Larkden Pty Ltd v Lloyd Energy Systems

FACTUAL BACKGROUND 14On 16 November 2001, Larkden and Lloyd entered into a written Licensing Agreement ("the Licensing Agreement") under which Larkden granted to Lloyd a Licence, applicable worldwide (including the right to sub-license) to use, commercialise, exploit, adapt, modify and improve any and all aspects of certain energy conservation technologies. Clause 19(b) of the Licensing Agreement required all disputes arising in connection with the Licence to be finally settled by arbitration. 15Disputes arose between Larkden and Lloyd in connection with the Licensing Agreement which became the subject of the arbitration. The arbitrator heard the arbitration between 25 July and 2 August 2011. Lloyd was claimant and cross-defendant, Larkden was respondent and cross-claimant. 16Lloyd also referred the disputes between it and the second and third plaintiffs to arbitration, which resulted in the second arbitration. On 14 July 2011 Lloyd discontinued the second arbitration. 17On 7 September 2011, the arbitrator published "draft reasons" in the arbitration. The draft reasons included the following introductory paragraph: 1.1 The Tribunal has decided to publish these reasons as "draft reasons" for the reasons set out in this section. 1.2 By "draft" the Tribunal means that it has not yet made any final decision in relation to any particular matter. 1.3 However, it will be apparent from these draft reasons that should these reasons be made then various parties have been substantially successful on various points. 1.4 However, there may be substantial intellectual property registration and taxation issues which follow from any such finding and orders and hence the Tribunal proceeds with an abundance of caution. 1.5 In particular, in some jurisdictions, the filing of patents in different names to the owner at different timeframes can be problematic (particularly when claiming PCT priority) and indeed may damage the mutual assets which are in dispute. 1.6 Accordingly, the appropriate course is for the parties to now: (a) obtain appropriate legal (including, without limitation, any foreign legal advice) advice on how best to protect their mutual assets in light of these draft reasons before same are made; (b) obtain taxation advice on how best to protect their mutual assets in light of these draft reasons before same are made; (c) consider now whether those rights are best protected by way of a suitable written agreement between the parties (reserving the question of costs for subsequent determination if necessary); and (d) consider what orders the Tribunal should now make. 1.7 Please note that whilst the parties are pursuing that course of conduct at their convenience the Tribunal can proceed to hear and determine any argument the parties may have in relation to costs. 1.8 The parties may, of course, individually apply immediately for appropriate orders and reasons based on these draft reasons if that suits. 1.9 The Tribunal notes that the practice of publishing draft reasons is occasionally used in intellectual property disputes to enable the parties to make any comments in relation to the form of orders sought including, without limitation, any confidential information restrictions before same are made and published. 1.10 The Tribunal notes that need to carefully consider any orders is very appropriate in this matter whereas publication is not an issue as the arbitrations are confidential 1.11 The mechanism is useful in an arbitral context where the parties rights to appeal the decision of the Tribunal may be limited and hence it is appropriate that any errors or omissions be corrected before the Tribunal becomes functus officio in relation to any particular jurisdiction it may have. 1.12 This is particularly the case when these reasons have been prepared in a comparatively short period of time since hearing (less than 5 weeks) and cover substantial and complex matters and are in a substantially more draft form than the Tribunal had hoped. 1.13 The disadvantage of such a short time for determination is that these reasons are not as mistake or error free or as comprehensive as one would hope. 1.14 The advantage is, of course, hopefully that the parties do not lose any further time or opportunities which is particularly relevant in the current market for renewable technology. 18On 13 September 2011, unbeknown to Larkden, the directors of Lloyd resolved that in their opinion Lloyd was insolvent or likely to become insolvent at some future time, and resolved that Ronald John Dean-Willcocks and Adam Farnsworth be appointed voluntary administrators ("the administrators") pursuant to s 439A of the Corporations Act. Larkden was informed of this development the following day. 19On 20 September 2011, the arbitrator published reasons and made his principal award, substantially in favour of Larkden ("the principal award"). The principal award is in the following terms: (1)The Tribunal determines and declares that, pursuant to clause 5.4(a) of the Licencing Agreement dated 16 November 2001 between the Claimant and the Respondent ("the Head Licence"), the Respondent is entitled to be made owner of, and have assigned to it, all the rights, title and interest in the inventions embodied in: (a)the Solfast Patent Application (being PCT/AU2009/001278) ("the Solfast Patent Application"); and (b)the patent applications ("the Assigned Patent Applications") set out in Exhibit C to the Patent Assignment and Settlement Agreement dated 4 March 2010 between Ausra Inc and the Claimant ("the Ausra Settlement Agreement") as may be amended from time to time in accordance with the Ausra Settlement Agreement. (2)The Tribunal determines and declares that the Claimant holds on constructive trust for the Respondent all its rights, title and interest in Solfast Pty Ltd (including its Solfast Pty Ltd shares) on behalf of the Respondent. (3)The Tribunal determines and declares that the Claimant holds on constructive trust for the Respondent all its rights, title and interest in the inventions embodied in the Assigned Patent Applications. (4)The Tribunal orders, pursuant to section 33A of the Commercial Arbitration Act 2010 (NSW), that the Claimant specifically perform clause 5.4(a) of the Head Licence by: (a)immediately procuring Solfast Pty Ltd to execute a deed of assignment in the form of the Annexure A to these orders; (b)taking all necessary steps to file and prosecute the Solfast Patent Application in the name of the Respondent; (c)irrevocably nominating the Respondent as the Nominated Assignee of the Assigned Patent Applications and forthwith notifying Areva Inc in writing of the irrevocable nomination; and (d)taking all necessary steps to ensure that the Respondent's interests in the prosecution of the Assigned Patent Applications are protected and secured. (5)The Tribunal orders that the Claimant perfect the Respondent's interest in the Assigned Patent Applications by: (a)irrevocably nominating the Respondent as the Nominated Assignee of the Assigned Patent Applications and forthwith notifying Areva Inc in writing of the irrevocable nomination; (b)taking all necessary steps to ensure that the Respondent's interests in the prosecution of the pending Ausra Patent Applications are protected and secured. (6)The Tribunal orders that the Claimant furnish the Respondent with all necessary assistance as requested by the Respondent from time to time, in relation to any proceedings the Respondent may take against Solfast and/or Areva including, without limitation, any proceedings under sections 32 and 36 of the Patents Act 1990 (Cth), such assistance to include (without limitation) providing the Respondent with all documents in the possession, custody or control of the Claimant necessary for the Respondent to prosecute any claims against Solfast and/or Ausra under sections 32 and 36 of the Patents Act 1990 (Cth). (7)Costs Reserved. (8)Liberty to Apply 20As may be observed, under the principal award the arbitrator expressly reserved the question of costs. 21On 21 September 2011 Larkden made a written submission to the arbitrator that it was entitled to its costs of the arbitration and the second arbitration in respect of the issues on which it had been successful. 22The first meeting of creditors in the voluntary administration of Lloyd took place on 23 September 2011. 23On 5 October 2011, over the opposition of the administrators, I granted Larkden leave, pursuant to s 440D of the Corporations Act, to bring and continue proceedings against Lloyd in voluntary administration for recognition and enforcement of the principal award pursuant to s 35 of the Commercial Arbitration Act; Larkden Pty Ltd v Lloyd Energy Systems Pty Ltd [2011] NSWSC 1305. 24On 16 October 2011 the administrators indicated to the arbitrator that they were in no position to make submissions on costs. 25Section 33B(1) of the Commercial Arbitration Act provides: Unless otherwise agreed by the parties, the costs of an arbitration (including the fees and expenses of the arbitrator or arbitrators) are to be in the discretion of the arbitral tribunal. 26Section 33B(4) of the Commercial Arbitration Act provides: The arbitral tribunal may, in making an award: (a) direct to whom, by whom, and in what manner, the whole or any part of the costs that it awards are to be paid, and (b) tax or settle the amount of costs to be paid or any part of those costs, and (c) award costs to be taxed or settled as between party and party or as between legal practitioner and client. 27In its pleadings in the arbitration, Larkden's prayers for relief had included one for an order pursuant to s 33B of the Commercial Arbitration Act that Lloyd should pay its costs of the arbitration. 28On 12 October 2011, the arbitrator made the costs award. Under the costs award the arbitrator: (a)ordered that Larkden's costs of and incidental to the issues included in the Award are payable by Lloyd on a party and party basis in accordance with s 33B(4)(c) of the Commercial Arbitration Act; (b)settled Larkden's costs on a party and party basis, pursuant to ss 33B(1) and 33B(4)(b) of the Commercial Arbitration Act at $943,849.07; (c)ordered that the second and third plaintiffs' costs of and incidental to the second arbitration were payable by Lloyd on a legal practitioner and client basis in accordance with s 33B(4)(c) of the Commercial Arbitration Act; (d)settled the second and third plaintiffs' costs on a legal practitioner and client basis pursuant to ss 33B(1) and 33B(4)(b) of the Commercial Arbitration Act at $38,419.75; (e)ordered that Lloyd pay Larkden's costs of the Costs Award in accordance with s 33B(1) in the sum of $8,000; and (f)ordered that all of the costs are immediately due and payable. 29On 24 October 2011, the administrators of Lloyd reported to creditors pursuant to s 439A of the Corporations Act. They proposed that Lloyd enter into the DOCA. 30On 1 November 2011, after Lloyd's creditors had resolved that it do so, Lloyd entered into the DOCA, the parties to which were Lloyd, the administrators and Kerama Energy Pty Ltd, an entity related to Lloyd. 31Upon execution of the DOCA, control and management of Lloyd's business and affairs was returned to its directors. 32On 3 November 2011, over the opposition of Lloyd, I made orders pursuant to ss 35 and 36 of the Commercial Arbitration Act recognising and enforcing the principal award; Larkden Pty Ltd v Lloyd Energy Systems Pty Ltd [2011] NSWSC 1331.

THE DOCA 33The DOCA makes provision for the establishment of two Deed Funds to be held by the administrators for their benefit and for the benefit of participating creditors. It provides that all creditors entitled to participate (excluding certain deferred creditors) will accept their entitlements under the DOCA in full settlement of all claims existing as at the date of the administration, that is, 13 September 2011. 34Clause 1 of the DOCA includes the following definition: Claim means as at the Effective Date, in relation to the company any claim, cost (including legal costs on a solicitor and client basis), damages, debt, expense, demand, cause of action, proceeding or judgment of any kind however calculated or caused, whether direct or indirect, consequential, incidental or economic, known or unknown, liquidated or unliquidated, present, prospective, future or contingent, the circumstances giving rise to which occurred on or before the Relevant Date, including but not limited to: (a) Residual Claims; (b) any claims arising out of or in connection with or relating in any way to any Pre-Administration Contract (whether or not the Company had breached such Pre-Administration Contract on or before the Relevant Date but excluding the Larkden licence). 35Clause 1 defines: Creditor to mean "in relation to the Company" any person with a Claim, Effective Date to mean the date of the DOCA, Larkden Licence to mean the Licensing Agreement, Pre-Administration Contract to mean a contract, deed, agreement, lease or understanding entered into by the Company on or before the Relevant Date (but excluding the Larkden Licence), Relevant Date to mean the date upon which the Administrators were appointed to the Company and Residual Claim to mean any Claim of any secured creditor to the extent that the security over any assets of undertaking of the Company for payment of such a Claim is not sufficient to pay such Claim in full. 36Clause 18.1 of the DOCA provides that for the purposes of s 444A(4)(i) of the Corporations Act, the relevant day is the Relevant Date. 37Clause 4 of the DOCA is in the following terms: Each Creditor, other than the Secured Creditors, the Deferred Creditors and Larkden in relation to any licence fees properly payable under the Larkden Licence, must accept its entitlements under this Deed in full satisfaction and complete discharge of any and all Claims which it has or claims to have against the Company and will, if called upon to do so, execute and deliver to the Company such form of release of any such Claim as the Deed Administrators may require. 38Clause 5 provides that the DOCA may be pleaded against any creditor in bar of any debt or claim that is admissible under the DOCA. Clause 6 of the DOCA provides that if the Administrators have paid participating Creditors their full entitlements under the DOCA, the Claims of all Creditors are released in full and extinguished. These provisions do not affect Larkden's Claims for licence fees properly payable under the Licensing Agreement.

The First Issue 39Under s 444E of the Corporations Act, until a deed of company arrangement terminates, a person cannot make an application for an order to wind up the company or begin or proceed with a proceeding against the company or in relation to any of its property except with the leave of the Court in accordance with such terms (if any) as the Court imposes. 40Section 35(1) of the Commercial Arbitration Act provides: An arbitral award, irrespective of the State or Territory in which it was made, is to be recognised in this State as binding and, on application in writing to the Court, is to be enforced subject to the provisions of this section and section 36. 41Section 36 of the Commercial Arbitration Act enumerates grounds for refusing recognition or enforcement of the arbitral award. None of those grounds apply here. 42Section 444D(1) of the Corporations Act limits the extent to which a deed of company arrangement binds creditors. Creditors are only bound so far as concerns claims against the company arising on or before the day specified in the deed under paragraph 444A(4)(i); Lehman Brothers Holdings Inc v City of Swan (2010) 240 CLR 509 at [52]. To the extent that the DOCA purports to cover claims beyond those covered by s 553(1), the DOCA is ineffective to bind creditors. 43Division 6 of Pt 5.6 of the Corporations Act is entitled Proof and Ranking of Claims. Subdivision A, headed Admission to Proof of Debts and Claims, identifies those debts and claims which are provable in the winding up of a company. Section 553(1), which is in subdivision A, provides that ... 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. 44Where ss 444A(4)(i) and 444D(1) refer respectively to a "claim arising" and to a "claim having arisen" on or before the day specified in the deed, they refer to a claim which at that date would have been provable, under s 553(1) of the Corporations Act, in the winding up of the company; Brash Holdings Ltd (Administrator appointed) v Katile Pty Ltd [1996] 1 VR 24. 45A claim (including a contingent claim) is provable in a winding up under s 553(1) if the circumstances giving rise to it occurred before the relevant date (in this case 13 September 2011). 46Larkden's first contention is that the costs award is not such a claim because the circumstances giving rise to it did not occur before the relevant date. If this is correct, it is entitled to an order recognising and enforcing it outside the operation of the DOCA. 47Lloyd contends that the circumstances giving rise to the costs award occurred before the relevant date. In the alternative, it contends that Larkden had a contingent claim for those costs. If either contention is correct, the costs award falls to be dealt with under the DOCA. 48The first issue is whether the costs award is such a claim.

The Second Issue 49Larkden's second contention is that the costs award falls outside the operation of the DOCA because it does not fall within the definition of Claim in the DOCA by virtue of subparagraph (b) of that definition. It says that on the proper construction of the definition, any claim arising out of or in connection with or relating in any way to the Larkden Licence is not included in the definition of Claim. 50This contention was put for the first time during submissions on the first issue. Lloyd took the stance, correctly, that the Commercial Arbitration List Statement needed to be further amended and informed the Court that it was not ready to deal with that contention, which I accepted. I gave leave to Larkden to effect the necessary amendment and for Lloyd consequentially to amend its pleadings. The parties agreed that the Court should determine the first issue before determining the second. 51By consent, I ordered pursuant to Pt 28 r 28.4 of the Uniform Civil Procedure Rules 2005 (NSW) that there be decided first the question whether the costs award is a claim arising on or before 13 September 2011 within the meaning of s 444D(1) of the Corporations Act.

Circumstances Giving Rise to a Claim 52As at 13 September 2011, all of the facts giving rise to Larkden's substantive rights against Lloyd arising out of Lloyd's breaches of the Licensing Agreement for which Larkden was seeking redress by way of its cross-claims in the arbitration had occurred. Although the principal award had not yet been handed down and submissions as to costs had not been made in the arbitration, it may be accepted that the circumstances by reason of which it was appropriate for the arbitrator to exercise his discretion to make the costs award, so far as it applied to the arbitration, had by then occurred. By this time, the second arbitration had been discontinued so that the circumstances by reason of which it was appropriate to make the costs award, so far as it applied to the second arbitration, had also occurred. 53Is the costs award a claim to which these circumstances had given rise within the meaning of s 553(1) of the Corporations Act? 54The Court was referred to a number of instances in which the Court has considered whether circumstances have given rise to a claim. 55For example, in Re Walker (2007) 215 FLR 428 at [22], Barrett J observed that authorities dealing with "the circumstances" which may give rise to a debt or claim within the meaning of s 553(1) of the Corporations Act, 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"; see too McDonald v Commissioner of Taxation (2005) 187 FLR 461 at [44]. 56However, beyond this, the Court was not referred to an articulation in any of the authorities of the test to be applied in determining whether particular circumstances have given rise to a particular claim. 57In my view, whether particular circumstances have given rise to a claim requires identification of the elements of the substantive obligation which the claim represents and an assessment of whether those circumstances reveal the existence of a basal fact necessary to bring that substantive obligation into being. 58Hence, as Barrett J further pointed out in Re Walker at [20] to [21], in a 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. His Honour had regard to the nature of the contract in question which involved the company's continuing obligation to supply or perform an ongoing service or benefit. The existence of that contract was undoubtedly a basal fact necessary to bring the substantive contractual obligation comprising the claim into being. 59It is also necessary to bear in mind that, as Hayne J pointed out in Sons of Gwalia v Margaretic (2007) 231 CLR 160 at [172], the words of the section indicate an intention to define provable claims widely. 60The nature of an order for costs was comprehensively considered by the High Court in a related context in Foots v Southern Cross Mine Management Pty Ltd (2007) 234 CLR 52 (" Foots" ). Under consideration there was whether an order for costs was a debt or liability arising from an obligation incurred by a bankrupt prior to his bankruptcy under s 82(1) of the Bankruptcy Act 1966 (Cth). That section provided, relevantly, that ...all debts and liabilities, present or future, certain or contingent, to which a bankrupt was subject at the date of the bankruptcy, or to which he or she may become subject before his or her discharge by reason of an obligation incurred before the date of the bankruptcy, are provable in his or her bankruptcy. 61Section 553(1) of the Corporations Act does not require the existence of a debt or liability at the relevant date as does s 82(1) of the Bankruptcy Act . However, it is no less pertinent to s 553(1) of the Corporations Act than it is to s 82(1) of the Bankruptcy Act that, as the High Court pointed out in Foots at [24] to [37], an order for costs itself is the source of the legal liability. Such orders turn on discretionary considerations that arise independently of the entry of judgment against the losing party. There is no certainty that the Court in question will decide to make the order. Indeed, there is no certainty that any party will move for an order. 62However widely one considers the notion of provable claim to be, the substantive obligation under the costs award has only one element, namely, the making of the costs award by the arbitral tribunal in the exercise of its discretion under s 33B(1) of the Commercial Arbitration Act. 63It follows that only the making of the order itself can constitute circumstances giving rise to the claim. Before this occurs there is no claim. Neither a prayer for costs nor the potential, however strong, that a party may have to obtain an order for costs by persuading a tribunal to exercise a discretion in its favour suffices; cf Southern Cross Mine Management Pty Ltd v Ensham Resources Pty Ltd (2006) 196 FLR 419 per Chesterman J. 64In Haagmans v Australian Bight Infrastructure Pty Ltd [2010] SASC 337 , Judge Lunn, a Master of the Supreme Court of South Australia, concluded that Foots decides that costs payable under an order made after the relevant date for the winding-up is not a provable debt. I respectfully agree. It is accordingly not necessary to consider first instance decisions prior to Foots which might arguably say differently; see too MGR Gronow, McPherson's Law of Company Liquidation (5 th ed) (2006) (Thomson Lawbook, Sydney) at [12.470].

Contingent Claim 65Lloyd put, as an alternative, that at the relevant date Larkden had a contingent claim for the costs which became the subject of the costs award because Lloyd was subject to an existing obligation implied by the terms of the Licensing Agreement to perform any award made by the arbitrator and the possibility of an adverse costs order was a contingency to which that obligation was subject. 66For the reasons which follow, this submission is unsustainable. 67In support of it, Lloyd relied on McLellan v Australian Stock Exchange (2005) 144 FCR 327 in which Finkelstein J considered that the possibility that a costs order may be made is a contingency. In that case, a participant in the stock exchange (Terrain Securities) breached several of the stock exchange operating rules which, by virtue of a provision in the Corporations Act, had the effect of a contract between it and the Australian Stock Exchange ("ASX"). Those rules provided that for breach, the ASX could impose penalties without a hearing, including fines. After breaching the rules, Terrain Securities went into voluntary administration and entered into a deed of company arrangement. His Honour considered whether as at the date of the administration, the ASX was a contingent creditor of Terrain Securities in respect of the fines. In holding that it was, his Honour cited the decision of the English Court of Appeal in Glenister v Rowe [2000] Ch 76. At [16] his Honour said: The possibility that a costs order may be made is a contingency. So also, in my view, is the possibility that a fine may be imposed a relevant "contingency"; it is a future event which may or may not occur out of which a legal liability to pay money will arise. Nevertheless, in Australia, if not in England, it is still necessary to find an underlying legal liability which is the source of the obligation to pay the fine. That underlying liability exists. It is to be found in either the statutory contract with its implied term to pay the fine or in the private contract with ASX which would be the source for an obligation to pay damages suffered by ASX if the fine is not paid. 68Subsequently, however, the High Court held in Foots at [36] that The most that can be said, as Mummery LJ observed in Glenister, is that "[o]nce legal proceedings have been commenced there is always a possibility or a risk that an order for costs may be made against a party". But that risk is not a contingent liability within the sense of s 82(1). The order for costs itself is the source of the legal liability and there is no certainty that the court in question will decide to make an order. 69It does not seem to me that the notion of a contingent liability for the purposes of s 82(1) of the Bankruptcy Act differs from the notion of a contingent liability for the purposes of s 553(1) of the Corporations Act. Moreover, the requirement that circumstances must have occurred giving rise to the claim is a constant under s 553(1) and that requirement is not satisfied in the present case. 70Additionally, the facts in McLellan are materially distinguishable from the facts in this case. There, the fine was imposed by a party itself acting pursuant to a contractual entitlement to do so. That is not this case. Lloyd's liability under the costs award arises from the exercise by the arbitrator of jurisdiction, which presupposes the existence of a valid arbitration agreement, but which is given to him by s 33B(1) of the Commercial Arbitration Act. In this respect it is no different from an order for costs made by a Court.

CONCLUSION 71I conclude that the costs award is not a claim arising on or before 13 September 2011 within the meaning of s 444D(1) of the Corporations Act. 72Having regard to the conclusion I have reached, it seems to be that Larkden and the second and third plaintiffs are entitled to the orders which they seek irrespective of whether they would succeed on the second issue. 73I would accordingly make the following orders and any necessary ancillary orders: (1)the first, second and third plaintiffs have leave, insofar as it is necessary, under s 444E(3) of the Corporations Act 2001 (Cth) to proceed against the defendant; (2)the defendant is to pay the first plaintiff's costs of and incidental to the issues included in the Interim Award made by Mr Stephen Wallace White on 20 September 2011 on a party and party basis in the amount of $943,849.07; (3)the defendant is to pay the second and third plaintiffs' costs of and incidental to the arbitration between them before Mr Stephen Wallace White on a legal practitioner and client basis in the amount of $38,419.75; (4)the defendant is to pay the first, second and third plaintiffs' costs of the award made on 12 October 2011 by Mr Stephen Wallace White in the amount of $8,000 (excluding GST); (5)the costs the subject of orders (2), (3) and (4) are immediately due and payable. 74It follows that the defendant's Cross-Claim is to be dismissed, insofar as it seeks a declaration that the costs award is a claim arising on or before 13 September 2011, within the meaning of s 444D(1) of the Corporations Act. The question as to whether it is covered by the definition of Claim in the DOCA has taken on a different complexion because of Larkden's amendment. That issue remains to be determined. 75I will hear the parties on costs and whether it is appropriate for orders to be entered forthwith having regard to the fact that the second issue remains to be resolved. 76I note that the proceedings have been stood over to 20 February 2012 and directions with respect to the second issue have been made. The parties have liberty to apply on 3 days notice.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 16 December 2011