Newtronics Pty Ltd (Receivers and Managers Appointed) (In Liquidation) v Atco Controls Pty Ltd (In Liquidation)

[2010] HCATrans 109

[2010] HCATrans 109

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Melbourne  No M100 of 2009

B e t w e e n -

NEWTRONICS PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) (ACN 061 493 516)

Applicant

and

ATCO CONTROLS PTY LTD (IN LIQUIDATION) (ACN 005 182 481)

Respondent

Application for special leave to appeal

GUMMOW J
CRENNAN J

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 23 APRIL 2010, AT 11.17 AM

Copyright in the High Court of Australia

MR W.J.N. WELLS, QC:   May it please the Court, I appear with my learned friend, MR P.G. WILLIS, for the applicant.  (instructed by Johnson Winter & Slattery)

MR A.C. ARCHIBALD, QC:   May it please the Court, in this matter I appear for the respondent with MR P.D. CRUTCHFIELD, SC and MR C.T. MOLLER.  (instructed by Middletons)

GUMMOW J:   Yes, Mr Wells.

MR WELLS: May it please the Court. Your Honours, this case raises for attention and guidance by this Court the judicial task of determining whether a contract is to be inferred and whether the terms of that contract effect its purpose having regard to the statutory context of the Corporations Act provisions on insolvent trading. The setting for this task, we submit, is a not uncommon occurrence in corporate commercial life in this country in respect of which there has been little judicial attention, let alone in this Court. The setting has these common features – and I mean common in more than one sense – a business or enterprise is carried on by a corporation through the agency of a subsidiary or subsidiaries usually wholly owned but at least controlled by the parent, which is both exemplified in this case.

The holding or parent company has the financial clout and is well placed to provide financial accommodation to subsidiaries usually, one might say perhaps often, secured where the amounts are significant, but the accommodation provided by the parent, whether secured or not, will not necessarily assure the solvency of the subsidiary, particularly where the loan is repayable on demand, or at least the successive advances are repayable on demand and, indeed, ironically, if there is such a thing in commercial life as irony, can indeed contribute to the subsidiary’s insolvency.  This will often lead to intercompany arrangements for providing a form of support designed to avoid the prospect of insolvent trading by the subsidiary and not infrequently these intercompany arrangements are accompanied by a degree of informality on their documenting and recording.

Your Honours, it is not suggested that these intercompany arrangements follow exactly the same form, that is, that the documentary evidence of these arrangements, whether by correspondence or notes to the accounts or both, as in this case, are not always from case to case in the same terms, but our submission is that the task for the Court is much the same, which is to undertake a process of analysis to determine whether, often in the circumstances that we have outlined, of course, arrangements intercompany, whether a contract may be inferred and whether its terms can be construed to effect its purpose in the statutory context.  It is this process of analysis which had received little judicial attention and which deserves the attention of this Court.

GUMMOW J:   What is the significance of Division 5 of Part 5.7B? It creates a liability in the holding company in some circumstances where there is a contravention.

MR WELLS:   Yes.

GUMMOW J:   So that the liquidator, the subsidiary, may recover from the holding company.

MR WELLS:   Your Honour, one perhaps also has to take account of section 588X, which is the defence available.

GUMMOW J:   Yes.

MR WELLS:   In particular, the terms of that defence in subsection (2) ‑ ‑ ‑

GUMMOW J:   “[R]easonable grounds”.

MR WELLS: “[R]easonable grounds to expect” – and your Honour I think in that respect is referring to the materials that we have provided to the Court. The Court of Appeal in this case, in our respectful submission, in considering the question of whether from the available facts and context the essential elements of a contract was to be inferred, in our submission, overlooked altogether the operation of Division 5, sections 588V to X. Their Honours concentrated, we submit, on the position of the directors of the subsidiary company. Your Honours will see that in the application book at pages 53 to 56, but particularly at pages 54 to 55.

They considered only the position of the Newtronics directors and considered in that context paragraphs 56 and 57 and that it was open to directors to make the declaration that the Corporations Act requires of them in the financial accounts on the basis of a non‑binding undertaking by the parent company Atco and on that basis concluded that there was therefore a ground for inferring no contractual intent since a non‑contractual, non‑binding undertaking from Atco could be considered as sufficient to protect the directors in terms of their defence under section 588G.

What their Honours, in our respectful submission, did not consider, however, was the position – again looking at the whole set of circumstance for the purpose of inferring the essential elements of the contract – the position of the directors of the holding company and they are the ones who give the undertaking. They are the ones who know the extent to which they reserve their rights to depart from it. Our submission is that a very important part of the circumstances and material from which the essential elements of the contract were to be inferred included that consideration, namely, objectively considered whether by giving a non‑binding assurance the directors of the holding company must necessarily be taken to have consciously reserved the right to withdraw it and that on that basis, it could not be said in terms of Division 5 that they had reasonable grounds to expect that the subsidiary would remain solvent.

The difference between the position of the directors of the holding company and the directors of the subsidiary is that the directors of the holding company know the extent to which they have consciously reserved the right to withdraw the undertaking.  All the directors of the subsidiary company can ever know, or at least form, is an expectation that it will not be departed from, perhaps, one might say, except in very exceptional and unforeseeable circumstances.  The particular obligation that arose here could not be regarded as unforeseeable at all.  It was understood and noted in the accounts and identified as a contingent liability.  Added to that is the further consideration, again a matter ‑ ‑ ‑

CRENNAN J:   In that setting, what do you say about the respondent’s arguments at page 91 of the application book in paragraphs 17 and 18 where it is suggested that “Atco’s potential liability for insolvent trading was not . . . a matter from which the alleged contract” was argued to “have been inferred”?.  Then if you look at the bottom of paragraph 18, it is said that “the trial was not conducted by reference to Atco’s potential liability for insolvent trading”.

MR WELLS:   If your Honour turns to the applicant’s reply on page 96, paragraph 10, the response that is made is that this consideration was squarely before the learned trial judge.  It was a part of the written submissions in opening before the trial judge and it belonged also to the written closing submissions before the trial judge as a statutory context within which the task of drawing inferences as to the essential elements of a contract arose.

CRENNAN J:   Did he take it up in his judgment?

MR WELLS: Not in explicit terms, but spoke more generally about the statutory context in which the events took place. The matter was slightly more explicitly considered in the Court of Appeal, your Honour, in the paragraphs that I had earlier taken your Honours to, but as we say, what was conspicuous by its absence in that respect was a consideration of Division 5 and the effect of Division 5.

GUMMOW J:   What were the terms of the contract found by the primary judge?  Where do we see them?  There are alternative pleadings, I see.

MR WELLS:   Yes.  Your Honour correctly observes that there was an alternative pleading.  The two possibilities that were put forward which the applicant, as the plaintiff, did not express any real preference for was the continuing obligation arising at some point before 1997 or the more immediate contract arising at some point before the end of April 2001, the judgment being ordered at the end of 2001.  His Honour did not opt for one or other and, as I am reminded, neither did the Court of Appeal, not that it took the view that there was a contract, but it did not pursue one in preference to the other. 

What his Honour came to the conclusion, really, was that at the relevant time – which of course was the applicant’s argument – namely, at the time at which the obligation arose from the judgment debt, that there existed a contractual obligation in the terms, not the source of the contract, but the terms, those that are set out, your Honours, in the application book at page 34, paragraph 5 of the Court of Appeal’s judgments, the letter of support.  That represented the terms of the underlying contract of which the letter of support was put forward as both evidence of the contract and performance of the contract.  His Honour the trial judge concluded sufficiently that those terms were contractually binding and his Honour’s judgment flowed.

GUMMOW J:   What was the duration of this contractual obligation?  Is it terminable on reasonable notice or ‑ ‑ ‑

MR WELLS:   We address that in our summary, your Honour.  The position that was adopted before the Court of Appeal was that it was terminable at the end of each financial year or otherwise upon reasonable notice.  It was not a contract perpetual.  It was in the terms of Crawford’s Case, an indefinite contract which had terms for its termination.  In that respect, one of the errors that we identify in the Court of Appeal is that although their Honours in the Court of Appeal were disposed to, at one level, accept that implied term so far as one looked at it from the point of view of Atco, the parent company, their Honours were concerned about how Newtronics could view this, that is, that they were under an obligation to continue to trade, as their Honours put it, “come what may”.

Your Honours will see that discussed on page 60 of the application book.  At paragraph 67 their Honours put the point, what if something arose during the course of a financial year which, as they suggested it, the directors of Newtronics felt as a matter of commercial significance led them to the conclusion that they should cease to trade?  The submission that we make is that such a consideration in paragraph 67 on page 60 begs the question.  If there is, as we contended, the contractual obligation in the terms that were identified by the trial judge and appears at paragraph 5, then that particular circumstance would not arise and would not present itself in any extreme form.  They were protected by the agreement to subordinate and support.  By reason of that, the circumstance that their Honours mention at page 60, line 24:

it was at least reasonably conceivable that the market in which Newtronics conducted its trade would further turn against Newtronics, or that its staff and other resources might become so depleted that it effectively could not go on –

is not a matter that, in any event, would happen overnight –

and, perhaps more pertinently for present purposes, that it might be saddled with a liability so massive that it could no longer see its way clear to ever paying down its debts.

Of course, that is the question begging the proposition.  The contractual obligation for which we contend protected them and provided a suitable regime within which to trade to a year’s end.  No doubt at year’s end the matter would be reconsidered and that was, in effect, the reservation.

GUMMOW J:   The Court of Appeal emphasised, Mr Wells, what they said was the reality, that the letters of support were forthcoming only when requested by the auditors and in years when that request was made.  That is at page 51.

MR WELLS:   Yes.  Your Honour that depends on what view ultimately is taken about the actual form of this contract.  It takes us back to the alternative plea, your Honour.  If we are looking at a contract which was created at some time before 1997 and it was a continuing contract but with the term that it was terminable at year’s end or otherwise on reasonable notice, then the case that was made before the trial judge was that the letters and the notes were evidence of an agreement that subsisted.  The purpose of there actually being manifested in any particular year, but not from year to year, was really more dictated by the progress of the business and the nature of the potential liabilities that arise. 

For example, the litigation which gave rise to the judgment which is at the centre of all this, the Seeley litigation, was commenced in February 1998 and it was in respect of that financial period that a letter of support was procured.  Our case was and is that it was not necessary to the contract that we contended for that there should be a consistent set of letters of support.  They were there because of particular exigencies.  It was not our case that the letters of support were the source of the contract.  They were evidence of the contract and, indeed, evidence of performance.  So, whether we are talking about a continuing contract or, alternatively, whether we are talking about a contract which came into existence before 30 April 2001, the letters of support have a sensible and coherent part to play in the inference of contract.

GUMMOW J:   You mentioned the Seeley litigation.  Is there not then a question as to the phrase “current trading obligation” and whether that picked that up?

MR WELLS:   Yes.  Our respectful submission is that the interpretation of that phrase, your Honour, necessarily falls to be determined within that same statutory context having regard to the purpose that is served by such a contractual obligation, which is to ensure that a subsidiary does not continue to trade insolvently.  It is against that context and the purpose of a contract to that effect that one comes to interpret that clause.  Of course, that phrase would have to be interpreted but our submission is that terms of this kind are part of the setting which I earlier invited your Honours to consider as recurring and therefore requiring guidance.

CRENNAN J:   Was not the Court of Appeal influenced by the fact that in the accounts the obligation was treated as a contingent obligation?

MR WELLS:   With respect, no, your Honour.  The approach of the litigation was recorded in the accounts as a contingent liability, but their Honours, in fact, did not come to a conclusion about the meaning of the phrase “current trading obligations incurred”.  Their Honours came to a view about the meaning of “current”, at paragraphs 82 and 84, with which we respectfully agree, but their Honours otherwise took the view simply that whatever it meant, it did not include this particular obligation and they proffered two reasons for that, both of which, we submit, are not sustainable.  One is they said it was an extraordinary liability for accounting purposes and therefore could not be regarded as a trading obligation and accounting terminology, in our respectful submission, offers no assistance to the interpretation of the plain words “current trading obligations”. 

The other, in paragraph 86, was an apparent attempt to construe the phrase “retrospectively”, that is, by reference to what had in fact occurred by way of obligations and is best explained, we submit, by the unexpressed and erroneous premise that the term means only debts incurred in the ordinary course of the trade, whereas we contend not only is that plainly too narrow to accomplish the statutory purpose and therefore the contractual purpose, but it cannot depend on the cause of action which creates the obligation and it is simply interpreted, in our respectful submission, as obligations arising from trading transactions, whether they are transactions which result in a claim for a sum certain or a claim for damages. 

It is sufficient that that be so and, in our respectful submission, the Court, if it granted special leave, would have no difficulty in coming to the conclusion that the interpretation proffered by the Court of Appeal, with great respect, is unsustainable and that the other issues that arise therefore come to be determined.  May I just sit down with this comment, your Honours, that of course to construe properly that phrase, it has to be done upon the assumption that it is a binding contractual obligation.  One cannot start to construe that phrase upon the assumption that it is not binding.  In our respectful submission, the Court of Appeal’s approach to this was afflicted by that kind of error as well.  Those are our submissions, may it please the Court.

GUMMOW J:   Thank you.  Yes, Mr Archibald.

MR ARCHIBALD:   If the Court pleases, the dispositive issue before the Court of Appeal is the issue to which my learned friend has lastly addressed his submissions.  Our contention is that that point raises no ground upon which the grant of special leave would be warranted.  It raises no point of principle.  It is an expression in a somewhat casual one‑off document and is of no general importance.  My friend sought to contend that the phrase should be construed within the framework of the insolvent trading provisions.  Our contention is that that is unsound, was not advanced before the Court of Appeal, nor the trial judge.  The setting, if any, within which that phrase might be construed is the setting of accounting and audit standards and none of those standards would call up in any respect the elements of section 588V or the cognate provisions within that division.

Their Honours in the Court of Appeal, in our submission, embarked upon the process of construction in an entirely habited way.  No error is discernible in their reasoning and for that reason, no grant of special leave would be attracted by their decision on that issue.  If that is so, this case is not a suitable vehicle for the examination of the other matters that my learned friend has devoted most of his oral submissions to.  In relation to those matters, we would make a number of submissions in addition to those that we set out in our written summary. 

First, the way in which the insolvent trading provisions might have been germane to a consideration as to whether there was an inferred contract would be if those provisions or consequences of them were part of the orthodox matrix of surrounding circumstances which could be taken into account. Surrounding circumstances which can be taken into account are, as we know, confined to those matters which are known to both parties. There was no evidence before the courts that the provisions of section 588V or any of the provisions of that division of the Corporations Act were known to the parties in any respect. Indeed, the provisions of section 588V are somewhat unusual provisions, relatively new, foisting upon a holding company a liability for a subsidiary’s insolvent trading. It would not be surprising if many of the persons who occupy boards of corporations around this country and, I might add warily, even parts of the legal profession would be unaware of the existence of that provision.

The Court of Appeal was incapable of getting to that point were it to have been agitated before them, but even if there were evidence of knowledge of that point, that would not be enough. What one would need to have in addition was evidence that the directors of these companies had a belief that section 588V should be construed in the way contended for by the applicant, that is to say that properly construed the section would afford no protection against liability for insolvent trading unless you had a binding contract. Leave aside for the moment whether that construction is correct or not, one would need to have that evidence because otherwise their knowledge of the section would not conduce to a conclusion that the parties objectively intended that their arrangements be legally binding, and there was no evidence to that effect either.

But we would go further to say that the proposition for which the suggestion is now advanced on behalf of the applicant is palpably unsound.  The question is simply whether there is an indication of insolvency and insolvency has always been and is now determined by reference to matters of commercial reality.  There is no trace in the authorities, nothing referred to by our learned friends to suggest that within the examination of whether there may or may not be insolvency the existence of a legally binding contract is elevated to some decisive significance.  There is no magic, in our submission, suggested in the cases as to whether the question of insolvency is to be decided by the existence of the contract.  The existence of a contract is neither necessary nor sufficient. 

You might have a funding support contract given by a bankrupt.  Such a contract, in our submission, would afford no comfort to a board considering solemnly whether their enterprise could continue to trade.  So that wherever one turns in this area, in our submission, one never gets to a point in which this matter rises above, in any event, a simple examination of what facts might constitute commercial realities.  That is not a matter which, in our submission, calls for the attention of this Court.  It is purely a question of fact upon the evidence before a court in any particular case.  Accordingly, even if one were ever to get to these provisions, in our submission, nothing is shown that would attract this Court’s attention for the purposes of resolving the issues within the case.

There are two other matters that were decisive of the outcome of the litigation before the Court of Appeal.  The first of them was the question as to consideration.  The Court of Appeal held that even if there were present all the other ingredients required for a binding and enforceable contract,

here there was no valuable consideration.  That point again was determinative of the case before the court even if there were present, conducive to a conclusion of an intention to be bound, the matters for which the applicant contends.  The dealing by the Court of Appeal was the issue of consideration is, in our submission, (a) not attended by any matter of principle which requires the court’s attention and (b) was without error.  The Court carefully looked at all the evidence and concluded upon the facts that there was not discernible in the meagre material before the court anything that could constitute valuable consideration.  So again, if the applicant were seeking to agitate the 588V issue, our submission is this case is not an appropriate vehicle for that reason.

Still further, the other point which the applicant itself propounds in its submissions as having been treated as of decisive significance, was the question of the debenture.  The Court of Appeal held that the debenture was powerful evidence that the parties objectively did not intend their arrangements to be legally binding because had they had such an intention, their objectives would have been destroyed by the presence of the agreement for which the applicant contends.  The function of the debenture was to give Atco security for its funding support.  If the contended for contract existed, it would have destroyed the commercial utility of the debenture. 

The court rightly found, in our submission, that that was a very powerful indicator that the parties could not in light of the debenture have had such an intention.  Of course, it was not just the entry into the debenture that led the court to that conclusion, but the later amendment of it and up stamping of it in later years.  All of those matters, in our submission, clearly provided solid support for the court’s conclusion on that factual matter.  It is just a matter of factual ingredients considered by the court in relation to assessment as to whether the contract should be inferred.  Again, no point of principle is suggested. 

The court carefully set out the way in which it should approach the issue of inferred contractual matters.  No contest is raised about the accuracy of those principles.  The court embarked upon that task and found in the existence of the debenture its up stamping and its amendment, matters which were in practical terms decisive of the matter.  That was a further foundation upon which this litigation was resolved by the Court of Appeal and further makes the matter one inapt for consideration by this Court.  If the Court pleases.

GUMMOW J:   Thank you, Mr Archibald.  Mr Wells.

MR WELLS:   May it please the Court.  Four matters in reply, if the Court pleases.  First, in the application book at page 8, paragraph 9, the reasons of the learned trial judge reveal that his Honour was very much alive to what I have called the statutory context in both its aspects from the point of view of both the subsidiary and the parent.  Your Honours will see at line 43 a reference to the purposes, including security for both Atco and Newtronics in the continuation of trading.  Your Honours will also see at the top of the next page, page 9, there is also a reference to the context of insolvent trading.  That is the first point.

The second point is, my learned friend says that in some way it is necessary to show that the directors were alive to these provisions in order to establish that they form the matrix, as he puts it, of the inferred contract.  If your Honours in that respect turn in the application book to page 50 in the judgment of the Court of Appeal your Honours will see that although in their Honours’ treatment of the matter of consideration that my learned friend refers to, their Honours, in our submission, did not stick to this.  In the middle of the page, paragraph 44, the middle portion, their Honours set out what appears to be an uncontroversial approach to the process of identifying the existence, in effect, of a legally binding contract:

to be determined objectively according to what a reasonable person would take to be the intent of the parties as evidenced by their actions in the circumstances of the case, and not according to the subjective interpretations of the parties –

However one talks about matrix of facts surrounding the creation of a contract, in our respectful submission, the statutory context has to be regarded as a relevant circumstance.  Whether that is because, in the terms of Codelfa, it is to be seen as notorious or because, when one talks about matters known to the parties, one is consistently with an objective theory of contract talking about what is reasonably available by way of information to the parties or reasonably to be expected that they will know. 

Whichever line one takes and applying the statement of principle at paragraph 44, in our respectful submission, is not a matter of determining whether subjectively the directors did or did have a knowledge or understanding of the particular section and its operation, although one can confidently expect in the Court of Appeal was quite willing to express its expectations about a lot of commercial matters, that directors of companies, particularly where there are subsidiaries, will have some awareness of their obligations under the Corporations Act and would be a very reluctant court to start with a presumption, in our respectful submission, that they did not know.

What we would say about the issue of consideration, your Honours, is that, in our respectful submission, although their Honours stated the principle initially correctly when they came to deal with the question of

consideration and whether that element existed, their Honours reverted to an analysis – page 58, paragraph 64 – based on the historical common law model of contract, that is, bargain, and therefore conducted a search for what they considered was a real request, express or implied, which is not consistent, in our respectful submission, with the objective theory of contract or for that matter, consistent with what our law regards as being consideration; in this case, subordination of an intercompany debt and the undertaking to support being the price for the act or, as it was put in The Crown v Clarke, a reciprocal conventional inducement.  How one infers that is not dependent on whether there exists a request or not and in that respect, in our respectful submission, there was a very important error to be clarified in the way in which their Honours conducted their approach to the question of consideration. 

On the question, finally, of debenture, in our respectful submission, what their Honours failed to take into account was not only the terms of the contract contended for which, as your Honours will see in the Court of Appeal reasons at page 34, talks about in the subordination phrase “shall not be called upon”, that is, the amounts owing shall not be called upon, which clearly raises the operation of the debenture.  In any event, there is nothing wrong at all with a contract which separately from the debenture postpones the exercise of rights under the debenture, and that is what was being undertaken here and for good reason.  May it please the Court.

GUMMOW J:   Thank you. 

The outcome of any appeal to this Court substantially would turn upon the classification of the liability arising from what has been called the Seeley litigation as a “current trading obligation”. There are insufficient prospects of success in displacing the conclusion of the Victorian Court of Appeal on this issue in paragraphs 80 to 87 of its reasons to warrant a grant of special leave. That being so, this is not an appropriate occasion to consider any larger questions of principle which the applicant would seek to agitate in this Court, including the significance in this case of Division 5, Part 5.7B of the Corporations Act 2001 (Cth).

Special leave is refused with costs.

AT 11.56 AM THE MATTER WAS CONCLUDED