Silberman v One Tel Ltd

Silberman v One Tel Ltd - [2001] NSWSC 895 - NSWSC 2001 case summary — Zoe

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1 - 1 MASTER: This is an application pursuant to s 500(2) of the Corporations Act for leave to continue proceedings against the defendant which is in liquidation. The defendant had been subject to an Appointment of Administrator on 29 May 2001. Subsequently the creditors have resolved that the company be wound up. The first plaintiff was a director of the defendant at relevant times and the second plaintiff was his service company who had an arrangement with the defendant. The third plaintiff was also a director and the fourth plaintiff his service company. Each of the directors and their contracting companies have already commenced proceedings in the Industrial Relations Commission in New South Wales seeking to set aside certain arrangements entered into with the defendant. In the actions they have also joined Diners Club Pty Ltd and American Express International Inc. 2 The reason for the joinder of these two companies arose from the fact that the matters the subject of the proceedings were the use by the directors of corporate credit cards with those organisations. Each director had a corporate card and as a result had both a joint and several liability along with the defendant, One Tel Ltd, to meet the liabilities on those cards. The cards were used by the directors almost exclusively for the purpose of acquiring services and products for the purposes of the business of the defendant. The amounts that are owing on the cards as at the time of liquidation are very substantial and both American Express and Diners Club are pressing ahead with the proceedings against the directors to recover from them as well as seeking in due course to enforce their rights as an unsecured creditor in the winding up of the defendant. 3 The defendant, One Tel Ltd, from time to time had accepted payment from its customers by the use of the customer's Diners Club or American Express credit cards. Accordingly, in any one month period there would be substantial setoffs as a result of those payments against the amounts incurred on the directors' corporate cards. 4 Each director and their contracting company have brought two proceedings. One Tel Ltd is the defendant in each of the proceedings and each of the credit card companies are defendants in one of the proceedings brought by each of the directors. The applications seek to set aside the various contracts as unfair pursuant to s 106 of the Industrial Relations Act 1966 (New South Wales). In addition compensation is claimed for the amount of the applicant's liability to the credit card company. 5 The application by the plaintiffs is opposed by the defendant notwithstanding that the plaintiffs offer to undertake to the court, first, that the terms of their claim in the Industrial Relations Commission not be amended without the leave of this court and, secondly, that they will not seek to give effect to nor enforce any judgment which may be obtained without the leave of this court. 6 The principal grounds for opposition are that the effect of the proceedings may well be to give the directors a priority over other unsecured creditors and an advantage in relation to setoff of mutual claims. It is also said that the orderly administration of the liquidation of the defendant will be interrupted if the claims proceed in the Industrial Commission. 7 There does not seem to be any doubt that the liquidator would regard the debts to the credit card companies as appropriate debts able to be proved as unsecured debts in the winding up of the company. In the event that recovery is obtained by the credit card company against the directors then to that extent given that the debts relate to obligations of the company, the liquidator would allow the directors to prove in the liquidation for the amounts to the extent that they had paid the credit card companies as a result of the actions brought by the credit card companies against them. The directors then, of course, would only have status as unsecured creditors. 8 The principles upon which a court acts either under s 471B or s 500 of the Corporations Act have been deal with in a number of cases. Two reasons for refusing leave are commonly advanced.

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That a company should not be subject to a multiplicity of actions which would interfere with the orderly liquidation. 9 The relationship between these two principles was usefully dealt with by Austin J in Re Summit Design & Construction Pty Ltd 33 ACSR at 301 at paragraphs 14 to 16 in these terms:- "It appears to me that I ought not to exercise my discretion to grant substantial leave, notwithstanding the very able and forceful arguments which have been put to me on behalf of the applicant. If one reviews the foundational provisions of Chapter 5 of the Corporations Law dealing with external administration, one identifies an important public policy. The public policy is to ensure that once a step has been taken which causes the company to be in external administration, individual creditors are no longer able to recover their debts from the company separately but must abide by a system of rateable distribution out of the assets of the company in accordance with the principles of the Law. Thus s 555 states that except otherwise provided by the law (not, one notes, by other legislation such as the Act), all debts and claims proved in a winding up rank equally and, if the property of the company is insufficient to meet them in full, they should be paid proportionately. Section 556 ordains the order of priority of payment in a winding up. Section 559 states that the debts of a class referred to in any of the paragraphs in s 556(1) rank equally between themselves and are to be paid in full, unless the property of the company is insufficient to meet them, in which case they are to be paid proportionately. One of the events which commences this regime is the appointment of a provisional liquidator under s 472 of the Law. The applicant referred me to cases dealing with the exercise of the Court's discretion under s 471B. He placed particular reliance on some observations by McPherson J in Ogilvie-Grant v East (1983) 7 ACLR 669, 671-2, where his Honour said: 'The precise purpose and function of provisions similar to s 230(3) [then the equivalent of s 471B] have seldom been explained. From time to time the suggestion had been made that the prohibition exists in order to effectuate the statutory policy of ensuring that corporate assets are distributed rateably among all creditors so that none of them will gain an advantage over others: See eg. Re Sydney Formworks Pty Limited ... But in Australia at least it is not often that the institution of proceedings or even the recovery of judgment operates to confer a priority or advantage on a litigating creditor. A more convincing explanation is that, without the relevant restriction, a company in liquidation would be subjected to a multiplicity of actions which would be both expensive and time consuming well as in some cases as unnecessary. This explanation has been accepted in a number of Canadian cases and appears also to have been adopted by Street J in Re A J Benjamin Limited.' That passage was cited with approval by the full Federal Court in Vagramd Pty Limited (in liq) v Fielding & Ors (1993) 10 ACSR 373 and by Rolfe J in Bell Coal Pty Limited v UB Minerals Inc (in liq) [1999] NSWSC 3O1 (7 April 1999). The passage establishes that it is open to the Court in the exercise of its discretion to grant leave under s 471B even in a case where the effect of doing so is to give the applicant for leave an advantage over other unsecured creditors. McPherson J's observations show that it is relevant to take into account such other matters as the need to avoid multiplicity of actions which would be expensive and time consuming, and possibly unnecessary. But that is not to say that the fundamental principle of rateable distribution in an external administration is to be disregarded by the Court when it deals with an application for leave under s 471B. McPherson J's point was only that the fundamental principle is not necessarily relevant to an application under s 471B because the institution of proceedings is not itself an event which in the normal case confers priority or advantage on the litigating creditor. But in the present case, the granting of leave will set in motion a chain of events which could and probably would give the applicant an advantage over other creditors, though the quantification of that advantage is unclear in view of the terms of the contract which I have mentioned. That being so, it is relevant in this case to take into account the fundamental principle with respect to rateable distribution in deciding whether to grant leave." 10 In addition it is necessary that there must be a serious question to be tried in the proposed proceedings and the court must consider whether the proceedings would serve any useful purpose. See Oceanic Life Ltd v Insurance and Retirement Services Pty Ltd (1993) 11 ACSR 516 at 520 (12 ACLC 1157 at 1159). There was no debate about these propositions before me. It would seem that the proposed proceedings do raise a serious question to be tried. 11 I turn to the way in which the defendant submits that the plaintiffs may obtain some priority in the winding up if they are successful in their proceedings before the Commission. Under s 553(1) of the Act "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 arise to which occurred before the relevant date, are admissible to proof against the company." 12 The relevant date in this case is the day on which the company's administration began which was 29 May 2001. The results which flow from being an admissible debt is set out in sections 555 and 556. Apart from priority payments unsecured debts must be paid proportionately. 13 For the debts to be admissible for proof they must be debts or claims the circumstances giving rise to which occurred before the relevant date. On this aspect the defendant submitted authority clearly showed that where an order of the Industrial Commission is made varying a contract that contract takes effect from the date of the court's order. In this case it would be well after the relevant date and, accordingly, the debt would not be able to be proved. The effect of non-proof was said to be for there to be recovery in priority to unsecured creditors. In Madden v Fisher (2001) NSWSC 535 Windeyer J dealt with a claim that orders that might be made by the Industrial Relations Commission pursuant to s 106 of the Industrial Relations Act 1996 gave rise to a priority payment over the rights of a chargee under a floating charge. He was concerned with a situation were a receiver had been appointed and he was asked to determine whether any payments for retrenchment payments had priority under s 433(3)(c) of the Act. For that section to apply the debt had to be a provable debt and the question arose as to whether the debt would be provable in circumstances where the Commission made its order after the relevant date in this case the date of appointment of the receiver. His Honour referred to the statutory structure and to the decisions which indicated that the Commission under s 106 of the Act retained jurisdiction even though the contract of employment had come to an end. In paragraph 12 of his judgment His Honour found: "An order of the Commission operates from its date, but it may operate so as to alter entitlements in respect of past events. Thus an order on 1 July 2001 varying a terminated contract of employment declared unfair might bring about entitlement to payments under the contract if so varied. Those amounts would be due on 1 July 2001 as a result of the order and not on the date of termination." 14 His Honour then went on to consider a South Australian case which he distinguished. His Honour's conclusion on this aspect was part of the ratio of the case and it is binding on me. In the case before His Honour that conclusion was sufficient for him to be able to determine the matter before him because on the facts it was clear that the date of termination was the relevant date for redundancy payments if they were to have priority. 15 In the present case it is necessary to look at the facts and circumstances which might emerge on the hearing before the Commission to see whether they are circumstances which occurred before the relevant date. I have already indicated that the proceedings in the Commission claim compensation which was "in an amount not less than the amount required to indemnify the first applicant against the claims or demands brought against him by the second respondent…" This is a claim for compensation payable by the present defendant in an amount equal to the amount claimed by the credit card company against the director. 16 The unfairness which is the basis upon which the court would order such compensation is set out in paragraphs 7 to 14 of the claims before the Commission. There are a number of matters set out which obviously relate to events prior to the appointment of the administrator, such as the fact that the defendant knew the amount was greater than any of the individual directors could pay and that insurance cover for them against such liability was available but not put in place. Circumstances also include the factual matters which have happened since liquidation, namely, that there are insufficient funds to meet the debts and that over time after liquidation the defendant will be able to offset mutual debts due between it and the credit card companies. There are thus a number of factors which occurred after the relevant date not the least being the order of the Commission determining the contract to be unfair and the post liquidation events to which I have referred. However, there is also perhaps another way of looking at it which is exemplified by the Bank of Queensland Ltd v C.D. Morris & Sons Pty Ltd (In liquidation) (1980) 146 CLR 165. That case concerned a particular post liquidation dealing and whether it was a cost or expense of the winding up. There the court held that the honouring by the acceptor bank of the accommodation bills drawn by the liquidator of a company could not be treated as a cost or expense of the winding up because that transaction was only a continuation of an arrangement (a bill acceptance facility) entered into before the company went into liquidation. It therefore characterised it by reference to its origins before the commencement of winding up. As a result the bank was only an unsecured creditor. 17 In the present case there has to be an order of the Commission varying or setting aside the contract and then an order for compensation or indemnity. Such an order operates to make the amount due on the date of the order. There is no continuance of an arrangement which existed before the relevant date but a later substitution of a varied arrangement. The circumstances giving rise to the debt are really the Commission's determination that the arrangement was unfair. In these circumstances I do not think that an order for payment of compensation is a provable debt. 18 The second proposition is that in the event that the order of the Commission is not a provable debt in the liquidation that it will have priority over the provable debts of the unsecured creditors. The precise reason why this was said to flow was not expanded on in submissions other than a reference to costs associated with a late claim having priority. When considering this question it is important to remember that some of the principles behind the legislation. Although there are many similarities with bankruptcy the object of a winding up is different from bankruptcy. The object in winding up is to get in the company's assets, pay expenses and distribute the proceeds in accordance with the Act amongst the creditors. Thereafter the company is dissolved. In contrast bankruptcy concentrates on allowing a debtor a fresh start once he is discharged. Hence there are provisions for after acquired property and second bankruptcy. Another important concept to keep in mind in this consideration is that the company's property does not vest in the liquidator in a similar way to the statutory vesting of a bankrupt's property in the trustee. All the liquidator does is take over from the Board of Directors and his powers are derived from the Corporations Law. 19 When dealing with voluntary winding up s 501 provides that subject to the provisions of the Act as to preferential payments the property of the company must be applied in a certain way, namely, payment of costs, etc. It is this provision which brings into play sections 555 and 556. Of importance is s 556 which gives priority to various classes of expenses. When considering whether any order that the Commission might make against the company may be effective one has to see whether such a liability might fall within the various priority payments. If it does not fall within one of those classes of priority payments there is no provision for it to be payable by the company because it is only debts that are provable in the winding up which give an entitlement to share in the assets of the company under s 555. It is important to differentiate when considering the matter between the actual order of the Commission establishing the liability and the costs associated with that litigation. The relevant paragraphs of 556(1) which might fall for consideration are the following. "(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; ……

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(dd) next, any other expenses (except deferred expenses) properly incurred by a relevant authority;" 20 A "relevant authority" for the purposes of these sections is the liquidator in the present case. McPherson "The Law of Company Liquidations" Second Edition said at page 322 said of the expression "expenses of the liquidator "which appeared in earlier acts. "The expression 'expenses of the liquidation' is not however a term of art but one which has been said to cover any expenses which the liquidator might be compelled to pay in respect of his acts in the course of a proper liquidation of the company's assets. It thus includes, in addition to the items already mentioned, the costs of recovery, preservation, and realisation of the assets, such as costs awarded against the liquidator in proceedings brought, continued, or defended by him, whether in compulsory winding up, irrespective of the form in which the order is made - whether it be an order for payment of costs simpliciter, or for costs out of the assets, or for costs to be paid by the liquidator personally with liberty to retain the amount out of assets coming into his hands. And it also embraces all manner of debts and liabilities incurred in the winding up in carrying on the business of the company, such as salaries and wages of employees, rent and rates payable on premises occupied by the company, and even liability to taxation on profits earned during this period. On occasions it may be necessary to apportion liabilities between liquidation and pre-liquidation periods for the purpose of determining what costs and expenses of winding up entitled to priority." 21 It would seem to me that defending a claim in the Industrial Relations Commission is one which would not ordinarily be described as carrying on the business of the company. The liquidator is not now carrying on the company's business but is getting it its assets. An order for payment of compensation can hardly be seen to be an expense properly incurred in conserving the property of the company. It is also hard to see how an order for payment by the Commission can be said to be an expense properly incurred by a liquidator (within s 556(1)(dd)) if, as will be the case, it is a liability imposed on the company by a court order and does not result from actions of the liquidator. It would seem to me that the second proposition is unlikely to be correct in so far as it relates to an order for payment. The costs incurred in defending the claim might be within s 556(1)(a). 22 There is no doubt that if the actual order for payment of compensation was a cost and expense in the winding up which fell within s 556 and that the amount was not a provable debt, then there would be an effective creating of a priority over unsecured creditors. If the order is not within s 556 then there would be little purpose in allowing the proceedings to continue because any order for compensation, assuming it is not a provable debt, can not be recovered from the company. In these circumstances leave should not be given. 23 It is necessary to look at the other arguments and particularly those concerning setoff. Under s 553C of the Act there can be set-off mutual credits or mutual debts. In Ex Parte Parker 25 ACSR 560 Mansfield J held that the relevant date for determining whether set-offs should occur was same date as the date fixed for determining what debts are provable in a winding up. At the present time one credit card company, Diners Club International, seems to be claiming set-offs in respect of its claim against one of the directors based upon an account of dealings as at 4 July 2001 which is a different date from that which is appropriate in this liquidation. There is thus at least concern on the liquidator's part that the liquidation is the proper forum in which to debate what was the correct setoff to be allowed at 29 May 2001. This may be a matter of some substance as there was substantial incurring of debts immediately prior to the appointment of the administrator. At this stage the liquidator has not carried out his investigation as to whether there are any possible preference payments to the credit card companies which would affect the mutual setoffs. 24 If the matter were to proceed in the Commission by the time of the hearing there would be further amounts paid by credit card by the customers of the defendant. Indeed, this is one of the circumstances relied upon in the application. 25 Section 106 of the Industrial Relations Act 1996 is in these terms:- " Power of the Commission to declare contracts void or varied (1) The Commission may make an order declaring wholly or partly void, or varying, any contract whereby a person performs work in any industry if the Commission finds that the contract is an unfair contract. (2) The Commission may find that it was an unfair contract at the time it was entered into or that it subsequently became an unfair contract because of any conduct of the parties, any variation of the contract or any other reason. (3) A contract may be declared wholly or partly void, or varied, either from the commencement of the contract or from some other time. (4) In considering whether a contract is unfair because it is against the public interest, the matters to which the Commission is to have regard must include the effect that the contract, or a series of such contracts, has had, or may have, on any system of apprenticeship and other methods of providing a sufficient and trained labour force. (5) In making an order under this section, the Commission may make such order as to the payment of money in connection with any contract declared wholly or partly void, or varied, as the Commission considers just in the circumstances of the case." 26 The Commission, in making any order, is given a very wide discretion. Matters such as the usual date for set-off in a liquidation may not, in the exercise of that discretion, seem as important as other personal circumstances of the directors. Thus there may be a decision, arrived at properly having regard to many discretionary factors, which avoids the provisions of s 553C. This is a further reason for declining to give leave. 27 Another area which the liquidator wishes to investigate is the effect of the accumulation of Frequent Flier Reward points for the benefit of the cardholders. The liquidator has no view at all as to the proprietary of such matters and whether any amount might be payable in respect of these matters. However, he has not had the opportunity to investigate the circumstances. 28 In relation to the second set of principles, namely, whether the liquidation might be exposed to a multitude of actions which would interfere with the conduct of the liquidation the evidence makes it clear that there are one or two other directors who might be in the same position as the present directors. Given the small number I would not consider that there would be an adverse effect on the liquidation. 29 There were statements in submissions by the defendant that they would waive any priority. The fact of the matter is that it is irrelevant for them to waive their rights. It is the correct construction of the legislation which must determine the matter. 30 I dismiss the originating process and order the plaintiffs to pay the defendant's costs.

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Cases Cited (2)