IN THE MATTER of a caveat lodged by TRANSMETRO CORPORATION LIMITED ACN 001 809 043

1 On 4 November, 1998 pursuant to a resolution of their creditors, Real Investments Pty Ltd ("Investments") and Ballville Pty Ltd ("Ballville") went into liquidation. On 3 December, 1998 the liquidator of the two companies gave notice, pursuant to section 568A(1) of the Corporations Law 1989 (Cth), that he disclaimed a contract described as "Management Agreement and Sub-lease" dated 12 March, 1997 between Investments and Transmetro Corporation Limited ("Transmetro"). A similar notice was given in respect of an agreement of the same description and date made between Ballville and Transmetro. There is in fact only one agreement. Each of Investments, Ballville and Transmetro were parties to it. On 17 December, 1998, Transmetro applied for an order that the two notices of disclaimer should be set aside or, alternatively, be declared invalid "because of the failure of the liquidator to obtain the leave of the court to disclaim" the contract.

2 Transmetro is a listed company which carries on the business of managing hotels. It owns one hotel property itself, but for the most part operates hotels in premises owned by others. It obtains income from fees paid for the provision of its management services. Investments owns land located in Montague Road, South Brisbane, adjacent to the William Jolly Bridge. It developed the land by the construction of a building which could be conveniently utilised as a hotel. The real property was subdivided into 162 lots pursuant to the Building Units and Group Titles Act 1980. The subdivision consisted of 159 accommodation units and two commercial lots, lots 1 and 65 on BUP No. 106759. There was, as well, another lot in which a cafe was to be located.

3 The Management Agreement and Sub-Lease ("the agreement") to which Investments, Ballville and Transmetro bound themselves shows by the recitals what the parties intended it to achieve. The intentions were:

* all residential lots would be sold by Investments to members of the public. A term of each contract of sale would oblige the purchasers to lease the lot to Ballville;

* Investments would lease the two commercial lots, 1 and 65, to Ballville;

* Ballville would carry on the business of a hotel utilising the residential lots leased to it by the purchasers and the commercial lots leased to it by Investments;

* Transmetro agreed to provide management, marketing, administrative and maintenance services to Ballville to enable it to conduct the hotel business. As well, Transmetro was to provide financial assistance to both Investments and Ballville.

* to secure Transmetro's position Ballville agreed to sub-lease to Transmetro all the lots of which it was lessee.

4 The term of the agreement was, by clause 1.39, to be five years. Clause 2.4 conferred on Transmetro three options to renew the term for successive periods of five years each. By clause 3.1(d) Investments promised to do all things and sign all documents which Ballville and/or Transmetro might from time to time reasonably require to assist the conduct of the hotel business. Pursuant to clause 3.2, Ballville appointed Transmetro its agent to manage Ballville's hotel business. By clause 5.2 Transmetro, as agent for Ballville, was to hire, dismiss and control employees necessary for the operation of the hotel. Except for the general manager, all employees were to be employed by Ballville, though the discharge of their duties were to be controlled by Transmetro. The general manager was to be a Transmetro employee. For the purpose of enabling Transmetro to manage the hotel clause 5.3 empowered it, as agent for Ballville, to make such contracts as it thought necessary for the running of the hotel. By clause 6.1, Ballville had to establish bank accounts for the operation of the hotel. To the extent that bank accommodation might be necessary to provide working capital, Ballville was to obtain the accommodation but was allowed to charge the hotel's stock and debtors as security for any advance.

5 Pursuant to clause 12 Ballville agreed to pay Transmetro a management fee equal to a percentage of nett operating profit on a sliding scale found in annexure 6 to the agreement. Ballville was obliged by clause 16 to maintain policies of insurance identified in annexure 10 for the whole of the term of the agreement including renewals. Clause 25.1 provided that on or prior to the commencing date, Ballville should grant and Transmetro should accept sub-leases of all lots in the hotel to be leased by Ballville from Investments and purchasers of lots. The sub-leases were to be in registerable form. The term of each sub-lease was to commence on the commencing date and expire on the day immediately preceding the expiration of the relevant head-lease. The commencing date was quite elaborately defined. I will later identify the salient features of the definition.

6 The expenses which would be incurred in operating the hotel were to be paid out of the revenues earned on behalf of Ballville or, to the extent they were insufficient, from working capital constituted by bank accommodation which Ballville was to establish prior to the commencing date. A combination of clauses 1.15, 1.25, 1.27, 1.35 and 6.2 brought about this result.

7 The by-laws made with respect to the building unit plan for the hotel provide (by-law 30) that the proprietor of lot 1 should be entitled to establish and maintain in it such installations as were necessary for an entry, lobby and hotel reception. By-law 31 gives to the proprietor of lot 1 exclusive use in respect of all recreational facilities on defined common property. Similar rights are conferred on the proprietor of lot 65. By-law 32 effectively gives control of the management and letting rights of the hotel to the proprietor of the two lots.

8 As at 4 November, 1998, Investments had sold 113 residential lots. It remains the registered proprietor of the forty-six accommodation lots unsold and lots 1, 2 and 65. Lot 2 was to be the cafe.

9 Each contract for the sale of a residential lot provided, by clause 33, that the purchaser should deliver to Ballville "a duly completed and signed lease" seven days prior to completion. The annual rental was an amount equal to 7 per cent of the purchase price. The terms of the lease were found in schedule 4 to the contract. By clause 12.1 of the standard form lease it was agreed that:

"This Lease shall be deemed to be terminated automatically upon the winding up or passing of a resolution for the administration of [Ballville] pursuant to the Corporations Law ..."

10 The rent payable under each sub-lease was $1.00 per year. No lease of either lot 1 or 65 was ever granted by Investments to Ballville; Ballville in turn never sub-leased these lots (or indeed any accommodation lot) to Transmetro.

11 In addition to its application to set aside the disclaimers, Transmetro commenced an action (10810 of 1998) against Investments and Ballville seeking specific performance of part of the agreement which Transmetro alleges amounts to a promise by Investments to lease lots 1 and 65 to Ballville and a promise by Ballville to sub-lease those lots to it. To protect its claimed interest in the lots Transmetro lodged a caveat on 8 December, 1998. On 23 December, 1998 Investments filed Originating Summons 11930 of 1998 seeking an order that the caveat be removed.

12 The relevant provisions of the Corporations Law are found in Part 5.6, Division 7A entitled "Disclaimer of Onerous Property". They are:

Subject to this section, a liquidator of a company may at any time, on the company's behalf, by signed writing disclaim property of the company that consists of:

(c) property that is unsaleable or is not readily saleable; or

(d) property that may give rise to a liability to pay money or some other onerous obligation; or

(e) property where it is reasonable to expect that costs ... that would be incurred in realising the property would exceed the proceeds of realising the property; or

(h) in the case of a contract - the company or the liquidator has tried to assign or has exercised rights in relation to, the contract or any property to which it relates.

A liquidator cannot disclaim a contract (other than an unprofitable contract or a lease of land) except with the leave of the Court.

568B(1) [Application to Court to set aside disclaimer]

A person who has, or claims to have, an interest in disclaimed property may apply to the Court for an order setting aside the disclaimer before it takes effect ...

On an application under sub section (1), the Court:

(b) if it does so - may make such further orders as it thinks appropriate.

However, the Court may set aside a disclaimer under this section only if 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."

13 The liquidator has not sought the court's leave to disclaim the agreement. If the disclaimer is valid, it must therefore be on the basis that the agreement is an unprofitable contract or a lease. The parties are united in arguing that what is involved is whether the agreement is an unprofitable contract. Neither contends it is a lease. It may have been possible to regard the agreement as equivalent to a lease, at least if Transmetro's major premise that it constitutes an agreement for sub-lease is correct. See the discussion of Ex parte Monkhouse, re Maughan (1885) 14 QBD 956 found in Disclaimer of Contracts in Bankruptcy by Melville, (1952) 15 MLR 28 at 29. Support for this view might be found in the terms of section 568(1A) which allows a liquidator to disclaim two types of contracts without the leave of the court - unprofitable contracts and leases of land. Ordinarily one might think that a "lease of land" would constitute land which can only be disclaimed if burdened with onerous covenants (see section 568(1)(a)) but the draftsman seems to have regarded leases as a species of contract, not an interest in land, and permitted that species and one other to be disclaimed without leave. This curiosity need not detain me for the parties are content to limit their arguments to the questions whether the agreement is an unprofitable contract.

14 They do, unhappily, differ when it comes to choose the criteria by which to decide whether a contract is unprofitable. The term is not defined in the Corporations Law. Counsel for Investments and Ballville referred to definitions of "unprofitable" found in standard dictionaries and thus argued that a contract which does not produce a profit is "unprofitable". Counsel for Transmetro refers, I think more convincingly, to the legislative history of a liquidator's power to disclaim property to show that there was a recognisable type of contract which could be disclaimed and that the draftsman of Division 7A would have had that notion in mind.

15 The history was traced by Bowen CJ in Eq in Re Middle Harbour Investments Ltd (in liq.) and the Companies Act (1977) 2 NSWLR 652 at 657:

"Legislative provision for disclaimer first appeared at s. 23 of the Bankruptcy Act 1869 (Imp.) ... it will be seen that s. 23 referred to `land of any tenure burdened with onerous covenants'. ... In England the section was repeated in successive Bankruptcy Acts, appearing as s. 55 of the 1883 Act and as s. 54 of the 1914 Act. It was first adopted in company legislation in 1929, when it appeared as s. 267 of the Companies Act 1929 (Imp.). It was repeated as s. 323 of the Companies Act 1948 (Imp.).

In New South Wales a similar provision was in force in s. 104 of the Bankruptcy Act 1924 (Cth.). This now appears as s. 133 of the Bankruptcy Act 1966.

In company legislation it appeared as s. 300 of the New South Wales Companies Act 1936. It was repeated in s. 296 of the Companies Act 1961, which I have to consider.

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."

16 One of the cases cited by Bowen CJ as authority for the proposition in the passage last quoted was Ex parte East and West India Dock Company in Re Clarke (1881) 17 Ch D 759 in which Lord Selborne, referring to section 23 of the Bankruptcy Act 1869, said at 764:

"What were those objects? It appears to us that the object was to cut short by disclaimer all liability of the bankrupt's estate in the classes of case which are there referred to, and which include beyond all question future liability under leases. The object was to cut it short by disclaimer, leaving any person who might be injured by the operation of the section to prove in the bankruptcy for whatever he could establish to be the value of injury done to him ... The power given by it is to be exercised with a view to the administration in bankruptcy of the bankrupt's estate, and for the benefit of all the persons interested in that administration."

17 In Re Bastable ex parte the Trustee [1901] 2 KB 518, Collins LJ said at 527, speaking of section 55 of the Bankruptcy Act 1883:

"I think the effect of the section is ... to enable the trustee to get rid of property which is subject to some burdensome obligation."

18 Mr Melville wrote in his article (op cit at 28 - 29):

"It is probably true to say that `unprofitable' means, not simply a contract which is a bad bargain, but one the performance of which cannot satisfactorily be carried out by a trustee in bankruptcy".

Young J accepted this description of an unprofitable contract as correct in Dekala Pty Ltd (in liquidation) v. Perth Land and Leisure Ltd (1989) 17 NSWLR 664 at 667. Speaking of a contract which "would involve the liquidator in at least eight months of work and in taking the chance the purchaser would obtain finance on terms and conditions ... satisfactory to it" his Honour said:

"This would seem to me to be a contract which cannot satisfactorily be carried out by a liquidator whose interest is to realise the company's property and to pay a dividend to creditors at the earliest possible time".

19 In Rothwells Ltd (In Liquidation) v. Spedley Securities Ltd (In Liquidation) (1990) 20 NSWLR 417, Hodgson J pointed out, at 422, that before a contract can be unprofitable in this context it must give rise to future obligations or liabilities on the company, such as an obligation to pay money or transfer property or provide goods or services. The whole point of disclaimer is that it terminates liabilities. Unless, therefore, a contract will or may give rise prospectively to liabilities there is nothing to terminate and no point in disclaiming. His Honour said (at 423):

"... It is not necessary for me to decide whether the words `unprofitable contract' extend to cover contracts which are merely financially disadvantageous, rather than being of such an onerous nature that they cannot satisfactorily be performed by a liquidator."

20 In Old Style Confections Pty Ltd v. Microbyte Investments Pty Ltd (in Liq.) [1995] VicRp 65; [1995] 2 VR 457, Hayne J also found it unnecessary "to consider whether the amendments made to s. 568 by the 1992 legislation extend the property which may be disclaimed beyond onerous or burdensome property". His Honour accepted as correct what Bowen CJ had said in Re Middle Harbour Investments Ltd and Mr Melville's description in the Modern Law Review. The case was one in which the liquidator wished to disclaim a contract by which the company had granted a licence to use a machine for manufacturing ice-cream cones. The liquidator's object was to bring to an end a situation in which the licence fee for the machine was not paid in cash but was applied, by set off, to reduce a debt owed by the company to the licensee. If the contract were disclaimed the liquidator would sell the machine or grant a licence that would produce actual cash payments. Hayne J said (at 466-7):

"It is said that the contract is `unprofitable' because a better return could be obtained if the machine were to be sold (or perhaps its use licenced) to another. Assuming that that is so, I consider that demonstrating that a better commercial bargain could be made than the bargain struck by the company before it went into liquidation falls well short of showing that the contract is unprofitable or onerous."

21 From this review of the authorities it is possible to extract the following principles:

* A contract is unprofitable for the purpose of section 568 if it imposes on the company continuing financial obligations which may be regarded as detrimental to the creditors, which presumably means that the contract confers no sufficient reciprocal benefit.

* Before a contract may be unprofitable for the purposes of the section it must give rise to prospective liabilities.

* Contracts which will delay the winding-up of the company's affairs because they are to be performed over a substantial period of time and will involve expenditure that may not be recovered are unprofitable.

* No case has decided that a contract is unprofitable merely because it is financially disadvantageous. The cases focus upon the nature and cause of the disadvantage.

* A contract is not unprofitable merely because the company could have made or could make a better bargain.

With these principles in mind I turn to consider the submissions.

(a) Because the liquidator did not seek the leave of the court section 568(1A) will invalidate the disclaimer unless the agreement was unprofitable.

(b) If the agreement was unprofitable Transmetro must then satisfy the pre-condition set out in section 568B(3) before the court is empowered to set aside the disclaimer. The pre-condition is that Transmetro must stand to suffer, by reason of the loss of the agreement, prejudice grossly out of proportion to the prejudice that the creditors of Investments and Ballville would suffer if the agreement were to remain in force.

(c) If the pre-condition is satisfied, section 568B(2) confers on the court a discretion to set aside the disclaimer. There are no legislative criteria to control or guide the exercise of the discretion.

23 The agreement will be unprofitable if its performance obliges the liquidator to maintain a course of action over a substantial period during which the company incurs liabilities without a commensurate return. There may be contracts which do not fit this description which are still "unprofitable" for the purposes of Division 7A of the Corporations Law but the authorities establish that a contract such as I have just described will be unprofitable.

24 There is no doubt that the agreement, if it subsists, would impose substantial obligations upon Ballville for a long period that may, at the discretion of Transmetro, last for twenty years. During that time, Ballville or its representative, must serve on a committee responsible to review the management and operation of the hotel in all its aspects, "including but not limited to financial aspects, marketing, market positioning and overall performance and maintenance of the Hotel" (see clause 4). I have already mentioned that the agreement obliges Ballville to employ all hotel staff save the general manager. I have also noticed clause 5.3 which authorises Transmetro to make contracts as Ballville's agent. So long as the contracts are within the scope of the authority given by the agreement, Ballville is bound by them whatever their terms.

Ballville must establish a bank account, whether by depositing moneys or obtaining an overdraft, to allow for the payment of current trade debts, Transmetro's management fee and other obligations necessarily incurred in running the hotel. I have earlier pointed out Ballville's obligation to procure and maintain insurance policies.

25 Ballville is hopelessly insolvent. Proofs of debt from unsecured creditors come to $11,291,507.00. It has guaranteed Investments' secured debt to it financier, Oversea-Chinese Banking Corporation Pty Limited ("OCBC Pty Ltd"). The amount owed, with accrued interest, now exceeds $4,000,000.00. To satisfy these debts which exceed $15,000,000.00 Ballville has only the management rights to the hotel which it can sell if the disclaimer stands, and whatever moneys may be recovered should the liquidator succeed in setting aside preferential payments to creditors. The amount involved may be as high as $1,000,000.00 but it is not possible to express any opinion on the likelihood of recovery. Mr Georgakis's present anticipation is that the unsecured creditors will receive no dividend.

26 The agreement appears to be the epitome of a class of contract which Division 7A allows a liquidator to disclaim. The duration of the contract is extremely long. The company does not have the financial or human resources to perform it. Its continued existence will result in further obligations which Ballville cannot begin to discharge. It is clearly an agreement which cannot satisfactorily be carried out by a liquidator. It belongs to the third description of contract I summarised in paragraph 20. It is the type referred to in Dekala and by Mr Melville.

"Ballville stands to derive potentially considerable profit from the Management Agreement. Although it is to receive only a nominal rent in respect of the commercial lots, as the owner of the business, it is entitled to receive the Net Operating Profit generated by the business less the management fee payable to Transmetro."

This is an unsatisfactory response because it postulates a financial return to Ballville from the agreement which, for two reasons, is without foundation. The first is that the profits all come from the operation of the hotel pursuant to the agreement. But Ballville is unable to perform its part of the bargain. It is not simply to receive profits generated by Transmetro. It had a role to play in the generation of those profits and it cannot fulfil its part. The second is that there is no longer available the number of accommodation lots which were to be let out as hotel rooms. Some eighty-five of the purchasers have placed their lots in the hands of a real estate agent to obtain either short or long-term tenancies. This fact has a significance which I will mention later. For present purposes it is to be noticed that the generation of profits was to come from the hire of 159 rooms. At most Ballville can have access to twenty-eight rooms. It needs at least fifty-four before the hotel can be viable. It is impossible to feel sanguine that the potential "considerable profit" will become an actual one.

28 I come to the same answer in relation to Investments. The agreement imposes continuing obligations on that company too. It is not necessary to go beyond clause 3.1 by which Investments promised that it would "not allow a position to arise where [it is] no longer capable of permitting [Transmetro] to manage its business being conducted in the Hotel in accordance with this Agreement" and further promised to "do all things and sign all documents which ... [Transmetro] may from time to time reasonably request in aid of the business of [Ballville] conducted at the Hotel and ... shall in all matters ... act in support of said business". The agreement confers no reciprocal benefit upon Investments. It was to receive a peppercorn rent from Ballville but nothing from the operation of the hotel. From Investments' point of view the agreement is clearly unprofitable. It is insolvent but is obliged to remain in existence and perform obligations for which it obtains no benefit at all. Transmetro's reply is that is has not been shown that Investments could not obtain rent, at an appropriate commercial rate, for the commercial lots which it owns. But this overlooks the fact that the agreement was predicated upon there being a head-lease of those lots from Investments to Ballville at a nominal rent. It is no answer to the argument that the agreement is unprofitable for Investments to say that part of the agreement may not now be performed (the lease from Investments to Ballville) and that an alternative performance involving a different lessee may produce a profit. The enquiry to which the court must direct itself is whether the agreement in question is unprofitable, not whether a rearrangement of it may be profitable.

29 I conclude that the agreement is unprofitable and the liquidator could disclaim it without the court's leave. The next question is to determine whether the pre-condition has been satisfied so as to enliven the court's discretion to set aside the disclaimers. The pre-condition is 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".

Section 568B(3) demands a comparison between the position of the person who will lose if the disclaimer is not set aside and that of the person who will lose if it is. Only if the prejudice to the former is "grossly out of proportion" to the prejudice of the latter will the court be authorised to set the disclaimer aside. "Prejudice" is a wide term, no doubt chosen deliberately. In most, if not all, cases one would expect prejudice to manifest itself in financial disadvantage.

30 In fact two sets of comparisons are called for. The first is an examination of the relative positions of Transmetro and the creditors, on the supposition that the agreement is ended by disclaimer. The second is the same examination on the supposition that the agreement remains in force. The contrast in position between those comparisons allows the court to make the assessment described by the section.

31 The pre-condition is satisfied only if the alteration in Transmetro's position between the first and second comparisons is to its disadvantage, and is grossly out of proportion to the prejudice suffered by the creditors as shown by the two comparative positions. What is meant by "grossly out of proportion" is, I think, that the change in Transmetro's position between comparison one and comparison two must be much greater than the alteration in the creditors' position.

32 If the agreement is disclaimed, Transmetro will lose the right to manage the hotel and derive its profit-based fee for conducting the management. That right and the commercial opportunity to make a profit from it is itself valuable. The quantification of value is difficult because the income to be derived from management depends upon the gross returns earned by the hotel, which in turn depends upon occupancy rates and tariffs which can only be estimated but not known. Nevertheless Mr Van Homrigh, an experienced and expert accountant in this field, has valued those rights at somewhere between $250,000.00 and $470,000.00. In addition to this Transmetro expended about $275,000.00 in preparing for the implementation of the agreement. This amount was to be recouped from revenue generated by the agreement. If it cannot manage the hotel and earn its fee it will have no means of recouping the expenditure.

33 In summary if the agreement is disclaimed Transmetro will lose rights worth perhaps as much as $470,000.00 and forego the chance of recovering $275,000.00 already spent by it.

34 The position of the creditors does not appear to be much affected by the disclaimer. If the agreement remains in force the creditors of Ballville will receive nothing by way of dividend. The company has a huge debt and no assets apart from the preference claims. If the agreement is set aside the liquidator will have available for sale the management rights which will fetch no more than $470,000.00. If the whole of this amount were available to be distributed as a dividend to the unsecured creditors they would receive about four and a quarter cents in the dollar. This "best" result ignores,

* The liquidator's fees and other costs of the liquidation;

* Ballville's debt as guarantor to OCBC Pty Ltd, which if included will decrease the rate of dividend;

* That the management rights might sell for a lower amount.

35 Whether or not the agreement is set aside, Ballville's creditors appear unlikely to receive any dividend. There is a possibility that, if the agreement is set aside and the management rights are sold by the liquidator, the creditors might receive a cent or two in the dollar.

36 The creditors of Investments would appear to be unaffected by the disclaimer. If the agreement is disclaimed the asset represented by the management rights will go to Ballville not Investments. Its creditors will be no better off if the agreement is disclaimed. It is true that OCBC Pty Ltd is also a creditor of Ballville by reason of the guarantee but what is required is a comparison of the position of Investments' creditors and for that purpose one ignores the point that one of those creditors, in its capacity as a creditor of Ballville, might be affected by the disclaimer.

37 Both parties approached the comparison compelled by section 568B(3) by reference to what use might be made of the management rights in the commercial context in which the parties find themselves. Transmetro wishes to maintain its position as appointed manager to strike a bargain with the individual lot owners whom it will encourage to participate in a hotel operation by making their units available. As long as it has those rights it is in a strong position because the hotel cannot be operated without the two lots, control of which is given by the agreement to Transmetro. If the purchasers are to obtain a reasonable return they will have to come to terms with Transmetro to enable it to run the hotel. The liquidator will be unable to operate the premises as a hotel because he does not have the right to manage the hotel.

38 Conversely the liquidator argues that the creditors will be best served if the agreement is disclaimed so he can sell the management rights in a competitive market. He has already obtained a number of expressions of interest from hoteliers. The truth is that both sides wish to resurrect the hotel as a going concern because it is only by so doing that the purchasers and other creditors will obtain any appreciable return. The tussle is for control of the hotel management which will in practical terms confer an advantage in negotiating with the lot owners. Each points with equal vigour and persuasiveness to what will probably occur should Transmetro or the liquidator be given the management rights with which to bargain for the new business.

39 I do not think that section 568B(3) is concerned with such potentialities. It is concerned with a more immediate comparison. It does not look to what subservient advantage may be wrought from the consequences of the disclaimer. It compels examination of what the primary consequence will be to those interested in the property or contract and the creditors should there be a disclaimer. Anything beyond direct consequences is to be ignored.

40 The language of the section suggests this approach. It talks of prejudice that the disclaimer "would" cause, not that it "might" cause. Any comparison beyond the immediate and direct effect of the disclaimer is too hard to evaluate with the necessary certainty to arrive at a conclusion that disproportionate prejudice "would" occur.

41 That comparison leads to the conclusion that the disclaimer will cause prejudice to Transmetro grossly out of proportion to the prejudice which the creditors will suffer if the disclaimer is set aside. Transmetro's loss is immediate and exceeds half a million dollars. The creditors will receive nothing, or next to nothing, whatever happens to the agreement. The evidence does not suggest that the commercial lots have any value apart from the rights appurtenant to them to manage the hotel. The liquidator does submit that the unsold accommodation lots which remain an asset of Investments (subject to the mortgage in favour of OCBC Pty Ltd) will have an enhanced value if the liquidator can offer them for sale in association with the disposition of the management rights so that the purchaser may be confident that they will constitute part of an operating hotel. The evidence does not permit me to find whether this is so or not. Nor does it permit a finding as to the monetary value of the alleged enhancement. It is the difficulty in evaluating the monetary worth of such conjectural gains or losses that inclines me to conclude that the comparison is limited to the immediate, ascertainable, consequences which will flow from the rival positions: disclaimer or no disclaimer.

42 It is then necessary to consider whether, in the exercise of its discretion, the court should set aside the disclaimer. This involves a consideration of the factors which support the retention of the contract or property by the company and those which support the disclaimer of the contract or property and the judicial weighing of those competing factors. It is obvious that an applicant who has satisfied section 568B(3)

(a) will, if the court does not set aside the disclaimer, suffer prejudice

(b) which will be disproportionate to the loss that would be suffered by the creditors in the event the contract or property is not disclaimed.

The facts which satisfy the pre-condition will constitute a factor relevant to the exercise of the discretion but will not necessarily determine how the discretion should be exercised.

43 The matters which lead to the determination that the agreement was unprofitable weigh heavily in favour of the disclaimer. The liquidator's primary function is to crystallise the company's liabilities, realise its assets and to pay a dividend to creditors at the earliest feasible time. The continued existence of the agreement, for perhaps two decades, is inimical to that function. Moreover, it is unrealistic to expect the liquidator to perform continuing obligations when the company lacks the capacity, or the assets to acquire the capacity, to do so. It is not to the point that if the disclaimer is set aside Transmetro may be able to negotiate with the purchasers to achieve the happy result that the hotel will become a going concern so that Investments and Ballville can assign their interest in the agreement, or that Transmetro will be entitled to terminate it, thus ending any continuing commitment on the part of Investments or Ballville. In exercising its discretion the court must take things as they are, not as they might become, unless the likelihood of the eventuality is so high as to approach actuality.

44 Another factor which tends in favour of the disclaimer is that the agreement will not be performed regardless of the outcome of these proceedings. Whether or not the disclaimer stands, Transmetro does not intend to perform the agreement. Mr McEvoy, Transmetro's managing director, was a witness of refreshing candour. His company is involved in negotiations with the purchasers with a view to arriving at an arrangement that will supplant the structure of the agreement. If the disclaimer is set aside, Transmetro, according to Mr McEvoy, does not intend to carry its terms into execution. It will make another, different, agreement, no doubt omitting Investments and Ballville. The liquidator of the companies professes their inability to perform their part of the agreement. In these circumstances counsel for the liquidator submits that the agreement has been abandoned, relying on DTR Nominees Pty Ltd v. Mona Homes Pty Ltd [1978] HCA 12; (1977) 138 CLR 423 at 434 at which Stephen, Mason and Jacobs JJ said:

"But there can be no doubt that ... when these proceedings were commenced, neither party, whatever may have been their reasons, regarded the contract as being still on foot. Neither party intended that the contract should be further performed. In these circumstances the parties must be regarded as having so conducted themselves as to abandon or abrogate the contract"

That does not quite express the position here. Transmetro insists that the agreement should not have been terminated though it does not intend to perform it in the future. The other contracting parties, by the liquidator, assert that the agreement should be brought to an end by disclaimer and confess to an inability to perform in the future. There is no mutuality of intention with regard to the existence of the contract in this case so that it is probably not right to regard it as having been abandoned. However, the fact that one party is unable to perform and the other does not intend to perform seems a powerful factor in exercising the discretion in favour of disclaimer and the cessation of the agreement which neither party wants.

45 The third factor relied upon by the liquidator is that the basic premise underlying the agreement was undone by the liquidation of Ballville. That premise was the availability of all the accommodation lots to provide hotel rooms. The contractual arrangement included leases from the individual owners to Ballville and sub-leases from it to Transmetro. Upon Ballville's liquidation the leases, pursuant to clause 12, terminated automatically. The argument proceeds that without the rooms which, by reason of the leases and sub-leases, Transmetro could let out, there can be no hotel. From the profit of the hotel the purchasers were to have received their guaranteed seven per cent return. Without control of the rooms and the guaranteed rate of return the sub-stratum of the arrangement has been lost. The liquidator submits that the agreement has been frustrated.

46 Before turning to the particular point it is necessary to digress to consider the submission that Ballville's liquidation automatically terminated the leases. Despite the form of clause 12.1 of the standard leases, I do not consider that the liquidation, by itself, brought the leases to an end. If the provision had appeared in a contract rather than a lease it is clear that termination would not have been automatic. The contract would have been voidable but unless and until one or both of the parties to it acted to avoid it, it would have remained in force. See Suttor v. Gundowda Pty Ltd [1950] HCA 35; (1950) 81 CLR 418 at 441-2. Different considerations might be thought applicable to a lease which confers an estate in land in addition to merely contractual rights. However, it appears that the High Court has taken the view that the general principles of contract apply to leases. In Progressive Mailing House Pty Ltd v. Tabali Pty Ltd [1985] HCA 14; [1985] 157 CLR 17, Mason J said at 29:

"... As the law of landlord and tenant had outgrown its origins in feudal tenure, it was more appropriate in the light of the essential elements of the bargain, the modern money economy and the modern development of contract law that leases should be regulated by the principles of the law of contract."

47 Accordingly, the leases to Ballville cannot be regarded as having come to an end by reason only of the liquidation. The liquidator's evidence did not directly address the question of avoidance of the leases by the purchasers but it does appear that some eighty-five purchasers have engaged an estate agent to let their accommodation lots. This must mean that those eighty-five owners regard themselves as no longer bound to lease their property to Ballville. The persuasive inference is that at least eight-five purchasers have acted in consequence of the liquidation to avoid their leases to Ballville.

48 Reverting to the question of frustration, Transmetro can count on at most twenty-eight accommodation lots out of the 159 contemplated by the agreement as being available. Of course, Transmetro may come to an arrangement with others but on the evidence it has not yet done so. The agreement contemplated that, as a matter of certainty, all of the accommodation sold by Investments would be controlled by Transmetro. Only a handful may be available.

49 Frustration of a contract occurs whenever its performance, or the performance of a substantial part of it, will be radically different from that which was contemplated by the contract by reason of events that occur without fault on the part of any contracting party. See Davis Contractors Ltd v. Fareham Urban District Council [1956] UKHL 3; [1956] AC 696 at 729, approved by the High Court in Codelfa Construction Pty Ltd v. State Rail Authority of New South Wales (1982) 149 CLR 337. Whether or not the agreement has been frustrated by reason of Ballville's liquidation there is no doubt that were the agreement to remain in force it would apply to a very different set of circumstances to that which the parties envisaged. Only a fraction of the lots may be let as part of the hotel and the complex management structure designed to run a hotel of 159 rooms will have to apply to a smaller enterprise which must co-exist with a larger number of individually owned and tenanted rooms. The agreement will not continue in its intended form or mode of operation. This seems to me to favour disclaimer.

50 The last factor relied upon by the liquidator is that the agreement does not, by itself, confer on Transmetro any right to occupy the commercial lots which are essential to the operation of the hotel. Transmetro recognises this deficiency in its position and seeks, in the action it has commenced, specific performance of the agreements to grant it sub-leases of the premises. If specific performance is not decreed, the agreement cannot take effect as the parties intended. Indeed it is difficult to see how it can take effect at all because the management of the hotel depends upon Transmetro occupying and utilising the two commercial lots. Without the sub-leases it has no right to do so.

51 It is necessary therefore to consider if Transmetro is entitled to a decree of specific performance. There can, of course, be no sub-lease from Ballville to Transmetro unless Ballville has a lease from Investments, the registered proprietor of the lots. There is no head-lease. Transmetro endeavours to find in the agreement a promise made to it by Investments that it would demise the lots to Ballville and seeks a decree of specific performance of that promise. The agreement does not, in my view, contain such an agreement for the grant of the head-lease and there is nothing which the court can order to be specifically performed. The only references to a head-lease appear in recital C, and clauses 25.1 and 25.3. Recital C notes that Investments "intends to grant a lease to Ballville of the lots in the plan comprising hotel administration, food and beverage department, functions and other support lots of the hotel". Clause 25 relevantly provides:

"25.1 On or prior to the commencing date [Ballville] shall grant and [Transmetro] shall accept subleases of all Lots comprised in the Hotel and to be leased by [Ballville] from [Investments] and investors.

25.3 The term of each sublease shall commence on the Commencing date and shall expire on the day immediately preceding the date of expiry of the relevant headlease."

52 These provisions do not constitute an agreement to lease between Ballville and Investments or between the latter and Transmetro. They merely note the state of affairs which it was assumed would come into existence. It is well established that a sub-lease comes to an end when the head-lease terminates. This is the basis on which Devlin J decided Allied Iron Founders Ltd v. John Smedley Ltd [1952] 1 All ER 1344 and Napier CJ decided Price v. Maymen [1948] SAStRp 24; [1948] SASR 241. No sub-lease can come into existence where there is no head-lease. Here there is no head-lease and no agreement for one.

53 Moreover, the agreement is silent as to essential terms of the head-lease. There was no agreement as to the date on which the head-lease should commence either by specification of a date or by reference to events which could be fixed in time. In the absence of such agreement a contract to grant a lease cannot be specifically performed because the particular estate to be created by the lease cannot be identified; Harvey v. Pratt [1965] 1 WLR 1025. Not only is there no agreement as to the commencing date, nothing is specified as to the length of the term or the rent to be paid. These deficiencies make the agreement ineffective because uncertain. See Whitlock v. Brew [1968] HCA 71; (1967) 118 CLR 445.

54 Transmetro attempts to avoid the consequence of the deficiencies in the agreement by relying upon representations made on behalf of Investments "that a lease would be granted of Lots 1 and 65 by [Investments] to [Ballville] and [Ballville] would sub-lease those lots to [Transmetro]". Lengthy particulars are given of the occasions and the circumstances in which and by which the representations were made, but no more particularity of the content of the representations is given beyond what I have quoted. The difficulty with this approach is that the contract which Transmetro seeks to establish from representations is a contract which cannot be enforced. As Kirby P pointed out in Austotel Pty Ltd v. Franklins Self-Serve Pty Ltd (1989) 16 NSWLR 582 at 584:

"... Once it is determined that no concluded agreement was made between the parties (for want of a concluded term as to rent) the first ground of estoppel ... must fail. ... All that such an estoppel would do would be to prevent the appellant from denying the existence of an `agreement' which was not a legal agreement at all."

The representation pleaded by Transmetro does not supply the missing detail of term, commencement date, or rent.

55 It is true that in his dissenting judgment, Priestly JA referred to cases in which representations which did not contain sufficient detail to amount to an enforceable contract, but which were acted on so as to give rise to detriment, may give rise to an equity which the court, in the exercise of its discretion, could enforce by giving relief appropriate to the circumstances. See at 608. The majority view in Austotel appears to be that there will be no affront to conscience where two large commercial entities did not, in negotiation, reach final agreement as to their bargain but one of them made representations to the effect that a binding arrangement had or would come into existence. Kirby P said (at 585-6):

"... For equitable estoppel to operate, there must relevantly be the creation of encouragement ... of an assumption that a contract will come into existence, or a promise be performed, or a transaction carried out ... and reliance on that ... in [the] circumstances where departure from the assumption ... would be unconscionable.

We are not dealing here with ordinary individuals invoking the protection of equity from the unconscionable operation of a rigid rule of the common law. Nor are we dealing with parties which were unequal in bargaining power. Nor were the parties lacking in advice, either of a legal character or of technical expertise. The court has before it two groupings of substantial commercial enterprises, well resourced and advised, dealing in a commercial transaction having a great value. ... At least in circumstances such as the present, courts should be careful to conserve relief so that they do not, in commercial matters, substitute lawyerly conscience for the hard-headed decisions of business people.

But the court should ... be wary lest they distort the relationships of substantial, well-advised corporations in commercial transactions by subjecting them to the overly tender consciences of judges."

56 These considerations are apposite. Indeed the remarks of Kirby P can be applied literally to the facts of this case. It is not in my view unconscionable for Investments and Ballville to disregard an arrangement which the parties did not get round to finalising and making into a binding contract.

57 What I have said is sufficient to dispose of Transmetro's claim for specific performance. There is, in addition, a further problem. Even if there were a head-lease the agreement is silent as to the date on which the sub-lease should commence and that omission is fateful - Harvey v. Pratt. The agreement provided that the sub-lease should commence on the "Commencing Date" which was defined by clause 1.12 to mean:

"The date upon which the Hotel ... is complete, equipped and stocked, with Liquor Licence granted and the Minimum Drawing Facility established pursuant to clause 6.2 ... so that the hotel is fully operational and able to be opened ... to the public AND upon [Ballville] and [Transmetro] agreeing in writing to the effect, said Date shall be the Commencing Date of the Term."

Clause 6.2 required Ballville, seven days prior to the commencing date, to deposit, or arrange a bank overdraft facility for, a sum specified in the clause. Because of Ballville's financial problems, it was never able to provide the working capital to constitute the minimum drawing facility. An essential pre-condition to the fixing of the commencing date never occurred and the commencing date never arrived.

58 Again Transmetro endeavours to avoid the consequence of the omission by resort to estoppel and a plea that the parties waived the precise terms of clause 25.3 and substituted for the defined commencing date the actual date on which the hotel commenced operations, 13 March, 1998. The representation relied upon is that, in effect, the sub-lease had commenced when the hotel opened for business. Mr McEvoy's evidence makes that contention untenable. He said with commendable frankness that Transmetro had never varied the contractual "commencing date" or relieved Ballville from its obligation to provide the minimum drawing facility which had to occur before the date would arrive. He was content that operations should start before the contractual commencing date arrived because he could see a commercial benefit to his company in this situation. His evidence, in particular, was:

"... The hotel opened on ... 17 March 1998? - Yes [The actual date was 13 March]

And I think you agree that by that time the commencing date had not yet occurred? - Yes

Now the commencing date was something that you insisted on occurring, or in accordance with the terms of the management agreement? - Yes

One of the things that was important to you about postponing the commencement date was postponing the commencement of clause 15 ... which enabled Ballville to terminate the management agreement if Transmetro didn't achieve a certain level of performance? - Yes

... It would not be right to say that when the hotel opened you had agreed with Ballville to dispense with the need for a commencing date? - No

And similarly, you hadn't agreed with Ballville to dispense with the requirements of the management agreement regarding the drawing facility? - No

And you never did agree to dispense with either of those things, did you? - No

Mr McEvoy admitted (T49.50-.60 and T51.50) that between April and July 1998, he knew that Transmetro did not have the benefit of sub-leases over the commercial lots. Whatever representation might have been made this evidence makes it impossible to accept that Mr McEvoy, and therefore Transmetro, acted on the faith of a representation that sub-leases existed. He knew they did not and would not until the commencing date was fixed in accordance with the agreement.

59 The upshot is that Transmetro's action for specific performance must fail with the result that in an important respect the agreement cannot operate as intended. If the agreement is not disclaimed Transmetro will have the right, and indeed the obligation, to manage the hotel but will be unable to occupy space essential for the performance of that function. This circumstance makes the continued existence of the agreement pointless.

60 Transmetro emphasises the prejudice it will suffer if the agreement is disclaimed and that the preservation of the agreement will enable it to negotiate with the liquidator and/or the lot owners to re-establish the hotel as a going concern which will produce for it a better outcome than if it is left to prove in the winding-up.

61 The factors I have discussed which support the disclaimer are, in summary

(a) one party will not and the other cannot perform the agreement. It will come to an end whether or not the disclaimer is set aside.

(b) The agreement cannot operate according to its terms.

(i) Transmetro cannot insist upon occupying the lots which are essential to the functioning of the hotel.

(ii) Without making further agreements Transmetro cannot let all of the rooms which were to comprise the hotel and may not be able to let sufficient to make the hotel viable.

62 What Transmetro puts in opposition to these factors is the opportunity it will lose, unless the disclaimer is set aside, to negotiate the better outcome I have mentioned. Transmetro does not, however, seek to extirpate the prejudice to it by maintaining the agreement. It seeks to overcome the prejudice by replacing the agreement with a different arrangement. The temporary continuation of the agreement is necessary for that purpose. What it really wants is to bring about the termination of the agreement at a time and in a manner which it chooses. This is an insufficient reason to set aside the disclaimer. It is not possible to know what will follow from Transmetro's choice. The only certainty is that the agreement will cease to exist. What consequences there will be for Investments, Ballville, and their creditors is wholly speculative. On the other hand, if the disclaimer stands the agreement will have been brought to an immediate end, the companies will be quit of their obligations under it and the liquidator can do what he can to recover something for the creditors.

63 For these reasons it is my view that the application should fail. The formal orders are:

(a) Application No. 11725 of 1998 be dismissed with costs to be taxed;

(b) Action No. 10810 of 1998 be dismissed with costs to be taxed;

(c) In OS No. 11930 of 1998 order that the caveat lodged by Transmetro on 8 December, 1998 in the freehold land register as dealing number 703050871 over the land described as Lots 1 and 65 in Building Units Plan No. 106759, County of Stanley, Parish of South Brisbane, being the whole of the land contained in Certificate of Title reference numbers 50210218 and 50210282 respectively be removed and that Transmetro pay Investments' costs of and incidental to the summons, to be taxed.

ACN 010 351 667 (in liquidation) and BALLVILLE PTY LTD

BALLVILLE PTY LTD ACN 066 386 472 (in liquidation)

IN THE MATTER of Land Title Act 1994 (Qld)

IN THE MATTER of a caveat lodged by TRANSMETRO CORPORATION LIMITED ACN 001 809 043

CATCHWORDS: CORPORATIONS LAW - Liquidation - disclaimer of unprofitable contracts - whether agreement an unprofitable contract - whether disclaimer would cause prejudice grossly out of proportion to the creditors' prejudice - exercise of discretion to set aside disclaimer.

Specific performance - whether agreement for sub-lease can be enforced where no head-lease - whether contractual principles regarding automatic termination apply to leases - whether contract frustrated - whether estoppel can supply omitted essential terms.

Counsel: Mr G Gibson QC with him Mr M Burnett for the plaintiff

Mr J Sheahan SC with him Mr TP Sullivan for the defendant

Solicitors: Corrs Chambers Westgarth for the plaintiff