Foots v Southern Cross Mine Management Pty Ltd

DECISION : Liquidators to submit form of direction

CATCHWORDS : CORPORATIONS - winding up - proof and ranking of claims - where small credit balances recorded in respect of subscribers to whom telephone services not provided - where relevant contracts pre-dated the "relevant date" of the winding up - where some credits recorded before relevant date and others after - how such credits should be treated by liquidators

LEGISLATION CITED : Bankruptcy Act 1966 (Cth), ss 82, 140(9) Corporations Act 2001 (Cth), Part 5.3A, ss 443, 511(1)(a), 553(1), 553E, 556

Foots v Southern Cross Mine Management Pty Ltd [2007] HCA 56 Hardy v Fothergill (1888) LR 13 App Cas 351 Lofthouse (as liquidator of Main Jenkins Pty Limited) v Commissioner of Taxation [2001] VSC 326 CASES CITED : Re Hide; Ex parte Llynvi Coal & Iron Co (1871) 7 Ch App 28 Re One.Tel Ltd; Walker and Sherman [2002] NSWSC 1081; (2002) 43 ACSR 305 Something Better Pty Limited v Pyramid Building Society (in liq) [1996] 2 VR 352 Sons of Gwalia Ltd v Margaretic [2007] HCA 1; (2007) 81 ALJR 525

PARTIES : Peter Murray Walker and Steven John Sherman - Applicants

COUNSEL : Mr B A J Coles QC - Applicants

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST

3610/02 PETER MURRAY WALKER & ANOR RE ONE.TEL LIMITED & ORS JUDGMENT Background 1 The liquidators of One.Tel Limited ("One.Tel") seek the court's determination of a question arising in the winding up of One.Tel. Their application is made under s 511(1)(a) of the Corporations Act 2001 (Cth). The question concerns the course to be followed in relation to claims that may be maintainable in the winding up by certain former customers of One.Tel.

2 Before becoming subject to voluntary administration under Part 5.3A of the Corporations Act on 29 May 2001, One.Tel supplied telecommunications services to more than three million domestic subscribers (or customers). Of these persons, 143,271 appear from the accounting records to have credit balances of $50 or less in their customer accounts with One.Tel according to information extracted from One.Tel's accounting system (known as "ADEPT"). Customers of this kind form the basis of the application presently before the court. 3 A smaller number of customers (about 6,527) had customer accounts with a credit balance exceeding $50 and all of those accounts have been investigated. Of these 2,626 accounts had credit balances as a result of various erroneous recordings described in paragraph 11 of Mr Sherman's affidavit of 3 May 2006. Accounts for 3,901 of those customers were accepted as valid. 4 The liquidators have not subjected the 143,271 customer accounts with a credit balance of $50 or less to the same individual scrutiny as that undertaken with respect to those appearing to be in excess of $50. The expense of doing so would be considerable. 5 The liquidators have, however, taken a sample of 144 customer accounts with a credit balance between $25 and $50, and a smaller sample (25 customer accounts) with a credit balance of less than $25. The samples have been derived from what the liquidators consider to be a methodologically acceptable sampling technique. The results are recorded in annexure "B" to Mr Sherman's affidavit of 16 April 2007 and summarised in paragraphs 10 and 11 of that affidavit. 6 As appears from that material, there is a relatively small number of cases (about 5%) in which the credit balance appears to be the result of an invalid credit (in the sense that the credit was recognised incorrectly or without foundation) or a credit arising before the date which is, for the purposes of the winding up, "the relevant date" as referred to in s 553(1). 7 Invalid credits and those which arose before the "relevant date" pose no difficulty. Invalid credits are not credits at all and may simply be ignored. Credits arising before the relevant date are, for that reason alone, provable under s 553(1), since the liability for them was in all ways complete before the relevant date. 8 The more difficult question relates to the 95% of cases in which the credit arose after the "relevant date". Those cases appear broadly to be the product of: (a) duplicated or excess payments made by customers for telecommunications services provided by the company, whether before or during a relatively brief period after the relevant date; or (b) prepayments for services (such as line rental and access fees) to be supplied for a period extending beyond the last date when the company supplied the services. 9 The balance of these reasons relate to those two classes of cases. 10 The basic issues raised by the liquidator's application are as follows: (a) whether customers whose accounts show such credit balances should be treated as persons with debts or claims provable pursuant to s 553(1) of the Act; (b) whether any such debts and claims fall within any of the priority categories in s 556 of the Act; and (c) whether the liquidators should take active steps in relation to the credit balances.

11 Section 553(1) provides: "Subject to this Division, in every winding up, all debts payable by, and all claims against, the company (present or future, certain or contingent, ascertained or sounding only in damages), being debts or claims the circumstances giving rise to which occurred before the relevant date, are admissible to proof against the company." 12 It is clear from the wording in s 553(1) itself that the section is to be interpreted widely. This is consistent with the approach taken to the analogous provision of bankruptcy law. In Re Hide; Ex parte Llynvi Coal & Iron Co (1871) 7 Ch App 28 James LJ it said: "Every possible demand, every possible claim, every possible liability, except for personal torts is to be the subject of proof in bankruptcy…". 13 In Hardy v Fothergill (1888) LR 13 App Cas 351, Lord Halsbury observed that the legislative intention is directed towards exhausting: "every conceivable possibility of bankruptcy under which the bankrupt might be, to make it provable in bankruptcy and relieve the bankrupt for the future from any liability in respect thereof." 14 In Something Better Pty Limited v Pyramid Building Society (in liq) [1996] 2 VR 352, Tadgell JA said:

"It is to be remembered also that the statutory specification of provable debts, which is now contained in s82 of the Bankruptcy Act, was one achieved by degrees over a long period of time. Lord Halsbury LC in Hardy v Fothergill (1888) 13 App Cas 351 at 355-6, referred to the engagement of the legislature for over 40 years up to 1869 in the effort to exhaust every conceivable possibility of liability under which a bankrupt might be, to make it provable in bankruptcy against his estate and relieve the bankrupt for the future from any liability in respect thereof."

15 In Lofthouse (as liquidator of Main Jenkins Pty Limited) v Commissioner of Taxation [2001] VSC 326, Warren J referred to Tadgell JA's judgment and various other judgments in the same vein as follows: "...Mellish LJ in Re Hide; Ex parte Llynvi Coal and Iron Co (1871) LR 7 Ch App 28 at 33, referring to the 1869 Act, regarded it as 'quite plain that the object of these sections is that the bankrupt shall be absolutely relieved from any liability under any contract he has ever entered into'. S82, in unmodified form, is to be given a similarly wide signification with a view to providing for the result, as James LJ put it in Ex parte Llynvi Coal and Iron Co, at 32 that:'... the bankrupt is to be a freed man - freed not only from debts, but from contracts, liabilities, engagements and contingencies of every kind.'" 16 That these judicial statements correctly reflect the comprehensive nature of s 553(1), so far as concerns identification of relevant debts and claims, is borne out by the following observation of Hayne J in Sons of Gwalia Ltd v Margaretic [2007] HCA 1; (2007) 81 ALJR 525 at [172]: "The section speaks of ' all debts payable by, and all claims against, the company'. It amplifies those expressions by the parenthetical reference: 'present or future, certain or contingent, ascertained or sounding only in damages'. If the words of the section were not wholly sufficient (as they are) to indicate an intention to define provable claims very widely, the Report of the Australian Law Reform Commission on the General Insolvency Inquiry (the Harmer Report), read with the Explanatory Memorandum for the Bill that became the 1992 Act, puts the point beyond any doubt. The Harmer Report identified a basic aim of insolvency laws as being "to deal comprehensively with all of the debts and liabilities of the insolvent" and said that, "[i]n the case of a company, the aim is to deal with all the claims against a company so that its affairs can be fully wound up or so that it can resume trading" (emphasis added). The Harmer Report concluded that '[t]he categories of claims which are admissible should be as wide as possible so that the financial affairs of the insolvent are dealt with comprehensively'. Otherwise, as the Harmer Report pointed out, 'if the creditors are unable to make their claims in the insolvency, they are unable to recover at all (unless they have a basis for action against either directors of the company or a guarantor of the company's debts or unless the winding-up is stayed)'. The Explanatory Memorandum for the Bill that became the 1992 Act said that the reforms embodied in the new provisions of ss 553 to 553E 'reflect[ed] the recommendations of the Harmer Report'. 17 It is then necessary to pay attention to the temporal aspect of s 553(1). The temporal connection is indicated by the words, "being debts or claims the circumstances giving rise to which occurred before the relevant date". That is a matter to which Hayne J also gave attention in the Sons of Gwalia case. His Honour's decision (at [175], [176]) was, in essence, that, if the essentials of the cause of action existed at the "relevant date", even though not then known to the claimant, the temporal connection existed. 18 While the bankruptcy analogy already mentioned is instructive in identifying the kinds of claims that are relevant, it should be emphasised that the temporal aspect of s 553(1) differs significantly from that involved in the analogous bankruptcy provision. Section 82 of the Bankruptcy Act 1966 (Cth) makes provable not only debts and liabilities to which the bankrupt was subject at the date of bankruptcy but also those to which he or she becomes subject before discharge "by reason of an obligation incurred before" the date of bankruptcy. The connection envisaged by the Corporations Act provision pays attention, by contrast, to the time at which the "circumstances" giving rise to the debt or liability occurred, rather than focusing on the point at which any "obligation" was incurred. The recent decision of the High Court in Foots v Southern Cross Mine Management Pty Ltd [2007] HCA 56 is accordingly of no guidance in the present case. 19 In applying s 553(1) of the Corporations Act in the case of a liability under a contract, it is not necessary that the breach or other event giving rise to the claim must have occurred before the relevant date. A claim which is triggered by an event that occurs after the relevant date is admissible to proof, provided that the contract existed at the relevant date. Obvious examples include post liquidation claims under pre-liquidation insurance policies. It is "the circumstances giving rise to" the debts or claims which must have "occurred before the relevant date", not the debts or claims themselves. 20 An important element is the nature of the contract in question as one involving the company's continuing obligation to supply or perform an ongoing service or benefit.

21 In Thiess Infraco v Smith [2004] FCA 1155; (2004) 50 ACSR 434, Finkelstein J (at para [15]) drew attention to observations of Cotton LJ in Re Asphaltic Wood Pavement Co (Lee & Chapman's case) (1885) 30 Ch D 216 concerning a claim based on work unperformed by a construction company at the date of its winding up. The company there under consideration had, before the onset of winding up, entered into a construction contract. The work had not been completed. Cotton LJ said: "It is argued that this is not a liability at the time because there was no breach. At the time when the company commenced its liquidation, it was under a contract which implied a liability to maintain the streets if it were required. It is now rendered impossible by the winding up of the company to do that … That is properly a liability the damages for which are capable of being proved." 22 Authorities dealing with "the circumstances" which may give rise to a debt or claim, not infrequently refer to some act (or omission) on the part of the company which "carries within it the seed" of the eventual claim, or provides its "genesis". Thus in McDonald v Commissioner of Taxation [2005] NSWSC 2; (2005) 187 FLR 461, a claim under a costs order resulting from the post liquidation dismissal of a prior winding up application by another creditor was not admissible to proof under s 553 (see, in particular, at para [44]).

23 In the present case, although payments by the subscribers may have been made after the "relevant date", the circumstances giving rise to any claim in this regard are properly regarded as circumstances occurring before the "relevant date" (in this instance, the date of appointment of the administrators). The "circumstances giving rise to the claim" were the making by the company and each subscriber of the relevant contract for the supply of telecommunications and related services. Under the subscriber contracts the company agreed to supply on an ongoing basis the telephone services in consideration of the customers agreeing to make periodic payments for such supply. In the normal course, payments made to the credit of a customer's account, whether in arrears or in advance (including payments exceeding amounts currently due) would be expected to be applied to satisfy the customer's ongoing liabilities for the company's continuing obligations to supply the services.

24 Upon the company's failure to perform the supply the contract for services, a cause of action for breach of contract accrued to each relevant customers, the breach being essentially the non-supply of the services contracted for. The damages may be measured in various ways. They might involve the differential cost of acquiring substituted services (although it may be unlikely that subscribers would be concerned to assert claims under this head). More realistically, the measure of the subscriber's loss might involve a claim for the value of consideration paid for the continued supply of the service the delivery of which was required by the contract, but which by reason of the company's post liquidation position, it was not able to supply.

25 Neither the onset of administration nor the eventual winding up resolution of itself terminated the supply contracts. The customers had an entitlement to the supply of the services under the contracts for the whole period of those contracts, and their respective causes of action are essentially for the breach of those contracts after the failure after liquidation to perform the services required. The contract necessarily envisaged the making of payments, and the extent of those payments whenever made will be relevant to the calculation of compensation for breach. But, importantly, "the circumstances" giving rise to the claim can be seen to have occurred when the contracts were made, not when subsequent steps, incidental to the obligations on either side to perform, took place.

26 Thus, it can be seen that mistaken or negligent performance by a customer of his or her obligations under the subsisting contract with a company may produce an outcome (in this case, overpayment leading to a credit) which has its origin in the terms of the contract itself, albeit misperformed. In this sense, the customer's conduct can be seen in the same way as other conduct which involves a breach of the obligations under that contract. In either type of case, the relevant event is related to the performance of the contract. It is not, for example, a gratuitous or adventitious event.

27 On this footing, the conclusion is that the claims of the persons the subject of the present application had their "origin" or "genesis" in circumstances occurring before the relevant date. In consequence, they are provable debts within s 553(1). 28 I turn now to the question whether the claims of relevant customers come within any of the priority categories in s 556(1): "Subject to this Division, in the winding up of a company the following debts and claims must be paid in priority to all other unsecured debts and claims: (a) first, expenses (except deferred expenses) properly incurred by a relevant authority in preserving, realising or getting in property of the company, or in carrying on the company's business; (b) if the Court ordered the winding up - next, the costs in respect of the application for the order (including the applicant's taxed costs payable under section 466); (c) next, the debts for which paragraph 443D(a) entitles an administrator of the company to be indemnified (even if the administration ended before the relevant date), except expenses covered by paragraph (a) of this subsection and deferred expenses; (d) if the winding up began within 2 months after the end of a period of official management of the company - next, debts of the company properly incurred by an official manager in carrying on the company's business during the period of official management, except expenses covered by paragraph (a) of this subsection and deferred expenses; (da) if the Court ordered the winding up - next, costs and expenses that are payable under subsection 475(8) out of the company's property; (db) next, costs that form part of the expenses of the winding up because of subsection 539(6); (dc) if the winding up began within 2 months after the end of a period of official management of the company - next, the remuneration, in respect of the period of official management, of any auditor appointed in accordance with Part 2M.4; (dd) next, any other expenses (except deferred expenses) properly incurred by a relevant authority; (de) next, the deferred expenses; (df) if a committee of inspection has been appointed for the purposes of the winding up - next, expenses incurred by a person as a member of the committee; (e) subject to subsection (1A) - next, wages and superannuation contributions payable by the company in respect of services rendered to the company by employees before the relevant date; (f) next, amounts due in respect of injury compensation, being compensation the liability for which arose before the relevant date; (g) subject to subsection (1B) - next, all amounts due: (i) on or before the relevant date; and (ii) because of an industrial instrument; and (iii) to, or in respect of, employees of the company; and (iv) in respect of leave of absence; (h) subject to subsection (1C) - next, retrenchment payments payable to employees of the company." 29 The only paragraphs of s 556(1) considered by the liquidators to be potentially relevant are paragraphs (a), (dd) and (c). Paragraphs (a) and (dd) are concerned with "expenses … properly incurred". I am of the opinion that the emergence of a liability to refund, in the circumstances under discussion, did not entail any "incurring" by One.Tel and that it cannot be said that the liability to refund was "properly incurred". The reasons are those stated by me in McDonald v Commissioner of Taxation (above). In short, neither One.Tel nor its liquidators did nothing to precipitate the liability to refund. I should also say that I am not satisfied that the liability to refund is properly regarded as an "expense". 30 Section 556(1)(c) affords priority to: "next, the debts for which paragraph 443D(a) entitles an administrator of the company to be indemnified (even if the administration ended before the relevant date), except expenses covered by paragraph (a) of this subsection and deferred expenses;" 31 Section 443D is in these terms: "The administrator of a company under administration is entitled to be indemnified out of the company's property for: (a) debts for which the administrator is liable under Subdivision A or a remittance provision as defined in subsection 443BA(3); and (b) his or her remuneration as fixed under section 449E. 32 By referring back to "Subdivision A", s 443D(a) operates upon and in relation to a number of classes of debts for which a Part 5.3A administrator is made liable by provisions in Subdivision A of Division 9 of Part 5.3A. Apart from debts within those classes, an administrator is not liable for the company's debts: s 443C. The only class of debts for which an administrator is made liable and which is of any potential relevance here is that in s 443A: "(1) The administrator of a company under administration is liable for debts he or she incurs, in the performance or exercise, or purported performance or exercise, of any of his or her functions and powers as administrator, for: (a) services rendered; or (b) goods bought; or (c) property hired, leased, used or occupied.

(2) Subsection (1) has effect despite any agreement to the contrary, but without prejudice to the administrator's rights against the company or anyone else." 33 There is, in my opinion, no basis on which the credit balances arising after the "relevant date" can come within s 443A. To the extent that the credits represent debts incurred, they are not debts that were incurred by the Part 5.3A administrators. This is for the reasons referred to at paragraph [29] above. 34 The overall result in relation to credits arising after the "relevant date" is that (a) credit balances reflecting invalid credits (that is, those recognised incorrectly or without foundation) should be ignored; (b) credit balances which arose before and existed at the "relevant date" should be recognised as debts or claims provable under s 553(1) but not within any of the priority categories in s 556(1); and (c) credit balances which arose after the "relevant date" in a way mentioned in paragraph [8] above should also be recognised as debts or claims provable under s 553(1) but not within any of the priority categories in s 556(1). 35 By virtue of s 553E, the rule created by s 140(9) of the Bankruptcy Act, read in the light of the prevailing version of any regulation prescribing an amount for the purposes of that provision, will apply to dividends in the winding up in respect of the classes of credits mentioned in the immediately preceding (b) and (c): see Re One.Tel Ltd; Walker and Sherman [2002] NSWSC 1081; (2002) 43 ACSR 305. 36 I direct that the liquidators submit for consideration the precise form of direction they seek in the light of the foregoing.

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