Re Emilco [2002] NSWSC 1124

Mr J V Gooley - Cross-Claimants COUNSEL : Mr M K Rollinson - Cross-Defendant Mr B A J Guest - Creditors Mr P V Winters, Solicitor - Trustee in Bankruptcy Clinch Neville Long - Cross-Claimants SOLICITORS : Carters Law Firm - Cross-Defendant Egisto Solicitors - Creditors Roxburgh & Co - Trustee in Bankruptcy CATCHWORDS : CORPORATIONS - winding up - winding up commenced in 1991 - identification of law governing such winding up - whether s.563B requires payment of interest on admitted debts - proofs by creditors with interest bearing debts - rights to interest accruing after commencement of winding up Corporate Law Reform Act 1992 (Cth) LEGISLATION CITED : Corporations Act 2001 (Cth) Corporations Law Re Emilco Pty Ltd (2001) 20 ACLC 388 Re Fine Industrial Commodities Ltd [1956] Ch 256 Re Humber Ironworks and Shipbuilding Company (Warrant Finance Company's case) (1869) LR 4 Ch App 643 CASES CITED : Re Hyman (1930) 3 ABC 61 Re One.Tel Ltd [2002] NSWSC 1081 Shaw v Goodsmith Industries Ltd (2002) 41 ACSR 556 Re W W Duncan & Co [1905] 1 Ch 307 DECISION : See paragraph 18

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

1869/91 - RE EMILCO PTY LIMITED JUDGMENT 1 Emilco Pty Limited ("Emilco") was wound up in insolvency by order of this court made on 16 May 1991. The summons for winding up was filed on 13 March 1991. By his interlocutory process filed in court on 20 November 2002, the present liquidator, Mr Crisp, seeks "directions from the Court in relation to principles to be applied in respect of any distribution to be made in respect of proofs of debt claiming interest on the principal debt." 2 Mr Gooley of counsel appeared for the liquidator on the hearing of the application for directions. Also represented were Wahib and Nehia Jaa Jaa, Nagah Jaa Jaa (the widow of the late Emile Jaa Jaa and the executrix named in his will which as yet has not been admitted to probate) and the trustee of the bankrupt estate of Emile Jaa Jaa. All these persons claim to be creditors of Emilco. 3 The liquidator's pre-occupation with the matters on which directions are sought arises in unusual circumstances. The winding up has been in progress for more than eleven years. Until recently, the liquidator has been without funds. In circumstances related in Re Emilco Pty Ltd (2001) 20 ACLC 388, a substantial sum became available to the liquidator for the benefit of creditors. He must therefore now address and deal with claims that were previously of academic interest only. 4 It became clear in the course of the submissions made by Mr Gooley for the liquidator that clarity and guidance are sought on two matters: first, the correct treatment of a provable debt that carries interest by virtue of the terms of the relevant contract; and, second, the effect and operation of s.563B of the Corporations Act 2001 (Cth) in relation to this winding up. 5 The first step in addressing these issues is to identify the body of statute law by which the winding up is governed. 6 As I have said, the winding up order was made on 16 May 1991 upon a summons for winding up filed on 13 March 1991. The corporations legislation applying generally on both of those dates was the Corporations Law of New South Wales in the form in which it had been brought into effect on 1 January 1991 by the Corporations (New South Wales) Act 1990 (NSW), that is, the form set out in s.82 of the Corporations Act 1989 (Cth) as in force on that date. The corporations legislation applying generally today is, of course, the Corporations Act 2001 (Cth). That Act contains (but the Corporations Law in force on 13 March 1991 and 16 May 1991 did not contain) the following provision: "563B. Interest on debts and claims from relevant date to date of payment (1) If, in the winding up of a company, the liquidator pays an amount in respect of an admitted debt or claim, there is also payable to the debtor or claimant, as a debt payable in the winding up, interest, at the prescribed rate, on the amount of the payment in respect of the period starting on the relevant date and ending on the day on which the payment is made. (2) Subject to subsection (3), payment of the interest is to be postponed until all other debts and claims in the winding up have been satisfied, other than debts owed to members of the company as members of the company (whether by way of dividends, profits or otherwise). (3) If the admitted debt or claim is a debt to which section 554B applied, subsection (2) does not apply to postpone payment of so much of the interest as is attributable to the period starting at the relevant date and ending on the earlier of: (a) the day on which the payment is made; and (b) the future date, within the meaning of section 554B." 7 This section was introduced into the Corporations Law by the Corporate Law Reform Act 1992 (Cth) with effect from 23 June 1993. There was no equivalent or comparable provision in earlier corporations legislation. It follows that s.563B will apply in relation to the winding up of Emilco if the statutory provisions governing that winding up are those in force today (or at any time since 23 June 1993), but not if the governing provisions are those in force before 23 June 1993. 8 Section 1383 of the Corporations Law of New South Wales, as inserted by the Corporate Law Reform Act 1992 (Cth), dealt with a number of situations requiring transitional treatment, including the situation where, before the "relevant commencement" (that is, the commencement of s.57 of the Corporate Law Reform Act 1992 (Cth) on 23 June 1993), the "Court" (which, by virtue of s.58AA of the Corporations Law in its original 1991 form, included the Supreme Court of New South Wales) had "ordered the winding up of a company". Section 1383(2) declared that "the old winding up law" (that is, Parts 5.4, 5.5 and 5.6 of the Corporations Law in force before the "relevant commencement" on 23 June 1993) continued to apply for the purposes of such a winding up. In other words, a court ordered winding up resulting from an order made by this court before 23 June 1993 was, by virtue of s.1383 which began to operate on that date, to be carried out in accordance with and governed by so much of Parts 5.4, 5.5 and 5.6 of the Corporations Law in force before 23 June 1993 as was concerned with that type of winding up. Pursuant to that statutory directive, s.563B which formed part of the revised Part 5.6 of the Corporations Law resulting from the Corporate Law Reform Act 1992 (Cth) and had not previously existed did not apply for the purposes of the winding up of Emilco, the relevant winding up order having been made in 1991. 9 On 15 July 2001, the Corporations Act 2001 (Cth) came to supersede, for most purposes, the Corporations Law of New South Wales. That Act contains no equivalent of s.1383 as inserted into the Corporations Law with effect from 23 June 1993. However, s.1408 of the Corporations Act 2001 (Cth) is relevant for present purposes. The operation and effect of s.1408 were examined by me in Shaw v Goodsmith Industries Ltd (2002) 41 ACSR 556. The question in that case was whether s.1362CH of the Corporations Law was continued in force by s.1408 of the Corporations Act 2001 (Cth). The following observations with respect to the operation of s.1408 upon s.1362CH of the Corporations Law apply with equal force to its operation upon s.1383 of the Corporations Law: "Section 1362CH is continued in force by operation of s 1408 (1) of the Corporations Act 2001 (Cth): Subject to subsection (3), this Act has the same effect, after the commencement, as it would have if: (a) the transitional provisions (see subsections (6) and (7) of the old Corporations Laws of the States and Territories in this jurisdiction (as in force from time to time before the commencement) had been part of this Act; and (b) those transitional provisions produced the same results or effects (to the greatest extent possible) for the purposes of this Act as they produced for the purposes of those old Corporations Laws.

Subsection (3) of s.1408 allows regulations to adjust the effects produced by subs.(1) but no relevant regulations are in force. Subsection (6) identifies the provisions of the Corporations Law which are 'transitional provisions' for the purposes of subs.(1), while subs.(7), which also enables adjustment by regulation, may likewise be ignored in the absence of relevant regulations. Among the elements of the Corporations Law identified by s 1408(6) as 'transitional provisions' for the purposes of s.1408(1) is 'Chapter 11, other than s.1416'. Section 1362CH of the Corporations Law of New South Wales appears in its Ch 11 and is therefore a provision identified by s.1408 (6). The effect of s.1408(1) of the Corporations Act 2001 (Cth) is therefore to cause s.1362CH of the Corporations Law to have, in the context of the Corporations Act itself, the force and effect it had while the Corporations Law was in force generally such force and effect being the same as if created by the Corporations Act. Section 1362CH can therefore be used today in the same way as it could be used before the advent of the Corporations Act, but so that the results are recognised as results produced by the Corporations Act rather than the Corporations Law. It thus represents an appropriate source of jurisdiction in the present case."

10 In this case, of course, I am not dealing with a provision such as s.1362CH conferring jurisdiction. The Corporations Law transitional provision in question (s.1323) is one that defines the body of statute law applicable to a particular case or situation. The effect of s.1408(1) of the Corporations Act 2001 (Cth) is, in this case, to cause s.1323 of the Corporations Law to have, in the context of the Corporations Act itself, the force and effect that it had while the Corporations Law was in force generally, such force and effect being the same as if created by the Corporations Act. 11 The combined effect of s.1323 of the Corporations Law of New South Wales and s.1408 of the Corporations Act 2001 (Cth) is therefore that the winding up of Emilco must be carried out in accordance with and is governed by so much of Parts 5.4, 5.5 and 5.6 of the Corporations Law in force before 23 June 1993 as applies to such a winding up. It follows that neither s.563B of the Corporations Law as it existed on and after 23 June 1993 nor s.563B of the Corporations Act 2001 (Cth) applies to or in relation to the winding up of Emilco. That disposes of the second matter on which the liquidator has sought guidance from the court. 12 It is now necessary to consider the extent to which a creditor whose debt bears interest under the terms of the relevant contract may come to be entitled to interest in the winding up. The first aspect of that inquiry concerns the question whether such a creditor may prove for interest. 13 Bearing in mind that the body of statute law relevant to the present case has already been identified as that contained in Parts 5.4, 5.5 and 5.6 of the Corporations Law as in force before 23 June 1993, the starting point in that inquiry is s.553 of the Corporations Law as it existed before the June 1993 amendments: " Proofs of debts 553 (1) In every winding up, subject in the case of insolvent companies to the application in accordance with the provisions of this law of the Bankruptcy Act 1966, all debts payable on a contingency and all claims against the company (present or future, certain or contingent, ascertained or sounding only in damages) are admissible to proof against the company, a just estimate being made so far as possible of the value of such debts or claims as are subject to any contingency or sound only in damages or for some other reason do not bear a certain value. (2) Subject to subsections 206RD, 279 and 556, in the winding up of an insolvent company the same rules shall prevail and be observed with regard to the respective rights of secured and unsecured creditors and debts provable and the valuation of annuities and future and contingent liabilities as are in force for the time being under the Bankruptcy Act 1966, in relation to the estates of bankrupt persons, and all persons who in any such case would be entitled to prove for and receive dividends out of the property of the company may come in under the winding up and make such claims against the company as they respectively are entitled to by virtue of this section." 14 Section 82(3B) of the Bankruptcy Act 1966 (Cth), introduced by the Bankruptcy Amendment Act 1987 (Cth), is as follows: "A debt is not provable in a bankruptcy in so far as the debt consists of interest accruing, in respect of a period commencing on or after the date of the bankruptcy, on a debt that is provable in the bankruptcy." 15 Section 82(3B) is unquestionably a rule "with regard to … debts provable" in force under the Bankruptcy Act (cf Re One.Tel Limited [2002] NSWSC 1081 (15 November 2002)). It will therefore apply, via s.553 of the Corporations Law set out above, in this winding up if Emilco is properly regarded as an "insolvent" company as referred to in that s.553. But even if Emilco is not "insolvent", proofs in relation to interest bearing debts are limited in the same way as is stated in s.82(3B). Whether the company is solvent or insolvent, the right to prove is a right referable to the state of its indebtedness as at the commencement of the winding up, while any question of entitlement to interest accruing after that commencement falls to be dealt with separately once it becomes clear (assuming that it does) that there is a surplus after satisfaction of provable claims as they existed at commencement and are afterwards admitted. The matter was put thus by Giffard LJ in Re Humber Ironworks and Shipbuilding Company (Warrant Finance Company's case) (1869) LR 4 Ch App 643: "For these reasons I am of opinion that dividends ought to be paid on the debts as they stand at the date of the winding-up; for when the estate is insolvent this rule distributes the assets in the fairest way; and where the estate is solvent, it works with equal fairness, because, as soon as it is ascertained that there is a surplus, the creditor whose debt carries interest is remitted to his rights under his contract; and, on the other hand, a creditor who has not stipulated for interest does not get it. I may add another reason, that I do not see with what justice interest can be computed in favour of creditors whose debts carry interest, while creditors whose debts do not carry interest are stayed from recovering judgment, and so obtaining a right to interest." 16 In Re W W Duncan & Co [1905] 1 Ch 307, the crystallisation of claims that occurs at commencement of winding up was the subject of a question posed by Buckley J to himself and then immediately answered: "Now what do you admit to proof for dividend in the winding-up of a company? The amount of the debt at the commencement of the winding-up. That has nothing whatever to do with the payment of interest accruing due after the winding-up if the company turns out to be solvent. There could not until the fact of solvency was ascertained be a right to claim that interest. The sum for which proof can be made is the amount which is entitled to rank for dividend against the assets to such an extent as they will go." 17 Whether a creditor whose debt bears interest and who has proved for the principal plus interest to the commencement of the winding up may receive anything on account of interest accruing due after that commencement depends on whether there is a surplus in the hands of the liquidator after all expenses and the like have been met and funds thereafter remaining have been distributed among creditors rateably according to the amounts for which their proofs have been admitted. If a surplus does remain - that is, there has been payment of 100 cents in the dollar in respect of all admitted claims and the liquidator still has funds in hand - the creditor with a claim for post-commencement interest referable to an obligation incurred by the company before commencement is entitled to assert his or her contractual right against the company. This is the position in bankruptcy (Re Hyman (1930) 3 ABC 61) and also in winding up: Re Fine Industrial Commodities Ltd [1956] Ch 256. 18 The matters on which the liquidator seeks the assistance of the court may be summarised as follows:

1. No creditor of Emilco may assert an entitlement to interest under s.536B.

2. Each creditor of Emilco whose debt carried a right to interest under a contract made before the commencement of the winding up is entitled to prove for principal together with such interest as had accrued due and was unpaid at that commencement.

3. If, after payment of all claims admitted to proof, funds remain in the hands of the liquidator, those funds must be applied in meeting interest on debts proved as mentioned in 2 above to the extent that such interest has accrued due since the commencement of the winding up, such applications being in priority to any distribution among contributories. 19 The funds that came into the liquidator's hands as a result of the decision in Re Emilco Pty Ltd (above) were received by him for the benefit of the company's creditors generally. Payments of interest, whether as part of a debt proved and admitted in accordance with item 2 above or pursuant to item 3 above, are clearly for the benefit of creditors generally. 20 I direct that the liquidator prepare a draft of such directions as he wishes the court to make in the light of this judgment and that the draft be submitted for comment to the other parties who were represented on the hearing of this application. The draft, together with such comments as may be forthcoming from those parties (plus any observations the liquidator chooses to make on the comments) must be filed by delivery to my Associate within 21 days from today. I shall then decide the precise form of the directions to be given. 21 I observe in conclusion that little seems to have happened in this winding up in the year since it was last before the court. There may be good reasons for this of which I am unaware. It is to be hoped that, with the matters concerning interest clarified, it will now be possible for the administration to proceed with reasonable expedition.

Last Modified: 11/28/2002 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.