Syncap Management (Rural) Australia Ltd v Lyford

managed investment scheme 5 On 11 August 2000 a managed investment scheme ('the scheme') as governed by ch 5C of the Corporations Act and known as the 'Fruit Projects Australia Farmers Management Scheme' was registered with ASIC. The responsible entity for the scheme at its inception was FPA, which remained the responsible entity until 10 March 2004 when the plaintiff was appointed as the responsible entity of the scheme in its place. 6 The scheme was established under a constitution ('the Constitution') which has application in the context of the Corporations Act and the other applicable agreements. Clause 3.7 of the Constitution described the nature of the project as: 'a number of individual Farms in primary production for the growing of fruit trees and harvesting of the fruit thereon and the sale of such fruit conducted by the Farmer upon the Farm with a view to obtaining income.' Clause 14 of the Constitution provided a right of indemnity, relevantly in the following terms: '14.1 If the Responsible Entity: (a) acted in accordance with this Constitution and the Corporations Law and its duties as Responsible Entity; or (b) believed in good faith that it was acting in accordance with this Constitution and the Corporations Law and its duties as Responsible Entity, the Responsible Entity and each of its officers will be indemnified and kept indemnified and reimbursed out of the Funds in respect of any liability for those matters provided in clause 30.3 and for all costs, charges, and expenses which are incurred by the Responsible Entity in establishing, administering, winding up or doing anything in respect of the Project. The rights of the Responsible Entity of indemnity and reimbursement out of the Fund are available only in relation to the proper performance of the Responsible Entity's duties and the duties of each officer.' Clause 30.3 provided for an indemnity from farmers to the responsible entity in respect of taxes and levies. 7 To raise monies for the scheme a prospectus was duly registered with ASIC. Only 343 interests in the scheme were taken up by investors ('the farmers'). The objects of the scheme were described there as follows: 'Fruit Projects Australia offers investors the opportunity to collectively develop an integrated fruit growing, coolstore and packhouse business. There are four main components to the Project: 1. The purchase of a 25 hectare orchard planted with high value Pink Lady apples. … 2. The development of an orchard of approximately 100 hectares growing both new and established varieties of premium stone fruits. 3. The construction of a state-of-the-art coolstore and packhouse facility. This facility will pack the fruit produced from the Project. … 4. Professional sales and marketing of the Project's fruit production…' The third component in the scheme was described as a 'key' component.

project lease 8 By the scheme, the landowner granted to FPA a lease ('the project lease') of orchard land near Kirup, Western Australia for the purpose of enabling the orchard business to be conducted. The lease was for 20 years and two days from 30 June 2000 subject to earlier determination. The project lease was undated but was stamped on 20 June 2001. Pursuant to the scheme, FPA was not permitted to assign or transfer, sublet, mortgage, charge or encumber its interest in the project lease without the consent of the landowner.

subleases and licences 9 Under the scheme the farmers obtained the right to farm an orchard with respect to 0.065 hectares of the land owned by the landowner. For this purpose FPA sublet an identifiable portion of the land ('a farm') to each farmer for a period of 20 years and two days from 30 June 2000. The subleases provided for earlier termination in specified circumstances. Each farmer was required to pay the landowner an annual indexed farm fee, presently $168.18 (inclusive of GST) per lot. 10 The effect of the sublease of a farm to a farmer was to put that farmer in the position to carry on the business of running an orchard. 11 In addition, where required, the landowner granted to each farmer a licence to grow certain types of fruit. Varieties grown included plums, peaches, nectarines, traditional pink lady apples and tegan blue plums. 12 Each farmer also subscribed for shares in the landowner. 13 The farms established under the scheme occupy approximately 20 per cent of the land the subject of the project lease between the landowner and FPA. 14 The utilisation of the balance of the land is a matter of factual dispute between the parties. The plaintiff maintains that an orchard business was conducted on the balance but that it is not clear for whose benefit that occurred and, in any event, the issue was irrelevant to the questions raised by this proceeding. The defendants assert that FPA conducted a single orchard operation over the whole of the orchard land, pooling the produce. They assert that the operation of the orchard on the land is relevant as is operation of the storage and packing facility.

management 15 FPA as the responsible entity contracted with each farmer to cultivate and care for the orchard business. Each farmer was required to pay to FPA a management fee. Each farmer had the option to collect and harvest the produce from their farm or to elect for FPA to do so. All elected to engage FPA to harvest and collect the produce.

landowner's loan facility and securities 16 In March 2000 the landowner borrowed $3.2 million from National Australia Bank Ltd ('NAB'). The purpose of the loan is considered later in these reasons. 17 To secure the loan the landowner granted NAB a fixed and floating charge dated 10 March 2000 over all its assets and undertaking, and a mortgage over all of the land the subject of the project lease. FPA guaranteed the obligations of the landowner to NAB and granted a charge over all its assets and undertaking. It is a matter of dispute between the plaintiff and the defendants as to whether the security documentation between FPA and NAB provided for the charge to extend to assets held on trust by FPA. The defendants contend that it is the securities granted to the second defendant which are relevant to this proceeding and those securities do charge the trust property.

refinancing the loan and securities 18 In consideration of a heads of agreement dated 4 April 2003, the landowner obtained finance from the second defendant to repay NAB (then known as Australia Net.Com Limited). The purpose of the refinancing was to prevent NAB from enforcing default remedies and to provide working capital for the orchard. The financing was in the sum of $4 million upon the terms of a convertible note and other security documents. The heads of agreement required as security a first ranking fixed and floating charge over all of the assets of FPA excluding certain packing equipment the subject of the scheme. 19 The primary obligation under the terms of the convertible note to the second defendant was on the part of the landowner. It was contemplated by the convertible note agreement that FPA would provide security for the obligations of the landowner to the second defendant under the terms of the convertible note. Such obligations on the part of FPA were secondary to those of the landowner. FPA was therefore in the position of a surety of the landowner's obligation to the second defendant. Consequently, the second defendant obtained, to secure the obligations under the terms of the convertible note: (a) a fixed and floating charge from the landowner over all its assets and undertakings; (b) a mortgage over the land owned by the landowner (but subject to the rights of FPA under the project lease and the interests of the farmers); (c) a fixed and floating charge from FPA over all its assets and undertakings ('the FPA charge'); (d) a deed of acknowledgement between the landowner and the second defendant which provided, inter alia, that the second defendant agreed to preserve the rights of FPA and any farmer in the project lease and any farm and each farmer's lease in any event. 20 Clause 2.1 of the FPA charge read: 'The Chargor as legal owner, as beneficial owner and in its capacity as beneficiary of any trust of which it is a beneficiary (whether discretionary or otherwise) charges in favour of the Chargee all its estate, right, title and interest in, to, under or derived from the Secured Property, as security for payment of the Secured Moneys and performance of the Secured Obligations.' By cl 2.2 the FPA charge was stated to be a fixed charge in respect, inter alia, of 'Land'. That term was defined to include interests whether freehold or leasehold. The project lease was identified and defined as a leasehold interest in the document. The definition of 'Secured Obligations' included all of FPA's obligations, covenants or undertakings under the 'Transaction Documents'. This latter term was defined to include the 'Main Agreement', being in turn identified as the convertible note deed between the landowner and second defendant. 'Secured Property' was defined to mean all of FPA's estate, right, title and interest in, to, under or derived from its assets and undertakings both present and future and wherever situate and whether real or personal and any part of it. Provision was also made of powers to the second defendant to appoint a receiver.

retirement of responsible entity 21 On 10 March 2004 FPA retired as the responsible entity of the scheme and the plaintiff was appointed in its place.

default 22 From around September 2002 the landowner defaulted in its obligations to the second defendant. The second defendant therefore became entitled (subject to what is considered hereafter) to enforce the above securities including the entitlement to appoint receivers and managers over the assets of the landowner and FPA. It made such appointments on 4 May 2004.

assignment of project lease 23 On the same date, there was an assignment of the project lease from FPA to the plaintiff. The defendants contend that such assignment was without their knowledge or consent. They contend that the project lease was assigned subject to the second defendant's equitable interest as chargee and that the second defendant's interest in the project lease supports the second appointment of the first defendant as receiver of the lease. The plaintiff does not contend that the assignment was not subject to the securities entered into by FPA. 24 On 22 June 2004, the second defendant filed a notice with ASIC purportedly pursuant to s 263 or s 264 of the Corporations Act asserting that the plaintiff's predecessor had by an instrument charged the property referred to in the annexure to the notice to secure the landowner's obligation to the second defendant under the convertible note.

first appointment 25 On 31 May 2004, the second defendant purported to appoint the first defendant as receiver and manager over alleged assets of the plaintiff including, inter alia, its right, title and interest in all of the plaintiff's assets or undertaking acquired from FPA by virtue of it replacing FPA as the responsible entity of the scheme and s 601FS and s 601FT of the Corporations Act. It did so in reliance on the powers given by FPA to it by virtue of the FPA charge. The second defendant's notice of appointment asserted that the plaintiff should be deemed to be the chargor as a consequence of s 601FS and s 601FT.

second appointment 26 On 28 July 2004, the second defendant purported to appoint the first defendant additionally as receiver and manager of one of the assets of the plaintiff, namely, the project lease which had been assigned by FPA to the plaintiff. 27 In relation to each of these appointments of the first defendant, the first and second defendants filed necessary notices with ASIC under the Corporations Act.

RELEVANT STATUTORY PROVISIONS 28 The submissions of the parties principally bring into question the application and operation of the following two sections of the Corporations Act: 29 Section 601FS: '(1) If the responsible entity of a registered scheme changes, the rights, obligations and liabilities of the former responsible entity in relation to the scheme become rights, obligations and liabilities of the new responsible entity. (2) Despite subsection (1), the following rights and liabilities remain rights and liabilities of the former responsible entity: (a) any right of the former responsible entity to be paid fees for the performance of its functions before it ceased to be the responsible entity; and (b) any right of the former responsible entity to be indemnified for the expenses it incurred before it ceased to be the responsible entity; and (c) any right, obligation or liability that the former responsible entity had as a member of the scheme; and (d) any liability for which the former entity could not have been indemnified out of the scheme property if it had remained the scheme's responsible entity.' 30 Section 601FT: '(1) If the responsible entity of a registered scheme changes, a document: (a) to which the former responsible entity is a party, in which a reference is made to the former responsible entity, or under which the former responsible entity has acquired or incurred a right, obligation or liability, or might have acquired or incurred a right, obligation or liability if it had remained the responsible entity; and (b) that is capable of having effect after the change; has effect as if the new responsible entity (and not the former responsible entity) were a party to it, were referred to in it or had or might have acquired or incurred the right, obligation or liability under it. (2) Subsection (1) does not apply to a right, obligation or liability that remains a right, obligation or liability of the former responsible entity because of subsection 601FS(2).' 31 A further relevant provision is s 601GA(2) which provides: '(2) If the responsible entity is to have any rights to be paid fees out of scheme property, or to be indemnified out of scheme property for liabilities or expenses incurred in relation to the performance of its duties, those rights: (a) must be specified in the scheme's constitution; and (b) must be available only in relation to the proper performance of those duties; and any other agreement or arrangement has no effect to the extent that it purports to confer such a right.'

effect of the change in responsible entity: s 601FS(1)

Plaintiff's submissions 32 In relation to s 601FS, the plaintiff contends that if s 601FT has no application then the second defendant cannot rely on s 601FS as providing it with a right to appoint a receiver. This is because the contractual right of the second defendant to appoint a receiver is not a right, obligation or liability of the former responsible entity FPA. 33 Alternatively, the plaintiff submits that the FPA charge was not, in any event, a right, obligation or liability of FPA 'in relation to the scheme'. The plaintiff says those words are to be construed narrowly and only relate to 'rights vis ŕ vis parties such as members of the scheme, being rights arising from and forming part of the matrix of legal relationships making up the scheme': Re Investa Properties Ltd (2001) 187 ALR 462 at 465, at [11]; s 15AA, Acts Interpretation Act 1901 (Cth). The reasons why this is so are those argued by the plaintiff in relation to the alternative argument on s 601FT.

Defendants' submissions 34 The defendants contend that on change of a responsible entity, the rights, obligations and liabilities of the former responsible entity (FPA) in relation to the relevant scheme become the rights, obligations and liabilities of the new responsible entity (the plaintiff): s 601FS(1) of the Corporations Act, Re Investa at 465-467, at [12]-[19] per Barrett J. 35 It is said by the defendants that the effect of ss 601FS, 601FT and (possibly) 601FC(2) is to vest in the plaintiff any property, obligations and liabilities of FPA relating to the scheme. The charge, and the second defendant's rights under the charge including the right to appoint a receiver, is such an obligation or liability. Support is sought in Re Investa where Barrett J held that the incoming responsible entity took the scheme property subject to a charge over the property. It is said the plaintiff 'step[s] into the shoes' of FPA: Re Investa at 465, at [11]. 36 The defendants say the analysis in Re Investa, except the reliance on s 601FC, is confirmed by par 37 and par 38 of the Managed Investment Bill 1997 explanatory memorandum. 37 In relation to s 601FT, it is argued it gives effect, in part, to s 601FS. It provides that any document FPA was a party to (as a responsible entity of the scheme) is read 'as if' the plaintiff were a party to the document. That is, to the extent the charge is capable of having effect after the change in responsible entity, it is read 'as if' the plaintiff was the chargor. 38 Therefore the defendants submit the effect of s 601FS, or s 601FS and s 601FT, is that the plaintiff has taken on various rights, including the leasehold interest in the orchard land, on being appointed as the responsible entity of the scheme. With that right comes the obligations or liabilities contained in the charge. 39 The plaintiff submits that the second defendant's contractual rights to appoint a receiver is not an 'obligation or liability' to which FPA was subject. The defendants say in response that FPA's contractual submission to the second defendant's right to appoint a receiver is an obligation or liability; the right connotes the correlative obligation, Kendle v Melsom (1998) 193 CLR 46 at 62-63, at [39]. Further, the proprietary right created by the charge includes the contractual right to appoint a receiver: WJ Gough, Company Charges, 2nd ed, Butterworths, London, 1996 at 15, 16, 897 and 898. That proprietary right binds third parties: Agnew v Commissioner of Inland Revenue [2001] 2 AC 710 at 728, at [41]. 40 Regarding the plaintiff's submission that s 601FS is to be narrowly construed to exclude the FPA charge, the defendants say Re Investa does not support the plaintiff's submission - the obligations under the charge in Re Investa were assumed by the new responsible entity. Again, the evidence shows the charge was entered into for the benefit of the scheme. The plaintiff has not lead any admissible evidence to the contrary.

The decision in Re Investa 41 It is accepted by the parties that Re Investa is the only authority in which the effect of s 601FS and s 601FT has been considered. The issue before Barrett J was whether time for lodgement of a notice of a charge should be extended in circumstances where a trust had attained registration as a registered managed investment scheme under the newly introduced provisions. Permanent Nominees (Aust) Ltd ('Permanent') was the trustee of the Investa Property Trust ('Investa') and Westpac Property Funds Management Ltd ('Westpac'), the latter being the management company which thereby became the responsible entity. Barrett J at 463, at [3] said of the application of the above sections: 'The former had the effect that, subject to exceptions not presently relevant, "the rights, obligations and liabilities" of Permanent "in relation to the scheme" became "rights, obligations and liabilities" of Westpac. The latter caused every "document" to which Permanent was a party or in which a reference to it was made (or under which it had acquired or incurred a right, obligation or liability), being a document capable of having effect after the registration, to have effect as if Westpac, instead of Permanent, was the party or was referred to. Section 601FT(1) is not expressly restricted to documents concerning the scheme but such a limitation must be implied.' Subsequently Investa replaced Westpac as responsible entity of the trust. Barrett J found that Investa was, by direct operation of those sections, substituted for Westpac in the ways the sections prescribe (at 464, at [7]). 42 The principal issue before Barrett J was whether, at the time either Westpac or Investa became the responsible entity, the incoming responsible entity 'acquire[d] property that is subject to a charge' as referred to in s 264(1) of the Corporations Law from which the obligation to give a notice of charge arguably arose. In that context Barrett J (at 465) said of the sections here in issue: '[11] Sections 601FS(1) and 601FT are drafted in a particular economical way. They appear intended to cause an incoming responsible entity to step into the shoes of its predecessor (or, in a case in which the sections are activated by s 1462, those of the combination of trustee and management company). Yet nowhere does one find in those two sections any reference to property. There is a reference to "rights", being rights "in relation to the scheme", and there can be no doubt that certain "rights" (although not all) are property. The sections do not seem to effect a form of statutory vesting or assignment of property generally in such a way that the incoming responsible entity "acquires property that is subject to a charge" (as mentioned in s 264) except, perhaps, to the extent that the subject matter of the charge is a species of property which clearly involves no more than a "right". An example might be the kind of property involved in a charge made registrable by s 262(1)(f) referring to "a charge on a book debt". A debt as a chose in action falls quite comfortably within the concept of "right". But even then, there is a question whether a chose in action forming part of the assets of a scheme is a right "in relation to the scheme". These last words are perhaps intended to cover only rights vis ŕ vis parties such as members of the scheme, being rights arising from or forming part of the matrix of legal relationships making up the scheme, including rights derived from the scheme's constitutional documents. [12] But these doubts about ss 601FS(1) and 601FT(1) are, in the present context, largely overshadowed by the effect of s 601FC(2).' Section 601FC(2) declared that the responsible entity 'holds scheme property on trust for scheme members'. Barrett J held that this section produced the result that the incoming responsible entity on both occasions began to hold property and so acquired property within s 264(1). His reasoning was that 'attainment of the office of responsible entity is made by statute to bring about consequences in terms of the holding of property'. At 467 he said: '[17] The property which Westpac thus came to hold was property which was at that time subject to the charge created by Permanent in 1994, since the charge, by its terms, extended to "all the present and future assets and undertaking of the Trust". Furthermore, s 601FT(1) had the effect that the references to Permanent as mortgagor in the charge given to Perpetual in 1994 became references to Westpac, while s 601FS(1) caused the obligations and liabilities of Permanent in relation to the scheme to devolve upon Westpac. It may be that these obligations and liabilities included those arising from or in relation to the charge, although again the words "in relation to the scheme" are the product of some doubt about this.'

Reasoning 43 I agree with the plaintiff's submission that, absent the operation of either or both of s 601FS or s 601FT, the FPA charge does not provide any contractual or other entitlement for the second defendant to appoint a receiver to the assets of the plaintiff. This follows from the fact that the plaintiff is not a party to the FPA charge nor has it granted leave and licence to the second defendant to do so. 44 However, subject to any effect of s 601FS(2) or s 601FT(2), it is apparent that s 601FS(1) applies in its terms to the transition in the responsible entity from FPA to the plaintiff. 45 It is not the case that the second defendant's contractual rights to appoint a receiver is not 'an obligation or liability' FPA was subject to. I accept the above submissions for the defendants on this. 46 The submission of the plaintiff that the FPA charge is not a right, obligation or liability of FPA 'in relation to the scheme' cannot be sustained. The words 'in relation to' are of wide import signifying no more than some relationship or connection: Australian Competition and Consumer Commission v Maritime Union of Australia (2001) 114 FCR 472 at 487, at [68] per Hill J. The findings of fact made below on the purpose of the FPA charge do not provide any support for the plaintiff's contention. They also have the consequence that the rights and obligations created by the FPA charge are to be characterised as within the description of legal relationships making up the scheme: cf Kay v Australian Securities and Investments Commission (2002) 43 ACSR 229. 47 The plaintiff's submission that this cannot be so because it could occasion it to become liable to the second defendant personally in relation to its assets held over and above the scheme property. I agree with the primary submission of the defendants that the fact the plaintiff's assets may be of lesser value than the liabilities for which it becomes liable by operation of s 601FS is no reason to deny that section (or s 601FT) its proper application. Alternative submissions were made for the defendants but I do not decide these as no opportunity arose for these to be the subject of opposing submission. 48 The consequence of the application of s 601FS was that the rights, obligations and liabilities of FPA in relation to the scheme became rights, obligations and liabilities of the plaintiff. Upon default by the plaintiff in its obligations as the successor responsible entity under the FPA charge, the second defendant was entitled to exercise the remedy of enforcement of appointing a receiver. I accept the primary submission for the defendants in that regard. In doing so I agree that there is no basis for distinguishing the reasoning of Barrett J in Re Investa; I rely upon it and the plain language of the relevant provisions to reach this view.

Plaintiff's submissions 49 It is submitted by the plaintiff that FPA could not have been indemnified out of the scheme property in respect of the liability created by the FPA charge if it had remained as the scheme's responsible entity: see s 601FS(2)(d) and s 601FT(2). The latter subsection brings into consideration the former. It is submitted that the reference to a responsible entity being indemnified out of the scheme property made in the former subsection needs to be read in the context of s 601GA(2) of the Corporations Act. 50 Therefore, it is said that s 601FS and s 601FT only apply in respect of rights obtained and liabilities incurred in the proper performance of the responsible entity's duties. In this case, that would be the proper performance of FPA as a responsible entity for the scheme. 51 Here the plaintiff submits that FPA did not enter into the FPA charge in performance of its duties as a responsible entity. Rather, the FPA charge was provided by way of surety in respect of the obligations of the landowner to the second defendant pursuant to the convertible note issued by the second defendant to the landowner. Support is sought for this in recital C to the first notice of appointment, which acknowledges that the FPA charge was entered into solely as security for the loan obtained from the second defendant by the landowner. The plaintiff also submits that the monies obtained by the landowner under the FPA charge were used solely or predominantly to pay out the loan to NAB. In summary it is stated that the FPA charge was entered in to by FPA: (a) to secure a loan to a third party being the landowner (not even to borrow monies in its own right let alone as the responsible entity); (b) to relieve FPA of its liability to NAB which liability was incurred in respect of a loan to a third party being the landowner; and (c) in respect of the repayment by the landowner of monies loaned by it from NAB and used otherwise than for the purpose of the scheme. The plaintiff therefore submits that by reason of each of the matters set out in (a) to (c) above FPA did not enter into the FPA charge in the exercise of duties and thereby its authority under the Constitution of the scheme; or in relation to the proper performance of its duties as responsible entity. Therefore, it is contended, FPA was not entitled to be indemnified out of the scheme property in respect of the liabilities incurred by it pursuant to the FPA charge by reason of s 601GA(2). Accordingly, it is submitted, s 601FS and s 601FT do not apply to the FPA charge as FPA was not entitled to be indemnified in respect of its liability arising out of the FPA charge from the scheme property.

Defendants' submissions 52 In relation to the plaintiff's alternative contention that s 601FS(2)(d) and s 601FT(2) apply and FPA is not entitled to an indemnity from the scheme property (defined in s 9 of the Corporations Act), the defendants say that it should be rejected for the following reasons. First, the scheme was not limited to those areas sublet to the farmers: see definition of 'Project' and 'Project Land' in the Constitution. Also, the definition of project lease shows the project land to be the whole of the orchard land. Second, in any event, s 601GA(2) requires that any right of indemnification be specified in the Constitution. Breach of that provision should not be held to adversely affect the second defendant, which is not a party to any breach. Here, cl 14 of the Constitution provides for a right of indemnification. Such right arises if the responsible entity acted in accordance with the Constitution, Corporations Act and its duties as the responsible entity. FPA had the power to mortgage the orchard land: cl 12.2 and cl 12.6(c). FPA's duties appear in cl 12.3 - in substance to act in the farmers' interest. Mr Lloyd's affidavit shows that the FPA charge was entered into by FPA for the farmers' benefit. There is no evidence to the contrary. There is an absence of any evidence from Mr O'Brien, who was a director of both FPA and the plaintiff at the relevant times. 53 Alternatively, the responsible entity is protected if it believed in good faith that it was acting in accordance with the Constitution, Corporations Act and its duties. It is said to be clear that FPA, as the responsible entity, did believe it was acting in good faith: see Mr Lloyd's affidavit. The plaintiff must show that the responsible entity acted other than in good faith, the onus being on the plaintiff: see, by analogy, the rule with respect to a trustee's rights of indemnity, Nolan v Collie (2003) 7 VR 287 at 308, at [53] per Ormiston JA, Batt and Vincent JJA agreeing. The plaintiff has not called Mr O'Brien, a director of FPA and the plaintiff. An inference should be drawn that Mr O'Brien, a witness clearly in the plaintiff's camp, could not say anything which assists the plaintiff's case: Jones v Dunkel (1959) 101 CLR 298. Without the borrowing from the second defendant, the rights of the farmers would have been lost altogether. The security required for the borrowing protected the farmers' rights. Further, the Court should treat with great caution an argument advanced by the plaintiff, which has a common director to FPA, that FPA's conduct is such that it should defeat the security rights of the second defendant. Therefore it is submitted the right to indemnity exists; the exclusion in s 601FS(2)(d) and s 601FT(2) does not apply; s 601FS(1) and s 601FT(1) therefore apply, and the plaintiff took the property subject to the charge.

Reasoning 54 The terms of the indemnity provided for in the Constitution have been set out above. 55 There is the preliminary question of fact concerning the basis upon which FPA acted when it entered into the FPA charge. Mr Lloyd's affidavit evidence is that the further funding obtained by the landowner from NAB was required to develop the orchard, construct a packing and storage shed and to meet the costs associated with setting up the scheme, that is to provide working capital. He further stated that the funds were in fact applied for those purposes. This evidence is not contradicted. I agree with the defendants' submissions that there is a notable absence of evidence from Mr O'Brien and that an inference should be drawn from that to the effect that his evidence would not have assisted the plaintiff's case. I therefore find that the FPA charge was entered into by FPA for the benefit of the farmers in the scheme and that FPA did so in good faith. In any event, the plaintiff does not put in issue the question of good faith. 56 It follows that I cannot accept the plaintiff's submission that the FPA charge was not entered into in performance by FPA of its duties as the responsible entity. The fact that the security was described in the notice of appointment as having been entered into solely as security for the loan obtained from the second defendant by the landowner does not affect that conclusion. The reason is that the evident purpose of the loan being obtained by the landowner was that he sought thereby to serve the interests of the scheme. 57 It also follows that I agree with the defendants' submission that as the right to indemnity exists, the exclusion in s 601FS(2)(d) and s 601FT(2) does not apply. Neither of them can therefore affect the primary application of s 601FS(1).

whether s 601FT precluded by the Australian Constitution

Plaintiff's submissions 58 The plaintiff first addresses the second defendant's assertion that s 601FT operates so as to effectively substitute the plaintiff for FPA as a party to the FPA charge. It is submitted that s 601FT does not have the effect of amending terms of contractual arrangements such as the FPA charge other than in respect of the names of the parties. It is said that if, absent further amendments to the document, the document is not capable of having effect if the new responsible entity is substituted for the old, then the section can have no application. It is said for that reason the section cannot effectively amend the terms of the FPA charge so as to limit its application to only some of the assets of (or in the control of) the plaintiff and to allow it to also appoint a receiver to FPA. It is submitted that if the name of the plaintiff is substituted for that of FPA in that document the charge would apply to all of the assets of the plaintiff, including assets held by the plaintiff in its own right and not as a responsible entity. It is argued that if it was intended that s 601FT could operate so as to enable the second defendant to acquire property of the new responsible entity (the plaintiff) in this manner, provision should have been made for just terms: the Australian Constitution, s 51(xxxi). Accordingly, it is said, the FPA charge cannot be said to be capable of having effect after the plaintiff is substituted for FPA.

Defendants' submissions 59 With regard to the plaintiff's submissions that s 601FT cannot apply as to do so would offend s 51(xxxi) of the Australian Constitution, the defendants accept that if that submission were arguable, notices under s 78B of the Judiciary Act 1903 (Cth) would be required. However, the defendants submit the plaintiff's submission is not arguable and therefore does not properly raise a constitutional issue. The defendants say the plaintiff's submission that s 601FT is precluded should be rejected for each of, or a combination of, the following. First, the defendants do not need to rely on s 601FT; s 601FS has the same effect. The 'concession of leave and licence' by FPA to the appointment of a receiver (Kendle at 62-63, at [39]) is an obligation or liability assumed by the plaintiff. Second, s 601FT is to be read purposively: s 15AA of the Acts Interpretation Act 1901 (Cth), Network Ten Pty Ltd v TCN Channel Nine Pty Ltd (2004) 205 ALR 1 at 4, at [11]. Section 601FT is to be interpreted to mean that the charge is to be read 'as if' it referred to the new responsible entity to the extent of the assumed rights, obligations and liabilities. In this case, the charge attaches to those assets transferred from FPA to the plaintiff and any future property acquired by the plaintiff in relation to the scheme. The interpretation propounded by the plaintiff would result in the second defendant's security interests being defeated by a change in responsible entity - a result which is clearly inconsistent with s 601FS and s 601FT and the explanatory memorandum. It is also inconsistent with the principle that expropriation of property rights requires clear language. Third, if the charge attaches to all of the plaintiff's property, provision is made for just terms: s 1350 of the Corporations Act; Capricorn Diamonds Investments Pty Ltd v Catto (2002) 5 VR 61 at 93, at [123]-[127] per Warren J and the cases cited therein. Fourth, there is no expropriation of property to which s 51(xxxi) applies as s 601FT merely adjusts competing rights or claims of persons in an area of activity: Australian Tape Manufacturers Association Ltd v Commonwealth (1993) 176 CLR 480 at 510; Capricorn Diamonds at 91, at [117].

Reasoning 60 Section 78B of the Judiciary Act 1903 (Cth) requires a notice to be given of a matter arising under the Australian Constitution or involving its interpretation. The section provides that it is the duty of the Court not to proceed in the cause unless and until it is satisfied of the giving of the notice. Here the plaintiff seeks to rely upon s 51(xxxi) of the Australian Constitution. However, it is clear that the cause here does not 'really and substantially' raise any constitutional issue: Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd (1999) 95 FCR 292 at 297 citing Narain v Parnell (1986) 9 FCR 479 at 486-489. This is because the issues here are resolved by the application of s 601FS. Furthermore, if it were necessary to decide whether s 601FT(1) had application, I would approach the matter in accordance with the defendants' second submission above. That submission is consistent with the implication drawn by Barrett J in Re Investa at 463, at [3] quoted in [41] above. The constitutional issue raised by the plaintiff and addressed in the defendants' third and fourth submissions therefore does not arise for resolution. I add that had it arisen the Court would have been obliged to adjourn to enable proper compliance with the requirement to give notice.

SECOND APPOINTMENT 61 The plaintiff says it is unclear from the second notice of appointment whether or not the second defendant contends that the project lease was a scheme property transferred to the plaintiff pursuant to s 601FS and/or s 601FT. It is said that, if so, the second appointment is invalid for the reasons expressed above in respect of the first appointment. 62 The defendants contend the whole of the lease was transferred to the plaintiff, either by s 601FS and s 601FT or by the contractual assignment. They say that the FPA charge creates a proprietary interest in the charged property including the lease. That proprietary interest includes the covenants relating to the appointment of a receiver; as an incident of the nature of the charge (Gough at 15, 16, 897 and 898) and contractually (by virtue of cl 2.1, the charging clause and the definition of 'Secured Obligations'). That proprietary interest binds a third party purchaser such as the plaintiff: Agnew at 729, at [41]. While a bona fide purchaser for value without notice may have defeated the second defendant's claim, the plaintiff paid no value and had notice; Mr O'Brien signed the assignment for all parties. 63 I agree with the submissions for the defendants. They accord with the contents of the FPA charge and the circumstances of the assignment. The second defendant does not make any argument that its right to appoint a receiver arose under the project lease and that such lease was not part of the property nor would such an argument be sustainable on the facts. 64 As the plaintiff relies on the same contentions it has made against the first appointment and as none of those contentions has succeeded, the plaintiff does not have any case in respect of the second appointment.

property charged 65 In its written submissions the plaintiff raises the question whether the FPA charge and the notice of first appointment are ambiguous and uncertain as to the property to which they are said to apply. The plaintiff contends that both define the property subject to the charge circuitously as property which has been effectively transferred to the plaintiff by virtue of s 601FT and s 601FS. It is therefore submitted that there is a real uncertainty as to what, if any, property was transferred to the plaintiff pursuant to those sections. The defendants say this ambiguity point is not raised in the plaintiff's points of contention and that it is too late for it to be raised now. I agree; the case was not conducted on the basis that both the FPA charge and the notice were uncertain. 66 Additionally under this head, the plaintiff's written submissions contend that if property was transferred to the plaintiff pursuant to those sections such property was effectively excluded from the property charged under the FPA charge for the following reasons. First, it is said that cl 2.1 of the FPA charge does not on a plain reading create a charge over the scheme property (the second defendant maintain that the project lease is a scheme property which was held by FPA on trust for scheme members). However, cl 2.1 is unambiguous; it charges all rights, whether legal or equitable, which FPA had in any property. Alternatively the plaintiff contends that it did not create a charge in respect of the beneficial interest in the scheme property which is and was held by the farmers. It is said that such an interpretation of cl 2.1 is consistent with the convertible note which expressly excluded the rights of FPA and any farmer in the project lease and any farm in each farmer's lease and the deed of acknowledgement. In the absence of ambiguity, the plaintiff's reference to this extrinsic material is inadmissible. 67 Second, it is submitted by the plaintiff that the scheme property was not in any event held by FPA. It is said that, pursuant to the Constitution, property was held by the custodian: the Constitution, cl 3.2(a) and cl 3.2(b). The evidence, however, is that whatever may have been the requirement of the Constitution, FPA held some of the scheme property. 68 Third, the plaintiff submits that FPA was restricted from buying or raising money where the security offered was scheme assets: cl 11.2. Here it is said that FPA did not borrow money in its own right or as a responsible entity of the scheme, rather the charge was offered as security for a loan made to the landowner. Whilst cl 12.6(c) provided FPA with the power to charge the scheme assets, it is said it could only have done so in the performance of its duties as a responsible entity given that the charge was to secure borrowings by and for the landowner. It is said that the charge was not given by FPA in performance of its duties as responsible entity: s 601GA(2)(b). Findings of fact have been made above which dispose of this contention. The purpose of the borrowing by the landowner has been found to have included the purposes of the scheme. 69 Fourth, it is said that s 210 of the Act cannot cure or defeat the operation of s 601GA(2). It has already been decided above that s 601GA does have relevant application here but not in the manner contended for by the plaintiff. 70 It is also said by the plaintiff that in the event the project lease is not a scheme property, reliance is placed on the submissions in respect of the second appointment. Those submissions have not succeeded for reasons set out above.

conclusion 71 For the above reasons the application should be dismissed. I certify that the preceding seventy-one (71) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice RD Nicholson.

Associate: Dated: 20 October 2004 Counsel for the Plaintiff: KL Christensen

Solicitor for the Plaintiff: Christensen Vaughan

Counsel for the First and Second Defendants: JC Giles

Solicitor for the First and Second Defendants: Solomon Brothers

Date of Hearing: 31 August 2004

Date of last Written Submission: 6 September 2004

Date of Judgment: 20 October 2004