HIS HONOUR: Until early 2014, the company THO Services Limited carried on a construction engineering business. On 8 August 2008, it entered into a contract with the defendant the Commonwealth of Australia, for the construction of a physical fitness complex, including a swimming pool and associated works, at RAAF Base Amberley in Queensland. The contract provided for any dispute between the parties to be referred to arbitration in accordance with the International Chamber of Commerce Rules, the seat of the arbitration to be in Victoria. The relevant works were carried out by the company during 2008 and 2009. Between 2011 and 2013, the Commonwealth notified the company of a number of alleged defects and other construction issues in respect of the works.
In about February 2014, the company sold its business, or at least most of it, for about $33.5 million. The proceeds of that sale appear to have been distributed by way of a capital reduction.
On 25 January 2016, the company appointed Paul Gerard Weston and Geoffrey Trent Hancock as voluntary administrators, pursuant to (CTH) Corporations Act 2001, s 436A. The convening period for the second creditors' meeting was extended, by order of the Court made on 18 February 2016, to 17 May 2016.
By letter dated 10 September 2015, the Commonwealth commenced arbitration proceedings under the contract, claiming damages in excess of $12 million. An arbitrator was appointed on 22 December 2015. Procedural orders were made and a timetable set on 1 February 2016, which is to culminate in a hearing in November 2016. During February and March 2016, the parties have complied with the procedural timetable, including the filing of requests for production of documents and objections to those requests.
On 3 February 2016, the Commonwealth submitted a proof of debt to the administrators in an amount in excess of $14 million, for the purposes of voting at the first creditors' meeting. The other proofs of debt are very much smaller; the next largest being for an amount in the order of $14,000. Indeed, the other proofs appear to total only about $45,000, although the administrators have formed the view that there may be other ordinary unsecured creditors in the order of $278,000. As the administrators accept, the Commonwealth's claim is by far the largest claim and, in terms of guarantees alone, dwarfs all the others.
By interlocutory process filed on 3 March 2016, the administrators claim an order pursuant to Corporations Act, s 447A, to the effect that Corporations Act, Pt 5.3A, operate in relation to the company as if, for the purposes of Corporations Act, s 440D(1), a "proceeding in a Court" included an arbitration proceeding. The intent that underlies this application is to bring about a situation whereby the stay imposed by s 440D on proceedings in a court against a company in administration, also applies to the arbitration instituted by the Commonwealth in the International Chamber of Commerce's Court of Arbitration. The application is made in the context that there is authority that the section does not, in its own terms and of its own force, apply to arbitration proceedings.
On this application, two main questions arise. The first is one of power (whether the order sought can be made) and the second is one of discretion (whether if it the order can be made, it ought to be made).
[3]
The current legislative regime
Before the present Corporations legislation, predecessor legislation provided for stays of proceedings against companies in liquidation. Relevantly, in the Companies Codes of 1980, under the co-operative scheme, provision was made by s 371(2) in respect of a court-ordered winding up, in the following terms:
Where an order has been made for the winding up of a company … no action or other civil proceeding may be commenced or proceeded with against the company; except:
(a) by leave of the Court; and
(b) in accordance with such terms as the Court imposes.
In each case, the reference to "the Court" was to the Court with the conduct of the liquidation.
That provision was held to apply to an arbitration proceeding, as the term "civil proceeding" was held to include an arbitration. [1] Kelly J's judgment in Re Vassall is important for the express mention that the provision's reference to civil proceedings was not limited to proceedings in a Court. His Honour said at 772D:
On consideration of all the authorities to which I have referred, and in particular the passage in the judgment of King CJ in Alliance Petroleum Australia NL v Australian Gas Light Co, supra, I am of the opinion that 'civil proceeding' in s 371(2) of the Code includes an arbitration. The proceedings are between parties and have the characteristics to which King CJ refers. I can see no warrant for limiting the term to proceedings taking place in a Court. I am therefore not prepared to make the declarations sought and I hold that leave is required to commence the arbitration which is the subject of the originating summons.
Had the provisions of the current legislation reflected or mirrored the provisions of the Code, the difficulties which now arise might not. The present Corporations Act contains no less than four relevant provisions, each in different terms and each making slightly different provision. The closest to the version in the former Companies Code is s 500(2), which applies to a creditors' voluntary winding up and provides as follows:
After the passing of the resolution for voluntary winding up, no action or other civil proceeding is to be proceeded with or commenced against the company, except by leave of the Court and subject to such terms as the Court imposes.
As that provision uses almost identical wording to the provision in the Companies Code to which I have referred, and was enacted after the authorities to which I have referred, it may be inferred that Parliament intended to adopt the meaning given by those authorities to that term, and thus that s 500(2) would catch an arbitration, using as it does the term "no action or other civil proceeding", as Companies Code s 371(2) did.
But when one turns to the provisions concerning court-ordered windings up - which one might have expected even more closely to reflect the predecessor section appearing in the same context - s 471B provides:
While a company is being wound up in insolvency or by the Court or a provisional liquidator of the company is acting, a person cannot begin or proceed with:
(a) a proceeding in a court against the company or in relation to property of the company; or
(b) enforcement process in relation to such property, except with the leave of the Court and in accordance with such terms, if any, as the Court imposes.
Thus whereas, in Re Vassal, Kelly J referred to the absence of any warrant for limiting the term "civil proceeding" to proceedings taking place in a court, s 471B(a) explicitly does so by using the words "in a Court".
Section 471B is largely reflected in s 440D(1) - the section of most import for present purposes in the context of a voluntary administration - which provides:
During the administration of a company a proceeding in a Court against the company or in relation to any of its property cannot be begun or proceeded with; except
(a) with the administrator's written consent; or
(b) with the leave of the Court and in accordance with such terms, if any, as the Court imposes.
It is relevant also to refer to subsection (2), which provides that subsection (1) does not apply to a criminal proceeding or a prescribed proceeding.
Again, s 440D(1) uses the words "in a Court", thus providing warrant, not present in Re Vassal, for limiting the term to proceedings taking place in a Court.
Two judges of this Court have held that s 440D(1) does not catch a private arbitration - Bergin J (as her Honour the Chief Judge then was) in Auburn Council v Austin Australia Pty Ltd (2004) NSWSC 141 and Hammerschlag J in Larkden Pty Ltd v Lloyd Energy Systems Pty Ltd [2011] NSWSC 1305 285 ALR 207. Although it is possible to argue that, for present purposes, those decisions might be regarded as obiter, I am independently of the view that they are, with respect, correct: the words "in a Court" in s 440D are intractable, and do not encompass a private arbitration.
Yet, when one turns to the position under a deed of company arrangement ("DOCA"), provision is made by s 444E that a person bound by a DOCA cannot:
(a) begin or proceed with a proceeding against the company or in relation to any of its property; or
(b) begin or proceed with enforcement process in relation to the property of the company; except:
(c) with the leave of the Court; and
(d) in accordance with such terms, if any, as the Court imposes.
That provision uses the term "proceeding", and does not use the words "in a Court". It is therefore more closely analogous to s 500(2) and to the predecessor section in the Companies Code than to s 471B or s 440D. Mr Sulan submitted that, appearing as it did in Pt 5.3A in the same general area as s 440D, it should be given the same meaning as s 440D so as to exclude an arbitration. But in circumstances where the words "in a Court" make all the difference, and s 444E does not use those words, I see no reason from departing in its interpretation from the earlier authorities on a "civil proceeding". It may be remarked that the section is not even limited to a "civil" proceeding. It was submitted that this was of some significance, but when s 444E is contrasted with s 440D, the significance is that while s 440D(2) expressly excludes a criminal proceeding from the stay, s 444E, by referring only to a "proceeding" and no similar exclusion of a criminal proceeding, means that even a criminal proceeding against a company or in relation to any of the its property would be stayed.
That review of the current legislative situation reveals a situation which is ripe for the attention of an appropriate corporations law reform agency. But it also confirms, in accordance with the decisions of Bergin J and Hammerschlag J to which I have referred, that s 440D does not catch an arbitration.
[4]
Power - can the s 447A order be made?
The question is whether the power given by s 447A can be used in those circumstances to extend the reach of s 440D, in the context of a particular case, to catch an arbitration. For the Commonwealth, Mr Sulan submitted that it could not, essentially on the basis that such an order would not be an order as to how Pt 5.3A was to operate in a particular case, but an order about a subject matter outside Pt 5.3A, namely arbitration. Perhaps another way of putting the same argument is to the effect that s 447A could not be used to expand the scope and operation of Pt 5.3A, as distinct from modifying its operation within its existing scope.
The problem with that submission is that statements of principle to be found in the judgment of the High Court in Australasian Memory Pty Ltd v Brian (2000) 200 CLR 270 (which I will shortly summarise) are to the contrary.
In Australasian Memory, the High Court identified the question that arose as being whether an order could be made under s 447A to alter the way in which s 439A applied to the company, and observed that asserting that the question should be answered in the negative provided no reason for reaching that conclusion. In the present case, the essential question that arises is whether an order can be made under s 447A to alter the way in which s 440D operates in relation to this particular company by extending its operation to a private arbitration.
The High Court then enunciated a number of matters of principle in connection with s 447A, which may be summarised as follows.
First, orders under s 447A are orders about how Pt 5.3A is to operate in relation to a particular company, and the power is not cast in terms of or limited to one to make orders to cure defects or remedy the consequences of some departure from the scheme or the Part. [2]
Secondly, the reference in s 447A to "this Part" is to be understood as a reference to each of the provisions in Part 5.3A. The examples given in s 447A are not exhaustive of the scope of s 447A, and do not control its meaning but they do make clear that orders under the section can alter the operation of other provisions of the part. For example, an administration can be terminated when it otherwise would not be terminated. Thus, s 447A authorises orders that go beyond a curial determination of what is the effect of existing provisions on a particular company in the events which have happened, and may alter how the provisions are to operate (in futuro) in relation to the company. [3] The section was intended to permit a much wider class of orders than declarations as to the effect of the Part, or orders that protect the interest that creditors undoubtedly have in the administration of a company being carried out in accordance with law. [4]
Thirdly, the section is not a subsidiary provision but an integral part of the legislative scheme provided for by Pt 5.3A. It is not right to characterise it as some general source of power to which resort cannot be had if to do so would circumvent statutory limitations upon the exercise of some other power under the section - in that case, to extend the convening period. The other provisions of Pt 5.3A do not have an immutable operation in relation to all companies, but in a particular case can be modified by an order made under s 447A, the evident legislative intention being to permit alterations to the way in which the part operates in the case of a particular company. [5]
Applying Australasian Memory, in Re Ansett Australia Ltd [2001] FCA 1806 (2002) 115 FCR 376, Goldberg J (at 390 [53]) said that the High Court had made clear that s 447A empowered the Court to make orders which may alter the operation of other provisions of Pt 5.3A:
An analysis of the High Court's consideration of the particular limitations on the power under s 447A suggested to it in the course of argument leads me to the conclusion that it is not a limitation on the power which may be exercised under s 447A that such exercise must not impinge upon or affect the rights of unsecured creditors found in Pt 5.3A.
After referring to the High Court's observation that the section was an integral part of the legislative scheme, enabling the making of orders which alter the way in which the Part is to operate in relation to a particular company, his Honour continued:
The passage to which I have referred makes it clear that there is no limitation on the power under s 447A that the alteration to the way in which Pt 5.3A is to operate cannot affect or impinge upon creditors.
Those authorities, in my opinion, stand against the proposition that an order under s 447A cannot enlarge the scope of operation of Pt 5.3A in an individual case. To the contrary, such an order can alter the operation of the Part in a way that affects or impinges on creditors.
On its face, the order sought is patently one as to how Pt 5.3A is to operate in a particular case; as is reflected in the use of the formula to the effect that the Part operate "as if...".
Mr Sulan argued that, in deciding whether it was within power to make such an order, the Court should have regard to the policy that informed other legislation dealing with arbitration, in particular the (CTH) International Arbitration Act 1974, and also the (VIC) Commercial Arbitration Act 2011, Victoria being the seat of the present arbitration. As is well-known, the Arbitration Acts narrowly confine the scope for intervention by courts in an arbitration. They do not contemplate intervention by a court to stay an arbitration. However, I do not find that of much assistance in resolving this question. On the authorities, s 500(2) (and necessarily s 444E) impact on arbitrations. There is no evident reason of policy as to why a creditors' voluntary winding up should operate as a stay of an arbitration, yet a court ordered winding up should not, nor why a DOCA should but a voluntary administration should not. In that context, to proceed on the basis that the exclusion of an arbitration from s 440D reflects a sophisticated policy decision would be misconceived. While I proceed on the basis that arbitration is excluded from the prima facie effect of s 440D, I am unpersuaded that this reflects a conscious policy decision that arbitration should be permitted to proceed notwithstanding an insolvency administration; s 500(2) and s 444E indicate otherwise.
Moreover, the Commonwealth Arbitration Act has no application in the present circumstances, as the arbitration is not an international one. The Victorian Act being the Act of a State would be trumped by the Commonwealth Corporations Act in the event of inconsistency. The order sought here is, in my view, not an order about arbitration but an order in connection with an insolvency administration. Mr Sulan referred to the judgment of Campbell JA in Burton v AG. In that case, an order made, purportedly under s 447A, that extended the meaning of "creditor" to include a person who was not a creditor as defined was held beyond power. But that was because to do so was inconsistent with the objects of the Act, which were to maximise the return to creditors, as defined.
For those reasons, I have come to the conclusion that the order sought is within power, and I turn to the question of discretion.
[5]
Discretion - should the s 447A order be made?
The discretionary question involves some considerations similar to those which inform an application for leave to bring or continue proceedings under s 440D, but it is not entirely analogous for two important reasons. The first is that in the present case, the starting point is not that there is a stay such that an applicant for leave to bring proceedings must persuade the Court to grant leave; rather, the default position is that s 440D does not apply, and to the extent that there is a burden, the party contending that an order under s 447A should be made bears the burden of persuading the Court to do so. The second difference is that if an order to the effect sought is made, it would remain open to the Commonwealth to seek leave under s 440D (in its modified and extended application) if so minded.
As it seems to me, the policy that informs s 440D - and, for that matter, s 440B and s 440F - is one that is founded on avoiding disruption to and distraction of administrators from performing their functions and duties as administrators during the relatively short period available to them, and providing a breathing space for the company, until the creditors make a decision under s 439C about its future. Thus, under s 440B, even secured creditors and lessors are prevented from enforcing their security interests, distraining for rent or taking possession of leasehold property. Under s 440F, enforcement process is suspended. Together, these provisions create the so-called "moratorium" associated with voluntary administration.
The continuation during that period of commercial arbitration proceedings appears, at least at first sight, inconsistent with the scheme of a moratorium. The policy that informs the existence of the moratorium suggests that it would be appropriate to apply it also to a private commercial arbitration, particularly one of the scale and scope in question here.
Another element of that underlying policy is the avoiding of expenditure of an insolvent company's limited resources in the defence of claims which, in the likely outcomes of an administration, will sooner or later be stayed. Thus, if the administration proceeds to a DOCA, the arbitration will be stayed under s 444E. If it proceeds to a deemed creditors' voluntary winding up, it will be stayed under s 500(2). In either case, of course, the Commonwealth can apply for leave to continue with the proceedings, but application of s 440D in these circumstances would simply accelerate, by the period of the administration, a stay which is likely to arise or be imposed in any event upon the outcome of the administration, it appears unlikely in the extreme that the outcome of this administration would be the return of the company to the control of the directors.
In the context of this case, the administrators could not safely ignore the arbitration proceedings. There is on foot a strict timetable calculated to bring the proceedings to hearing in November. If the administrators do not defend the proceedings then, although there is no procedure for default judgment, the interests of the company would not be properly represented. Moreover, the rights of the company under any relevant insurance policy - and there are some - may be jeopardised, by the company failing to defend the proceedings in the meantime.
Absent a stay, the administrators will be required to expend their limited resources - which might otherwise be available for creditors generally - on the defence of the claim of one potential creditor.
Consistently with the general policy of the sections to which I have referred, a stay would avoid giving a preferred position to a single creditor against the other creditors. At first, I thought that this was of limited significance, due to the overwhelming quantum of the Commonwealth's claim, but it is to be borne in mind that, at this stage, the Commonwealth's claim is no more than a contested, as yet unestablished, unliquidated claim for damages for alleged breach of a construction contract. It is a very large claim, so far as it goes, but it may ultimately turn out to be worth nothing. In those circumstances, it is not clear why a potential creditor, albeit one with a very large claim, should be afforded a preferred position over other creditors whose claims are stayed. Moreover, a stay would also be for a period of about six weeks only, until the second creditors meeting. It would not involve any jeopardy to the Commonwealth's ultimate right, such as it may be, to recover.
It was argued that the insurance situation weighed against granting a stay and, in particular, that the only real beneficiaries of a stay would be the insurers, or alleged insurers, of the company. Whether and to what extent the company is insured in respect of the Commonwealth's claim is unclear. Liberty International Underwriters has granted indemnity in respect of a very small part of the claim which, after providing for the excess, results in a practically insignificant potential benefit to the company. QBE has declined indemnity, but its declinature may be disputed. There may potentially be other insurers yet to be ascertained. It is clear that further investigation of the insurance position is required, and that the outcome of those investigations will be relevant for creditors to consider at the s 439C meeting. The Commonwealth contends that a stay will effectively remove the pressure that the inexorable progress of the arbitration timetable imposes on the administrators and the insurers to resolve the insurance position, but it seems to me unlikely in the extreme that the insurance position can be resolved during the pendency of the voluntary administration - a period, as I have said, of about a further six weeks. If it is appropriate to contest QBE's declinature, that in itself will probably take some considerable time. Ultimately, a period of six weeks is unlikely to have any significant detrimental impact on resolution of the insurance question, nor on the Commonwealth's position.
Consistently with what I have said about preference to a single creditor, at first I was impressed by the argument that the size of the Commonwealth's claim, and its interest as the overwhelming creditor, meant that its views were entitled to very great weight indeed. Indeed, at one stage, I thought this argument very compelling; but when it is appreciated, as I have said, that it is no more than a very large disputed unliquidated claim, it is less so.
Weighing all those matters, having regard to the circumstance that a stay will be for only six weeks or thereabouts until the second creditors' meeting, and that, in any event, it will remain open to the Commonwealth to apply for leave under s 440D (as modified), if so minded, the purposes of Part 5.3A will better be achieved by extending the operation of section 440D to catch the arbitration proceedings.
[6]
Orders
The Court therefore orders that:
1. Pursuant to (CTH) Corporations Act 2001, s 447A, Part 5.3A of the Act is to operate in relation to THO Services Limited as if for the purposes of s 440D(1), a "proceeding in a court" included an arbitration proceeding, to the intent that s 440D(1) applies to the arbitration proceedings between the company and the Commonwealth of Australia in the International Chamber of Commerce Court of Arbitration, case number 21321/CYK.
2. The costs of the application be costs in the administration of the company.
[7]
Endnotes
Re Vassal Pty Limited [1983] 2 Qd R 769 (Kelly J); Mowbray College v Exhib Design & Construction Pty Ltd (1987) 5 ACLC 478 (Nathan J)
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Decision last updated: 26 April 2016