Enron Australia v TXU Electricity

Reported Decision : 48 ACSR 266 (2004) 22 ACLC 596

CITATION : Enron Australia v TXU Electricity [2003] NSWSC 1169 HEARING DATE(S) : 4 July 2003 (and subsequent supplementary submissions) JUDGMENT DATE : 24 December 2003 JURISDICTION: Equity JUDGMENT OF : Austin J DECISION : Separate question answered to the effect that s 568(1B) of the Corporations Act does not empower the Court to make an order varying contractual rights and liabilities in the manner sought

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 by requiring a contractual party to exercise rights under the contract so as to bring forward in time the obligations of the parties with respect to settlement and payment LEGISLATION CITED : Corporations Act 2001 (Cth) ss 568, 568B, 568C, 568D, 568E, 568F Capital Prime Properties Plc v Worthgate Ltd (in liq) [2000] 1 BCLC 647 Ex parte Arnal (1883) 24 ChD 26 Ex parte Brook (1878) 10 Ch D 100 Ex parte Glegg (1881) 19 Ch D 7 Ex parte Hart-Dyke (1882) 22 Ch D 410 Ex parte Isherwood (1882) 21 ChD 384 Ex parte Stephens (1877) 7 Ch D 127 Global Television Pty Ltd v Sports Vision Australia Pty Ltd (in liq) (2000) 35 ACSR 484 Hindcastle Ltd v Barbara Attenborough Ltd [1997] AC 70 CASES CITED : Re ABC Coupler and Engineering Co Ltd (No 3) [1970] 1 All ER 650 Re Downer Enterprise Ltd [1974] 2 All ER 1074 Re Lundy Granite Co (1871) 6 Ch App 462 Re Middle Harbour Investment Ltd (in liq) [1977] 2 NSWLR 652 Re Moser (1884) 13 QBD 738 Re Oak Pits Colliery (1882) 21 Ch D 322 Re Tulloch Ltd (in liq) (1977) 3 ACLR 808 Rothwells Ltd (in liq) v Spedley Securities Ltd (in liq) (1990) 20 NSWLR 417 Sandtara Pty Ltd v Abigroup Ltd (1996) 42 NSWLR 491 Workers Compensation Board (Qld) v Technical Products Pty Ltd (1988) 165 CLR 642 Anthony Milton Simms and Neil John Singleton in their capacity as liquidators of Enron Australia Finance Pty Ltd (in liq) (P) PARTIES : TXU Electricity Ltd (D1) Yallourn Energy Pty Ltd (D2) FILE NUMBER(S) : SC 4873/02 COUNSEL : Mr J Sheahan SC with Mr V F Kerr (P) Mr A C Archibald QC with Ms S R Horgan (D) SOLICITORS : Baker & McKenzie (P) Blake Dawson Waldron (D)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

4873/02 ANTHONY MILTON SIMMS AND NEIL JOHN SINGLETON IN THEIR CAPACITY AS LIQUIDATORS OF ENRON AUSTRALIA FINANCE PTY LTD (IN LIQ) V TXU ELECTRICITY LTD & ANOR JUDGMENT (Revised on 24 December 2003 to correct typographical errors) 1 HIS HONOUR: This judgment follows the hearing of separate questions conducted on the basis of an agreed statement of facts, pursuant to s 191 of the Evidence Act 1995 (NSW). 2 The plaintiffs are the liquidators of Enron Australia Finance Pty Ltd (in liquidation) ("Enron"). Enron was placed into voluntary administration on 3 December 2001, and was placed into liquidation by its creditors on 29 January 2002. 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. 10 For convenience, I shall concentrate on the position of TXU, but my observations will be applicable, mutatis mutandis, to Yallourn. The Agreements 11 Section 2(a) of the TXU Agreement deals with the payment obligations of the parties (and also delivery obligations). Subsection 2(a)(i) says that each party will make the payments specified in each Confirmation, and subsection (ii) sets out the manner and place of payment. There are netting provisions in Section 2(c) and Part 4(i) of no space (a)(the Schedule. 12 Subsection 2(a)(iii) provides that the payment obligations specified in each Confirmation are subject to (1) the condition precedent that no Event of Default or Potential Event of Default with respect to the other party has occurred and is continuing, and also (2) the condition precedent that no Early Termination Date in respect of the relevant Transaction has occurred or been effectively designated. Since these two conditions are conditions precedent to the payment obligations of the counterparties, if either condition has not been met at any given time, there is no payment obligation under any of the trades that have been made under the TXU Agreement. However, a payment obligation will spring up under a pre-existing trade once the relevant condition is satisfied, and in that sense it might be said (with only approximate accuracy) that the payment obligation is "suspended" while the condition remains unfulfilled, and that amounts "accrue" notwithstanding that the condition is unfulfilled. 13 Condition (1) relates to Events of the Default, which are defined in section 5(a). The definition includes failure to pay or deliver (subsection 5(a)(i)), breach of the Agreement (subsection 5(a)(ii)), and "bankruptcy", defined to include (to the extent relevant here), having a resolution passed for winding-up (subsection 5(a)(vii)(5)) and becoming subject to the appointment of an administrator (subsection 5(a)(vii)(6)). 14 An Event of Default as defined by subsection 5(a)(vii)(6) occurred when Enron went into voluntary administration on 3 December 2001, and continued during the course of the administration until 29 January 2002. Therefore during that time, the payment obligations of TXU in respect of its trades with Enron under the TXU Agreement were "suspended". Then an Event of Default as defined by subsection 5(a)(vii)(5) occurred on 29 January 2002, when Enron was placed into liquidation by its creditors, and that the Event of Default has continued since that time, with the result that the payment obligations have continued to be "suspended". 15 Section 6(a) deals with the right to terminate following an Event of Default. It enables the Non-defaulting Party to give a notice to the Defaulting Party designating an Early Termination Date in respect of all outstanding Transactions. 16 Section 6(c) says that if an Early Termination Date has been effectively designated, no further payments or deliveries are required in respect of the Terminated Transactions, and the amount (if any) payable is determined under Section 6(e). 17 Section 6(e)(i) deals with the payments to be made if an Early Termination Date has been designated because of an Event of Default. The relevant method of calculation is in subparagraph 6(e)(i)(3), called the "Second Method and Market Quotation". "Market Quotation", a defined term, applies where the amount determined is based on quotations from Reference Market-makers. Generally speaking, the calculation has the effect of preserving the economic equivalent of payment or delivery under the Terminated Transaction has if the Early Termination Date had not been designated. Under this method, the Non-defaulting Party works out the Settlement Amount in respect of the Terminated Transactions owing to it, from which are deducted the Unpaid Amounts owing to the Defaulting Party, all converted into the Termination Currency. If the amount so calculated is a positive number, the Defaulting Party must pay it to the Non-defaulting Party; if it is a negative number, the Non-defaulting Party must pay the absolute value of that amount to the Defaulting Party. 18 In the present case these clauses gave TXU, but not Enron, the contractual right to designate an Early Termination Date in respect of all outstanding Transactions, and then to settle by making or receiving a payment calculated under Section 6(e)(i)(3), thereby terminating those Transactions. According to the plaintiffs' contention, set out above, TXU would be obliged to pay a substantial amount to Enron, rather than the reverse, if it were to designate an Early Termination Date. 19 While the TXU Agreement in terms authorises TXU as the Non-defaulting Party to initiate the early termination procedure, it does not oblige TXU to do so. If the plaintiffs' contention as to the value of accrued and open trades is correct, it would obviously not be in TXU's economic interest to take steps that would generate an obligation to make a large payment, when the obligation does not presently exist. 20 The present position under the TXU Agreement is that, in the absence of any such step being taken by TXU, there will continue to be no payment obligations in respect of any outstanding Transactions. The Agreed Statement of Facts says that as a consequence of the occurrence of an Event of Default, TXU is not required to make any payments before the last trade expires on 31 December 2005 (31 December 2003 in the case of Yallourn). 21 The plaintiffs take the view that, once the last outstanding Transaction expires on 31 December 2005, Enron will be entitled to designate an Early Termination Date and cause a net settlement of all outstanding Transactions to occur under Section 6(e)(ii) (which has the effect, in the present case, of making the method of calculation described in sub-paragraph 6(e)(i)(3) apply if an Early Termination Date has been designated resulting from a Termination Event). This is because section 6(b) permits Enron to give a notice designating an Early Termination Date, in respect of all Affected Transactions, if a Termination Event occurs. Section 5(b) defines Termination Events to include an Additional Termination Event specified in the Schedule. 22 Part 1(h) of the Schedule is as follows, to the extent relevant: " Additional Termination Events: Will apply. The following shall constitute Additional Termination Events: "(i) An Event of Default occurs with respect to a party ('Party X'), Party X has satisfied all its payment and delivery obligations under Section 2(a)(i) with respect to all Transactions and has no future payment or delivery obligations to the other party ('Party Y') whether absolute or contingent under Section 2(a)(i), and Party Y refuses to make a payment to Party X based upon the condition precedent in Section 2(a)(iii). "For the purpose of the foregoing Termination Event, the Affected Party shall be Party X. However, despite Section 6(b)(iv) [which would allow either party to designate and Early Termination Date], Party X is the party entitled to give the notice under Section 6(b)(iv) designating the Early Termination Date for the foregoing Termination Event. …" 23 As I understand the plaintiffs' position, set out in their written submissions (especially paragraphs 33, 42 and 43), they say that when the last outstanding Transaction expires, Enron will be in the position of Party X in Part 1(h) of the Schedule and will therefore be entitled to designate an Early Termination Date, and thereby cause a net amount to become payable by TXU under Section 6(e)(ii). In the plaintiffs' view, Enron will be entitled to do so notwithstanding that it will continue to be in liquidation, but its right to do so will not arise until the expiry of the last open trade. They apply the same analysis to the Yallourn Agreement, which is to the same effect. 24 The plaintiffs say that, because on their calculations large amounts will eventually be payable by TXU and Yallourn respectively, the two Agreements are valuable "assets" of Enron. Their commercial objective is to realise those "assets" promptly, rather than waiting for the expiry of the last trades. They do not have the contractual right to do so, and indeed, the word "assets" must be used with caution because no value can be realised by Enron under the Agreements except according to their terms. The originating process and the orders for the determination of separate questions 25 In order to achieve their commercial objective, the plaintiffs wish to disclaim the TXU Agreement and the Yallourn Agreement. Since the parties accept that the Agreements are not "unprofitable contracts" for the purposes of s 568(1A) of the Corporations Act, the plaintiffs need the leave of the Court to disclaim them. 26 The plaintiffs are concerned that, if the Agreements were to be disclaimed without further orders, they would forfeit their right to recover the net value of the Agreements, except in respect of payment obligations that had fallen due prior to 3 December 2001. In other words, they are concerned that by disclaiming they would forgo the potential benefit of the open trades. Their concern arises because of s 568D(1), and they have presented an analysis of the effect of s 568D(1), having regard to relevant case law, to reveal the legal basis for their concern. It is unnecessary for me, in the present judgment, to decide directly how s 568D(1) would operate if the plaintiffs were to terminate without additional orders, and I shall not do so. To overcome the perceived difficulty under s 568D(1), the plaintiffs seek orders that would enable them, forthwith upon disclaimer, to recover the value of the Agreements. 27 By their Further Amended Originating Process filed on 6 February 2003, the plaintiffs seek orders that leave be granted to them to disclaim the TXU Agreement and the Yallourn Agreement under s 568(1A) of the Corporations Act 2001 (NSW). They also seek orders under s 568(1B) which would have the effect of varying the payment obligations of the defendants. The order sought in the case of TXU, replicated in the case of Yallourn, is as follows: "2. An order that, in the event the plaintiffs disclaim the TXU contract pursuant to the leave granted in order 1, (a) TXU determine an amount payable in respect of an Early Termination Date in accordance with Section 6(e) of the TXU contract, as though TXU had designated the date the disclaimer takes effect under s 568C as the Early Termination Date and TXU was the Non-defaulting Party; (b) if the amount so determined is a negative number, TXU pay the absolute value of that amount, together with interest thereon calculated in accordance with Section 6(d)(ii), to Enron; and (c) if the amount so determined is a positive number, TXU lodge a proof of debt for that amount with the plaintiffs." 28 The purpose of this order, and the corresponding order for Yallourn, would be to make the disclaimer an event triggering the final settlement of all open trades pursuant to the terms of the Agreements, on the same basis as if the respective defendants had designated the date of disclaimer as an Early Termination Date as the Non-defaulting Party under section 6(a). Although the order would make provision for TXU (and Yallourn) to lodge a proof of debt if the calculation produced a figure owing by Enron, obviously the plaintiffs' expectation is that the amount so determined will be a substantial negative number, so that TXU (and Yallourn) will have an obligation to make a payment to Enron. 29 If the orders are made, the defendants' payment obligations under the Agreements will be substantially changed, because in the absence of the order, they have no payment obligations until 31 December 2005 and 31 December 2003 respectively, and then their payment obligations will depend on calculations based upon mid-point prices not yet available. 30 The Further Amended Originating Process also seeks declarations with respect to the proper construction of other parts of the Agreements, which need not concern us for the purpose of determining the separate questions. 31 On 24 March 2003 the Court made the following order by consent: "The following questions be set down for separate determination pursuant to Part 31 Rule 2 of the Supreme Court Rules 1970 (NSW): (a) whether a disclaimer by the Plaintiffs of the contract entitled ISDA Master Agreement between Enron Australia Finance Pty Ltd and TXU Electricity Limited dated 15 December 2000 would take effect as the occurrence or designation under the said contract of an Early Termination Date; (b) whether a disclaimer by the Plaintiffs of the contract entitled ISDA Master Agreement between Enron Australia Finance Pty Ltd and Yallourn Energy Pty Limited dated 10 August 2001 would take effect as the occurrence or designation under the said contract of an Early Termination Date; (c) whether this Honourable Court has power under Division 7A of Part 5.6 of the Corporations Act 2001 (Cth) to make such orders imparting such an effect to a disclaimer." 32 When the hearing for the determination of these separate questions began, the parties informed me they had agreed, for the purposes of that hearing, that a disclaimer of the two Agreements by the plaintiffs would not have the effect described in subparagraphs (a) and (b) of the order. In other words, it was agreed between the parties that the correct answer, in the case of each of subparagraph (a) and (b), is "It would not". Consequently the only question before the Court is subparagraph (c). The plaintiffs say that the correct answer to subparagraph (c) is "It does", and the defendants say that the correct answer is "It does not". 33 It is worth emphasising that the question relates to the power of the Court to make orders of the kind contemplated by paragraph 2 of the Further Amended Originating Process. If it is held that the Court has the power to make such orders, questions will arise at the final hearing of the proceeding as to whether the Court should exercise its discretion to make some such order as the plaintiffs seek. The plaintiffs will succeed with respect to the separate questions if I decide that the Court has the power to make orders of the kind sought, even if my view is that it would rarely do so and would be unlikely to do so in this case. The statutory provisions 34 Division 7A (ss 568-568F) of the Corporations Act deals with the disclaimer of "onerous property". It is contained in Part 5.6, the subject of which is "winding up generally", as opposed to "winding up in insolvency or by the Court on other grounds" (Parts 5.4, 5.4A and 5.4B) and "voluntary winding up" (Part 5.5). In general, therefore, Division 7A applies to disclaimer both by a liquidator in a voluntary winding up and by a court-appointed liquidator. 35 Section 568(1) says that, subject to the section, a liquidator may disclaim property of the company that consists of (inter alia) a contract. The two provisions of critical importance in the present case are as follows: "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 such conditions; and (b) make such orders in connection with matters arising under, or relating to, the contract; as the Court considers just and equitable." 36 Section 568B allows an interested person to apply to the Court for an order setting aside a disclaimer before it takes effect. Section 568C explains when the disclaimer takes effect. 37 Section 568D is also important in this case. It provides: "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." 38 The plaintiffs' case is that s 568(1B) is a very wide provision that gives the Court a discretionary power to vary the contractual arrangements between the parties in such a manner as the plaintiffs propose here. To establish their case, they have presented to me a very thorough and well-researched argument about the proper construction of that provision, having regard to its legislative history and purpose, in the context of the overall structure and purpose of Part 5.6 Division 7A. I have concluded, however, that s 568(1B) does not empower the Court to make orders of the kind sought by the plaintiffs. Therefore notwithstanding their impressive endeavours, the plaintiffs are unsuccessful on the separate questions. I shall endeavour to explain my reasons, by reference to the plaintiffs' four principal submissions, which relate to the statutory language, the structure of the provisions, their legislative history, and general legislative intent. The statutory language 39 The Court's powers under s 568(1B) arise upon an application for leave under subsection (1A). There is a power to grant that leave subject to conditions, and a power to "make such orders in connection with matters arising under, or relating to, the contract". The plaintiffs emphasise the breadth of these words. It is well established that expressions such as "in connection with" and "relating to" are expressions of wide import, although their precise scope will always be informed by the context in which they appear (for example, Workers Compensation Board (Qld) v Technical Products Pty Ltd (1988) 165 CLR 642, 653-4). Where the expressions "in connection with" and "relating to" are used in the same provision to confer a power of the Court, their cumulative effect is to reinforce the breadth of the power. 40 I accept the submission that the words of s 568(1B) are words of wide import. Nevertheless, they are not boundless in scope. The words identify matters arising under or relating to the contract to be disclaimed, and the order must be in connection with such matters. As a matter of construction of the statutory language, the subsection does not authorise the Court to make orders in connection with matters arising under a contract that was not the subject of an application for leave to disclaim. Likewise, it does not authorise the Court to make orders unconnected with any matters arising under a contract between the parties. By parity of reasoning, the subsection does not authorise the Court to make orders in connection with matters that do not arise under or relate to the terms of the existing contract, but would arise if the terms of the contract were altered. 41 The order sought by the plaintiffs against TXU would, if the plaintiffs were to disclaim the TXU Agreement, require TXU to take a step under the Agreement that it would not otherwise be obliged to take, namely the step of designating an Early Termination Date and thereby causing final net payment to be calculated under section 6(e). The order sought against Yallourn would operate in the same way. The plaintiffs say that these orders provide a mechanism by which the interests, albeit contingent, of Enron and the two counterparties, which are "matters arising under, or relating to" the respective Agreements, can be crystallised. They say this crystallisation is squarely "[connected] with" those matters. 42 I disagree with this contention. In my opinion, the orders vary the rights and obligations of the parties to the contracts. It is, in substance, a term of the Agreements that for as long as an Event of Default continues there will be no liability on the Non-defaulting Party to make any payment pursuant to any trade or Confirmation. Arguably this term is subject to the implied limitation that a payment obligation may arise if there is an Additional Termination Event entitling the Defaulting Party to designate an Early Termination Date. But subject to any such qualification, there is such a term and it will be effectively varied, indeed negated, if the orders are made. That being so, the orders cannot be described as orders "in connection with" anything that arises under or relates to the contracts in their present form. 43 The plaintiffs' argument is not improved by speaking in terms of the interests of the parties, as opposed to their strict legal rights and obligations under the Agreements. The interests of the parties under the Agreements are defined by the provisions of the Agreements. Assuming the plaintiffs' calculations are correct, Enron has, by virtue of the terms of the Agreements considered together with the movement in electricity prices over the relevant time, a commercial "interest" (perhaps more activity, and expectancy or aspiration for commercial reasons) that TXU and Yallourn will exercise their contractual rights to designate Early Termination Dates so as to generate payment obligations in favour of Enron. But that "interest" is not a matter arising under or relating to the Agreements themselves, but rather a matter arising under or relating to the way in which the counterparty will exercise its contractual rights in the economic circumstances that have emerged after the contract was made. 44 The wording of s 568(1B) does not permit the Court to bestow on the company in liquidation substantive rights that it did not have under the contract which is to be disclaimed. It does not, as a matter of construction, permit the Court to deprive the counterparty of its contractual rights, such as the right not to designate an Early Termination Date under section 6(a) after an Event of Default occurs and the right under section 2(a)(iii) not to make a payment under section 2(a)(i) while an Event of Default continues. The structure of the provisions 45 The plaintiffs say that the scope of subparagraph (b) of s 568(1B) needs to be assessed in light of subparagraph (a), which gives the Court a power to impose conditions on the grant of leave to disclaim. They say, and I agree, that the power to grant leave subject to conditions is apt to permit the Court to impose obligations on the company or the liquidator in the event of disclaimer. It is the next step in the submission that I find unacceptable. The plaintiffs say that if subparagraph (b) is to add anything, it must be to permit the Court to give the company rights, or to impose obligations on the other party to the contract, in the event of disclaimer. 46 But if one has regard to how provisions analogous to subparagraph (b) in the bankruptcy and liquidation law of the United Kingdom have been used, it becomes evident that there is a field of operation for sub-paragraph (b) that does not involve altering the rights of the contractual counterparty, a step that has not in fact been taken in any of the English cases. As the defendants point out in their written submissions, the English cases offer the following examples of the use of the ancillary power to make other orders that are just: (a) where a trustee in bankruptcy or liquidator in possession of leased property, after the date of liquidation or sequestration and for the purpose of winding up or bankruptcy, is to be liable to pay the rent for the period of occupation as an expense of the winding up or bankruptcy (rather than leaving the landlord to prove for such amounts): Re Lundy Granite Co (1871) 6 Ch App 462 at 466-7; Re Oak Pits Colliery (1882) 21 Ch D 322 at 330; Ex parte Isherwood (1882) 21 ChD 384 at 395; Ex parte Arnal (1883) 24 ChD 26; Re ABC Coupler and Engineering Co Ltd (No 3) [1970] 1 All ER 650 at 657; Re Downer Enterprise Ltd [1974] 2 All ER 1074 at 1082; (b) orders concerning the removal by the liquidator, or purchase by the landlord, of tenants' fixtures: Re Moser (1884) 13 QBD 738. 47 The plaintiffs submit that, in the words of their senior counsel, Division 7A contains and a "miscellany of provisions to create a flexible regime". There are, in the plaintiffs' submission, three discrete powers of the Court to adjust the interests of parties affected by ongoing contracts with a company in liquidation: under ss 568(9), 568B or 568E, and under 568F or 568D(2). 48 First, the plaintiff refers to s 568(9). That subsection permits the Court, on the application of the person who is, as against the company, entitled to the benefit or subject to the burden of the contract made with the company, to make an order discharging the contract on terms as to the payment by or to either party of damages for non-performance of the contract, or otherwise, as the Court thinks proper. The Court is also empowered to make an order rescinding the contract on such terms as to restitution by or to either party, or otherwise, as the Court thinks proper. 49 Subsection 568(9) does permit to party to a contract to apply to have the Court bring the contract to an end, independently of the liquidator exercising any rights of disclaimer, and if such an application is made, the Court has a wide power to adjust the interests of the parties under the contract. The plaintiff says it is important that the subsection envisages both a resultant liability that is inconsistent with the strict contractual rights of the parties (because no actual entitlement to discharge or rescind the contract has arisen or been exercised), and a calculation of the relevant liability on the premise of a non-performance breach. There is said to be some similarity between such an order and the order that the plaintiffs seek in the present case, which gives effect to the contractual right of the defendants to recover agreed damages for breach by Enron, and is precisely the kind of order that the Court would be likely to grant if one of the defendants made an application for an order under s 568(9). 50 In my opinion s 568(9) sheds no light on the problem that I have to decide. The subsection is available only upon the application of the counterparty to a contract with the company, and is not available to the company or its liquidator. In most cases, the application will arise in circumstances where the company has not performed its contract. Further, the Court's power under the subsection is a power to discharge the contract or rescind it, in each case on terms. It does not purport to authorise the Court to vary the parties' vested contractual rights. It is not a power to require a contracting party to exercise rights under the contract on the basis that the contract remains on foot. 51 Perhaps most importantly, s 568(9) demonstrates, to my mind, that when the Legislature wished to give the Court a power to make an order affecting contractual rights and liabilities by permitting an order for discharge or rescission, it did so in express terms which stipulated the kind of order that would be permissible. In contrast, the plaintiffs' contention about s 568(1B) would mean that this provision would entitle the Court to vary contractual rights and liabilities more or less at large, subject only to discretionary considerations. That would be out of line with the approach taken in s 568(9). 52 Secondly, the plaintiffs refer to ss 568B and 568E. Those sections permit a person who claims to have an interest in disclaimed property to apply to the Court for an order setting aside the disclaimer. Section 568B applies before the disclaimer takes effect, and s 568E after the disclaimer has taken effect. Both provisions authorise the Court to make an order setting aside the disclaimer, and to make further orders as it thinks appropriate. In both cases, the Court may make an order only if it is satisfied that the disclaimer would cause, to persons who have or claim to have interests in the property, prejudice that is grossly out of proportion to the prejudice that setting aside the disclaimer would cause to the company's creditors. Where the application is made after the disclaimer has taken effect, the applicant must jump some additional hurdles which need not be particularised here. 53 The plaintiffs say that these provisions demonstrate two matters: first, that the Legislature permits a disclaimer to prejudice persons with interests in the disclaimed property to a significantly greater extent that the prejudice caused to creditors, by allowing the Court to make an order only if the prejudice is grossly disproportionate; secondly, the Court has the widest possible powers under these provisions to adjust the interests of the parties in the event that it selects to set aside the disclaimer. The first point is correct but does not assist. Sections 568B and 568E address quite a different problem from the one addressed by s 568(1B). When the liquidator has purported to disclaim, very good reasons must be established for the Court to reverse liquidator's decision. The position is that the disclaimer is likely to have prejudiced the interests (not the vested contractual rights) of the counterparty and of the creditors respectively, and the Court's task is to weigh those prejudices to decide whether there is a case for intervention. As to the second point, the Court's power to make other orders is conditional upon an order being made to set aside the disclaimer. There is nothing in these sections to indicate that, having set aside the disclaimer and having thereby restored the contract, the Court would be empowered to embark on a new course by interfering with the contractual rights and liabilities. 54 Thirdly, the plaintiffs refer to ss 568F(1) and s 568D(2). Section 568F(1) allows the Court, on the application of a person who claims an interest in disclaimed property or is under liability in respect of the property, to order that the disclaimed property vest in an appropriate person. In my opinion this provision sheds no light on the proper meaning of s 568(1B), because it deals with a very different problem. 55 Section 568D(2) states that a person aggrieved by the operation of a disclaimer is taken to be a creditor to the extent of any loss suffered because of the disclaimer. Thus, says the plaintiff, a person adversely affected by an order under s 568(1B) which interferes with the operation of the contract in accordance with its strict terms would not be entirely deprived of any remedy, because this provision would allow that person to prove in the winding up. I agree that s 568D(2) would be available if the Court were empowered to vary contractual rights and liabilities under s 568(1B), but its existence does not provide any basis for adopting the liberal construction of s 568(1B) for which the plaintiffs contend. 56 While the various provisions addressed in the plaintiffs' submissions are provisions under which the Court has a discretion to make orders reflecting the interests of contractual counterparties or dealing with prejudice to them, the existence of such provisions in specific and different contexts provides no basis, in my view, for imposing on s 568(1B) a construction that the words of that provision do not naturally bear. 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. Legislative history 61 In written and oral submissions senior counsel for the plaintiffs gave extensive consideration to the history of the disclaimer provisions in Part 5.6 Division 7A. The disclaimer provisions in corporate liquidation have for a large part of their history been placed in the shadow of the comparable bankruptcy provisions. There is, of course, an important distinction between disclaimer by a trustee in bankruptcy and disclaimer by a liquidator of a company, namely that in the former case but not in the latter, the estate vests in the external administrator. Nevertheless it was appropriate for the plaintiffs to pay attention to disclaimer in bankruptcy law, since it is obvious that the statutory provisions dealing with disclaimer in corporate liquidation have been largely borrowed from bankruptcy law. As their submissions show in detail, the identification of the property that can be disclaimed, and the extent to which the court's leave is required to do so, are matters that have changed from time to time as the provisions have evolved.

62 The Bankruptcy Act 1869 (32 & 33 Vict Ch 71), s 23, dealt with the disclaimer of onerous property by a trustee in bankruptcy. The section immediately followed provisions dealing with the trustee's dominion over the bankrupt's property. It authorised the trustee to disclaim property of various descriptions, which burdened the possessor to the performance of some onerous act, including "unprofitable contracts". It did not permit disclaimer, in the case of a contract, unless it was unprofitable. In this respect, s 23 was narrower in scope than the present s 568(1). It said that, in the case of a contract, disclaimer would have the effect of determining the contract from the date of the order of adjudication. The parallel provisions in corporate liquidation are now in s 568C (as to the effective date of the disclaimer) and s 568D(1) as to the effect of disclaimer. The section said that a person injured by its operation was deemed a creditor of the bankrupt to the extent of that injury, and could accordingly lodge a proof of debt. The comparable provision is now s 568D(2). There was a provision to permit the Court to make a vesting order, comparable to s 568F.

63 Section 23 of the 1869 Act did not provide for the leave of the Court to be sought, nor for the Court to make orders imposing conditions or terms. This caused particular difficulties in relation to leases. Since the effect of disclaimer under s 23 was deemed surrender of the lease, it was held that neither party was able to take the benefit of provisions that would operate on the ordinary expiry of the term of the lease. Thus, it was held that a tenant could not retrieve tenant's fixtures: Ex parte Stephens (1877) 7 Ch D 127; Ex parte Brook (1878) 10 Ch D 100; Ex parte Glegg (1881) 19 Ch D 7.

64 In his submissions, senior counsel for the plaintiff dwelt upon the decision in Ex parte Hart-Dyke (1882) 22 Ch D 410. He said that this case exemplified the position under the 1869 Act from the perspectives of both the lessor and the bankrupt estate of the tenant. In that case it was held that the tenant's trustee could not rely on the terms of the lease to compel the lessor or to pay for the value of cottages erected by the tenant, on the principle that I have stated. It was also held, on the same principle, that the lessor was not entitled to rely on a term of the lease so as to pay for mown hay left on the land by the tenant at a rate lower than the market rate.

65 The Bankruptcy Act 1883 (46 & 47 Vict, Ch 52) took a different form, evidently in order to overcome such difficulties. Sections (1) and (2) were broadly similar to the previous law, but subsection (3) was new. It provided: "(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 may impose such terms as a condition of granting leave, and make such orders with respect to fixtures, tenants' improvements, and other matters arising out of the tenancy as the Court thinks just."

66 Senior counsel for the plaintiffs drew attention to observations by the authors of Williams & Muir Hunter on Bankruptcy (19th ed, page 390) to the effect that the change introduced by this provision permitted the court to give a remedy in a case such as Ex parte Hart-Dyke. He sought to draw the inference that the provision was understood to permit the court to grant leave to disclaim on a basis that would, if appropriate, put the parties in positions equivalent to what they would enjoy in the event of termination in the ordinary course.

67 The plaintiffs relied on Re Moser (1884) 13 QBD 738. In that case a question arose as to the appropriate form of order to be made in respect of a tenant's fixtures on disclaimer. Wills J made an order that the tenant's trustee have leave to disclaim, on terms that he pay rent in respect of his occupation of the premises from the time of commencement of the bankruptcy; but he ordered the lessor to elect within two days whether to pay for the fixtures at valuation, failing which the trustee could remove them.

68 The reasoning in the case is very short and rather cryptic. His Lordship said: "I think the principles applicable to fixtures on the determination of the tenancy under ordinary circumstances should be applied when a lease is determined by the disclaimer of a trustee in bankruptcy."

69 Senior counsel for the plaintiffs sought to draw from this case the proposition that the power granted by s 55(3) was treated as permitting the Court to alter the parties' rights inter se, and in particular, to make them equivalent to the position where the lease had been brought to an end by effluxion of time. He submitted that the power in s 568(1B) should be given no narrower scope.

70 This argument deserves careful consideration. In the end, however, I have decided that it is unpersuasive, when weighed against the wording of the modern provision and its context in Division 7A. Section 55(3) of the 1883 Act was not a provision applying to contracts generally, but only with respect to fixtures, tenants' improvements and other matters arising out of the tenancy. Secondly, 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.

71 The remainder of the legislative history outlined in the plaintiffs' submissions, though interesting, does not, in my opinion, bear upon the question before me for determination. General legislative intent 72 The plaintiffs submit that the broad reading of s 568(1B) for which they contend is supported by reflection on the legislative purpose of the disclaimer provisions in Part 5.6 Division 7A. The plaintiff relies on some observations in Re Middle Harbour Investment Ltd (in liq) [1977] 2 NSWLR 652 and Global Television Pty Ltd v Sports Vision Australia Pty Ltd (in liq) (2000) 35 ACSR 484. 73 In the Middle Harbour case, Bowen CJ in Eq said (at 657): "The purpose of providing for disclaimer by an official receiver or trustee in bankruptcy or by a liquidator in a 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." 74 In the Global Television case, Santow J said (at 498): "Very obviously, the disclaimer provisions are intended to enable insolvency administrators to relieve themselves of ongoing liabilities which so prolong the administration and delay the dividend." 75 The plaintiffs extract from these observations the proposition that Division 7A is intended to enable the liquidator promptly to wind up the affairs of the company by bringing to an early end ongoing contractual obligations of the company, thereby avoiding difficulties, risks and delay in the liquidation that would operate to the detriment of creditors. They say that the Court should construe s 568(1B) so as to facilitate the achievement of this statutory purpose. 76 I agree that one of the legislative purposes of Division 7A is to facilitate the efficient administration and distribution of the insolvent estate. Another purpose, not relevant in the present case but at issue in both the Middle Harbour and Global Television cases, is the purpose of permitting the liquidator to rid the company of ongoing and burdensome financial obligations. These purposes are implemented in the legislation in specific ways by provisions that establish the metes and bounds of the disclaimer regime. The power to disclaim is not a power given to the liquidator at large. It does not, except to a very circumscribed degree, enable the liquidator to affect the rights of others with whom the company has dealt. When one considers the implementation of the legislative intention in provisions such as ss 568(9), 568B, 568D(1), 568E and 568F, there is nothing to indicate that the effectuation of the legislative purpose is intended to include the variation of contractual rights and liabilities of other parties existing before the disclaimer, even where such a variation might contribute to the efficient administration of the liquidation. Conclusions 77 For the reasons I have given, my opinion is that s 568(1B) does not empower the Court to make an order requiring the defendants to designate an Early Termination Date under section 6(a) of the respective Agreements, or to participate in any final settlement of payment obligations under section 6(e) as if such a designation had occurred. Therefore the answer to paragraph (c) of the questions set down for separate determination by me is "It does not". The parties have agreed that the answer to question (a) and the answer to question (b) is, in each case, "It would not". 78 Since the plaintiffs have failed to make out their case at the hearing for the separate determination of these questions, and my orders will finally dispose of those questions (subject to appeal), I am inclined to order the plaintiffs to pay the defendants' costs. However, I shall give the parties the opportunity to make submissions with respect costs, and any submissions as to the form of my orders, by standing the matter over for mention before me at 9:30am on 4 February 2004.

Last Modified: 12/30/2003 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.