Case: McDonald v Commissioner of Taxation [2005] NSWSC 2 ; (2005) 187 FLR 461
Outcome: referred to
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.' 42 In McDonald v Commissioner of Taxation ('McDonald') [2005] NSWSC 2 ; (2005) 187 FLR 461 at 472 [36] Barrett J noted that s 553(1) of the Act directs attention not to the time at which a debt or claim arises but to whether 'the circumstances giving rise to' the debt or claim occurred before the 'relevant date'. 43 In the Australian Law Reform Commission's final report, General Insolvency Inquiry (ALRC 45) ('the Harmer Report'), to which reference will be made hereafter, the recommended provision which ended up as s 553(1) of the Act, as set out above, was as follows (see Vol 2 at 151): ' C1. In the administration of a company that is being wound up in insolvency, a debt or liability, present or future, certain or contingent, being an ascertained debt or liability or a liability sounding only in damages, may be admitted as a claim against the company.' 44 Prior to the passage of the Corporate Law Reform Act 1992 (Cth) s 553 of the Corporations Law provided as follows: '553(1) In every winding up, subject in the case of insolvent companies to the application in accordance with the provisions of this Law of the Bankruptcy Act 1966 , all debts payable on a contingency and all claims against the company (present or future, certain or contingent, ascertained or sounding only in damages) are admissible to proof against the company, a just estimate being made so far as possible of the value of such debts or claims as are subject to any contingency or sound only in damages or for some other reason do not bear a certain value. (2) Subject to sections 206RD, 279 and 556, in the winding up of an insolvent company the same rules shall prevail and be observed with regard to the respective rights of secured and unsecured creditors and debts provable and the valuation of annuities and future and contingent liabilities as are in force for the time being under the Bankruptcy Act 1966 , in relation to the estates of bankrupt persons, and all persons who in any such case would be entitled to prove for and receive dividends out of the property of the company may come in under the winding up and make such claims against the company as they respectively are entitled to by virtue of this section.'' 74 In FAI Workers Compensation (NSW) Limited v Philkor Builders Pty Limited ('Philkor') (1996) 20 ACSR 592, Young J, as his Honour then was, held that the prospect of a plaintiff securing an entitlement to costs in winding up proceedings under the Corporations Law did not enable such a plaintiff to contend that a contingent debt was payable by the company to the plaintiff in circumstances where, before a winding up order was made, the company was placed in administration and a deed of company arrangement was thereafter executed following a resolution of the majority of creditors of the company that it should do so. Such resolution had not been supported by the plaintiff. This decision is quite unexceptional and has no real bearing on the resolution of the issues in the present case. As his Honour said at 597: 'As under s 466 there is a personal obligation to bear one's own costs of a winding up petition until the winding up order is made and then a statutory right to get costs which commences as at that day, it does not appear to me that a claim for costs before the order is made can be classed as a contingent debt.' (see also Expile at 673-5 and McDonald at 474-5) 75 After referring to Philcor and Expile Barrett J said in respect of the costs of winding up proceedings in McDonald at 474-5 [45]-[46]: '... The preferable analysis ... is that it is the state of insolvency found by the court to exist that forms the basis of the winding up order. The applicant's debt is the source of the applicant's standing to seek a winding up order. That debt may also cause a presumption of insolvency to apply via the statutory demand process provided for in Div 2 of Pt 5.4 for the purposes of the winding up application. But even then, it is the court's positive decision that insolvency exists, rather than the particular circumstance of non-payment of the applicant's debt, that forms the basis for the exercise of the jurisdiction to make a winding up order.' 90 In McDonald , Barrett J drew a distinction between prospective orders for costs in winding up proceedings and in other proceedings. At 474 [44] his Honour said: 'Where some act or omission of a company occurring before winding up carries within it the seeds of substantive relief in proceedings in which an adverse costs order is likely if the claim against the company is made out, the eventual liability under such a costs order may be seen to have its genesis in the original act or omission. But where the relevant proceeding is for a winding up order which does not, of its nature, entail substantive relief grounded in any particular anterior act or omission of the company, no such link is apparent.' 91 When addressing who may fall within the expression 'the creditors' in s 439C of the Act, it is important to note that there are distinct differences between the terminology used in s 82 of the Bankruptcy Act referable to the determination of 'debts provable', being the applicable section in relation to insolvent companies by virtue of s 553(2) of the Corporations Law prior to the passage of the Corporate Law Reform Act 1992 , that used in s 553(1) of the Corporations Law at that time referable to the determination of debts and claims that were 'admissible to proof' against a solvent company that was being wound up, and that used in the current s 553(1) of the Act referable to the determination of debts and claims which are 'admissible to proof' against a company that is being wound up, whether solvent or insolvent. 92 Firstly, the Bankruptcy Act was concerned with debts and liabilities to which a bankrupt was subject at the date of the bankruptcy, or to which he may become subject before his discharge by reason of an obligation incurred before the date of his bankruptcy. Section 553(1) of the Corporations Law, prior to its amendment in 1992, was silent in respect of any question of prior 'obligation'. It provided for 'all debts payable on a contingency' and for 'all claims' against the company to be admissible to proof against the company. Section 553(1) of the Act is concerned with debts and claims 'the circumstances giving rise to which occurred before the relevant date'. 98 To use Barrett J's expressions in McDonald , the eventual liability of Charben under the costs orders of the Full Court made on 19 May 2006, following the appointment of Charben's administrator on 31 March 2006, had its 'genesis' in the judgment of the Full Court in the plaintiff's favour, handed down on 22 December 2005. One could also say that 'the seeds' of the costs orders were the circumstances occurring before 31 March 2006, namely the delivery of the judgment in the plaintiff's favour on 22 December 2005. 99 In my opinion the plaintiff had, as at the date of the appointment of the administrator to Charben, a present claim for costs to which s 553(1) of the Act applied. Accordingly, subject to compliance with the regulations, the plaintiff would be entitled to vote at the adjourned decision meeting under s 439A-439C of the Act on Friday 23 June 2006 as a creditor of Charben in respect of both the debt of $1.4m which has already been admitted and also in respect of the plaintiff's costs and disbursements.