CORPORATIONS - Voluntary administration - Deed of company arrangement - Where company entered into deed of company arrangement with creditors including its landlord - Where landlord later terminated lease due to breach by company - Where moratorium in deed of company arrangement was subject to requirement that company continue to pay rent - Whether landlord can commence proceedings against company - Effect of decision of Campbell JA in BE Australia WD Pty Ltd v Sutton
[2017] NSWSC 1018
Supreme Court of NSW|2017-06-19|Before: Robb J, Campbell JA
(2004) 49 ACSR 97
Lam Soon Australia Pty Ltd v Molit (No 55) Pty Ltd (1996) 70 FCR 34
Source
Original judgment source is linked above.
Catchwords
[2011] NSWCA 414Community Development Pty Ltd v Engwirda Construction Co (1969) 120 CLR 455
Henaford Pty Ltd v Strathfield Group Ltd [2009] NSWSC 539(2009) 72 ACSR 240
J Aron Corporation v Newmont Yandal Operations Pty Ltd [2004] NSWSC 159(2004) 49 ACSR 97
Lam Soon Australia Pty Ltd v Molit (No 55) Pty Ltd (1996) 70 FCR 34(1996) 22 ACSR 169Mehan v Arrium Ltd [2016] NSWSC 1680
Re Bluenergy Group Ltd [2015] NSWSC 977(2015) 107 ACSR 373
Category: Principal judgment
Parties: Place Management NSW (formerly known as Sydney Harbour Foreshore Authority) (plaintiff)
Judgment (12 paragraphs)
[1]
Judgment
The plaintiff, Place Management NSW (which was formerly known as Sydney Harbour Foreshore Authority) (the Landlord), was at all relevant times the owner of premises in Science House, 157-161 Gloucester Street, The Rocks (the Premises), which it had leased to the defendant, Baseline Constructions Pty Ltd (subject to a deed of company arrangement) (the Company).
[2]
The lease
On 17 October 2011, the Landlord entered into a lease of the Premises to the Company for a period of 5 years commencing on 17 October 2011 and continuing until 16 October 2016.
Clause 2.1 of the Lease obliged the Company to pay rent by monthly instalments in advance on each payment date for the term of the Lease.
The Company was liable under cl 8.2 to pay interest on overdue money owing to the Landlord under the Lease at the rate prescribed in the clause.
Clause 25.1 obliged the Company to complete all Make Good Works at the Premises, which had the practical effect of requiring the Company to reinstate the Premises when the Lease terminated.
Under cl 24.1 of the Lease, the Landlord could terminate the Lease in the event of a default set out in the clause.
[3]
External management of the Company
On 13 January 2015, receivers and managers were appointed to the Company. They retired on 23 February 2015.
The sole director of the Company, Nicholas John Bettar (the Director), appointed Andrew Sallway and Said Jahani (the Administrators) as administrators of the Company on 15 January 2015 under Pt 5.3A of the Corporations Act 2001 (Cth) (the Act). (Mr Sallway ceased to be an administrator of the Company on 11 October 2016).
On 10 March 2015, the Company entered into a deed of company arrangement (DOCA) and the Administrators ceased to be administrators and became deed administrators under the DOCA.
The parties to the DOCA are the Administrators, the Company, the Director and the Secured Creditor (the last-mentioned being New Bounty Pty Ltd).
[4]
Terms of the DOCA
Clause 1.1 of the DOCA contains definitions, a number of which are relevant to the issues now in dispute. "Claim" is defined as including "claim, demand, debt, action, proceeding, suit, cost, charge, expense, damage, loss and other liability".
"Creditor" is defined in the following way:
a person other than the Deferred Creditors and the Secured Creditor who has a debt payable by or Claim against the Company whether present or future, certain or contingent, ascertained or sounding only in damages, the circumstances giving rise to which occurred on or before the Relevant Date, including, for the avoidance of doubt, parties having Claims arising under or in connection with Home Owners Warranty Claims.
The "Relevant Date" is defined as 15 January 2015, which is the date when the Administrators were appointed as voluntary administrators.
"Creditor's Claim" is defined as meaning, "in relation to a Creditor, the Creditor's debt payable by or Claim against the Company as at the Relevant Date" (emphasis added).
Accordingly, while the term "Creditor" is defined in a conventional way by reference to claims "the circumstances giving rise to which occurred on or before the Relevant Date", "Creditor's Claim" is not defined in a way such that the Claims of all Creditors will necessarily fall within the definition. To be a "Creditor's Claim", not only must the Claim arise out of circumstances which occurred on or before the Relevant Date, but it must be a "debt payable by or Claim against the Company as at the Relevant Date".
"Landlord" is defined as the lessor of the Company's Premises.
So far as the operative terms of the DOCA are concerned, it is convenient to start by noting that cl 6.1 provides that upon execution of the DOCA "control of the Company will return to the Director". That may be a significant background matter, as the introduction to the DOCA records that one purpose of the deed is to maximise the chances of the Company and its business continuing in existence. It appears that the intent was that, subject to the terms of the DOCA being satisfied, the Company would continue to engage in its original business under the control of the Director. To achieve that aspiration, the Company would need to be able to continue to operate from the Premises and to incur both obligations to trade creditors and employees and other operating expenses.
[5]
Relief claimed
The relief that the Landlord seeks in these proceedings against the Company relates to the Company's business activities after the commencement of the DOCA and the return of the control of the Company to the Director.
On 15 May 2015, the Landlord terminated the Lease due to the Company's failure to comply with its obligations under the Lease, including the payment of the rent the subject of cl 5.4 of the DOCA, and the Landlord took possession of the Premises on 27 May 2015. The Landlord alleges that the state of the Premises at the end of the Lease was such as to enliven the Make Good Works provision in cl 25.1 of the Lease.
By originating process filed on 22 May 2017 the Landlord seeks the following relief:
1. Pursuant to section 444E(3) of the Act, leave be granted to the plaintiff to bring and proceed with proceedings against the defendant in the District Court of New South Wales (in the form of the statement of claim annexed to this process).
2. Upon the making of order 1, these proceedings be transferred to the District Court.
3. The plaintiff's costs of this application follow the event of the subsequent proceedings brought by the plaintiff against the defendant.
[6]
Draft statement of claim
The draft statement of claim makes a claim against the Company for the following amounts, founded on the terms of the Lease referred to above:
1. $60,899.31 for unpaid rent due (in advance) between 15 March and 15 May 2017 (that is, for the period after the commencement of the DOCA).
2. Approximately $59,500 as Make Good Works costs.
3. Damages for the present value as at the date of the draft statement of claim of the rent owing to the Landlord under the Lease from 15 June 2015 until 16 October 2016 of $267,799.
4. Interest on the Make Good Works costs as provided for by the Lease.
[7]
Statutory provision governing grant of leave
The Landlord has sought leave to commence and bring the proceedings under s 444E of the Act, which relevantly provides:
(1) Until a deed of company arrangement terminates, this section applies to a person bound by the deed.
…
(2) The person cannot:
(a) begin or proceed with a proceeding against the company…
…
except
(c) with the leave of the Court; and
(d) in accordance with such terms (if any) as the Court imposes.
The Landlord accepts that it is a Creditor under the terms of the DOCA, and a person bound by the DOCA, notwithstanding its claim that the terms of the DOCA do not prevent it from being entitled to pursue against the Company the claims contained in the draft statement of claim.
[8]
Outline of parties' submissions
The Landlord's primary submission is that: (a) the claims made in the draft statement of claim are non-contingent liabilities which fell due after the DOCA was entered into; and (b) pursuant to cl 5.4(b) of the DOCA, the Company was obliged to pay all of the moneys claimed by the Landlord after the date of the DOCA as and when they fell due; such that (c) the amounts claimed are not provable for the purpose of the DOCA; and therefore (d) the Landlord should be given leave to pursue those claims in the District Court.
In supplementary written submissions made by leave, the Landlord tendered the Administrators' report to creditors made under s 439A of the Act and relied on statements made on pages 6, 7 and 43 of the report as background evidence known to the parties to the DOCA, which the Landlord submits was available to be taken into account by the court for the purpose of properly construing the terms of the DOCA.
As will be seen, I have not found it necessary to go beyond the terms of the DOCA to resolve the dispute in this case. In any event, I do not consider the wording of the DOCA to raise any questions that will be resolved by any of the aspects of the report relied upon by the Landlord. I regard the statements in the report to which the Landlord makes reference as being inconclusive and uncertain, and in any event more so than the relevant provisions of the DOCA itself.
Section 444A(4) of the Act identifies a number of factors that the instrument must specify, including (c) the nature and duration of any moratorium period for which the deed provides, and (d) to what extent the company is to be released from its debts. These provisions may introduce special considerations into the question of how the court may have regard to the terms of the administrators' report to creditors that has led to the creditors' resolution that the company should enter into a deed of company arrangement in construing the terms of the deed. This is not necessary or an appropriate case for the court to venture into that question, and I do not do so.
The Landlord also put an alternative submission based upon an obiter dictum of the Full Court of the Federal Court of Australia in Lam Soon Australia Pty Ltd v Molit (No 55) Pty Ltd (1996) 70 FCR 34; (1996) 22 ACSR 169 (Lam Soon), concerning the Landlord's entitlement to pursue its claim for a future breach of covenant (such as the Make Good Works covenant) in circumstances where the breach had not occurred as at the date of the appointment of the administrators. I will return to this submission after I have dealt with the Landlord's primary submission.
[9]
Consideration of Landlord's primary submission
Section 444D(1) of the Act governs the effect of the DOCA on the creditors of the Company in the following terms:
A deed of company arrangement binds all creditors of the company, so far as concerns claims arising on or before the date specified in the deed under paragraph 444A(4)(i).
Sub-section (3) of this section provides:
Subsection (1) does not affect a right that an owner or lessor of property has in relation to that property, except [for circumstances not presently relevant].
The first thing to observe about this section is that sub-s (1), in so far as it provides that the DOCA binds all creditors of the Company, will only have effect to the extent that the DOCA purports to have that effect. While the DOCA notionally binds all creditors whose claims fall within the description in the sub-section, if the DOCA does not purport to change or interfere with a particular creditor's contractual rights against the Company, then those rights will not be affected.
I respectfully accept the statement of principle made by White J in Henaford. So did Black J in Re Bluenergy Group Ltd [2015] NSWSC 977; (2015) 107 ACSR 373, where he is Honour said:
[43] It should also be noted that s 444D(2), dealing with the preservation of rights of a secured creditor, and s 444D(3), dealing with the preservation of rights of an owner or lessor of property (other than PPSA retention of title property), are in similar form, and they were also in similar form prior to the Personal Property Securities (Corporations and Other Amendments) Act 2010 (the Amending Act). That matter is of present relevance because there is authority that claims for future rent may be extinguished by a deed of company arrangement, although the right to take extra-curial action is preserved by s 444D(3) of the Act: Lam Soon Australia Pty Ltd (administrator appointed) v Molit (No 55) Pty Ltd (1996) 70 FCR 34 ; 22 ACSR 169 (Lam Soon Australia); Henaford v Strathfield Group Ltd (2009) 72 ACSR 240 ; [2009] NSWSC 539 (Henaford)…
It is crucial to a proper understanding of the decision in Henaford to bear in mind that at [23] White J said: "It follows that if, on its proper construction, the DOCA has extinguished the plaintiff's claim for future rent, the deed is binding on the plaintiff" (emphasis added).
White J set out the relevant provisions of the deed of company arrangement in the case before him at [24]. "Creditor" was simply defined as "any person with a Claim". "Claim" was defined as meaning:
a debt payable by, or a claim against, the Company (whether present or future, certain or contingent, ascertained or sounding only in damages) being a debt or claim the circumstances giving rise to which occurred on before the Appointment Date.
[10]
The Landlord's alternative argument
As I have recorded above, the Landlord put an alternative argument to support its claim for leave to commence and prosecute its Make Good Works claim against the Company. That argument was to the effect that, before any breach of cl 25.1 of the Lease occurred, the landlord did not have a claim in relation to that breach, and had no more than an expectancy. The Landlord relied upon observations made by the Full Court of the Federal Court of Australia in Lam Soon.
In that case, the Full Court held that the entitlement of a lessor to future rent payments accruing under a lease entered into before the commencement of a deed of company arrangement constituted a claim arising before the day specified in the deed of company arrangement entered into by the lessee. It then said, by way of obiter dictum, at 44:
"Future breaches of covenant" may be quite another matter. No doubt it is true, for example, that the right of a lessor under an existing covenant to keep leased premises in repair is an existing right or claim which may in theory have a value. A right to sue for damages for a particular future breach of that covenant, however, is we think, looked at before the breach occurs, not even a contingent claim: it is a mere expectancy and could not be the subject of proof. But that is a question which does not arise in this case…
The company responded by relying upon the judgment of Campbell JA (with which McColl JA agreed) in Sutton, where his Honour said:
[200] In my view it follows inexorably from the remarks of Kitto J in Engwirda Constructions, treated as still relevant to s 553 by the majority in Sons of Gwalia, that the warranty creditors in Re Motor Group would be contingent creditors of the company. There might be big problems in valuing their claims: unless there was a sound statistical basis for estimating the probability that a particular car would turn out to have a defect within the warranty period, and a sound statistical basis for quantifying the likely cost of remedying a defect, the claims might need to be valued at zero or merely a nominal amount. But that does not deny that, as a matter of analysis, they are contingent creditors. The position of the warranty creditors in Re Motor Group is distinguishable from that of Ms Sutton, who at the start of the administration had no legal rights against the company at all.
[201] The Full Federal Court in Lam Soon at 44 made the obiter remark that a right to sue for damages for a particular future breach of a covenant to keep leased premises in repair was not even a contingent claim. To that extent, Lam Soon is, in my respectful opinion, contrary to the decisions in Engwirda and Sons of Gwalia that I am obliged to follow. There may be excellent reasons for concluding that the right to sue for damages for a particular future breach of a covenant to keep leased premises in repair could not be valued at anything other than zero or a nominal amount, but it still gives rise to a contingent claim.
[11]
Conclusion
The result of this reasoning is that in my opinion the Landlord should be granted the leave that it seeks in par 1 of its originating process, subject to the condition that I consider below. The court should also make the costs order in par 3, as this seems reasonable, and has not been contested by the Company.
In its submissions, the Company referred to the decision of Black J in Mehan v Arrium Ltd [2016] NSWSC 1680 at [9] to [14] concerning the principles to be applied by the court in exercising its discretion to grant leave under s 444E(3) of the Act. I respectfully accept the observations made by his Honour. However, in the present case, with one exception, the grounds upon which the Company relied in opposition to the grant of leave assume that on the proper construction of the DOCA the claims that the Landlord wishes to make are able to be proved in the administration of the deed. As I have found that the DOCA does not have that effect, those grounds do not have force.
Additionally, the Company argued that the Deed Fund contributed by the Director and the Secured Creditor (the latter being intended to benefit the Company's employees in respect of their entitlements and the Administrator's fees capped at $37,500) is not substantial, and it would be expensive and time-consuming if the Landlord was given leave to pursue the proposed District Court Claim, and would diminish the assets available to be distributed amongst all the creditors.
The court is empowered by s 444E(3)(d) of the Act to grant leave subject to conditions. On the one hand, as the Company is now under the control of the Director, it should be the Director who will be responsible for the conduct of the Company's defence of the proposed proceedings. The remaining Administrator should not need to be involved. On the other hand, the Deed Fund was made available by the Director and the Secured Creditor paying monies to the Company that would otherwise not have been available to be divided between the creditors who are entitled to prove under the DOCA.
The Landlord should not be given leave to commence and prosecute the District Court proceedings in any manner that causes the remaining Administrator to have to engage in work for which he will not be remunerated outside the cap of $37,500. Furthermore, the Landlord should not be entitled to execute any judgment it may obtain from the District Court against any part of the Deed Fund, or to diminish that fund in any way.
[12]
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Decision last updated: 04 August 2017
Parties
Applicant/Plaintiff:
CORPORATIONS - Voluntary administration - Deed of company arrangement - Where company entered into deed of company arrangement with creditors including its landlord - Where landlord later terminated lease due to breach by company - Where moratorium in deed of company arrangement was subject to requirement that company continue to pay rent - Whether landlord can commence proceedings against company - Effect of decision of Campbell JA in BE Australia WD Pty Ltd
Clause 4.5 requires the Administrators, as soon as practicable after the execution of the DOCA, to call for Proofs of Debt from all Creditors of the Company except the Deferred Creditors. Deferred Creditors were creditors associated with the Director.
Clause 5 sets out obligations of the Company, the Director and the Secured Creditor. Relevantly, cl 5.4 provides:
The company must from the date of this Deed pay:
(a) All monies due to the Lessors;
(b) All monies due to the Landlord; and
(c) All entitlements due to continuing employees of the Company accruing after the date of this Deed.
(d) Ongoing trade creditors
as and when they fall due.
"Lessors" is a term defined to cover the lessors of plant and equipment leased by the Company. This term clearly required the Company to pay on an ongoing basis all of the operating expenses of the continuation of the business under the control of the Director. Clause 5(b) specifically obliged the Company from the date of the DOCA to pay all monies due to the Landlord as and when they fell due.
While, as shall be seen below, the expression "Claim against the Company…the circumstances giving rise to which occurred on or before the Relevant Date" in the definition of "Creditor" has been held to encompass the obligations under a lease of premises in force at the Relevant Date, even in respect of payments that would fall due and payable after that date, cl 5.4 of the DOCA clearly obliges the Company, at the suit of the parties to the deed, to pay all monies due to the Landlord after the date of the DOCA as and when they fell due; i.e. in the future.
Clause 7.4 has the effect that, in certain circumstances provided for in cl 7, if the Company breached its obligation in cl 5.4, the Administrators could call a meeting of creditors with a view to terminating the DOCA.
Clause 10.1 provides for a moratorium that prevents "each Creditor and Deferred Creditor" from taking certain actions against the Company. Relevantly, the term provides:
During the period of this Deed and subject to compliance by the parties with clause 5 of this Deed, each Creditor and Deferred Creditor, must not:
…
(b) without the leave of the Court, and then, only in accordance with such terms as the Court imposes:
(i) begin or proceed with a proceeding against the Company…either in a court or in an arbitration…
This moratorium is expressed to be subject to, among other things, the Company complying with its obligations in cl 5.4 to pay all operating expenses incurred after the date of the DOCA, including the payment of all monies due to the Landlord as and when they fall due.
Clause 11.1 contains a bar to creditors' claims in the following terms:
Subject to section 444D of the Act this Deed may be pleaded by the Company against any Creditor in bar of any debt or claim that is admissible under this Deed and a Creditor (whether the Creditor's debt or claim is or is not admitted or established under this Deed) must not, before the termination of this deed:
…
(b) except for the purpose and to the extent provided in this Deed, institute or prosecute any legal proceedings in relation to any debt incurred or alleged to have been incurred by the Company before the date when the administration began…
This bar to creditors commencing legal proceedings against the Company in relation to any debt applies to any Creditor. As noted above, the term "Creditor" is defined relatively widely in cl 1.1 (i.e. without the restrictive aspects of the definition of "Creditor's Claim"). However, the bar only applies to "any debt or claim that is admissible under this Deed". Clause 13.2 identifies the debts that are admissible under the DOCA in the following terms:
A debt payable or Claim against the Company is not admissible to proof under this deed unless it is a Creditors' Claim.
Consequently, the bar only applies to Creditors whose Claims fall within the definition of "Creditor's Claim".
Clause 17.1 provides that the Creditors must "accept their entitlements" under the DOCA in "full satisfaction and complete discharge of all debts or claims which they have or Claim to have against the Company as at the day when the administration began…" In the way that I have explained above, this provision is capable of applying to all obligations of the Company under a lease that was in place at the Relevant Date, but it will only have that effect in so far as the DOCA provided an entitlement to the Creditors.
Clause 19.1 has the effect that a creditor is deemed to have abandoned a Creditor's Claim if the creditor does not prove under the DOCA.
The parties agreed that the DOCA remains in force. One of the circumstances in which the DOCA will terminate is when the remaining Administrator has applied all of the proceeds of the realisation of the assets available for the payment of creditors and certifies to that effect in writing: see cll 16.2 and 16.3. As I understand the effect of the DOCA, cl 4 provides that the Fund to be made available for the payment of Creditors and expenses was to be made up of a payment by the Director called "The Director's Contribution" and a payment by the Secured Creditor called "The Secured Creditor Contribution". The DOCA does not provide for the Administrators to realise any other assets of the Company for the benefit of the Creditors. The effect would be that, control of the Company having been returned to the Director upon the execution of the DOCA, upon the DOCA being terminated after the Creditors have received the payments contemplated by it, the Company would then have available the assets that it then owned for the purpose of carrying on its business into the future.
It does not appear from the evidence why the Administrator is still administering the DOCA. Nor is there evidence of what remains to be done. However, as the continuing administration involves the implementation of the DOCA outside the control of the Company's continuing business activities, it does not appear that any proceedings against the Company in relation to its continuing business operations would interfere with the remaining activities of the Administrator.
The Company's primary argument in response to the Landlord's application is that it is settled law that the term "creditors" where used in s 444D(1) of the Act covers the same persons who would be entitled to prove in a winding up of the company in accordance with s 533 of the Act. The Company relies upon the decision of White J (as his Honour then was) in Henaford Pty Ltd v Strathfield Group Ltd [2009] NSWSC 539; (2009) 72 ACSR 240 (Henaford) (and the authorities therein considered by his Honour) for the proposition that, where a lease is entered into before the date specified in the DOCA as the day on or before which claims must have arisen if they are to be admissible under the deed, then the DOCA has the effect of extinguishing the Landlord's claim for future rent.
The Company also relies upon the decision of the Court of Appeal in BE Australia WD Pty Ltd v Sutton (2011) 82 NSWLR 336; [2011] NSWCA 414 (Sutton) at [200], for the proposition that the DOCA also extinguished the Landlord's claim for the Make Good Works payment, as that was a contingent or prospective claim notwithstanding that it did not arise unless and until the Company breached cl 25.1 of the Lease after the date on which the DOCA became effective.
The Company responded to the Landlord's reliance upon cl 5.4(b) of the DOCA by submitting that the Landlord was not a party to that instrument, and not being privy could not sue to enforce the provision. The provision was included in the DOCA for the benefit of the Administrators, and the relevant effect of the term being breached by the Company was that there would be a default for the purposes of cl 7 that would, if the Company did not remedy the breach after being served with a Default Notice, entitle the Administrators to call a meeting of creditors with a view to terminating the DOCA.
Accordingly, the Company submitted that the court should not grant to the Landlord the leave under s 444E(3) of the Act that it sought in its originating process. It argued that the court should refuse leave because the DOCA binds the Landlord and has the effect of placing a moratorium on the Landlord's right to pursue the claims in the draft statement of claim, and from the time of termination of the DOCA, the Landlord's claims will be released, and the DOCA will operate as an absolute bar to the claims being pursued.
As I understand the Company's case, no other reason is suggested as to why the court should refuse leave that is connected with the effect that the commencement of the proceedings in the District Court might have on the ability of the remaining Administrator to carry out his duties under the DOCA. I apprehend that may be, as suggested above, because the control of the Company has been returned to the Director.
These definitions of "Creditor" and "Claim" are different to the equivalent definitions in the present case.
"Participating Creditors" was defined as meaning "all Creditors other than Excluded Creditors in respect of their Excluded Claims". There is no need to consider the Excluded Creditors further. The effect of cl 4.5 of the deed of company arrangement considered by White J was that: "Participating Creditors must accept their Entitlements under this Deed or the Trust (as the case may be) in full satisfaction and complete discharge of their Admitted Claims". Clause 4.6 had a corresponding effect of the release and extinguishment on the termination of the DOCA of all Claims of Creditors (except for immaterial exceptions).
Relevantly, the deed of company arrangement in the case considered by White J treated all Creditors (with irrelevant exceptions) in the same manner, which included any lessor of property under any lease granted to the company before the Appointment Date. If within the meaning of the definition of "Claim" the claim by the lessor under the lease was a claim the circumstances giving rise to which occurred before the Appointment Date, or within the meaning of s 444D(1) of the Act it was a claim arising on or before the s 444A(4)(i) date, then the moratorium applied, as would in due course the release and bar.
The question is whether on its proper construction the DOCA in the present case has the same effect. The Landlord submits that it does not. I agree.
I observe at the outset that one would expect a well-drawn deed of company arrangement to contain terms such that the claims that were the subject of the moratorium and bar while the deed is in effect would be defined consistently with the claims that would be discharged and released upon payment of the creditors' entitlements under the deed and upon its determination. Furthermore, the claims made subject to the moratorium, bar, discharge and release would be defined in a way that entitled the creditors with those claims to participate in the arrangements for making funds available to creditors under the deed in lieu of their rights to enforce their claims against the company.
As the DOCA is still in effect, it is the moratorium created by cl 10 that must operate on the claims that the Landlord seeks the court's leave to pursue in the District Court, if the Landlord is to be precluded by the DOCA from pursuing the claims.
Clause 10.1 is expressly made "subject to compliance by the parties with clause 5 of this Deed". In the absence of such compliance, the moratorium in cl 10.1(b)(i) of the DOCA simply does not apply to the Landlord, notwithstanding that it accepts that it is a Creditor.
Clause 11.1 creates a bar that may be pleaded by the Company against any Creditor in respect of "any debt or claim that is admissible under this Deed". The only debts or claims that are admissible under cl 13.2 are Creditors' Claims. As I have noted above, they are defined as "the Creditor's debt payable by or Claim against the Company as at the Relevant Date" (emphasis added).
Clause 17 of the DOCA is a provision that has the effect of discharging debts owed by the Company to Creditors. This term provides that the Creditors must accept their entitlements under the DOCA in full satisfaction and complete discharge of all debts or claims "which they have or claim to have against the Company as at the day when the administration began" (emphasis added).
Clause 18.1(a) has the effect that upon termination of the DOCA the Company is "released from all Creditors' Claims", and cl 18.1(b) entitles the Company to plead the DOCA "in bar to any action…brought by a Creditor in respect of that Creditor's Claim".
It must be accepted that the meanings of the qualifications "as at the date when the administration began" and "as at the Relevant Date" may not be entirely clear. Once it is understood that the authorities establish that the claim by a lessor for rent falling due after the Relevant Date is a claim that arises before the Relevant Date, it may lead to doubt as to whether the two qualifications were intended to exclude rent falling due after the Relevant Date.
However, in my view the proper way to construe the DOCA is to do so in a way that makes the discharge of debts in cl 17 and the release of claims in cl 18, as well as the bar in cl 11, operate consistently with the moratorium in cl 10.
In my view, all of these provisions should be construed consistently with cl 10 and the evident intent of cl 5.4(b), in preserving the obligation on the Company from the date of the DOCA to pay all monies due to the Landlord as and when they fall due, so that the effect of the DOCA is that it does not affect or interfere with the rights of the Landlord under the Lease.
It will now be appropriate to deal with the Company's submission that, as the Landlord is not party to the DOCA, it is not entitled to enforce cl 4.5(b) of that instrument.
The Company is correct to submit that deeds of company arrangement do not confer contractual rights on the creditors bound by the deed who are not parties to it, and creditors who wish to enforce the provisions of the deed of company arrangement must rely upon the provisions of the Act that may be available to ensure that result: see J Aron Corporation v Newmont Yandal Operations Pty Ltd [2004] NSWSC 159; (2004) 49 ACSR 97 per Austin J at [24], where the issue was whether a creditor who was not a party to a deed of company arrangement was entitled to seek a determination with respect to the construction of the deed.
However, in the present case the Landlord does not seek to enforce the DOCA, but seeks leave to commence and prosecute proceedings in the District Court to enforce its rights under the Lease. It is the Company who relies upon the DOCA as creating a moratorium against the Landlord seeking to enforce its rights under the Lease, and a bar to the Landlord enforcing those rights. That is what gives the Landlord a right to make submissions about the proper construction of the DOCA, in order to establish that the combined effect of the DOCA and s 444D of the Act is not to interfere with the right of the Landlord to enforce the obligations owed by the Company to it under the Lease.
Accordingly, it makes no difference to the outcome of the present application that the Landlord is not entitled to enforce the DOCA.
It may be that these statements by Campbell JA are strictly also obiter dicta, as the Court of Appeal was not concerned with a right to sue for damages for a particular future breach of covenant to keep leased premises in repair, but with a claim pending under s 106 of the Industrial Relations Act 1996 (NSW) at the time when the appellant company went under administration and later became subject to a deed of company arrangement. Nonetheless, had I been required to decide this issue, I would have followed the majority decision of the Court of Appeal in Sutton.
This issue illuminates a potential difficulty with the manner in which Part 5.3A of the Act may operate in situations where the creditors of the company resolve that the company should enter into a deed of company arrangement that contemplates that the company will continue to trade from leased premises under a lease in force on the day specified under s 444A(4)(i) of the Act, and perhaps particularly if the deed of company arrangement provides for control of the company to revert to its directors.
The problem arises because it is accepted that the word "claims" in s 444A is used as a single expression to cover what s 553 divides into "debts" and "claims" in the context of a winding up. Campbell JA in Sutton referred back to the judgment of Kitto J (with whom Barwick CJ and Windeyer J both agreed) in Community Development Pty Ltd v Engwirda Construction Co (1969) 120 CLR 455, where Kitto J said, at 459
Not much assistance is to be gained, I think, from observations that are to be found in reported cases as to the import of the word "contingent", and I shall refer to one only. In Re William Hockley Ltd, Pennycuick J suggested as a definition of "a contingent creditor" what is perhaps rather a definition of "a contingent or prospective creditor", saying that in his opinion it denoted "a person towards whom, under an existing obligation, the company may or will become subject to a present liability upon the happening of some future event or at some future date". The importance of these words for present purposes lies in their insistence that there must be an existing obligation and that out of that obligation a liability on the part of the company to pay a sum of money will arise in a future event, whether it be an event that must happen or only an event that may happen. A building contract creates, as soon as it is entered into, an obligation upon the building owner to pay the contract price, either as a whole upon a future event or, more usually, by progress and final payments each of which is to be made on a future event. The event or events may not happen, but if and when one of them does happen the building owner, by force of the contractual obligation, must pay the builder a sum of money…
As appears from this extract from the judgment of Kitto J, the High Court in that case was concerned with the obligation on a building owner to pay the contract price after the completion of the building. Campbell JA appears to have given absolute and literal effect to Kitto J's words "there must be an existing obligation and that out of that obligation a liability on the part of the company to pay a sum of money will arise in a future event, whether it be an event that must happen or only an event that may happen", so that it extends to a future event that is in the nature of a breach of contract by the company. It is with respect understandable that a contingent debt should be held to exist where the obligation may arise in the future on the occurrence of an event that may or may not happen, where that event depends upon external circumstances beyond the control or choice of the company. It is not clear from reading the judgment of Kitto J that his Honour had in mind future breaches of the building contract by a party that may occur because of the choice of that party. Be that as it may, the effect of Campbell JA's judgment is clear.
There may be no problem in treating "claims" referred to in Pt 5.3A of the Act in the same way as "claims" and "debts" in provisions of the Act dealing with the winding up of companies, where the outcome of the administration is the winding up of the company.
It should be borne in mind, however, that s 435A of the Act provides that the object of the Part is:
The object of this Part, and Schedule 2 to the extent that it relates to this Part, is to provide for the business, property and affairs of an insolvent company to be administered in a way that:
(a) maximises the chances of the company, or as much as possible of its business, continuing in existence; or
(b) if it is not possible for the company or its business to continue in existence--results in a better return for the company's creditors and members than would result from an immediate winding up of the company.
Section 435C(2) provides that there are three possible normal outcomes of the administration of a company, being that a deed of company arrangement be entered into, the creditors resolve that the administration should end, or they resolve that the company be wound up. It is only the third of these alternatives which has the result that Pt 5.3A of the Act will have the same outcome as the commencement of the winding up of the company. In the case where the outcome is a winding up, treating creditors' claims in the same way as if the initial application had been for a winding up should always be a sensible course. However, in the alternative outcomes where the effect of Pt 5.3A is to keep the company alive, the statutory purpose of the Part may not be well served by both treating "claims" as having the same meaning and effect as in the context of a winding up and extending the concept of "claims" not only to all obligations, such as rent, that may accrue under an agreement entered into before the relevant date, such as a lease, but also to all possible future breaches of the contract, where those breaches may or may not occur in the future.
Where the objective of the deed of company arrangement is to preserve the business of the company, and to permit it to trade on, whether or not control of the company reverts to its directors, it will often be necessary for the company to retain its lessee's rights under a pre-existing lease in order to have premises from which the business can operate. Any operation of Pt 5.3A which has the practical effect of depriving the company of its right to continue as lessee under the lease may be inconsistent with the achievement of the objects of the Part as specifically stated in s 435A of the Act.
Whilst the company is under administration, the effect of s 440B(2) and Item 3 of the table in that section of the Act is to prevent the lessor taking possession of the leased property without the consent of the administrator or the leave of the court. If the company enters into a deed of company arrangement, the lessor will be free under s 444D(3) to exercise its right to terminate the lease and to obtain possession of the property, subject to the power of the court in s 444F(4) to order the lessor not to take possession of the property or otherwise recover it, provided the court is satisfied of the matters in s 444F(5).
In the deed of company arrangement considered by White J in Henaford, the definitions of "Creditor" and "Claim", and the provisions of the deed governing such matters as the moratorium, bar and release of Claims did not make any special arrangements to exclude the rights of the lessor in relation to future obligations under the lease if the lease continued during the period of operation of the deed of company arrangement. The effect of the judgment is that the deed of company arrangement operated to limit the lessor's rights in relation to future obligations arising under the lease to the provisions made in the deed for the payment of Claims. The effect of s 444D(3) of the Act is that the section did not affect a right that the lessor had "in relation to that property". White J said of this at [31] that: "In my view, it is to be construed in the same way, and refers to there being no restriction on the right of an owner or the lessor to take extra-curial action in relation to the property such as by re-entry for non-payment of rent".
Thus, if the deed of company arrangement is not carefully drawn to protect all of the interests of the lessor under a continuing lease, the preservation of which may be essential to the continuation of the trading of the company's business, the operation of Pt 5.3A may give the lessor no practical alternative but to forfeit the lease by re-entry, so as to avoid the risk that it will lose the right to terminate the lease as well as the right to sue the company for future breaches of the terms of the lease.
This problem is illustrated by the argument put forward by the Company in the present case. The Landlord did not immediately terminate the lease, although it did so soon after the Relevant Date for non-payment of rent. In another case the Director may have caused the Company to start paying rent. The Landlord may have lost the right to terminate the Lease because of the original failures to pay rent, by reason of the Landlord having accepted payments of rent during the period of the DOCA. In any event, the Company argues that the Landlord's entitlement to be paid the costs of the Make Good Works would be the subject of the moratorium and the release and bar established by the DOCA.
That is, I suggest, a very curious result. The Lease may continue but the entitlement of the Landlord to sue the Company in respect of future breaches of the Lease, after they have actually happened, may be extinguished by the operation of the DOCA, because the Lease was entered into before the Relevant Date, and the consequent "Claim" of the Landlord encompassed the right to sue for all future breaches of the Lease, whether or not such breaches might occur.
If a lessor does terminate the lease, and in order to preserve the benefit of the deed of company arrangement the deed administrator applies to the court for an order under s 444F(4) of the Act that the lessor not take possession of the property, sub-s (5) will prevent the court from making that order unless, having regard to the matters listed in pars (b)(i) to (iii), "the interests of the…lessor will be adequately protected".
It must at least be questionable how the interests of the lessor could be adequately protected if the terms of the deed of company arrangement do not keep all of the rights of the lessor under the lease alive, in particular the right to seek a remedy for all future breaches by the company. If a generally worded deed of company arrangement treats the lessor's claim in the same way as all other creditors, the effect of the decision in Sutton may be to convert the lessor's right to claim for all future breaches of the terms of the lease into a right to share in whatever fund is created by the deed of company arrangement for the purpose of both benefiting the creditors and subsequently extinguishing their claims. For the reasons given by Campbell JA in Sutton, that right will usually be worthless because it will be difficult for the deed administrator to assign a substantial value to a claim that may never arise when the circumstances and consequences of the claim cannot logically be known.
The parties to deeds of company arrangement can always deal with this problem by including appropriate terms to protect existing lessors in the deed. They should do so. If they do not, they may in practical terms oblige the lessor to terminate the lease, which may be the only right left to the lessor in order to avoid the risks involved in being party to a continuing lease for breach of which the lessor will be barred from suing the company.
It may also be that the court could make appropriate orders under s 447A of the Act in relation to how the deed of company arrangement is to operate, that would further the purposes of Pt 5.3A by encouraging lessors not to terminate leases, by protecting the lessors' continuing rights under those leases. For obvious reasons this may not be an attractive or convenient way to deal with the problem, if it is not adequately dealt with by the terms of the deed of company arrangement.
As, in the present case, the DOCA had the express effect of preserving the Landlord's right to claim against the Company for breach of the obligation in cl 25.1 of the Lease in relation to Make Good Works, it is not necessary for me to resolve the dispute between the parties concerning the Landlord's alternative argument. I do not do so. That is a question best left to a case in which it is necessary to be decided, as the outcome may depend upon the precise terms of the particular deed of company arrangement, and the other facts of the case.
If the Landlord wishes to commence and pursue a claim against the Company in the District Court, it should have to take the risk involved in the only assets of the Company being available to meet any judgment and order for costs being the assets other than the Deed Fund.
I will give the parties 14 days to consider this issue and to submit short minutes of order to my associate that makes the orders contemplated in these reasons, but does so in a way that imposes the condition to which I refer in par 96.
It is not clear to me why, once the Supreme Court makes an order granting leave under s 444E of the Act, there is any practical need or proper purpose in the court also making an order as sought in par 2 transferring the proceedings to the District Court. The effect of granting the leave sought in par 1 and making an appropriate costs order is that the court has exhausted the claim made in the originating process and these proceedings are at an end.
As the Landlord has not had an opportunity to deal with this issue, I will give the Landlord 14 days in which to advise my associate as to whether it still seeks the making of order 2 in the originating process, together with a submission limited to 2 pages as to why that order should be made. If the Company wishes, it may also deliver submissions limited to 2 pages. I will then deal with the issue in chambers.
I grant to the parties liberty to relist the proceedings for further brief argument by arrangement with my associate, should that prove necessary.