Wallace-Smith v Secretary, Department of Family and Community Services [2004] VSC 123

5. Questions have arisen as to the potential obligations of the plaintiffs under the deed as a result of the provisions of the Social Security Act 1991 (Cth) and differences have emerged between the plaintiffs and the defendant, the Secretary to the Department of Family and Community Services, concerning those questions.

8. By originating motion, the plaintiffs seek declarations, and also directions pursuant to s.447D(2) of the Corporations Act. The primary question raised is whether or not certain distributions under the deed to persons who had personal injury claims ("claimants") against any one of the National Express group will constitute "compensation" within the meaning of s.17(2) of the Social Security Act, thereby potentially triggering the recovery provisions contained in Part 3.14 of the Social Security Act.

11. The defendant at first contended that it was inappropriate for the plaintiffs merely to seek directions under the Corporations Act. The plaintiffs reacted by seeking and obtaining leave to substitute, for the initial originating process, the current originating motion seeking binding declarations as well as directions. The defendant raised no objection to this substitution but reserved the right to contend that the questions raised were hypothetical, that the plaintiffs had no standing to seek the declarations, or that it was inappropriate for the Court in its discretion to grant the declarations sought. In the end, the defendant abandoned all of these objections, at least as far as concerned the primary question of statutory interpretation raised by the plaintiffs.

15. Under the deed, the "Available Property"[1] is to be made available to meet, on a pro rata basis, the pooled claims of the Creditors. A "Creditor" is any person who has a "Claim" against the Franchisee Companies and "Claim" means:

"a debt payable by, or a claim against, a Franchisee Company (based in contract, tort, statute or otherwise, present or future, certain or contingent, ascertained or sounding only in damages)...[excluding certain priority employee entitlements]."

19. The deed administrators are empowered to administer the Available Property for the payment of Admitted Claims[2] and to make interim or other distributions thereof for the payment of Admitted Claims.[3]

22. Clauses 9 and 14 of the deed relevantly provide:

"9.1.. Subject to clause..9.4.., the Franchisee Companies will be released and discharged from all Claims against them...upon receipt by the Administrators of the Available Property...

9.3.. Subject to section 444D of the Act, this Deed may be pleaded by a Franchisee Company or the Administrators against any person...having a Claim against that company as an absolute bar and defence to any legal proceedings brought or made at any time in respect of that Claim.

9.4.. The parties acknowledge and agree that once the Claims against the Franchisee Companies are released pursuant to clause 9.1, the Creditors who had Claims will be entitled to make Equivalent Claims against the Available Property and to prove for those Claims in accordance with clause 14.

14.1.. The Administrators will prepare the Admitted List.[4]

14.2.. For the purpose of any person having an Equivalent Claim seeking to formally prove their Asserted Claim, subdivisions A, B, C and E of Division 6 of Part 5.6 of the [Corporations] Act...apply to the Asserted Claim, with such modifications as may be necessary...."

33. The administrators have received a number of Asserted Claims, each described in the originating motion as "a claim for liability [not covered by public liability insurance] in respect of a personal injury suffered by the person, [which] includes as part of the claim, a claim for lost earnings or lost earning capacity or both." The evidence shows that at least 7, and up to 14, of 29 personal injury claims received by the plaintiffs are claims including a claim for lost earnings or lost earning capacity. Further, 13 of these 14 claimants have names which match the names of persons who have received social security payments since the date of injury and they are thus likely to be persons who have therefore received "compensation affected payments" as defined by s.17(1) of the Social Security Act. Finally, one of these 13 claimants has positively alleged that he was receiving social security benefits during the period in which he says that he was unable to work as a result of his claimed injury. It would appear, therefore, that the primary question raised by the plaintiffs is not hypothetical but, in any event, as I have noted, the defendant abandoned his objection in this regard.

The relevant provisions of the Social Security Act

37. The key question is whether payments to relevant claimants will constitute "compensation" as defined by s.17 of the Social Security Act. It is convenient here to set out that definition and some other pertinent definitions and provisions contained in s.17:

"s.17(1) In this Act, unless the contrary intention appears: compensation has the meaning given by subsection (2). compensation affected payment means:

(aa) an age pension; or

(a) a disability support pension; or

(b) a parenting payment; or

(c) a social security benefit; or

(e) a disability support wife pension; or

(f) a carer payment; or

(g) a special needs disability support pension; or

(h) a special needs disability support wife pension; or

(i) mature age allowance; or

(j) mature age partner allowance; or

(k) a former payment type.

compensation part, in relation to a lump sum compensation payment, has the meaning given by subsections (3) and (4). compensation payer means:

(a) a person who is liable to make a compensation payment; or

(b) an authority of a State or Territory that has determined that it will make a payment by way of compensation to another person, whether or not the authority is liable to make the payment.

... potential compensation payer means a person who, in the Secretary's opinion, may become a compensation payer. receives compensation has the meaning given by subsection (5). ...

s.17(2) Subject to subsection (2B), for the purposes of this Act, compensation means:

(b) a payment under a scheme of insurance or compensation under a Commonwealth, State or Territory law, including a payment under a contract entered into under such a scheme; or

(c) a payment (with or without admission of liability) in settlement of a claim for damages or a claim under such an insurance scheme; or

(whether the payment is in the form of a lump sum or in the form of a series of periodic payments and whether it is made within or outside Australia) that is made wholly or partly in respect of lost earnings or lost capacity to earn resulting from personal injury. 17(3) Subject to subsection (4), for the purposes of this Act, the compensation part of a lump sum compensation payment is:

(a) 50% of the payment if the following circumstances apply:

(i) the payment is made (either with or without admission of liability) in settlement of a claim that is, in whole or in part, related to a disease, injury or condition; and

(ii) the claim was settled, either by consent judgment being entered in respect of the settlement or otherwise; or

(ab) 50% of the payment if the following circumstances apply:

(i) the payment represents that part of a person's entitlement to periodic compensation payments that the person has chosen to receive in the form of a lump sum; and

(ii) the entitlement to periodic compensation payments arose from the settlement (either with or without admission of liability) of a claim that is, in whole or in part, related to a disease, injury or condition; and

(iii) the claim was settled, either by consent judgment being entered in respect of the settlement or otherwise; or

(b) if those circumstances do not apply--so much of the payment as is, in the Secretary's opinion, in respect of lost earnings or lost capacity to earn, or both."

58. Part 3.14 of the Social Security Act is entitled "Compensation recovery". The prime purpose of Part 3.14 is to prevent "double dipping" by eliminating or reducing a person's compensation affected payment because of the receipt of compensation[5] or by requiring the repayment of some or all of that person's compensation affected payment because of the receipt of compensation.[6] One method of achieving repayment is by recovery from the compensation payer. This method is dealt with by Subdivision C of Division 4 of Part 3.14. The main provisions here are as follows:

(a) a person (the claimant) makes a claim against another person (the potential compensation payer) for compensation; and

(b) the claimant claims a compensation affected payment in relation to a day or days in the periodic payments period or the lump sum preclusion period, as the case may be;

the Secretary may give written notice to the potential compensation payer that the Secretary may wish to recover an amount from the potential compensation payer. ... s.1183(1) If a person (the potential compensation payer):

(a) is given a notice under subsection 1182(1) in relation to a person; and

(b) whether before or after receiving the notice, the potential compensation payer becomes liable to pay compensation to the person;

the potential compensation payer must give written notice to the Secretary of the liability within 7 days after:

(c) becoming liable; or

(d) receiving the notice;

whichever happens later. Penalty: Imprisonment for 12 months. ... s.1184(1) If:

(a) a person (the compensation payer):

(i) is liable to pay compensation to a person (a claimant); or

(ii) where the compensation payer is an authority of a State or Territory, has determined that a payment by way of compensation is to be made to a claimant; and

(b) the claimant has received a compensation affected payment in relation to a day or days in the periodic payments period or the lump sum preclusion period, as the case may be;

the Secretary may give written notice to the compensation payer that the Secretary proposes to recover from the compensation payer the amount specified in the notice. ... s.1184A(1) If a person receives compensation affected payments in relation to a day or days in a lump sum preclusion period, the recoverable amount under this section is equal to the smallest of the following amounts:

(a) the sum of all compensation affected payments made to the person that relate to a day or days in a lump sum preclusion period;

(b) the compensation part of the lump sum payment;

(c) in the case of a compensation payer--the maximum amount that the compensation payer is liable to pay to the person in relation to the matter at any time after receiving:

(i) a notice under section 1182 in relation to the matter; or

(ii) if the compensation payer has not received a notice under section 1182--the notice under section 1184 in relation to the matter;

(d) in the case of an insurer--the maximum amount for which the insurer is liable to indemnify the compensation payer in relation to the matter at any time after receiving:

(i) a notice under section 1182 in relation to the matter; or

(ii) if the insurer has not received a notice under section 1182--the notice under section 1184 in relation to the matter.

83. In essence, it was submitted on behalf of the plaintiffs that because the deed released, discharged and extinguished all Claims and replaced them with Equivalent Claims to be dealt with by the machinery set up by the deed, new and different rights were created which, or more precisely, the payment of which, did not fall within the definition of "compensation" in s.17(2) of the Social Security Act. The deed created an accord and satisfaction. The new payment could not be "a payment of damages" (s.17(2)(a)), or a payment within s.17(2)(b), or "a payment...in settlement of a claim for damages" (s.17(2)(c)), or "any other compensation or damages payment" (s.17(2)(d)), that was "made wholly or partly in respect of lost earnings or lost capacity to earn resulting from personal injury". Any such payment would not be "damages" but a payment in respect of the claimant's right (when established) to a pro rata distribution of the pool available under the deed. There would be no "settlement" in the sense of a compromise of any claim for damages. The payment would not be "compensation" but a dividend calculated pursuant to the provisions of the deed.

86. The plaintiffs asserted their interest in the questions posed not only because they needed to establish whether they had any potential obligations under the Social Security Act, but also because they considered that they needed to know their position before admitting any relevant claims. As they put it, this was because (if the Social Security Act did not apply) they had a right, as referred to in Redding v Lee [1983] HCA 16; (1983) 151 CLR 117, to set off any social security benefits received by a claimant to the extent that such benefits were in the nature of a substitute for lost wages or lost earning capacity.[7] The amounts thus set off and retained would then benefit all creditors under the deed, they said.

90. It was submitted on behalf of the defendant that the potential distributions to claimants would be "compensation" payments "made wholly or partly in respect of lost earnings or lost capacity to earn resulting from personal injury" within the plain meaning and construction of s.17(2)(d) of the Social Security Act. It was submitted that, because the meaning was plain, it was unnecessary to call in aid the purposes or aims of Part 3.14 of the Social Security Act but, if this were done, the construction urged by the defendant manifestly served those purposes.

Whether relevant distributions are "compensation"

94. In my opinion the relevant distributions will be caught by s.17(2)(d) of the Social Security Act. It may be accepted that the deed creates new causes of action,[8] replacing personal injury claims for damages in tort, or otherwise, with claims under a deed of company arrangement, the so-called "Equivalent Claims". It may be further accepted that the right to a distribution arises under and subject to the mechanisms created by the deed. Nevertheless the tests for admission of an Admitted Claim into the Admitted List will necessarily be and remain the identical principles of tortious or other liability which applied to the extinguished causes of action. This was not disputed by the plaintiffs and indeed was recognised by their reference to Redding v Lee.

97. The nature or purpose of a distribution to a claimant will continue to be the payment of compensation made (wholly or partly) in respect of lost earnings or lost capacity to earn resulting from personal injury. The true character of the payment is covered by the plain language of the section. I do not think that the character of the payment can turn upon the drafting devices adopted in a particular deed of company arrangement. A payment will still be compensation for the claimant, in ordinary language,[9] and the expression in s.17(2)(d), "compensation...payment...in respect of...lost earnings [etc]" emphasises the source and purpose of the payment.

100. If it be appropriate to have recourse to the purpose and aims of the legislation, the above conclusion is reinforced. The purpose of the legislation is both to prevent "double dipping" and to enable recovery of funds in the context of fairly maximising the resources available for social welfare payments. In Secretary, Department of Social Security v Banks (1990) 23 FCR 416, von Doussa J (at 422) referred to the Second Reading Speech on the Social Security Amendment Bill on 13 April 1988 in which it was said "This Bill contains measures to improve the administration and integrity of compensation recovery provisions. Where a person receives personal injury compensation that makes up for lost income, the Social Security Act provides that pension or benefit may be reduced or recovered. This is one way in which social security expenditures are directed to those most in need." What was said in that case by von Doussa J (at 424), in relation to the determination of the recoverable amount, may be seen as reflecting a general aim of Part 3.14: it is "a broad attempt to balance the interests of the recipient of the payments with the competing interests of others in the community whose needs must be met as far as possible from a finite budget allocation for social security measures."

103. In Re Blunn v Cleaver (1993) 47 FCR 111, the Full Federal Court (Sheppard, Neaves and Burchett JJA) referred to "the very wide meaning" given to the word "compensation" by s.17(2) of the Social Security Act.[10] The Court went on to say:

"[At page 123] Counsel for the applicant, the Secretary to the Department of Social Security, contended that the manner in which, or the method by which, the compensation was paid was not the relevant criterion. In her submission, the appropriate criterion for characterising a compensation payment for the purposes of any of the provisions of Div 4 of Pt 3.14 of the Act was the nature of the payment and the circumstances which gave rise to the entitlement. To adopt the criterion contended for by the respondent would, it was submitted, open the way for manipulation as to the manner in which, or the method by which, the compensation was to be paid... . This would not reflect, so it was said, the intention of the legislature as ascertained from a consideration of the provisions as a whole. In so far as the language of the provisions is ambiguous, the construction of the provisions which would more closely give effect to that intention should be adopted so as to further the obvious purpose and object underlying Pt 3.14 of the Act, namely to prevent "double dipping". ... [At pages 126-7] ...the context and purpose served by these provisions, and the consistency and fairness of their operation, are better guides to their meaning than a bare appeal to the literal sense of the words used..."

107. Likewise, in the present case, the characterisation of the payment for the purposes of the Social Security Act should not depend upon the mode of drafting adopted for the deed of company arrangement. The plaintiffs' analysis would defeat a clear purpose of the provisions. In any event, I do not think that reliance upon "the literal sense of the words used" supports the plaintiffs' position.

110. It was urged in the alternative on behalf of the defendant that the distributions would fall within s.17(2)(c) as payments in "settlement" of a claim for damages. I find it unnecessary to consider that submission.

114. If they failed upon the first question (as they have), declarations were also sought by the plaintiffs, and questions raised, as to the appropriate measurement of the "compensation part of a lump sum compensation payment" as provided for by the alternatives contained in s.17(3) of the Social Security Act. That concept is relevant to the ascertainment of the "recoverable amount".[11] In my opinion it would have been inappropriate to answer these questions because federal legislation provides specified avenues for review of these matters by all interested persons, when the precise facts of a particular case have been ascertained, as was conceded. In any event, the plaintiffs "withdrew" the relevant question, question (d).

118. The plaintiffs have failed to make out their case for the declaration sought in paragraph A of the Prayer for Relief and the declaration is refused. I will however, by way of directions under s.447D(2) of the Corporations Act, answer questions (a) and (b) in paragraph 10 of the originating motion for the reasons which I have stated. Because the parties were then agreed (correctly in my view) upon an affirmative answer to question (c), I will also answer that question.

121. By way of directions, the questions will be answered as follows:

Question (a): Whether the payment of a distribution or interim distribution in respect of an Admitted Claim under the Deed (being an Admitted Claim which corresponds to an Equivalent Claim against one of the National Express Group of Companies which but for the release in clause 9.1 of the Deed would have been a personal injuries claim against one of the National Express Group of Companies) ("a distribution") would be a payment of "compensation" within the meaning of s.17(2) of the Social Security Act 1991 (Cth)? Answer: Yes. Question (b): Whether the Administrators would be a "Compensation Payer" for the purposes of Part 3.14 of the Social Security Act in respect of a distribution? Answer: Yes. Question (c): If a distribution would be a payment of "compensation" within the meaning of s.17(2) of the Social Security Act and the Deed Administrators would be required, upon receipt of a notice under s.1182 of the Social Security Act to give notice to the Secretary of the Department pursuant to s.1183 of the Social Security Act, is the recoverable amount under s.1184A calculated upon the distribution made (or which would have been made but for a section 1182 or 1184 notice)? Answer: Yes. Question (d): Withdrawn.

125. There will be an order that the defendant's costs, including reserved costs, be taxed on a solicitor and client basis and paid out of the Available Property under the deed of company arrangement. I am not persuaded that the defendant should have his costs on a solicitor and own client basis.

[1] The contributions totalling $30M plus interest accrued thereon.

[2] "Admitted Claim" means an Equivalent Claim that is admitted to proof by the administrators against the Available Property in accordance with the terms of Cl. 14 of the deed.

[4] "Admitted List" means a list of all Admitted Claims.

[5] See s.1160(1)(a) and (b) of the Social Security Act.

[6] See s.1160(1)(c) of the Social Security Act.

[7] See the majority judgments on this point in Redding v Lee [1983] HCA 16; (1983) 151 CLR 117: per Mason and Dawson JJ esp. at 145-7, Wilson J at 159 (concurring on this point) and Deane J at 168 (concurring).

[8] For the binding effect of a deed of company arrangement, see esp. ss.444D, 444G and 444H of the Corporations Act.

[9] "Something given or received as an equivalent for services, debt, loss, suffering, etc.", The Macquarie Dictionary (3rd Edition), page 448.

[10] See Re Blunn v Cleaver (1993) 47 FCR 111 at 114.

[11] See ss.1184 and 1184A of the Social Security Act.