30 March, 2012

 

Legal News & Analysis – Asia Pacific – Australia – Insolvency & Restructuring

 

Two recent NSW court decisions have shed light on which claims will be admissible against a company in external administration. 

 
How does it affect you?
 
  • These decisions identify the requirements for claims to be caught by a deed of company arrangement (DOCA) or provable in a liquidation under sections 444D and 553(1) of the Corporations Act 2001 (Cth).

 

Case one

 
BE Australia WD Pty Ltd (subject to a Deed of Company Arrangement) v Sutton1
 
Ms Sutton claimed that her work arrangements with BE Australia were 'unfair' within the meaning of section 106 of the Industrial Relations Act 1996 (Cth). She initiated proceedings in the Industrial Relations Commission seeking to have the relevant arrangement varied to make BE Australia liable for her termination without prior notice or payment in lieu.
 
Before Ms Sutton's case was heard, BE Australia went into administration and entered into a DOCA. Claims will be caught by a DOCA if 'the circumstances giving rise' to them occurred before the administrators were appointed. Ms Sutton lodged a proof of debt with the deed administrators but it was rejected on the ground that her claim was not provable. Ms Sutton challenged that decision in the New South Wales Supreme Court.
 
Justice Palmer agreed with the deed administrators. However, he still allowed Ms Sutton to prove in the DOCA by exercising a discretion under s447A of the Corporations Act. This section gives the court a power to make such orders 'as it thinks appropriate' about how the provisions of the Corporations Act dealing with voluntary administration and DOCAs should operate in relation to a particular company. Purporting to use this power, his Honour ordered that Ms Sutton, although she was not a creditor, should be treated as a creditor for the purposes of the DOCA. BE Australia appealed to the New South Wales Court of Appeal.
 
To determine whether the claim was provable, the Court of Appeal examined whether a legal obligation had arisen prior to the company going into administration. While Ms Sutton's claim under s106 of the Industrial Relations Act entitled her to apply for an order, it did not entitle her to recover amounts from BE Australia unless an order had been made in her favour. As there was no existing legal obligation on the part of BE Australia towards Ms Sutton, the court found that she did not have a provable 'claim' and she was not a 'creditor'.
 
The next question was whether the court's discretionary powers under s447A of the Corporations Act could be used to enable Ms Sutton to claim in the DOCA, even though she was not a 'creditor' and did not have a 'claim'. A majority of the Court of Appeal (Justice Young dissenting) held that s447A did not enable it to order that Ms Sutton be treated as a creditor for the purposes of the DOCA because to do so would infringe on the purpose of that power.
 
Case two
 
Larkden Pty Ltd v Lloyd Energy Systems Pty Ltd2
 
A dispute between Larkden Pty Ltd and Lloyd Energy Systems Pty Ltd was arbitrated. Before issuing a final award, the arbitrator provided the parties with draft reasons in which Larkden succeeded. A few days later, Lloyd appointed voluntary administrators. The arbitrator went on to issue his final award and a costs award in favour of Larkden. Lloyd then entered into a DOCA. The issue in this case was whether Larkden's costs award was bound by and extinguished by the DOCA.3
 
Justice Hammerschlag's approach required identification of the elements of the substantive obligation that the claim represented and assessment of whether those circumstances revealed the existence of a basal fact necessary to bring the substantive obligation into being. As the source of legal liability for a costs order is the exercise by the court (or here the arbitrator) of its discretion to make the costs order itself, Justice Hammerschlag held that the costs order was neither a present claim arising on or before the date of administration nor a contingent claim in existence at that date. It was not therefore provable under s444D of the Corporations Act.
 
The effect of the decisions
 
In both cases, the courts were required to determine whether a claim was caught by a DOCA. In both decisions, the question of whether the circumstances giving rise to the claim occurred before the company went into administration turned on the nature of the claim itself. If all the elements of a claim exist prior to a company entering administration, that claim will be provable even if there has not been a formal adjudication of the claim by a court or arbitrator. The decision of Justice Hammerschlag in Lloyd Energy Systems may go one step further in suggesting that the existence of a 'basal fact' necessary to bring the obligation into being will be sufficient, and that it is not necessary that the breach or event giving rise to the claim must have occurred before the relevant date.
 
No appeal has been filed in respect of Lloyd Energy Systems but an application for special leave to appeal to the High Court has been filed in Sutton.
 
 

For further information, please contact:

 

Michael Quinlan, Allens Arthur Robinson

michael.quinlan@aar.com.au

 

Mitch Riley, Allens Arthur Robinson

mitch.riley@aar.com.au 

 

Alistair Oakes, Allens Arthur Robinson

alistair.oakes@aar.com.au 

 

 

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