Case: McCluskey v Pasminco Limited (Administrators appointed) [2002] FCA 231 ; (2002) 120 FCR 326
Outcome: distinguished
Prior to the administrator rejecting the proof of debt for voting purposes to the extent to which it claimed an amount in excess of $1.4m the administrator received from his lawyers a letter of advice dated 19 April 2006, which relevantly provided as follows: 'The issue discussed at our meeting with the directors and Phillips Fox was whether ... the claims of EES and Caltex (to the extent that they have any claims) with respect to costs are debts/claims which are provable in any Deed of Company Arrangement that may be proposed. As we have indicated to you in our view they are not. It is of course a matter for any party propounding a Deed of Company Arrangement to specify in the proposal the debts and claims of creditors which are provable in the Deed (see section 444A(4) of the Corporations Act ). Relevantly however section 444A(4)(i) states that the Deed must specify the day (being a day not later than the day when the administration began) on or before which claims must have arisen if they are to be admissible under the Deed. The word " claims " is not defined in the Act although the definition contained in 553 of the Corporations Act which deals with debts provable in a winding up is often used as the definitions in a Deed as to which claims are provable in the Deed. Whatever definition of claims is incorporated into the Deed however it is clearly the case that the claim must have " arisen " by the time of the Administrator's appointment for the debt to be provable. The question arises whether the asserted right of Caltex and EES to the benefit of Costs Orders is a claim which has " arisen " as at the date that the Administrator was appointment (sic) . In our view the claims had not " arisen " at that date. As long ago as 1899 the Courts had determined (in Bankruptcy proceedings see Re: British Goldfields of West Africa (1899) 2 Ch 7) that the legal costs arising out of Court proceedings are not provable unless an Order is made for the payment prior to the date of the winding up. The New South Wales Supreme Court recently considered this position when determining whether the costs incurred by an applicant in seeking to wind up a company are provable in a subsequent Deed of Company Arrangement in circumstances where no Order had been made for costs with respect to that application prior to the Administrator's appointment. The Court held that such costs were not provable in the Deed of Company Arrangement ( see McDonald v Deputy Commissioner of Taxation [2005] NSWSC 2 ; (2005) 23 ACLC 324). The logic behind these decisions is that the award of costs is a matter which is wholly within the discretion of the Court. While in many cases it is fairly predictable as to how that discretion will be exercised (ordinarily costs follow the event so that the successful party would expect an Order to be made in their favour with respect to costs) until the Court actually exercises its discretion to make an Order it is wholly impossible for an Administrator or Liquidator to make an assessment that the discretion will be exercised in a particular way. It seems to us this is particularly the case in the circumstances of this matter. The issue concerning costs is complicated. There are clearly complex matter to be taken into account in determining what if any Costs Orders should be made and it seems to us those complexities only reinforce the importance of the following the previous authorities and not allowing EES or Caltex to vote with respect to any amount they may claim for legal costs nor to participate in any distribution that may be under any Deed of Company Arrangement that may be proposed. There have been cases which have considered exceptions to this principle. There is some authority for the proposition that contractual arrangements between the parties may alter the legal position. If for instance a party agrees in a contract to be responsible for another parties legal costs then there is an argument that the costs have arisen under that contract and so may be provable. In Re: Pasminco Limited [2002] FCA 231 ; (2002) 20 ACLC 782 considered whether costs associated with pursuing a personal injury action against the Company would be provable. The Court considered alternative views as to the nexus between incurring costs and obtaining compensation for personal injury but reinforced the general principle that costs are not provable in the absence of agreement to the contrary or an Order for their payment. In all the circumstances we confirm that we do not believe EES and/or Caltex should be allowed to vote or prove for their legal costs. To the extent that an Order is made by the Court subsequently those costs will be claimable against the Company and it may be if Caltex and EES intend to pursue their claim for costs (if an order is made in their favour) that it is important for the purposes of any Deed proposal that the directors commit to continuing to resist the making of any Order for Costs and give some consideration as to how any Order against the Company would subsequently be funded. It seems to us little point in proceeding with a Deed of Company Arrangement if the commercial reality is that the Company will subsequently face insolvency by breach of its inability to meet an adverse Costs Order.' 85 McCluskey v Pasminco Limited (Administrators appointed) ('Pasminco') [2002] FCA 231 ; (2002) 120 FCR 326 was concerned with the status of claims for legal costs and expenses incurred in prosecuting claims for injury compensation prior to the date of the commencement of the administration of Pasminco Limited and 21 other companies in the Pasminco Group. Prior to the appointment of the administrators there were approximately 442 claims outstanding against three of the Pasminco companies for injury compensation. The Pasminco Group carried on a number of lead and zinc mining and smelting operations. Goldberg J held that the claims for injury compensation were admissible to proof in the administration they being present claims sounding in damages under s 553(1) of the Act, the relevant workplace events giving rise to the claims having occurred prior to the commencement of the administration. His Honour found that the claims for injury compensation were present claims which had to be valued or quantified by the administrator and in respect of which a just estimate of value must be made before the relevant claimants were allowed to vote at a creditors meeting. His Honour proceeded to find that any claims for legal costs and expenses incurred in prosecuting the claims for injury compensation prior to the date of the commencement of the administration were admissible to proof as contingent claims because of their association and connection with the primary claims for injury compensation, even though there had not been any costs orders obtained for the payment of such legal costs and expenses prior to the commencement of the administration. (See 338 at [39]-[41]). 87 The criticism, by way of obiter, of the decision of Goldberg J in Pasminco , by Finkelstein J in McLellan v Australian Stock Exchange Limited ('McLellan') [2005] FCA 585 ; (2005) 144 FCR 327 at 331-3 [12] - [17] may require further consideration in the light of the matters recorded in these reasons with respect to the relevant statutory framework now prevailing as noted under the heading '"Creditors" for the purpose of Part 5.3A decision meetings '. So also the criticism by Chesterman J of the proposition for which Emma Silver Mining Co v Grant (1880) 17 ChD 122 was cited as authority in British Goldfields , in Southern Cross Mine Management Pty Limited v Ensham Resources Pty Limited [2006] QSC 7 at [27] - [35] .