Silbermann v One.Tel Ltd

COUNSEL : J L Trew QC with I D Faulkner for the plaintiffs H K Insall SC for the defendant SOLICITORS : Piper Alderman Lawyers for the plaintiffs Freehills Lawyers for the defendant CATCHWORDS : Corporations - leave to proceed against company in liquidation - appeal from Master - proceedings to vary contracts as unfair before Industrial Relations Commission - indemnity sought for directors' liability to credit card companies for company expenses - not provable in the winding up - meaning of future "claims" - set-offs of credit card company obligations to company in liquidation. Corporations Act 2001 (Cth) Supreme Court Act 1970 (NSW) LEGISLATION CITED : Industrial Relations Act 1996 (NSW) Bankruptcy Act 1966 (Cth) Corporate Law Reform Act 1992 (Cth) Do Carmo v Ford Excavations Pty Ltd [1981] 1 NSWLR 409 Morrison v Judd (NSWCA), 10 October 1995,Unreported House v The King (1936) 55 CLR 499 at 505 Madden v Fisher [2001] NSWSC 535 CASES CITED : Fisher v Madden [2002 NSWCA 28 Something Better Pty Ltd v Pyramid Building Society (in liquidation) [1996] 2 VR 352 at 353-355, 367-368, 370-371 Pyramid Building Society (in liquidation) v Terry (1996-1997) 189 CLR at 189, 193-194 Majik Markets Pty Ltd v Brake and Service Centre Drummoyne Pty Ltd (1992) 28 NSWLR 443 at 461 Visalli v Southwell (1988) 12 NSWLR 502 DECISION : See par 22.

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

4258/01 MARK SILBERMANN & ORS v ONE.TEL LTD (IN LIQUIDATION) 1 The appellants sought leave nunc pro tunc under the Corporations Act 2001 (Cth), s 500(2) to proceed against the respondent in the Industrial Relations Commission of New South Wales. Master Macready refused leave. An appeal lies to the Court constituted by a judge under the Supreme Court Rules, Pt 60 r 10. The Supreme Court Act 1970, s 75A(5) provides that the appeal is by way of rehearing. It has been held, however, that where the Master's decision involves an exercise of discretion, the same principles apply to the appeal as apply to an appeal from a single judge to the Court of Appeal (Do Carmo v Ford Excavations Pty Ltd [1981] 1 NSWLR 409, Morrison v Judd (NSWCA), 10 October 1995, unreported). The appellants must show that the Master acted on a wrong principle such as failing to take into account a material consideration (House v The King (1936) 55 CLR 499 at 505). 2 The first appellant is a director of the respondent. He provided services to the respondent through his service company, the second appellant. Likewise, the third appellant is a director of the respondent who provided services to the respondent through his service company, the fourth appellant. The first and third appellants by arrangement with the respondent held credit cards with American Express International Inc ("Amex") and with Diners Club Pty Limited ("Diners") which they used exclusively to discharge expenses incurred for or on behalf of the respondent. The first and third appellants owe large sums to Amex and Diners. Amex and Diners hold significant sums received from customers of the respondent. Diners, at least, concedes a set-off against the debts owed to it by the first and third appellants. 3 The Industrial Relations Act 1996, s 105 contains a definition of the term "contract" to mean any contract or arrangement, or any related condition or collateral arrangement. Section 106 is in the following terms: "(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 the 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." 4 The proceedings before the Industrial Relations Commission were commenced on 17 August 2001. The first and second appellants on the one hand and the third and fourth appellants on the other hand brought two sets of proceedings before the Commission. The first set was against the respondent and Amex. The second was against the respondent and Diners. Each sought a declaration that the contract or arrangement between the director and his service company and the respondent was unfair and an order declaring it void insofar as it failed to provide complete indemnity against the credit card liability. Each also sought a declaration that the contract or arrangement or collateral arrangement between the director, the respondent and the credit card company was unfair and an order declaring it void insofar as it imposed a personal liability on the director. Each also claimed compensation against the respondent in an amount not less than the amount required to indemnify the director against the credit card company claims. 5 On 29 May 2001 the respondent was placed in voluntary administration. On 24 July 2001 the creditors resolved that the company be wound up. In such circumstances the respondent is deemed to have passed a special resolution that the company be wound up voluntarily in terms of the Corporations Act 2001 (Cth), s 446A(2)(a). Section 500(2) provides that after the passing of the special resolution for voluntary winding up, no action or other civil proceeding is to be proceeded with or commenced against the company except by leave of the Court and subject to such terms as the Court imposes. 6 Master Macready took the view that if the Industrial Relations Commission made an order for compensation or indemnity consequent upon its varying or setting aside the contracts, those orders would speak from the date they were made so that no debt provable in the liquidation would arise (Reasons par 17). The Master adverted to the circumstance that Diners seemed to be claiming set-offs in respect of its claim against one of the directors as at a date different from that appropriate to the liquidation. On this basis the Master took into account concern on the liquidator's part that the liquidation was the proper forum in which to debate the correct set-off to be allowed (Reasons par 23). The Corporations Act 2001 (Cth), s 553C(1) provides that where there have been mutual credits, mutual debts or other mutual dealings between an insolvent company that is being wound up and a person who wants to prove in the liquidation, an account is to be taken of what is due from one party to the other in respect of the mutual dealings, the sum due from one party being set off against any sum due from the other party and only the balance of the account is admissible to proof against the company. Master Macready also took into account the prospect that the Commission in the exercise of its discretion might make a decision inconsistent with the above provision (Reasons par 26). The appellants challenge each of these matters. 7 For his first proposition, that an order of the Industrial Relations Commission would not give rise to a debt provable in the liquidation, Master Macready relied upon a decision of Windeyer J in Madden v Fisher [2001] NSWSC 535. An appeal from that decision was heard on the same day as this matter came before me and I was invited to reserve my decision until the Court of Appeal had delivered its decision. I acceded to this proposal and re-listed the matter for further argument when judgment in Fisher v Madden [2002] NSWCA 28 was handed down. It that case, the appellant was employed by a company in receivership. The respondent was the receiver and manager. He terminated the appellant's employment because she was redundant. She commenced proceedings before the Industrial Relations Commission claiming her contract of employment was unfair and seeking orders varying it either ab initio or from some other time so as to include a provision for 12 months' notice of termination and severance pay. 8 The Corporations Act 2001 (Cth), s 556(1)(h) provides that in a winding up retrenchment payments payable to employees of the company must be paid in priority to unsecured debts and claims. The receiver and manager sought the direction of the Court under the Corporations Act 2001 (Cth), s 424 as to whether in terms of s 433(3)(c) he was obliged to give priority to any sum arising from an order of the Industrial Relations Commission. Windeyer J and the Court of Appeal answered this question in the negative. Sheller JA, with whom Beazley JA agreed, said at par 41 that no obligation existed at the date of appointment of the receiver and manager. An obligation would only come into existence if and when the Industrial Relations Commission varied the contract of employment to include a provision for severance pay, even though the contract might be varied ab initio. His honour continued: "Thus, the question distilled is whether, within the meaning of s 556(1)(h), retrenchment payments payable to employees of the company include payments which the company might become liable to pay as a result of a subsequent variation of the contract of employment giving rise to an obligation to pay. I think not. The language is different from that used in paragraph (f) dealing with amounts due in respect of injury compensation being compensation a liability for which arose before the relevant date. This may extend to compensation awards for workplace injuries which occurred before the relevant date even though the awards were not made until after the relevant date. The language used in (h) is the language of obligation. True, the obligation is not expressly said to be one existing at the relevant date. But if the obligation is not one existing at the relevant date it is an obligation which may come into existence at any time in the future. In accordance with the accepted practice of computing the amount of a debt or claim at the date of the receiver's appointment, this seems an unlikely legislative intention." 9 It was common ground before me that Fisher was not determinative of the issue before Master Macready and me as to whether a prospective order of the Industrial Relations Commission constitutes a debt provable in the winding up in terms of the Corporations Act 2001 (Cth), s 553(1) which 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." 10 Counsel for the appellants submitted that an historical analysis of the section reveals a legislative intention to widen the categories of what are admissible to proof in a winding up such that, should the appellants be successful in the Industrial Relations Commission, its orders would, as of the date on which the winding up is taken to have begun, be characterised as future claims against the company. 11 It is true that the history of what debts and claims may be proved in a liquidation or bankruptcy demonstrates a gradual liberalisation (Something Better Pty Ltd v Pyramid Building Society (in liquidation) [1996] 2 VR 352 at 353-355, 367-368, 370-371; Pyramid Building Society (in liquidation) v Terry (1996-1997) 189 CLR 176 at 189, 193-194). My attention was drawn to The Law Reform Commission Report No 45 entitled General Insolvency Inquiry in which it was said that the categories of claims admissible to proof should be as wide as possible so that the financial affairs of the insolvent are dealt with comprehensively (par 777). This necessitated a review of the admissibility of claims for unliquidated damages in tort and fines (par 779). In relation to tort claims, the Commission recommended that claims from liquidated damages arising from tort should be admissible (par 786). With respect to fines, the Commission recommended that they be admissible as claims in bankruptcy but not automatically released on discharge (par 792). The suggested draft legislation contained the following (Appendix N, cl C1): "In the administration of a company that is been wound up in insolvency, a debt or liability, present or future, certain or contingent, being an ascertained debt or liability or a liability sounding only in damages, may be admitted as a claim against the company."

In my view the references relied upon by the appellants relate to a recommended widening of the categories of claim to include only tort claims and fines. 12 Section 553(1) as it stood prior to amendment in 1992 was as follows: "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." 13 The Bankruptcy Act 1966 (Cth), s 82(2) provides that demands in the nature of unliquidated damages arising otherwise than by reason of a contract, promise or breach of trust are not provable in bankruptcy. Section 82(3) provides, subject to an exception, that penalties or fines imposed by a Court in respect of an offence against a law are not provable in bankruptcy. The incorporation of these provisions by reference in s 553(1) meant that tort claims and fines were not provable in a winding up. The present form of s 553(1) was introduced by the Corporate Law Reform Act 1992 (Cth), s 92. As is explained in the explanatory memorandum which accompanied the introduction of this legislation to the parliament (pars 848-859) the removal of the incorporation of the Bankruptcy Act 1966 (Cth) and the non-inclusion of the above limitations on tort claims and fines in the Corporations Law meant that these claims became provable in a winding up. 14 I reject the submission that the 1992 amendments effected a widening of the term "claims." In this respect, the language is the same. The difference is that both debts and claims are now defined in terms that the circumstances giving rise to them occurred before the date on which the winding up is taken to have begun. It may be thought that those words add little to the concept of debts and claims in the earlier legislation. After all, if a debt or claim depends upon an obligation on the part of a company on the date upon which the winding up is taken to have begun, it must have arisen from circumstances which occurred before that date. 15 Counsel for the respondent submitted that while not determinative of the matter, Fisher supported the proposition that an application under the Industrial Relations Act 1996, s 106 is not a future claim for the purposes of the Corporation Act 2001 (Cth), s 553(1). 16 In Majik Markets Pty Ltd v Brake and Service Centre Drummoyne Pty Ltd (1992) 28 NSWLR 443 at 461 Mahoney JA said of the predecessor of s 106 that by its own operation it did not create any rights or obligations and that its function was to grant jurisdiction to the Industrial Commission. His Honour said: "It is only if and in so far as that power is exercised that rights or obligations arise." (See, also, per Handley JA at 467). In Fisher at par 44 Sheller JA said: "In the present case at the relevant date Dataflow was under no existing obligation to pay a sum of money by way of a retrenchment payment to Ms Fisher immediately or on a future event. Ms Fisher had only a right to take proceedings in the Industrial Relations Commission to vary the contract to that end."

Having quoted the extracts from Majik Markets referred to above, his Honour concluded at par 46: "However Ms Fisher's right under s 106 be categorised, her right to invoke the jurisdiction of the Industrial Relations Commission did not until such time as an order was made create any obligation on Dataflow to make a retrenchment payment to her. Moreover, even if the Industrial Relations Commission declared the contract unfair, varied it ab initio and ordered Dataflow to make a retrenchment payment to Ms Fisher, it remains true that at the relevant date of Mr Madden's appointment no amount for retrenchment payment had become payable before, on or after the relevant date."

The reasoning in these paragraphs applies equally, in my view, to the category of future claims for the purposes of s 553(1). If there was no obligation on the respondent on the date on which the winding up is taken to have begun, to indemnify the directors against their personal liability to the credit card companies or to pay to the directors amounts sufficient to enable them to discharge their liabilities to the credit card companies and such obligations can only arise if and when the Industrial Relations Commission makes orders, there was, in my view, no future claim against the company. Sheller JA said at par 41 the accepted practice is to compute the amount of a debt or claim at the relevant date. In these circumstances it seemed unlikely to his Honour that the legislative intention was no longer to confine an obligation to one in existence at the relevant date but to extend the category of future claim to any obligation which comes into existence at any time in the future. In my view, such a construction of s 553(1) would place an intolerable burden on a liquidator whose responsibility it is to determine which future claims are to be admitted to proof and in what amounts. 17 In a separate judgment in Fisher, Meagher JA said at par 7 that s 553(1) was not of central relevance in that case. This was because it deals with a winding up whereas a receivership existed in that case. Having referred to the passage referred to above from the judgment of Mahoney JA in Majik Markets, his Honour went on at par 13 to say: "… even at today's date, one cannot accurately categorise Miss Fisher's rights (if any) as a "contingent" debt or claim. She has the bare right to make a claim, nobody knowing whether it will succeed or not, or if so in what amount, or subject to what terms or conditions. And if that be her position today, it was so much the less substantial before the appointment of the receiver." 18 If an application to the Industrial Relations Commission for the payment of compensation does not give rise to a claim admissible to proof against the respondent, an application to the Commission for a variation of the contract of service to include an indemnity against the director's liability to the credit card companies is even more remote and does not, in my view, constitute a future claim admissible to proof against the respondents. I am fortified in this view by the above pursuasive observations of Meagher and Sheller JJA in Fisher. In my view Master Macready did not err in principle in exercising his discretion against granting leave to the appellants to proceed against the respondent in terms of pars 1A and 2 of the amended notice of appeal. 19 So far as the other complaints about the Master's reasoning are concerned, I regard them as incidental to the main issue. Standing alone, the concerns might have been overcome by appropriate conditions imposed upon a grant of leave. But as the primary arguments have failed, I do not regard the way in which the Master approached the liquidator's concern that set-offs might be allowed by the Industrial Relations Commission on a basis inconsistent with the legislation as vitiating his conclusion. 20 There is the additional point that a successful order for variation of the contracts of service will achieve nothing. The appellants' case is that the credit cards were only used for the benefit of the respondent. On that basis, the directors may prove now. They do not need a variation of the contracts of service to include an indemnity to achieve this result. The inclusion of an indemnity in the contracts of service will not advance the position of the directors. 21 As counsel for the respondent submitted, the main purpose of the proceedings in the Industrial Relations Commission appears to be the avoidance of personal liability by the directors to the credit card companies. I was concerned that the respondent was a necessary party to those proceedings. That may not be the case (Visalli v Southwell (1988) 12 NSWLR 502), although the absence of the respondent would probably preclude findings being made against it. Since for the reasons set out above, I am of the view that the proceedings in the Industrial Relations Commission will not advance the appellants' case against the respondent, its presence in the Commission to enable the proceedings against the credit card companies to be prosecuted is, in my view, an insufficient reason to require the liquidator to expend time and money, better directed towards the creditors, on the proceedings. 22 I dismiss the appeal I will hear the parties on costs.

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