Norman, in the matter of Forest Enterprises Australia Limited (Administrators Appointed) (Receivers & Managers Appointed) v FEA Plantations Ltd

REASONS FOR JUDGMENT 1 This application raises for consideration the obligations that are owed by the receivers of a responsible entity of a managed investment scheme to scheme members. The unusual aspect of the application is that the conduct that is being called into question is conduct which the receivers propose to engage in not in their capacity as receivers of the responsible entity but as receivers and managers of the parent company of the responsible entity. 2 The following is a summary of the main facts. The receivers, Messrs Norman and Algeri of Deloitte Touche Tohmatsu, were appointed as receivers and managers of Forest Enterprises Australia Ltd (FEA) a public company listed on the ASX and FEA Carbon Pty Ltd, a subsidiary, on 14 April 2010. They were also appointed controllers of another subsidiary, Tasmanian Plantation Pty Ltd. These appointments occurred immediately following the directors' appointment of administrators to FEA, FEA Carbon, Tasmanian Plantation and FEA Plantations Ltd (FEAP), another subsidiary. On 3 June 2010 the receivers were also appointed to receive certain assets of FEAP. 3 The FEA group was involved in the establishment and operation of 19 managed investment schemes in the forestry sector. One scheme had been established in each of the years 1993 to 2009 and is referred to by that year. In broad outline each scheme, apart from the 2009 scheme, operates in the following way. Land or an interest in the land on which forestry operations are conducted was acquired by a group company by purchase, lease, grant of a profit ŕ prendre or the acquisition by deed of what are described as "forestry rights". Scheme members (who are referred to in scheme documents as "growers") were granted (it is not always clear by which group company) a lease, sublease, profit ŕ prendre, sub-profit or sub-forestry right (collectively a "grower lease") of an identifiable allotment of land (a "woodlot"). It is only the leases and profits that are relevant to the present dispute. Growers entered into a management agreement with FEAP, which required it to undertake the day-to-day management and control of the growers' woodlots and to harvest and market the timber on the growers' behalf. In turn, FEAP contracted FEA to perform the management services that it is was required to perform. 4 The 2009 scheme is different in that (1) growers did not take a grower lease of a woodlot but, instead, through a trustee, FEAP, acquired a beneficial interest in an identifiable woodlot and in the timber planted on that woodlot; and (2) there is no separate management agreement between the growers and FEAP. Nonetheless FEA is responsible to perform the management and forestry services that are required. 5 Since 2000 the responsible entity for each scheme has been FEAP. It has held an Australian Financial Services Licence since 2004. 6 There are several aspects of each lease and profit ŕ prendre that should be noted. Each lease (they are mostly in common form): (1) permits the lessee to use the demised land for the plantation of trees (cl 6); (2) requires the lessee to comply with all the requirements of any law that applies to the land or its use (cl 8); (3) contains a non-assignment clause in the absence of the lessor's consent (cl 21); (4) permits the lessor to determine the lease if the rent is in arrears for more than 28 days and the lessee has failed to comply with a notice requiring the rent to be paid within a further 28 days (cl 25); and (5) provides that the "fundamental and essential reason for the Lessee entering into this Lease is to enable the Lessee to sublet the Land … to others for the purpose of growing Trees" (cl 41). 7 Each profit ŕ prendre (the majority are in a common form): (1) provides that the relevant plantation is and shall remain the property of the grantee (cl 2.5); (2) requires the grantee to comply with all laws applying to the use or occupancy of the plantation area (cl 3.2); (3) provides that the grantee may surrender the agreement and the ownership of the trees if the plantation is destroyed or rendered unsaleable or the grantee considers it uneconomical to continue to plant, maintain or harvest the trees; (4) permits the grantor to terminate the agreement if the grantee defaults and remains in default for two months after receipt of a written notice (the same applies for defaults of the grantor) (cls 8.4-5); and (5) prohibits assignment without the grantor's prior written consent (cl 9.1). 8 In their capacity as receivers and managers of FEA, Messrs Norman and Algeri are concerned about their personal liability in respect of the land and interests in land acquired by that company. There is legislation in the states in which the land is located (Queensland, New South Wales and Tasmania) that imposes obligations on an occupier of land (which includes persons such as privately appointed receivers) (1) to take fire prevention measures, which can include an obligation to burn off, maintain fire breaks and remove any hazardous or flammable material; and (2) to adopt particular forestry practices, including weed control and pest prevention. The penalties for non-compliance with these laws can be severe. They include fines and, in some instances, a term of imprisonment. 9 The receivers say they do not have the means or the funds to comply with this legislation. I take the receivers to mean that the mortgagees on whose behalf they were appointed, ANZ and CBA, will not pay for the required work to be carried out and the receivers have not realised sufficient funds from FEA's assets to cover the costs. 10 Looked at from the perspective of the growers, it is not FEA but FEAP that has general responsibility for the operation and management of the schemes. Perhaps in recognition of this, the administrators of FEAP have recently advised the receivers that they (the administrators) will procure FEAP to carry out the required works. Mr Silvia, one of the administrators, said that he is in funds for the schemes up to 2002 and in respect of the later schemes the administrators will obtain a non-recourse loan to pay for the works. 11 Before being told that the administrators would ensure that the relevant legislation is complied with, the receivers wanted to "terminate, surrender, abandon, assign or otherwise deal with" FEA's leases and profits, to eliminate any risk to them of liability under the state legislation. Indeed, the application that the receivers bring to court is for a direction that they are justified in taking one or other of those steps. 12 As matters have now turned out, the risk to the receivers has been significantly reduced by the administrators taking responsibility for the works and ensuring they will be carried out. But, things may not go ahead as planned and, in any case, the receivers may have other reasons for "terminating, surrendering, abandoning, assigning or otherwise dealing with" the leases and profits. So it is as well that I express my views on what restrictions they face. 13 The persons most affected by what the receivers might do are the growers. They live in hope of the administrators either managing the schemes and harvesting the forests or finding an organisation that will take on the role of responsible entity in place of FEAP. There is evidence of some discussions along those lines with potentially interested persons. But the FEA group was placed into administration over six months ago and the likelihood of many schemes being saved is not great. It is probable that most schemes will be liquidated. 14 Be that as it may, I will, for the present, assume that the growers' wishes may be realised. And, to ensure they had a voice in this application, I ordered that a grower group, FEA Growers Group Inc, be joined to represent their interests. They took up the opportunity to argue that the receivers should neither "surrender, terminate, abandon, assign nor otherwise deal with" the leases and profits. 15 The growers resist surrender of any lease (ie the yielding up of the estate by agreement, express or implied, to the person with the reversion) notwithstanding that a surrender does not affect the subleases that have been granted to the growers. By the provisions of legislation in each state, which are derived from s 139 of the Law of Property Act 1925 (UK), subsisting subleases are protected against a surrender. But, say the growers, they will not have the benefit of a head lessor to coordinate their activities. Each sub-tenant grower would be responsible for his/her own woodlot unless the growers were able to get together to operate some kind of joint venture, an obviously difficult task. 16 As regards the profits, the common law doctrine of surrender does not apply, although one sometimes sees, as in this case, a contractual right to "surrender". Rights can be released, either by deed or by conduct (eg by abandonment). On release any derivative rights that have been granted to the growers will come to an end, although they may be able to pursue their interests in proceedings against the landowners. 17 With respect to an assignment, what is of concern to the growers is the possibility that the assignee be a person who the growers describe as a "hostile entity", ie a person that may have no interest in continuing to operate the management investment schemes. This, say the growers, will make it difficult, if not impossible, for them to find a replacement responsible entity. 18 In essence, what the growers want is for the receivers not to deal with the leases and profits notwithstanding that they are charged to the banks to secure a debt of around $220 million. To justify this stand the growers contend that the receivers owe duties to the growers which override the usual duty of receivers, which is to get in the charged assets, sell them on the best available terms and liquidate the secured creditor's debt. 19 It goes without saying that if the growers' contention be accepted, it will put a severe dent in the utility, from a lender's perspective, of providing finance to companies involved in managed investment schemes. Whether that be in the interests generally of managed investment schemes and their continued viability is not for me to say. All I need to do is decide the extent to which, if at all, the interests of a secured creditor are required to be subordinated to those of the members of a managed investment scheme. 20 The foundation upon which the growers build their case, namely that the receivers owe them a duty superior to the duty they owe to the banks, is two provisions (and their associated definitions) in Ch 5C of the Corporations Act 2001 (Cth), which deals with managed investment schemes. The relevant provisions are ss 601FC and 601FD. Relevantly they provide that the responsible entity of a managed investment scheme must "act in the best interests of the members and, if there is a conflict between the members' interests and its own interest, give priority to the members' interests" (s 601FC(1)(c)) and that an "officer" of a responsible entity must "act in the best interests of the members and, if there is a conflict between the members' interests and the interests of the responsible entity, give priority to the members' interests" (s 601FD(1)(c). 21 The way the argument runs is as follows: Step 1:The receivers have been appointed to receive the assets of the responsible entity (FEAP) other than the scheme assets; Step 2:Each receiver therefore is a receiver of "the property of the corporation" and hence an "officer" within the definition in s 9 of the Corporations Law. This step assumes that a person appointed to receive only some of the property of a corporation is a receiver of "the property" of that corporation, a proposition which is not self-evidently correct but has not been put in issue; Step 3:Being an officer in accordance with the definition in s 9, it follows that each receiver is an "officer" of a responsible entity for the purposes of s 601FD, owing the duties therein imposed (including the duty to act in the best interests of the members of the managed investment scheme (ie the growers)). This step assumes that there is "no contrary intention" to the application of the s 9 definition, a proposition which is very much in dispute; Step 4:The performance of the statutory duty imposed by s 601FD(1)(c) relates not only to acts done, or not done, by the receivers on behalf of the responsible entity but also to acts done, or not done, by them in any other capacity (eg as receivers of the assets of another corporation) provided those acts may adversely affect the interests of members of the managed investment scheme. This step has not been expressly articulated but is a necessary step in the grower's argument, for what they complain about is the receivers' proposed actions as receivers of FEA, which is not the responsible entity of any of the schemes; Step 5:It would be a breach of the receivers' statutory duty to do any act which adversely impacts on the growers; and Step 6:There would be an adverse impact on the interests of the growers if the receivers of FEA were to take any of the suggested steps with the land for the purposes of reducing (or discharging) the debt due to the banks. It would adversely impact on their interests as it would diminish the growers' rights or make it more difficult for them to find a substitute responsible entity. 22 Bold as this line of reasoning may be, it breaks down in several of the steps. The most significant flaw is step 3 and the assumption that the "officers" of the responsible entity who owe duties imposed by s 601FD(1) include receivers. This assumption would be correct if the s 9 definition of "officer" applies to s 601FD(1) without modification. In my view, however, the enacting history of Ch 5C (a history that occurs before the Corporations Law was repealed and replaced by the Corporations Act) shows a contrary intention. 23 In 1991 the Commonwealth Attorney General referred to the Australian Law Reform Commission (ALRC) and the Companies and Securities Advisory Committee for review and report the questions whether the regulation of collective investment schemes was efficient and effective and whether a different operating structure should be provided for those schemes. A "collective investment scheme", a somewhat loose expression, was intended to refer to investments in which the investors' contributions were pooled to acquire an asset from which they would share the profits or losses. At the time the most popular forms of collective investment schemes were "prescribed interests", which were regulated by Ch 7 of the Corporations Law (the securities chapter). A prescribed interest covered a diverse range of investments but, in essence, was a right to participate in the profits of a financial or business undertaking or the profits from any common enterprise. 24 In October 1992 the ALRC and the Advisory Committee published a discussion paper entitled "Collective Investment Schemes" (Discussion Paper 53), which contained a proposed regulatory regime for collective investment schemes. A key proposal of this regime was that the operation of a collective investment scheme be the responsibility of a single entity. Another proposal was that the Corporations Law contain a minimum set of duties that the responsible entity must comply with. In that regard it was suggested that the responsible entity be subject to the following statutory duties: (1) to hold property for the benefit of investors; (2) to become familiar with the constituting documents and to interpret the rules fairly; (3) to act honestly in all matters concerning the scheme; (4) to avoid conflicts of interest; (5) to act always in the best interests of the investors; (6) to exercise care and diligence; (7) to keep scheme money and assets separate from the responsible entity's money and assets; (8) to exercise discretions only after proper consideration; (9) to act personally and not to delegate; and (10) not to make a profit from the collective investment scheme other than as provided for in the constituting document: see Discussion Paper 53 proposal 4.7. 25 It was also proposed that parallel duties be owed to investors by each member of an unincorporated responsible entity and by each director of an incorporated entity: Discussion Paper 53 proposal 4.8. 26 Following a consultation process, in 1993, the ALRC and the Advisory Committee published their report, "Collective Investments: Other People's Money" (Report No 65). The Report recommended sweeping changes to the existing regulation of collective investment schemes. The Report was accompanied by a draft Bill and a suggested Explanatory Memorandum. 27 As regards the regulation of schemes, the recommendation was that only a public corporation should be the responsible entity in charge of managing a scheme: Report at [10.2]. The Report recommended that the Corporations Law should be amended to set out the obligations that were to be owed by the operator of a collective investment scheme: Report at [10.6]. One obligation was a duty to act in the interests of investors. This was explained (at [10.8]) in the following way: Investors in collective investment schemes rely heavily on the operator to act in their best interests. Nevertheless, there will often be a potential for conflict between their interests and those of the operator … [c]onflicts of interest between scheme operators and investors are inevitable. The Review has concluded that the appropriate formulation of the test is that operators must prefer the interests of investors over their own interests where any conflicts arise. The Review recommends that the Corporations Law should impose an obligation on the operator of a collective investment scheme to exercise its powers and perform its duties as operator in the best interests of investors rather than in its own, or anyone else's, interest, if that interest is not identical to the interests of the scheme investors. 28 The Review also recommended that investors should have obligations owed to them by the officers of the operator: Report at [10.16]. Investors would be entitled to take action against officers to enforce those rights directly, without first proceeding against the company. Those rights were to be modelled on s 232 of the Corporations Law: Report at [10.16]. In summary, s 232 imposed upon an officer of a corporation the obligations to act honestly in the exercise of his/her powers, to exercise a reasonable degree of care and diligence in the exercise of his/her powers, not to make improper use of information acquired by his/her position, and not to make any improper use of his/her position to gain an advantage for himself/herself. 29 In the draft Bill which accompanied the Report, cl 232AA dealt with the additional duties of officers of responsible entities. This is the clause upon which s 601FC was modelled. The duties mentioned in cl 232AA are: (1) to take reasonable steps to ensure that the operator complies with the obligations of the operator; (2) in relation to the exercise of powers, to use the degree of diligence and care that a reasonable person in a like position would exercise; (3) to act honestly; (4) not to exercise his/her powers in the interest of himself/herself; (5) not to use his/her position to gain advantage for himself/herself. 30 Clause 232AA(8) contained a definition of "officer" for the purposes of cl 232AA, which was in the following terms: "Officer", in relation to a body corporate, means a director, secretary or other executive officer of the body corporate. 31 Chapter 5C was introduced in 1998 by the Managed Investments Act 1998 (Cth). Broadly speaking, the new chapter adopted the Review's proposals in relation to what came to be called managed investment schemes. In particular, provision was made for the responsible entity, which was to be a public company (s 601FA), to operate a managed investment scheme (s 601FB). In exercising its powers, the responsible entity was required to observe the duties set out in s 601FC(1). Relevantly s 601FC(1) provided that the responsible entity must: (a) act honestly; and (b) exercise the degree of care and diligence that a reasonable person would exercise if they were in the responsible entity's position; and (c) act in the best interests of the members and, if there is a conflict between the members' interests and its own interests, give priority to the members' interests; and … (e) not make use of information acquired through being the responsible entity in order to: (i) gain an improper advantage for itself or another person; or (ii) cause detriment to the members of the scheme; and … The duties of the responsible entity imposed by s 601FC(1) overrode any conflicting duty an officer or employee of the responsible entity owed under Pt 2D.1: s 601FC(3). Part 2D.1 was where the general duties of directors and other officers were to be found. 32 The new Chapter also adopted the proposal that duties be imposed upon officers of the responsible entity. That is the function of s 601FD(1), which relevantly provided that an officer must: (a) act honestly; and (b) exercise the degree of care and diligence that a reasonable person would exercise if they were in the officer's position; and (c) act in the best interests of the members and, if there is a conflict between the members' interests and the interests of the responsible entity, give priority to the members' interests; and (d) not make use of information acquired through being an officer of the responsible entity in order to: (i) gain an improper advantage for the officer or another person; or (ii) cause detriment to the members of the scheme; and (e) not make improper use of their position as an officer to gain, directly or indirectly, an advantage for themselves or for any other person or to cause detriment to the members of the scheme; and … The duties of an officer overrode any conflicting duties the officer has under Pt 2D.1: s 601FD(2). 33 There was no provision in Chapter 5C which contained a definition of "officer". Instead the definition of "officer" in s 9 was amended so that officer: (a) in relation to the responsible entity of a registered scheme - means a person who is a director, secretary or executive officer of the responsible entity; or (b) in any other case - has the meaning given by section 82A. 34 Paragraph (a) of this definition closely followed the language of cl 232AA(8) of the draft Bill. It may be contrasted with the definition of "officer" of a corporation in s 82A of the Corporations Law. That definition included as an "officer" receivers and managers, administrators of the body or entity, administrators of a DOCA and liquidators, but expressly excluded, among others, receivers who are not managers, receivers and managers appointed by the court and liquidators appointed by the court. 35 So, with the introduction of the new regime, including the requirement that a public company be the responsible entity of a managed investment scheme and the imposition of duties on the company and its officers, the duties in s 601FD were not imposed on privately appointed receivers. Now it is argued that this position changed when a new definition of "officer" was introduced by the Corporate Law Economic Reform Act 1999 (Cth). By that Act (Item 113 of Pt 3 of Sch 3) the definition of "officer" in s 9 was repealed and replaced by a new definition. That definition includes as an officer: … (c) a receiver, or receiver and manager, of the property of the corporation; or (d) an administrator of the corporation; or (e) an administrator of a deed of company arrangement; or (f) a liquidator; or … 36 The question that arises is whether each of those persons is an officer for the purposes of s 601FD(1). In particular, in this case the issue is whether a receiver (not a receiver who is also a manager) of the property of a responsible entity is an "officer" and hence bound by the duties imposed by s 601FD(1). 37 Once again the answer will be found in the enacting history of the provisions of which the new definition forms a part. In March 1997 the Treasurer announced that as part of the Government's new Corporate Law Economic Reform Program (CLERP), reviews would be undertaken in key areas of corporate law policy. One of those areas was directors' duties and corporate governance. Proposals for the reform of directors' duties were contained in CLERP Paper No 3 ("Directors' Duties and Corporate Governance") published in late 1997. The proposals included amendments to the Corporations Law that would clarify key aspects of the duties owed by directors and officers in areas such as the duty to exercise care and diligence, the obligation to act honestly and the duty to avoid conflicts. 38 The proposals relating to directors' duties contained in the Paper were enacted by the Corporate Law Economic Reform Act as were other CLERP proposals. According to the "Commentary on Draft Provisions" published by the Department of Treasury (at 56): 71. The draft provisions rewrite the duties of officers and employees in current section 232 of the Law to make it easer for company officers to know what is expected of them. 72. The draft provisions define officer to include a director or secretary as well as certain other persons who may manage the company, but not employees (proposed subsection 1(2)). Where an obligation imposed by the Law applies to employees, as well as officers, the Law will state this. 39 The draft provisions contained the new definition of "officer", which was substantially the same as the definition in s 82A of the Corporations Law. That definition (ie the s 82A definition) was not intended to apply to a responsible entity, as the original legislation made plain. 40 Against this background, it is, in my view, clear that the new legislation did not intend to bring about a change in the regulation of managed investment schemes. Moreover, neither the CLERP reviews nor the recommendations which were adopted by the amendments introduced in the Corporate Law Economic Reform Act, concerned the effectiveness of the operation of managed investment schemes. Indeed, neither these schemes nor Chapter 5C were mentioned in any review. For that reason I do not accept that such an important change as is here suggested would be made to Chapter 5C effectively by a sidewind. 41 Finally, the conclusion is confirmed by what I see as the object of s 601FD(1). The object is to complement the duties owed by the responsible entity. That is achieved by imposing duties on persons who control the responsible entity's activities in the administration of a managed investment scheme and its dealings with scheme assets. A receiver, particularly a receiver who is not also a manager, plays no part in the administration of a scheme nor in the decisions regarding the investment of scheme assets. 42 A party appointed receiver has different functions. They are, as I have said, to take possession of the charged assets (which in this case do not include scheme assets) and realise them to pay out the debt due to the chargee. There is no reason to bring such a person under the operation of s 601FD(1). A fortiori in the case of court appointed receivers and liquidators who, being court officers, owe their duties to the court that appointed them. Indeed those duties may be in conflict with the duties set out in s 601FD(1). 43 Step 3 is not the only flaw in the growers' case. Another problem is Step 4 - the proposition that the duties imposed on officers of a responsible entity are transported to actions they may take in some other capacity (eg as officers of another corporation). That is not the effect of s 601FD(1). Its operation is simple enough. The section establishes a norm of conduct for officers of a responsible entity. That standard applies to that officer only when he/she is acting in that capacity: ie when the officer's action or non-action can be attributed to the responsible entity by operation of law or can bind the responsible entity under principles of agency. There is no basis for reading into s 601FD(1) an intention to regulate the conduct of an officer when acting in some other capacity. 44 There is yet another false step. The last step - that it is not in the interests of the growers to deal with the leases and profits - is far from obvious. It may be accepted that if there is a real possibility that a new responsible entity could be found to take over the schemes it would be in the growers' interests to maintain the status quo. But the status quo could only be maintained for a short period. Sooner or later the group's debts must be paid and, because the banks hold security for this debt, the security will be realised. 45 Further, even if, contrary to my view, the receivers are under the duties imposed by s 601FD(1), that would not assist growers. A duty to act in the best interests of the growers cannot, in my opinion, be used as a justification for the responsible entity or its officers to ignore bargains freely entered into. Put bluntly, neither s 601FC nor s 601FD permits a responsible entity to breach, or its officers to procure a breach of, obligations that the responsible entity or a related company owes to a third party. It follows that s 601FD(1) does not prevent a receiver from realising charged assets (including putting those assets into a proper condition for sale) to enable payment of the debt due to the secured creditor. 46 I accept that the duty (if there be one) could come into play if the receiver has available to him/her alternative courses of action; one that would advantage and the other that would disadvantage investors. In that event the receiver would be required to take the course that would avoid harm to investors. This, however, is not one of those cases. 47 This brings me back to the receivers' application for directions. The conditions which gave rise to the application have disappeared. The administrators will do the work which, had it not been done, may have put the receivers at personal risk of a fine or imprisonment. The growers have no basis to make a claim against the receivers for breach of s 601FD(1). All that is left is for the receivers to act in accordance with their usual obligations. In that regard they do not need any protection from the court. In any event, they cannot ask for protection until they have decided upon a specific course of conduct which may result in some person contending that their conduct is in breach of duty. There is as yet no action in respect of which the receivers could receive court sanction. 48 Accordingly I do not propose to make the direction sought. I will hear the parties on costs. I certify that the preceding forty-eight (48) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein.