Editions Tom Thompson Pty Ltd v Pilley [2004] FCA 93 | Case summary

REASONS FOR JUDGMENT 1 Riverside Nursing Care Pty Ltd, its administrator and its parent, Illawong Retirement Equity Pty Ltd (Illawong), are bound by a deed of company arrangement which was executed on 16 June 2000. The deed has been amended twice in accordance with resolutions passed by the company's creditors. The original deed established a trust fund to be distributed among the creditors whose claims against the company would then be extinguished. The second amendment added a further sum to the fund or, more accurately, created a new trust fund which was also to be distributed to the creditors. The administrator, as trustee of the funds, now wishes to distribute the money. He is, however, in doubt about two issues which he thinks should be resolved before there is a distribution. The first issue concerns the two amendments. The administrator is uncertain whether the amendments are effective. The second issue arises from several costs orders which have been made against the company. The administrator needs to know whether the deed requires him to pay those costs out of the funds he holds before he makes any payment to creditors. Needless to say, the resolution of the second issue is of some importance. Two litigants, the Minister for Ageing (Victoria) and the Secretary, Department of Health and Ageing (Victoria) have costs orders in their favour. They have petitioned to wind up the company on account of its failure to pay those costs. But they have indicated that if the costs are paid out of the trust funds their application for winding up will not be pressed. 2 The administrator has brought an application for directions under s 447D of the Corporations Act 2001 (Cth) as a means of having the two issues resolved. Section 447D(2) permits an administrator of a deed of company arrangement to apply "for directions about a matter arising in connection with the operation, or giving effect to, the deed". Difficult questions can arise as to the scope of this type of proceeding. It has been held to be the same as the power to give directions to a liquidator under s 479(3); Editions Tom Thompson Pty Ltd v Pilley (1997) 77 FCR 141, 149. In that event no order binding upon or affecting the rights of third parties can be made: Re Lorenz's Settlement (1861) 62 ER 433, 434. The only proper subject of a direction is the manner in which the administrator should act in carrying out his functions: Re G B Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 674, 679. The effect then of a direction is to protect the administrator against a claim that he has acted in breach of his duty when acting in accordance with the direction: Re Ansett Australia Ltd (2001) 39 ACSR 355, 370. It is possible that a direction does not amount to a judicial determination, but only constitutes an advisory opinion: Murdoch v Crawford [1986] VR 97, 99-100. For this reason one finds authority for the view that no appeal can be brought from a direction: Re Blackbird Pies (Management) Pty Ltd (No 2) (1970) QWN 33, 35. Reference might also be made to In re Tooth's Trusts (1877) 5 QSCR 10 and Re Security Provident Fund Ltd (in liq); Rodger v Gourlay (1984) 73 FLR 264; 9 ACLR 56. 3 It is important to observe that this application is brought ex parte. In Editions Tom Thompson (supra) at 149-150 Lindgren J said that this was the proper course to take and that to join an interested party as a defendant was "strictly inappropriate, since the giving of directions to the Administrators is not the making of an order which could directly affect [the defendant's] rights or liabilities". This probably goes too far. Relevantly, the court's practice of giving advice dates back to its dealings with trustees in the first half of the 19th century. The only way a trustee could obtain advice was to pay the trust fund into court and seek an administration order. This was a lengthy and costly process. The Law of Property and Trustee Relief Amendment Act 1859 (UK) 22 & 23 Vict, c 35 was enacted to enable trustees, without bringing an action, to apply for the opinion, advice or direction of the judge on any question concerning the management or administration of trust property: Amendment Act, s 30. The petition or summons had to be served on all interested parties: Amendment Act, s 30. Provided the trustee was not guilty of fraud, wilful concealment or misrepresentation in obtaining the advice, he was discharged of all responsibility in the matter when acting on the advice: Amendment Act, s 30. While there are examples of applications for directions being made ex parte, the usual practice for over 150 years has been to join all interested parties so that binding decisions can be made. This practice is, and examples of cases which have applied it are, referred to in Ford & Lee, Principles of the Law of Trusts, 3nd ed (1996) at para [17030]. 4 That said, I do not think that now is an appropriate occasion upon which to rule upon the validity of the two amendments, this being a proceeding to which no creditor or other person bound by the deed is a party. On the other hand, I will deal with the issue of costs. It is an issue upon which I have had the benefit of submissions, not only from the administrator but also from the Minister and the Secretary. I should say that I was initially of the view that this issue should also not be considered ex parte. However, I propose to give directions for two reasons. First, I have formed a firm view about the appropriate course the administrator should take. Second, to require the administrator to join additional parties to this application will, in the circumstances, be disproportionately expensive. In any event, if a creditor is dissatisfied with the result he will not be bound by my ruling and is free to challenge it in separate proceedings. 5 Shorn of irrelevant facts, the problem arises in this way. The company operated an aged care facility in Melbourne under an approval granted pursuant to s 8.1 of the Aged CareAct 1997 (Cth). On 16 and 17 February 2000 the Aged Care Standards and Accreditation Agency conducted a review of the facility following complaints made about the treatment of residents. On 18 February 2000 the Accreditation Agency produced a preliminary report to the Department of Health and Aged Care (the former name of the Department of Health and Ageing) which was critical of the treatment accorded to residents. On 22 February 2000 the Secretary of the Department sent a letter to the company notifying it of a decision (by the Secretary's delegate) to revoke the company's approval as a provider of aged care services. The revocation, however, was not to take effect if within fourteen days the company agreed to appoint an administrator under ss 66.2(1)(a)(iv) of the Aged Care Act to assist it in complying with its statutory obligations. 6 If the company were to lose its approval to provide aged care services it would be insolvent. The directors believed there was a risk that the approval might be lost. So, on 3 March 2000, acting under s 436A(1) of the Corporations Law, the legislation which was then in force, the directors appointed the plaintiff, Mr Lofthouse, to be the company's administrator. The administrator immediately met with representatives of the Department to see whether the company's operations could be saved. By then the Accreditation Agency had provided its final report to the Department. It had also submitted three supplementary reports following site visits. The administrator's discussions were to no avail. On 6 March 2000 the Secretary served the administrator with a notice advising him that the company's approval as a provider of aged care services had been revoked, as had its allocation of sixty "bed licences". As a result the company could no longer provide aged care services. The value of its bed licences was reduced from approximately $1.5 million to zero. 7 On the instruction of the administrator the company commenced two proceedings to protect its position. The first was an application in the Federal Court to review the decisions of the Secretary. In that proceeding, to which the Minister was made a party, the company sought an interim injunction to restrain the implementation of the decisions pending the trial or, alternatively, an order that all proceedings under those decisions be stayed. The second was an application to the Administrative Appeals Tribunal (AAT) for a merits review of the Secretary's decisions. 8 The application in the Federal Court for interlocutory relief was dismissed by order made on 7 April 2000. Costs were ordered to be paid to the respondents; the Minister and the Secretary. The company then filed a motion seeking leave to appeal the interlocutory orders and sought an expedited hearing of the leave application. The expedition application was refused with costs on 3 May 2000. 9 The stage was now set for the meeting of creditors required by s 439A. The creditors met on 26 May 2000. Shortly beforehand the administrator received a proposal from the directors that the company enter into a deed of company arrangement. The proposal was put to the creditors who resolved that the company execute the deed. It was executed on 16 June 2000. 10 The deed provided for the establishment of a trust fund (styled a "Distribution Fund") of $300,000. This amount was to be provided within 90 days by the company and Illawong out of the proceeds of sale of land owned by a related company, Rulandra Pty Ltd (the Rulandra land). The deed requires the administrator to hold the fund on trust "to discharge the admitted claims or debts of participating creditors of Riverside including the Voluntary Administrator": cl 6.1. Initially, the deed provided that if the Distribution Fund was not sufficient to discharge the debts due to "admitted participating Creditors" the shortfall was to be "met from the net proceeds (if any) from: i. The assets recovered and realized as a result of the proceedings in the Federal Administrative Appeals Tribunal or the Federal Court against the Department of Health and Aged Care, and/or; ii. The proceedings issued by the company against [a director] Mr Vladymir Martyniuk": cl 6.5. By cl 9 Illawong undertook "to provide sufficient funds to the company to allow it to adequately prosecute the actions instituted against Vladymir Martyniuk and the Department of Health and Aged Care." These provisions were substantially changed by the second amendment. 11 There are aspects of cl 6.5 which require explanation. It is not clear what was meant by "[t]he assets recovered and realized" as a result of the two review proceedings. Neither proceeding was of a type in which any assets could be recovered. On the other hand, if the company was successful in either proceeding it may have had its approval to operate a nursing care facility and its bed licences restored. It is likely that these are the "assets" that were covered by the clause. The other proceeding, the claim against Mr Martyniuk, had been commenced in the Supreme Court of Victoria. The administrator had advised creditors that the company had "a reasonably strong" claim against Mr Martyniuk for breach of "his duty of care and diligence to the company". The administrator estimated that the claim might yield $1.3 million. 12 The manner in which the administrator is required to deal with the Distribution Fund is set out in cl 8. First the administrator is required to settle a list of creditors who had claims against the company as at 3 March 2000, the date of the administrator's appointment. When the list is settled the administrator is then required to make the following payments: "… 8.2.1 first, the Administrator in respect of the Administrator's Remuneration and Costs; 8.2.2 secondly, subject to Clause 8.2.1 above the Priority Creditors in order of priority set out in Section 556 of the Corporations Law provided that the Administrator is satisfied immediately prior to any payment to a Priority Creditor that the Company shall, following that payment, have sufficient funds to pay amounts which are to be paid to any other Priority Creditor in priority to that payment under Section 556 of the Corporations Law; 8.2.3 thirdly, the balance to Participating Creditors to be apportioned pro-rata amongst all the Participating Creditors." 13 The "Administrator's Remuneration and Costs" are defined in cl 1.1 of the deed to mean "the amount which the Administrator and the Deed Administrator is entitled to be remunerated and reimbursed under Clause 10 of the Deed". It is common ground that the reference to cl 10 is in error. The administrator's remuneration and costs are dealt with in cl 11. So far as is presently relevant cl 11 provides that the administrator will be: "11.1.1 remunerated by the Company in respect of any work done by the Administrator...11.1.2 reimbursed by the Company in respect of all costs, fees and expenses incurred in connection with the performance of his duties, obligations and responsibilities as Administrator...". 14 There are two other provisions in the deed that should be noted. They are also provisions which were later amended. First, cl 7.1 provided that "the Director [which expression was defined to mean Mr John Irving or such other director as appointed from time to time] shall [be] in control of the operations of the Company under the supervision and direction of the Administrator…". Second, cl 7.2 imposed an obligation upon the company and the director to report at least quarterly to the administrator on the state of the actions against Mr Martyniuk and the Department. 15 Following the execution of the deed, further steps were taken in the Federal Court judicial review proceeding which resulted in costs orders being made against the company. The steps were taken while the company was under the immediate control of the director but under the ultimate control of the administrator. On 2 August 2000 the respondents obtained an order for security for their costs. The company was ordered to pay the costs of an adjournment of the security application. On 16 August 2000, the application for leave to appeal the refusal to grant interlocutory relief was heard and refused with costs. 16 The hearing of the company's application in the AAT was due to begin on 2 October 2001. The AAT had given directions concerning the manner in which it would hear the application. The company believed that the procedure breached the rules of natural justice and consequently instituted an action in the Federal Court challenging the manner in which the AAT proposed to hear the case. It sought an interlocutory order to restrain the AAT from commencing the hearing. I have not been told whether the application was begun with the knowledge or concurrence of the administrator. In any event, the application for interlocutory relief was dismissed with costs on 5 October 2001. 17 It turns out that the administrator did not receive the Distribution Fund of $300,000 from Illawong as promised. This was because the sale of the Rulandra land had not been completed. The administrator did, however, receive a proposal from Illawong's receiver that Illawong immediately pay $30,000 in part-payment and that the deed be amended to extend the time within which the balance of $270,000 would be paid. On 11 September 2001, the creditors resolved to accept the proposal and an amending deed (in the form of a deed which incorporated all the provisions of the original deed together with the amendments) was prepared and executed on 14 December 2001. Aside from the extension, the only other amendment that should be noted is that the amending deed removed the administrator's power of supervision of the company's director. 18 In due course the administrator received the balance of the amount owed by Illawong together with $14,040 by way of interest. He also received yet another proposal for the deed to be amended. The proposal was that upon payment by Illawong of an additional sum of $125,000, the company would release: (1) Illawong from its obligation to prosecute the claim against Martyniuk; (2) the directors from all claims based on insolvent trading; and (3) Illawong and related entities from any claims for reversal of transactions. It was also proposed that the company "releas[e]" any claim to "the proceeds from the AAT proceeding in the event that the AAT rules that the bed licen[c]es be reinstated". 19 The creditors resolved to accept the new proposal and, on 3 March 2003, the deed was amended accordingly. As regards the distribution of the sum of $125,000, cl 5.3 of the deed of variation provides that it be paid out as follows: "… (a) $75,000.00 in full and final settlement of the fees of the Administrator; (b) the balance owing of any Voluntary Administration and Deed of Company Arrangement's fees and expenses; (c) to the payment on a pro rata basis of the claims made against the Company by employees of the Company in their capacity as employees; and (d) the balance, if any, to be applied on a pro rata basis to Creditors other than Excluded Creditors." This takes us to cl 1.1 of the deed of variation and the definition of "Deed of Company Arrangement Costs and Expenses". Those costs and expenses include: "(b) the remuneration of the Administrator of the Company…and such costs, disbursements and liabilities incurred by the Administrator during the period of Administration of the Company…; (c) the remuneration of the Administrator of the Deed of Company Arrangement … and such costs, disbursements and liabilities incurred by the Administrator of the Deed of Company Arrangement…" 20 Against this background the administrator poses the following question: Is the administrator required to apply any part of the trust funds to discharge the costs orders which have been made against the company? 21 I do not think that the terms of the original trust authorise the administrator to apply any part of the Distribution Fund in discharge of the costs orders. The only provision relied upon as a possible source of authority is the administrator's right in cl 11 to pay the administrator's "remuner[ation]" or "costs". The first limb of that provision (cl 11.1.1) has no application as it is confined to the administrator's remuneration. The second limb, (cl 11.1.2) does deal with costs, fees and expenses, a category into which legal costs may fall. But this limb is limited in its operation to the situation where the administrator has made a payment in connection with the performance of his duties and seeks reimbursement out of the Distribution Fund. This limitation follows from the use of the word "reimburse". Clause 11.1.2 might apply to a proceeding instituted or defended on the authority of the administrator where the administrator voluntarily discharges a costs order made against the company and looks to the fund for reimbursement. It may also apply where the administrator is ordered personally to satisfy a costs order made against the company. But these issues need not be decided until they arise. 22 The position is different when one considers the terms of the second trust. The administrator is entitled to take $75,000 in accordance with cl 5.3(a), although this may be qualified by cl 6 which suggests that this figure is merely the maximum amount to which he is entitled. The balance of the fund, namely $50,000, is available to meet, in successive order, the administrator's fees and expenses, the claims of employees and the claims of creditors. Here the question is whether the costs orders can be treated as part of the administrator's "fees and expenses"? 23 I have already pointed out that cl 1.1 of the deed of variation contains a definition of "Deed of Company Arrangement Costs and Expenses". That is not the phrase that appears in cl 5.3(b) which refers to the "Voluntary Administration and Deed of Company Arrangement's fees and expenses." However, the defined expression is not repeated in the deed of variation. The only reference to fees and expenses is that found in cl 5.3(b). For this reason it is appropriate to proceed on the basis that cl 5.3(b) intended to pick up the definition. 24 That being so, the question to be resolved is whether the costs orders can be described as costs incurred by the administrator during the course of the administration or as costs incurred by the administrator of the deed. The answer depends upon the resolution of two underlying issues. The first is whether costs awarded against a company in administration or under deed of company arrangement can be regarded as costs incurred by the administrator. The second issue is whether costs which are ordered against a company under a deed of company arrangement, but not under the immediate control of the administrator, can be treated as costs incurred by the administrator. 25 An analysis of these issues will be assisted by history. The Companies Act 1862 (UK) 25 & 26 Vic, c 89 made provision for the payment of costs, charges and expenses of the winding up out of the assets of the company. Section 110 applied in a compulsory winding up: "The Court may, in the event of the Assets being insufficient to satisfy the Liabilities, make an Order as to the Payment out of the Estate of the Company of the Costs, Charges, and Expenses incurred in winding up any Company in such Order of Priority as the Court thinks just." Section 144 applied in a voluntary winding up: "All Costs, Charges, and Expenses properly incurred in the voluntary Winding-up of a Company, including the Remuneration of the Liquidators, shall be payable out of the Assets of the Company in priority to all other Claims." 26 There soon arose for determination the question whether costs ordered against a company in liquidation were costs in the winding up. The principal cases that considered the issue were: In re Bank of Hindustan, China and Japan; Ex parte Joseph Mackrill Smith (1867) 3 Ch Apps 125; Madrid Bank v Pelly (1869) 7 Eq 442; In re Trent and Humber Ship-Building Company (Bailey and Leetham's case) (1869) 8 Eq 94; In re Home Investment Society (1880) 14 Ch Div 167; In re Dominion of Canada Plumbago Company (1884) 27 Ch Div 33; In re London Metallurgical Company [1895] 1 Ch 758; In re London Drapery Stores [1898] 2 Ch 684; In re Wenborn & Co [1905] 1 Ch 413; In re Pacific Coast Syndicate Ltd [1913] 2 Ch 26. The cases established the following rules. If the liquidator commenced an unsuccessful action in the name of the company any costs ordered against the company were not to be proved as a debt in the winding up. This was because the costs were incurred in the winding up and were payable in full out of the company's assets. The same position held if the liquidator unsuccessfully defended an action brought against the company. It did not matter whether the action was begun before liquidation and its defence or prosecution (as the case may be) was taken over by the liquidator. Nor did it make any difference whether the liquidation was compulsory or voluntarily. Moreover, if the company was insolvent the costs were to be paid in priority to the general costs of the liquidation and in priority to the liquidator's remuneration. 27 The English practice that costs orders were part of the costs of the winding up to be paid in priority to the general costs of the liquidation was changed by the Companies (Winding Up) Rules 1903 (UK) which, following the model instituted by the Companies (Winding Up) Rules 1890 (UK), established a fixed hierarchy for the payment of liquidation expenses, including the costs of unsuccessful litigation: the history is summarised in In re Toshoku Finance UK plc [2002] 1 WLR 671. In Australia a similar hierarchy was adopted not by rules of court but by the relevant Companies Act. The current provision is s 556 of the Corporations Act. This provides that the first type of expense to be paid out of the assets of a company which is being wound up in priority to all unsecured debts and claims is: "(1)(a)…expenses…properly incurred by [the liquidator] in preserving, realising or getting in property of the company, or in carrying on the company's business" and (following the payment of certain presently irrelevant amounts) that the eighth category of expense is "(1)(dd)…any other expenses…properly incurred by [the liquidator]." 28 The cases show that the costs of unsuccessful litigation ordered against the company in liquidation form part of the expenses of the winding up for purposes of s 556: Fused Electrics Pty Ltd v Donald (1995) 13 ACLC 432, 433; Jeffcott Holdings Ltd (in liq) v Young (1995) 16 ACSR 33, 35-36. In the ordinary case, there is no reason for the unsuccessful costs incurred in a proceeding brought or defended by an administrator in relation to a company under administration or under a deed of company arrangement to be treated any differently. That is, they are part of the costs of the administration or deed (as the case may be). I appreciate that in McCluskey v Pasminco Ltd (2002) 120 FCR 326, 341; 41 ACSR 256, 270 Goldberg J reached a different conclusion. In fairness to the judge, it appears that he was not referred to all relevant authorities. Moreover, if the costs are ordered against the company in a proceeding which is begun or defended on the instruction of the administrator they are properly characterised as costs incurred by the administrator. Likewise if the company is under the indirect control of the administrator, as was the case here while the director was under the "supervision" of the administrator. 29 The application of these principles leads to the conclusion that the administrator is required to pay out of the trust funds the costs ordered against the company on 7 April 2000 and 3 May 2000. They fall within the general category of "costs, disbursements and liabilities incurred by the Administrator". For the same reason the administrator should also pay the costs ordered on 5 October 2001 in the proceeding brought against the AAT. 30 This leaves for consideration the costs orders made on 2 August 2000 and 16 August 2000. Those orders fall outside the general rule. This is because the deed of company arrangement made provision for the litigation in which these orders were made in a manner which took the costs outside the general category of "costs, disbursements and liabilities incurred by the Administrator". The provision is cl 9 of the deed. It will be remembered that by this clause Illawong promised to provide sufficient funds to prosecute the actions against the Minister and Secretary. It is not necessary to decide whether cl 9 imposed an obligation on Illawong to discharge any costs ordered against the company. Whatever may be the answer to that question, cl 9 indicated that the costs of those actions were to be treated differently from the general costs of the administration. In my view, the effect of cl 9 was that costs orders made in the action against the Minister and Secretary after the commencement of the deed were not to be regarded as having been incurred by the administrator. Moreover, their character did not change with the later removal of cl 9. It follows that the administrator should not satisfy those orders out of the trust fund. 31 The administrator also seeks directions in relation to costs orders that may or may not have been made, or that may in the future be made. I do not propose to give directions about the hypothetical. 32 As regards the administrator's costs of this application, they will be costs in the administration of the deed. I certify that the preceding thirty-two (32) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein.

Editions Tom Thompson Pty Ltd v Pilley

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