State Government Insurance Office v Rees [2002] FCA 231 | Case summary

REASONS FOR JUDGMENT 1 The plaintiffs, who were appointed administrators of Pasminco Limited and twenty‑one other companies in the Pasminco group set out in the Schedule to these reasons (collectively "the Pasminco group") in accordance with the provisions of Pt 5.3A of the Corporations Act 2001 (Cth) ("the Act"), have applied to the Court for directions pursuant to s 447D of the Act in relation to the following question or issue: "Whether or not legal costs and disbursements incurred by a past or present employee of any of Pasminco Cockle Creek Smelter Pty Ltd, Pasminco Australia Ltd and Pasminco Port Pirie Smelter Pty Ltd (each an 'Employer') and/or their legal representatives in pursuing injury compensation claims from the Employer and for which the Employer is liable or has agreed to accept liability, enjoy priority under section 556(1) of the Act." 2 The issue or question arises in the following circumstances. The Pasminco group carries on a number of lead and zinc mining and smelting operations. There are presently approximately 442 claims against three of the Pasminco companies by employees or former employees for injury compensation of which approximately four hundred have been made in New South Wales, thirty-eight in Tasmania and four in South Australia. Approximately one hundred and forty-five legal proceedings have been commenced in respect of these claims by employees against Pasminco Cockle Creek Smelter Pty Ltd, Pasmino Australia Limited and Pasminco Port Pirie Smelter Pty Ltd, all administrators appointed ("the Pasminco companies"). 3 The Pasminco companies are self‑insurers in respect of a number of these claims in the following circumstances. In New South Wales, until about 9 November 2001, Pasminco Cockle Creek Smelter Pty Ltd and Pasminco Australia Limited held self‑insurer's licences under Pt 6 of the Workplace Injury Management and Workers Compensation Act 1998 (NSW) granted by the Workcover Authority of New South Wales. These licences covered those companies' liabilities under the Workers Compensation Act 1926 (NSW) and the Workers Compensation Act 1987 (NSW). The licences were suspended on or about 9 November 2001. 4 From the date of their appointment, the administrators obtained an insurance cover note from Royal Sun Alliance Group in respect of workers' compensation claims in New South Wales arising from the date of their appointment, which insurance is still in place. 5 In Tasmania, Pasminco Australia Limited holds a self‑insurance permit under Pt IX Div 2 of the Workers Rehabilitation and Compensation Act 1988 (Tas) granted by the Workcover Tasmania Board in respect of the Rosebery Mine and the Hobart Smelter. In South Australia, Pasminco Port Pirie Smelter Pty Ltd is registered as an exempt employer under s 60 of the Workers Rehabilitation and Compensation Act 1986 (SA) by the Workcover Corporation of South Australia. 6 The claims which are presently being litigated are claims which seek not only compensation under statute and damages at common law but also the payment of legal costs and disbursements in relation to the claims which have been made. The total legal costs claimed against the Pasminco companies are presently estimated to be of the order of $1.5m. 7 The claims against the Pasminco companies by employees or former employees, which relate to injuries which occurred before the commencement of the administration, fall into three categories: (a) orders against the Pasminco companies for legal costs, or settlements under which the Pasminco companies have agreed to pay legal costs, where the costs liability arose before the commencement of the administration. Beneficiaries of these orders for costs and of these agreements to pay costs are unsecured creditors of the respective Pasminco companies in respect of debts incurred prior to the commencement of the administration; (b) orders against the Pasminco companies for legal costs, or settlements under which the Pasminco companies have agreed to pay legal costs, for litigated claims commenced before the commencement of the administration but determined or settled after the commencement of the administration. These costs, therefore, relate to work performed by employees' lawyers both before and after the commencement of the administration. Apparently the administrators have given their consent, pursuant to s 440D of the Act, to the continuation of these legal proceedings; (c) orders against the Pasminco companies for legal costs, or settlements under which the Pasminco companies have agreed to pay legal costs, for litigated claims commenced after the commencement of the administration and therefore determined or settled after the commencement of the administration. This situation arises where the administrators have given their consent, pursuant to s 440D of the Act, to the commencement and continuation of the proceedings. There are also legal costs which have been claimed against the Pasminco companies and the former owners of the Broken Hill Mine in respect of compensation claims in circumstances where there is a dispute as to whether the claims are payable by the Pasminco companies or the former owners of the mine. 8 The liabilities of the Pasminco companies are substantially in excess of their assets and there will be insufficient funds to pay all creditors of the Pasminco companies. Issues have arisen between the administrators and solicitors who represent the majority of the employees making claims against the Pasminco companies as to the priority for payment to be accorded to costs yet to be paid by the Pasminco companies in respect of the claims which have been made. The question which arises, in short, is whether the payment of such costs is to be accorded priority under s 556(1) of the Act. Solicitors for claimants have put to the administrators that the payment of their costs of the claims are payments which the administrators should make. The administrators are concerned that if they pay these claims for costs on the basis that they do attract priority under s 556(1) of the Act, the interests of unsecured creditors will be prejudiced if, as a matter of law, those payments are not entitled to such priority. 9 Counsel for three unions, who have members employed in the industries in which the Pasminco companies carry on operations, appeared at the hearing and supported the submission that the legal costs and expenses incurred in pursuing the claims were amounts due in respect of injury compensation pursuant to s 556(1)(f) of the Act. 10 The administrators have approached the matter on the basis that they should consider the claims made, and to be made, for legal costs by reference to the regime of priority of payments provided by s 556(1) of the Act in any liquidation of the Pasminco companies. They expect that this will be the applicable regime under any deed of company arrangement executed by any of the Pasminco companies. In the event of the liquidation of any of those companies, it will be the applicable regime. 11 This is an appropriate basis upon which the administrators should approach the issue of payments for legal costs. Section 444A(5) of the Act, taken in conjunction with reg 5.3A.06 and cl 4 of Sch 8A of the Corporations Regulations, provides that where, at a meeting convened under s 439A of the Act, the company's creditors resolve that the company execute a deed of company arrangement, the administrator must prepare an instrument setting out the terms of the deed, which is taken to include the provisions set out in Sch 8A of the Corporations Regulations, except so far as it provides otherwise. It is open to the creditors to resolve otherwise by virtue of s 439C(a) of the Act. Clause 4 of Sch 8A provides: "The administrator must apply the property of the company coming under his or her control under this deed in the order of priority specified in section 556 of the Act." 12 Section 556(1) of the Act relevantly provides: "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; … (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; … (dd) next, any other expenses (except deferred expenses) properly incurred by a relevant authority; … (f) next, amounts due in respect of injury compensation, being compensation the liability for which arose before the relevant date. …" A number of the terms referred to in s 556(1) are defined in other sections of the Act. Section 9 defines "injury compensation" as meaning "compensation payable under any law relating to workers' compensation". Section 556(2) defines: (a) "deferred expenses" as meaning the remuneration or fees for services payable to the relevant authority and expenses incurred by the relevant authority in respect of the supply of services to the relevant authority by his or her firm; (b) "relevant authority" as including an administrator and a liquidator. For the purposes of s 556(1), where a company has been under administration pursuant to Pt 5.3A of the Act before the winding up commenced, the "relevant date" is the date upon which the administration began: see ss 9, 513A(b), 513B(b) and 513C(b) of the Act. 13 Section 563(1) of the Act relevantly provides: "Notwithstanding anything in section 556, paragraph 556(1)(f) does not apply in relation to the winding up of a company in any case where: (a) the company is being wound up voluntarily merely for the purpose of reconstruction or of amalgamation with another company and the right to the injury compensation has, on the reconstruction or amalgamation, been preserved to the person entitled to it; or (b) the company has entered into a contract with an insurer in respect of any liability for injury compensation." In the present circumstances, s 563(1)(b) does not apply because the relevant Pasminco companies are self-insurers in respect of the claims which have been made and have not entered into any contract with an insurer which covers or relates to the claims which have been made. 14 The administrators identified two bases, or a combination of two bases, upon which it could be contended that liability for legal costs and expenses incurred by the Pasminco companies before the administration commenced, or incurred by the administrators after the administration commenced in connection with claims against the Pasminco companies for injury compensation, attract a priority for payment under s 556(1) of the Act, namely: (a) the legal costs and expenses are "amounts due in respect of injury compensation" within the meaning of s 556(1)(f); (b) the legal costs and expenses are expenses properly incurred by the administrators in preserving the companies' businesses (within s 556(1)(a) of the Act), or are "other expenses" incurred by the administrators (within s 556(1)(dd) of the Act). 15 I turn first to the basis that the legal costs and expenses charged by the claimant employees' solicitors, and thereby incurred by the claimant employees, and either ordered by a court or a tribunal to be paid by, or agreed to be paid by, the relevant Pasminco companies are "amounts due in respect of injury compensation". The proposition derived from this basis is that the costs are integrally tied up, and associated, with the compensation paid or due to be paid. 16 The content and scope of the expression "amounts due in respect of injury compensation" was considered by the High Court in State Government Insurance Office v Rees (1979) 144 CLR 549. There is a critical distinction between the facts in that case and the facts presently under consideration, namely the beneficiary of the payment in respect of which priority was claimed. A company went into liquidation owing substantial sums to the State Government Insurance Office (Queensland) ("SGIO") in respect of payments made by the SGIO out of the Workers' Compensation Fund under the Workers' Compensation Act 1916 (Q) to employees of the company in circumstances where the company had failed to maintain relevant insurance cover in respect of those employees. The SGIO lodged a proof of debt with the liquidators in respect of amounts paid to employees. The liquidators sought thedeterminationoftheCourtastothepriority,if any,forpaymentoftheamountclaimed. The trial judge declared that the amount was entitled to priority pursuant to s 292(1)(c) of the Companies Act 1961 (Q), which accorded priority to: "all amounts not exceeding in any particular case one thousand pounds due in respect of workers' compensation under any law relating to workers' compensation accrued before the relevant date." The Full Court set aside the order of the trial judge and the SGIO appealed to the High Court which unanimously dismissed the appeal. 17 The company had failed to pay the premiums due under its policy of accident insurance for a period of almost twenty months and had therefore failed to comply with its obligation to maintain the relevant insurance policy under the Workers' Compensation Act. It was liable to the SGIO for the amounts which the SGIO had paid out of the Workers' Compensation Fund to the company's employees or their dependants for workers' compensation during that period. The amount of $269,443.23, in respect of which the proof of debt was lodged, represented the aggregate of those amounts of less than $2,000 paid to the company's employees by the SGIO during the period in respect of which the premiums due were not paid and the insurance policy had not been maintained. 18 Accordingly, the issue to be determined was whether the amount in respect of which the proof of debt was lodged was an aggregate of amounts due "in respect of workers' compensation" within the meaning of s 292(1)(c) of the Companies Act 1961 (Q). It was not in issue that the Workers' Compensation Act was a "law relating to workers' compensation" and that the amount in question was due under that Act. The critical question to be determined was the meaning to be given to the expression in s 292(1)(c) "in respect of workers' compensation". The leading judgment was delivered by Mason J (with whom Stephen and Aickin JJ agreed). 19 Mason J noted, with evident approval, the meaning ascribed to the words "in respect of" by Mann CJ in Trustees Executors & Agency Co Ltd v Reilly [1941] VLR 110 where his Honour said at 111: "The words 'in respect of' are difficult of definition, but they have the widest possible meaning of any expression intended to convey some connection or relation between the two subject‑matters to which the words refer." Mason J continued at 561: "But, as with other words and expressions, the meaning to be ascribed to 'in respect of' depends very much on the context in which it is found." Mason J rejected the interpretation of the words "amounts due in respect of workers' compensation" as being that the words denoted amounts due to the SGIO by an employer by way of recoupment under s 8(5) of the Workers' Compensation Act in favour of the interpretation that the words were confined: "to amounts due for or by way of workers' compensation by the person liable to pay that compensation to the person entitled to it;" Mason J found the context of this interpretation in s 292(8)(a) of the Companies Act 1961 (Q), which was in equivalent terms to s 563(1) of the Act (par 13 above). Mason J considered that s 292(8)(a) proceeded on the basis that s 292(1)(c) (the equivalent of s 556(1)(f) of the Act) was only concerned with amounts "due for or by way of workers' compensation". Mason J noted, in particular, that the reference to "the right to the compensation" in s 292(8)(a) (which finds its equivalent in the expression "the right to the injury compensation" in s 563(1)(a) of the Act) assumed that: "the amounts due 'in respect of workers' compensation' of which s.292(1)(c) [the equivalent of s 556(1)(f)] speaks are amounts which are due to a worker or his dependants from the employer in satisfaction of a right to workers' compensation conferred upon the worker or his dependants and exercisable against the employer. The 'liability [of the company] under any law relating to workers' compensation' referred to in the second limb of s.292(8)(a) [the equivalent of s 563(1)(b) of the Act] is obviously the liability imposed upon the employer which is correlative to the right of the worker or to his dependants mentioned in the first limb and so this limb, too, makes the same assumption as to the nature of the amounts to which s.292(1)(c) is addressed." 20 Mason J found that this interpretation of s 292(1)(c) was reinforced by the place which par (c) had in the order of priority set out in s 292(1). That order of priority is similar to that set out in s 556(1) of the Act. Mason J said at 562: "There is good sense and good policy in an order of priorities which, after making provision for the costs and debts mentioned in par. (a),(aa) and (ab), [similar to s 556(1)(a), (b), (d) and (dc) of the Act] descends from wages or salary, to workers' compensation due to workers and their dependants, and then amounts due for or in respect of leave. It would be incongruous to include in this order money owing by way of reimbursement to an insurer for workers' compensation which it has paid. Consequently, the position which par. (c) occupies in the statutory order of priorities points to the conclusion that the paragraph deals with amounts due for or by way of workers' compensation." 21 In the SGIO case, the amounts, the subject of the proof of debt, were clearly not due to a worker or the worker's dependants in satisfaction of a claim for worker's compensation. The policy which Mason J identified excluded the amounts claimed by SGIO from the relevant order of priorities. The present circumstances are different as the legal costs and expenses are, in a sense, integrally and intimately tied up and associated with the injury compensation recovered, or to be recovered by the employees. Without the expenditure of the legal costs and expenses, the injury compensation would not be recovered. Nevertheless, it might be said that the legal costs and expenses are not amounts due to employees in respect of injury compensation, notwithstanding the fact that without the incurring of those costs and expenses, the injury compensation could not or would not be recovered. The employees are not the ultimate recipients of those legal costs and expenses, although they obtain a benefit from them. 22 More detailed consideration must be given to how the legal costs and expenses arise, and as to who bears the initial burden of being responsible for their payment. Although the legal costs and expenses are ultimately payable to the solicitors for the employees or their dependants, that conclusion should not be allowed to obscure the fact that the primary liability for the payment of those costs and expenses falls upon the workers or their dependants. They are incurred as a result of what is, in substance, a contract entered into between the employees and their dependants and their solicitors whereby the solicitors accept a retainer to prosecute a claim for injury compensation on the basis that they are paid the legal costs and expenses they charge and incur in respect of making those claims. 23 Although it might be said that because the legal costs and expenses are not paid to the worker or worker's dependants "in satisfaction of a right to workers' compensation conferred upon the worker or his dependants and exercisable against the employer", to adopt the words of Mason J in the SGIO case, with the result that they should not attract the priority given by s 556(1)(f) of the Act, which is designed to protect employees' entitlements, this approach fails to take into account the primary liability of the employee or the employee's dependants to pay the legal costs and expenses or the integral connection between the recovery of the injury compensation and the legal costs and expenses. If, for any reason, the employee or the employee's dependants obtain an order or an agreement to pay injury compensation but do not obtain a separate order or agreement for the payment of the costs and expenses incurred in achieving that result, then the worker and the worker's dependants have to discharge their liability to the solicitors for the payment of their costs and expenses out of the amount of injury compensation received. 24 However, that situation does not apply where compensation is payable in New South Wales under the Workplace Injury Management and Workers Compensation Act 1998 (NSW). Section 116(1) of that Act provides: "The legal representative or agent of a person claiming compensation under this Act is not entitled: (a) to recover from the person any costs in respect of the claim, or (b) to claim a lien in respect of those costs on, or deduct those costs from, the sum awarded, ordered or agreed as compensation, unless those costs are awarded by the Compensation Court." Nevertheless, notwithstanding this legislation, the position still applies that without the expenditure of the legal costs and expenses, the injury compensation awarded by the compensation court or tribunal would not have been obtained and the primary liability for their payment falls upon the employee or the employee's dependants. There is a close and significant connection between the right of an employee to recover injury compensation and the costs incurred to vindicate that right. In short, without the incurring of the legal costs, the compensation would not have been payable to the employee. 25 An approach similar to that taken by Mason J in the SGIO case was taken by the Full Court of the Federal Court in Construction Industry Long Service Leave Board v Irving (1997) 74 FCR 587. Section 556(1) of the Corporations Law relevantly provided: "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: … (g) … - 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;" Part 6 of the Construction Industry Long Service Act 1987 (SA), and in particular s 26, required all employers in the construction industry to pay a levy to the Construction Industry Long Service Leave Board which was used to pay construction workers' pay during long service leave. A construction company was placed in administration and the question which arose was whether the Construction Industry Long Service Leave Board should be admitted to proof as an unsecured creditor with priority on the basis that the company was liable to pay an outstanding amount in respect of the levy which the Board contended comprised payments which fell within s 556(1)(g)(iv) as being "in respect of leave of absence". 26 The Full Court held that the amounts due were not due "in respect of leave of absence", but rather were due in respect of statutory levies. The Full Court accepted that the words "in respect of" ordinarily had a wide meaning but said, at 595, that this did not mean that the words were: "satisfied by any connection at all between the two subject matters, regardless of the statutory context or the objectives of the particular legislation …" The Full Court regarded the connection between a levy payable by a particular employer and the entitlement of a worker to receive a payment from the Board as too remote. The Full Court was influenced in reaching this conclusion by the policy which it saw as underlying the priority provisions of the Corporations Law. The Full Court said at 597: "Section 556(1)(g) forms part of a group of provisions designed to protect individual employees, or their dependants, by according priority to their entitlement. Subparagraph (e) of s 556(1) covers wages and superannuation contributions payable by the company; subpar (f) covers injury compensation; and subpar (h) covers retrenchment payments. Mr Wicks was not able to point to any convincing reason why a statutory corporation, which is able to spread the financial responsibility for making long service leave payments across the construction industry as a whole, should be held to enjoy priority over the general body of unsecured creditors." 27 The Full Court explained the remoteness of the connection in the following passage, at 597: "However, we do not think that any amounts of unpaid levy can be described as 'in respect of [long service leave]', within the meaning of s 556(1)(g)(iv). As we have explained, the levy is neither imposed on an employer by reason of, nor calculated by reference to, any obligation on that employer to make payments to construction workers entitled to long service leave. Neither the levy nor the Fund of which it forms part is directed exclusively to discharging the Board's obligation to make payments to construction workers entitled to long service leave. As Jacobs J observed in Re E & L Constructions at 160, any payment or benefit to a construction worker who takes long service leave is made by the Board out of a composite or common fund and the worker's right to payment is independent of his employer's obligation to contribute to that fund. In these circumstances, the relationship between any unpaid levy and long service leave entitlements of construction workers is too remote to justify holding that the amounts due are 'in respect of [long service leave]'." 28 As can be seen from these passages, the Full Court looked at the underlying policy aimed at protecting individual employees and considered the degree of the connection between the amounts sought to be given priority and the employees of the relevant companies. 29 Although the legal costs and expenses incurred in obtaining the injury compensation are ultimately payable to the legal advisers for the workers or their dependants, I am satisfied, consistently with the authorities to which I have referred, that there is a sufficiently close connection and causal relationship between the injury compensation obtained and the legal costs and expenses incurred in obtaining that injury compensation to warrant the conclusion that the payments of the legal costs and expenses are amounts "due in respect of injury compensation" within the meaning of s 556(1)(f) of the Act. 30 This analysis is sufficient to resolve the issue relating to orders obtained for the payment of legal costs and expenses, and agreements to pay legal costs and expenses entered into by the Pasminco companies, prior to the commencement of the administration. If a deed of company arrangement is executed by the relevant Pasminco company which includes the provisions set out in Sch 8A of the Corporations Regulations, or if the relevant Pasminco company is wound up, the payment in respect of the legal costs and expenses pursuant to a court order or an agreement by the Pasminco company to pay those costs and expenses prior to the commencement of the administration will be entitled to the priority of payment accorded by s 556(1)(f) of the Act. 31 Different considerations arise in relation to orders obtained by employees or their dependants for the payment of legal costs and expenses by the Pasminco companies after the commencement of the administration, and agreements entered into thereafter by the administrators in relation to the payment of such legal costs and expenses. 32 A distinction needs to be drawn between the legal costs and expenses incurred before and after the commencement of the administration. The workplace event which gives rise to the claim made by the employee or the employee's dependants will have occurred before the commencement of the administration. Further, the relevant proceedings may have been initiated before the commencement of the administration. For present purposes, I make the assumption that the employee or the employee's dependants have incurred legal costs and expenses both before and after the commencement of the administration. 33 In such circumstances, assuming a subsequent court order or agreement is made or entered into, the legal costs and expenses incurred before the commencement of the administration will be entitled to the priority of payment accorded by s 556(1)(f) of the Act, if a deed of company arrangement is subsequently executed by the relevant Pasminco company. However, the legal costs and expenses incurred after the commencement of the administration will not be entitled to such priority of payment. 34 This differential result arises because of the further assumption that the deed of company arrangement includes the "prescribed provisions" referred to in s 444A(5) of the Act. The "prescribed provisions" are found in Sch 8A of the Corporations Regulations which provides, inter alia: "4 The administrator must apply the property of the company coming under his or her control under this deed in the order of priority specified in section 556 of the Act. … 6 If the administrator has paid to the creditors their full entitlements under this deed, all debts or claims, present or future, actual or contingent, due or which may become due by the company as a result of anything done or omitted by or on behalf of the company before the day when the administration began and each claim against the company as a result of anything done or omitted by or on behalf of the company before the day when the administration began is extinguished. … 8 Subdivisions A, B, C and E of Division 6 of Part 5.6 of the Act apply to claims made under this deed as if the references to the liquidator were references to the administrator of this deed." Subdivision A of Div 6 of Pt 5.6 includes s 553(1) which provides: '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." Section 444D(1) provides: "A deed of company arrangement 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)." 35 The effect of these provisions is that a creditor having a present unliquidated claim against the company, that is a claim sounding only in damages, and a creditor having a contingent claim against the company, is entitled to lodge a claim with the administrators. Further, any creditor having such an unliquidated claim or a contingent claim is bound by the deed of company arrangement when it is executed. 36 This issue was considered by the Appeal Division of the Supreme Court of Victoria in Brash Holdings Ltd (Administrator appointed) v Katile Pty Ltd [1996] 1 VR 24. The Court rejected the submission that the expression "creditors" in s 444D(1) of the Act meant only those creditors whose claims were for debts due and payable on or before the date specified in the deed in favour of the proposition that the expression "creditors" in s 444D(1) included all of the creditors for the time being of the company. The Court concluded that creditors bound by a deed of company arrangement pursuant to s 444D(1) were those creditors who had debts admissible to proof in a winding up in accordance with s 553(1) of the Act. Such creditors included creditors with a claim sounding only in damages and creditors with a contingent claim. 37 If the relevant Pasminco companies execute a deed of company arrangement which incorporates the "prescribed provisions" referred to in s 444A(5) of the Act, then employees and their dependants who have a claim for injury compensation arising out of a workplace event which occurred prior to the commencement of the administration will have a present claim sounding in damages for the amount of the injury compensation claimed, and a contingent claim for the legal costs and expenses incurred in pursuing that injury compensation up to the date of the commencement of the administration. They will not have a claim under the deed for the legal costs and expenses incurred after the commencement of the administration. 38 This conclusion depends upon the deed of company arrangement incorporating the "prescribed provisions". If they are not so incorporated, then the resolution of the issue will depend upon the description of the creditors and the claims bound by the deed. An example of a deed which adopted different provisions for the description of the creditors and claims bound by the deed is found in Daydream Island International Resort Pty Ltd v Cushway Blackford & Associates (Aust) Pty Ltd (1995) 13 ACLC 82. The deed in that case bound all persons having a "claim" which was defined as meaning "a debt owing (whether now, in the future or contingently) by, or a claim subsisting against, the Company in favour of a person as at 13 September 1993". Shepherdson J noted that the words in parentheses applied only to a debt and not to a claim and held that the deed did not purport to deal with contingent claims, although it did deal with contingent debts. 39 As the workplace event which gives rise to the claim for injury compensation will have occurred prior to the commencement of the administration, the claim for injury compensation will be admissible to proof in the administration, it being a present claim sounding in damages as provided for in s 553(1) of the Act. The claim for injury compensation will be a present claim which has to be valued or quantified by the administrator, and in respect of which a just estimate of its value must be made before the claimant is allowed to vote at a creditors' meeting: Corporations Regulation: 5.6.23(2)(c). Any claim for legal costs and expenses incurred up to the date of commencement of the administration in respect of that claim will be a claim for amounts due in respect of injury compensation, for the reasons given earlier, particularly in par 29 above. However, the claim for the legal costs and expenses incurred before the date of the commencement of the administration will be a contingent claim. It will be contingent because the liability to pay legal costs and expenses incurred in prosecuting that claim for injury compensation, which depends upon the administrator giving leave to commence or continue the proceedings and the making of a court order, or an agreement, for the payment of those legal costs and expenses in due course. 40 Although, as Tadgell J said in Federal Commissioner of Taxation v Gosstray [1986] VR 876 at 878: "A contingent creditor, like an elephant, is rather easier to recognise than to define", the critical integer to be identified in a contingent claim is that there be an existing obligation and that out of that obligation there will arise a liability of the company to pay a sum of money on the happening of an event that may not necessarily occur: Winter v Inland Revenue Commissioners [1963] AC 235 at 262; Community Development Pty Ltd v Engwirda Construction Co (1969) 120 CLR 455 at 459 per Kitto J; Jones v Deputy Commissioner of Taxation (1998) 157 ALR 349 at 354. 41 Although the liability to pay costs arising out of a court order arises separately from the liability to pay injury compensation, the costs order is an incident of the claim for injury compensation. It follows that any claim for legal costs and expenses incurred in prosecuting a claim for injury compensation prior to the date of the commencement of the administration is admissible to proof as a contingent claim because of its association and connection with the primary claim for injury compensation, even though there has not been any costs order obtained, or agreement reached, for the payment of those legal costs and expenses prior to the commencement of the administration. 42 In Re SBA Properties Ltd [1967] 1 WLR 799, an action had been brought in the name of a company by the Board of Trade against a bank. The bank issued an application to stay the action on the ground that the Board of Trade had no power to bring the action in the name of the company against the bank. The trial judge acceded to the bank's application in principle but, rather than staying the action, stood it over pending the hearing of a petition to wind‑up the company on the basis that if a liquidator was appointed, the liquidator could ratify the action against the bank which could then proceed. A petition was presented to wind‑up the company. The bank sought to appear on the hearing of the petition on the ground that it was a contingent creditor of the company for the costs of the action which it had already incurred if the bank's defence was successful. Pennycuick J did not consider that the bank was a contingent creditor of the company. The action had been brought by the Board of Trade without the authority of the company. Pennycuick J held that nothing had been done by the company which could give rise to a contingent liability at that point of time. 43 In that case, the Court found that as at the date of the hearing of the petition the company had done nothing which could give rise to a contingent liability. The reasoning behind that conclusion may be questionable but, in the present circumstances, the position is quite different. In the circumstances before the Court, the workplace events giving rise to each of the claims for compensation have occurred before the commencement of the administration, and legal costs and expenses have been incurred prior to that date in prosecuting the claims. The obligation to pay the compensation, alleged by each employee, is a present claim sounding in damages so that it is an existing claim yet to be quantified. If the employees satisfy the administrator or a court or tribunal subsequently of the validity of their claims those claims will then be capable of quantification. I do not consider that the reasoning in Re SBA Properties Ltd precludes my conclusion that costs incurred in relation to the prosecution of a claim for compensation before the commencement of the administration give rise to a contingent claim in the administration against the relevant company. 44 There is authority for the proposition that unless a costs order is made against a person before a sequestration order is made against that person's estate, the costs incurred prior to the sequestration order are not a provable debt in that person's bankruptcy: In re British Gold Fields of West Africa (1899) 2 Ch 7 at 11‑12; In re Pitchford (1924) 2 Ch 260 at 265-268; Re Seres; Ex parte Byrne Bros Pty Ltd (1967) 10 FLR 439 at 440; Re Hedge; Ex parte Goddard (1994) 50 FCR 421 at 423. However, none of those authorities was concerned with the issue presently before the Court, namely the existence of a claim for unliquidated damages which was admissible to proof in the administration, and accrued legal costs and expenses incurred in prosecuting that claim which were not the subject of any order for payment, or agreement for payment, before the relevant date for determining what were provable debts and claims. The relevant legislation which applied in those authorities did not allow for the admission to proof of a claim sounding only in damages, that is an unliquidated claim. 45 Legal costs and expenses incurred in prosecuting a claim for injury compensation after the commencement of the administration are in a different position from the costs and expenses incurred before the commencement of the administration. Such costs and expenses will not be payable under any deed of company arrangement as such a deed can only provide for the payment of debts of the companies which had been incurred prior to the commencement of the administration: s 444A(4)(i). Any costs or expenses which are incurred thereafter should therefore be considered in the context whether they are costs and expenses of the administration and therefore properly payable by the administrators, subject to an indemnity in respect of them out of the assets of the Pasminco companies: ss 443A and 443D of the Act. In any deed of company arrangement these costs and expenses would be accorded priority under s 556(1)(a), (c) or (dd) (see par 12 above), unless the creditors resolve to the contrary. 46 The question arises whether any order for the payment of compensation or damages, and any order for the payment of a claimant's legal costs and expenses, or an agreement by the administrators to pay a claimant's legal costs and expenses (and also any agreement to pay compensation or damages) creates a liability in the administrators which is one for which they are entitled to be indemnified out of the assets of the company. 47 Section 443A of the Act provides: "(1) The administrator of a company under administration is liable for debts he or she incurs, in the performance or exercise, or purported performance or exercise, of any of his or her functions and powers as administrator, for: (a) services rendered; or (b) goods bought; or (c) property hired, leased, used or occupied. (2) Subsection (1) has effect despite any agreement to the contrary, but without prejudice to the administrator's rights against the company or anyone else." Section 443D of the Act provides: "The administrator of a company under administration is entitled to be indemnified out of the company's property for: (a) debts for which the administrator is liable under Subdivision A [which includes s 443A] …" Subject to s 556 of the Act, that right of indemnity has priority over all the unsecured debts of a company: s 443E(1)(a), and is secured by a lien on the company's property: s 443F(1). 48 These provisions give rise to the question whether the incurring by the administrators of a liability for the legal costs and expenses of a claim by an employee or an employee's dependants against the company after the commencement of the administration is in respect of "services rendered" to the administrators within s 443A(1)(a) of the Act. There is a tension between s 443A(1)(a) and ss 556(1)(a) and (dd) of the Act as s 443A(1) is more limited in its scope. It does not render an administrator liable for debts incurred in carrying on the company's business, although an administrator is empowered to carry on a company's business: s 437A(1)(a) of the Act, and may perform any function, and exercise any power, that the company could perform or exercise if it were not under administration: s 437A(1)(d) of the Act. Section 443A(1) only renders an administrator liable for debts incurred for services rendered, goods bought or property hired, leased, used or occupied. 49 An issue will only arise if the administrator consents to the bringing, or continuation, of a proceeding as s 440D of the Act provides that during the administration of a company, a court proceeding against the company cannot be commenced or proceeded with, without the administrator's written consent or the leave of the Court: s 440D(1) of the Act. Even if the administrator consents, enforcement proceedings against the company in relation to its property cannot be commenced or proceeded with, except with the leave of the Court: s 440F of the Act. 50 I do not consider that any order for legal costs and expenses obtained against a company under administration, or any agreement to pay legal costs and expenses entered into by an administrator on behalf of such a company after the commencement of the administration in respect of costs and expenses incurred after the commencement of the administration, is entitled to any priority under s 556(1)(a), (c) (dd) or (f) of the Act, unless it can be said that the expenses can in some way fall within s 443A(1)(a) of the Act. 51 As I have noted earlier, during the administration of a company, no proceeding can be commenced or continued against the company without the written consent of the administrator or the leave of the Court: s 440D(1) of the Act. The period of the administration of a company begins with the appointment of an administrator: s 435C(1)(a) of the Act, and ends on the execution by the company and the deed's administrator of a deed of company arrangement or a resolution of the company's creditors that the administration should end or that the company be wound up: s 435C(2), or on the happening of one of the events specified in s 435C(3) of the Act. 52 If, during the period of the administration, the administrator consents to the commencement or continuation of a court proceeding, any order for legal costs obtained or agreement to pay legal costs in relation to that proceeding will not create a debt or liability which will be covered by any subsequent deed of company arrangement executed by the company. Debts payable under a deed of company arrangement must have arisen before the date of the commencement of the administration: s 444A(4)(i) of the Act. 53 If the legal costs cannot in some way fall within s 443A(1)(a) of the Act, then the position will be that the claimant will have a right against the company, but not against the administrator, for the payment of his or her legal costs. However, the claimant will not be able to do anything about that right or be able enforce it (absent any court order) until the administration ends for one of the reasons described in par 51 above. 54 If the administration ends because the company executes a deed of company arrangement, it will then be open to a claimant with the benefit of a legal costs order against the company, or an agreement by it, through the administrator, to pay legal costs to take enforcement proceedings against the company to recover those costs to the extent to which the costs were incurred after the commencement of the administration. The deed of company arrangement will not include the claimant's legal costs as the entitlement to be paid the costs will only have arisen after the commencement of the administration and will therefore not be covered by the deed: s 444A(4)(i) of the Act. Further, a deed of company arrangement binds only creditors of a company in relation to claims arising on or before the day specified in the deed on or before which claims must have arisen: s 444D(1) of the Act. 55 However, it is only those creditors who are bound by the deed of company arrangement who are precluded from taking enforcement proceedings against the company in respect of their debt until the deed terminates: s 444E(1) of the Act. This inhibition does not apply to creditors of the company not bound by the deed. They can take enforcement proceedings in respect of their debt once the deed of company arrangement is executed. 56 On the material presently before me, I do not consider it appropriate, in the absence of evidence of a particular claim, to find or conclude whether, where an administrator of a company under administration consents to the commencement or continuation of a proceeding (or the Court gives leave to do so) and an order for the payment of a claimant's legal costs is made against the company, or the administrator agrees to pay the claimant's legal costs, those costs are costs for which the administrator is liable under s 443A(1)(a) of the Act, and in respect of which the administrator is entitled to indemnity out of the company's property. It may be that in a particular case such a claim can be sustained, but it would be necessary to have a particular claim before the Court to enable such a finding to be made. 57 If the payment of such legal costs and expenses does not fall within s 443A(1)(a) of the Act, the consequence would be that, where an administration ends because either the creditors so resolve, or a deed of company arrangement is executed, a claimant entitled to be paid legal costs and expenses as a result of a court order or an agreement for costs, obtained or reached after the commencement of the administration in respect of costs incurred after the commencement of the administration, would have no priority for the payment of those costs in accordance with s 556(1) of the Act. The issue of priority does not arise because the legal costs and expenses are not covered by the deed and the administrator is not liable for them or entitled to be indemnified by the company out of its property. The claimant can take enforcement proceedings at that time which can be proceeded with, subject to any steps that may be taken to wind up the company. 58 It follows, therefore, that if an order is made for the payment of costs, or an agreement is reached to pay costs, in favour of a claimant for injury compensation after the commencement of the administration in respect of an injury occurring before the commencement of the administration, the administrators will have to have such costs apportioned in respect of the period before and the period after the commencement of the administration, as it is only the costs incurred before the commencement of the administration which will be entitled to priority of payment under any deed of company arrangement executed by the Pasminco companies. Such an exercise was undertaken, albeit in a liquidation context, in Sandtara Pty Ltd v Abigroup Ltd (No 2) (1995) 16 ACSR 494. 59 If winding‑up proceedings are taken against the company, consideration would have to be given as to whether any order for legal costs or any agreement to pay legal costs obtained or made after the commencement of the administration in respect of costs incurred after that commencement falls within s 556(1)(a) or (dd) of the Act. That determination would depend upon the particular circumstances of the proceeding in which the order for legal costs, or the agreement to pay them, arose. At the present time, that issue is hypothetical and not appropriate for determination. 60 The administrators referred to a number of authorities in which it has been accepted that the liability of a liquidator for legal costs incurred in defending an action brought against the company in liquidation is properly an expense of the liquidation. They referred to the following statement of principle found in McPherson The Law of Company Liquidation (4th ed) 1999 at 589: "The term 'expenses' is clearly not, however, a term of art, but one that has been said to cover any expenses that the liquidator (or other relevant authority) might be compelled to pay in respect of preserving, realising or getting in of property of the company. Thus, it includes the costs of recovery, preservation and realisation of the assets, such as solicitors' and real estate agents' costs, costs awarded against the liquidator in proceedings brought, continued or defended by her or him, whether in compulsory or voluntary 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 the assets coming into the hands of the liquidator. 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 occasion, it may be necessary to apportion liabilities between liquidation and pre‑liquidation periods for the purpose of determining what expenses of winding up are entitled to priority." This passage (as it appeared in an earlier edition of the text) was cited with approval in L E Force & W J Wilde v Thos Clark & Son (Queensland) Pty Ltd, Re Kratzmann Holdings Pty Ltd (in liq) (1982) 1 ACLC 320 at 322, which was applied in Irons v Merchant Capital Ltd (1994) 116 FLR 204 at 210. 61 There is also authority for the proposition that if a liquidator wishes to defend proceedings brought against the company in liquidation and costs are awarded against the liquidator, then the costs payable are expenses of the liquidation. In Re Wenborn & Co [1905] 1 Ch 413, Buckley J said at 416: "… when 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." 62 However, these principles and authorities do not deal with the situation which is presently before the Court, namely the situation of an administration under Pt 5.3A of the Act, where an administrator gives consent to the commencement or continuation of a proceeding pursuant to s 440D of the Act, and where the issue arises as to whether the legal costs of the proceeding, ordered to be paid by the company under administration, or agreed to be paid by the administrator on behalf of the company, which will not be covered by any deed of company arrangement, are properly the liability of the administrators in respect of which the administrator is entitled to indemnity out of the company's property. 63 I am therefore satisfied that it is appropriate to give directions in respect of the priority of payments to be accorded to legal costs and expenses ordered to be paid by the Pasminco companies or agreed to be paid by them and incurred by a claimant for injury compensation prior to the commencement of the administration, but not subsequent thereto. 64 I therefore propose to give a direction that any legal costs or expenses: (a) incurred by an employee of Pasminco Cockle Creek Smelter Pty Ltd (Administrators Appointed), Pasminco Australia Limited (Administrators Appointed) and Pasminco Port Pirie Smelter Pty Ltd (Administrators Appointed), prior to the appointment of the administrators of these companies, in connection with a claim for "injury compensation" (as that expression is defined in s 9 of the Act) against those companies, being compensation the liability for which arose before the appointment of the administrators of those companies; and (b) which Pasminco Cockle Creek Smelter Pty Ltd (Administrators Appointed), Pasminco Australia Limited (Administrators Appointed) and Pasminco Port Pirie Smelter Pty Ltd (Administrators Appointed) (as the case may be) are liable to pay to or on behalf of the employee by agreement or pursuant to an order of a court or tribunal entered into or made either before or after the appointment of the administrators of those companies, are amounts due in respect of injury compensation for the purposes of s 556(1)(f) of the Act. 65 I propose to reserve liberty to the administrators to apply for any further orders or directions in this matter which might arise in relation to any particular claim for further injury compensation in respect of which there may be any doubt. I will also order that the costs of the application be costs in the administration of Pasminco Cockle Creek Smelter Pty Ltd (Administrators Appointed), Pasminco Australia Limited (Administrators Appointed) and Pasminco Port Pirie Smelter Pty Ltd (Administrators Appointed). I consider that the three unions should bear their own costs in relation to the hearing, having regard to the peripheral role they played in the proceeding and their very limited participation in it.

State Government Insurance Office v Rees

At a glance

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Judgment (12 paragraphs)

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Legislation Cited (7)

Cases Cited (7)

Cited By (4)