Morrison Knudsen Corporation of Australia Ltd v Australian National Railways Commission
[1996] FCA 947
•1 NOVEMBER 1996
CATCHWORDS
CORPORATIONS LAW - voluntary administrator - directions to administrator under s 444D - whether monies received under contract should be set-off against monies owing under separate contract - moratorium under s 440D - meaning of contract - nature of voluntary administration - no set-off.
Corporations Law ss 435C, 436A, 436E, 439A, 439C, 440D, 444A, 444D, 445A, 445E, 445D, 447A, 447B, 447D and 553C
Corporations Law Parts 5.3A and 5.4
Corporations (South Australia) Act 1990 s 44(2)
Ford's Principles of Corporations Law 7ed (1995)
Anonymous (1676) 1 Mod. Rep. 215; 86 ER 837;
Chapman v Derby (1689) 2 Vern. 117; 23 ER 684
Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd (1974) AC 689
P.J. Hegarty & Sons Ltd v Royal Liver Friendly Society [1985] IR 524
Re Partnership Pacific Securities Ltd (1994) 1 Qd.R. 410
Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99
Gye v McIntyre (1990-91) 171 CLR 609
No SG 3124 of 1996
MORRISON KNUDSEN CORPORATION OF AUSTRALIA LIMITED
ACN 056 629 988 (ADMINISTRATOR APPOINTED) and
MORRISON KNUDSEN AUSTRALIA LEASING LIMITED ACN 063 022 908
(ADMINISTRATOR APPOINTED) and BRUCE JAMES CARTER
- and -
AUSTRALIAN NATIONAL RAILWAYS COMMISSION
Mansfield J
Adelaide
1 November 1996
IN THE FEDERAL COURT OF AUSTRALIA )
)
SOUTH AUSTRALIA DISTRICT REGISTRY ) No SG 3124 of 1996
)
GENERAL DIVISION )
BETWEEN:
MORRISON KNUDSEN
CORPORATION OF
AUSTRALIA LIMITED
ACN 056 629 988
(ADMINISTRATOR APPOINTED)
and
MORRISON KNUDSEN AUSTRALIA
LEASING LIMITED
ACN 063 022 908
(ADMINISTRATOR APPOINTED)
and
BRUCE JAMES CARTER
Applicants
- and -
AUSTRALIAN NATIONAL
RAILWAYS COMMISSION
Respondent
MINUTES OF DIRECTIONS UNDER S447D, CORPORATIONS LAW
CORAM: Mansfield J
PLACE: Adelaide
DATE: 1 November 1996
THE COURT GIVES DIRECTIONS THAT:
The administrator Bruce James Carter of the first applicant MKA is entitled to receive the sum of $313,391.57 paid on 6 September 1996 pursuant to monies owing by the respondent ANRC to MKA under a certain Maintenance Deed dated 17 August 1992 and under a certain
later Maintenance Agreement dated 23 December 1993 as property of MKA.
The administrator Bruce James Carter is not obliged to set-off against the sum referred to in paragraph 1 above either the sum of $113,079.28 owing by MKA to ANRC at 31 August 1996 or the sum of $146,325.14 being the value of work done by ANRC for MKA during August 1996, both amounts arising under a certain Maintenance Subcontract dated 16 June 1993 and under a certain oral later Maintenance Sub-agreement.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA )
)
SOUTH AUSTRALIA DISTRICT REGISTRY ) No SG 3124 of 1996
)
GENERAL DIVISION )
BETWEEN:
MORRISON KNUDSEN
CORPORATION OF
AUSTRALIA LIMITED
ACN 056 629 988
(ADMINISTRATOR APPOINTED)
and
MORRISON KNUDSEN AUSTRALIA
LEASING LIMITED
ACN 063 022 908
(ADMINISTRATOR APPOINTED)
and
BRUCE JAMES CARTER
Applicants
- and -
AUSTRALIAN NATIONAL
RAILWAYS COMMISSION
Respondent
REASONS FOR DECISION
CORAM: Mansfield J
PLACE: Adelaide
DATE: 1 November 1996
By application made by the applicants on 6 September 1996, various orders were sought, largely but not exclusively declaratory orders as to the status of certain payments made or to be made between the first applicant Morrison Knudsen Corporation of Australia Limited (Administrator Appointed) ("MKA") on the one hand and the respondent Australian National
Railways Commission ("ANRC") on the other hand. The application also sought directions from the Court at the behest of the third applicant Bruce James Carter ("the administrator"), who on 15 August 1996 was appointed administrator of each of MKA and of the second applicant pursuant to s436A of the Corporations Law ("the Law").
By notice of motion dated 10 September 1996 the applicants sought directions pursuant to s447D of the Law as to how the administrator of the applicants should deal with an amount of $313,391.57 paid to him by ANRC on 6 September 1996, in circumstances which are set out below.
By notice of motion dated 13 September 1996 ANRC sought an order that these proceedings should be transferred for determination to the Supreme Court of South Australia pursuant to s44(2) of the Corporations (South Australia) Act 1990. The grounds of that motion were initially twofold: firstly that this Court did not have jurisdiction to hear and determine the matters raised by the application, including that it did not have jurisdiction to give any directions under s447D of the Law to the administrator in the particular circumstances of the matter, and secondly that the Supreme Court of South Australia was a more convenient forum for the determination of the matters generally in issue between the parties, even in the event that the Court determined that it had jurisdiction to hear and determine the matter. That alternative claim was not pursued. The motion was opposed.
After hearing argument on that motion, I indicated that I was of the view that the Court had jurisdiction both to give directions to the administrator, even though the directions sought involved inquiring into events which preceded his appointment as administrator and even though the directions sought effectively might involve the making of final orders as to certain issues about the contractual relationship between the applicants and ANRC, and further and more generally that this Court had in the circumstances more general jurisdiction to hear and determine all issues between the parties. I indicated that I would give my reasons for my decision as to the Court's jurisdiction when judgment was delivered in the action generally.
The notice of motion for directions dated 10 September 1996 was then listed for hearing, and the remaining issues in the action are to be heard on a later date.
This decision is in respect of the applicants' notice of motion of 10 September 1996 for directions under s447D of the Law. It has been dealt with separately from the main claims for relief because there is some urgency about its disposition. That is partly because, pursuant to s439A of the Law, the administrator must shortly provide to creditors of each of MKA and the second applicant a report of their business, property, affairs and financial circumstances, and as a deed of company arrangement is proposed he must also provide a statement setting out his opinion and the reasons for his opinion as to whether it would be in the creditors' interests for each of MKA and the second applicant to execute any proposed deed of company arrangement or for his appointment to end or for MKA and the second applicant each to be wound up, and partly because the administrator also incurs personal liability in respect of work carried out pursuant to the contracts mentioned below subsequent to the date of his appointment and he is anxious to know the status of payments due by ANRC to MKA both presently and in the future.
For the purposes of giving directions under s447D of the Law, the nature of the dispute although based upon quite complex documentation is relatively uncomplicated. In presenting the summary of the relevant documents below, I am conscious of the fact that there are a number of other matters in issue between the parties which are not raised by the notice of motion that are subsequently listed for trial. In those circumstances, it is inappropriate to go beyond that which is absolutely necessary to be considered for the purposes of the motion. I should be excused, therefore, if the description of issues and documents is brief. Brevity sometimes fails to disclose a perception as to the subtlety of a clause or clauses of the agreement which might otherwise arise in another context. I am not therefore to be taken to be passing a concluded view on other than the matters which are fundamentally important to the determination of the issues arising under the notice of motion.
The business of MKA is to re-manufacture, repair and maintain locomotives. The business of the second applicant is to accept leases and grant sub-leases of locomotives. In 1992, MKA entered into a complex arrangement with ANRC and others involving the re-manufacture, maintenance and lease of 25 locomotives. It is common ground between the parties that, for present purposes, it is necessary to have regard only to one of the series of documents comprising that arrangement, namely an agreement entitled 'Maintenance Deed' between ANRC and MKA made on 17 August 1992 ("the Maintenance Deed"). By the Maintenance Deed, which was to ensure that the 25 locomotives achieved a certain level of availability, MKA agreed to maintain, service, repair, overhaul and test the locomotives for a period of 12 years (subject of course to other provisions). It is unnecessary to refer in any detail to the nature of the work to be carried out, or the quality of the performance of that work. Payment for maintenance work carried out by MKA under the Maintenance Deed was provided for in clause 6. ANRC agreed to pay MKA for work performed under the Maintenance Deed at certain rates and calculated in a certain way. It was common ground for the purposes of the notice of motion that the process of payment was as follows: MKA would present to ANRC on or about the first business day of each calendar month an invoice for maintenance payments to become due for that months' work and payable on the last business day of that month, and ANRC would then pay for that work performed during that month on that invoice on the last business day of that calendar month.
In circumstances which are not necessary to explore, by a further agreement entitled 'Subcontract' again between MKA and ANRC and dated 16 June 1993 ("the Maintenance Subcontract"), MKA subcontracted back to ANRC the obligations of MKA under the Maintenance Deed with respect to the maintenance, service, repair and testing of the locomotives. The Maintenance Subcontract did not extend to all the obligations of MKA under the Maintenance Deed, nor were all its terms entirely parallel with the Maintenance Deed. It did not relieve MKA of its obligations under the Maintenance Deed, but represented a subcontracting arrangement in relation to much of the work which MKA was to perform under the Maintenance Deed. Following the Maintenance Subcontract, therefore, ANRC performed the maintenance work on the locomotives and invoiced MKA for that work, and MKA invoiced ANRC for that same work under the Maintenance Deed (as well as any other entitlement to payments under that Maintenance Deed).
Clause 9 of the Maintenance Subcontract provided for MKA to make payments to ANRC in respect of the maintenance, service and repair obligations subcontracted to be performed and in fact performed by ANRC. Under clause 9.2 of the Maintenance Subcontract, ANRC was to present MKA with a payment invoice on or about the first business day of each calendar month invoicing payments due for such months' work to be performed but to be paid on the last business day of the following month. In effect, whilst MKA under the Maintenance Deed was paid for the work done during a month at the end of a month, ANRC under the Maintenance Subcontract was paid for the work done during a month at the end of the following month. It was common ground that, in practice, whilst the payments to MKA under the Maintenance Deed were effected in accordance with it, ANRC tended to invoice at the start of the month but for the work done in the preceding month, for which it was paid at the end of that month. The practical effect is insignificant, and it has not been submitted to me that the arrangement qualifies or is relevant in any way to the issue which I am asked to decide.
In addition to the arrangements referred to, MKA had also entered into another complex arrangement with ANRC and others involving the remanufacture and lease of four tractive effort booster units used by ANRC. Again, by common acknowledgment, it is necessary for present purposes to have regard to only one of the series of documents comprising that arrangement, namely an agreement entitled 'Maintenance Agreement' between ANRC and MKA made on 23 December 1993 ("the later Maintenance Agreement").
By the later Maintenance Agreement, which was to ensure that the four tractive effort booster units achieved a certain level of availability, MKA agreed to maintain, service and overhaul those units. Again, there is no immediate issue as to the nature of the work to be carried out or the quality of the performance of that work. Payment for maintenance work carried out by MKA pursuant to the later Maintenance Agreement was provided for in clause 6. It was in effect in the same terms as in the Maintenance Deed.
Again, by a further arrangement between MKA and ANRC, MKA has subcontracted certain of its obligations under the later Maintenance Agreement in respect of maintenance of the four tractive effort booster units to ANRC. That arrangement is not the subject of a separate written agreement between MKA and ANRC, but on the affidavit evidence before me is an oral agreement upon the same substantial terms (obviously different as to details of work, rates and the like) as the Maintenance Subcontract ("the later Maintenance Sub-agreement"). Counsel for ANRC accepted that to be the case, but only for the purpose of the determination of the notice of motion now under consideration.
The payment arrangements between ANRC and MKA under the later Maintenance Agreement and the later Maintenance Sub-agreement were the same as those for the Maintenance Deed and the Maintenance Subcontract.
At the end of each month, ANRC would pay to MKA one cheque for the amount invoiced by it at the start of the month pursuant to the Maintenance Deed and the later Maintenance Agreement and MKA would itself hand over at the same time a cheque to ANRC for the amount payable to ANRC under the Maintenance Subcontract and the later Maintenance Sub-agreement pursuant to its invoice also handed over at the start of the month. The parties conducted their affairs accordingly, and apparently without difficulty, until the appointment of the administrator on 15 August 1996.
At the end of August 1996 there was payable to MKA by ANRC the sum of $313,391.57 in respect of the Maintenance Deed and the later Maintenance Agreement, and there was payable to ANRC by MKA the sum of $113,079.28 invoiced by it in respect of the later Maintenance Subcontract and the later Maintenance Sub-agreement. In addition, ANRC had performed work during August 1996 to the value of a further sum of $146,325.14 in respect of those two last mentioned agreements which had not by then been invoiced to MKA. In the normal course, at the end of August 1996, cheques for $313,391.57 and $113,079.28 would have been exchanged and at the start of September 1996 MKA would have issued an invoice to ANRC for work to be performed by it during September and payable at the end of September, and ANRC would have issued an invoice to MKA for $146,325.14 payable also at the end of September (although strictly speaking ANRC could have invoiced that amount of $146,325.14 at the start of August 1996 for payment at the end of September 1996 and have invoiced further at the start of September for the work it was to do during September payable at the end of October).
The difficulty arises because, following the appointment of the administrator and during the administration: s435C of the Law, ANRC is unable to take action to recover the amount or amounts which MKA owes to it: s440D of the Law. There is, in effect, a moratorium for that period preventing it from recovering such debts.
At the end of August 1996, the administrator took the view on behalf of MKA that he should recover the full amount then owing by ANRC to MKA of $313,391.57, but that in respect of MKA's liability to ANRC also payable at that time, a moratorium was in effect which enabled him not to make payments to ANRC. ANRC made payment of the $313,391.57 under protest, but subsequently by agreement $53,987.15 was released in an unqualified way to MKA as reflecting in any event the uncontested excess of MKA's entitlement, after allowing for the two amounts of $113,079.28 and $146,325.14 referred to.
ANRC asserts that it is entitled to set-off against the $313,391.57 liability to MKA at the end of August (which ANRC acknowledges) the amount which MKA is liable to pay ANRC also at the end of August in respect of its invoice given at the start of August of $113,079.28 (which MKA acknowledges), and the further amount not invoiced by ANRC but being for work performed during August pursuant to the Maintenance Subcontract and the later Maintenance Sub-agreement of $146,325.14 (which MKA accepts as the proper value of that work).
The issue upon which it is sought to have directions under s447D of the Law is whether the administrator can receive absolutely the full payment made by ANRC of $313,391.57 and treat ANRC as an unsecured creditor in respect of MKA's liability to ANRC, or whether there is a set-off as ANRC asserts.
Counsel for ANRC rightly contends that, in the absence of such a set-off, there is an apparent unfairness and indeed irony in MKA being able to recover its debt which relates to work at least largely performed in fact by ANRC under the Maintenance Subcontract and the later Maintenance Sub-agreement, and that such a consequence does not reflect the practice of the parties in the past. He contends that, at common law, such a right of set-off exists: Anonymous (1676) 1 Mod. Rep. 215; 86 ER 837; Chapman v Derby (1689) 2 Vern. 117; 23 ER 684, and has been statutorily recognised, subject to limitations, in relation both to bankrupts: s86 Bankruptcy Act, and to insolvent companies being wound up: s553C of the Law. See generally Ford's Principles of Corporations Law, 7ed (1995), pp1038-1039. I assume for the purposes of this decision the necessary degree of mutuality applies between the debts of ANRC and MKA each to the other. It was not contended that s553C applied directly in the present circumstances, where MKA is under administration under Part 5.3A of the Law. It was contended, however, that the common law position should apply, subject to the terms of the relevant agreements.
It is to the terms of the agreements that I now turn.
Clause 6.5 of the Maintenance Deed provides:
"ANRC's obligation to make each Maintenance Payment and to pay other moneys under this Deed and its obligation to ensure that MKA receives payments in accordance with clause 6.1, shall be absolute and unconditional and are not affected by anything which might otherwise affect them at law or in equity. ANRC may not for any reason set-off or withhold a Maintenance Payment or other moneys payable under this Deed, including (without limitation) because:
(a)any Units are experiencing a Failure or otherwise are damaged, do not operate or are not in ANRC's possession;
(b)ANRC has, or claims to have, a set-off, counter claim, defence or other right against MKA or anyone else; or
(c)of any defect in the title, condition, design, operation or fitness for use of, or any damage to or loss or destruction of, any Unit.
ANRC's remedies under this Deed are limited to its right to receive liquidated damages under clause 8.4."
Clause 6.5 of the later Maintenance Agreement is in identical terms.
The Maintenance Subcontract does not contain any provision expressly qualifying that clause. Indeed, it expressly recognises the import of clause 6.5. Firstly, in clause 3.1, it records MKA's liability to pay liquidated damages to ANRC in the event of a failure by MKA to provide the agreed levels of availability of locomotives under the Maintenance Deed, even though the maintenance under the Maintenance Subcontract was thereafter to be performed by ANRC. Secondly, it specifically addresses the matter of invoicing by ANRC to MKA and payment by MKA (clauses 2.4.3, 2.5.5 and 9) discretely from such processes under the Maintenance Deed, and including the specific adoption of clause 6.3 of that Deed relating to variation of maintenance payments. Finally, clause 9.5 of the Maintenance Subcontract provides:
"It is a special condition of this Subcontract that MKA's obligation to make payments to ANRC under this Subcontract are subject in all things to MKA receiving payment by ANRC of all monies due to it from time to time under the terms of the Maintenance Deed."
The oral later Maintenance Sub-agreement is not said to qualify that contractual picture in any sense.
In my view, the terms of the contractual arrangements between ANRC and MKA make it plain that the obligation of ANRC to make payments to MKA under both the Maintenance Deed and under the later Maintenance Agreement are absolute, and are not subject to any set-off by ANRC by reason of any failure by MKA to properly perform its maintenance obligations or by reason of any other claim ANRC may have whether arising under or externally from those documents. That is explicit and clear. The later express provisions of the Maintenance Subcontract both recognise and reinforce that, in particular by clause 9.5 referred to above.
It is not unlawful for the parties to have made such an agreement: Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd (1974) AC 689 per Lord Diplock at 717; P.J. Hegarty & Sons Ltd v Royal Liver Friendly Society [1985] IR 524; Re Partnership Pacific Securities Ltd (1994) 1 Qd.R. 410 at 424-425. In each of those cases, it was stressed that the Court should be slow to construe contractual arrangements so as to exclude remedies for breach of such arrangements arising by operation of law, and indeed expressed that approach as a presumption of construction. It is true that it will, generally speaking, require clear and unequivocal words in an agreement to remove from a contracting party a substantive defence to a claim which would otherwise be available to it. In the last mentioned case, Williams J concluded that a clause in a lease that rent had to be paid "without any deduction" was not such as to exclude the tenant's right in appropriate circumstances to set-off against the liability for rent as an equitable set-off claims for damages for breach of covenants in the lease and in an antecedent agreement for lease.
I have been mindful of those strictures in reaching my conclusion thus far, but in my view this is one of those cases where the parties have - no doubt for sound reasons - made such an agreement. They have specifically dealt with the matter at the time of the Maintenance Deed, and of the later Maintenance Agreement, and of the Maintenance Subcontract. They have specifically limited ANRC's remedy for defective performance of the Maintenance Deed and of the later Maintenance Agreement to that of damages under clause 8.4 of those documents, which clause sets up its own regime for quantifying and paying such damages. Clause 9.5 of the Maintenance Subcontract specifically makes ANRC's right to be paid under it "subject in all things to MKA receiving payment by ANRC of all monies due to it" under the Maintenance Deed. I do not think there is room for doubt.
So much was not really gainsaid by counsel for ANRC. However, it was submitted, as clause 6.5 of the Maintenance Deed and of the later Maintenance Agreement do not expressly provide for the circumstance where an administrator has been appointed under the Law, it was open to the Court to construe clause 6.5 so as to limit its operation so that it did not operate when an administrator had been appointed.
It is certainly correct that, if language is open to two constructions, that which will be preferred is that which avoids apparently capricious, unreasonable, or unjust results: Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99, per Gibbs J at 109. It is also true, as I have noted above, that the consequence of the construction contended for by the administrator is in the circumstances both idiosyncratic and ironic. In addition, of course, if MKA were to be wound up, then the right to set-off (assuming it exists) would be preserved by s553C of the Law, subject to the issue of whether parties to a contract can exclude that statutory right; cp. Gye v McIntyre (1990-91) 171 CLR 609. But it is noteworthy, in the context of determining in the face of the apparently clear words of clause 6.5 of the Maintenance Deed reinforced by later equally explicit and unqualified expressions whether some such qualification was intended by the parties, to observe the way in which Part 5.3A of the Law operates.
The administration is only a temporary phase, and will normally end by execution of a deed of arrangement, by resolution of the creditors, or by winding up on resolution of the creditors: s435C. It is only a temporary state because the administrator, having been appointed, is required to convene an initial creditors meeting within 5 days, and then (unless the time is extended by the Court) a further creditors meeting within a further 21 days: s436E and s439A. At the second meeting, the fate of the company is in the hands of the creditors: s439C. The structure of the Law therefore is to define a limited moratorium period. If the creditors simply resolve that the administration is brought to an end, the normal legal rights may be enforced. If the creditors resolve that the company be wound up, Part 5.4 and subsequent Parts of the Law, including s553C, become activated. If the creditors resolve that a deed of company arrangement be executed by the company: s444A, the deed itself will generally deal with the position of creditors as they will be bound by the deed: s444D. The creditors may vary or terminate the deed: s445A, s445E and in limited circumstances on the application of a creditor the Court may do so: s445D. A creditor may seek orders generally from the Court relating to the administration: s447A, or to protect the interests of creditors or of that creditor while the company is under administration: s447B.
I reject the submission that clause 6.5 of the Maintenance Deed and of the later Maintenance Agreement should be construed so as to permit set-off of ANRC's claims under the Maintenance Subcontract and the later Maintenance Sub-agreement in the event of MKA coming under administration, but not otherwise. In my view, for reasons which I have given, the wording is clear and unambiguous. It does not admit of alternative meanings, so as to give me the option of adopting the construction contended for. In addition, having regard to the structure of and way in which Part 5.3A of the Law operates, even if there were some ambiguity, I would not conclude that the qualifying words contended for should be read into the two agreements referred to. The consequence is but a temporary one; it is one during which other avenues are available to ANRC if specific protection is necessary for its position; and it is one where the control of the company lies with its creditors in any event.
Consequently, on the notice of motion for directions, I give directions that:
The administrator Bruce James Carter is entitled to receive the sum of $313,391.57 paid on 6 September 1996 pursuant to monies owing by the respondent ANRC to the first applicant MKA under a certain Maintenance Deed dated 17 August 1992 and under a certain later Maintenance Agreement dated 23 December 1993 as property of MKA.
The administrator Bruce James Carter is not obliged to set-off against the sum referred to in paragraph 1 above either the sum of $113,079.28 owing by MKA to ANRC at 31 August 1996 or the sum of $146,325.14 being the value of work done by ANRC for MKA during August 1996, both amounts arising under a certain Maintenance Subcontract dated 16 June 1993 and under a certain oral later Maintenance Sub-agreement.
It is unnecessary in the circumstances for me to consider whether different considerations might apply from the circumstances in which ANRC claims to be entitled to the separate amounts of $113,079.28 and $146,325.14.
I certify that this and the preceding pages are a true copy of the Reasons for Decision of the Honourable Justice Mansfield.
Associate:
Dated:
Counsel for the Applicants : Mr J A Shortt-Smith
Solicitors for the Applicants : Finlaysons
Counsel for the Respondent : Mr R D Ross-Smith
Solicitors for the Respondent : Phillips Fox
Hearing Date : 3 October 1996
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