24 Paragraphs 1103 to 1106 of the Explanatory Memorandum to the Corporate Law Reform Bill specifically address the proposed s 588M. The text appears to assume that the liquidator will effect recovery of the loss and damage suffered by a creditor to whom a debt is owed by "action", and explains why such "proceedings" should generally be permitted only through the liquidator, so the creditor's right to bring proceedings under s 588M(3) is curtailed: see s 588R - 588U. That was said to ensure the principle of equal sharing.
25 Nothing is said in the Explanatory Memorandum as to why the expression "loss and damage in relation to a debt" was introduced, rather than the form of expression in the earlier legislation.
26 The question is whether the essential character of the demand contained in the proofs of debt is in respect of a debt provable in the bankruptcies: Cornelius v Barewa Oil & Mining (NL) (In liq) (1982) 42 ALR 83 per Wickham J at 89-90. All debts and liabilities are provable in the bankruptcy unless they fall within one or more of the exceptions specified in s 82, relevantly for present purposes, s 82(2) of the Bankruptcy Act.
27 Section 82(1) of the Bankruptcy Act adopts the use of wide language in expressing what are to be considered admissible debts and liabilities in bankruptcy. See for example the discussion of its history and of its terms in the joint judgment of the majority (Gleeson CJ, Gummow, Hayne and Callinan JJ) in Coventry v Charter Pacific Corp Ltd (2005) 227 CLR 234 at [20] - [29]; Re Hide; Ex parte Llynvi Coal and Iron Co (1871) 7 Ch App 28 at 31 - 32 per James LJ.
28 Section 82(2) exists as an exception to the debts and liabilities which are admissible in bankruptcy. Under this provision, claims in the nature of unliquidated damages are inadmissible unless they arise by nature of contract, promise or breach of trust with the bankrupt. In this matter, the trustee argues that the liability of the directors to the company enforceable by the liquidator under s 588M is unliquidated and does not arise in the circumstances otherwise mentioned in the section, that is, it does not arise by reason of contract, promise or breach of trust. The liquidator's primary position is that his claims are not claims falling within s 82(2).
29 It is worthwhile considering the consequences of the trustee's approach. It would mean that the liquidator of a company could not prove the liability enlivened by s 588M(2) of the Corporations Act in any bankruptcy of a director. Nor could a creditor under s 588M(3). The right of recovery from the director, as a debt due to the company, of an amount equal to the loss or damage suffered by the creditor or creditors would not be provable in the bankruptcy because, so the argument runs, it is a demand in the nature of unliquidated damages arising otherwise than by reason of a contract, promise or breach of trust. That would be a surprising outcome. It would be surprising because it would be so different from the regime which existed up to the time Pt 5.7B, including Div 4 of Pt 5.7B, was inserted into the Corporations Law in 1992. Up to that time, it is plain that a debt incurred by a company for which a director was liable under s 592 of the Corporations Law or s 556 of the Code was provable in the bankruptcy of the debtor. It would also mean that, upon the discharge of the bankrupt from bankruptcy, the bankrupt would not be released from those liabilities because they would not have been provable in the bankruptcy: see s 153(1) of the Bankruptcy Act. Indeed, it would further mean that a creditor of the company, or the liquidator of the company, could institute and maintain proceedings against the bankrupt personally during the bankruptcy unrestrained by the operation of s 58(3) of the Bankruptcy Act because the remedy sought to be invoked would not be in respect of a provable debt. The power to stay actions under s 60 of the Bankruptcy Act also generally appears to be confined to actions to recover provable debts: see s 60(1)(b). There is nothing in the Harmer Report which suggests that the then proposed amendments to the Corporations Law by the addition of Div 4 of Pt 5.7B would make a dramatic change in that regime. Such a dramatic change would have the consequence that neither the liquidator of a company nor its creditors could enforce their rights under s 588M(2) and (3) by participating in the distribution of the bankrupt estate of the director who had breached the duty to the company imposed by s 588G. In my view, Div 4 of Pt 5.7B of the Corporations Act does not have that purpose or intention.
30 The wording of s 588M(2) also, in my view, tends to confirm that no such dramatic change was contemplated by the introduction of Div 4 of Pt 5.7B. Section 588M(2) empowers the liquidator to recover from the director "as a debt due to the company" an amount equal to the amount of loss or damage. That is the loss or damage suffered by the creditor or creditors in relation to the debt because of the company's insolvency. The use of the word "debt" in s 588M(2) and in s 588M(3) in the case of a creditor's action must be given some work. In Fryer v Powell (2001) 159 FLR 433, the Full Court of the Supreme Court of South Australia (Olsson, Duggan and Williams JJ) addressed the use of that word "debt" in s 588G and s 588M. In that case the liquidators of a company in liquidation sued the directors for recovery of a sum of money equivalent to the sum of the debts incurred at the time when the company was insolvent or when grounds existed for a reasonable suspicion that it was insolvent, to the knowledge of the directors. Judgment was given against the directors and they appealed. The relevant issue on that appeal was whether statutory imposts under the ITAA could constitute a debt for the purposes of s 588G of the Corporations Law, so the precise issue in this matter did not directly arise. The claim against the directors included a range of categories of debt including debts due to trade creditors (which do not appear to have been contentious), accrued leave entitlements, unpaid sales tax liabilities, penalties for non-payment of sales tax, unpaid group tax and assessed penalties for non-payment of group tax, and unpaid WorkCover levies and penalties for non-payment of WorkCover levies. Olsson J (with whom Duggan and Williams JJ agreed) concluded at 442, at [62] - [63] that the ordinary English meaning of the word "debt" should be adopted, there being nothing in the Corporations Law to suggest any other special meaning, and because that meaning had been attributed to that word in s 556 of the Companies Code: see eg per Gleeson CJ in Hawkins v Bank of China (1992) 26 NSWLR 562 at 572. In respect of the statutory imposts, his Honour said at [72], at 444:
… if, by reason of the normal, ongoing operations of a company (including the mere passive retention of existing staff or premises), it is liable to pay a statutory impost, then it may properly be said that such an impost has been "incurred", as a debt, by the entity in question.
In a complementary submission, counsel for the directors in that case (as here) placed emphasis upon the expression "loss or damage" in s 588M. It, too, is not defined either in the Corporations Law or in the Corporations Act. The argument was that the expression "loss or damage" indicated that the quantification of the liability was not the amount of the unpaid trade debt in each instance, and it was necessary for the Court to examine each individual debt and to make various potential abatements of it. His Honour said at [88] - [89], at 447 that:
I entertain no doubt that, read in context, the loss and damage adverted to is the amount of the unpaid debt due to the creditor in question. This is the view which was obviously taken by Austin J in Tourprint International Pty Ltd (In Liq) v Bott (1999) 32 ACSR 201 at 217 and, in my experience, has always been applied to the practical administration of the statute. Whilst the provisions of the Corporations Law, so applied, may give rise to some practical consequences which could be said to be somewhat arbitrary and possibly inequitable in some respects, the insolvency law has always, as a matter of practicality and commercial expediency, had to adopt certain parameters which are arbitrary. There is nothing particularly novel in the approach here in question. By way of contrast, the adoption of the approach espoused by Mr Randle would render administration in insolvency virtually unworkable. The legislature could not possibly have envisaged creating the inevitable complexity and requirement for detailed examination of collateral issues which Mr Randle propounds.
I therefore reject his submissions and conclude that the "loss or damage" in question will normally be the quantum of relevant unpaid debts.
Austin J in Tourprint International Pty Ltd (in liq) v Bott (1999) 32 ACSR 201 at 217 at [78] does not appear to have given the matter considerable attention because it did not arise in that case. See at [78]. His Honour's observations are certainly consistent with that conclusion, but they do not contain any consideration specifically of the point.
31 On the other hand, Mandie J in Australian Securities and Investments Commission v Plymin (No 1) recognised, correctly in my view, that Fryer v Powell 159 FLR 433 laid down only a general rule capable of variation according to particular circumstances: see at (2003) 175 FLR 124 at 255, at [535]. In that case, the loss and damage suffered by the creditors of a company in their claim against the directors needed to be adjusted beyond the amount of the unpaid debt because of an interim dividend distributed by the administrator under a scheme of arrangement of the company and for a further dividend which those creditors were likely to receive. His Honour added at 256 [535]:
To the extent that any allowance for actual unexpected dividends is contrary to what was decided concerning the meaning of "loss and damage" in Powell v Fryer (2001) 37 ACSR 589, 602-3 (sic), I understand the plaintiff to have conceded that such allowance should be made and I tend, with respect, to think that the concession was correct in principle.
32 There is some apparent inconsistency in expression in the observations of Olsson J in Fryer v Powell 159 FLR 433, between an absolute assertion that loss and damage is the amount of unpaid debt due to the creditor, and that it is normally the quantum of the relevant unpaid debts. Those two things are not necessarily the same. The difference may not have been significant to the resolution of that case.
33 In my view, the difference in expression is also not of significance to the issue which presently arises in this matter. That is because the question is as to the nature of the entitlement in the liquidator established by s 588M(2) so far as it applies in the bankruptcy of the directors, having regard to s 82(1) and (2) of the Bankruptcy Act.
34 I do not consider it is useful to import into the words of s 588M(2) a requirement that the loss and damage referred to in s 588M(1)(b) and s 588M(2) be characterised as liquidated or unliquidated. Clearly, s 588M(2) entitles the liquidator to recover the loss and damage, whatever its character, from the directors as a debt due to the company. It is the debt due to the company which entitles the liquidator to prove in the bankruptcy of the directors. Although the wording of s 588M(1)(b) and (c) indicate that the loss and damage of the creditor or creditors need not equate to the amount of the debt or debts (eg as Mandie J identified in Plymin 175 FLR 124),if there has been a distribution in the liquidation of the company to reduce that debt as at the date of the claim made in the bankruptcy by realisation of other assets of the company), s 588M(2) states that the loss and damage for the purposes of the claim against the directors be recoverable as a debt. I note that Hammerschlag J in Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd [2007] NSWSC 930 at [24] - [25] adopted that position, albeit that the question was not apparently in contention before his Honour.
35 In the case of a claim made by a liquidator or creditor against a director under s 588M(2) or (3) respectively, the director may put in issue the amount of the claimed debt. There will then need to be a determination about the extent of the loss and damage, as in any debt claim where the amount claimed may be put in issue. If the director does not do so, the claim should be treated as a claim for a debt because that is the statutory nature of the claim. Of course, the director may also dispute any contravention of s 588G(2) or (3) or enliven the defence available under s 588H; see s 588M(1)(a). In the present circumstances, the Trustee has the role on behalf of the director of deciding whether to dispute the claimed debt or to accept the claimed debt in whole or in part on the basis that the loss and damage which underlies it either was not suffered or was not suffered to the extent claimed. Any decision in that regard is reviewable under s 104(1) of the Bankruptcy Act.