paid.  One wonders whether the speculation in paragraph 178 gives a clue as to how the Full Court might have misdirected itself as to what the relevant considerations were. 

When one looks at the authorities at intermediate appellate level, one comes to the decision in the Queensland Court of Appeal in Forsyth v Gibbs - that authority appears at tab 3 of our folder of authorities - and Justice of Appeal Keane, with whom President McMurdo and Justice of Appeal Fraser agreed, said at paragraph [9]:

Consistently with the technique of equity, which does not seek to define what an elephant is but knows one when it sees one, the principles governing the availability of equitable set‑off of cross‑claims are couched in open textured terms, such as “sufficient connection” and “unfairness”.

He went on in the next paragraph to say that:

It is essential that there be such a connection between the claim and cross‑claim that the cross‑claim can be said to impeach the claim so as to make it unfair for the claim to be allowed without taking account of the cross‑claim.

But, when one looks back at what the Full Court did in this case, there is no reference to the application of any test concerning or involving injustice or unfairness, manifest or otherwise.  We simply have the conclusory statement and the assertion that the evidence did not admit that which the trial judge found. 

Now, it is our respectful submission that there is no contest on the evidence and a decision of this Court is required to resolve the differences of opinion as to the content or elements of the test which have emerged at intermediate appellate level.  We note as well that in England and Wales most recently in the Geldof decision, which is at tab 4 of our folder of authorities, Lord Justice Rix, with whom Lord Justices Patten and Maurice Kay agreed, said at page 912 of the report in paragraph 43:

The impeachment of title test, although derived from the leading case of Rawson v Samuel . . . should no longer be used . . . It is an unhelpful metaphor in the modern world.

The test which is now favoured in England and Wales, which eschews altogether any reference to impeachment, is described in subparagraph 43 (vi) of Lord Justice Rix’s reasons for judgment at page 914 and it is that equitable set‑off is available where there are:

cross‑claims . . . so closely connected with [the plaintiff’s] demands that it would be manifestly unjust to allow him to enforce payment without taking into account the cross‑claim.

In our respectful submission, if that test or the test spoken of by Justice of Appeal Keane had been applied in this case, the outcome ought to have been different.  So the submission we make is that it raises squarely and appropriately a question of principle, that is, what are the elements, what are the parts of the test to be applied, whether one attaches to it the label “impeaching” or not?  We find confusion at intermediate appellate level and no guidance in the judgment of the court below. 

Your Honours, if I might move briefly to the other question, there are two lines of authority concerning whether the words “without any deductions” are sufficient to exclude set‑off.

CRENNAN J:   You are moving to the construction point now?

MR YOUNG:   Yes, your Honour.  Those two lines of authority are referred to in Sandbank Holdings, the decision of the Western Australian Court of Appeal in 2010.  That is at tab 5 in our book of authorities and in paragraphs 35 and 36 Justice Murphy collects them in one place.  In that case he said:

It is unnecessary, in this appeal, to attempt to resolve the divergence of authority –

As, indeed, did the court below at paragraph 180 where their Honours Justices Jacobson, Nicholas and Yates said:

It is not necessary for us to decide the question of the meaning and effect of the words “without any deductions whatsoever” because of the view we have reached –

on the first question.  Now, curiously, the court below made no mention of the most recent relevant appellate authority which was cited before them in argument.  That is the decision of the England and Wales Court of Appeal in Edlington.  That is at tab 7 in our folder of authorities.  In that case Lord Justice Neuberger said, at paragraphs 74 and 75:

in the absence of any clear indication to the contrary in the lease, a covenant or other provision relating to the payment of rent will not exclude the tenant’s normal right to claim equitable set‑off, save where the word “set‑off” is specifically used.

KIEFEL J:   The question then on your argument is whether or not “without any deductions” is clear enough in its expression?

MR YOUNG:   Precisely.

KIEFEL J:   There may be a question about that.

MR YOUNG:   As to that, there are two competing lines of authority and there is dispute within Australia as to which is the preferable line of authority and which ought to be applied.  So we say that itself raises a question of general importance, particularly because we are given to understand that many leases contain covenants to pay rent without any deduction or some cognate phrase, including leases prepared using the pro forma which has been published by the Real Estate Institute of Victoria.

KIEFEL J:   But standing alone, I think you said at the outset, standing alone that ground would not be sufficient for special leave?

MR YOUNG:   We must accept that, your Honour.  May I deal briefly with two questions.  One is the suggested futility which is contended for by the respondents.  We reject the suggestion that any appeal would be futile.  As we say in paragraph 1 of our submissions in reply, the rent, if any, which is payable by FEAP, the applicant, to FEA is now in issue in a Supreme Court proceeding commenced by the respondents on 30 September last year and for the avoidance of doubt, FEAP denies that it is indebted to FEA for any sum of rent in excess of the $11 million which it claims to be entitled to set‑off. 

Further, and in any event, the rent claimed to be payable by FEAP to FEA is an aggregate sum in respect of some hundreds of parcels of land and leases.  The respondent’s futility argument takes no account of the possibility that FEAP might, in effect, relinquish some leases and choose to apply the set‑off to others and, at the very least, an appeal would not be futile because by pursuing an appeal FEAP may make good one element of the potential claim by it against FEA for damages for loss of opportunity, that is, for preventing FEAP from harvesting the plantation trees when it ought to be permitted to do so.

Finally, may I say a word about the suggested requirement for security for costs.  The respondents have made no request or made any attempt to obtain payment of any of their costs in the proceedings below.  They have not specified the security for costs by a sum that they now seek.  If special leave were granted and a particular amount of security for costs were requested, the applicant would address the request upon its merits.  If the parties were unable to agree, it would, of course, be open to the respondents to seek security pursuant to Part 59 of the rules.  If your Honours please, they are our submissions.

CRENNAN J:   Thank you.  We do not need to trouble you, Mr Crutchfield.

We are not satisfied that this application raises a question of law suitable for a grant of special leave.  Rather, the application turns on the facts and circumstances of rental default under a particular leasing agreement and the application of the principles of equitable set‑off to those particular facts and circumstances.  Special leave to appeal is refused with costs.

Adjourn the Court to 1.30 pm.

AT 12.47 PM THE MATTER WAS CONCLUDED