McDonald v Deputy Commissioner of Taxation

Supreme Court of NSW|2005-02-01|Before: Barrett J, Mr P

Background 1 The plaintiffs are the liquidators of Jay & Kay Safety Glass Pty Ltd ("the company"). In that capacity, they seek the guidance of the court, by way of direction and declaration, as to the correct treatment of a claim made in the winding up by the defendant, Deputy Commissioner of Taxation. 2 On 27 August 2003, the plaintiffs became administrators of the company under Part 5.3A of the Corporations Act 2001 (Cth). Shortly beforehand, on 18 August 2003, the Deputy Commissioner of Taxation had filed an originating process seeking an order for winding up on the grounds of insolvency, based on an unsatisfied statutory demand. By the time that originating process came before the court on 25 September 2003, the company's creditors had resolved, in accordance with s.439C(c), that the company be wound up. This occurred on 17 September 2003. The originating process was dismissed on 25 September 2003 and the court made an order for costs in favour of the plaintiff Deputy Commissioner of Taxation. The full text of the orders made on 25 September 2003 was: "1. That the proceedings be dismissed. 2. That the defendant pay the plaintiff's costs." The relief sought 3 In these circumstances, the liquidators seek, in relation to the costs order: "1. Directions as to whether the Costs Order is not a debt or claim provable under s553 of the Corporations Act or an expense entitled to priority under s556 of the Corporations Act . 2. In the event that directions are given in accordance with Paragraph 1, a declaration that the Costs Order is not a debt or claim provable under s553 of the Corporations Act or an expense entitled to priority under s556 of the Corporations Act ." 4 The passing of a resolution of creditors under s.439C(c) triggers s.446A(2) (see s.446A(1)(a)). As a result, the company is deemed to have passed a special resolution under s.491 for voluntary winding up. In addition, s.497 is deemed to have been complied with (see s.446A(3)), so that the deemed voluntary winding up is a creditors voluntary winding up. The administrator becomes the liquidator in the creditors voluntary winding up: s.446A(4). It is in that context that the application for directions must be approached. Translated to the circumstances of this case, this means that the company is to be regarded as having become subject to creditors voluntary winding up on 17 September 2003. The matter for determination is the status, in that winding up, of the costs which, on 25 September 2003, the company was ordered to pay to the Deputy Commissioner. The statutory provisions 5 Section 553(1) is, by virtue of s.513, a provision that applies to every type of winding up, whether in insolvency, by the court or voluntarily. It therefore applies to a creditors voluntary winding up. Section 553(1) is in the following terms: "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." 6 By virtue of s.513B(b) and s.513C(b), the "relevant date", in relation to a winding up of the kind now under consideration, is the date on which the antecedent Part 5.3A administration began. In the present case, that date is 27 August 2003. 7 Section 553(1) identifies, by reference to a particular kind of connection with the "relevant date", the debts and claims that are "admissible to proof against the company". But, as other provisions make clear and Campbell J observed in Hypec Electronics Pty Ltd v Mead (2004) 50 ACSR 448 at p.471, debts and claims thus admissible to proof are not the only things to which the estate or fund administered by a liquidator may be applied. Section 555 lays down a prima facie rule that "all debts and claims proved in a winding up" rank equally. I say it is a prima facie rule because the opening words of s.555 are, "Except as otherwise provided by this Act …". Section 556(1) then identifies "debts and claims" which, subject to other provisions of Division 6 of Part 5.6, must be paid "in priority to all other unsecured debts and claims". Section 556(1), in affording priority, does not refer to debts and claims that have been proved or are admissible to proof. It is clearly not confined to debts and claims tied, in a way specified in s.553(1), to the "relevant date". That this is so is borne out by, for example, paragraphs (a), (dd), (de), (df) and (h) of s.556(1) which all refer to things which may have no genesis in matters pre-dating the winding up. The full text of s.556(1) is as follows: "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." 8 Because the particular winding up is a voluntary winding up, it is necessary to have regard also to s.512: "All proper costs, charges and expenses of and incidental to the winding up (including the remuneration of the liquidator) are payable out of the property of the company in priority to all other claims." 9 I pause at this point to note briefly the obvious difficulty in reconciling ss.512 and 556(1) in a case of voluntary winding up. The former professes to identify items payable "in priority to all other claims", while the latter refers to items that, subject to other provisions of Division 6 of Part 5.6 (which does not include s.512), are to be paid "in priority to all other unsecured debts and claims". These sections lack the apparent symmetry of those in England where one provision is in the form of s.572 and another merely orders priorities among components of the subject matter of the first: see Re Toshoku Finance UK plc [2002] 1 WLR 671. Comments on the possible resolution of the apparent inconsistency between s.512 and s.556(1) were ventured by Hansen J in Ultra Tune Australia Pty Ltd v McCann (1999) 30 ACSR 651 at p.666. In the end, his Honour did not need to decide the matter. Nor, as will be seen, do I need to decide it here. The issue is nevertheless one that merits legislative attention with a view to clarification. The three relevant questions 10 The circumstances of this case pose three questions in relation to the costs the subject of the second order made on 25 September 2003: 1. Are those costs properly regarded as expenses incurred by the plaintiffs as either Part 5.3A administrators or as liquidators in the voluntary winding up which arose on 17 September 2003? 2. Are those costs properly regarded as "costs, charges and expenses of the winding up", that is, the voluntary winding up to which I have just referred? 3. Are those costs properly regarded as a debt or claim the circumstances giving rise to which occurred before 27 August 2003? 11 If Question 1 is answered in the affirmative, the costs may be within paragraph (a) or paragraph (dd) of s.556(1). If Question 2 is answered in the affirmative, the costs are within s.512. If Question 3 is answered in the affirmative, the costs are provable in the voluntary winding up in accordance with s.553. The liability represented by the costs order 12 Where this court makes an order for costs, the quantum of costs is, in default of agreement between the parties and specification of a particular sum in the order, determined by assessment under Division 6 of Part 11 of the Legal Profession Act 1987. The assessor by whom an assessment is made must issue a certificate setting out the assessor's determination. Upon the certificate being filed in the office or registry of a relevant court, the certificate takes effect as a judgment of that court: s.208J(3). 13 A debt for assessed costs arises upon filing of such a certificate. After the making of the order for costs which leads on to the assessment process, the party in whose favour the order has been made has, in effect, an existing right to future payment of a sum still to be determined. Before the order is made, however, the party in whose favour it is eventually made does not have any right in respect of the costs. 14 In the present case, the evidence does not show that there has been any assessment of costs following the making of the order of 25 September 2003. I therefore approach the three identified questions by reference to two basic propositions: first, that the order operates at this stage as no more than a foundation for resort to the system of quantification created by the Legal Profession Act; and, second, that the person ordered by the court to pay costs is the company itself. Question 1 - ss.556(1)(a) and (dd) 15 As I have said, the answer to Question 1 in paragraph [1] above will determine whether the liability for costs under the costs order may be within paragraph (a) or paragraph (dd) of s.556(1). The central issue is whether that liability represents "expenses … properly incurred by a relevant authority". 16 The plaintiffs are a "relevant authority" in relation to the company. That status arises from both their appointment as liquidators and their previous appointment as administrators: see paragraphs (a) and (c) of the definition of "relevant authority" in s.556(2). The question is therefore whether the liability under the costs order represents "expenses" that were "properly incurred by" the plaintiffs as such a "relevant authority". 17 The concept of the incurring of a debt by a company was described by Hodgson J in Standard Chartered Bank of Australia Ltd v Antico (1995) 38 NSWLR 290 (at p.314) as follows: "In my opinion, a company incurs a debt when, by its choice, it does or omits something which, as a matter of substance and commercial reality, renders it liable for a debt for which it otherwise would not have been liable. This formulation has three aspects which could cause difficulty in particular cases: first, as to whether the company has a choice whether to do (or omit) the act or not; secondly, as to whether it is the act or omission, or something else, which renders the company liable for the debt; and thirdly, as to whether the company would otherwise (in any event) have been liable for the debt." 18 "Incurring" of a debt by a company thus involves the company's choice to do or omit something. Here, however, the relevant incurring is not an incurring by the company itself; it is an incurring by the relevant authority. 19 In the case of an administrator, Subdivision A of Division 9 of Part 5.3A contains provisions making an administrator liable for certain debts incurred by the administrator in the performance of his or her functions and for certain rent and other amounts attributable to lease and similar arrangements made by the company before administration, as well as certain tax remittance obligations. These are clearly within the contemplation of paragraph (dd) of s.556(1). In the case of a liquidator, there are general powers in relation to the affairs of the company, as well as specific powers exercisable by liquidators as distinct from the company. In some instances, the liquidator will be personally liable as a result of the exercise of a power, in others there will be no personal liability of the liquidator and the liability will be a liability of the company. Paragraphs (a) and (dd) of s.556(1) operate, in my opinion, where a liquidator incurs a liability of either type, provided that the liability is "properly incurred" (and, in the case of s.556(1)(a), is of the relevant description). 20 The concept of "incurred" in the income tax context "does not mean only defrayed, discharged, or borne, but rather it includes encountered, run into, or fallen upon": New Zealand Flax Investments Ltd v Federal Commissioner of Taxation (1938) 61 CLR 179 at p.207. The "properly incurred" criterion used by ss.556(1)(a) and 556(1)(dd) involves an assessment of the quality, in terms of propriety, of the relevant incurring. There is accordingly an implicit assumption that choice is both available and exercised, either directly or indirectly. An involuntary incurring cannot sensibly be judged against the "properly" criterion. The "properly incurred" concept was seen by Warren J (as her Honour then was) in Ansett Australia Ground Staff Superannuation Pty Ltd v Ansett Australia Ltd (2002) 174 FLR 576 as involving the standard of conduct that attracts a trustee's right to be reimbursed out of trust property in respect of expenses of due execution of the trust. Her Honour quoted with apparent approval the following observation of Santow J in Re HIH Insurance Ltd (2001) 39 ACSR 645 at p.650: "It seems clear enough that the expression 'properly incurred' in s.556(1)(a) and s.556(1)(dd), Corporations Act 2001, is interpreted broadly: cf Price v Price (1904) 29 VLR 719; Re Just Juice Corp Pty Ltd (1992) 8 ACSR 444; James v Commonwealth Bank (1992) 37 FCR 445. Nevertheless, these provisions must be viewed in the context of the functions and duties of a liquidator. Those duties are primarily to realise and get in the assets of a company as soon as is practicable (see s.478, Corporations Act) and to distribute to the persons entitled." 21 In the case before me, the plaintiffs did nothing, either directly or more remotely, to precipitate the costs order. They, as individuals, were not parties to the winding up litigation; nor did the court purport to make a costs order against any non-party. They did not take any steps in the litigation on behalf of the company. No act or omission resulting from their choice, whether as agents of the company or in their own right as its liquidators, precipitated or contributed to the court's decision to make the order that the company pay the Deputy Commissioner's costs of the winding up application initiated by the Deputy Commissioner. The liability flowing from the costs order, even if regarded as one for "expenses", cannot be said to have been "properly incurred" by the liquidators. Question 2 - s.512 22 The answer to Question 2 in paragraph [10] above will determine whether the liability for costs under the costs order is within s.512. The issue is whether that liability represents "proper costs, charges and expenses of and incidental to the winding up". 23 Section 512, unlike ss.556(1)(a) and (dd), does not focus upon the question whether a liability is "incurred" by the liquidator. Rather, it uses the words "of and incidental to" to denote the relevant connection between a cost, charge or expense and the winding up. That particular formulation first appeared in the uniform Companies Acts of 1961-2. Before that, descendants of s.94 of the Joint Stock Companies Act 1856 (Eng) referred to costs, charges and expenses "properly incurred in the winding up": see, in New South Wales, s.195 of the Companies Act 1874, s.143 of the Companies Act 1899 and s.287(1) of the Companies Act 1936. Despite the change in terminology and omission of any expressly stated "incurred" concept, the form of the provision employing the words "of and incidental to the winding up" has been seen as drawing a distinction between a liability "incurred after commencement of the winding up as a cost or expense" [emphasis added] and "a pre-liquidation liability of the company": K D Morris & Sons Pty Ltd v Bank of Queensland Ltd (1980) 146 CLR 165 at p.179 per Stephen and Wilson JJ. An example of a cost or expense of the winding up given by Aickin J in the same case is "rent of premises occupied for the purposes of winding up a business after the commencement of the winding up". His Honour referred, in that connection, to "costs and expenses bona fide incurred by the liquidators" [emphasis added]. 24 It may be that the "incurred" concept, although no longer expressly mentioned, continues to play a role under the modern version of the provision, so that remarks of Buckley J in Re Wenborn & Co [1905] 1 Ch 413 at p.416 remain apposite: "[W]hen there is a winding-up of a company - whether the liquidation be compulsory or voluntary - all claims of creditors ought prima facie to be dealt with in the winding-up in accordance with the rules applicable to the distribution of the assets, and that costs ought also to be dealt with in like manner; but that if an action is pending to which the company is a party, then, if the company which is in liquidation acting by its liquidator determines to prosecute or defend the proceedings for the estate, the estate must be treated as the party litigant, and must in case of failure pay the costs in full. In other words, the other creditors, for whose benefit the action is defended, must in such case bear the costs."

The decision of a liquidator to prosecute or defend pre-existing litigation involving the relevant company was, in this passage, seen as determining whether the costs of that litigation were chargeable upon the estate administered by the liquidator. 25 Ms Foda of counsel, who appeared for the Commissioner of Taxation, furnished written submissions and referred to a number of cases in which the expression "of and incidental to" has been considered, mainly in relation to legal costs. In Re Fahy's Will Trusts [1962] 1 WLR 17 costs "of and incidental to" negotiations were seen as "costs of and consequent on the negotiations", so that costs incurred before negotiations began were not costs "of and incidental to" the negotiations. Ms Foda's submissions continue: "In Susic v New Zealand Company Limited & Ors [1998] ACTSC 50 at paragraph 47, Miles CJ took 'incidental' to mean 'connected with and subordinate to the major activity. As indicated in Watts v Perry & Another [(1972) 1 NSWLR 73] the matter is to be determined on the ordinary meaning of the words and as a matter of fact'. In Young v Callan [2004] TASSC 100, Evans J, adopted the meaning of 'incidental' in the Shorter Oxford English Dictionary: 'occurring or liable to occur in fortuitous or subordinate conjunction with something else'. In Dept of Health and Social Security v Envoy Farmers Ltd [1976] 2 All ER 173, Jupp J at 175 also considered that a thing is incidental if it 'occurs in subordinate conjunction with something else'. In Australian Competition & Consumer Commission v MHG Plastic Industries Pty Ltd [2003] FCA 1624, Emmett J at paragraph 20 considered the meaning of the phrase 'costs of and incidental to' and held that: '… it would ensure that costs incurred as part of the preparation for litigation will be recoverable as costs of the litigation.' In Comcare v Con Labathas (1995) 133 ALR 744: (1995) 61 FCR 149 at 154, Finn J noted that: 'A growing body of modern case law, for example, supports the view that a power to award costs "of and incidental to the proceedings" is of larger ambit than one to award costs "of the proceedings" see Re Gibson's Settlement Trusts, Mellors v Gibson [1981] 1 Ch 179 at 184; McIntyre v Perkes (1987) 15 NSWLR 417 esp per Samuels JA at 426; South Sydney City Council v Forte Enterprises Pty Ltd , Land and Environment Court of NSW, 15 July 1993, per Bignold J.' It is clear that the words 'incidental to' extend the ambit of an order for costs as stated by Samuels JA in McIntyre v Perkes (1988) 15 NSWLR 417 at 426: 'The collocation "of and incidental to" had been used in England for many years, not as a means of indicating the basis upon which the costs of a proceeding were to be taxed, but as defining the extent of the outgoings which fell within the scope of "costs" and this within the discretion of the Court.'" 26 The approach in Re Fahy's Will Trusts (above) was criticised by Megarry VC in Re Gibson's Settlement Trusts [1981] 1 Ch 179. He took the view, based in part on the decisions of the Court of Appeal in Pecheries Ostendaises (Soc Anon) v Merchants' Marine Insurance Co [1928] 1 KB 750 and Frankenburg v Famous Lasky Film Service Ltd [1931] 428, that costs antecedent to proceedings might properly be regarded as costs "incidental" to the proceedings. His Lordship said (at pp.184-5): "I find great difficulty in seeing on what basis it can be said that the addition of these words drives out the right to antecedent costs which the Pecheries and Frankenburg cases established. The words seem to me to be words of extension rather than words of restriction. The litigant is to have the costs 'of' the proceedings and also the costs 'incidental to' the proceedings. This phrase cannot mean that the costs 'of' the proceedings are to be included only if they are also 'incidental to' them." 27 I am satisfied that the words "of and incidental to the winding up", when used in s.512 of the Corporations Act, are capable of referring to matters forming part of the winding up, or intimately connected with it, even if antecedent. Ms Foda's submission is that costs of the earlier winding up proceedings that were eventually dismissed bear a relationship of that kind to the voluntary winding up that followed on from the Part 5.3A administration which, in turn, was put in place by the directors of the company some nine days after the Deputy Commissioner had filed the winding up application. I quote again from Ms Foda's written submissions: "The crucial aspect the Court must consider is the impact the Respondent's winding up proceedings had in relation to the instigation of both the administration and the eventual voluntary winding up. Although the Court dismissed the Respondent's proceedings, the Respondent's application was the 'source of pressure' that culminated in the voluntary winding up of the company. The costs awarded to the Respondent are in subordinate conjunction with the winding up of the company. The term 'incidental to' may be held to include those costs incurred after the voluntary liquidation of the company. If the Respondent's costs are 'incidental' to the voluntary winding up, section 512 of the Act requires that the costs be paid in priority from the property of the company." 28 The argument is that the Deputy Commissioner's initiation of the proceedings seeking compulsory winding up must be taken to have prompted the directors to resolve to appoint administrators under Part 5.3A; that the existence of the Part 5.3A administration enabled the creditors, in turn, to pass the resolution that caused the company to become subject to a deemed creditors voluntary winding by virtue of s.446A; and that, as a result, the costs order subsequently made against the company in the compulsory winding proceedings is the source of a cost, charge or expense that has such a connection with the creditors voluntary winding up as to be "incidental" to that voluntary winding up. This is so, it is said, even though nothing that had been done before the initiation of the compulsory winding up proceedings contemplated or, in the events that happened, gave rise to the eventual voluntary winding up. 29 In my opinion, the costs concerned do not bear such a relationship to the creditors voluntary winding up as to constitute part of the "costs, charges and expenses of and incidental to" the creditors voluntary winding up. Even if s.512 does not operate by reference to some implied concept of incurring of the kind suggested by the dicta in the K D Morris & Sons Pty Ltd case (above), there are two reasons for this opinion. 30 The first reason is that an approach under which promptings or factors contributing to some eventual decision or action are taken into account in the way suggested introduces unacceptable elements of vagueness. If it is true to say that the Deputy Commissioner's initiation of the proceedings for compulsory winding up led to the ultimate voluntary winding up in such a way that the costs of the proceedings were "incidental to" the voluntary winding up, the same might be said of, say, costs the directors of the company incurred in seeking, at the same point, advice as to its solvency, being advice which caused them to decide it to place the company in administration. The same might be said of legal costs incurred by a creditor whose simple demand by a solicitor's letter was enough to precipitate such a decision of the directors. Numerous other examples illustrating this concern may be imagined. 31 The second reason is that, in my view, "the winding up", as referred to in s.512, is confined to the process of collection of assets, ascertainment of claims and deployment of the former towards satisfying the latter that occurs under the direction and control of the liquidator. The boundaries of "the winding up", for the purposes of s.512, are, in my view, those that apply for the purposes of s.564 as recently described by the Court of Appeal in Fuji Xerox Australia Pty Ltd v Tolcher (2004) 50 ACSR 402. It is conceivable that some cost or expense prior in time to the formal commencement of the liquidator's functions might be so intimately connected with those functions as to be "incidental to the winding up", but I do not think that costs attributable solely to legal proceedings the existence of which may have played a part in the directors' decision to impose Part 5.3A administration which, in turn, provided the context for the creditors' decision to impose voluntary winding up bear the requisite relationship to the performance of the functions of the liquidator presiding over the voluntary winding up. 32 I therefore conclude that the liability for the costs the subject of the order for costs made in favour of the Deputy Commission on 25 September 2003 is not a liability comprehended by s.512 in relation to the voluntary winding up brought about by the resolution of creditors of 17 September 2003. Question 3 - s.553(1) 33 In considering Question 3 at paragraph [10] above, it is necessary to address two issues. The first is whether the claim the Deputy Commissioner has by virtue of the costs order of 25 September 2003 is within the description "all debts payable by, and all claims against, the company (whether present or future, certain or contingent, ascertained or sounding only in damages)". The second question is whether the claim is properly regarded as a claim the circumstances giving rise to which occurred before 27 August 2003. 34 The first question must, in my opinion, be answered favourably to the Deputy Commissioner. The costs order made on 25 September 2003 is capable of maturing into a quantified debt immediately payable. The costs assessment process can produce that result and will do so if put into operation. The Deputy Commissioner therefore has, by virtue of the costs order, a debt against the company that is contingent, the contingency being the fixing of its quantum through the system of costs assessment. In Community Development Pty Ltd v Engwirda Construction Co (1969) 120 CLR 455, it was held that a building contractor was a "contingent or prospective creditor" of a company where the company was under an existing obligation to pay the contractor the balance of the contract price together with the value of additional work upon the amount being determined by the certificate of the supervising architect or an arbitral award. Kitto J said: "In In re William Hockley Ltd . [1962] 1 W.L.R. 555, at p. 558, Pennycuick J. suggested as a definition of 'a contingent creditor' what is perhaps rather a definition of 'contingent or prospective creditor', saying that in his opinion it denoted 'a person towards whom, under an existing obligation, the company may or will become subject to a present liability upon the happening of some future event or at some future date'. The importance of these words for present purposes lies in their insistence that there must be an existing obligation and that out of that obligation a liability on the part of the company to pay a sum of money will arise in a future event, whether it be an event that must happen or only an event that may happen." 35 The costs assessment process relevant to the present case is sufficiently akin to the ascertainment mechanism considered by the High Court to justify a view that the making of the costs order on 25 September 2003 caused the Deputy Commissioner to have at least a contingent claim against the company. 36 I turn to the second aspect of the s.553(1) inquiry. The contingent claim did not come into existence until after the "relevant date" (27 August 2003). It was created by the costs order made on 25 September 2003. In terms of s.553(1), however, that is beside the point. That section directs attention not to the time at which a debt or claim arises but to whether "the circumstances giving rise to" the debt or claim occurred before the "relevant date". In this respect, s.553(1) differs, at least in its wording, from s.444D(1) which, dealing with deeds of company arrangement, says that such a deed "binds all creditors of the company, so far as concerns claims arising on or before the day specified in the deed under paragraph 444A(4)(i)". I mention s.444D(1) because it is that section, rather than s.553(1), that is dealt with in a number of decided cases referred to in submissions. 37 Section 444D(1) speaks of "claims arising on or before" a particular day. Section 553(1) refers to debts and claims "the circumstances giving rise to which occurred before" a particular date. It might be thought that the time at which a claim arises is not necessarily the same as the time of the occurrence of the circumstances giving rise to a claim. But there is authority (in the unanimous decision of the Victorian Court of Appeal in Brash Holdings Ltd v Katile Pty Ltd [1996] 1 VR 24, expressly and unanimously approved by the Full Federal Court in Lam Soon Australia Pty Ltd v Molit (No 55) Pty Ltd (1996) 70 FCR 34) for the proposition that the persons who are to be considered "all creditors" for the purposes of s.444D(1) are the persons who would have been creditors under s.553(1) had the company gone into liquidation, so that the claims referred to in s.444D(1) are, in all senses (including the relevant temporal sense), the same as the claims referred to in s.553(1). This coincidence or correspondence must mean that decisions about the scope and effect of s.444D(1), so far as concerns identification of relevant claims, are relevant to a determination of the debts and claims to which s.553(1) refers. 38 Accepting, as I do, that s.444D(1) and s.553(1) are co-extensive, in so far as identification of relevant debts and claims is concerned, I proceed to consider two cases involving the former provision in which circumstances analogous with those now under consideration were examined. The first is the decision of Young J (as his Honour then was) in FAI Workers Compensation (NSW) Ltd v Philkor Builders Pty Ltd (1996) 20 ACSR 592. In that case, as in this, the directors resolved to appoint an administrator after an application for compulsory winding up had been filed and before that application came on for hearing. The application was adjourned and, before it came back before the court, the creditors resolved that the company execute a deed of company arrangement. Upon the hearing of the adjourned winding up application, it was ordered that the application be dismissed and that the company pay the plaintiff's costs. (The costs order purported to attach a particular priority to the costs but that aspect may, for present purposes, be ignored). 39 The costs order was made on 20 October 1995. Young J held that the company's liability under the costs order was not, in terms of s.444D(1), a claim "arising on or before the day specified in the deed" (21 September 1995). His Honour rejected the possibility that, because of the pendency on 21 September 1995 of the proceedings in which the order was made, the liability for costs under the order was, as at that date, a contingent debt. Rather, it was the order itself that was the source of the debt or claim and it was the making of that order that caused the debt or claim to arise. 40 The essential feature of a contingent debt or claim is its source in some existing obligation or state of affairs that may or may not mature into a present debt. In Re Pasminco Ltd (2002) 41 ACSR 256, Goldberg J held that a claim for legal costs of litigation pending at the date made relevant by s.444D(1) was one "arising on or before" that day. The relevant proceedings there were proceedings by employees for damages for personal injury suffered in the course of employment before the relevant day. The claim for costs was seen as inherent in the claim for compensation and therefore as arising out of the events giving rise to the compensation claim. 41 The second s.444D(1) case involving facts analogous with those now under consideration is Expile Pty Ltd v Jabb's Excavations Pty Ltd (2004) 22 ACLC 667. Palmer J there raised but rejected the possibility that the conclusions of Young J in FAI v Philkor and those of Goldberg J in Pasminco may differ. His Honour referred to an important difference in surrounding circumstances: "In my opinion, for the purposes of considering whether claims for costs of litigation fall within s.444D(1) CA one must distinguish between a claim against a company to wind it up in insolvency and a claim against it for damages or other relief against wrongdoing. In the latter case, if the company has committed a wrong prior to the commencement of the winding up or the deed of company arrangement then in the eyes of the law it has already incurred a liability, although a Court would have to adjudicate the case to establish that liability. Thus, s.553(1) admits to proof in a winding up a claim for damages arising from a wrong committed by the company prior to the commencement of the winding up. If the company denies liability for that wrong so that it puts the claimant to the cost of establishing his or her case, the company will normally have to pay the successful claimant's assessed costs. However, I think it is stretching somewhat the accepted concept of a contingent liability to say that, from the moment that the company puts the ultimately successful claimant to proof of his or her case, the company is under an existing obligation to pay the claimant's legal costs. While the 'association and connection' between the claimant's substantive claim and the costs of establishing that claim certainly exist, as Goldberg J said in Pasminco , the substantive claim depends upon the existence of a legal right while the award of costs is always in the discretion of the Court, even though the way in which the discretion will be exercised will be fairly predictable in most cases." 42 Palmer J continued: "It is not necessary for the purposes of this case to explore further the nature of a costs claim against a company arising incidentally to a claim for damages or other relief against wrongdoing. It is sufficient to say that the nature of the right sought to be invoked by a plaintiff bringing such a claim is of an entirely different character from the nature of the right sought to be invoked in an application to wind up for insolvency. The former type of claim depends upon the company's wrongdoing; the latter type of claim depends upon the company's financial status. A company which becomes insolvent does not, by that circumstance alone, commit a legal wrong against anyone.

That an application to wind up in insolvency is in a category different from all other claims against a company is expressly recognised by s.466(1) and (2) and s.556(1)(b), the combined effect of which is that the company's obligation to pay the costs of an application seeking to wind it up in insolvency does not exist unless and until a winding up order is made; however once the order is made, the applicant's costs are to be reimbursed in priority to all other claims against the company save for the costs of getting in its assets and carrying on its business. Accordingly, even if it could be said that a claim against a company based on wrongdoing gives rise simultaneously to a contingent claim for the costs of proving the claim, s.466(1) CA renders that proposition inapplicable to a claim for winding up in insolvency. For these reasons, I would distinguish the decision in Pasminco for the purposes of the present case and I would follow the decision of Young J in Philkor ." 43 His Honour dealt finally with the possibility that there might have been, at the relevant day, a "future claim" for the costs ultimately awarded in the winding up proceedings: "Finally, I do not think that as at 7 June 2003 Expile can be said to have had a 'future claim' for its costs. A future claim is distinguishable from a contingent claim in that, while both are founded on an obligation existing as at the commencement of the winding up or the deed of company arrangement, a future claim will arise at some time thereafter while a contingent claim may arise. A typical example of a future claim is a claim for rent which will become due in the future under a lease which is in existence at the commencement of the winding up: see Molit (No 55) Pty Ltd v Lam Soon Australia Pty Ltd (Administrator Appointed) (1996) 19 ACSR 160, at 167ff; cf. Silbermann v One.Tel Ltd (In liq) (2002) 167 FLR 274, at 279. For the reasons which I have given in relation to 'contingent claim', as at 7 June 2003 the possibility that a winding up order would be made in the future and that s.466 would have the effect of making Jabb's liable to Expile for its costs of that application did not give rise to a future claim within the meaning of s.553(1)." 44 I accept the reasoning in FAI v Philkor and Expile v Jabb's as applicable to the present case. In my opinion, the distinction drawn by Palmer J in the second of the above passages from Expile v Jabb's is a valid and logical distinction. Where some act or omission of a company occurring before winding up carries within it the seeds of substantive relief in proceedings in which an adverse costs order is likely if the claim against the company is made out, the eventual liability under such a costs order may be seen to have its genesis in the original act or omission. But where the relevant proceeding is for a winding up order which does not, of its nature, entail substantive relief grounded in any particular anterior act or omission of the company, no such link is apparent. 45 In saying this, I do not overlook Ms Foda's submission that, in a case of the present kind, the winding up proceeding that is eventually overtaken by the Part 5.3A administration and the consequent voluntary winding up arises from the "wrongdoing" consisting of the company's failure to pay the debt due to the applicant for the winding up order. The preferable analysis, in my view, is that it is the state of insolvency found by the court to exist that forms the basis of the winding up order. The applicant's debt is the source of the applicant's standing to seek a winding up order. That debt may also cause a presumption of insolvency to apply via the statutory demand process provided for in Division 2 of Part 5.4 for the purposes of the winding up application. But even then, it is the court's positive decision that insolvency exists, rather than the particular circumstance of non-payment of the applicant's debt, that forms the basis for the exercise of the jurisdiction to make a winding up order. 46 In summary, I am not satisfied that, in the present case, the liability for costs under the costs order made on 25 September 2003 reflects a claim the circumstances giving rise to which occurred before 27 August 2003. Policy considerations 47 It was submitted on behalf of the Deputy Commissioner that the circumstances of this case represent a fairly common state of affairs. Experience in the Corporations List confirms this. It often happens that directors resort to Part 5.3A administration in the face of an application for a winding up order by a creditor whose statutory demand has not been satisfied. In many cases, such action by directors will represent an entirely reasonable and responsible response. I repeat here what I said in St Leonards Property Pty Ltd v Ambridge Investments Pty Ltd (2004) 50 ASCR 443 at p.446: "I hasten to say that it is not, of itself, reflective of improper purpose for directors faced with a winding up application to cause the company go to into Part 5.3A administration. Indeed, in many cases that will be the proper and responsible thing for directors to do. In some cases, the demands of a creditor and the indication that the creditor will pursue a winding up application will so focus the minds of directors that they become able to take stock of the company's position more critically and, realising that the company is insolvent or likely to become insolvent, to see resort to the Part 5.3A procedure as the appropriate course. In those cases, such action is entirely responsible and proper."

In other circumstances - as in the St Leonards case itself - directors taking such action may act for wrong and unacceptable reasons. 48 From a policy perspective, it may be thought unsatisfactory that the creditor who applies for a winding up order and thereby instills in directors the need to appoint an administrator must, in a practical sense, bear the costs of the dismissed winding up application even though the court has ruled that the company should pay those costs. There are expressions of disquiet about this in both FAI Workers Compensation (NSW) Ltd v Philkor Builders Pty Ltd (No 2) (1966) 21 ACSR 532 and Expile v Jabb's (above). In the former case, Young J said (at p.534) that it should not be: "… an available option to companies to put their creditors through the large expense of taking winding up proceedings, and then at the last moment, entering into administration without making any provision for the costs of the winding up proceedings." 49 In Expile v Jabb's, Palmer J said (at [56]): "That the costs of the successful applicant for the winding up of a company are given second priority under s.556(1)(b) in the insolvent administration reflects a well established policy of the law that it is in the public interest that insolvent companies be wound up rather than be permitted to trade: see e.g. Re Data Homes Pty Ltd (in liq) [1972] 2 NSWLR 22, at 26. Consistently with that policy, creditors are to be encouraged, rather than discouraged, to undertake the financial burden of proceedings to wind up a company which is insolvent by the consideration that in the winding up the costs of their application will receive high priority for payment. That is not regarded as unfair to other creditors because the applicant creditor is seen as seeking the winding up order, not for his or her exclusive benefit, but for the benefit of the class of creditors of which he or she is a member: In re Crigglestone Coal Company [1906] 2 Ch 327, at 331-2. It is right, therefore, that those who benefit from the financial risk undertaken by one of their number cede priority to the risk-taker for its costs of the risk-taking." 50 As Palmer J makes clear, the legislature has recognised the priority deserved, in an insolvent winding up, by the costs awarded to the successful applicant for the winding up order. On the view I take, it has not, at this point, recognised as similarly deserving the claim of an applicant whose winding up application is eventually unsuccessful because overtaken by s.446A voluntary winding up, even if the court has, as it were, underwritten the claim by making an order for costs against the company. I have already referred to what I perceive to be a need for legislative attention to the interaction between ss.512 and 556(1) (see paragraph [9] above)`. The legislature should, in my opinion, also consider whether s.556(1) requires amendment to afford some appropriate priority position to costs under a costs order made in circumstances of the kind at issue in this case. Conclusion 51 The claim of the Deputy Commissioner under the costs order made by the court on 25 September 2003 is not a debt or claim provable pursuant to s.553 in the creditors voluntary winding up that followed on from the Part 5.3A administration initiated on 27 August 2003; nor is that claim of the Deputy Commissioner, in relation to that winding up, a claim within any of the categories in s.556(1) or a cost, charge or expense of the winding up as referred to in s.512. 52 There should be a direction and declaration accordingly. **********

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CITATION : McDonald v Deputy Commissioner of Taxation [2005] NSWSC 2

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