The objectives of Part 5.3D are vital to an application under section 440C of the Corporations Act
Rewards Land Pty Ltd (administrators appointed) (receivers and managers appointed) v Jones  WASC 233, Supreme Court of Western Australia, Le Miere J, 2 September 2010
Section 440C of the Corporations Act 2001 (Cth) (the Act) provides that during the administration of a company, the owner or lessor of property that is used or occupied by or is in the possession of the company, cannot take possession of the property or otherwise recover it except with the administrator’s written consent or with the leave of the court. The plaintiffs in this case, two entities that had leased land to the defendants for the purposes of a managed investment scheme, sought to recover possession of these properties after the defendant companies were put into administration.
Le Miere J found that the interests of the property owners must be balanced against the interests of the company in administration, with regard also paid to the interests of members of the company and its creditors. It was held that the evidence lead by the plaintiffs had not adequately established that it should be allowed to take possession of the properties to prevent them from being damaged and devalued due to a lack of proper maintenance. It was also held that if the plaintiffs were allowed to take possession of the properties, it would be difficult, if not impossible, for the company that was in administration to enter into a deed of company arrangement that had been proposed, the prospects of which were to be assessed by the company’s creditors.
The plaintiff’s application for leave to take possession of the leased properties under section 440C of the Act was therefore refused.
Rewards Projects was the responsible entity of a large number of managed investment schemes for the commercial cultivation of fruit or timber (the Schemes). The Schemes were registered under the Act and carried out on behalf of the members of the Schemes. Each Scheme was carried out on land owned by Rewards Land Pty Ltd (Rewards Lands) and The ARK Fund Ltd (ARK), which had been leased to Rewards Projects. Rewards Projects was the wholly owned subsidiary of Rewards Group Ltd and was responsible for the operation and administration of the Schemes. Rewards Management (another wholly owned subsidiary of Rewards Group Ltd) was responsible for establishing, managing, harvesting and selling the fruit or timber produced under the projects by way of a contract with Rewards Projects.
Administrators for Rewards Group Ltd and its subsidiaries, including Rewards Projects, Rewards Land and Rewards Management, were appointed on 16 May 2010. Receivers and managers were appointed for the Rewards Group Ltd, Rewards Lands, Rewards Management and ARK on 1 June 2010 and 2 June 2010. The plaintiffs in this case, Rewards Land, ARK and their receivers and managers (the Plaintiffs) sought an order under section 440C of the Act for leave to take possession of the properties that had been leased to Rewards Projects. The administrators of Rewards Land, ARK, Rewards Group Ltd and its subsidiaries, Rewards Projects and Rewards Management (the Defendants) had taken possession of the leased properties after Rewards Projects had been put into administration.
Le Miere J first had to determine whether an application under section 440C of the Act was an interlocutory proceeding when a dispute about the admissibility of evidence arose. Le Miere J then considered whether leave should be granted to allow the Plaintiffs to take possession of the properties that were in the possession of the Defendants.
(i) Interlocutory proceeding?
Whether an application under section 440C of the Act is interlocutory or final needed to be determined as the Defendants argued an affidavit submitted by the Plaintiffs was inadmissible on the basis of hearsay. The Plaintiffs submitted that the proceeding was interlocutory and therefore hearsay is admissible. Under Order 37 rule 6(2) of the Rules of the Supreme Court 1971 (WA), an affidavit may contain statements of information or belief when used for the purposes of an interlocutory proceeding.
Le Miere J noted that there can be difficulty in determining whether a proceeding is interlocutory or final, but cited Gibbs J in the High Court case of Licul v Corney (1976) 180 CLR 213 to find that the ultimate test to resolve this question is whether the judgment or order, as made, finally disposes of the rights of the parties.
The Plaintiffs argued that an application under section 440C of the Act is incidental to the subsequent substantive proceedings in which the Defendants might seek to recover possession of the property of the Plaintiffs following the grant of leave under section 440C of the Act. Le Miere J did not accept this argument and found that section 440C of the Act only imposes a moratorium on the recovery of property from a company in administration, which ends where leave is granted. As the owner of the property does not have to commence any further proceedings to assert their rights, applications under section 440C of the Act are final. The Plaintiffs’ hearsay evidence was therefore inadmissible.
(ii) Leave to take possession?
Le Miere J assessed whether the Plaintiffs’ application for leave to take possession of the properties that had been leased to Rewards Projects should be granted having regard to the objects of Part 5.3A of the Act, in which section 440C is found. The focus of the application was placed on whether granting leave would:
detrimentally affect the chance of the company in administration continuing to exist; or
where the company could not continue to exist, whether the potential return for its creditors and members would be detrimentally affected.
In addition, particular focus was placed on the fact that the Explanatory Memorandum to the Corporate Law Reform Bill 1992, under which Part 5.3A was inserted into the Act, provided that the proposed Part 5.3A is intended to provide for an administrator to take over the affairs of a company, with a view to developing a deed of company arrangement, under which the company might be restored to financial health.
In determining whether the company, its creditors or its members would be detrimentally affected if leave under section 440C of the Act was granted, an analysis of previous case law indicated that regard must be paid to the legitimate interests of the party applying for leave on the one hand and the legitimate interests of the company, its creditors and its members on the other. Le Miere J acknowledged that weight must be given to the proprietary interests of Rewards Land and ARK. The detriment to Rewards Land and ARK if leave was not granted must be also be weighed against the detriment to the members and other creditors of Rewards Projects, and the effect on the chances of Rewards Projects continuing to exist if leave was granted.
The Plaintiffs led evidence that the properties had not been properly maintained and were at risk of deteriorating further. Allowing the Plaintiffs to take possession was argued to be necessary to prevent continuing loss and damage and to mitigate the damage that had already occurred. In response, the Defendants led evidence that various loan agreements had been entered into and argued that this funding would allow the proper maintenance of the properties to be carried out.
In noting that the Plaintiffs must satisfy the court that leave should be granted, Le Miere J found that the evidence did not establish that all the leased properties were unprotected and deteriorating due to non-performance of required maintenance, nor that the value of the leased land had deteriorated so that if it remained in the possession of Defendants, it was likely that the realisable value of the land would be less.
The Defendants also submitted that if the Plaintiffs retake possession of the leased land, it would be practically impossible for the Defendants to propound a deed of company arrangement that had been proposed by the company with significant forestry holdings and would enable the Schemes to continue in some form. The Plaintiffs argued that the evidence to support this contention was insufficient. Upon noting that the ability of a company to enter into a deed of company arrangement was of particular importance in Re Java 452 Pty Ltd (Admin Appointed); Permanent Trustee Australia Ltd (as trustee of Advanced Property Fund) v Stout (1999) 32 ACSR 507 and Canberra International Airport Pty Ltd v Ansett Australia Ltd (2002) 41 ACSR 309, Le Miere J found that the evidence had established it was inherently plausible that a deed of company arrangement will not be able to be pursued if the Defendants did not remain in possession of the leased land.
For both these reasons, it was held that granting leave would not advance the objects of Part 5.3A of the Act, as set out in section 435A of the Act and would impede the chances of Rewards Projects, or as much as possible of its business, to continue to exist. This would be to the detriment of Rewards Projects, as well as its members and creditors. Refusing leave would advance the objectives of Part 5.3A of the Act, as the creditors will have an opportunity to assess their options, including whether a deed of company arrangement should be entered into.
Further, once the period of administration ends, the Plaintiffs have the ability to exercise their rights to take possession of the leased properties at general law.
The Plaintiffs’ application for leave under section 440C of the Act was therefore refused.
Co-authored by Olivia Draudins.
Published by SAI Global on behalf of Centre for Corporate Law and Securities Regulation, Faculty of Law, the University of Melbourne with the support of the Australian Securities and Investments Commission, the Australian Securities Exchange and the leading law firms.