Mehan v Arrium Ltd (formerly Onesteel Ltd)

[2016] NSWSC 1680

Supreme Court

New South Wales

Medium Neutral Citation:	Mehan v Arrium Limited (formerly Onesteel Limited) & Anor [2016] NSWSC 1680
Hearing dates:	23 November 2016
Decision date:	29 November 2016
Jurisdiction:	Equity - Corporations List
Before:	Black J
Decision:	The Court orders that Plaintiff be granted leave pursuant to s 444E(3)(c) of the Corporations Act 2001 (Cth) to proceed against the First Defendant on condition that the Plaintiff does not seek to enforce any judgment against the First Defendant without further leave of the Court. The Plaintiff’s costs of the motion be the Plaintiff’s costs in the proceedings. Ancillary orders made.
Catchwords:	CORPORATIONS — Deed of company arrangement — Leave sought under s 444E(3) of the Corporations Act 2001 (Cth) to continue proceedings against company in deed administration – where there was dispute as to terms of the company’s insurance policy – where if leave were not granted there would be possibility of inconsistent results between proof of debt process and the proceedings against another defendant – whether leave ought be granted under s 444E(3)(c) of the Corporations Act 2001 (Cth).
Legislation Cited:	Corporations Act 2001 (Cth), ss 436A, 440D, 444E, 471B, 562, 562A, 553, 1321 Law Reform (Miscellaneous Provisions) Act 1946 (NSW), s 6
Cases Cited:	- Attard v James Legal Pty Ltd [2010] NSWCA 311; (2010) 80 ACSR 585 - Australian Competition and Consumer Commission v Phoenix Institute of Australia Pty Ltd (subject to deed of company arrangement) [2016] FCA 1246 - Calliden Insurance Ltd v Chisholm [2009] NSWCA 398 - Easey v Grosvenor Constructions (NSW) Pty Ltd [2005] NSWSC 878; (2005) 54 ACSR 820 - J F Keir Pty Ltd v Priority Management Systems Pty Ltd (admin apptd) [2007] NSWSC 748 - Latimer v Cutwood Panels Pty Ltd (in liq) [2012] WASC 408 - Lawless v Mackendrick (No 2) [2008] WASC 15 - Meehan v Stockmans Australian Café (Holdings) Pty Ltd (1996) 22 ACSR 123 - Mentha, Re Arrium Ltd (admin apptd) [2016] FCA 487; (2016) 113 ACSR 302 - Ogilvie-Grant v East (liquidator of Gordon Grant & Grant Pty Ltd) (1983) 7 ACLR 669 - Re AJ Benjamin Ltd (in liq) [1969] 2 NSWR 374 - Re Coastal Constructions Pty Ltd (1994) 13 ACSR 329 - Re Sydney Formworks Pty Ltd [1965] NSWR 646 - Timbercorp Finance Pty Ltd (in liq) v Vivian [2016] VSC 338; (2016) 114 ACSR 198
Category:	Procedural and other rulings
Parties:	Nathan Mehan (First Plaintiff) Arrium Limited (formerly Onesteel Limited) Pathways Labour Hire Pty Ltd (Second Defendant)
Representation:	Counsel: C Hart/A Edington (Plaintiff) J Mack (First Defendant)   Solicitors: Michael Evers & Co (Plaintiff) Sparke Helmore (First Defendant)
File Number(s):	2013/56365

Judgment

1. By Notice of Motion filed on 14 September 2016, the Plaintiff, Mr Nathan Mehan initially sought an order, under s 440D(1)(b) of the Corporations Act 2001 (Cth) that he be granted leave to continue proceedings in the Common Law Division of the Court against Arrium Limited (formerly OneSteel Limited) (“Arrium”) which was then in administration. The Second Defendant to those proceedings was Pathways Labour Hire Pty Limited (“Pathways”) and no leave was required to proceed against that entity. The matter was referred to the Corporations List for determination of that application.

2. By an Amended Notice of Motion filed on 23 November 2016, by leave, Mr Mehan seeks orders under s 440D(1)(b) and/or s 444E(3)(c) of the Corporations Act that he be granted leave to continue this action against Arrium. It seems to me that the question of leave under s 440D of the Corporations Act, which had been relevant at the time the proceedings were commenced, no longer needs to be determined, since Arrium has now passed from administration to deed administration and s 444E(3) of the Corporations Act is the applicable provision. Paragraphs 4 and 5 of the motion dealt with abridgement of time for service of the motion or an order that service of the motion on Arrium be dispensed with. I do not consider it necessary to make those orders, where Arrium has appeared and been heard in respect of the application.

Background and affidavit evidence

3. By way of background, Arrium was a listed company on the Australian Stock Exchange and the ultimate holding company of the Arrium Group. Arrium and the other companies in the Arrium Group were placed in administration and subsequently became subject to two deeds of company arrangement to which I refer below. It appears the administration was a large and complex one, involving numerous entities that conduct several businesses, assets and liabilities of very substantial size and several classes of creditors, and I note the observations of Davies J to that effect in Mentha, Re Arrium Ltd (admin apptd) [2016] FCA 487; (2016) 113 ACSR 302 at [34]–[35]. I infer that the deed administration will be similarly complex.

4. The Federal Court of Australia initially extended the time for a second meeting of creditors in respect of the companies in the Arrium Group to be held to late February 2017, although that second meeting of creditors was in fact held in early November 2016. Deeds of company arrangement were executed following a second meeting of creditors held on 4 November 2016, namely the Arrium Distribution Deed of Company Arrangement and the Arrium Transaction Support Deed of Company Arrangement.

5. The proceedings brought by Mr Mehan that are in issue in this application are of a somewhat narrower character, although they are plainly of substantial importance to Mr Mehan. Mr Mehan commenced proceedings against Arrium in the District Court of New South Wales on 22 February 2013, after he suffered a significant workplace injury while performing work at one of Arrium’s premises. Those proceedings were commenced nearly four years ago, long before Arrium was placed in administration, and transferred to this Court in 2015. Mr Mehan’s employer at the time of the incident, Pathways, was joined as Second Defendant in the proceedings by Amended Statement of Claim filed in April 2015. Prior to Arrium’s entry into administration, to which I will refer below, the parties were negotiating to mediate the proceedings in accordance with orders of the Common Law Registrar.

6. On 14 April 2016, Mr Mehan’s solicitor was advised by Arrium’s solicitors that Arrium had appointed voluntary administrators under s 436A of the Corporations Act and that proceedings against it were stayed under s 440D of the Corporations Act, and no steps could be taken in those proceedings without the administrators’ written consent or leave of this Court or the Federal Court of Australia. Mr Mehan’s solicitors followed the position up with Arrium’s solicitors and with its administrators on 25 May 2016. On 16 June 2016, Arrium’s solicitors repeated their previous advice and advised that the administrators were not in a position to agree to lift the stay which was currently in place, and also provided some information concerning Arrium’s insurance. Further correspondence followed and, by letter dated 15 August 2016, Arrium’s solicitors sent Mr Mehan’s solicitors a copy of the schedule and policy wording of commercial liability insurance held by Arrium at the relevant time.

7. Mr Mehan relies on the affidavit of his solicitor, Mr Evers, sworn 21 January 2015, which indicated, by reference to medical reports, the extent of Mr Mehan’s incapacity and that incapacity was likely to persist for at least the medium term and quantified Mr Mehan’s interim assessment of damages against Arrium as nearly $1.5 million (Evers 21.1.15 Annexure “D”). Mr Mehan also relies on an affidavit of Mr Willoughby, who is also a solicitor acting for Mr Mehan, dated 13 September 2016 which sets out aspects of the chronology to which I have referred above. By a further affidavit dated 7 October 2016, Mr Evers indicated Mr Mehan’s view that the matter remains ready to proceed to mediation and that orders should be made to allow the expeditious progress of the matter. Mr Evers also noted a concern that (Evers 7.10.16 [5]):

“Should the matter be further prolonged it will be necessary for the parties to seek to refresh all of their respective evidence pertaining to damages. This would come at a great expense to the parties and in the Plaintiff’s view, is at this stage highly unnecessary given the state of the proceedings. Disbursements incurred by the Plaintiff in preparing the damages case alone, currently stand at $18,000. To refresh this evidence will cost at least a further $20,000.”

Mr Evers also identified a concern that further delay could aggravate a stress-related disorder suffered by Mr Mehan. That affidavit annexed a report from Mr Mehan’s family doctor, identifying the difficulties he was facing while waiting to obtain “some sort of resolution” in the proceedings.

8. Arrium in turn relied on affidavits of Ms Thomas dated 31 October 2016 and 14 November 2016. Ms Thomas is a solicitor who has the conduct of the proceedings on behalf of Arrium. Her evidence was that she received instructions from Arrium, with the consent of its administrators and subsequently its deed administrators, in relation to the application. Ms Thomas also set out aspects of the history of the proceedings, and referred to three judgments delivered in the Federal Court of Australia in respect of the administration of the Arrium Group of companies and to further information provided by Ms Shepard, who is employed by Korda Mentha. Ms Shepard’s role and responsibilities were otherwise unidentified, although she works under the supervision of the administrators and now the deed administrators. Ms Thomas also referred to various statements made in the administrators’ report to the second meeting of creditors of the companies in the Arrium Group, including referring to the administrators’ advice that they were not in a position to provide creditors with an indication of the estimated distribution that would be paid by the Arrium Group for several reasons. The deed administrators also relied on a second affidavit of Ms Thomas dated 14 November 2016, which updated events in the administration and deed administration since her first affidavit. I will refer to other aspects of Ms Thomas’ affidavit evidence below.

Applicable legal principles

9. The appointment of deed administrators to Arrium has the consequence that leave to continue the proceedings is no longer required under s 440D(1)(b) of the Corporations Act, since Arrium is no longer in administration, but such leave is required under s 444E(3) of the Corporations Act which relevantly provides that, until a deed of company arrangement terminates, a person bound by a deed of company arrangement cannot proceed with a proceeding against the company, except with the Court’s leave, and in accordance with any terms that the Court imposes.

10. Mr Mack, who appears for Arrium, rightly points out that the Corporations Act contains four provisions which deal with leave for the commencement or continuance of proceedings, namely s 440D dealing with the position when a company is in administration, s 444E dealing with the position when a company is subject to a deed of company arrangement, s 471B dealing with the position when a company is being wound up by the Court, and s 500(2) dealing with the position when a company is in voluntary administration. Mr Mack also rightly points out that s 444E of the Corporations Act is not, in terms, directed only to a stay of proceedings, but focuses upon protection of the company’s property and operates only upon persons bound by the deed of company arrangement. Mr Mack also rightly points out that a deed of company arrangement will ordinarily specify the “property” of the company and the manner in which that property is to be distributed among creditors. Mr Hart, who appears with Mr Edington for Mr Mehan, did not, in terms, accept that that Mr Mehan was bound by the deeds of company arrangement in respect of Arrium, and submitted that was not a matter which needed to be determined for the purposes of this application.

11. Mr Hart relies on the observations of Lehane J in Meehan v Stockmans Australian Café (Holdings) Pty Ltd (1996) 22 ACSR 123, where his Honour was dealing with the position where proceedings were commenced before a company was placed in administration and a deed of company arrangement was subsequently executed. His Honour noted that the principles to be applied in such an application were analogous to those which would be applied by a court in considering an application for leave to proceed against a company in winding up under s 471B of the Corporations Act, rather than the more stringent test that may apply in determining applications for leave to proceed against a company under administration under s 440D of the Corporations Act.

12. Mr Hart refers to several relevant factors which have been identified in the case law, including J F Keir Pty Ltd v Priority Management Systems Pty Ltd (admin apptd) [2007] NSWSC 748 at [8] and Attard v James Legal Pty Ltd [2010] NSWCA 311; (2010) 80 ACSR 585 at [146], including whether the plaintiff’s claim has a solid foundation and gives rise to a serious dispute; whether the proceedings have progressed to an advanced stage; whether the plaintiff was involved in the administrators’ appointment; whether the plaintiff would suffer disadvantage if leave is refused; whether the defendant is insured against the alleged liability that is the subject of the proceedings; whether, if leave is granted, the deed administrators will be unreasonably distracted from performance of their statutory duties or obliged unnecessarily to incur substantial legal costs; and whether, in the circumstances, there are good reasons for allowing the plaintiff to continue the proceedings even if the deed administrators do not provide consent. It will be possible to deal with several of these matters briefly, before turning to a more extended analysis of whether the deed administrators will be unreasonably distracted from performance of their duties, or they or Arrium will be obliged unnecessarily to incur substantial legal costs, if leave is granted. Mr Hart rightly recognises that these factors are not exhaustive or a “shopping list” although they do seem to me to be of assistance in guiding the court in the exercise of its discretion.

13. Mr Mack also, fairly, draws attention to the decision of Easey v Grosvenor Constructions (NSW) Pty Ltd [2005] NSWSC 878; (2005) 54 ACSR 820, where Barrett J (as his Honour then was) granted leave under s 444E of the Corporations Act for a plaintiff to pursue a personal injury claim against a company that was subject to a deed of company arrangement, although there accepting that an alternative would have been for that plaintiff to bring a claim directly against the insurer under the Law Reform (Miscellaneous Provisions) Act 1946 (NSW). His Honour there referred (at [4]) to several authorities that establish that the approach to applications under s 444E(3) of the Corporations Act:

“is akin to that taken to applications for leave to proceed against a company in the course of being wound up, rather than the more stringent test applied to applications for leave to proceed against a company in Pt 5.3A administration.”

14. The principles applicable to the exercise of discretion to grant leave to begin or proceed with proceedings under s 444E(3) of the Corporations Act were also recently, and helpfully, summarised by Perry J, by reference to authority, in Australian Competition and Consumer Commission v Phoenix Institute of Australia Pty Ltd (subject to deed of company arrangement) [2016] FCA 1246 at [83]ff. Her Honour observed that the applicable principles were those applied in determining applications for leave under s 471B of the Corporations Act in relation to liquidation; the onus lies upon the applicant to establish that the ordinary procedure established by a deed of company arrangement should be displaced, namely, that the continued pursuit of the litigation should be substituted for the procedure by which a claimant lodges a verified proof of debt with the deed administrators who admit or reject it, wholly or in part and from whom an appeal lies to the court; the question whether leave should be granted turns upon the exercise of discretion, and each application must turn upon its particular facts and the question cannot be approached as a “shopping list” of factors; and the exercise of discretion is informed by previous decisions as to relevant factors to be considered and by the purpose of the ordinary rule in s 444E(3) of the Corporations Act prohibiting a creditor from pursuing litigation, including the risk that a company in deed administration would be subject to a multiplicity of actions.

15. I now turn to several matters that are relevant to the exercise of the Court’s discretion. Although these proceedings have continued for nearly four years, and Arrium has, so far as the evidence goes, never sought to strike them out, Arrium put in issue whether Mr Mehan had established that his case had some solid foundation, although it did not seek to lead evidence to the contrary. Mr Mehan refers to the pleadings in the proceedings in order to establish that his case has a solid foundation and there is a serious dispute. As Mr Hart points out, Arrium’s “GCM Document” filed in the proceedings admits Mr Mehan’s injury; admits that Arrium owed Mr Mehan a duty of care, although there is a dispute as to its scope and content; and contends that Mr Mehan’s injuries were caused by the negligence of Pathways. Pathways conversely contends that Arrium should be solely liable for Mr Mehan’s injuries, and each of Arrium and Pathways allege contributory negligence on Mr Mehan’s part. Mr Mack did not take issue with any of these matters in submissions. Mr Mehan also relies on the affidavit of Mr Evers dated 21 January 2015 and associated medical reports to which I have referred above, which seems to me to support the conclusion that his claim has a solid foundation.

16. Arrium also submitted that there is no evidence in this application that supports the proposition that Mr Mehan’s claim is likely to exceed the Deductible under its insurance policy and that that policy is likely to be responsive to his claim. However, evidence as to the extent of Mr Mehan’s impairment and the quantum of his claim has already been led in the proceedings, and that claim substantially exceeds the Deductible as I will note below. That claim is one for personal injury, to which the policy appears to respond as I will also note below.

17. Mr Mehan was obviously not involved in the appointment of the administrators to Arrium. Mr Hart points to several forms of disadvantage that will be suffered by Mr Mehan if leave is not granted, including the loss of the opportunity to resolve the matter quickly at a formal mediation; the need to refresh the parties’ damages evidence, by reason of further delay, to which I have referred above; and the adverse impact of delay upon Mr Mehan’s psychological condition. Mr Hart also identified a risk that Arrium’s rights under its insurance cover may be jeopardised by a failure on its part to defend the proceedings, although that risk is plainly qualified by the findings that I reach below in respect of the construction of that policy. A further, and substantial, disadvantage to Mr Mehan should be added to those disadvantages, namely his inability to pursue, or a substantial delay in pursuing, his claims against both Arrium and Pathways in one proceedings, or the alternative disadvantage of being left to pursue the proceedings against Pathways alone, where it appears that each of Arrium and Pathways seek to attribute liability to the other, without any realistic means of avoiding or resolving inconsistent findings in a proof of debt process in respect of Arrium and the proceedings in respect of Pathways. It seems to me that the fact that Arrium and Pathways each attribute liability to the other provides a very strong reason why it would be, at best, inconvenient and impractical, and at worst inconsistent with the interests of justice, to seek to separate the claims brought by Mr Mehan against Pathways and against Arrium. It seems to me that Mr Mehan will suffer disadvantage if leave is refused.

14. Mr Hart also points out, and I accept, that the existence of insurance is a factor that weighs strongly in favour of the exercise of a discretion to grant leave: Re AJ Benjamin Ltd (in liq) [1969] 2 NSWR 374; Re Sydney Formworks Pty Ltd [1965] NSWR 646; Re Coastal Constructions Pty Ltd (1994) 13 ACSR 329; Lawless v Mackendrick (No 2) [2008] WASC 15 at [37]; Latimer v Cutwood Panels Pty Ltd (in liq) [2012] WASC 408 at [12]–[13]; Timbercorp Finance Pty Ltd (in liq) v Vivian [2016] VSC 338; (2016) 114 ACSR 198 at [22]. There is evidence that Arrium is insured against the alleged liability, and I will address the terms of that insurance cover in some detail below.

15. Arrium also placed substantial weight on the proposition that Arrium or the deed administrators will be obliged unnecessarily to incur substantial legal costs in the defence of the proceedings, in opposing the grant of leave. The matters on which the administrators relied in this respect are complex and require extended analysis, to which I now turn.

Arrium’s insurance arrangements

20. First, Arrium placed substantial weight, in opposing the grant of leave, on the terms of its insurance arrangements. Arrium’s submissions in this respect seemed to be put on the basis that its insurance cover responded to the claim, and to address the terms of that cover, although I will also briefly address the position if cover has not been confirmed (nearly four years after the commencement of the proceedings) and Arrium is required to act as a prudent uninsured below, for completeness.

21. Ms Thomas’ evidence in her first affidavit was that, at the date of the incident that is the subject of the proceedings, Arrium had a combined liability insurance policy, which had a Deductible of $250,000 for any one Occurrence or Claim, of which approximately $170,000 had been “eroded” in Arrium’s legal costs to date. It would follow that, as at 31 October 2016, a balance of $80,000 remained within that Deductible. Since that time, Arrium will have incurred further costs in this application, although it did not lead further evidence to update the position in respect of the Deductible as at the date of this hearing. Mr Mack indicated, from the bar table, that those costs had not been treated as further eroding the Deductible and I will proceed on that basis. Nothing turns on that matter, for the reasons that I will note below.

22. Ms Thomas’ evidence in her first affidavit (Thomas 31.10.16 [20]) was that:

“[Arrium’s] insurer has not indicated whether it will pay defence costs within the Policy’s deductible. Accordingly, as things stand, defence costs, up to the limit of the Policy’s deductible, remain payable by the administrators.”

Ms Thomas did not there identify the terms of the policy on which that view was based or explain what steps, if any, had been taken to clarify the insurer’s position or whether the insurer had been asked to assume the conduct of the proceedings or asked to advise whether it would pay defence costs of the proceedings. In any event, as I will note below, it does not seem to me that this issue arises on the proper construction of Arrium’s insurance policy.

23. Both parties addressed the terms of Arrium’s insurance policy in submissions. Mr Hart points out that Arrium’s insurance policy provides, in section 1, for indemnity for damages arising out of “personal injury”, as defined in cl 4.3 of the policy. Mr Hart points out that Arrium assumes that the Deductible applies in respect of that section of the policy, but does not, as I noted above, explain the basis of that assumption in its affidavit evidence. Mr Hart points out that cl 3 of section 1 of the policy provides that the insurers will defend proceedings at their own cost in Arrium’s name and on Arrium’s behalf, and that amounts incurred on that basis are payable by the insurers in addition to the Limit of Liability under section 1 of the policy.

24. Mr Mack also made submissions that sought to support the view expressed in Ms Thomas’ affidavit, as to the operation of the Deductible under Arrium’s insurance policy, which involved reference to several provisions widely separated across that policy, and which appeared to be intended to establish that Arrium, rather than its insurer, would have to incur the costs of defence of the proceedings up to the point at which the Deductible was exhausted. The evidence to which I have referred above suggests that the maximum amount of expenditure which Arrium would need to incur before, on its case, its insurers would be obliged to fund the defence of the proceedings, would be $80,000.

25. The steps in Mr Mack’s submissions seem to be as follows. First, the term “Deductible” is defined in the general definitions applicable to all sections of the policy (Ex KPT4, CB 138) as “the amount of the Deductible as specified in the Schedule”, and the term “Deductible” is in turn specified in the Schedule to the policy (Ex KPT4, CB 132) as “AUD$250,000 any one Occurrence/Claim”. Second, general condition 11(a) of the policy requires Arrium to cooperate with the insurers, and upon their request, give all information and assistance to the insurers as the insurers “may reasonably require to enable it [ie the insurers, despite the odd shift to the singular] to investigate and to defend any suit or claim” and “to enable the [i]nsurers to determine their liability under this [p]olicy”. That clause does not assist Arrium because, contrary to Mr Mack’s submission, it is directed to Arrium’s cooperation with the insurers in, inter alia, the insurers’ defence of the claim, and does not impose any obligation on Arrium to defend the proceedings to the insurers’ exclusion as distinct from cooperating with the insurers in their defence of the proceedings.

26. Third, general condition 12(b) of the policy provides that the insurers shall be entitled at any time to conduct, in Arrium’s name, the defence or settlement of any suit or claim and shall have full discretion in relation to such conduct. I accept that that provision does not, in itself, impose an obligation on the insurers to conduct the defence of such a claim, but allows an entitlement to do so. Fourth, general condition 17 of the policy relevantly provides that:

“(a)   [Arrium] shall bear responsibility for the first portion of any sum which [Arrium] shall become legally liable to pay in respect to each claim made against it, up to the applicable amount specified in the Schedule as at the Deductible and the Insurers shall only be liable to indemnify [Arrium] for that part of any claim which is in excess of the Deductible.

(b)   Where the Insurers have elected to pay all or part of the Deductible in respect of any Claim, [Arrium] shall reimburse the Insurers forthwith.”

It seems to me that that clause also does not advance Arrium’s position. The clause operates at the point at which Arrium becomes “legally liable” to make payment, which will ordinarily be the point at which it agrees to a settlement of a claim or judgment is given against it. It does not seem to me to have any application to legal costs incurred in the defence of such a claim before such liability is established. The language “bear responsibility” also does not require Arrium to make a payment before such liability is established, and is directed to its being responsible for or carrying that liability, in a manner which may be addressed by the insurers proving for that liability in the deed administration: Calliden Insurance Ltd v Chisholm [2009] NSWCA 398 at [20]–[21].

27. Fifth, cl 1 of section 1 of the policy provides for the insurers to pay to or on behalf of Arrium all sums which Arrium shall become liable to pay by way of damages arising out of, inter alia, personal injury. Clause 2 of section 1 in turn provides that the insurers’ liability in respect of any one Occurrence shall not exceed the Limit of Liability, which shall apply in excess of any applicable Deductible. The Deductible will become relevant at the point that the insured has become liable to pay damages, by judgment or by settlement, on that basis.

28. I interrupt the steps in Mr Mack’s submission to note that he did not, in his written submissions, refer to cl 3.1 of section 1 of the policy, to which Mr Hart drew attention as I noted above. That clause provides that the insurers will:

“defend at their own cost in [Arrium’s] name and on [Arrium’s] behalf any suit against [Arrium] alleging Personal Injury … and seeking damages on account thereof even if such suit is groundless, false or fraudulent, but the Insurers shall not be obligated to pay any claim or judgment or to defend any suit after the applicable Limit of Liability has been exhausted by payment of judgments or settlements.”

Clause 3.2 of section 1 of the policy in turn provides for the insurers to pay expenses incurred by Arrium in any such suit. These clauses seem to me expressly to provide that Arrium’s insurers will defend the relevant claim at their cost and not Arrium’s cost. Although I sought to identify the basis for any contrary submission in the course of Mr Mack’s oral submissions, I find it impossible to see that the clause could have any other plausible construction. I note, for completeness, that cl 3 of Schedule 1 of the policy is headed “Supplementary Payments” and that description appears to be applicable to some of the relevant provisions, although it is less apt in respect of cl 3.1 of section 1 so far as that clause imposes an obligation on the insurers to conduct the defence of the proceedings. I also note, again for completeness, that cll 3.4 and 3.5 provide for the insurers to pay charges and legal costs incurred by Arrium in certain circumstances but those clauses take Arrium’s position no further since its ability to incur and be reimbursed for costs does not qualify the insurers’ obligation to conduct the defence under cl 3.1 of section 1 of the policy.

29. Sixth, Mr Mack referred to a further definition of “Deductible” in cl 4.17 of section 1 of the policy, which applies for the purposes of that section, and refers to:

“[T]he amount which is payable by the Insured (including Supplementary Payments) as specified in the Schedule.”

It also does not seem to me that that provision takes Arrium any further. Whether or not amounts incurred by the insurers in conducting the defence of the proceedings are treated as “Supplementary Payments” and included in the Deductible, no obligation is imposed on Arrium to pay them prior to its becoming legally liable in respect of the claim and any right of reimbursement of the insurers can be admitted to proof in the deed administration in the usual way.

30. Mr Mack submitted that:

“It is clear from the foregoing that the Policy focuses on the event of complete erosion of the Deductible and that Arrium is liable to pay the amount of the Deductible.”

It seems to me that, to the contrary, the policy requires the insurers to defend the proceedings at their own cost in Arrium’s name and on its behalf and, if the costs of doing so form part of the Deductible, Arrium is not required to pay them, but to “bear responsibility” for them under general condition 17, such that the insurers may submit a proof of debt for them in the deed administration. There seems to me to be nothing surprising as to this result since, in the ordinary course, Arrium’s insurers would be expected to defend the proceedings, in order to seek to minimise any judgment against Arrium for which they will be obliged to indemnify it and, if they do not do so, then Arrium may choose to defend the proceedings for itself, or (acting reasonably and in good faith and in circumstances that it is in deed administration) not to do so and rely on its rights to indemnity under the policy.

31. Mr Hart, in reply, put the somewhat simpler proposition that cl 3.1 of section 1 of the policy made clear that Arrium was entitled to have any defence of the proceedings funded (or, I should interpolate, conducted) by its insurers and that the Deductible under the policy was only relevant to limiting the insurers’ liability in meeting a claim. Mr Hart also pointed out that the damages claimed by Mr Mehan far exceeded the amount of any Deductible, particularly after legal expenses incurred by Arrium to date, and the amount involved in any claim by Mr Mehan against Arrium was a very small proportion of Arrium’s unsecured debt. Each of these propositions seems to me to be well founded.

32. Mr Mack’s extensive analysis of Arrium’s insurance arrangements is ultimately directed only to establishing the proposition that the grant of leave to Mr Mehan to pursue proceedings will require Arrium to incur the costs of defending the proceedings, up to the $80,000 remaining within the “Deductible”. As I read the policy, that has not been established. In any event, I conclude below that the evidence led by Arrium is insufficient to establish the case that Ms Thomas’ evidence (on Ms Shepard’s instructions) sought to establish, that it (or the deed administrators, relying on their right of indemnity against Arrium’s assets) did not have the funds necessary to meet those costs, if, contrary to the conclusion I have reached above, the effect of the grant of leave was to require Arrium to do so. If, as it seems to me the policy provides, Arrium’s insurers are obliged to conduct the defence of Mr Mehan’s claim at their cost, there should be little distraction and no cost to Arrium or the deed administrators in the conduct of the proceedings. Arrium led no evidence and made no submission that there was a significant risk that its insurers will not comply with their obligations under the policy as properly construed.

33. I should, for completeness, address the position if Arrium’s insurers have not yet confirmed indemnity, nearly four years after the proceedings were commenced, although there was no evidence as to whether that was the case. In that case, Arrium would be obliged to conduct itself as a prudent uninsured, albeit in circumstances which included the fact that it was in deed administration. As I will note below, I am not persuaded by Ms Thomas’ evidence, on information and belief, that Arrium, or at least its deed administrators with the aid of their statutory indemnity against Arrium’s assets, lack the funds to defend the proceedings, if they consider it necessary to do so.

The terms of the Arrium DOCAs

34. Mr Mack also submits that Mr Mehan is bound by the Arrium Transaction Support Deed of Arrangement (“Transaction DOCA”) and Mr Hart, while not conceding that matter, did not advance any substantive contention to the contrary. Mr Mack draws attention to the relevant provisions of the Transaction DOCA which provides, in cl 1, for its purpose and objects, in cl 6 for a moratorium, in cl 18 for a process for proof of debts and in cl 21 for the extinguishment and discharge of claims. In particular, cl 6.1 of the Transaction DOCA provides that, as from the Commencement Date (as defined), Creditors (as defined) may not, without the consent of the deed administrators, in relation to any Claim (as defined):

“(a) … continue any action, suit, arbitration, mediation or proceeding against [Arrium];

(f)   … proceed with any proceeding against [Arrium] except with the leave of the Court and in accordance with such terms (if any) as the Court imposes.”

There are several difficulties with that clause. Paragraph (a) appears to be an absolute prohibition on the continuance of a proceeding without the deed administrators’ consent. Paragraph (f) appears to be, inconsistently, a prohibition on proceeding with a proceeding except with the Court’s leave and in accordance with such terms as the Court imposes, but the term “Court” is then defined as the Victorian District Registry of the Federal Court of Australia and the Supreme Court of Victoria, and does not recognise the statutory jurisdiction of the Federal Court of Australia (in all aspects of its national operation other than its Victorian District Registry) and of several other Australian courts including this Court. The term “Claim” is relevantly defined for the purposes of that clause as including any claim, litigation or judgment, whether present or future, fixed or unascertained, or actual or contingent, arising directly or indirectly from any act or omission by Arrium and includes all claims provable in a winding up of Arrium under s 533 of the Corporations Act. It appears likely that Mr Mehan’s claim falls within that category, and Mr Mehan did not advance any substantive submission to the contrary.

35. Both cll 6.1(a) and 6.1(f) of the Transaction DOCA (so far as the latter is limited to proceedings in one District Registry of the Federal Court of Australia and one state court) leave open the possibility that, if this Court grants leave to continue proceedings to Mr Mehan in the exercise of its statutory jurisdiction under s 444E of the Corporations Act, the deed administrators could nonetheless contend that, as a matter of the operation of the Transaction DOCA, those proceedings cannot be continued without their consent, and withhold that consent. That difficulty would be exacerbated if, as Mr Mack noted, cl 22.6 of the Transaction DOCA (headed “Forum Shopping”) requires a creditor bound by the deed to bring any challenge to the deed administrators’ decision in that respect in the Victorian District Registry of the Federal Court of Australia or the Supreme Court of Victoria. I pause to note that the heading to that clause seems inaccurate in this context, since there would be no element of forum shopping, on the part of a plaintiff, in bringing an application in another court or another District Registry of the Federal Court of Australia in respect of existing proceedings in that other court or registry.

36. On reflection, I am satisfied that no real difficulty arises from that possibility. It is, of course, possible that the deed administrators would consider that they should not, or indeed could not, exercise a power under the Transaction DOCA in a manner that would interfere with the conduct of ongoing proceedings in this Court or other Australian courts, particularly after a court had determined to grant leave for the continuance of the proceedings. It is also possible that, if cl 6.1 of the Transaction DOCA were read as empowering the deed administrators to decline consent to the continuance of proceedings, which a court has granted leave to continue, then it is a nullity or void for public policy. That possibility finds support in the observation of Campbell J (as his Honour then was) in Josia Pty Ltd v Horvat Constructions Pty Ltd [2004] NSWSC 1252 at [8], that a bar provision under a deed of company arrangement:

“would need to be read with section 444E of the Corporations Act 2001 (Cth), which expressly allows for the possibility that proceedings can be begun against a company the subject of a deed of administration with the leave of the Court. A deed cannot oust that power of the Court.”

37. In Easey v Grosvenor Constructions (NSW) Pty Ltd above at [16], Barrett J (as his Honour then was) observed that the “clear implication” of that observation was that leave of the Court under s 444E(3) of the Corporations Act may allow a proceeding to be pursued, which could otherwise not be pursued under the terms of a deed of company arrangement, although his Honour (at [22]) noted some doubt as to that approach, while treating it as open for the purposes of that case. That proposition may readily extend to a proceeding that could not be pursued without a deed administrator’s consent under the terms of a deed of company arrangement.

38. Quite apart from those matters, if the deed administrators were to exercise a power conferred on them by cl 6.1 of the Transaction DOCA so as to prevent the continuance of proceedings, after a court had exercised its statutory jurisdiction to grant leave for their continuance, a plaintiff would have standing to appeal to the court and seek to have that decision reversed under s 1321 of the Corporations Act. The matters that led that court to grant leave to continue the proceedings, and possibly other matters, may be relevant in such an appeal. I will reserve liberty to the parties to apply on 1 business day’s notice in case that issue arises. In doing so, I have not neglected cl 22.6 of the Transaction DOCA, so far as it may purportedly prevent Mr Mehan bringing such an application in this Court, at least without the deed administrators’ consent. It seems to me to be preferable to defer any further comment as to whether that clause could have effect to prevent a plaintiff invoking this Court’s statutory jurisdiction, conferred on it by s 1321 of the Corporations Act, in existing proceedings before this Court, or could be enforced in another Australian court so as to restrain the conduct of existing proceedings in this Court, to the point where those questions squarely arise.

37. Mr Hart also recognises that cl 6.2 of the Transaction DOCA contemplates that the deed administrators may give consent to creditors taking action in order to access insurance proceeds and that cl 16.4(a) of the Transaction DOCA incorporates ss 562 and 562A of the Corporations Act with the result that such proceeds would be payable to the relevant insured creditor in priority to other unsecured debts. Mr Mack in turn submitted that Mr Mehan can request the deed administrators’ consent to take any action to obtain payment from the insurer under cl 6.2 of the Transaction DOCA. That submission has the difficulty that the fact that course is presently open to Mr Mehan has not been established.

38. Clause 6.2 of the Transaction DOCA relevantly provides that:

“If insurance held by or on behalf of [Arrium] or available under legislation would, but for this DOCA, be accessible to a Creditor in relation to that Creditor’s Claim, then the Creditor may in relation to its claim take action of the type referred to in clause 6.1 to the extent necessary to obtain payment from the insurer of the Insurance Proceeds with the consent of the Deed Administrators, which consent may be provided at the Deed Administrators’ sole and absolute discretion and on such terms and conditions as the Deed Administrators may require.”

41. That clause seems to contemplate the possibility that, if Mr Mehan was able to bring a direct claim against Arrium’s insurers and if the deed administrators consented to his doing so, in their sole and absolute discretion, then Mr Mehan can bring proceedings to enforce that claim. It is ultimately not necessary to have regard to that clause, or to consider whether it may have been sufficient to protect Mr Mehan’s interests if that course were available to him, since neither party sought to establish that a direct claim by Mr Mehan against Arrium’s insurers was available, whether under the Law Reform (Miscellaneous Provisions) Act or otherwise, and Mr Mehan has not sought, nor have the deed administrators made any open offer to grant, consent to Mr Mehan’s exercise of that right. In the absence of basis to think that the preconditions to Mr Mehan’s bringing a claim under that clause are satisfied, that clause provides no reason to decline leave which should otherwise be granted to him.

Other matters raised by Arrium

42. Several other aspects of Ms Thomas’ evidence appeared to be directed to other reasons not to grant leave for the continuance of the proceedings. In her first affidavit, Ms Thomas led evidence, on information and belief from Ms Shepard that (Thomas 31.10.16 [23]):

“[A]s there is already a shortfall in the funds necessary to meet the claims of existing creditors, the Administration does not have any available funds for the purpose of litigation relating to an unsecured claim.”

Ms Thomas is, of course, there recording what Ms Shepard has advised her, as to the position while Arrium was in administration. The basis on which Ms Shepard held that view and the details of her role were not disclosed to allow any assessment of the weight to be given to that view. In the course of submissions, I drew to Mr Mack’s attention the fact that it was difficult to accept that Arrium and its then administrators (and now deed administrators), who would have a right of indemnity against Arrium’s assets, could be conducting a very substantial business if they did not have access to the amount of the remaining Deductible identified by Arrium ($80,000) in available funds. It may be that Ms Shepard was intending to express a preference not to expend funds that are in fact available in the administration (and now deed administration) in meeting such costs, but that, of course, is a different matter from lack of availability of such funds. I am not persuaded by Ms Thomas’ evidence, on information and belief from Ms Shepard, that the administration, or at least the deed administrators with the aid of their statutory indemnity against Arrium’s assets, did not have available funds to defend the proceedings.

43. Mr Mack submitted that Ms Thomas’ evidence that the administration did not have any available funds for the purpose of the litigation was now of limited relevance, where Arrium is now in deed administration. That submission had the difficulties that, first, Arrium had relied on that evidence in opposing the application for leave, until it disclaimed its relevance; and, second, that evidence was repeated, although not attributed to Ms Shepard, in respect of the deed administration as noted below.

44. Ms Thomas also referred to confirmation provided by Ms Shepard that a claim within the $250,000 Deductible component would be classed as an unsecured claim in the administration. That proposition would only have relevance to the extent that Mr Mehan’s claim were in fact within the $250,000 Deductible component, which in large part it is not. Ms Thomas also referred to several difficulties which might be faced by the administrators in making judgments in respect of the proceedings, which seem to me to be of limited relevance where the administration has now transitioned to a deed administration, and Arrium’s insurance arrangements provide for Arrium’s insurers to conduct the defence.

45. In her second affidavit, Ms Thomas also identified, by way of bare assertion, several matters that were said still to be the case, including that Arrium’s insurer had not indicated whether it would pay defence costs within the policy’s Deductible and that there were not any “available funds for the purpose of litigation in relation to an unsecured claim” and a claim within the $250,000 Deductible would be classed as an unsecured claim. The difficulties with that evidence, which was in similar form to Ms Thomas’ first affidavit, included the continuing lack of disclosure as to what inquiries had been made of Arrium’s insurers as to their position; the lack of recognition of the manner in which expenditures by the deed administrators in the conduct of the litigation would be treated in a deed administration; the assumption, contrary to the terms of the policy as I have construed them above, that Arrium rather than the insurers would conduct and pay for the defence of the proceedings; and the failure to recognise that Mr Mehan’s claim was substantially more than the $250,000 Deductible or the amount of $80,000 that had not (on Arrium’s case) been “eroded” by legal costs.

Whether there are good reasons not to require Mr Mehan to lodge a proof of debt in the deed administration

46. I should also have regard to the more general question whether there are good reasons for allowing Mr Mehan, as a contingent creditor of Arrium, to depart from the general position that claims will be dealt with under the deed of company arrangement. Mr Mack relied on the observation in Ogilvie-Grant v East (liquidator of Gordon Grant & Grant Pty Ltd) (1983) 7 ACLR 669 at 672 to the effect that, ordinarily, a proof of debt procedure will be more expeditious and less expensive than normal proceedings and that a claimant should ordinarily adopt the course of lodging a proof of debt:

“unless he can demonstrate that there is some good reason why a departure from that procedure is justified in the case of the particular claim in dispute.”

47. Mr Mack also submitted that Mr Mehan can submit a proof of debt pursuant to cl 18 of the Transaction DOCA and have it determined in accordance with cl 18 of the Distribution DOCA, and an appeal can be lodged if that claim is rejected. That proposition has the difficulty, to which I have referred above, that it provides no means to reach a consistent determination of Mr Mehan’s claims against Arrium on the one hand and Pathways on the other.

48. It follows from my conclusions that I have reached above that there are good reasons for allowing Mr Mehan not to lodge a proof of debt, and to maintain the proceedings, including particularly the fact that these proceedings involve claims against Arrium and Pathways which cannot readily be separated; that the adoption of the proof of debt process would potentially lead to inconsistent results between that process and the proceedings against Pathway, with no capacity to resolve such inconsistency; and that Arrium is insured in respect of the claim. Those good reasons are reinforced, as Mr Hart points out, by the fact that the proceedings were at the point where mediation would be ordered, but for Arrium’s administration; by the evidence that delay is exacerbating Mr Mehan’s psychological condition; and that the delay contemplated by the deed administrators is likely to be substantial, given the complexity of the deed administration. The grant of leave for Mr Mehan to pursue the relevant proceedings would also at least preserve his opportunity to access the charge which may be available under s 6 of the Law Reform (Miscellaneous Provisions) Act: Easey v Grosvenor Constructions (NSW) Pty Ltd above at [19]. It does not seem to me that there will be any material increase in the complexity of the deed administration of Arrium because one plaintiff is permitted to pursue proceedings that are already well advanced in this Court. Mr Mack, at one point, suggested that there may be many persons in that category, but that is, with respect, wholly a matter of speculation as to which no evidence was led.

Conclusion and orders

49. I am satisfied that this is a proper case for the grant of leave under s 444E of the Corporations Act. I will reserve the Plaintiff’s ability to make further submissions as to costs, as Mr Hart requested, although I should indicate my preliminary view that the matters involved had a degree of complexity and it was not unreasonable for Arrium, or the administrators or deed administrators, to seek to be heard in opposition to the application for leave. I will also reserve liberty to apply on one business day’s notice, for the reasons noted above.

50. I make the following orders:

1. Leave is granted to the Plaintiff pursuant to s 444E(3)(c) of the Corporations Act 2001 (Cth) to proceed against the First Defendant on the condition that the Plaintiff does not seek to enforce any judgment against the First Defendant without further leave of the Court.

2.   Order that the Plaintiff’s costs of the motion be the Plaintiff’s costs in the proceedings.

3.   Reserve the Plaintiff’s ability to apply to vary the costs order made in paragraph 2 above, within seven days.

4.   Liberty to apply on one business days’ notice specifying the relief sought.

5.   Matter be listed for further directions, before the Common Law Registrar, on 30 November 2016.

**********

Decision last updated: 01 December 2016