The Bank's case against Colly
213 The Bank seeks a declaration that the sale proceeds for the 2001/2002 cotton crop delivered by the Company to Colly are subject to the Bank's Crop Lien dated 30 November 2001, registered number 840430, for the amount outstanding for the seasonal crop facility dated 30 November 2001 provided by the Bank to the Company and secured by the Crop Lien. The Bank also seeks a declaration that it is entitled to be paid those sale proceeds in priority to any set-off or claim between Colly and the Company. There is also a claim for a declaration that Colly holds the sale proceeds on trust for the Bank and a claim for an order that Colly pay the Bank the sum of $390,571.10 together with interest on that sum at the rate of 8.35% per annum from 19 June 2003 until the date of payment.
214 Colly's defence pleaded that: (1) the Bank's interest in the crop pursuant to the Crop Lien expired on 30 November 2002 (par. 16 of the Amended Defence (AD)); (2) Colly had a right of set-off under clause 35.2 of its Contract with the grower and that such amounted to a charge which defeated the Bank's interest in the crop (par. 17 to 19 of the AD); (3) that a purported assignment pursuant to clause 4(B) of the Crop Lien had not taken place and, even if it had occurred the book debt is to be reduced by Colly's set-off pursuant to clause 35.2 of the Contract (par. 20(a) & (c) of the AD); and (4) Colly had a contractual entitlement as between it and the Bank to a set-off (par 29 to 31 of the AD). On the second last day of the trial, 18 April 2005, Colly abandoned these defences.
215 Colly argued only two defences. The first is a defence that as a matter of construction of the Crop Lien, the proceeds the subject of the purported assignment pursuant to clause 4(B) of the Crop Lien, are the proceeds of sale after deducting, inter alia, the amount of the set-off pursuant to clause 35.2 of the Contract (Construction of the Crop Lien).
216 The second is a claim that the Bank is estopped from denying that Colly is entitled to the set-off prior to any amount being paid to the Bank. It is alleged that the Bank encouraged in Colly an assumption that the Bank would allow it to exercise a right of set-off in respect of the proceeds of sale and that the Bank would not enforce its rights in respect of such proceeds in a way inconsistent with Colly's right of set-off. Colly grounds the alleged assumption firstly in the Bank's conduct in 2001, when Colly alleges the bank allowed Colly to exercise a right of set-off before paying outstanding amounts to the Bank. Secondly the assumption is said to arise from the sending of the Notice to Marketor and the return of the amended Acknowledgement. Colly alleges that in reliance upon the assumption, and induced thereby, it acted to its detriment by liquidating the grower's currency positions in June 2002 and refrained from taking other steps (Estoppel Defence).
217 The relevant Crop Lien was dated 30 November 2001 between the Bank as Lienee and the Company as Lienor and Borrower. The "Advance" was recorded as "$350,000 plus any further advances for the 2001-2002 season cotton crop" which the Bank "may in its sole discretion agree to make at the request of the Lienor". "Property" was identified as "Lands upon which the Crops are growing or are about to be grown: 'Charlievale' at Warren" with reference to "attached" plans for the location of the cotton fields. The "crops" were recorded as cotton. The Facility Agreement was identified as the agreement between the Lienee and the borrower dated 30 November 2001.
218 The Crop Lien included the following:
4. LIEN ON CROPS
In consideration of:
(a) the Advance and any monies paid by the Lienee to the Lienor or to the Borrower pursuant to the Facility Agreement;
(b) any money now owing by the Lienor or the Borrower to PIBA, and the forbearance of PIBA to take immediate legal proceedings to recover that amount; and
(c) any further financial accommodation which may at any time be provided by PIBA to the Lienor or the Borrower on any account whatever;
the Lienor as beneficial owner of the Crops hereby:
(A) gives PIBA a preferable lien on the Crops; and
(B) assigns to PIBA the proceeds of sale of the Crops and all book debts now or subsequently to become due in respect of the proceeds of sale of the Crops;
to the extent of the Loan Balance together with interest at the Rate of Interest.
5. DEFAULT
It is agreed that if the Lienor does not pay the Loan Balance to the Lienee together with interest at the Rate of Interest on or before the expiration of the Loan Period or the Lienor or Borrower is in default of the Facility Agreement:
(a) the Crop shall be gathered carried away and made marketable by the Lienee or at the expense of the Lienor and shall be delivered to the gin at the location stipulated by the Lienee or stipulated in a ginning agreement approved by the Lienee or to the Lienee in which event the Lienee may sell the Crop by any of the means stipulated in the Facility Agreement, and from the proceeds may deduct all amounts owing under the Facility Agreement and shall pay to the Lienor the balance (if any), or if there be any deficiency may recover the same against the Lienor at law as any debt or otherwise in accordance with the Facility Agreement;
(b) The Lienee may appoint in writing any person or any two or more persons jointly and/or severally to be receiver, manager, receiver and manager, or agent of Lienee of the whole or any part of the Crops whether or not a receiver has been previously appointed, which persons shall have those rights stipulated in the Facility Agreement; and
(c) The Lienee may exercise any of its rights under the Facility Agreement.
6. PIBA'S PRIORITY
(a) This Crop Lien confers on PIBA priority over any subsequent security over the Crops for the Loan Balance even though the whole or any part of the money may be advanced, re-advanced, or made available after the date of this Crop Lien or after the date of any subsequent security.
(b) This Crop Lien is, and will remain in force as, a continuing security even though any amount at any time is paid so that the Borrower's account with PIBA is or appears to be in credit and despite any statement of account or anything else in the same manner as if the maximum amount of the Advance had been advanced or made available to the Borrower or the Borrower by PIBA before the date of any subsequent security.
(c) PIBA in its discretion may decline to execute a release of this Crop Lien if payment made is satisfaction of the Advance remains liable to be avoided under any law relating to insolvency.
7. PRIORITY AMOUNT
For the purpose only of fixing priorities between this Crop Lien and any other security interest given by Lienor and without affecting any obligation of the Lienor under this Crop Lien, the maximum prospective liability secured by this Crop Lien is the amount specified in any Corporations Law form relating to this Crop Lien.
8. INCONSISTENCEY
Where there is any inconsistency between the terms of this Crop Lien and the Facility Document, the Facility Document shall prevail.
219 Under the Facility Agreement the Company represented and warranted to the Bank that it had "good right and title to the crops" and that the crops were "free from all other liens, encumbrances and security interests" (cl H1(i) and (j)). The Facility Agreement also gave the Bank certain rights upon an Event of Default including the right to enter upon the property and harvest, gather, carry away, store and make marketable the crops or deliver them to the relevant gin or both (cl J2(c)).
220 Peter James Anderson, Branch Manager of the Dubbo Branch of the Bank, gave evidence that in 2002 the Company delivered 1,683 bales from the cotton crop to Colly and that the price payable by Colly to the Company was the Australian dollar equivalent sum of US$502,239. Mr Anderson's evidence was that in June 2002, when the foreign exchange contracts were closed out, a foreign exchange loss of $382,745.29 was realised. That was made up as follows: $44,355.48 in respect of the 2002 year; $155,138.15 in respect of the 2003 year; $83,726.19 in respect of the 2004; and $99,525.46 in respect of the 2005 year.
221 On 19 July 2002 Colly paid only $72,651.41 to the Bank and, notwithstanding the Bank's demand, Colly has refused to pay the balance alleged to be outstanding under the Crop Lien being $390,571.10.
222 Section 4 of the Liens on Crops and Wool and Stock Mortgages Act 1898 provides:
4. Lien on yearly crops
In all cases where any person makes any bona fide advance of money or goods to any holder of land on condition of receiving as security for the same the growing of crop or crops of agricultural or horticultural produce on any such land, and where the agreement relating to such security is made in the form or to the effect of the Second Schedule hereto, and purports on the face of it to have been made as security for such advance, and is duly registered within thirty days after its date in the General Register of Deeds, the person making such advance, whether before, at, or after the date of such agreement, shall have a preferable lien upon, and be entitled to the whole of such crop and the whole produce thereof, and possession thereof by the lienor shall be to all intents and purposes in the law the possession of the lienee, and when such advance is repaid with interest specified in such agreement the possession and property of such crop shall revert to and vest in the lienor.
223 "Agricultural produce" includes cotton (s 3). The "General Register of Deeds" is defined as "the General Register of Deeds maintained under Part 23 of the Conveyancing Act 1919: (s 3). Section 184C(2) in Part 23 of the Conveyancing Act, provides that the General Register of Deeds shall be comprised of, inter alia, (g) instruments registered under the Liens on Crops and Wool and Stock Mortgages Act 1898 after the commencement of the Liens on Crops and Wool and Stock Mortgages (Amendment) Act 1992". The method of registration is dealt with in s 184E, which provides that registration is "effected by the Registrar-General allocating a distinctive reference to the instrument in accordance with the regulations in order to signify registration of the instrument".
224 In Attorney General for NSW v Hill & Halls Limited (1923) 32 CLR 112, the plaintiff and the defendant had each entered into agreements with Walter Patrick Evans to secure the advances to him with security over crops. The agreement with the plaintiff was made on 2 May 1921 and registered on 10 May 1921. The agreement with the defendant was made on 7 May 1921, but was registered on 7 May 1921 before the registration of the plaintiff's Lien. The Supreme Court had ordered that judgment be entered for the defendant and, on appeal, the High Court unanimously, for varying reasons, upheld the appeal. Knox CJ described the "short point" before the Court as follows at 118:
The short point may be stated thus: the defendants contend that the registration of any agreement is a condition precedent to the acquisition of the rights conferred by the Act; the plaintiff contends that immediately an agreement is made in the form and for the purposes of the Act, all the rights by the Act conferred come into existence but may be lost if registration of such agreement does not take place within thirty days after the date of that agreement.
Knox CJ also said at 119-120:
The true meaning of the Act seems to be that, on registration of a proper agreement within thirty days after its execution, the lienee is to be regarded as having had a valid security as from the date of the execution of the lien.
225 Isaacs and Rich JJ said at 125 that the effect of the Act was:
(1) to enable the "holder of land" to give, even before crops come into existence, a lien on those crops after they come into existence and are severed; (2) to make that lien "preferable", that is, a preference lien (just as shares are preference shares), over every other claim, including bankruptcy, that might otherwise exist in respect of the crops; and (3) to leave the landholder in actual possession of the crops until the time comes for enforcing the lien.
226 Their Honours also said at 130 that "preferable" means taking precedence over all other rights. Finally their Honours said at 126-127:
A new legal interest with new rights and obligations and new consequences was therefore devised, primarily for the relief of the property owners, with appropriate protection to the lenders. The course prescribed by the Legislature for the relief of the property owner and the assured security of the lender is:- (1) Advance to be on condition of "receiving as security" only for such advance a lien on the crop. That looks ahead to the time of the severance of the crop from the land , and is a present fictional separation of the two for the purposes of the Act. (2) An agreement in the statutory form. The agreement carries out the same idea. (3) Registration within thirty days; which, of course, means at any time within the thirty days. Obviously, taking that Act alone, once the landholder has done all he can do to invest the lender with the statutory right, he cannot be supposed to derogate from that, and, provided the lender follows the only requirements demanded of him by the Legislature, he would be protected by the legislative declaration of consequences.
227 Registration is pivotal to the effectiveness or validity of the Crop Lien. Under the Act the Crop Lien was to be registered in the General Register of Deeds kept pursuant to Part 23 of the Conveyancing Act 1919. However, Part 2K.2 of the Corporations Act 2001 was in force at the time the Crop Lien was given on 30 November 2001. The Crop Lien was not registered in the General Register of Deeds under the Conveyancing Act 1919. It was registered under Part 2K.2 of the Corporations Act 2001. Section 273A deals with how particular State laws apply to a charge if notice of the charge must be lodged under Part 2K.2. The Liens on Crops and Wool and Stock Mortgages Act 1898 (the State Act) is a "specified law" for the purposes of Part 2K.2 (s 273A). Section 273A(2) provides that, "a failure to register the charge under a specified law does not affect the validity, or limit the effect, of the charge".
228 The Corporations Act 2001 also provides relevantly:
Application of Specified State and Territory Laws to crop liens, wool liens and stock mortgages registered under this Part
273C (1) [Specified laws and applicable registration laws]
This section deals with how particular State and Territory laws apply to a crop lien, wool lien or stock mortgage given by a company that is registrable under those laws if:
(a) notice in relation to the lien or stock mortgage is required to be lodged under this Part; and
(b) the lien or mortgage is registered under this Part.
The laws are called specified laws and are identified in subsections (3) and (4). The particular specified law under which the lien or mortgage is registrable is called the applicable registration law .
Note : section 273E provides that this section does not apply to certain joint charges.
273C (2) [Effect of Lien or Mortgage]
The lien or mortgage is, subject to subsection 273A (3), as valid and effectual as if it had been duly registered under the applicable registration law.
229 The reference in the Note to s 273E seems to be an error as there is no s 273E. It seems the Note was intended to refer to s 273D which provides that a charge given by a company jointly with another person who is not a company is not governed by Part 2K.2. That is not relevant in this case because the Lien was given by the Company alone. The question of priorities of charges referred to in s 273A(3) is also not of any relevance because no other charge has been registered or relied upon in this case. Thus the effect of s 273E(2) is that the registration of the Lien under the Corporations Act is as valid and effectual as if the Lien had been "duly registered" under the State law. The fact that the Lien was not registered within 30 days, as required under the State law, but was registered within 45 days, applicable under the Corporations Act 2001, does not affect its validity. It is as valid and effectual as if it had been registered under the State Act within 30 days.
230 In cross-examination Mr Anderson agreed that Mr Simmons contacted the Bank in December 2001 and advised him that no proceeds were due to the Company or the Bank in respect of the crop for the 2000/2001 season "due to the closing out of the currency positions" (tr 20). Mr Simmons informed Mr Anderson that it was because "certain sums were going to be deducted from the proceeds of sale of that crop" (tr 21). Mr Anderson assumed that the deductions were being made by Colly and that it was likely that the deductions would be made pursuant to the marketing agreement between Colly and the grower (tr 21). Mr Anderson said that he had no knowledge of the amounts that Colly was entitled to deduct, the amounts that Colly in fact deducted, or the basis on which any amounts were deducted. He agreed that he knew that if a grower made a loss, Colly would seek to recoup that loss from the grower, "if the Contracts were expiring that year" (tr 24).
231 Mr Anderson gave evidence that in February 2002 he did not look at the Acknowledgment from Colly at the time it was received. He did not read it and it was not brought to his attention. He first became aware of the contents of that Acknowledgment in late June or early July 2002. He gave the following evidence in cross-examination (tr 28-30):
Q. And as at late 2001/early 2002, you were aware that recipients of these acknowledgments might alter them in some way before returning them?
A. Yes.
Q. And there are a number of ways in which a recipient could alter an acknowledgment, weren't there?
A. Obviously, yes.
Q. As at late 2001/early 2002 you realised that an alteration, depending of course on what it was, might affect what, if indeed anything, the recipient was acknowledging; correct?
A. Yes.
Q. As at late 2001/early 2002 it was your understanding that the recipient of an acknowledgment form might regard it as being of importance what it had told you in the acknowledgment form?
A. No. I mean many merchants didn't return them. Some were returned without any reference to any of the stuff above, so potentially not
…
Q. I am suggesting to you that in late 2001/early 2002 it was your understanding that a recipient might regard what it had told you in the acknowledgment form as being of importance. Was that your understanding or not?
A. It might.
Q. And as at that time you understood that a recipient might regard it as being of importance that it had told you what it had said in the altered acknowledgment?
A. The importance of that document, historically when they are being returned some have just been crossed out all together, some have been altered, some haven't been touched, so the issue is is that important if they have all been crossed out. Obviously the merchant wasn't prepared to give that information. Whether that's important to them or not, I mean my understanding is it isn't because in many cases they weren't returned and at that stage I was aware of this, they weren't returned or they were crossed out or, you know, not completed. So did I think they thought it was important? No.
Q. Some of them altered the document and returned it in an altered form correct?
A. Yes.
Q. Did it not occur to you in late 2001/early 2002 that some of the merchants who took the trouble to do that might regard what they were telling you as being of some importance?
A. No, because, as I said, some of the merchants crossed out the whole page.
Q. Did it occur to you in late 2001/early 2002 that a recipient of an acknowledgment might alter his course of conduct depending upon the information that he had provided to PIBA in the acknowledgment.
A. No.
Q. Did it occur to you in late 2001/early 2002 that the recipient of an acknowledgment might alter his conduct depending upon whether PIBA responded or did not respond to the altered acknowledgment which he had sent to PIBA?
A. No.
232 Mr Butler has worked in the cotton industry for approximately 35 years and holds a diploma in accounting that he obtained in 1975. Mr Butler acknowledged in his evidence that Colly received the Notice to Marketor in respect of the Crop Lien granted to the Bank by the Company in October 2000. Colly's records show that the gross Australian dollar proceeds for the 2001 crop were $242,698.95. From that amount Colly deducted an amount of $145,915.15 for losses incurred in trading out of excess currency for the 2001 season, leaving net proceeds of $96,783.80. Colly made further deductions from the net proceeds for quality discount, ginning charges and for part-payment of a grower debt that had been carried forward from previous seasons. Mr Butler claimed that Mr Simmons ultimately received $9,262.56 for his 2001 crop representing the amount payable by Colly for GST liability.