Mutual Holdings Pty Ltd v Adam Shepard in his capacity as administrator of Quest Minerals Ltd - [2015] WASC 412

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CIVIL

CITATION: MUTUAL HOLDINGS PTY LTD -v- ADAM SHEPARD in his capacity as administrator of QUEST MINERALS LTD [2015] WASC 412

CORAM: MITCHELL J

HEARD: 19 OCTOBER 2015

DELIVERED : 5 NOVEMBER 2015

FILE NO/S: COR 219 of 2014

MATTER :In the matter of Quest Minerals Ltd (subject to deed of company arrangement)

BETWEEN: MUTUAL HOLDINGS PTY LTD
Plaintiff
AND
ADAM SHEPARD in his capacity as administrator of QUEST MINERALS LTD
Defendant

FILE NO/S :COR 220 of 2014

BETWEEN :CORPORATE ADMIN SERVICES PTY LTD
Plaintiff
AND
ADAM SHEPARD in his capacity as administrator of QUEST MINERALS LTD
Defendant

Catchwords:

Corporations - Voluntary administration - Appeal de novo from administrator's rejection of proof of debt - Related party transactions - Consequences of alleged contravention of s 208 of the Corporations Act 2001 (Cth)

Legislation:

Corporations Act 2001 (Cth), s 103, s 207, s 208, s 209, s 1321, s 1324

Result:

Debts admitted to proof regardless of alleged contravention of s 208 of the Corporations Act 2001 (WA)

Category: A

Representation:

COR 219 of 2014

Counsel:

Plaintiff: Mr M L Bennett & Ms C L Donald
Defendant: Mr J A Thomson SC

Solicitors:

Plaintiff: Bennett + Co
Defendant: Somerset Ryckmans

COR 220 of 2014

Counsel:

Plaintiff: Mr M L Bennett & Ms C L Donald
Defendant: Mr J A Thomson SC

Solicitors:

Plaintiff: Bennett + Co
Defendant: Somerset Ryckmans

Case(s) referred to in judgment(s):

Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue [2009] HCA 41; (2009) 239 CLR 27
Barker v Midstyle Nominees Pty Ltd [2014] WASCA 75
Certain Lloyd's Underwriters v Cross [2012] HCA 56; (2012) 248 CLR 378
Cherry v Boultbee (1839) 4 My & Cr 442; 41 ER 171
Commissioner of Taxation v Consolidated Media Holdings Ltd [2012] HCA 55; (2012) 250 CLR 503
Ethnic Interpreters and Translators Pty Ltd v Sabri-Matanagh [2015] WASCA 186
HCK China Investments Ltd v Solar Honest Ltd [1999] FCA 1156; (1999) 165 ALR 680
McGellin v Mount King Mining NL (1998) 144 FLR 288
Minister for Employment and Workplace Relations v Gribbles Radiology Pty Ltd [2005] HCA 9; (2005) 222 CLR 194
Nelson v Nelson (1995) 184 CLR 538
Orrong Strategies Pty Ltd v Village Roadshow Ltd [2007] VSC 1; (2007) 207 FLR 245
Plaintiff S4/2014 v Minister for Immigration [2014] HCA 34; (2014) 88 ALJR 847
Project Blue Sky Inc v Australian Broadcasting Authority [1998] HCA 28; (1998) 194 CLR 355
R v Trade Practices Tribunal; Ex parte Tasmanian Breweries Pty Ltd (1970) 123 CLR 361
Re Summit Resources (Australia) Pty Ltd [2012] WASC 125; (2012) 42 WAR 401
Tanning Research Laboratories Inc v O'Brien (1990) 169 CLR 332
Westchester Pty Ltd v Triton Resources Ltd [2001] WASC 57
Westpac Banking Corporation v Totterdell (1998) 20 WAR 150
Winpar Holdings Ltd v Goldfields Kalgoorlie Ltd [2001] NSWCA 427, (2001) 166 CLR 144
Zheng v Cai [2009] HCA 52; (2009) 239 CLR 446
MITCHELL J:

Summary

The plaintiffs appeal from the refusal of the deed administrator of Quest Minerals Ltd to admit their proofs of debt under a deed of company arrangement (DOCA). Mutual Holdings Pty Ltd claimed $1,407,485 under agreements for the sale of rights associated with an exploration licence application to Quest Minerals. Corporate Admin Services Pty Ltd (CAS) claimed a total of $768,040.31 under an agreement for the provision of services to Quest Minerals.
It is common ground that, in dealing with this appeal under s 1321 of the Corporations Act 2001 (Cth) (Act), the court conducts a hearing de novo. The court must consider, on the material before it, whether the claimed debts are true liabilities of Quest Minerals enforceable against it according to law.[1]
[1] Tanning Research Laboratories Inc v O'Brien (1990) 169 CLR 332, 338 - 339, 354; Westpac Banking Corporation v Totterdell (1998) 20 WAR 150, 154.
The only basis ultimately advanced by the deed administrator in these proceedings for rejecting the plaintiffs' formal proofs was an alleged contravention of s 208 of the Act. Section 208 provides that a public company giving a financial benefit to a related party must do so with the approval of its members or in a manner falling within prescribed exceptions. The deed administrator alleges that the plaintiffs are related entities of Quest Minerals, and that the relevant financial benefits do not fall within any exception to the requirement for shareholder approval. The plaintiffs dispute these allegations.
Before dealing with the factually complex questions arising from that dispute, I ordered the trial of the preliminary question of whether the contravention of s 208 of the Act alleged by the deed administrator, if established, would provide a basis for refusing to admit the plaintiffs' proofs of debt.
The answer to this question turns on whether there were enforceable debts owed to Mutual Holdings and CAS by Quest Minerals as at 9 May 2014.[2] The claimed debts were enforceable, as s 209(1)(a) of the Act expressly provides that contravention of s 208 does not affect the validity (a term comprehending enforceability) of a contract connected with the giving of the benefit to a related party. Section 103(2) and (4) of the Act also expressly provides that an agreement is not invalid or unenforceable merely because of a contravention of s 208 of the Act.
[2] The date when the administration began, being the date when the administrator was appointed by resolution of the directors: see s 435C(1)(a) and s 436A of the Act.
The only ground on which the agreements between Quest Minerals and the plaintiffs were said to be unenforceable was a contravention of s 208 of the Act. I have, therefore, concluded that the contravention of s 208 of the Act alleged by the deed administrator, if established, would not provide a basis for refusing to admit the proofs of debt. It is therefore unnecessary to determine whether the contravention can be established in order to allow the plaintiffs' appeal and reverse the deed administrator's decision to reject their formal proofs of debt.
My reasons for reaching these conclusions follow.

Mutual Holdings debt

On 23 October 2009, Mutual Holdings entered into an agreement with Quest Minerals for the transfer to Quest Minerals of rights associated with an exploration licence application (Tenement Sale Agreement). In consideration, Quest Minerals was to pay $50,000, and provide shares and share options to Mutual Holdings. Quest Minerals was also to pay royalties to Mutual Holdings on the announcement of JORC Code compliant inferred resources to the Australian Securities Exchange (ASX).
Transfer of the exploration licence, and payment of the immediate consideration, occurred on 1 December 2009.
On 4 March 2011, Quest Minerals announced a maiden 151 mt at 25% iron ore and 0.44% vanadium inferred mineral resource to the ASX. This activated Quest Minerals' obligation to make royalty payments under the Tenement Sale Agreement. Quest Minerals did not make those payments.
On 8 August 2012, Quest Minerals and Mutual Holdings entered into a Debt Agreement which provided for the issue of shares, required that 10% of any future capital raising by Quest Minerals be applied towards discharging its debt to Mutual Holdings and provided for Mutual Holdings to convert the whole or part of its outstanding debt to shares. The Debt Agreement acknowledged the debt at that time to be $3.02 million.
On 22 August 2012, 3 December 2012 and 3 January 2013, parts of Quest Minerals' debt to Mutual Holdings were converted into shares. On 19 April 2013 Mutual Holdings assigned part of its debt to a third party.
By its proof of debt, Mutual Holdings claims an outstanding amount of $1,407,085 as at 9 May 2014 plus interest at 12%. At trial, senior counsel for the deed administrator accepted that this amount was owing, subject to the operation of s 208 and associated provisions of the Act.

CAS debt

On 4 May 2007, CAS entered into an Administration Agreement with Quest Minerals under which CAS agreed to provide administrative services to Quest Minerals. Quest Minerals agreed to pay CAS a service fee of $370,000 per annum plus GST, subject to annual review. The fee was payable in monthly instalments in arrears. CAS was also able to recover its out of pocket expenses with a 10% handling surcharge, and costs of maintaining premises.
CAS submitted two proofs of debt for a total of $768,040.31 relating to services provided, outgoings and a termination fee owing as at 9 May 2014. At trial, senior counsel for the deed administrator accepted that this amount was owing, subject to the operation of s 208 and associated provisions of the Act.

Deed of company arrangement

The deed administrator was appointed by the directors of Quest Minerals as voluntary administrator of the company on 9 May 2014. On 18 August 2014, a meeting of the creditors of Quest Minerals, held under s 439A and s 439B of the Act, resolved that the company execute the DOCA as contemplated by s 439C(a) of the Act. On 18 August 2014, Quest Minerals executed the DOCA, as required by s 444B(2)(a) of the Act.
On execution, the DOCA became binding on the creditors of Quest Minerals, so far as concerns claims arising before 9 May 2014, by operation of s 444D(1) of the Act. The DOCA also binds Quest Minerals, its officers and members and the deed administrator, by operation of s 444G of the Act.
The DOCA requires the administrator to establish a Deed Fund comprised of cash and cash equivalent assets held by the administrator as at 18 August 2014. Clause 7.2 of the DOCA provides for the distribution of funds with ordinary creditors ranking last 'in respect of their Admitted Claims'. Clause 7.6 requires the administrator to transfer the Deed Fund or undistributed balance thereof to the trustee of the Creditors' Trust as soon as practicable.
Clause 8 of the DOCA required the administrator to execute the Creditors' Trust Deed, which takes effect when the balance of the Deed Fund is transferred. On the transfer of the Deed Fund, all Claims of Participating Creditors 'will be novated and assumed by the Creditors' Trust', and Quest Minerals is released from those Claims which are extinguished (cl 8.3 of the DOCA). The DOCA and Creditors' Trust Deed provide for two sub‑funds of certain assets of Quest Minerals (cl 3) to be held on trust for the Participating Creditors and the Trustee (cl 4). The Creditors' Trust Fund is to be distributed according to a specified order of priorities, the last of which is 'Participating Creditors in respect of their Admitted Claims'.
Clause 6 of the Creditors' Trust Deed provides for the making of claims under div 6 of pt 5.6 of the Act, as if references to the liquidator were to the Trustee, unless expressly stated to the contrary or modified by the Deed.[3] This involves a Participating Creditor submitting a proof of debt. Clause 6.3 of the Creditors' Trust Deed provides for the Trustee, in his absolute discretion, to admit all or part of any Claim of a Participating Creditor, and pay any Admitted Claim, in accordance with the provisions of the Deed.
[3] See also s 444A(5) of the Act and sch 8A to the Corporations Regulations 2001 (Cth).
A 'Claim' for the purposes of the DOCA and Creditors' Trust Deed is relevantly defined to include:
a debt payable by … [Quest Minerals] … being a debt … the circumstances giving rise to which occurred on or before [9 May 2014], that would be admissible to proof against [Quest Minerals] in accordance with Division 6 of Part 5.6 of the Act if the Company had been wound up.
Section 553 of the Act (in div 6 of pt 5.6) provides that all debts payable by the company, the circumstances giving rise to which occurred before the relevant date, are admissible to proof against the company.
An 'Admitted Claim' is defined in the DOCA and Creditors' Trust Deed to mean a Claim in respect of a Participating Creditor the proof of debt for which has been accepted by the Deed Administrator/Trustee. A 'Participating Creditor' is a creditor with a Claim.

Related party transactions

The deed administrator accepts that the debts claimed by the plaintiffs are owed by Quest Minerals under the terms of the relevant agreements. However, he denies that the debts are enforceable, and therefore admissible to proof. The only basis on which the deed administrator contends that the debt is not enforceable is a contravention of s 208 of the Act.
Section 208 of the Act provides that, for a public company such as Quest Minerals to give a financial benefit to a related party, the public company must obtain the approval of its members or the giving of the benefit must fall within an exception set out in s 210 to s 216 of the Act.
Mr Vladimir (Roger) Nikolaenko is the sole director and company secretary of Mutual Holdings and CAS. The deed administrator contends that both plaintiffs were related parties of Quest Minerals. This is on the alleged basis that Mr Nikolaenko, although not formally appointed, acted in the position of director of Quest Minerals, and that the formally appointed directors of Quest Minerals were accustomed to act in accordance with his instructions or wishes.[4]
[4] Section 228(4) of the Act, read with s 228(2)(a) and par (b) of the definition of 'director' in s 9 of the Act.
The plaintiffs deny that Mr Nikolaenko was ever a 'shadow' or acting director of Quest Minerals, and therefore deny that they are related parties of Quest Minerals or that the requirements of s 208 of the Act are applicable. In any event, the plaintiffs contend that their arrangements with Quest Minerals fall within the exception in s 210 of the Act, on that basis that the terms of the relevant agreements would be reasonable in the circumstances if they were dealing at arm's length with Quest Minerals.
The above issues concern contentious issues of fact. However, it will only be necessary to resolve those issues in the appeal if a failure to comply with s 208 of the Act, if established, would provide a basis for refusing to admit the debts to proof.
The deed administrator contends that the alleged contravention of s 208 would render the relevant agreements unenforceable. It seems to be common ground that if the agreements are not enforceable then the debts should not be admitted to proof.
On 7 October 2015, I ordered that the following matters be determined separately from other issues in the proceedings:
1.The question of whether the plaintiffs have established a debt which, apart from matters relating to s 208 of the Act, should be admitted to proof; and
2.The question of whether the contravention of s 208 of the Act alleged by the deed administrator, if established, would provide a basis for refusing to admit the proofs of debt.
During the course of the trial of these preliminary issues, the controversy about the answer to the first question disappeared. Senior counsel for the deed administrator accepted that the evidence adduced by the plaintiffs established that Quest Minerals owed the plaintiffs the amounts claimed in their respective proofs of debt, apart from matters relating to s 208 of the Act. The answer to the second question remains controversial.

Enforcement of illegal contracts

Cases dealing with illegal contracts commonly approach the analysis by reference to three categories. Either:
1.the statute expressly prohibits, absolutely or conditionally, the making of the contract or the doing of an act essential to its formation (first category);
2.the statute impliedly prohibits the making of the contract (for example, where the contract is to perform an act the performance of which is prohibited by the statute) (second category); or
3.the statute does not expressly or impliedly prohibit the contract, but the courts treat the contract as unenforceable because it is associated with or furthers illegal purposes (third category).[5]
[5] See Barker v Midstyle Nominees Pty Ltd [2014] WASCA 75 [37] - [38], [151] - [152] and cases there cited.
It is not clear how s 208 is to be categorised. The difficulty is that s 208(1) of the Act is not expressed in terms of a prohibition. Rather, it is expressed in terms of what must be done for a public company to give a financial benefit to a related party. The focus is on the giving of a financial benefit rather than entry into a contract, although provisions of a contract may constitute the giving of a financial benefit as that term is defined in s 229 of the Act. The proscriptive provision is s 209 rather than s 208 of the Act. The conduct which attracts sanction is not the giving by a public company of a financial benefit to a related party. Rather, what attracts sanction is:
1.a person being involved in a contravention of a public company, which under s 209(2), s 1317E, s 1317G and s 1317H of the Act may result in a declaration of contravention, a pecuniary penalty order or a compensation order; and
2.a person being involved in such a contravention in a manner that is dishonest, which is an offence against s 209(3) of the Act.
Whichever category a contract contravening s 208(1) of the Act falls into, the consequence of the contravention for the validity and enforceability of the relevant contracts turns on the proper construction of the Act[6] - in particular, s 103 and 209 of the Act, which make express provision for the consequences of a contravention.
[6] Barker [40] - [43], [153] - [155] and cases there cited.
As I noted in Ethnic Interpreters and Translators Pty Ltd v Sabri‑Matanagh,[7] the proper construction of the Act is 'reached by the application of rules of interpretation accepted by all arms of government in the system of representative democracy'.[8]
[7] Ethnic Interpreters and Translators Pty Ltd v Sabri-Matanagh [2015] WASCA 186 [63] ‑ [65].
[8] Zheng v Cai [2009] HCA 52; (2009) 239 CLR 446 [28].
Those rules require primary attention to be directed to the text of the relevant provisions.[9] There must be regard to the language of the statute viewed as a whole, considered in its context.[10] An important part of that context will be the purpose of the legislation, ascertained from what the legislation says (rather than any assumption about the desired or desirable reach or operation of the relevant provisions).[11] Once the purpose of the legislation is established, a construction that would promote that purpose shall be preferred to a construction that would not do so.[12]
[9] Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue [2009] HCA 41; (2009) 239 CLR 27 [47]; Commissioner of Taxation v Consolidated Media Holdings Ltd [2012] HCA 55; (2012) 250 CLR 503 [39].
[10] Project Blue Sky Inc v Australian Broadcasting Authority [1998] HCA 28; (1998) 194 CLR 355 [69]; Plaintiff S4/2014 v Minister for Immigration [2014] HCA 34; (2014) 88 ALJR 847 [42].
[11] Certain Lloyd's Underwriters v Cross [2012] HCA 56; (2012) 248 CLR 378 [26]; Minister for Employment and Workplace Relations v Gribbles Radiology Pty Ltd [2005] HCA 9; (2005) 222 CLR 194 [21].
[12] Section 15AA of the Acts Interpretation Act 1901 (Cth).

Statutory text

The purpose of the relevant provisions of the Act is expressed in s 207 in the following terms:
The rules in this Chapter are designed to protect the interests of a public company's members as a whole, by requiring member approval for giving financial benefits to related parties that could endanger those interests.
The consequences of contravention of s 208 are expressly provided for in s 209 of the Act:
(1) If the public company or entity contravenes section 208:
(a) the contravention does not affect the validity of any contract or transaction connected with the giving of the benefit; and
(b) the public company or entity is not guilty of an offence.
Note: A Court may order an injunction to stop the company or entity giving the benefit to the related party (see section 1324).
(2) A person contravenes this subsection if they are involved in a contravention of section 208 by a public company or entity.
Note 1: This subsection is a civil penalty provision.
Note 2: Section 79 defines involved.
(3) A person commits an offence if they are involved in a contravention of section 208 by a public company or entity and the involvement is dishonest.

Also important is s 103 of the Act, which relevantly provides:
(2) An act, transaction, agreement, instrument, matter or thing is not invalid merely because of:
(a) a contravention of section … 208 [or] 209 …
(4)In this section:
invalid includes void, voidable and unenforceable.

The critical question identified

The critical question in this case is whether there were enforceable debts owed to Mutual Holdings and CAS by Quest Minerals as at 9 May 2014. If there were enforceable debts then there were Claims and those debts should be admitted to proof. The question becomes whether the debts either do not exist or were unenforceable at 9 May 2014 because the agreements giving rise to the debts gave a financial benefit to a related party in contravention of s 208 of the Act.
Many of the deed administrator's submissions were directed to the question of whether payment of the amounts provided for in the agreements would also constitute the giving of a financial benefit by Quest Minerals to Mutual Holdings and CAS as related entities. It was submitted that s 103(2) and s 209(1)(a) of the Act do not apply to the future giving of a benefit to a related party. It was submitted that the court would not give effect to a provision in an agreement requiring the giving of a financial benefit in the future contrary to the requirements of s 208 of the Act.
It would be necessary to consider the merit of these submissions in a case where Quest Minerals was paying money to Mutual Holdings and CAS under the terms of the relevant agreements between those companies. However, no payment by Quest Minerals in contravention of s 208 of the Act is proposed in the present case. The debts under the agreements between Quest Minerals and the plaintiffs have been extinguished by the DOCA. The only contemplated payment of money by Quest Minerals is into the Deed Fund and the Creditors' Trust Fund. Any payments to the plaintiffs will be by the Deed Administrator or Trustee under the provisions of the DOCA and Creditor's Trust Deed.
Section 208 did not prevent entry into the DOCA, which is a statutory instrument brought into being by a resolution of creditors, and which Quest Minerals was under a statutory obligation to execute. The payments of Admitted Claims proposed under the DOCA cannot contravene s 208 of the Corporations Act. It is unnecessary in these circumstances to consider whether payments that might have been made under agreements between Quest Minerals and the plaintiffs, if the DOCA had not taken effect, would themselves have constituted the giving of a financial benefit.
Submissions were also addressed to the question of whether an injunction might be sought under s 1324 of the Act to restrain future payments in contravention of s 1324 of the Act under agreements made between Quest Minerals, Mutual Holdings and CAS. Again, it is unnecessary to address this question, as there is no application for an injunction and no such payments are proposed. It is also difficult to see how Quest Minerals could seek an injunction restraining itself from conduct said to breach s 208 of the Act.

Did an enforceable debt exist on 9 April 2014?

In my view, the critical question is expressly answered by s 103(2), s 103(4) and s 209(1)(a) of the Act. Section 103(2) and s 209(1)(a) provide that mere contravention of s 208 does not make an agreement invalid, and contravention of s 208 does not affect the validity of any contract connected with the giving of the benefit to a related party. Section 103(4) of the Act makes it plain that 'invalidity' encompasses unenforceability.
The deed administrator submitted that s 103 was concerned with protecting the position of an innocent third party who contracts with a public company. An example was provided of a sale by a public company of land to an independent third party, which provided for the payment of a commission to a related party. However, the terms of s 103 do not distinguish between the enforceability of a contract at the behest of the public company, an independent third party and a related party which receives a financial benefit.
Section 209(1)(a) of the Act also uses broad language. A contravention of s 208 'does not affect' the validity of a relevant contract. This says more than that contravention of s 208 does not itself produce invalidity, or that a contract is not invalid 'merely because' of such a contravention. The validity of a relevant contract is not affected in any way by contravention of s 208 of the Act. Further, the relevant contracts are not confined to those which give a financial benefit to a related party, but extend to 'any contract … connected with the giving of the benefit'.
In Nelson v Nelson,[13] McHugh J observed:
In most cases, the statute will provide some guidance, express or inferred, as to the policy of the legislature in respect of a transaction that contravenes the statute or its purpose. It is this policy that must guide the courts in determining, consistent with their duty not to condone or encourage breaches of the statute, what the consequences of the illegality will be. Thus, the statute may disclose an intention, explicitly or implicitly, that a transaction contrary to its terms or its policy should be unenforceable. On the other hand, the statute may inferentially disclose an intention that the only sanctions for breach of the statute or its policy are to be those specifically provided for in the legislation (citation omitted).
[13] Nelson v Nelson (1995) 184 CLR 538, 613.
In the present case, it is unnecessary to search for an inference as to whether the only sanctions for breach of s 208 are those provided for in the Act. This is because the Act expressly provides that contravention of s 208 does not make an agreement invalid or unenforceable. The court must give effect to this express legislative command.
The Act also makes express provision for the consequences of a contravention of s 208 of the Act.
A court may grant an injunction under s 1324 of the Act on the application of ASIC or an interested person to restrain conduct that constitutes contravention of the provision.
A person involved in the contravention (which in some circumstances may be the person who receives the financial benefit) may be subject to a declaration of contravention under s 1317E of the Act. If the contravention materially prejudices the interests of the corporation or its members, materially prejudices the corporation's ability to pay its creditors, or is serious, the court may also impose a pecuniary penalty of up to $200,000 under s 1317G of the Act.
A compensation order may be made under s 1317H of the Act in respect of damage to the corporation, subject to the operation of s 1317S of the Act. Under s 1317H(2), the reference to damage suffered by the corporation includes profits made by any person as a result of the contravention.
In addition, a person who behaves in a dishonest manner may commit an offence against s 209(3) of the Act. The maximum penalty is a fine of 2,000 penalty units (currently $360,000) or imprisonment for 5 years in the case of an individual and a fine of 10,000 penalty units (currently $1.8 million) for a corporation.[14] The offence is indictable.[15]
[14] Sections 1311(3) and 1312 of the Act, read with item 50 in sch 3 to the Act and s 4AA(1) to the Crimes Act 1914 (Cth).
[15] Section 4G of the Crimes Act.
The Act does not impose any sanction on a public company which gives a financial benefit to a related party. Given the purpose identified by s 207 of the Act - to protect the interests of the company's members - that approach is readily understandable. Imposing a sanction on the company itself could operate only to the ultimate detriment of the members of the company. Further, it may well be to the ultimate benefit of the company (and therefore its members) to be able to take advantage of a contract which provides a benefit to a related party. For example, in the present case, even if Quest Minerals paid too much for the mining tenement rights purchased from Mutual Holdings, the discovery of a valuable resource in the tenement area may make it in the company's best interests to enforce the sale.
Senior counsel for the deed administrator submitted that the Act does not evince an intention that a related party who receives a financial benefit in contravention of s 208 of the Act is able to retain the benefit. I accept that submission as far as it goes. However, I do not accept that the absence of such an intention is fatal to the plaintiff's claim. The Act provides for particular means by which the financial benefits of such a related party may be taken - principally a compensation order - in defined circumstances. The question raised by the present appeal is not whether the plaintiffs can ultimately retain the financial benefits provided for in their agreements with Quest Minerals. Rather, the question is whether an additional consequence of contravening s 208 is that the relevant agreements are unenforceable.
Senior counsel for the deed administrator also sought to argue that, while the agreements between Quest Minerals and the plaintiffs were not unenforceable, payment of money pursuant to those agreements is unenforceable. I am unable to perceive the distinction between those two allegedly different outcomes.
Having regard to all of the above provisions, the scheme of the Act is as follows. A public company itself is not subject to any sanction as a result of it giving financial benefits to a related party. However, other persons (including officers of the public company and the person receiving the financial benefit) may be subject to sanction if they are involved[16] in a contravention of s 208(1) of the Act. The sanction faced by a party involved in the contravention is, depending on the circumstances, a declaration of contravention, a pecuniary penalty order, a compensation order (which may relate both to damage suffered by the company and profits made by the contravening party) and a criminal conviction and sentence. The validity and enforceability of a contract is not affected by the fact that it provides for the giving of a financial benefit to a related party.
[16] Within the meaning of s 79 of the Act.
It follows that enforceable debts did exist under the relevant agreements between Quest Minerals and the plaintiffs on 9 May 2014. Whether those agreements led to a contravention of s 208 of the Act does not affect that conclusion.

Case law

A limited number of decisions have considered whether provisions such as s 103 and s 209(1) of the Act preserve both the validity and the enforceability of contracts entered into in contravention of a requirement of the Act.
In HCK China Investments Ltd v Solar Honest Ltd,[17] Hely J was concerned with a claim for money owed under a share sale agreement. The agreement was found to have contravened s 206 and s 615 of the Corporations Law, which made requirements for the acquisition of shares. Hely J held that the extent of the illegality and its consequences ultimately depend on the construction of the statute in question.[18] He also held that, where the Act expressly provides for the consequences of illegality upon contracts made or performed in breach of its terms, the legislative prescription is decisive.[19] Hely J found that it would be inconsistent with the legislative scheme, of which s 103 and provisions expressed in similar terms to s 209(1)(a) formed part, to treat the share sale agreement as void or unenforceable.[20]
[17] HCK China Investments Ltd v Solar Honest Ltd [1999] FCA 1156; (1999) 165 ALR 680.
[18] HCK [144].
[19] HCK [146].
[20] HCK [147] - [148].
In Winpar Holdings Ltd v Goldfields Kalgoorlie Ltd,[21] the New South Wales Court of Appeal upheld a decision refusing declaratory and injunctive relief in a challenge to the validity of a proposed capital reduction. The reduction was made without the required approval of shareholders under the Corporations Law. Giles JA, with whom other members of the court agreed, based his decision on s 256D(2) of the Corporations Law, which resembled s 209(2) of the Act. Giles JA observed:
I do not think that s 256D(2) can be cut down to only provisional or prima facie validity. Until it was made, a proposed capital reduction could be restrained if s 256B(1) of the Law was or would be contravened. Once it was made, although in contravention of s 256B(1), it was valid. The sanction for the contravention was imposed on those involved in the contravention, no doubt the directors of the company, by way of a civil penalty. No sanction was imposed on the company itself, nor was the capital reduction itself struck down by way of sanction. The legislation gave those affected an opportunity to restrain the making of a contravening capital reduction, but once it was made preferred certainty over invalidity [60].
[21] Winpar Holdings Ltd v Goldfields Kalgoorlie Ltd [2001] NSWCA 427, (2001) 166 CLR 144.
The decisions in HCK and Winpar are consistent with the approach I have adopted to the construction of the provisions of the Act.
The deed administrator relied on a decision of Habersberger J in Orrong Strategies Pty Ltd v Village Roadshow Ltd.[22] In that case a related party brought an action to enforce the payment of termination bonuses and incentives which were found to have been entered into in breach of related party transaction provisions of the Corporations Law. The Supreme Court of Victoria held that the agreements providing for those payments were not to be enforced on public policy grounds.
[22] Orrong Strategies Pty Ltd v Village Roadshow Ltd [2007] VSC 1; (2007) 207 FLR 245.
Habersberger J advanced three reasons for his conclusion that the agreements were unenforceable under provisions of the Corporations Law equivalent to s 208 and s 209 of the Act.[23] First, he considered that the purpose of the prohibition in s 208 would not be adequately served by relying solely on the civil penalty or criminal consequences of the contravention and otherwise allowing the agreement to be enforced. Secondly, he considered that the phrase 'merely because' in s 103(2) preserved the possibility of a finding of unenforceability based on public policy considerations. Thirdly, he relied on an approach adopted by Master Bredmeyer of this court, in Westchester Pty Ltd v Triton Resources Ltd,[24] as supporting the approach which he adopted. The decision in Winpar was distinguished on the basis that the contravening transaction in that case had been completed.
[23] Orrong [781] - [783].
[24] Westchester Pty Ltd v Triton Resources Ltd [2001] WASC 57, [12].
The approach adopted by Habersberger J distinguishes between the validity and enforceability of a contract. However, that distinction is not drawn by s 103(4) of the Act. The reference to an agreement not being 'invalid' in s 103(2) of the Act expressly includes the agreement not being unenforceable. The reference to the 'validity' of a contract or transaction in s 209(1)(a) of the Act must be construed in light of s 103, with which it is clearly connected. In that context the reference to 'validity' in s 209(1)(a) of the Act includes the enforceability of the contract.
Habersberger J's first reason identified above focuses on the court's perception of the adequacy of the mechanisms expressly provided for by the Act for contravention of s 208 to achieve the purpose of protecting the interests of members.
Ultimately it is for Parliament to determine the means by which its policy will be pursued, and the statutory text is the means by which it does so.
Where the question is whether it is to be inferred from the provision of particular statutory sanctions that no other sanction was available, the answer may be informed by the court's view of the adequacy of the statutory sanction. For example, in Barker, the provision for a very modest maximum penalty (a fine of $750) assisted the drawing of the inference that Parliament intended a contravening contract to be unenforceable.[25] If unenforceability follows, it may be unnecessary for Parliament to impose a substantial penalty for the offence.
[25] Barker [74] - [76].
However, there are two difficulties with applying that approach to the present case. Firstly, the statutory sanctions arising from contravention of s 208, described above, are substantial. Secondly, the question in this case is not one of inferring a consequence where there is no express provision. In this case the Act makes an express provision that contravention of s 208 and s 209 does not affect the validity of a contract connected with the giving of the benefit. Given the substantial statutory sanctions, and express provision that contravention does not produce invalidity or unenforceability, there is little scope for the proper construction of the Act to be informed by the court's view of the adequacy of the statutory sanction to achieve the stated objective. Primacy must be given to the statutory text, rather than the court's view of the adequacy of the mechanisms by which Parliament has chosen to pursue its policy.
The second reason relied on by Habersberger J is the use of the phrase 'merely because' in s 103(2) of the Act. I do not think that the use of the phrase assists in a case, such as the present, where the only reason a contract is said to be unenforceable is a contravention of s 208 of the Act. If that is the only reason a contract is unenforceable, then the contract will be unenforceable merely because of the contravention.
The fact that the court makes a finding about the enforceability of a contract does not alter that position. In determining the enforceability of a contract the court is engaged in the core judicial function of deciding a question as to the existence of rights and obligations. This involves an application of the law to the facts as found.[26] Any effect on the enforceability of a contract is a product of the application of statutory and non-statutory law on the rights of the parties before the court. The court's decision recognises, but does not produce, the result.
[26] R v Trade Practices Tribunal; Ex parte Tasmanian Breweries Pty Ltd (1970) 123 CLR 361, 374
A finding of unenforceability by reason of contravention of s 208 of the Act may be part of the ordinary curial process, but it would remain the case that the contract would be found to be unenforceable 'merely because' of that contravention.
The operation of the phrase 'merely because' in s 103 of the Act is illustrated by the decision of Murray J in McGellin v Mount King Mining NL.[27] In that case a plaintiff sought to enforce an alleged contract for the issue of shares to directors, said to have been made at a Board meeting of the company. The claim failed on the facts. Murray J noted that, even if the directors had intended to make a contract at the meeting, they would have failed because, as the directors had a material interest, the meeting would have been inquorate. Section 232A of the Corporations Law contained a prohibition against interested directors voting in a matter in which they had a personal interest and provided for a minimum quorum of two directors entitled to vote. The result was that there was no valid resolution adopting the alleged contract.[28] Murray J held that the deficiency was not cured by s 103 of the Act. Validity was not denied to the contract merely because of a breach of s 232A, but because there was no resolution creating binding legal relations between the plaintiff and the company.[29]
[27] McGellin v Mount King Mining NL (1998) 144 FLR 288.
[28] McGellin (306).
[29] McGellin (307).
In contrast to the position in McGellin, in the present case there is no additional unfulfilled legal requirement for the existence of the debts claimed by the plaintiffs. There is merely an alleged contravention of s 208 of the Act. If enforceability of the contracts is denied by reason only of such a contravention, it would be denied 'merely because' of the contravention of s 208 of the Act. Section 103(2) expressly denies that consequence.

In any event, the phrase 'merely because' does not qualify the operation of s 209(1)(a) of the Act, which provides that contravention of s 208 'does not affect' the validity of the contract.
The third reason advanced by Habersberger J was a reference to Westchester. However, in Westchester, Master Bredmeyer was dealing with a strike‑out application. He did no more than express the view that it was arguable that an agreement in contravention of the Corporations Law was not automatically invalid because of the contravention, but may be if the court decides. Master Bredmeyer was not determining the issue, but merely recognising an argument.
Further, the approach taken in Orrong is not consistent with that adopted by the New South Wales Court of Appeal in Winpar. In Winpar, the court did not think that the relevant provision could be 'cut down to only provisional or prima facie validity'. The idea that a contract is enforceable subject to a contrary finding of a court involves giving the contract only provisional or prima facie validity. While Winpar did not involve an attempt to enforce an obligation, that difference does not impact on the reasoning of the court in Winpar. The approach adopted in Orrong is also inconsistent with that adopted in HCK, which did involve an action to enforce the relevant obligation.
In Re Summit Resources (Australia) Pty Ltd,[30] Martin CJ noted that there was 'arguably some tension' in the above authorities. It was unnecessary in that case for Martin CJ to resolve the tension, as he was concerned with the validity of a completed transaction which involved a deed of release. There was no attempt in Re Summit Resources to enforce an obligation.
[30] Re Summit Resources (Australia) Pty Ltd [2012] WASC 125; (2012) 42 WAR 401 [69].
In my view there is a difference in approach reflected in the decisions in HCK and Winpar, on the one hand, and Orrong, on the other hand. For the reasons explained above, I prefer the approach in the former cases. In my view, the alleged contravention of s 208(1) of the Act could not affect the validity of the agreements between Quest Minerals and the plaintiffs which give rise to the debts sought to be proven in this case.

Set off

During the course of submissions, some reference was made to the possibility of Quest Minerals being able to set off its liability to Mutual Holdings and CAS under the relevant agreements against a liability which those companies may have resulting from a contravention of s 209(2) of the Act.
If it could be shown that either Mutual Holdings or CAS were involved in a contravention of s 208 by Quest Minerals, then those companies would have contravened s 209(2) of the Act. The circumstances in which a person may be involved in a contravention, such as being knowingly concerned in the contravention, are prescribed by s 79 of the Act. If such involvement could be established, then Quest Minerals might seek compensation for damage it suffered as a result of the contravention, or profits which the plaintiffs made as a result of the contravention, under s 1317H of the Act. In deciding whether to make a compensation order the court would consider whether it had been demonstrated that the plaintiffs had acted honestly and, having regard to all the circumstances of the case, ought fairly be excused from the contravention, under s 1317S of the Act.
It is unnecessary in this case to determine whether any capacity which Quest Minerals may have to obtain a compensation order under s 1317H of the Act should be set off against Quest Minerals' debt to the plaintiffs. This is because no right of set off has been claimed in these proceedings. The deed administrator has not asserted a contravention of s 209(2) of the Act by either plaintiff, or sought to produce evidence of the plaintiffs' involvement (within the meaning of s 79 of the Act) in any contravention of s 208(1) of the Act by Quest Minerals. Nor has the availability of a set off been advanced as a basis for rejecting the plaintiffs' proofs of debts by the deed administrator. Rather, the only reason adopted and advanced by the administrator for rejecting the proofs of debt is the alleged contravention of s 208(1) of the Act by Quest Minerals.
For the same reasons, it is unnecessary to consider whether the rule in Cherry v Boultbee[31] could support the rejection of the plaintiffs' proofs of debt on the basis that they were precluded from participating in the Creditor's Trust Fund until they had contributed the amount which might be subject to a compensation order into that fund.
[31] Cherry v Boultbee (1839) 4 My & Cr 442; 41 ER 171; see the discussion in JD Heydon, MJ Leeming and PG Turner, Meagher, Gummow & Lehane's Equity Doctrines and Remedies (5^th edition) [39-110] - [39-155].

Conclusions and orders

For the above reasons, the preliminary issues should be determined in the following manner. The plaintiffs have established debts of $1,407,085 plus interest at 12% pa (in the case of Mutual Holdings) and $768,040.31 (in the case of CAS) which, apart from matters relating to s 208 of the Act, should be admitted to proof. The contraventions of s 208 of the Act alleged by the deed administrator, if established, would not provide a basis for refusing to admit the proofs of debt.
It follows that the appeal should be allowed, and the deed administrator's decision to reject the proofs of debt and disallow the plaintiffs' claims should be reversed. The plaintiffs' claims in the formal proofs dated 11 September 2014 should be admitted to proof under the DOCA and the Creditors' Trust Deed.

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS

CITATION: MUTUAL HOLDINGS PTY LTD -v- ADAM SHEPARD in his capacity as administrator of QUEST MINERALS LTD [2015] WASC 412 (S)

CORAM: MITCHELL J

HEARD: ON THE PAPERS

DELIVERED : 4 DECEMBER 2015

FILE NO/S: COR 219 of 2014

MATTER :In the matter of Quest Minerals Ltd (subject to deed of company arrangement)

BETWEEN: MUTUAL HOLDINGS PTY LTD
Plaintiff
AND
ADAM SHEPARD in his capacity as administrator of QUEST MINERALS LTD
Defendant

FILE NO/S :COR 220 of 2014

BETWEEN :CORPORATE ADMIN SERVICES PTY LTD
Plaintiff
AND
ADAM SHEPARD in his capacity as administrator of QUEST MINERALS LTD
Defendant

Catchwords:

Corporations - Voluntary administration - Costs of successful appeal from administrator's rejection of proof of debt - Priority of costs over creditors' claims - Limitation of administrator's liability to funds available in the administration

Legislation:

Corporations Act 2001 (Cth), s 1335

Result:

The defendant pay the plaintiffs' costs of the proceedings

Category: B

Representation:

COR 219 of 2014

Counsel:

Plaintiff: No appearance
Defendant: No appearance

Solicitors:

Plaintiff: Bennett + Co
Defendant: Somerset Ryckmans

COR 220 of 2014

Counsel:

Plaintiff: No appearance
Defendant: No appearance

Solicitors:

Plaintiff: Bennett + Co
Defendant: Somerset Ryckmans

Case(s) referred to in judgment(s):

Hamilton v Donovan Oates Hannaford Mortgage Corporation Ltd [2007] NSWSC 10; (2007) 207 FLR 163
Orrong Strategies Pty Ltd v Village Roadshow Ltd [2007] VSC 1; (2007) 207 FLR 245
Re Mendarma Pty Ltd [No 2] [2007] NSWSC 99; (2007) 61 ACSR 601
Re Universal Distributing Co Ltd (1933) 48 CLR 171
Re Windy Dropdown Pty Ltd [2010] NSWSC 1099
Stewart v Atco Controls Pty Ltd [2014] HCA 15; (2014) 252 CLR 307

MITCHELL J: On 5 November 2015, I made orders allowing the plaintiffs' appeals against the defendant's decision to reject their proofs of debt. I also ordered that the question of costs be determined on the papers. These are my reasons for making costs orders in the proceedings.

The defendant's obligation to pay the plaintiffs' costs

Section 1335(2) of the Corporations Act 2001 (Cth) (Act) provides for the costs of these proceedings to be borne by such party to the proceedings as the court, in its discretion, directs. It is common ground that the plaintiffs, having been successful in the appeals, should be awarded costs.
There was a dispute at the hearing on 5 November 2015 as to whether the costs should be borne by the defendant personally. There was no real debate as to the general principle to be applied in cases of this kind. While costs are in the discretion of the court, generally a liquidator or administrator who is joined to proceedings as a defendant, and who acts appropriately, should not be ordered to pay the successful plaintiff's costs beyond the amount of assets available for the liquidator or administrator to do so: Re Mendarma Pty Ltd.[32]
[32] Re Mendarma Pty Ltd [No 2] [2007] NSWSC 99; (2007) 61 ACSR 601 [23].
I am satisfied that the defendant acted appropriately in defending these proceedings. It was reasonable for the defendant to rely on the decision in Orrong Strategies Pty Ltd v Village Roadshow Ltd,[33] which supported the position the defendant adopted in the proceedings. The submissions of counsel for the defendant were appropriately focused on the critical issue and assisted the court in resolving the matter. The defendant did properly fulfil his role in the proceedings.
[33] Orrong Strategies Pty Ltd v Village Roadshow Ltd [2007] VSC 1; (2007) 207 FLR 245.
It is regrettable that, at an earlier stage of the proceedings, the defendant did not comply with programming orders for the filing of affidavits in the proceedings. However, that failure does not require the conclusion that the defendant should personally bear the costs of the proceedings.
I do not accept the plaintiffs' invitation to deal with the question of costs by reference to the admissibility of the affidavits which were eventually filed. Those affidavits were directed to an issue which it was ultimately unnecessary to resolve in the proceedings, namely whether there had been a contravention of s 208 of the Act. I do not consider it appropriate for the court to resolve disputed questions as to the admissibility of the contents of the affidavits, which it has not yet proved necessary to answer, for the purposes of dealing with the costs of the proceedings.

Payment priorities

Under both the DOCA and the Creditors' Trust Deed, the defendant's liability to pay the plaintiffs' costs will be a 'disbursement' ranking in equal priority with other disbursements and ahead of the defendant's remuneration and amounts payable to creditors of Quest Minerals. The defendant's claim to be indemnified for such costs is not a debt which may be the subject of a Claim against the company for the purposes of the DOCA and Creditors' Trust Deed.[34]
[34] See Re Windy Dropdown Pty Ltd [2010] NSWSC 1099 [23] ‑ [25].
The defendant referred to the principle that a creditor may not have the benefit of a fund created by a liquidator's efforts in the winding up of a company without the liquidator's costs and expenses, including remuneration, of creating that fund first being met.[35] The cases to which the defendant refers in support of that proposition deal with the equitable lien which arises in those circumstances. The order which I make will recognise that lien by limiting the costs which the defendant must pay to the value of assets available to satisfy the lien.
[35] Citing Re Universal Distributing Co Ltd (1933) 48 CLR 171; Stewart v Atco Controls Pty Ltd [2014] HCA 15; (2014) 252 CLR 307; Hamilton v Donovan Oates Hannaford Mortgage Corporation Ltd [2007] NSWSC 10; (2007) 207 FLR 163 [18].
However, the defendant's liability to pay the plaintiffs' costs is not the liability of a creditor of Quest Minerals, which ranks in priority behind the defendant's lien in respect of disbursements he has made in relation to the funds. Rather, the defendant's liability to pay the plaintiffs' costs is itself a disbursement which is the subject of a lien. I accept the plaintiffs' submission that the word 'disbursement' in the DOCA and Creditors' Trust Deed refers to the costs, fees, liabilities and other expenses incurred to third parties in the administration of the DOCA and Creditors' Trust Deed. The DOCA and Creditors' Trust Deed do not provide for different disbursements of the deed administrator and trustee to have priority over each other. Therefore, I do not accept the defendant's submission that certain disbursements of the deed administrator and trustee (such as those made to secure a tax payment) rank ahead of the disbursement constituted by the defendant's liability to pay the plaintiffs' costs of these proceedings.
I see no warrant in this case for altering the priorities provided for in the DOCA and Creditors' Trust Deed.
The defendant, as deed administrator and trustee, was aware of the terms of the DOCA and Creditors' Trust Deed when making decisions about expenditure and when deciding, with the support of the creditors, to defend these proceedings. I do not accept the defendant's submission that he could not reasonably have anticipated these proceedings, or his potential liability for costs in respect thereof, when making decisions about expenditure from the funds he controlled as deed administrator and trustee. The appeal could reasonably have been anticipated once the plaintiffs' informal proofs of debt were rejected.
In commencing the proceedings, the plaintiffs were aware of the terms of the DOCA and Creditors' Trust Deed, and the limited assets available to satisfy any award of costs which may be made in the proceedings.
The parties should reasonably have framed the commercial decisions which they made in the proceedings by reference to the provisions of the DOCA and the Creditors' Trust Deed. In those circumstances it seems to me to be inappropriate to interfere with the priorities provided for in the DOCA and Creditors' Trust Deed.

Terms of the costs order

The priorities provided for by the DOCA and Creditors' Trust Deed can be preserved by adapting the terms of the order made in Mendarma.
The defendant submits that his liability to pay the plaintiffs' costs should be limited to the assets of the creditors' trust. I do not accept that submission. The purpose of an order limiting the defendant's liability to his right of indemnity is to avoid the defendant, who has acted properly as administrator, deed administrator and trustee, from being subject to the risk that he may have to meet the plaintiffs' costs from his personal assets.[36] That purpose is achieved if an order is made by reference to all rights of indemnity held by the defendant in relation to Quest Minerals and the assets available to satisfy the indemnity.
[36] Mendarma [26].
The purpose of the costs order I will make is not to insulate past payments of remuneration to the defendant. Under the DOCA and Creditors' Trust Deed, the defendant's remuneration ranks below the payment of disbursements of the deed administrator and trustee, and that position will be maintained under the order I will make. This may require the defendant to reinstate payments of remuneration which he has received in the past, to the extent that the otherwise available assets and funds are insufficient to cover disbursements which have priority over his remuneration. That outcome will be the result of the terms of the DOCA and Creditors' Trust Deed to which the defendant agreed.
However, because the order I will make is limited to assets and funds which are available to satisfy the defendant's rights of indemnity in respect of the liability, the defendant's liability to pay the plaintiffs' costs will not be extended by disbursements previously paid to third parties and which are not now available to the funds established by the DOCA and Creditors' Trust Deed. That is, the defendant's costs liability will not exceed the value of the assets and funds actually available (after any required reinstatement of remuneration) to satisfy his rights of indemnity in respect of that disbursement.
The parties made a number of other submissions ranging over a variety of topics. However, none of those submissions affect the conclusions I have reached above, and it is unnecessary to deal separately with them.

Order

In all the circumstances, the appropriate costs order in each of the proceedings is that the defendant pay the plaintiff's costs of the proceedings but that his liability to do so be limited to the extent there are assets of Quest Minerals Ltd and funds held under the DOCA and the Creditors' Trust Deed available to satisfy the defendant's rights of indemnity in respect of his liability under this order after making payments in priority to or pari passu with the defendant's liability under this order.