John William Smith v Roy Peter Carr and P J Smith and Son Pty Ltd Trading as QMB Transport and Clifton Hills Pastoral Co (Reg) Kellie Carmel Smith v Clifton Hills Pastoral Co (Reg); P J Smith and Son Pty Ltd..

[1993] SASC 3911

COURT IN THE SUPREME COURT OF SOUTH AUSTRALIA DEBELLE J

CWDS
Companies - scheme of arrangement - Creditors bound by the scheme - Scheme not stating whether contingent or prospective creditors bound - Whether person with unliquidated claim in tort for damages bound by the scheme Companies (South Australia) Code ss 315, 447.

HRNG ADELAIDE, 25 March 1993 #DATE 29:4:1993
Counsel for plaintiff K Smith:     Mr H C Williams
   QC with Miss M
   Taylor
Solicitors for plaintiff K Smith: Hume Taylor and Co
Counsel for plaintiff PJ Smith:     Dr R J Baxter Trading As QMB Transport
Solicitors for plaintiff PJ Smith: Finlaysons
Counsel for plaintiff JW Smith:     Mr H C Williams QC
   with Mr P Marker
Solicitors for plaintiff JW Smith: Peter Marker and
   Associates
Counsel for Clifton Hills         Mr N Strawbridge Pastoral Co (Reg)
Solicitors:   Baker O'Loughlin
Counsel for defendant GRE Insurance: Mr G Coppola
Solicitors:   Kelly and Co
Defendant Roy Peter Carr:         No Attendance
Counsel for Defendant P J Smith and Son Pty Ltd Trading As QMB Transport: Dr R J Baxter
Solicitors:   Finlaysons
Counsel for Defendant SGIC:         Mr M W Mills
Solicitors:   Ward and Partners
Defendant QBE Insurance:            No Attendance
Counsel for Defendant Clifton Hills Pastoral Co (Reg)             Mr N Strawbridge
Solicitors:   Baker O'Loughlin
Counsel Defendant John William Smith  Mr A Fairbank
Solicitors:   Ross and Mccarthy

ORDER
Plaintiffs are not scheme creditors.

JUDGE1 DEBELLE J Determination of preliminary question. The plaintiffs in the first two of these actions each claim damages for personal injuries received in a motor vehicle accident. One of the defendants is a transport company. On 21 December 1989, this Court made an order approving a scheme of arrangement between the transport company and its creditors pursuant to s.315(4)(b) of the Companies (South Australia) Code ("the Code"). A question has arisen whether the plaintiffs are scheme creditors and, if so, whether they are barred from prosecuting their actions. The question arises in the following way. 2. Shortly before midnight on 17 September 1985, Mr J.W. Smith was driving a van north along National Highway 1 between Port Pirie and Port Augusta. His wife was a passenger in the van. At a point about 2.5 kilometres south of the Wilmington turn off, his van collided with two bullocks. The bullocks were the property of a business trading as the Clifton Hills Pastoral Co ("Clifton Hills"). 3. The circumstances which led to the bullocks being on the National Highway were a little unusual. On 8 September 1985, P.J. Smith and Son Pty Ltd ("the transport company") had contracted with Clifton Hills to carry cattle from a pastoral property operated by Clifton Hills in the north of the State to Adelaide. The driver of the transport company's truck was a Mr R.P. Carr ("Carr"). On 8 September 1985, in the course of the journey from the Clifton Hills property to Adelaide, the truck being driven by Carr overturned on National Highway 1 near Mambray Creek. As a result of that accident, several cattle escaped including the two bullocks with which the van driven by Mr Smith collided. 4. Mr Smith and his wife both received injuries in the accident. Each has instituted an action in this court claiming damages for those injuries. Mr Smith brought an action against Carr, the transport company and Clifton Hills. Mrs Smith brought an action against Carr, the transport company, Clifton Hills, and her husband as driver of the van in which she was travelling. The actions were both commenced in September 1988. The summons in Mr Smith's action was served on the transport company soon after. The summons in Mrs Smith's action was served on the transport company in December 1988. The transport company filed its defence in both actions on 22 December 1988. 5. In early 1989, the transport company was experiencing financial difficulties. A receiver was appointed by the National Australia Bank on 7 June 1989 pursuant to powers contained in a debenture. By an order made in this Court on 21 December 1989, the scheme of arrangement between the company and its creditors was approved. The scheme would have terminated by effluxion of time on 21 December 1992. However, on 9 December 1992, an order was made extending the operation of the scheme for a further six months. The scheme will now expire on 21 June 1993 unless it is extended again or is terminated earlier pursuant to its terms. 6. Shortly stated, the effect of the scheme was to prevent scheme creditors from commencing or continuing any action against the transport company and, upon payment of a dividend under the scheme, all claims of scheme creditors would be forever extinguished. Mr and Mrs Smith lodged proofs of debt under the scheme. The transport company amended its defence in each of the actions to include a plea that Mr and Mrs Smith are barred by the scheme of arrangement from prosecuting their respective actions. The plea in each action is the same and is to the effect that the plaintiff in each action is a scheme creditor as defined by the scheme of arrangement and is thereby barred from commencing or continuing the action by virtue of the terms of the scheme. An application was made by the scheme manager in each action for determination of that question as a preliminary question. The application was opposed by some of the parties. It was supported by Mr and Mrs Smith. 7. The scheme manager is, in my view, entitled to know as soon as possible whether he must deal with the claims made by Mr and Mrs Smith under the scheme or whether the transport company must defend the claims outside the scheme. Apart from these actions, the only substantial question remaining in the administration of the scheme is the status of the proofs of debt lodged by the Smiths. If Mr and Mrs Smith are not scheme creditors, their claims are outside the scheme and the scheme manager need not expend scheme funds in investigating or defending them. It will be for the transport company to defend them. The scheme can then be brought to an early end and a dividend paid to scheme creditors. If Mr and Mrs Smith are scheme creditors, questions might arise as to the proof of their debts and the scheme manager might have to take steps to have those questions determined. This may involve extending the operation of the scheme beyond 21 June 1993. 8. One of those questions involves the interaction between the actions initiated by Mr and Mrs Smith with contracts of insurance held by the transport company. The transport company's truck was at all material times registered in accordance with the provisions of Part IV of the Motor VehiclesAct 1959 and was, therefore, the subject of a compulsory third party policy of insurance with the State Government Insurance Corporation. The transport company also held two other contracts of insurance with two other insurers. The first was a public liability policy in respect of the conduct of its business. The second was called "a Motor Vehicle Master Policy" which covered, among other things, the truck which had overturned and indemnified the transport company against loss, damage or liability arising out of the accident. Each of the insurers has denied liability and the transport company has instituted an action in this court naming each insurer as defendant and seeking declarations as to the liability of the insurers to it. That action is the action numbered 1595 of 1990, P.J. Smith and Son Pty Ltd v GRE Insurance Ltd and Ors. It has been ordered that that action be heard with the actions commenced by the Smiths. The prosecution of that action has been delayed pending the resolution of the question whether the Smiths are scheme creditors. 9. The operation of the scheme had been extended to 21 June 1993 because questions had arisen as to whether the plaintiffs were scheme creditors and because of the need to keep the scheme on foot pending the resolution of those questions. It would be a waste of time and expense if the scheme had to be further extended and it was then found that Mr and Mrs Smith were not scheme creditors. Furthermore, it would have been possible for the scheme manager to have issued a summons seeking advice and direction upon this question. It is convenient to deal with the question now rather than require him to issue such an application. Another factor which justifies an early resolution of this question is that the prosecution of these three actions may be indefinitely stayed pending the resolution of the issues. In short, the determination of the question whether the Smiths are scheme creditors will have the consequence of not only assisting the scheme manager in his administration of the scheme but will also enable the parties to be more certain about the future conduct of the three actions which have been mentioned. It is appropriate, therefore, to deal with the question whether Mr and Mrs Smith are scheme creditors as a preliminary question. 10. The scheme of arrangement bound the company and all scheme creditors. Although the expression "scheme creditors" is defined, it is not clear whether persons with unliquidated claims in tort against the company are excluded from that definition. On a number of occasions, courts have mentioned the desirability of excluding from the definition of scheme creditors any person having a contingent claim sounding in damages against the company at least where the company is entitled to an indemnity under a contract of insurance in respect of that liability: see, for example, Re Slade Constructions Pty Ltd
(1970) SASR 561 and Re R.L. Child and Co Pty Ltd (1986) 5 NSWLR 693. Those who are drafting schemes should have regard to those decisions when considering who will be bound by the scheme. This is particularly so in this case where there is a contract of insurance indemnifying the transport company against the unliquidated claims of the plaintiff. If provision is not made to exclude persons having a claim against a company in respect of which the company is entitled to indemnity under a contract of insurance, persons who would on a winding up have priority by reason of s.447 of the Code may find their claims defeated by the scheme, a result which might be as unjust as it was unintended. 11. I turn to the question whether the Smiths are scheme creditors as defined in the scheme. "Scheme creditors" are defined in the scheme to mean "every creditor of the company excluding:
    (a) those creditors whose claims were incurred on or
    after 7 June 1989,
    (b) those creditors whose claims would be entitled to
    priority of payment by virtue of s.441 of the Code if
    the company was wound up, and
    (c) those creditors of the company who are secured
    creditors within the meaning of the Bankruptcy Act 1966
    but only to the extent that such creditors claims would
    be secured." 12. The scheme does not define those who are creditors of the company. Who then are included in the term "creditors"? It is intended to refer to all creditors of whatsoever kind including creditors with a prospective or contingent unliquidated claim for damages in tort or in contract? Or is the term intended to have a more limited operation? 13. There is a difference of judicial opinion whether the word "creditors" in a scheme propounded under s.315 of the Code includes all persons with claims which would be entitled to be admitted to proof if the company were wound up and thus include persons with an unliquidated claim for damages in tort in respect of which liability the company was indemnified by a contract of insurance: contrast Trocko v Renlita Products Pty Ltd (1973) 5 SASR 207; Re Waymouth Guarantee and Discount Co Limited (1975) 10 SASR 407, 443 to 444, 457; and Re Corbett Morris and Associates Pty Ltd (1985) 3 ACLC 741 with Re Glendale Land Development Limited (in liq) (1982) 2 NSWLR 563; Re Asia Oil and Minerals Ltd (1986) 5 NSWLR 42; Re R.L. Child and Co Pty Ltd (1986) 5 NSWLR
693; Re Huon Valley Springs Pty Ltd (1986) Tas SR 112 and Bond Corporation Holdings Ltd v State of Western Australia (No 2) (1992) 7 WAR 61 and the cases therein cited. It is, however, unnecessary in the circumstances of this case to enter into the issues raised in those decisions. If, as was held in Trocko v Renlita Products Pty Ltd persons with unliquidated claims in tort are not creditors bound by the scheme of arrangement, Mr and Mrs Smith are not creditors bound by this scheme. If, however, such persons are creditors and are capable of being bound by a scheme of arrangement, I have concluded, for the reasons which follow, that it was not the intention of this scheme to include as scheme creditors persons with an unliquidated claim in tort in respect of which liability the transport company was indemnified by a contract of insurance. 14. The scheme defined several classes of creditors in addition to scheme creditors, namely, "preferred creditor", "secured creditor", "the receiver's creditors", and "unsecured creditor". For present purposes, it is unnecessary to refer to the definition of "the receiver's creditors". The definition of "unsecured creditor" is in these terms: "Any person (not being a secured creditor or preferred creditor) who has and claims to have any claim against the company arising out of any matter or any transaction, act or omission of the Company or any person occurring on or before the appointment date whether the claim is present, future or contingent or liquidated or sounding only in damages and whether in contract or in tort or however else arising." 15. This definition is expressed in terms wide enough to include all those with claims which would be admitted to proof if the company were wound up. It will be noticed, however, that the definition excludes a preferred creditor. A "preferred creditor" is defined in the scheme to mean: "a creditor of the company in respect of a debt or claim incurred prior to the commencement date which would be entitled to priority of payment by reasons of any statutory or other rule of law if a winding up of the Company had commenced on the commencement date but to the extent only that such debt or claim would be entitled to that priority." 16. One group of creditors entitled to priority are those referred to in s.447 of the Code. Section 447(1) provides:
    Where a company is, under a contract of insurance
    entered into before the relevant date, insured against
    liability to third parties, then, if such a liability is
    incurred by the company (whether before or after the
    relevant date) and an amount in respect of that liability
    has been or is received by the company or the liquidator
    from the insurer, the amount shall, after deducting any
    expenses of or incidental to getting in that amount, be paid
    by the liquidator to the third party in respect of whom the
    liability was incurred to the extent necessary to discharge
    that liability, or any part of that liability remaining
    undischarged, in priority to all payments in respect of the
    debts mentioned in section 441." 17. The definition of "preferred creditor" is plainly expressed in terms which includes a creditor entitled to priority by virtue of s.447. Given that the transport company held contracts of insurance which indemnified it against any liability arising out of the claims by Mr and Mrs Smith, Mr and Mrs Smith are by virtue of s.447 preferred creditors and as such excluded from the definition of "unsecured creditor". While there may be questions as to how that liability is to be borne by the insurers, whatever is recovered by the transport company from its insurers is payable to the Smiths in priority to all other payments. The expression "unsecured creditor" is not used elsewhere in the scheme. Nevertheless, I think that the combined operation of these definitions discloses an intention not to include as secured creditors persons with an unliquidated claim against the transport company in respect of which claims the transport company was indemnified by a contract of insurance. "Secured creditor" is defined to mean the National Australia Bank but only to the extent that it is secured by its debenture. 18. With these definitions in mind, it is appropriate to examine the definition of "scheme creditors" to determine to whom it is intended to refer. If effect is first given to the exclusions in paras (a) and (c), the group of creditors remaining is unsecured creditors whose claims were incurred before 7 June 1989. There is no provision elsewhere in the scheme which prevents those unsecured creditors from including all those who would be entitled to prove on a winding up of the company. Indeed, such a construction is consistent with the definiti on of "unsecured creditor". If effect is then given to the exclusion in paragraph (b), the definition refers to all those unsecured creditors excluding those entitled to priority by virtue of s.441 of the Code if the company was wound up but not to those who are entitled to priority under s.447. The result is inconsistent with the combined operation of the definitions of "unsecured creditor" and "preferred creditor". The apparent inconsistency should be resolved in the following way. The priorities prescribed by s.441 are expressed to be subject to the following provisions of Sub-division C of Division 4 of Part XII of the Code. They are, therefore, subject to s.447 of the Code. The exclusion in paragraph (b) is, in my view, intended to comprehend in its terms creditors entitled to priority under both s.441 and s.447. The reference to s.441 in paragraph (b) is a shorthand expression intended to include both groups of creditors. If that were not so, the exclusion in paragraph (b) would except from the scheme one group of creditors entitled to priority on a winding up but not another. Not only would that be a very curious result but, as already mentioned, it would also be inconsistent with the combined effect of the definitions of "unsecured creditor" and "preferred creditor". I do think that result was intended. For these reasons, it is my view that the definition of scheme creditors was not intended to include persons with an unliquidated claim in tort against the transport company in respect of which liability the company is indemnified by a contract of insurance. 19. Reference to the Explanatory Statement reinforces this conclusion. The Explanatory Statement frequently refers to the fact that the creditors participating in and bound by the scheme are unsecured creditors. The definition of "unsecured creditors" in the scheme states that it is intended to apply "in the scheme and in any instrument or other writing issued under this scheme". The definition, therefore, does not apply to the meaning of words in the Explanatory Statement but it would be a curious position if the words did not have the same meaning in each document. If they did not, there would be a real risk of the Explanatory Statement failing to discharge the statutory requirement that it explain the effect of the scheme: see s.316(1) of the Code. The use of the terms "unsecured creditors" and "preferred creditors" in the Explanatory Statement is consistent with the definition of "unsecured creditor" and "preferred creditor" in the scheme. 20. An affidavit sworn by Mr B.J. Smith, a director of the company, in support of the application to this Court to direct a meeting of creditors also demonstrates that it was not intended that the scheme should bind persons with an unliquidated claim in tort against the transport company in respect of which liability the company is indemnified by a contract of insurance. Mr B.J. Smith is not one of the plaintiffs. In his affidavit he states that it was intended to call a meeting of certain creditors only of the transport company to consider the proposed scheme, namely, those creditors "whose debts were incurred prior to the appointment of the receiver on 7 June 1989." The affidavit then expressly states that the creditors who will participate in the scheme and who are defined in the scheme as "scheme creditors" are the unsecured creditors of the company as at 7 June 1989 who are named in a list which is annexed to his affidavit. The list did not include Mr and Mrs Smith, the plaintiffs in these actions. Thus, there is an unambiguous statement made on behalf of the transport company identifying the class of creditors intended to be bound by the scheme. Mr B.J. Smith also deposes that he is not aware of the existence of any partly secured, prospective or contingent creditors of the company. That is a surprising assertion given that the summons in each action had been served on the transport company and the transport company had filed its defence in each action on 22 December 1988. However, whether or not he was aware of the actions instituted by these plaintiffs, that assertion coupled with the rest of his affidavit points to the conclusion that the scheme was intended to bind unsecured creditors other than those with an unliquidated claim in tort against the company in respect of which liability the company was indemnified pursuant to a contract of insurance. 21. For all of these reasons, the scheme does not purport to bind creditors who have an unliquidated claim for damage in tort against the transport company in respect of which liability the company is indemnified under a contract of insurance. In other words, the plaintiffs, Mr and Mrs Smith, are not scheme creditors. It follows that the plea by the transport company in paragraph 10 of its defence in the actions instituted by Mr and Mrs Smith should be struck out. 22. Mr Williams QC, who appeared for Mr and Mrs Smith contended that, to the extent that any part of the claim of either of Mr and Mrs Smith would not be covered by a contract of insurance held by the transport company, Mr and Mrs Smith should be able to prove in the scheme. I think that submission must fail. The extent to which, if at all, Mr and Mrs Smith can prove in the scheme depends on whether or not they are scheme creditors. They are not scheme creditors and, therefore, cannot prove against the scheme fund for any part of their respective claims which is not paid in full. Any claim for such a shortfall must be made against the transport company itself and not against the scheme fund.