Hansen v Namoi Enterprises

• 1 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

4493/03 Alan Edward Hansen v Namoi Enterprises Inc (In Liquidation) JUDGMENT 1 MASTER: This is the hearing of an application filed on 25 August 2003 for an order pursuant to s 500(2) of the Corporations Act 2001 (Cth) that the plaintiff be at liberty to continue two proceedings in the Industrial Relations Commission of New South Wales which seek relief pursuant to s 106 of the Industrial Relations Act 1996 (NSW) against his former employer, the defendant.

Relevant history 2 The defendant company was incorporated as an association under the Associations Incorporation Act 1984 (NSW). It operated a sheltered workshop employing physically and mentally handicapped people at Narrabri. The defendant was funded largely by government grants and to a lesser extent, by the sale of waste paper, plastic and glass bottles which were recycled. In addition, it also made artefacts for sale. 3 The plaintiff was employed as a manager pursuant to an agreement made on 8 March 2002 for a period of 3 years ending 25 February 2005. 4 The defendant ceased trading on 31 July 2002 and at or about that time Challenge Disability Services Limited (Challenge) took over the business that had been operated by the defendant. Challenge is also a defendant in the proceedings in the Industrial Relations Commission. 5 The plaintiff alleges that he was dismissed from his position with the defendant on or about 25 July 2002 and that he was not offered any further position with Challenge in the operations which that company continued. 6 The defendant was placed into liquidation on 3 January 2003, the winding up being a creditors voluntary winding up. Mr Stephen Neville Hall of Forsyth's Accounting was appointed liquidator. 7 The first of the proceedings in the Industrial Relations Commission was commenced on 25 October 2002 and the second proceedings on 24 October 2003, apparently, in order to preserve the entitlement to relief which must be obtained within 12 months of commencing proceedings. 8 On 3 January 2003, the liquidator wrote to all creditors including the plaintiff calling for the lodging of formal proofs of debt on or before 7 July 2003. To date no formal proof of debt has been lodged by the plaintiff with the liquidator. 9 There have been a number of motions brought before the Industrial Relations Commission. However, they will not be dealt with until such time as the question of the plaintiff's application for leave has been determined by this Court.

The state of the company's assets and money available to creditors 10 But for the proceedings presently before this Court and the Industrial Relations Commission, the liquidator is in a position to distribute the assets of the defendant and to complete the winding up.

11 The assets of the defendant will not be sufficient to meet all secured and unsecured priority creditors.

12 The creditors proven claims are as follows: % No. % Amount Secured Creditor 2.38 1 39.05 $22,011.00 Employees 50 21 25.85 $14,559.50 Unsecured Creditors 47.62 20 35.10 $19,783.35 100% 42 100% $56,353.85

13 The funds available as at 22 September 2003 are $42,140.65.

14 The employees' proven claim amounts to $14,559.50. There are 21 employees.

15 The liquidator is concerned that the disadvantaged employees have been without their pay since the defendant ceased trading on 31 July 2002, some 14 months ago. 16 The remaining funds held by the liquidator are subject to erosion by costs that are presently being incurred both in this Court and in the Industrial Relations Commission. The total costs to date amount to $11,494.18. This means that there are now no funds to pay unsecured creditors and that the short fall of funds available to pay the employee creditors is now $5,924.03. This figure is, of course, subject to there being no recovery by the liquidator of costs if he does obtain an order for costs in either of the proceedings. The defendant's submissions 17 The defendant opposes the relief sought on the following grounds: "(a) The proceedings before the Commission, or leave to be granted, would be futile as;

(i) Any award of compensation as sought in the two Summonses pursuant to s 106 (5) of the Industrial Relations Act would not be a debt provable against the Defendant and so the Plaintiff's claim could not give rise to an entitlement to participate in a distribution; and (ii) In any event, were the Applicant's claim to succeed, it would certainly not be a debt ranking in priority pursuant to s.558 of the Corporations Act but the Plaintiff would rather rank as a normal unsecured creditor with no priority in circumstances where there are insufficient funds to distribute to that class of creditor.

(b) In the circumstances, on the balance of convenience, the prejudice to creditors as a whole will significantly outweigh the Applicant's interests in pursuing the application before the Commission.

(c) There has been an unexplained delay of approximately eight months between the date when the Plaintiff was first advised that the Defendant was in liquidation and leave would be required and the date on which this Court was moved by way of Summons for that leave to be granted."

18 The plaintiff suggests that it may be necessary for the defendant to still be a party to the proceedings in the Industrial Relations Commission in order to make those proceedings effective. It also relies upon an undertaking, which it is prepared to give. In a letter of 16 October 2003, it made an offer in these terms: "We advise that our client is willing to [sic] give an undertaking not to enforce any judgment obtained against Namoi Enterprises Inc (in liquidation) in the Industrial Relations Commission." Would an award under s 106 (5) of the Industrial Relations Act give rise to a provable debt? 19 This matter seems to be fairly clearly addressed by the decision of Gzell J in Silberman v One.Tel Limited (No 2) (2002) 167 FLR 274; (2002) 20 ACLC 846; [2002] NSWSC 295. That was an appeal from a decision of mine at first instance, an appeal His Honour dismissed. The question at issue was whether a prospective order of the Industrial Relations Commission constitutes a debt provable in the winding up of a company in terms of s 553(1) of the Corporations Act. It was suggested that there had been a widening of the type of claim sufficient to allow future claims to be provable. The matter had partially been dealt with in Fisher v Madden (2002) 54 NSWLR 179; (2002) 41 ACSR 1; (2002) 20 ACLC 753; (2002) 114 IR 119; [2002] NSWCA 28. In that case, where a receiver and manager were appointed, Ms Fisher had commenced proceedings in the Commission claiming the contract was unfair and seeking orders varying it so as to include a provision for 12 months notice of termination and severance pay. 20 After reviewing the history of s 553 of the Corporations Act Gzell J then referred to paragraph 44 in the judgment of Sheller JA in Fisher v Madden, which was in these terms: "In the present case at the relevant date Dataflow was under no existing obligation to pay a sum of money by way of a retrenchment payment to Ms Fisher immediately or on a future event. Ms Fisher had only a right to take proceedings in the Industrial Relations Commission to vary the contract to that end."

His Honour also referred to what was said by Sheller JA at paragraph 46 in these terms: "However Ms Fisher's right under s.106 be categorized, her right to invoke the jurisdiction of the Industrial Relations Commission did not until such time as an order was made create any obligation on Dataflow to make a retrenchment payment to her. Moreover, even if the Industrial Relations Commission declared the contract unfair, varied it ab initio and ordered Dataflow to make a retrenchment payment to Ms Fisher, it remains true that at the relevant date of Mr Madden's appointment no amount for retrenchment payment had become payable before, on or after the relevant date."

His Honour concluded at paragraph 16 in these terms: "The reasoning in these paragraphs applies equally, in my view, to the category of future claims for the purpose of s 553(1). If there was no obligation on the respondent on the date on which the winding up is taken to have begun, to indemnify the directors against their personal liability to the credit card companies or to pay the Directors amounts sufficient to enable them to discharge their liabilities to the credit card companies and such obligations can only arise if and when the Industrial Relations Commission makes orders, there was, in my view, no future claim against the company. Sheller JA said at para 41 the accepted practice is to compute the amount of a debt or claim at the relevant date. In these circumstances it seemed unlikely to His Honour that the legislative intention was no longer to confine an obligation to one in existence at the relevant date but to extend the category of future claim to any obligation which comes into existence at any time in the future. In my view, such a construction of s 553(1) would place an intolerable burden on a liquidator whose responsibility it is to determine which future claims are to be admitted to proof and in what amounts." 21 His Honour then concluded that there had been no error in principle in exercising the discretion. This result is just one of the matters to be taken into account, in my view, in the exercise of my discretion on whether or not to grant leave. Would the plaintiff's claim rank in priority to the normal unsecured creditors? 22 Section 556 of the Corporations Act provides that in the winding up of a company a number of debts and claims must be paid in priority to all other unsecured debts and claims. These include, of course, expenses of the winding up and relevantly, the matters in the following sub paragraphs: "(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." 23 Subsection (h) deals with retrenchment payments and the definition of a retrenchment payment found in s 556(2) of the Act is as follows: ""retrenchment payment" , in relation to an employee of a company, means an amount payable by the company to the employee, by virtue of an industrial instrument, in respect of the termination of the employee's employment by the company, whether the amount becomes payable before, on or after the relevant date." In the present case the plaintiff does not suggest that he is entitled to a retrenchment payment, rather he seeks, in his application, to insert a term of payment in lieu of notice of termination and full redundancy. I assume from his application that he is thus is not entitled to a retrenchment payment payable by virtue in an industrial instrument, as he does not claim that in his application. 24 In these circumstances, when one considers the funds available, it is plain that the ultimate order for compensation, if it were made, would not have priority over the employees' claims which are presently made to the liquidator. There are 21 employees who have made what the liquidator describes as "the employees' proven claims" amounting to $14,559.50. It was not submitted that the order could be an expense in the winding up. 25 This result indicates that in a practical sense little would be achieved as a result of the order, if indeed it were made by the Commission. The prejudices of the creditors 26 In paragraph 11 of the plaintiff's submissions the following submission was made: "Given the financial position of the Defendant the real contest in the Industrial Relations Commission is between the Plaintiff and Challenge Disability Services. The Applicant, therefore, is willing to give an undertaking that he will not enforce any judgment obtained in any proceedings in the Industrial Relations Commission of New South Wales against Namoi Enterprises ( Re W A Brown & Sons Pty Ltd and Companies Act 1961 1964-65 NSWR 575 per McClelland CJ at 58.45)."

I have already referred to the terms of the undertaking above. The problem with the defendant still remaining a party to the proceedings is that it is clear that the proceedings will take some months, if not longer, to finally determine. Until that happens the liquidator is not in a position to further advance the liquidation as he does not know what the ultimate result of any order for costs might be in the Commission. As the company is a party it is at risk as to an order for costs, indeed the liquidator himself may be at risk. Undertakings of this type certainly have been given as the price for continuing proceedings in the Commission. See Re WA Brown & Sons Pty Limited and The Companies Act 1961 [1964-65] NSWR 575. But in my view such an undertaking, whether it be in the form offered or not to enforce without further leave, would not be sufficient protection, particularly having regard to costs and the time for which the liquidator would have to wait before making a distribution. Is the defendant a necessary party to the plaintiff's challenge in the Commission? 27 The discretionary factors to which I have been referring must be weighed up against what was submitted regarding the need for the plaintiff to still have the defendant as a party to the Commission proceedings as the defendant was a party to the contract. The relevant submissions made on behalf of the plaintiff in respect of this aspect were as follows: "7. The contract between Mr Hansen and Namoi attracts the jurisdiction.

8. Section 105 of the Industrial Relations Act 1996 (NSW) is in the following terms: 'Contract means any contract or arrangement, or any related condition or collateral arrangement, but does not include an industrial instrument.'

9. While it may be that there was a collateral arrangement between Challenge and Mr Hansen such that jurisdiction would be attracted separately from the contract between Namoi and Mr Hansen, that argument has yet to be determined. Its basis is the proposition that the Plaintiff, as manager, kept the Defendant as a going concern while Challenge negotiated the Defendant's takeover. This is set out in part B of the Summons for Relief in proceedings 4131 of 2003. Consequently Mr Hansen, in order to protect his position, will need to litigate both the contract between himself and Namoi and any collateral arrangement to that contract involving Challenge Disability Services. If the Commission in Court Session declines to find an arrangement collateral to the contract between the Plaintiff and the Defendant it is still arguable that Challenge Disability Services is associated with unfairness associated with the primary contract. For that position to be maintained the contract between the Plaintiff and the Defendant will need to be before the Commission. In that case the Defendant should properly be a party.

10. If the contract is to be litigated in the s.106 proceedings then, as a party to that contract, Namoi Enterprises should be joined." 28 I do not doubt that proof of the contract is necessary to found jurisdiction. There is also no doubt that orders may be made in s 106 of the Industrial Relations Act proceedings against those who are not parties to the relevant contract. This was settled by the High Court in Brown v Rezitis (1970) 127 CLR 157. The principle has been consistently followed by full benches of the Commission over the years. For example, in Reich v Client Server Professionals of Australia Pty Limited (No 2) [2000] NSWIR Comm 196, Hungerford J observed: "It is not unusual in s 106 applications, where a contract is challenged, for persons not strictly parties to the contract to be made respondents so that they may be heard as to claims against them for the payment of money on the avoidance or variation of the subject contract once the grounds of unfairness have been made out. So much is clear from the very many occasions occurring in this Court on a regular basis, and as dealt with by the High Court in Brown v Rezitis (1970) 127 CLR 157; that is effectively the position here: see also Ace Business Brokers Pty Ltd v Phillips-Treby [2000] NSWIR Comm 163." 29 The defendant rightly points out that s 108 of the Industrial Relations Act specifies who may be applicants to proceedings and relevantly restricts the right to an application to a party to a contract (as defined in s 105 of that Act to include an arrangement). No such qualification exists in the legislation as to who may be made a respondent to an application. Nor is there any requirement for them to be a party. 30 It seems to me that it is not necessary for the defendant to be a party to the proceedings before the Commission. The contract can be proved by the plaintiff. It seems plain from the material which I have quoted that the plaintiff itself sees its claim as against Challenge and does not seek to enforce any judgment in the winding up. Unfortunately unless the proceedings remain stayed against the defendant there will be difficulties and delays in the winding up and further expense may be caused. In these circumstances I refuse leave to proceed against the defendant. Orders 31 I dismiss the summons and order the plaintiff to pay the defendant's costs.

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