McLellan v Australian Stock Exchange Limited

REASONS FOR JUDGMENT 1 This case raises what, to my mind, is a very difficult point. ACN 008 082 157 Pty Ltd (formerly Terrain Securities Pty Ltd) was placed into administration on 8 August 2003 and shortly thereafter executed a deed of company arrangement. Australian Stock Exchange Ltd (ASX) is a creditor of Terrain Securities. The point at issue is whether ASX is bound by the deed and, together with all other creditors, only entitled to be paid a composition of its claim. 2 The issue arises in the following way. ASX operates a financial market (the Stock Exchange) and has operating rules and procedures for the regulation and supervision of participants in the market. By s 793B of the Corporations Act 2001 (Cth) the operating rules (once known as the Business Rules and now as the Market Rules) have effect as a contract under seal between ASX and each participant in the market. Terrain Securities conducted a stockbroking business and was a participant in the Stock Exchange. Between 8 April and 30 December 2002 Terrain Securities breached several of the Business Rules including rule 3.4.1(1) (operating a discretionary account without the client's written authorisation), rule 3.4.4 (failing to record the details of discretionary accounts in a Register) and rules 1.2.1.2(c) and 1.2.1.4 (failing to maintain adequate records of transactions). It also failed to take out professional indemnity insurance on and after 30 June 2003 in breach of rule 5B.6.1. The latter breach was dealt with summarily, in accordance with the procedure outlined in rule 13.5.1(6). According to this rule ASX may impose a penalty, ranging from censure to a fine or suspension, without a hearing. If a participant is dissatisfied with the penalty it can seek a hearing by the National Adjudicatory Tribunal. On 14 January 2004 ASX imposed a fine of $15,000 (plus GST) for the breach of rule 5B.6.1. On 3 March 2004 ASX laid charges in respect of the remaining contraventions which were far more serious. The charges were heard by the Adjudicatory Tribunal on 29 April 2004. The tribunal found the charges proven and on 10 May 2004 imposed a fine of $150,000 (plus GST). The fine was one of a number of penalties which might have been imposed. 3 There is a gap in the operating rules. The rules do not provide for a fine imposed on a participant to be a debt due to ASX. The only rule which deals with the non-payment of fines is rule 13.4.1(2). This rule permits the suspension of a participant until the fine is paid. It may be possible to recover a fine by an order made under s 793C or s 1101B of the Corporations Act: Australian Stock Exchange Ltd v McLachlan (2002) 43 ASCR 362, 384. It is certainly recoverable in an action for damages for breach of contract: Australian Stock Exchange Ltd v McLachlan at 384. In that case the Court of Appeal did not identify the contract which is breached by the non-payment of a fine nor the term which imposes the obligation to pay. There are two possibilities. One is an implied term of the statutory contract to the effect that a participant will pay any fine imposed for a breach of the operating rules. The other possibility is a breach of the contract made with ASX upon acceptance of a participant to operate in the financial market. While I have not seen any documents constituting this contract, there is the uncontradicted evidence from a witness that a condition of acceptance imposed by ASX is that the participant will comply with the operating rules, procedures, practices, directions, decisions and requirements of ASX. 4 The deed of company arrangement was approved by creditors on 31 October 2003 and executed on 20 November 2003. The effect of the deed is to discharge the claims of all creditors as at the Appointment Date (8 August 2003). The discharge takes effect by force of s 444D(1). In return, provision is made for the payment by the deed administrators of a dividend on claims from assets which have been placed under their control. 5 The problem is now exposed. The fines were imposed on Terrain Securities after it had been placed into administration. Before then there was only a possibility that the company would be fined. Did this possibility mean that ASX was a contingent creditor of Terrain Securities as at the Appointment Date? 6 Before answering this question, there is a preliminary matter that must be dealt with. According to cl 4 of the deed, the fund which the administrators hold is available "to pay the Creditors of the Company (other than the Excluded Creditors)". Clause 8.1 then provides that after payment of the deed administrators' costs and payment in full of all claims which would have priority in a winding up "the balance [of the fund is] to be distributed pro rata amongst the Unsecured Creditors (except the Excluded Creditors)." The definition clause, cl 1, provides that "Creditors" means "all unsecured and secured creditors of the Company", "Unsecured Creditors" means "any person to whom an Unsecured Debt was owing by the Company as at the Appointment Date" and "Unsecured Debt" means "a debt due by the Company to a Creditor who does not hold security for payment of the debt". When read in isolation, the effect of these definitions is that the creditors of the company are those to whom a debt was due or, perhaps, due and payable as at 8 August 2003. A creditor with a contingent claim or an unliquidated claim is excluded. Even a creditor with a future debt may be excluded if the words "owing" in the definition of "Unsecured Creditor" and "due" in the definition of "Unsecured Debt" create cumulative conditions. 7 Yet there are many factors that point towards the conclusion that "Creditors" was intended to have a wider meaning. In their report to creditors the administrators explain the financial position of Terrain Securities taking into account both liquidated and unliquidated claims. The unliquidated claims include potential claims in damages for breach of contract and negligent advice. When calculating the estimated return to creditors if they approve the proposed deed of company arrangement, unliquidated claims or potential claims against the company were taken into account. Then there are the various provisions in the deed itself which assume that "Creditors" include those with future contingent or unliquidated claims. For instance, cl 11 provides for a set-off in respect of "a Creditor [who] is claiming damages against the Company … and has lodged a proof of debt … in respect of the Claim." Clause 13.6 (which deals with the discharge of debts), states that creditors must accept their entitlements under the deed "in full satisfaction and complete discharge of all debts or claims which they have or claim to have against the Company as at the Appointment Date". Clause 13.7 provides that upon receipt of their full entitlements "all debts or claims, present or future, actual or contingent, due or which may become due by the Company" are extinguished. Clause 13.8 states that the deed "may be pleaded by the Company against any creditor in bar of any debt or claim that is admissible under [the deed]". Finally, cl 13.9 incorporates into the deed the provisions in the Corporations Act which deal with the proof and ranking of claims. Of particular importance is s 553(1) which provides that the debts and claims admissible to proof are "all debts payable by, and all claims against, the company (present or future, certain or contingent, ascertained or sounding only in damages)". 8 To my mind it is clear that the definitions of "Creditors", "Unsecured Creditors" and "Unsecured Debt" must give way to the circumstances in which the deed was approved as well as the provisions in the deed that are inconsistent with a narrow reading of "Creditors" and "Unsecured Creditors". The result is that for the purposes of this deed, the creditors who are entitled to participate in its benefits and are bound by its restrictions are those with debts owed by or claims against Terrain Securities, present or future, actual or contingent as at 8 August 2003. 9 Returning to the issue at hand, the question comes down to this: Was ASX a contingent creditor of Terrain Securities when it went into administration, or did its claims only come into existence when the fines were imposed? In Australia it is accepted that for there to be a contingent liability there must be an existing obligation out of which on the happening of the contingency (an event that may or may not occur) there will arise a fixed obligation to pay a sum of money, which can be either liquidated or sounding only in damages: Community Development Pty Ltd v Engwirda Construction Company (1969) 120 CLR 455, 459; The National Bank of Australasia Ltd v Mason (1975) 133 CLR 191, 201; Federal Commissioner of Taxation v Gosstray [1986] VR 876, 878. In England the position may be different. There it has been suggested that notwithstanding the early cases which are to the opposite effect, an existing liability is not an essential element of a contingent debt: In re Sutherland, decd [1963] AC 235, 251, 253, 263. 10 Taking the meaning of contingent creditor as his starting point, Mr Crutchfield for the administrators put the following argument. From the moment Terrain Securities became a participating organisation it was under an obligation to observe the Business Rules. The obligation was contractual in nature; the contract being imposed by s 793B. Prior to the Appointment Date (8 August 2003) Terrain Securities had committed several breaches of the Business Rules and there was a possibility that each breach might be punished by a fine. As a result ASX became a contingent creditor of Terrain Securities. It remained a contingent creditor down to the Appointment Date. Therefore, ASX was bound by the deed of company arrangement. 11 On Mr Crutchfield's argument there are in fact two contingencies that need to be satisfied to create a fixed liability. The first is a finding by the relevant tribunal that Terrain Securities had breached the Business Rules. The second contingency is the imposition of a monetary penalty out of the range of available remedies. That the nature of these contingencies might mean that the contingent debt had no value is of no moment. The cases say that it is possible to value a claim at nil: In re Trepca Mines Ltd [1960] 1 WLR 1278, 1280. Compare Re Oriel Homes Pty Ltd [1998] 1 QdR 652, 654 which held that a contingent claim which could not fairly be valued should at least be given a nominal value of $1.00. However that may be, if on the occurrence of the contingency it appears that the claim is greater than the value (if any) previously attributed to it, the creditor is to be treated as a creditor for the full amount, provided this will not disturb distributions that have been made to other creditors: In re Trent and Humber Company. Ex parte Cambrian & Steam Packet Company (1868) 6 Eq 396, 340; In re Northern Counties of England Fire Insurance Company. MacFarlane's Claim (1880) 17 ChD 337, 341; In re Dodds. Ex parte Vaughan's Executors (1890) 25 QBD 529, 535. 12 The correctness of Mr Crutchfield's argument depends upon it being accepted that the possibility of the imposition of a fine by a domestic tribunal is a relevant contingency. The difficulty, if there be any difficulty, lies in the discretionary nature of the power to impose the fine. Can such a power be treated as a contingency? So far as I am aware this issue has not been considered in any case. But there are authorities which, by analogy, do provide some assistance. Here I have in mind a long line of English cases that deal with proof for costs of litigation involving a bankrupt. The cases do not support the judgment in McCluskey v Pasminco Ltd (Administrators Appointed) (2002) 120 FCR 326 which is incorrect on this point. 13 Under the early Bankruptcy Acts the rule was that costs were provable in a bankruptcy provided the judgment awarding those costs had been pronounced before the sequestration order, although the costs had not been taxed: Ex parte Ruffle. In re Dummelow (1873) 8 Ch App 997, 1001. (I put to one side as irrelevant for present purposes the distinction between a plaintiff's costs and a defendant's costs.) Indeed, proof for costs was allowed even if final judgment had not been signed, provided the order for the payment of those costs had been made: Ex parte Peacock. In Re Duffield (1873) 8 Ch App 682, 685. On the other hand, the mere possibility of having to pay costs at the date of bankruptcy was not a provable debt: Vint v Hudspith (1885) 30 Ch D 24, 27. The reason was that there was no debt, contingent or otherwise, until the order for costs was made: see In re Bluck; ex parte Bluck (1887) 56 LJ QB 607, 608 per Cave J: ("I cannot, however, find that there was any obligation incurred before the date of the receiving order. For it cannot be said that the mere bringing [of] an action puts the plaintiff under an obligation to pay costs if the action goes against him; that can only arise on judgment being given, and then, if the judgment is that he pay the costs, he becomes a debtor for the amount of the costs, whether ascertained then or afterwards, but he was under no obligation before that."); In re British Gold Fields of West Africa [1899] 2 Ch 7, 12 per Lindley MR: ("[I]f no verdict is given against [the bankrupt] and no order is made for payment of costs until he becomes bankrupt, they are not provable. In such a case there is no provable debt to which the costs are incident, and there is no liability to pay them by reason of any obligation incurred by the bankrupt before bankruptcy; nor are they a contingent liability to which he can be said to be subject at the date of his bankruptcy."); In re A Debtor, No. 68 of 1911 [1911] 2 KB 652, 657 per Buckley LJ: ("Every person who has the misfortune to be a party to pending litigation stands in a position in which he may be ordered to pay costs. Whether there is a possibility or a contingent liability I need not determine. I will assume that it is a contingent liability. Under the Bankruptcy Act, 1883, s 37 sub-s 3, the question then is whether the debtor was subject to a contingent liability 'by reason of any obligation incurred before the date of the receiving order'. I am unable to find here that the debtor was under any obligation at the date of the prior bankruptcy.") 14 To this point, the position was that costs were not provable in the absence of an order because there was no underlying legal liability which would crystallise into a debt on the making of the order. It was the order itself that was the source of the liability. Moreover it was not yet clear whether the possibility of a costs order being made was a "contingency": In re Pitchford [1924] 2 Ch 260, 269 per Lawrence J. 15 The old rules continue to apply in England, save that it may not now be necessary to source the contingent debt in an existing liability. This issue was discussed by the Court of Appeal in Glenister v Rowe [2000] Ch 76. There it was argued that there could be a contingent liability for costs without any order. The principal judgment was delivered by Mummery LJ, with whom Thorpe and Butler-Sloss LLJ, agreed. Mummery LJ said (at 84): "(1) Costs of legal proceedings are in the discretion of the court. Until an order for payment of costs is made there is no obligation or liability to pay them and there is no right to recover them. (2) Once legal proceedings have been commenced there is always a possibility or a risk that an order for costs may be made against a party and, in certain circumstances, even against a non-party or the representative of a party. I would accept that an order for costs is a 'contingency' which may or may not happen at some stage during or at the conclusion of a proceeding. (3) The fact that an order for costs (a) creates an obligation to pay money and (b) is a contingency in legal proceedings is not sufficient, however, to make a claim that the court should exercise its discretion to make such an order a 'contingent liability' of the person against whom such an order may ultimately be made. It is accepted that before an order is made there is no present liability to pay. Nor can there be a future liability: there is no certainty that the court will exercise its discretion to make such an order. If, as some of the authorities hold, a contingent liability must arise out of an existing or underlying liability, no such liability can exist simply by reason of a claim for costs made in a writ, summons, application or notice of appeal to the judge or to the Court of Appeal. (4) Even if [as counsel] forcefully contends on the authority of In re Sutherland, decd. [1963] AC 235, a contingent liability can exist for insolvency purposes without any existing or underlying obligation, the discretionary nature of the court's power to order costs indicates that there is no liability, contingent or otherwise, in the absence of a court order." In a brief concurring judgment Thorpe LJ said (at 85) that: "[Counsel's] endeavour to uphold the judge founders on his inability to distinguish between liability and risk of a liability. Of course when his client issued [the relevant process] he exposed himself to the risk of a liability for costs contingent on the future exercise of the court's discretion when determining the pending application. The element of contingency is certainly satisfied but, in my judgment, the element of liability is not. The future exercise of the court's discretion might eliminate that risk of liability. Equally it might elevate the risk of liability into an actual liability, either present, in diem or subject to taxation. This essential distinction between incurring a liability and exposing oneself to the risk of liability should not be undermined." 16 This case has cleared up at least one point. 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. 17 Ex parte Harding; re Pickering (1854) 5 DG&M 367 supports this result. An action for an account was resolved by agreement. An arbitrator was directed to take the accounts and the costs were to abide the result of the award. In due course an award was made in favour of the plaintiff, but before there was any judgment for costs, the defendant committed an act of bankruptcy. The costs were provable in the bankruptcy. Turner LJ (at 372) said that the underlying liability for the costs was to be found in the "valid agreement for valuable consideration, that the amount to be found due by the arbitrator should be the amount to be recovered in the action, and for which judgment should be entered up, and that such judgment, when entered up, should be binding on both parties". 18 There will be a declaration that ASX is a creditor of Terrain Securities and bound by the deed of company arrangement in respect of the penalties that were imposed for breach of the Business Rules. I will hear the parties on costs. I certify that the preceding eighteen (18) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein.