Awada v Linknarf [2002] NSWSC 873 | Case summary

3703/02 - KHADIJEH AWADA v LINKNARF LIMITED (IN LIQUIDATION) JUDGMENT 1 The present application raises a short but important point about voluntary winding up. The defendant, Linknarf Limited (formerly Franklins Limited), became subject to members' voluntary winding up by virtue of a special resolution passed on 15 April 2002. A declaration of solvency (Form 520) signed by a majority of its directors and dated 12 April 2002 was duly lodged in accordance with s. 494 of the Corporations Act 2001 (Cth). The declaration showed assets of $25,230,093 and liabilities of $24,770,711, leaving an estimated surplus of $459,382 after paying debts in full. 2 In September 2001 (that is, some eight months before the winding up), the plaintiff commenced proceedings 8890 of 2001 against the defendant in the District Court claiming damages for injuries allegedly sustained when the plaintiff slipped and fell at the defendant's supermarket at Chester Hill. The question for immediate consideration is whether it is open to the plaintiff to continue the District Court proceedings without the leave of this court or some other "Court" (with a capital "C") as defined in the Corporations Act. The answer turns upon the proper construction, in its context, of s.500(2) of the Act. That section is in the following terms: "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." 3 Mr Walsh of counsel, who appeared for the plaintiff, submitted that s.500(2), on such a proper construction, does not apply to a case of members' voluntary winding up. He relied, in that respect, on the decision of Judge Burley, Master of the Supreme Court of South Australia, in Catto v Hampton Australia Ltd (1998) 29 ACSR 225. Mr Lucarelli of counsel, who appeared for the company, submitted to the contrary, adding that the decision in Catto's case did not afford sufficient weight to the possibility that a winding up which begins as a members' voluntary winding up may afterwards come to be treated as a creditors voluntary winding up. 4 As Mr Lucarelli pointed out, there are really two ways in which a company may become subject to creditors' voluntary winding up. The first (and the more common today) is by way of follow-on from Part 5.3A voluntary administration by resolution of creditors under s.439(1) or s.445E or in default of execution of a deed of company arrangement as resolved by creditors (s.444B). The second is under Division 3 of Part 5.5 where a special resolution of members for winding up under s.491 is supplemented by a meeting of creditors convened in accordance with s.497. A variant on the second (which Mr Lucarelli was inclined to classify as a third possibility) is that, in the case of a winding up which begins as a members' voluntary winding up, the liquidator may form the opinion that the company is insolvent, in consequence of which a meeting of creditors is convened and the winding up thereafter proceeds "as if the winding up were a creditors' voluntary winding up" (see ss.496(6) and (8)). I shall return to the significance of these provisions and to the submission based on them. 5 First, I proceed to examine the statutory provisions. It is essential to consider the totality of the context in which s. 500(2) is found. The process of voluntary winding up for which the Act provides is created by Part 5.5. That Part consists of Divisions 1 to 4. Under s.491, a company may be wound up voluntarily "if the company so resolves by special resolution". Having regard to the definition of "special resolution" in s.9, this initiating step is, of its very nature, taken by the members only. By virtue of s.493, the passing of the special resolution marks the point at which cessation of the company's business occurs (except to the extent the liquidator considers continuation necessary for the beneficial disposal or winding up of that business) and there arises an embargo on transfers of shares and the alteration of the status of members (in the sense that a transfer or alteration after the passing of the resolution is void). In a real and direct sense, therefore, it is the passing by members of the s. 491 special resolution that causes the voluntary winding up regime to be imposed. 6 Whether the voluntary winding up thus initiated by the passing of a special resolution by members is a "members' voluntary winding up" or a "creditors' voluntary winding up" depends on a factor mentioned in the s.9 definition of the first of these terms, namely, whether a declaration of solvency has been made by directors and lodged pursuant to s.494. If it has, the winding up is a members' voluntary winding up; otherwise, it is a creditors' voluntary winding up. This is the effect of the two definitions. 7 Sections 491, 493 and 494 appear in Division 1 of Part 5.5 headed "Resolution for winding up". There follow Division 2 headed "Members' voluntary winding up", Division 3 headed "Creditors' voluntary winding up" and Division 4 headed "Voluntary winding up generally". Divisions 2 and 3 contain certain provisions resembling one another and dealing with the same subject matter. Thus, for example, s.495(2) in Division 2 and s.499(4) in Division 3 are as follows: "495(2) On the appointment of a liquidator, all the powers of the directors cease except so far as the liquidator, or the company in general meeting with the consent of the liquidator, approves the continuance of any of those powers." "499(4) On the appointment of a liquidator, the powers of the directors cease except so far as the committee of inspection, or, if there is no such committee, the creditors, approve the continuance of any of those powers." 8 Similarly, Division 2 contains s.495(3) and Division 3 contains s.499(5): "495(3) If a vacancy occurs by death, resignation or otherwise in the office of a liquidator, the company in general meeting may fill the vacancy by the appointment of a liquidator and fix the remuneration to be paid to him or her, and for that purpose a general meeting may be convened by any contributory or, if there were 2 or more liquidators, by the continuing liquidators." "499(5) If a liquidator, other than a liquidator appointed by or by the direction of the Court, dies, resigns or otherwise vacates his or her office, the creditors may fill the vacancy and, for the purpose of so doing, a meeting of the creditors may be convened by any 2 of their number." 9 There are thus in ss.495(2) and 499(4) provisions which, if they apply indiscriminately to every company to which a liquidator is appointed in a voluntary winding up, are inconsistent in a such a way that they cannot operate together. Likewise, if ss.495(3) and 4999(5) apply to every such company, there are again provisions on the same subject which so conflict as to be irreconcilable. The provisions can only be properly understood on the footing that those located in Division 2 apply where the winding up is a members' voluntary winding up as defined by s.9 (but not where it is a creditors' voluntary winding up) and those in Division 3 apply where the winding up is a creditors' winding up as defined by s. 9 (but not where it is a members' voluntary winding up). 10 Division 2 and Division 3 each refer to "the company", without any attempt to describe or define the company to which reference is made. Thus, for example, s. 500(3) empowers the court to require certain persons, including agents of "the" company to deliver to the liquidator property to which "the" company is prima facie entitled and s. 500(1) renders void any attachment or the like put in force against the property of "the" company. If a reference to companies without distinction were intended, the words "a company" would be used. The definite article shows that a particular company is in contemplation. The context demonstrates that "the company" is, of necessity, a company in liquidation. Furthermore and for the reasons I have already stated, I consider the "the" company referred to in a Division 2 provision is a company subject to members' voluntary winding up, while "the" company referred to in a Division 3 provision is a company subject to creditors' voluntary winding up. 11 This approach attaches weight to the headings of Division 2, Division 3 and Division 4 of Part 5.5. Underlying it is the notion that the Division 2 heading "Members' voluntary winding up" and the Division 3 heading "Creditors' voluntary winding up" convey the message that the provisions in each of those divisions are applicable only to the type of winding up mentioned in the particular heading, while Division 4 - "Voluntary winding up generally" - contains provisions applicable to both types of voluntary winding up. I consider this approach to be correct as a matter of statutory interpretation. 12 By force of s.5C of the Corporations Act, the Acts Interpretation Act 1901 (Cth) as in force on 1 November 2000 applies to that Act. The status of headings in Acts is dealt with in s.13 of the Acts Interpretation Act. Section 13, as it has existed since 1980, is in the following terms: "13. Headings, schedules, marginal notes, footnotes and endnotes (1) The headings of the Parts Divisions and Subdivisions into which any Act is divided shall be deemed to be part of the Act. (2) Every schedule to an Act shall be deemed to form part thereof. (3) No marginal note, footnote or endnote to an Act, and no heading to a section of an Act, shall be taken to be part of the Act. " 13 Because of s.13(1), there can be no doubt that the headings of Divisions 1, 2, 3 and 4 of Part 5.5 of the Corporations Act form part of that Act and are to be taken into account in construing its provisions. It is useful to note two recent observations on the weight to be afforded to headings in Acts, whether under s.13(1) or otherwise. I refer first to the following passage in the judgment of Drummond J in Hagan v Trustees of Toowoomba Sports Ground Trust [2000] FCA 1615: "But to give s.18C(1)(b) such a mechanical application is to ignore the statutory context and purpose of s.18C. It is in Part IIA of the Act headed 'Prohibition of Offensive Behaviour based on Racial Hatred'. It is necessary to take this heading into account in seeking the true meaning of s.18C(1)(b): that heading is part of the statutory context of the phrase, 'act done because of the race ...', in this sub-section. See s.13(1) the Acts Interpretation Act 1901 (Cth) and CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384, where it was said at 408 that 'the modern approach to statutory interpretation ... insists that the context be considered in the first instance, not merely at some later stage when ambiguity might be thought to arise ...'. " 14 I refer next to the remarks of Mansfield J in Australian Prudential Regulation Authority v Holloway (2000) 104 FCR 521: "Section 13 of the Acts Interpretation Act 1901 (Cth) may be relevant. It directs that the headings of Parts and Divisions (but not of sections) of an Act are deemed to be part of the Act. In Silk Bros Pty Ltd v State Electricity Commission (Vic) (1943) 67 CLR 1 Latham CJ said (at 16): 'The headings in a statute or in Regulations can be taken into consideration in determining the meaning of a provision where that provision is ambiguous, and may sometimes be of service in determining the scope of a provision ... ' A provision which is unambiguous will not (necessarily) be read down by a heading which might otherwise suggest a more limited meaning: Hornsby Building Information Centre Pty Ltd v Sydney Building Information Centre Ltd (1978) 140 CLR 216 at 225; Bevanere Pty Ltd v Lubidineuse (1985) 59 ALR 334 at 341; Pearce and Geddes in Statutory Interpretation in Australia (4th ed, 1996), p 120 state: 'The other context in which problems occur is where a section expressed in general terms is included in a Part headed in a way that could limit its operation and it is clear that other sections in that Part fall within the description contained in the heading. This causes greater difficulty as prima facie it would appear that the general section should be confined by its context.' In each of Chalmers v Thompson (1913) 30 WN (NSW) 161 and K & S Lake City Freighters Pty Ltd v Gordon & Gotch Ltd (1985) 157 CLR 309, the heading did not limit the scope of the particular provisions because of the legislative history of the section and the context of the Act. In considering the significance of a heading, as K & S Lake City Freighters shows, it is appropriate to have regard to the fact that the heading's function is to serve as a brief guide to the provisions which fall within it: see Henry LJ in Oyston v Blaker [1996] 1 WLR 1326 at 1333; [1996] 2 All ER 106 at 114; F A R Bennion, Statutory Interpretation (3rd ed, 1997), p 574, s 255. The heading is necessarily brief, and may therefore be inaccurate or incomplete. It may survive despite amendment to the sections in the course of the passage of the Bill.

The section in the group of sections under a heading must be read in connection with the words of the heading and interpreted in the light of them: Inglis v Robertson [1898] AC 616, 630. See also Knight v Lambrick Contractors Ltd [1957] 1 QB 562 at 566; Elliott v Grey [1960] 1 QB 367 at 372; Qualter, Hall & Co Ltd v Board of Trade [1961] 3 WLR 825 at 832, 835; Fisher v Raven [1964] AC 210; Tolley v Giddings [1964] 2 QB 354 at 358." 15 These observations of Drummond J and Mansfield J and the authorities to which their Honours refer seem to me to compel the conclusions I have expressed with respect to reconciliation of provisions appearing in Divisions 2 and 3 and the meaning of "the company" in each of those divisions. The clear specification in s.13(1) of the Acts Interpretation Act was, I suggest, at the forefront of the collective mind of the legislature when it chose to construct Part 5.5 in the way in which it now exists. 16 I turn now to the decision in Catto. Judge Burley there canvassed various reasons of policy relevant to the question whether an embargo of the kind imposed by s.500(2) has utility in the context of a members' voluntary winding up which proceeds on the footing emerging from the s.494 declaration of solvency, namely, that, according to the directors' assessment, the company will be able to pay its debts in full within one year after the commencement of the winding up. On the basis of those reasons of policy, he answered that question in the negative. Judge Burley added: "Although it is not determinative of the point, I am of the view that the fact that s.500 forms part of Div 3, which deals with creditors' voluntary winding up, and is not part of Div 4, which deals with voluntary winding up generally lends support to the contention that s.500(2) only applies to a creditors' voluntary winding up." 17 I accept that the reasons of policy referred to in Catto may be taken as indicators of the correctness of the view that s.500(2) applies only in the case of a creditors' voluntary winding up. The conclusion based on those reasons of policy accords with a dictum of McPherson J in Ogilvie-Grant v East (1983) 7 ACLR 669 at p 672. I am, however, much more heavily influenced by the matters of construction based on the arrangement of the provisions in the several divisions of Part 5.5. Unlike Judge Burley, I consider those matters of construction to be determinative for the reasons I have expressed. 18 The same matters of construction formed the basis of a decision to like effect of the Full Court of the Supreme Court of South Australia (Bray CJ, Mitchell and Walters JJ) in R A Ringwood Pty Ltd v Lower [1968] SASR 454. That decision concerned the provisions as to voluntary winding up in the Companies Act 1962 (SA). Those provisions appeared in Division 3 of Part X. Division 3 contained four numbered subdivisions headed respectively "Introductory", "Provisions applicable only to Members' Voluntary Winding Up", "Provisions applicable only to Creditors' Voluntary Winding Up" and "Provisions applicable to every Voluntary Winding Up". The analysis made by Walters J at pages 462 and 463, with which the other members of the court agreed, proceeded on the basis that I consider applicable to the present legislation. It may be that the word "only" in the second and third headings in the 1962 Act reinforced the result in that case. Against that, it may be noted that the Acts Interpretation Act 1915 (SA), as in force in 1968, appears to have contained no equivalent of s.13(1) of the Acts Interpretation Act 1901 (Cth) as in force on 1 November 2000. 19 It remains to deal expressly with a particular submission made by Mr Lucarelli, namely, that the conclusion reached in Catto (with which I have indicated agreement) produces such an anomalous result in one circumstance that it must be rejected. That circumstance is where, as Mr Lucarelli put it in his written outline, a voluntary winding up "starts as a member's voluntary liquidation but later (potentially years later) converts into a creditors' voluntary liquidation - section 496". It was submitted that, in such a case, the construction adopted in Catto means that there occurs a retrospective stay of proceedings so that, "if a members' voluntary liquidation which has continued for, say, three years then converts to a creditors' voluntary pursuant to section 496, the section 500(2) stay of proceedings operates retrospectively, all the way back to the date of the section 491 members' voluntary resolution." 20 Such a construction, it is said, produces uncertainty and inconvenience because a person contemplating litigation against a company in the course of members' voluntary winding up cannot know in advance whether and, if so, when he or she will be put to the expense, bother and risk of a leave application pursuant to s.500(2). 21 These concerns are not, to my mind, well founded. Section 496 applies where a declaration of solvency has been made under s.494 (so that the winding up is a members' voluntary winding up) and the liquidator later forms the opinion that the company will not be able to pay its debts in full within the period stated in the declaration. In such a case, the liquidator must, in obedience to s.496(1), take one of three courses, namely, apply for a court order that the company be wound up in insolvency, appoint an administrator under s.436B or convene a meeting of creditors. If the liquidator opts for the third of these courses, the following subsections of s.496 apply. They lay down a procedure that results in either appointment of a new liquidator by resolution of the creditors or failure of the creditors, duly assembled in a meeting, to make such an appointment. In each of those eventualities, "the winding up must thereafter proceed as if the winding up were a creditors' winding up". This is the effect of s.496(6) in the first case and s.496(8) in the second. 22 These provisions do not produce the confusion and difficulty suggested by the submission. The key word is, in each case, "thereafter". It is only after the occasion on which the creditors are afforded, at a meeting, the opportunity to appoint a new liquidator that the winding up proceeds as if it were a creditors' voluntary winding up. The change of classification or new designation produced by the "as if" specification only prevails as to the future. The past is left undisturbed. The dividing point between past and future is the meeting of creditors at which a decision to appoint a new liquidator, or not to do so, is made. 23 The true effect of s.496(6) or 496(8), as it affects s.500(2), is therefore to cause s.500(2) to apply only after that dividing point and to do so in such a way as not to affect steps taken in litigation beforehand, even though they may be, in terms of s.500(2) itself, steps taken after the passing of the s.491 special resolution. Sections 496(6) and 496(8) do not purport to affect in any way things done before the dividing point to which I have referred. 24 The plaintiff is entitled to the relief sought in paragraph 5 of the amended originating process filed in court on 23 September 2002, namely, a declaration that the plaintiff does not require the leave of a court exercising jurisdiction under the Corporations Act 2001 (Cth) to proceed with proceedings 8890 of 2001 in the District Court of New South Wales. I make that declaration. The plaintiff's costs of these proceedings will be paid by the defendant. **********

Awada v Linknarf

At a glance

Court

Decision date

Before

Source

Judgment (8 paragraphs)

Parties

Legislation Cited (5)

Cases Cited (8)

Cited By (5)