Timbercorp Securities Limited v Plantation Land Limited

The liquidators of Timbercorp Securities Limited (in liquidation) (TSL) and Timbercorp Limited (in liquidation) (Timbercorp) recently approached the Federal Court for guidance on the priority to be afforded to rent payments under section 556 of the Corporations Act 2001 in the companies' liquidation.  The Court's treatment of rent payments in this case, whilst a victory for the liquidators and investors, may in fact be peculiar to the liquidation of managed investment schemes (MISs) as distinct from other types of liquidation.

Timbercorp, and later TSL, each acted as the responsible entity for the MIS '1999 Timbercorp' in which investors were offered the opportunity to participate in the scheme's forestry operations.  Features of the scheme, common to many agribusiness MISs, were:

• Timbercorp (later TSL) leased land from third party landlords on which to conduct the scheme;
  
  
• crops were then planted and cultivated on the leased land including eucalypts, almonds and olive groves;
  
  
• rent was payable to the landlords in quarterly instalments on 30 June, 30 September, 31 December and 31 March of each year of the respective leases;
  
  
• investors entered into a management agreement with the responsible entity and paid management fees accordingly;
  
  
• investor contributions (including annual management fees) were used to fund, amongst other things, the lease payments;
  
  
• the responsible entity entered into sub-leases of the leased land with investors; and
  
  
• during the term of the leases, and provided rent was paid, the responsible entity was entitled to harvest the crops and to the benefit of carbon credits.

Plantation Land Limited (PLL) was one such landlord.

Both Timbercorp and TSL were labelled 'hopelessly insolvent' (1) having entered into administration on 23 April 2009 and liquidation on 29 June 2009, the administrators being appointed liquidators. At the commencement of the administration, rent under the PLL leases was paid up to and including 30 June 2009. The administrators remained in possession of the leased land.

During the course of their investigations, the administrators wrote to landlords, including PLL, requesting they enter into a 'standstill arrangement' by which existing obligations under the leases would be maintained except that rent would not be paid for the 30 September quarter (September rent) nor would the administrators assume personal liability for its payment. The administrators neither disclaimed nor ratified the leases and instead proposed that PLL claim in the companies' administration (and any subsequent liquidation) for the September rent.

Critically, if September rent was not paid when due, PLL was entitled to terminate the leases, the effect of which was twofold:

• the sub-leases between the responsible entity and the investors automatically ended; and
  
  
• the responsible entity (and ultimately the investors) would be divested of ownership of the plantation crops and entitlement to the associated carbon credits compromising the realisation of any tangible value of the companies' assets.

PLL declined to accept the administrators' proposed standstill arrangement.

During the companies' liquidation, September rent fell due for payment.  The liquidators advised PLL that they would not use, occupy or enter onto the leased land to perform any obligations under the leases and neither disclaimed nor ratified the PLL leases. Argument consequently arose as to whether the liquidators were responsible for payment of the September rent and how PLL's claim against the companies should be treated under section 556. This resulted in the liquidators approaching the Court in this case to which PLL was the defendant.

Before the Court, argument centred on whether the September rent was a section 556(1)(a) expense 'incurred...in preserving, realising or getting in property of the company, or in carrying on the company's business' and to be afforded the highest priority of payment in the liquidation or was more properly a section 556(1)(dd) expense, payment of which is deferred to other expenses including payment of the administrators' costs and costs of a winding-up application.

The pivotal consideration for the Court was whether the liquidators' stance in neither ratifying nor disclaiming the leases amounted to 'preserving, realising or getting in property of the company, or...carrying on the company's business.'

In a short judgment, Justice Finklestein ruled the September rent was not a liquidation expense to be afforded priority under section 556(1)(a).  His Honour found the liquidators had not elected to retain possession of the PLL leased land for the purposes of the liquidation and in fact, were still considering whether to ratify or disclaim the leases. In His Honour's opinion, it followed that the rent was not a liquidation expense under section 556(1)(a) or section 556(1)(dd) and could not be afforded priority under either section unless and until:

• the liquidators ratified the PLL leases; or
  
  
• the liquidators failed to disclaim the PLL leases after receipt of, and within the time required under, a notice from PLL pursuant to section 568(8) of the Corporations Act 2001.

The Court's decision in this case represents a departure from previous decisions concerning the priority of rent payments under section 556. It has particular importance to the realisation of property in the liquidation of MISs. Liquidators, and indeed administrators, should carefully consider whether entities to which they are appointed are technically in possession of leased property. In circumstances where no election has been made to retain possession, a landlord's claim for rent may in fact be an unsecured claim to be treated in the usual way, pari passu to those of other unsecured creditors.

For further information please contact Alison Robertson on 9288 6872, alison.robertson@lavanlegal.com.au or Claire Petersen on 9288 6746, claire.petersen@lavanlegal.com.au.