Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd (in liq)

[2006] NSWSC 434

CITATION:	Bidald Consulting v Miles Special Builders; Bidald Consulting v Miles Special Builders [2006] NSWSC 434
HEARING DATE(S):	17 February 2006
JUDGMENT DATE :	18 May 2006
JURISDICTION:	Equity
JUDGMENT OF:	Campbell J
DECISION:	Costs of deed termination application are costs in respect of the application for the order for winding up.
CATCHWORDS:	PRACTICE AND PROCEDURE – costs – plaintiff’s application to vary costs orders made in favour of plaintiff - where plaintiff succeeded in its application to terminate a Deed of Company Arrangement and subsequently obtained orders for the winding up of the defendant – where termination of Deed was a statutory precondition to the making of the order for winding up – whether costs of the deed termination application are costs in respect of the application for the order for winding up under section 556(1)(b) Corporations Act 2001 (Cth) – whether statutory requirement under section 466 Corporations Act 2001 (Cth) that applicant for winding up bear its own costs until a liquidator has been appointed militates against cost orders sought by plaintiff – policy considerations – whether plaintiff’s costs of deed termination proceedings can be characterised as expenses properly incurred by deed administrators under section 556(1)(a) Corporations Act 2001 (Cth) – whether plaintiff’s costs of deed termination proceedings can be characterised as other expenses of deed administrators under section 556(1)(dd) Corporations Act 2001 (Cth) – PRACTICE AND PROCEDURE – Supreme Court Procedure – where liquidator appointed after Deed of Company Arrangement terminated and deed administrators no longer have carriage of proceedings on behalf of the defendant - whether deed administrators should be granted leave to be heard on plaintiff’s application – CORPORATIONS – Deed of Company Arrangement and winding up – order of priority of claims in winding up – whether costs of deed termination application are costs in respect of the order for winding up under section 556 Corporations Act 2001 (Cth) – whether orders sought by plaintiff interfere with administrators’ entitlement to remuneration and expenses – administrator’s right of indemnity – administrator’s lien securing right of indemnity – property over which lien extends – non-effect of order of priority of unsecured claims under section 556 Corporations Act 2001 (Cth) on right of indemnity to the extent that it is secured by lien – no ruling on whether administrator has a lien on this application – WORDS AND PHRASES – “in respect of”
LEGISLATION CITED:	Corporations Act 2001 (Cth) Corporations Regulations 2001 Supreme Court (Corporations) Rules 1999
CASES CITED:	Bidald Consulting Pty Ltd v Miles Special Builders (2005) 189 FLR 309; (2005) 54 ACSR 228; [2005] NSWSC 397 Bidald Consulting v Miles Special Builders; Bidald Consulting v Miles Special Builders [2005] NSWSC 1235 Cinema Plus Ltd (administrators appointed) and Another v Australia and New Zealand Banking Group Limited (2000) 49 NSWLR 513 Cresvale Far East Ltd (in liq) v Cresvale Securities Ltd & Others (No 2) [2001] NSWSC 791; (2001) 39 ACSR 622 Expile Pty Ltd v Jabb's Excavations Pty Ltd (2004) 22 ACLC 652; [2004] NSWSC 284 Ganter v Whalland [2001] NSWSC 1101; (2001) 54 NSWLR 122 Kirwan v Cresvale Far East Ltd (in liq) [2002] NSWCA 395; (2002) 44 ACSR 21 McDonald v Deputy Commissioner of Taxation [2005] NSWSC 2; (2005) 187 FLR 461 Weston & Another v Carling Constructions Pty Ltd (in prov liq) and Another (2000) 35 ACSR 100 Wonall Pty Ltd v Clarence Property Corporation Limited (2003) 58 NSWLR 23
PARTIES:	Bidald Consulting Pty Ltd (trading as "Forstaff") - Plaintiff Miles Special Builders Pty Ltd (in liq) - Defendant
FILE NUMBER(S):	SC 2858/04; 2583/05
COUNSEL:	M R Aldridge SC; V E Whittaker - Plaintiff G Lucarelli - Defendant
SOLICITORS:	Kemp Strang - Plaintiff Colin Biggers & Paisley - Defendant

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
EQUITY LIST

CAMPBELL J

18 MAY 2006

2858/04 BIDALD CONSULTING PTY LTD v MILES SPECIAL BUILDERS PTY LTD
2583/05 BIDALD CONSULTING PTY LTD v MILES SPECIAL BUILDERS PTY LTD

JUDGMENT

HIS HONOUR:

1 This is an application to vary a costs order in proceedings the substance of which has already been determined.

Events Leading to the Costs Order

2 On 9 December 2005 I gave a judgment in two sets of proceedings: Bidald Consulting v Miles Special Builders; Bidald Consulting v Miles Special Builders [2005] NSWSC 1235. Each of those proceedings was brought by Bidald Consulting Pty Ltd (“Bidald”) against Miles Special Builders Pty Ltd (“the Company”). Bidald was a creditor of the Company.

3 One set of proceedings (‘the Winding Up Proceedings”) was begun by Bidald on 13 May 2004. That set of proceedings sought the winding up of the Company, on the ground of insolvency. Those proceedings came to be listed for hearing before Gzell J on 1 March 2005.

4 On 28 February 2005 the directors of the Company resolved to appoint Mr Anthony Warner and his then partner Mr Worrell as administrators of the Company. That appointment led Gzell J on 2 March 2005 to adjourn the Winding Up Proceedings until 11 April 2005, a date by which the second meeting of creditors in the administration would have been held.

5 On 4 April 2005 the second meeting of creditors voted to accept a Deed of Company Arrangement.

6 On 11 April 2005, when the Winding Up Proceedings were next before the Court, Bidald foreshadowed that it would make an application to terminate the Deed of Company Arrangement.

7 On 22 April 2005 Bidald began the second set of proceedings, No. 2583 of 2005, (“the Deed Termination Application”), in which it sought the termination or declaring void of the Deed of Company Arrangement.

8 The foreshadowing, and eventual bringing, of the Deed Termination Application, led to the Winding Up Proceedings being adjourned from time to time so that the Deed Termination Application could be decided. As a matter of administrative convenience, both sets of proceedings were listed before me on dates commencing on 23 September 2005.

9 Section 444E(2) Corporations Act 2001 (Cth) says that a person bound by a Deed of Company Arrangement::

“… cannot:
(a) make an application for an order to wind up the company; or
(b) proceed with such an application made before the deed became binding on the person.”

Bidald was a person bound by the Deed here in question.

10 The prohibition in section 444E(2) does not prevent a winding up application, which had been brought before a Deed of Company Arrangement was entered, from being adjourned while an application to terminate that Deed of Company Arrangement is on foot or being determined: Bidald Consulting Pty Ltd v Miles Special Builders (2005) 189 FLR 309; (2005) 54 ACSR 228; [2005] NSWSC 397 per Barrett J. Thus, even though the Winding Up Proceedings were listed before me, it was the clear understanding of both counsel that section 444E(2) required that the substance of those proceedings could be dealt with only when, and if, the Deed were to be terminated. Even so, as a sensible way of minimizing costs and court time, both counsel made, at the hearing, such submissions as they would have wished to make if I were to come to the conclusion that the Deed should be terminated.

11 My eventual decision was that the Deed should be terminated, and I made orders in the Deed Termination Application to bring about that result. Immediately after, I made orders in the Winding Up Proceedings, that the Company be wound up, and appointing a liquidator. I altered the usual situation which arises when a Deed of Company Arrangement is terminated by appointing Mr John Sheahan – ie someone other than the deed administrators – as liquidator.

12 In my reasons for judgment at para [309], I said:

“To minimise costs so far as possible, I propose to make a costs order now. However, I do so without having heard the parties, and on the assumption that no principle or factual circumstance bears upon the costs order other than that costs should follow the event. I shall reserve leave to the parties to otherwise argue.”

13 The only plaintiff in each of the sets of proceedings I decided on 9 December 2005 was Bidald. The only defendant in each of those sets of proceedings was the Company.

14 In each of the sets of proceedings, I made orders on 9 December 2005 to the effect that:

“(a) the plaintiff’s costs of the proceedings be paid by the Company.

(b) that order (a) not be entered until 21 days after the date of delivery of reasons for judgment, and

(c) that either party have leave, on not less than 2 days written notice to the other, to argue that order (a) should be revoked or varied.”

The Application to Vary the Costs Order – Bidald’s Preferred Order

15 In exercise of that leave, Bidald applied for the costs order in the Deed Termination Application to be varied to read:

“That the plaintiff’s costs of these proceedings be paid by the Company, as a cost in respect of the application for the order for the winding up of the company.”

16 Bidald also sought that the costs order in the Winding Up Proceedings be varied to read:

“That the costs of the plaintiff of these proceedings be paid from the assets of the Company, together with the costs of proceedings 2583 of 2005.”

17 Bidald made this application because it is now apparent that the Company has insufficient assets to pay both Bidald’s costs of the Deed Termination Application and the whole of the expenses and remuneration of Mr Warner and Mr Worrell as company administrators and Deed administrators.

Situation Concerning Payment of Administrators’ Fees, Administrators’ Expenses, and Plaintiff’s Costs

18 All expenses incurred during the period of voluntary administration of the Company have been paid, except for the remuneration of the administrators. The total remuneration claimed by the voluntary administrators was $120,942. The whole of that remuneration was approved by a resolution of creditors passed on 4 April 2005. An amount of $75,155 of that remuneration has actually been paid, and an amount of $45,487 remains unpaid.

19 All the expenses incurred by the deed administrators have been paid, except solicitors and counsel’s fees, and the remuneration of the administrators. Unpaid fees to the deed administrators’ solicitors and counsel exceed $40,000.

20 Total remuneration claimed by the deed administrators to the date of the hearing of this application exceeds $163,000. Creditors have approved, on 4 April 2005, fees for the deed administrators in the sum of $50,000. The deed administrators have actually been paid $47,810 of this amount, and $2,190 of it remains unpaid.

21 The costs and disbursements incurred in connection with both the Deed Termination Application and the Winding Up Proceedings by Bidald since 5 April 2005 exceed $115,000. That amount has not been subjected to any process of assessment, and hence might reduce upon assessment. The solicitor for Bidald estimates that no more than $1,100 of those costs and disbursements would be attributable to the Winding Up Proceedings. The correctness of that estimate might also need to be considered in an assessment. There would, presumably, be other costs and disbursements attributable to the Winding Up Proceedings which were incurred up to 5 April 2005, but no attempt has been made for the purposes of this application to quantify those other costs and disbursements.

22 The only assets of the Company which the former deed administrators now have, to meet all those costs and expenses, is a sum of a little over $14,000. It came to their hands on 14 December 2005, ie after the making of the orders which terminated the Deed. That sum is a refund of GST, but the evidence does not disclose whether it is GST paid by the Company during the voluntary administration, during the Deed administration, or at some other time.

Procedural Aspects of this Application

23 When the Winding Up Proceedings and the Deed Termination Application were being argued before me last September, the deed administrators had the carriage of both sets of proceedings on behalf of the Company. Bidald gave notice of this application to vary the costs orders to the solicitors who had acted for the Company at that time.

24 As a result of the Deed being terminated and Mr Sheahan appointed as liquidator, the solicitors who had acted for the Company when the litigation was being heard no longer had valid instructions to act for the Company. However, on 17 February 2006 when the matter came back before me, Mr Lucarelli of counsel sought, and was granted without opposition, leave, under Rule 2.13 of the Supreme Court (Corporations) Rules 1999, for Mr Warner and Mr Worrell to be heard on the application. That rule provides, so far as is relevant:

“(1) The Court may grant leave to any person who is, or who claims to be:
…
(c) any other interested person,
to be heard in a proceeding without becoming a party to the proceeding.”

Mr Aldridge SC, counsel for Bidald, explained his lack of opposition to the application by saying:

“No orders are sought against the deed administrators but the indirect effect will be that the liquidator may wish to recover funds from them.”

25 I was not satisfied that all relevant parties were aware of the application, given that Mr Sheahan was now the person who had power to represent the Company. As well, one possible consequence of the order which Bidald sought might have been to affect the order of priority of payment of debts of the Company so as to give the liquidator’s own remuneration and expenses a lower priority than it would have had if the order had not been made. I therefore gave directions as follows:

“I direct the plaintiff's solicitors to notify the liquidator in writing of:
(a) the precise order which they seek concerning costs of the proceedings,
(b) the terms of all evidence filed in connection with the application,
(c) the written submissions of both sides concerning the application, and
(d) a transcript of the argument which occurred today
by 5 pm Friday 24 February 2006.
I direct the plaintiff’s solicitors to inform the liquidator that the Court has indicated that if he wishes to be heard he should contact my Associate to arrange a time at which he is heard, and that if no such contact is made prior to Friday 10 March 2006, judgment on the application will be given without him having any further opportunity to be heard.
I direct the plaintiff's solicitor to file and serve an affidavit verifying that this direction has been complied with by 5 pm Wednesday 1 March 2006.”

Those directions have been complied with. The liquidator has not sought to be heard concerning the orders which Bidald seeks.

26 I say immediately that the present application is procedurally irregular. The question it raises is essentially one of priority of creditors in the winding up. Ordinarily such a question should be decided in the winding up proceedings themselves. However, when the question has been argued and all affected parties given the opportunity to make submission, I think it is preferable to decide the question.

Bidald’s Argument

27 The following provisions of the Corporations Act 2001 (Cth) are relevant:

466(1) The persons, other than the company itself or the liquidator of the company, on whose application any winding up order is made must, at their own cost, prosecute all proceedings in the winding up until a liquidator has been appointed under this Part.
(2) The liquidator must, unless the Court orders otherwise, reimburse the applicant out of the property of the company the taxed costs incurred by the applicant in any such proceedings.
…
556(1) Subject to this Division, in the winding up of a company the following debts and claims must be paid in priority to all other unsecured debts and claims:
(a) first, expenses (except deferred expenses) properly incurred by a relevant authority in preserving, realising or getting in property of the company, or in carrying on the company's business;
(b) if the Court ordered the winding up—next, the costs in respect of the application for the order (including the applicant's taxed costs payable under section 466);
…
(dd) next, any other expenses (except deferred expenses) properly incurred by a relevant authority;
(de) next, the deferred expenses;
…”

28 Pursuant to section 556(2) “relevant authority” includes “an administrator of the company, even if the administration ended before the winding up began”, “an administrator of a deed of company arrangement executed by the company, even if the deed terminated before the winding up began”, and a liquidator of the company. Also pursuant to section 556(2), “deferred expenses” “… means expenses properly incurred by a relevant authority” consisting of, amongst other things, remuneration, and expenses incurred.

29 Mr Aldridge SC, for Bidald, submits that the costs which the Company must pay to Bidald concerning the Deed Termination Application fall within section 556(1)(b). The effect of those costs falling within 556(1)(b) is, he submits, that they have priority over any expenses incurred by the administrators (because those expenses fall under section 556(1)(dd)), and over the remuneration of the administrators (because those expenses fall under section 556(1)(de)).

30 Mr Aldridge SC points out that the wording of section 556(1)(b) is not “costs of the application for the order …”, but “costs in respect of the application for the order …”. Further, because section 556(1)(b) includes the words “(including the applicant’s taxed costs payable under section 466)”, it by its terms contemplates that the amount which can be payable under section 556(1)(b) might be wider than merely the applicant’s taxed costs of prosecuting the winding up proceedings themselves.

31 In the present case, he submits, the Deed Termination Application was an essential prerequisite to the obtaining of the winding up order. He reminds me that the Winding Up Proceedings were adjourned from time to time precisely so that the Deed Termination Application could be decided. In those circumstances, he submits, the costs of the Deed Termination Application should be seen as ones “in respect of” the application for the winding up order. Further, it is, he submits, appropriate to make an order which gives effect to that construction of section 556(1)(b), rather than leave it as a matter for Mr Sheahan to work out for himself.

32 I venture to repeat the collection of authorities I gave in Wonall Pty Ltd v Clarence Property Corporation Limited (2003) 58 NSWLR 23 at 44-45, [41]-[43]:

“… In Rogers v Wentworth (1986) 7 NSWLR 88 at 92 Young J (as his Honour then was) said:
“The phrase “in respect of” was described as “colourless words” by Lord Greene MR in Cunard’s Trustees v Inland Revenue Commissioners [1946] 1 All ER 159 at 164 but in Trustees Executors and Agency Co Ltd v Reilly [1941] VLR 110 at 111, Mann CJ said:
“… The words ‘in respect of’ are difficult of definition, but they have the widest possible meaning of any expression intended to convey some connection or relation between the two subject-matters to which the words refer.”
In applying this passage Wilcox J, in Frost v Collector of Customs (Qld) (1985) 63 ALR 297 at 308; 9 FCR 174 at 185, gives six other cases where Mann CJ’s words have been applied. The passage has at least twice been referred to with approval in the High Court; see State Government Insurance Office (Queensland) v Crittenden (1966) 117 CLR 412 at 416 and McDowell v Baker (1979) 144 CLR 413 at 419.”
In Evans v Button (1988) 13 NSWLR 57 at 72 Mahoney JA (with whom Priestley and McHugh JJA agreed) said, “the words ‘in respect of’ have traditionally … been given a wide operation …”. In Attrill v Richmond River Shire Council (1995) 38 NSWLR 545 at 554 Kirby P (with whom Clarke and Powell JJA agreed) described “in relation to” as one of “the classic phrases of wide connection”.

However, while the words “in respect of” can have this width of meaning, it is not necessary that they have it. In Workers Compensation Board of Queensland v Technical Products Pty Ltd (1988) 165 CLR 642 at 646-647 Wilson and Gaudron JJ said:
“It has been said, perhaps somewhat extravagantly, that the words “in respect of” “have the widest possible meaning of any expression intended to convey some connexion or relation between the two subject-matters to which the words refer”: Trustees Executors & Agency Co Ltd v Reilly [1941] VLR 110, at p 111, cited in State Government Insurance Office (Qld) v Crittenden (1966) 117 CLR 412, at p 416. The words were cited again by Gibbs J in McDowell (1979) 144 CLR at p 419, and by Mason J in State Government Insurance Office (Qld) v Rees (1979) 144 CLR 549 at p 561, when his Honour added the comment: “But, as with other words and expressions, the meaning to be ascribed to “in respect of” depends very much on the context in which it is found.

In that same case, Deane, Dawson and Toohey JJ said, at 653-654:

“Undoubtedly the words “in respect of” have a wide meaning, although it is going somewhat too far to say, as did Mann CJ in Trustees Executors & Agency Co Ltd v Reilly [1941] VLR 110 at p 111, that “they have the widest possible meaning of any expression intended to convey some connection or relation between the two subject-matters to which the words refer”. The phrase gathers meaning from the context in which it appears and it is that context which will determine the matters to which it extends.”

33 In the present case, other provisions of the Corporations Act 2001 (Cth) can cast some light on what sort of connection is needed between costs, and an application for a winding up order, before those costs are “in respect of the application for the order”.

34 Section 440A(2) requires the Court:

“… to adjourn the hearing of an application for an order to wind up a company if the company is under administration and the Court is satisfied that it is in the interests of the company's creditors for the company to continue under administration rather than be wound up.”

35 One practical effect of this provision is that if the Court is satisfied it is in their interests, creditors will be given the opportunity to decide (inter alia) whether they wish the company to enter a Deed of Company Arrangement, rather than have the company wound up. However, the means chosen is adjournment of the winding up application, not its dismissal.

36 I have already referred to section 444E(2), which prevents the making of, or proceeding with, a winding up application concerning a company which is subject to a Deed of Company Arrangement. If a winding up application is made, but adjourned, and a Deed of Company Arrangement is then entered, this provision then comes into operation. A consequence of the provision is that it is not possible for a creditor of a company to seek a winding up order in the same proceedings as the creditor brings to set aside a Deed of Company Arrangement. The Act has a positive requirement, in this way, that an application to terminate a Deed of Company Arrangement be separate to, and different from, an application to wind the company up. However, it is consistent with the statutory scheme for the winding up application to stay on foot, although not proceeded with immediately, so that it can be reactivated when and if the Deed is terminated or set aside.

37 Mr Lucarelli submits that the statutory framework which positively requires an application to wind a company up to be brought in separate proceedings to an application to terminate a Deed of Company Arrangement has the consequence that costs which the company is ordered to pay in the Deed Termination Proceedings, could not be costs “in respect of” the application for the winding up order. I do not agree. I accept that the statutory structure requires the two proceedings to be separate, but it is an inevitable consequence of the working through of the statutory scheme that, when a Deed of Company Arrangement is on foot, the termination or setting aside of that Deed is a necessary prerequisite to the making of a winding up order. I see nothing in the statutory scheme which prevents the costs of the Deed Termination Application being ones “in respect of” the winding up application.

38 In McDonald v Deputy Commissioner of Taxation [2005] NSWSC 2; (2005) 187 FLR 461 Barrett J considered a situation where the following sequence of events had ccurred:

(a) creditor files winding up application;

(b) company appoints voluntary administrators;

(c) creditors resolve that the company be voluntarily wound up;

(d) winding up application is dismissed, with an order for costs in favour of the creditor.

39 The question for determination was whether the costs which the company was ordered to pay were provable in the voluntary winding up. One argument which Barrett J considered was whether those costs were ones “of and incidental to the [creditor’s voluntary] winding up”, within the meaning of section 512 Corporations Act 2001 (Cth). The creditor submitted that, because the making of the winding up application had caused the directors of the company to start the administration, which in turn had led to the creditors’ voluntary winding up, the costs of the court application for winding up were “of and incidental to” the voluntary winding up. Barrett J held, at [27] that:

“… the words ‘of and incidental to the winding up’, when used in s 512 of the Corporations Act, are capable of referring to matters forming part of the winding up, or intimately connected with it, even if antecedent. ” (emphasis added)

I respectfully agree with that view.

40 Barrett J held, however, that the costs there in question were not provable in the voluntary winding up. His Honour said, at [30]-[31]:

“30 The first reason is that an approach under which promptings or factors contributing to some eventual decision or action are taken into account in the way suggested introduces unacceptable elements of vagueness. If it is true to say that the Deputy Commissioner’s initiation of the proceedings for compulsory winding up led to the ultimate voluntary winding up in such a way that the costs of the proceedings were “incidental to” the voluntary winding up, the same might be said of, say, costs the directors of the company incurred in seeking, at the same point, advice as to its solvency, being advice which caused them to decide it to place the company in administration. The same might be said of legal costs incurred by a creditor whose simple demand by a solicitor’s letter was enough to precipitate such a decision of the directors. Numerous other examples illustrating this concern may be imagined.
31 The second reason is that, in my view, “the winding up”, as referred to in s 512, is confined to the process of collection of assets, ascertainment of claims and deployment of the former towards satisfying the latter that occurs under the direction and control of the liquidator. The boundaries of “the winding up”, for the purposes of s 512, are, in my view, those that apply for the purposes of s 564 as recently described by the Court of Appeal in Fuji Xerox Australia Pty Ltd v Tolcher (2004) 50 ACSR 402. It is conceivable that some cost or expense prior in time to the formal commencement of the liquidator’s functions might be so intimately connected with those functions as to be “incidental to the winding up”, but I do not think that costs attributable solely to legal proceedings the existence of which may have played a part in the directors’ decision to impose Pt 5.3A administration which, in turn, provided the context for the creditors’ decision to impose voluntary winding up bear the requisite relationship to the performance of the functions of the liquidator presiding over the voluntary winding up.”

41 If anything, it is a wider class of costs which can be “with respect to” the application for the winding up order than is comprehended by costs which are “incidental to” a winding up. I do not accept Mr Lucarelli’s submission that there is a close analogy between the present case, and McDonald. Barrett J’s first reason cannot be analogised to the present case, where the statute itself requires the termination or setting aside of the Deed as a prerequisite to the winding up application being proceeded with. Barrett J’s second reason was one which depended upon the particular phrase which his Honour was construing, and that phrase does not appear in section 556(1)(b).

42 Mr Lucarelli submits that section 466 tells against the orders which Bidald seeks, because it requires an applicant for winding up to bear its own costs. In my view, if a winding up order is eventually made, the effect of section 466 bears purely on cash flow – it is the applicant for winding up who bears its own costs until a liquidator is appointed, but once the liquidator is appointed those costs are to be reimbursed to it.

43 In substance, the requirement inherent in the statutory scheme that separate proceedings be taken to set aside a Deed of Company Arrangement before a winding up application can be proceeded with is no different to if the statute had a requirement for leave to be granted before the winding up application could be proceeded with. In my view, the costs incurred in the carrying through of a step which the statutory structure itself requires to be a pre-requisite to the making of a winding up order are properly described as costs "in respect of" the application for winding up. I conclude that the costs the company has been ordered to pay in the Deed Termination Proceedings are costs “in respect of” the application for winding up.

No Order Interfering with Administrators’ Entitlements to Fees?

44 Mr Lucarelli submitted that an order ought not be made which interferes with the entitlement of the administrators to remuneration and expenses. Section 449E contemplates that both the administrator of a company under administration, and the administrator of a Deed of Company Arrangement, will be entitled to remuneration as fixed by the creditors or the Court. As well, section 443D entitles the administrator of a company under administration to be indemnified out of the company’s property for (amongst other things) (picking up wording from section 443A(1))

“… debts he or she incurs, in the performance or exercise, or purported performance or exercise, of any of his or her functions and powers as administrator, for
(a) services rendered; or
(b) goods bought; or
(c) property hired, leased used or occupied”,

and also for his or her remuneration as fixed under section 449E.

45 Section 443E(1) provides:

“Subject to section 556, a right of indemnity under section 443D has priority over … all the company’s unsecured debts …”

46 Section 443F(1) provides:

“To secure a right of indemnity under section 443D the administrator has a lien on the company’s property.”

47 The property over which the lien under section 443F(1) extends is “the company’s property as it existed at the time that the debts were incurred and the right to remuneration accrued”: per Spigelman CJ (with whom Sheller and Giles JJA agreed), Cinema Plus Ltd (administrators appointed) and Another v Australia and New Zealand Banking Group Limited (2000) 49 NSWLR 513 at 528, [67]. I accept the conclusion of Austin J in Weston & Another v Carling Constructions Pty Ltd (in prov liq) and Another (2000) 35 ACSR 100 at 106, [26] that:

“… “subject to section 556” in s 443E do not diminish the administrator’s right to recover, out of the assets of the company realised in the course of the administration, his or her remuneration as well as disbursements and recoupment for debts incurred during the course of the administration. But those words have the effect that if any additional assets are recovered by a subsequently-appointed provisional liquidator or liquidator, the administrator’s priority to payment out of those additional assets is governed by s 556.”

48 While the Act does not confer any lien upon the administrator of a Deed of Company Arrangement, it is still possible for a deed administrator to have a lien for certain of his remuneration and expenses under the general law: Cresvale Far East Ltd (in liq) v Cresvale Securities Ltd & Others (No 2) [2001] NSWSC 791; (2001) 39 ACSR 622 at [66]-[76], 635-637 per Austin J. (The reversal of that decision by the Court of Appeal in Kirwan v Cresvale Far East Ltd (in liq) [2002] NSWCA 395; (2002) 44 ACSR 21 does not, in my view, affect the soundness of the legal principles set out in the paragraphs to which I have referred.)

49 It is to be observed that section 556(1) is concerned with the relative priorities of unsecured debts and claims against the company. To the extent to which the administrator of a company under administration has a lien, the administrator is a secured creditor. It is no part of the present application to decide for what amount, if any, the administrators have a lien, or over what property, if any, they have any such lien. A costs order in litigation gives rise to an unsecured claim against the company. Wherever an amount payable pursuant to that costs order properly might lie in section 556, a valid lien of the administrators will prevail over it. Nothing in the order which is sought will prevent that from happening.

50 To the extent to which the administrators might not have a lien for their remuneration and expenses, deciding the present question will have a direct consequence on whether, on the proper construction of section 556 (1), that remuneration and expenses has priority over the amount which the Company has been ordered to pay to Bidald for costs. However, deciding the present question will not interfere with any entitlement of the administrators to remuneration and expenses – it will merely decide one matter relevant to what rights the administrators already have to actually receive payment, from the available funds, of their remuneration and expenses.

Checking by Consequences

51 It is legitimate for a court engaged in construing a particular statutory provision to check whether a construction of that provision (which has been arrived at through legal analysis) is correct, by considering whether that construction would produce seriously anomalous consequences: Ganter v Whalland [2001] NSWSC 1101; (2001) 54 NSWLR 122 at [35]-[36], 131 and cases there cited.

52 One form of anomaly, which could lead one to reconsider whether a construction arrived at through legal analysis was correct, is if the construction is inconsistent with well established policies of the law.

53 In Expile Pty Ltd v Jabb’s Excavations Pty Ltd (2004) 22 ACLC 667; [2004] NSWSC 284 at [56]-[57], 679 Palmer J said:

“That the costs of the successful applicant for the winding up of a company are given second priority under s 556(1)(b) in the insolvent administration reflects a well established policy of the law that it is in the public interest that insolvent companies be wound up rather than be permitted to trade: see eg Re Data Homes Pty Ltd (in liq) [1972] 2 NSWLR 22, at 26. Consistently with that policy, creditors are to be encouraged, rather than discouraged, to undertake the financial burden of proceedings to wind up a company which is insolvent by the consideration that in the winding up the costs of their application will receive high priority for payment. That is not regarded as unfair to other creditors because the applicant creditor is seen as seeking the winding up order, not for his or her exclusive benefit, but for the benefit of the class of creditors of which he or she is a member: In Re Crigglestone Coal Company [1906] 2 Ch 327, at 331–2. It is right, therefore, that those who benefit from the financial risk undertaken by one of their number cede priority to the risk-taker for its costs of the risk-taking.
The inducement to risk-taking for the general good of creditors held out by s 556(1)(b) is not lightly to be taken away or weakened.”

The conclusion which I have arrived at is consistent with that policy.

54 There is, however, an analogous policy that is applicable to costs properly incurred by an administrator of a company under administration, and the administrator of a Deed of Company Arrangement. In the ordinary course, costs of such administrators are also regarded as ones incurred for the benefit of all creditors, and so are given priority over other unsecured debts of the company. For a company under administration, that priority is conferred by section 443E(1) (set out in para [45] above). In the ordinary course, for a Deed of Company Arrangement that priority arises because section 444A(5) deems a Deed of Company Arrangement to contain the “prescribed provisions” unless the deed provides otherwise. Those “prescribed provisions” are identified by Regulation 5.3A.06 of the Corporations Regulations as being those in Schedule 8A of those Regulations. Schedule 8A includes clause 4, which says:

“The administrator must apply the property of the company coming under his or her control under this deed in the order of priority specified in section 556 of the Act”.

55 Section 556(1)(a) (set out in para [27] above) confers first priority on, broadly, the administrator’s proper expenses other than his or her own fees, incurred for a particular purpose.

56 If a deed of company arrangement is succeeded by a winding up, section 556(1)(a) also has the effect that expenses (other than for his or her own fees) properly incurred by the deed administrator for the purpose stipulated in section 556(1)(a) will continue to retain first priority, along with expenses which meet that description that are incurred by the liquidator. However the administrator's own fees are accorded, by section 556(1)(de), a priority lower than the costs in respect of the application for the winding up order.

57 The deed administrator is usually someone who has had a significant role in the formulation of the deed which was actually adopted, and it is usually on the recommendation of the person who becomes deed administrator that the creditors decide that is appropriate to adopt the deed. Thus, usually, the deed administrator is, or should be, in a particularly good position to judge whether the deed is an appropriate one for the circumstances of that particular company. If the court decides to terminate the deed, on one of the grounds set out in section 445D(1), that decision involves a conclusion that, in some fashion, the judgment that a deed in the terms of the one adopted will be appropriate to the circumstances of that particular company was, or has proven to be, defective. It is possible for such a judgment to be, or to be proven to be, defective in circumstances which do not involve there having been any impropriety on the part of the deed administrator. Even so, it does not seem anomalous that the creditor who has brought the proceedings which have resulted in the deed being terminated should have priority for its costs over the fees of the deed administrator.

58 I conclude that there do not seem to be anomalous consequences of the construction of section 556(1)(b) which I have arrived at.

The Application to Vary the Costs Order – Bidald’s Alternative Orders

59 Bidald had two alternative submissions. Each of them recognised (correctly) that Mr Warner and Mr Worrell, as both administrators of the Company and administrators of the Deed of Company Arrangement, were a “relevant authority” within the meaning of section 556(2) Corporations Act 2001 (Cth).

60 The first of Bidald’s alternative submissions was that the Court should hold that Bidald’s costs of the Termination Proceedings are expenses properly incurred by Mr Warner and Mr Worrell in preserving, realising or getting in property of the company, or carrying on the company’s business, and so fall within section 556(1)(a) Corporations Act 2001 (Cth).

61 Mr Lucarelli submits that when Mr Warner and Mr Worrell were not parties to the litigation, and indeed are still not parties (see para [24] above) it would be inappropriate to make any findings about whether the costs had been properly incurred. It seems to me that the first of Bidald’s alternative submissions depends upon an acceptance that the costs in question were ones which were properly incurred, but even so, I shall not express any views on the topic of whether the costs were properly incurred.

62 There may be room for argument about whether the costs in question are ones which were incurred by Mr Warner and Mr Worrell: cf McDonald at [17]-[21]. I likewise express no view on that topic.

63 In my view, section 556(1)(a) is inapplicable because the costs in question were not ones which arose “in preserving, realising or getting in property of the company, or carrying on the company’s business”. Rather, the costs are ones which arose from a dispute about the legal regime under which the assets of the company should be administered. Thus Bidald’s first alternative submission fails.

64 Bidald’s second alternative submission was that, if Bidald’s costs of the Termination Proceedings did not fall within section 556(1)(a), then the Court should hold that they are “any other expenses (except deferred expenses) properly incurred by a relevant authority”, and are afforded priority pursuant to section 556(1)(dd) Corporations Act 2001 (Cth).

65 When I have already decided that the costs in question have a higher priority than that which section 556(1)(dd) would give them, I see no point in deciding this second alternative submission.

Orders

66 I vary the order for costs made in the Deed Termination Application to read:

“That the plaintiff’s costs of these proceedings be paid by the Company, as a cost in respect of the application for the order for the winding up of the company.”

67 I vary the order for costs made in the Winding Up Proceedings to read:

“That the costs of the plaintiff of these proceedings be paid from the assets of the Company, together with the costs of proceedings 2583 of 2005.”
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