Matheson Property Group Pty Ltd (Trustee) v Virgin Australia Holdings Limited

Federal Court of Australia|2022-09-02|Before: Lee J, Bryan AM

BY CONSENT, THE COURT ORDERS THAT:

Pursuant to s 37P(2) of the Federal Court of Australia Act 1976 (Cth) (FCAA) and r 30.01(a) of the Federal Court Rules 2011 (Cth) (FCR), the issues relating to the proper construction of those provisions of the deed of company arrangement dated 5 September 2020 (DOCA) which relate to the creditor indemnity referred to in cl 8.1(d)(1) of the DOCA be determined separately and before any other issue in the proceeding and be heard, on a final basis, forthwith and the requirement to file any additional process be dispensed with.

THE COURT DECLARES THAT: 2. On the proper construction of the DOCA, cl 8.1(d) requires the applicant to provide the first respondent with: (a) an indemnity in the form of Schedule 5 of the DOCA in relation to all claims made against the first respondent in the proceedings; and (b) evidence, to the first respondent's reasonable satisfaction, that the applicant is and will continue to be able to satisfy that indemnity.

A INTRODUCTION 1 This is a representative proceeding commenced pursuant to Pt IVA of the Federal Court of Australia Act 1976 (Cth) (FCA Act). The applicant, Matheson Property Group Pty Ltd (MPG), represents a class comprising various holders of unsecured notes issued by the first respondent, Virgin Australia Holdings Limited (VAH) pursuant to a prospectus dated 5 November 2019, which MPG asserts was misleading and deceptive. 2 The class action has been bedevilled by collateral disputation, even prior to its commencement. 3 In broad terms, the genesis of the present disputation was that, in April 2020, VAH and a number of its subsidiaries entered voluntary administration and, in September 2020, deeds of company arrangement covering the entities in the Virgin group of companies, and in broadly similar terms, were executed. One of those deeds was a deed of company arrangement (DOCA) with respect to VAH, among other entities (Deed Companies). 4 Again, put very generally, the DOCA relevantly provided that, to the extent that a creditor was unable to seek or obtain payment on account of its claim from the relevant insurer, the DOCA operated to extinguish and release the relevant Deed Company from any uninsured claims. Although the DOCA did not bar the enforcement of insured claims, it did require that, prior to any proceedings being commenced, an indemnity first be provided to the Deed Company in the form identified in the DOCA. 5 A dispute has arisen about the adequacy of the form of indemnity proposed by MPG following the commencement of the proceeding. Although the indemnity is a pre-condition to the commencement of proceedings, an initial arid debate about whether the pre-condition provides a defence to the proceeding has since evaporated. I indicated that if such a point was maintained by VAH, I would be disposed to allow MPG to file in Court a further originating application, returnable instanter, after a valid indemnity had been provided (with costs of the discontinued proceeding being costs in the new proceeding). But, such a course is, of course, dependent upon a valid indemnity being provided. 6 At a recent case management hearing, the dispute as to the terms of the indemnity proffered by MPG (proposed indemnity) crystallised. Everyone agreed (at least at that time) that it was necessary to quell this dispute with alacrity so that, belatedly, focus can be directed to the substantive issues. Although an earlier interlocutory application filed by VAH for summary dismissal had sought to raise the issue of the adequacy of the proposed indemnity, I considered the preferable course was to decide the issue on a final basis by way of declaratory relief. Accordingly, with the consent of the parties, I identified a separate question as to an entitlement to declaratory relief, adjourned for ten minutes in order to allow VAH and MPG to formulate competing declarations, and then proceeded to hear argument on a final basis. Such a course was within the subject matter jurisdiction of the Court because this collateral dispute was within the bounds of the same Constitutional "matter". 7 At the hearing, the evidence consisted only of the following three documents: the DOCA (Exhibit A); the proposed indemnity dated 5 August 2022 (Exhibit B); and a proposed deed of indemnity (Exhibit C). I make specific mention of this fact because this constitutes the entire record before the Court on the separate but final hearing (notwithstanding the parties provided subsequent material to the Court referring to affidavits that were not (and indeed have not) been read, and are thus not part of the evidentiary material before me). 8 In any event, at the conclusion of oral argument, I made the declaration proposed by VAH. These are my reasons for doing so.

B THE DOCA, THE INDEMNITY AND RELEVANT PROVISIONS 9 The DOCA is binding on creditors of the company by force of the provisions of Pt 5.3A of the Corporations Act 2001 (Cth). Clause 6 of the DOCA provides for the extinguishment of creditors' claims generally, and provides that each "Creditor" of (relevantly) VAH agrees that upon "Completion" its "Claim" against VAH is "extinguished and released", with all such claims being then converted into claims on a Creditors' Trust: cl 6.4 of the DOCA. Completion occurred on 17 November 2020. 10 A "Claim" is defined in cl 1.1 (Definitions) as follows: a debt payable by, and all claims against, a Deed Company (present or future, certain or contingent, ascertained or sounding only in damages), being a debt or claim that would be admissible to proof against a Deed Company in accordance with Division 6 of Part 5.6 of the Corporations Act, if the Deed Company had been wound up and the winding up is taken to have commenced on the Appointment Date, and any fine or penalty to which a Deed Company is subject or liable to be subject arising out of circumstances occurring prior to the Appointment Date that would be so admissible but for the operation of section 553B of the Corporations Act. 'Claim': 1 includes a Claim of a Secured Creditor; and 2 includes a Claim arising under the DOCG (including, for the avoidance of doubt, any Claim against a Deed Company under the DOCG in respect of a Liability incurred by another party to the DOCG after the Appointment Date); but 3 does not include an Excluded Claim. (Emphasis added). 11 The emphasised words are of importance. 12 An "Excluded Claim" is defined, relevantly, to include an "Insured Claim", which in turn is defined as follows: a Claim which a Creditor has against a Deed Company where: 1 the Deed Company is insured against that Claim under a contract of insurance (not being a contract of reinsurance) entered into before the Appointment Date; and 2 an amount in respect of that Claim would be payable by the insurer to the Deed Company under the contract of insurance, but only to the extent of such part of the Claim as would be discharged by the payment from the insurer. 13 As can be seen from the above, an "Insured Claim" and a "Claim" are defined as mutually exclusive concepts; however, distinguishing the two is not quite as straightforward as it might seem at first glance. For instance, whether a proposed proceeding involves an Insured Claim might not be readily ascertainable at the time the proceeding is commenced (as is the present case) and may not be known until the claim is finally determined, perhaps on appeal. Furthermore, a claim is an Insured Claim only to the extent that the relevant insurer is liable to indemnify the Deed Company in respect of that claim. Hence a claim sought to be vindicated in a proceeding might end up involving both a "Claim" and an "Insured Claim". 14 In any event, the moratorium upon the "Claims" of Creditors during and after the "Deed Period" in cl 6.3 is "subject to clause 8 in relation to Insured Claims". Clause 8, in turn, enables Creditors, subject to certain conditions, to take action to recover amounts due to them in relation to "Insured Claims". More specifically, cl 8.1 of the DOCA, titled "Rights of Creditors who have Claims covered by insurance", provides: If insurance is held by or on behalf of a Deed Company in respect of an Insured Claim: (a) the Creditor may, in relation to its Insured Claim and notwithstanding that Completion has occurred, take action to recover the amount due in respect of the Claim against the Deed Company, but such action must not exceed what is necessary to obtain payment from the insurer; (b) to the extent that the Creditor is able, by settlement, arbitral award or judgment, to obtain payment from the insurer on account of the Claim, the Creditor may retain that amount in full satisfaction of its right to receive a distribution from the Trust Fund in respect of that Claim; (c) the Deed Companies are not required to provide assistance to a Creditor in relation to a Claim under this clause or take any action in response to enforcement action taken by a Creditor in accordance with this clause; and (d) where a Creditor intends to take enforcement action in relation to a Claim under this clause: (1) if requested by a Deed Company, the Creditor must, prior to taking any enforcement action in relation to the Claim, provide the Deed Companies with an indemnity in the form of Schedule 5 (Creditor Indemnity); (2) if requested by the Deed Companies, provide the Deed Companies with evidence, to the reasonable satisfaction of the Deed Companies, that the Creditor will be (and will continue to be) in a financial position, or have access to sufficient funds, to enable it to satisfy the Creditor Indemnity; and ] (3) the Deed Companies may plead this Deed as a bar to any enforcement action taken by a Creditor in relation to the Claim in circumstances where the Creditor has not, prior to commencing that enforcement action, given the Creditor Indemnity referred to in clause 8.1(d)(1) to the Deed Companies. 15 As referred to in cl 8.1(d)(1), upon request, and prior taking any enforcement action, the Creditor must provide the Deed Companies with an indemnity in the form of Schedule 5, which appears as follows: INDEMNITY IN RELATION TO INSURED CLAIM I/We [insert creditor name] refer to the deed of company arrangement in respect of the Company (DOCA) dated [insert date]. I/We wish to take legal proceedings to enforce a Claim under clause 8 of the DOCA (Insured Claim) against the Company. The Insured Claim is [insert full description]. I/We irrevocably and unconditionally indemnify the Company against any costs, expenses, judgments (including but not limited to any judgment or order obtained by me/us against the Company, or any amounts required to be paid by the Company in connection with any judgment or order), suits or actions incurred directly or indirectly as a consequence of commencing legal proceedings in relation to the Insured Claim (Costs) to the extent that the Company is not indemnified for such costs pursuant to a contract of insurance entered into before [insert Appointment Date for Deed Company] or such Costs are not otherwise paid by the Company's insurer. I/We confirm our agreement to be bound by the terms of clause 8 of the DOCA in respect of the Insured Claim. 16 In purported compliance with cl 8.1(d), a document dated 5 August 2022, being the proposed indemnity, has been provided by MPG to VAH and is said to be in the form provided in Schedule 5. The form has been populated by MPG, but the precise terms of the second and controversial paragraph of the proposed indemnity is as follows: We wish to take legal proceedings to enforce a Claim under clause 8 of the DOCA (Insured Claim) against the Company. The Insured Claim is any Insured Claim included in the claim made by MPG against the Company in Federal Court of Australia Proceeding NSD346/2022 (Matheson Property Group Pty Ltd as trustee for the MPG Trust v Virgin Australia Holdings Pty Ltd & Ors). 17 As may be evident from comparing the terms of this paragraph of the proposed indemnity with Schedule 5, MPG has sought to make it plain that the indemnity is operational only in relation to an "Insured Claim". From the perspective of MPG, it is easy to understand why this would be the case. It has unsuccessfully sought confirmation that the claim made by MPG is an "Insured Claim" and not a "Claim". No such confirmation has been forthcoming and I infer this is because VAH is unable to give such an assurance based upon the current state of its dealings with its insurer. 18 As will already be obvious, this constructional dispute matters because it may not be known with certainty whether insurance responds to the claims the subject of the class action until after significant legal costs have been expended.

C MPG's PROPOSED DECLARATION AND ARGUMENT 19 The declaration sought by MPG was in the following terms: 1. That the Creditor Indemnity in Schedule 5 applies only to Insured Claims as defined in Cl 1.1 of the DOCA. 2. That the Creditor Indemnity given by the Applicant on 5 August 2022 complies with Schedule 5 of the DOCA. 20 Mr Jackman, senior counsel for MPG, made the following submissions in support of the construction reflected in MPG's proposed declaration. 21 First, cl 8.1 refers to "Insured Claims" and "Claims" in a manner which is discordant with the definitions. To overcome the infelicitous wording, a reference to a "Claim" in cl 8 must be read as meaning an "Insured Claim". Given cl 8 is, clearly enough, directed towards the rights of Creditors who have "Claims covered by insurance", the only kind of claim that the clause contemplates is an "Insured Claim". To read the terms of cl 8 otherwise, and literally as a reference to those "Claims" extinguished and released under cl 6, would mean that a creditor could never take legal proceedings to enforce a claim under cl 8 of the DOCA. Similarly, the reference to a "Claim" in the second paragraph of the Creditor Indemnity must be read as meaning an "Insured Claim". The most obvious reason for this is that, to do otherwise would allow for an indemnity in the form of Schedule 5 for a claim that is extinguished by the DOCA itself. 22 Secondly, an "Insured Claim" is defined as a matter of fact and law; rather than as a matter of subjective belief. The language is definitive, and only applies where the Deed Company is insured against the claim and where an amount in respect of that claim would be payable by the insurer. This, it is said, leaves no room for cl 8.1 to operate in circumstances where an amount in respect of that claim might be payable or is otherwise argued to be payable. 23 Thirdly, accepting that there may be circumstances, such as the present, in which it may be difficult to ascertain from the outset whether a claim is an "Insured Claim" and thus covered by an indemnity for the purpose of cl 8.1, the language of the DOCA allocates the risk of that uncertainty. This proposition finds support from the fact that MPG was not a party to the DOCA, but rather bound by it, as a creditor, by force of legislation. Accordingly, one must look to the text of the DOCA to determine how risk was to be allocated. By reading the precise terms of the definition of an "Insured Claim", as explained above, it can be seen that the DOCA allocates the risk by defining an Insured Claim definitively in fact and law. This is reiterated in the third paragraph of Schedule 5 of the DOCA, as it is only the "costs, expenses … incurred directly or indirectly as a consequence of commencing legal proceedings in relation to the Insured Claim" that are indemnified (emphasis added). 24 Fourthly, and relatedly, one must consider that MPG, as a creditor, is not a party to the contract of insurance. The company knows what its own insurance arrangements are and, as such, it is in a position to be able to demonstrate at the outset whether the claim is an Insured Claim. If it is not, then the claim will be extinguished, and the proceedings will be dismissed. Furthermore, where there is any doubt, then the proceedings will continue and the company will be protected by security for costs and any ordinary orders as to costs.

D CONSIDERATION AND THE PROPER CONSTRUCTION 25 There was no dispute before me at the hearing as to relevant principles. The DOCA is a form of instrument which owes its existence to statute and it is necessary to focus upon the terms of the instrument itself to determine its proper construction. But such a textual focus must not be undertaken acontextually; nor must it occur without regard to the evident purpose of the arrangements recorded in the DOCA, being to resolve the financial position of the company generally so as to create a fresh start and, in facilitating this end, creating a moratorium on claims against the Deed Companies, only allowing claims against the Deed Companies if it is said to involve a recovery against an insurer, but only if there is no cost to the Deed Companies. 26 Following the resolution passed at the second meeting of Creditors, an arrangement was put in place to bind all Creditors. At the risk of repetition, one purpose was to prevent the diminution of the assets of the Deed Companies and allow those of the Creditors who can recover against an insurer to be able to obtain a third-party recovery. But allowing such third-party recovery is not unqualified: it must be done in such a way that costs and expenses or judgments are not visited upon the Deed Companies as a consequence of proceedings against the Deed Companies, hence the indemnity. 27 It did not appear to be in dispute that a person who has an Insured Claim has a choice: they can either commence a proceeding against a Deed Company and provide the required indemnity or, alternatively, they can proceed to enforce the claim (said to be an Insured Claim) against a third party (if there was a co-ordinate liability) or, with leave, against the relevant insurer directly: see ss 4 and 5 of the Civil Liability (Third Party Claims Against Insurers) Act 2017 (NSW). 28 MPG correctly asserts that the purpose of cl 8.1 was to preserve claims to which a policy would respond, and to supply a mechanism by which those claims could be vindicated. It does so, but not at the expense of the Deed Companies; nor does it provide an exhaustive or sole mechanism by which claims, said to be Insured Claims, may be vindicated. 29 Returning, as one must, to the starting point of the text, the heading in cl 8 ("Insured Claims") and the bold type ("Rights of Creditors who have Claims covered by Insurance") can be put to one side, as they do not affect the interpretation of the DOCA: see cl 1.2(a) of the DOCA. But when one comes to the text of cl 8.1, incorporating Schedule 5, the drafting is less than ideal. On any view, cl 8.1 and Schedule 5 refer to "Insured Claims" and "Claims" in a manner which sits somewhat unhappily with the definitions assigned to those terms in the DOCA. 30 As MPG stresses, an "Insured Claim" as used in the concluding words of the chapeau is defined in a manner that is objectively ascertainable. There is something to be said for the point that the chapeau provides that the clause is operative only when a particular state of affairs exists, that is, when insurance is held "in respect of an Insured Claim". This is consistent with the reference made at the beginning of cl 8.1(a) to the Creditor being able to do things "in relation to an Insured Claim". However, there is then reference to the notion that the Creditor may "take action to recover the amount due in respect of the Claim". 31 These latter words are curious, as the DOCA provides that there can be no successful recovery action in relation to a "Claim". But the clause must be read as a whole, including by reference to Schedule 5. In the balance of cl 8.1, the expression "Claim" is used seven times. The Schedule then uses the term "Insured Claim" several times, consistently with the fact that the Creditor executing and then providing the indemnity asserts the identified claim is an Insured Claim. 32 These references to a "Claim" merit attention. Reference has already been made to the use of the word "Claim" in cl 8.1(a). Clause 8.1(b) also references the word "Claim", in defining the consequences of "obtain[ing] payment from the insurer". 33 Importantly, cl 8.1(d) then refers to the creditor's "right to receive a distribution from the Trust Fund in respect of that Claim", which refers to cl 6.6, the effect of which is to convert Claims that are extinguished and released (by cl 6.4) into claims on the Trust Fund. However, given the Creditor is only entitled to receive a distribution from the Trust Fund pursuant to cl 6.6 in relation to a Claim, such a mechanism could not operate if "Claims" was somehow read down to mean "Insured Claims". The consequence of this is that the reference to "Claims" in cl 8.1 appears to be something more than a mere drafting error arising from inattention to the drafting convention as to initial capitalisation: c.f. City of Swan v Lehman Brothers Australia Ltd [2009] FCAFC 130; (2009) 179 FCR 243 (at 249 [15] per Stone, Rares and Perram JJ). 34 On balance, it seems to me these references to "Claim" recognise that it may be unclear whether a claim is, in fact, an Insured Claim. In these circumstances, on MPG's proposed construction, the indemnity would be of no effect (which would seem to jar with the evident purpose of the scheme reflected in the terms of the DOCA). As I said during the course of argument, it seems strange that the Deed Company would be absent an indemnity and hence in a worse position in circumstances where a Creditor had mistakenly sued on the misapprehension that a claim was insured (but when in truth the claim had been extinguished under the DOCA), than if that Creditor had sought to enforce what was eventually found to be an Insured Claim. 35 The less than pellucid terms of the DOCA occasion ambiguity, but the better view is that cl 8 allows Creditors to pursue claims against Deed Companies to the extent covered by insurance but requires them to do so in a way that does not expose the relevant Deed Company (here, VAH) to any expense or loss, including legal expenses. The requirement to give the Creditor Indemnity is not engaged only where the claims are established to be Insured Claims but where the Creditor "intends to take action in relation to a Claim under [cl 8]" - that is, where the Creditor seeks to rely on cl 8. The awkward drafting, at least in part, reflects the fact, already noted above, that the demarcation between Claims and Insured Claims is not necessarily clear cut at the time of providing the indemnity, and the fact a Creditor only loses the right to a distribution from the Creditors' Trust if and to the extent that the Creditor obtains payment from the relevant insurer and is able to retain the proceeds of the insurance: cl 8.1(b). 36 There was an attempt post-hearing by MPG to develop a new argument not advanced at the hearing to the effect that this construction of cl 8.1(d) and Schedule 5 of the DOCA raises the spectre of stifling the class action (and that this affects the proper construction of the DOCA). No evidence as to stultification or uncommerciality was adduced at the separate hearing to support this proposition (assuming such evidence would be admissible), and it is far from self-evident. Moreover, it was not in dispute that there was an alternative, and it was evidently the choice of MPG not to proceed against the insurer directly. 37 Looked at in the context of the DOCA as a whole, cl 8 provides a regime which recognises that it may be necessary for an indemnity to be provided to enable litigation to be commenced, which will resolve the question as to whether a person has a Claim (which may be asserted against the Creditors' Trust) or an Insured Claim (which may be asserted against the insurer). 38 Contrary to the construction proposed by MPG, the construction urged by VAH makes intuitive sense, given: (a) the reality that the indemnity may be required when the question of whether a claim is an Insured Claim is unresolved; (b) the DOCA's protection of Deed Companies' assets is intended to maximise any return to Creditors pursuant to the DOCA; and (c) relevant to stultification, there is no apparent fetter against proceeding against the insurer directly and, in any event, many Creditors would have been required to provide security for legal costs.

E CONCLUDING OBSERVATIONS AND RELIEF 39 It follows from the above that VAH is entitled to the declaratory relief it sought. No order for costs of the separate determination was sought or made. 40 Two further points should be made. 41 First, it is important to keep in mind that this is a class action and there has been no opt out. Usually, of course, there should be no final determination of any issue in a class action until after group members have had the opportunity to opt out. The reasons are obvious: there should be no "binding" of group members to a substantive order until they have had the opportunity of considering whether they wish to have their rights affected by an order in the class action, and it would also be unfair to allow a group member to adopt a "wait and see" approach as to how a trial of common issues was going and then make a decision to opt out (and hence prevent a "statutory estoppel" arising). But this is an unusual case. Setting a date for opt-out in this case is premature, and what I have resolved is a discrete issue not directing affecting the substantive claims of group members (and no orders under s 33ZB of the FCA Act were sought by either party). Accordingly, I adopted the exceptional course of granting leave pursuant to s 33J(4) of the FCA Act, allowing the separate hearing to commence earlier than the date before which a group member may opt out of the proceeding. 42 Secondly, after I invited them to do so, the parties helpfully addressed me on whether I should entertain an application for leave to appeal. There is no need to canvass the competing submissions. If an application for leave is pursued, given the present demands on the Full Court list, it is unlikely any appeal could be heard in February 2023, even if I were to grant leave immediately. Accordingly, I think I should allow any leave application to be dealt with in the usual course. I certify that the preceding forty-two (42) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Lee.

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