Pybar Mining Services Pty Ltd v Challenger Gold Operations Pty Ltd

[2018] SASC 156

SUPREME COURT OF SOUTH AUSTRALIA

(Civil)

PYBAR MINING SERVICES PTY LTD v CHALLENGER GOLD OPERATIONS PTY LTD

[2018] SASC 156

Judgment of The Honourable Justice Doyle

28 September 2018

CORPORATIONS - VOLUNTARY ADMINISTRATION - PROTECTION OF COMPANY PROPERTY DURING ADMINISTRATION - STAY OF PROCEEDINGS

Application by the plaintiff for a grant of leave to proceed with these proceedings against the defendant (a company in voluntary administration) under s 440D of the Corporations Act 2001 (Cth). Leave is sought for the limited purpose of pursuing an application to strike out the defendant’s counterclaim.

Held (per Doyle J), dismissing the application:

1. Consideration of the principles governing leave to proceed under s 440D of the Corporations Act.

2.       The interlocutory application the plaintiff wishes to pursue has the requisite solid foundation, and will only involve a relatively modest distraction of, and expense to, the administrators.

3.       However, the interlocutory application is not merely a defensive step, and will be of limited utility.

4.       To refuse leave will not occasion any significant disadvantage to the plaintiff.

5.       In all the circumstances, it is not appropriate to grant the plaintiff the leave sought.

Corporations Act 2001 (Cth) s 440D, referred to.
Slater v Global Finance Group Pty Ltd (1999) 30 ACSR 519; Foxcraft v The Ink Group Pty Ltd (1994) 15 ACSR 203; Brian Rochford Ltd v Textile Clothing and Footwear Union (NSW) (1998) 47 NSWLR 47; Larkden Pty Ltd v Lloyd Energy Systems Pty Ltd (2011) 285 ALR 207; Modcol v National Build Plan Group (2013) 93 ACSR 598; Mead Corporation v Carbonless Papers (Australia) Pty Ltd [2002] WASC 268; Re Pool & Spa Builders (Aust) Pty Ltd [2013] NSWSC 185, considered.

PYBAR MINING SERVICES PTY LTD v CHALLENGER GOLD OPERATIONS PTY LTD
[2018] SASC 156

Civil

1. DOYLE J:             This is an application by the plaintiff for a grant of leave to proceed with these proceedings against the defendant (a company in voluntary administration) under s 440D of the Corporations Act 2001 (Cth). Leave is sought for the limited purpose of pursuing an application to strike out the defendant’s counterclaim.

   Background

2. The plaintiff is a contractor engaged by the defendant to provide mining services, including the provision of labour, equipment and materials, in connection with the defendant’s mining operations at the Challenger Gold Mine.  The services, and payment for those services, were governed by a contract between the parties (the Contract).

3. The plaintiff commenced these proceedings in October 2017.  It claims a total of approximately $9.5 million said to be owed to it by the defendant in respect of its June, July and August 2017 invoices rendered under the Contract, and in respect of progress payments for services or work performed under the Contract.

4. The defendant filed a defence and counterclaim.  The defence and counterclaim include various allegations by the defendant to the effect that the work performed by the plaintiff under the Contract was not properly performed.  The counterclaim is for an amount of approximately $9.3 million, being about the same as the amount claimed by the plaintiff.  A significant proportion of the counterclaim relates to amounts claimed by the defendant as additional costs that it claims it will be required to incur as a result of deficiencies in the plaintiff’s services or work, and its forecast that the operation of the mine will need to extend for an additional two months beyond the 31 December 2018 end date contemplated by the Contract. 

5. The plaintiff applied to strike out the defence and counterclaim on the basis that they are untenable in some respects, and inadequately pleaded or particularised in other respects.  Broadly speaking there were three grounds advanced for the untenability of the defence and counterclaim.  The first was that there is no factual basis for the contention that the mining operations would continue for a further two months.  Secondly, it was said that the losses claimed were precluded by the contractual bar upon recovery of consequential losses.  Thirdly, as to one component of the counterclaim, it was said that the precondition of an audit or review to the amount claimed had not been satisfied.  The argument on the strike out application was scheduled for hearing on 31 July 2018. 

6. Quite literally on the eve of that hearing, the defendant (together with the group of companies of which it was a member) was placed into voluntarily administration. As a result of this, the proceedings were in effect frozen by the operation of s 440D of the Corporations Act.  While the plaintiff sought leave to press ahead with the interlocutory argument listed for hearing, I adjourned the argument to give the administrators an opportunity to consider their position. 

7. Receivers and managers have subsequently been appointed to the defendant.  The plaintiff has continued to press the administrators, and receivers and managers, for an acknowledgement of the merit of its claim against the defendant, and the lack of merit in the defendant’s counterclaim.  While the administrators have admitted the plaintiff’s claim in its entirety for the purposes of voting at the first meeting of creditors, there has been no acknowledgement of the merit of the plaintiff’s claim or lack of merit in the defendant’s counterclaim.  Further, the administrators have recently obtained from the Federal Court an extension of the time within which to convene the second meeting for each of the companies in administration until 28 February 2019.

8. Frustrated by the position in which it has found itself, the plaintiff now seeks a grant of limited leave to proceed with these proceedings under s 440D(1) of the Corporations Act.  In particular, the plaintiff seeks leave merely to proceed with its interlocutory application to strike out the counterclaim. 

9. At the end of the hearing of argument on this application, I declined to grant the limited leave to proceed sought by the plaintiff.  These are my reasons for refusing the plaintiff’s application.

   General principles governing an application for leave to proceed

10. Section 440D provides:

    Stay of proceedings

    (1)During the administration of a company, a proceeding in a court against the company or in relation to any of its property cannot be begun or proceeded with, except:

    (a)     with the administrator's written consent; or

    (b)     with the leave of the Court and in accordance with such terms (if any) as the Court imposes.

    (2)     Subsection (1) does not apply to:

    (a)     a criminal proceeding; or

    (b)     a prescribed proceeding.

11. As mentioned, the effect of s 440D is to freeze court proceedings against the company in voluntary administration or in relation to any of its property. It creates a moratorium on such litigation.

12. It has been said that the rationale for this moratorium reflects two general themes.  The first is the undesirability of an administrator being distracted from his or her statutory duties and being required to incur the expense associated with litigation.  The second is the undesirability of permitting one creditor to advance their own interests in respect of some disputed matter at the expense of, or at least ahead of, the interests of creditors more generally.[1]

    [1]    Slater v Global Finance Group Pty Ltd (1999) 30 ACSR 519 at 522.

13. The significance of these themes has led some judges to suggest that caution is required in a court exercising its discretion to grant leave to proceed under s 440D(1), or that the Court will only rarely grant this leave.[2] Further, while there is some analogy with the position under s 471B of the Corporations Act in respect of a company in liquidation, it has been said that the need for, or at least the appropriateness of, caution is particularly relevant in the case of a company in administration.  As Young J explained in Foxcraft v The Ink Group Pty Ltd:[3]

    There is, however, quite a big difference between a company in administration and a company in liquidation. A company in administration is seeking to continue to trade and is, in accordance with s 435a, seeking to maximise the chance of it remaining in business. A company in liquidation is one where the liquidator is seeking not to trade but to realise the company's assets as soon as possible for the best price, in order to be able to distribute the net available funds to the creditors and in some circumstances, the members.

    The provisions of Pt 5.3a, as exemplified in sections such as 437c, 437f, 440c and 440d, provide that there shall be a complete freeze of proceedings against the company during the administration so that the administrator can have time to assess the situation, and the company's creditors have an opportunity to work out the net position and adopt an attitude under s 439c which will be in their common interest. To allow one creditor or potential creditor to proceed would not only take the administrator's attention from what he needs to do under the division in a relatively short period of time, but it would also involve costs in running the legal action on behalf of the administrator, as well as perhaps giving the claimant some advantage over the other creditors or potential creditors.

    [2]    Foxcraft v The Ink Group Pty Ltd (1994) 15 ACSR 203 at 205; Brian Rochford Ltd v Textile Clothing and Footwear Union (NSW) (1998) 47 NSWLR 47 at 54.

    [3]    Foxcraft v The Ink Group Pty Ltd (1994) 15 ACSR 203 at 204.

14. Against this, some more recent authorities have emphasised that the discretion remains an unfettered one, and that it should not be approached with any preconception as to the caution or rarity with which it should be exercised.[4] However, even these authorities acknowledge that the starting point under s 440D is that the proceedings are stayed, and hence that there must be circumstances which warrant its displacement.[5] 

    [4]    See Larkden Pty Ltd v Lloyd Energy Systems Pty Ltd (2011) 285 ALR 207 at [36]; Modcol v National Build Plan Group (2013) 93 ACSR 598 at [17]-[24].

    [5]    Larkden Pty Ltd v Lloyd Energy Systems Pty Ltd (2011) 285 ALR 207 at [39].

15. Bearing in mind that, in determining whether such circumstances do exist, regard must be had to the two themes underpinning the rationale for the existence of s 440D, it is likely that there will be little, if any, practical difference between these two approaches. Indeed, these two approaches might be reconciled on the basis that they are merely expressed at differing levels of generality or abstraction. It is true that at the most general or abstract level the discretion is unfettered and so must be approached without any preconception as to the caution or rarity with which it will be exercised. However, once the Court moves to the task of exercising the discretion, the considerations underpinning the rationale for the existence of s 440D will generally carry significant weight, and thus require the identification of other considerations of at least equivalent weight before it will be appropriate to grant leave to proceed. While it is perhaps unnecessary to describe this as taking a cautious approach, and as resulting only rarely in leave being appropriate, they are in my mind accurate enough descriptions of the practical application and outcome of the exercise of the discretion under s 440D.

16. In any event, the authorities identify a number of circumstances that will be relevant in the exercise of the discretion.  The relevant circumstances include, but are not confined to, the following:[6]

    [6]    See similar lists in JF Keir Pty Ltd v Priority Management Systems Pty Ltd [2007] NSWSC 748 at [8], and Kavourakis v Waverley Bowling & Recreation Club Ltd [2010] NSWSC 439 at [5].

    ·    whether the proceedings have a solid foundation and give rise to a serious dispute;

    ·    whether, and the extent to which, the administrator would be distracted by the proceedings from his or her own duties and obliged to incur legal costs;

    ·    the stage which the proceedings have reached;

    ·    who appointed the administrator and the circumstances of that appointment;

    ·    who is applying for leave to proceed;

    ·    whether the claim is a monetary one;

    ·    whether the claim is one in respect of which the company is insured;

    ·    any disadvantage to the applicant in not being granted leave to proceed; and

    ·    whether there are otherwise good reasons for allowing a creditor to depart from the general intention of Pt 5.3A which is that a creditor ought not be able to take action against the company.

    Application to the present case

17. Applying these considerations in the present case, I commence by accepting that the interlocutory application with which the plaintiff seeks leave to proceed has at least the requisite solid foundation.  However, given the complexity of the matters in issue in that application, I am not in a position to say anything more concrete about the likely outcome of the application.  Nor am I in a position to express any view about the likely ultimate outcome of the counterclaim, or the proceedings more generally, to the extent that these are relevant considerations.

18. The plaintiff accepts that proceeding with the interlocutory application will result in the administrators being distracted from their duties to some extent, and involve the incurring of some material legal costs.  However, the plaintiff contends that the distraction and expense will be modest in the scheme of things, given the limited nature of the leave sought.  Not only would the leave be confined to an interlocutory argument, but also one in respect of which the parties had already prepared the matter for argument.  The plaintiff also points out that the administrators are represented by the same counsel as the defendant had retained to appear on the argument of the interlocutory argument on 31 July 2018.

19. While there is some force in the above, I do not think I should take too narrow a view of what will be involved in meeting the plaintiff’s interlocutory application.  In my view, the administrators ought not be forced into the interlocutory argument without having had a proper opportunity to understand the underlying merits of the counterclaim (and the manner in which it has been pleaded), which is of course bound up in the nature of the claim itself.  While not overlooking the assistance that will no doubt be provided by the administrators’ counsel and solicitors, I nevertheless infer that there would be a significant task involved in coming to terms with the detail of these matters in order to properly determine the approach to be taken on the interlocutory application.

20. The plaintiff also emphasises that it seeks leave to proceed in order to address a counterclaim brought by the defendant, and that it is therefore seeking to engage in a defensive process rather than an offensive one.

21. The law is not entirely clear or settled as to whether s 440D(1) operates to stay a counterclaim brought by a company in administration. It might do so on two bases. It might do so on the basis that the counterclaim is part and parcel of the proceedings brought against the company and so caught by s 440D(1) on that basis – particularly in circumstances where, as here, the defence to the plaintiff’s claim includes a set off based upon the matters alleged by way of counterclaim. Alternatively, it might do so on the basis that the counterclaim is itself a claim in relation to the company’s property within the meaning of s 440D(1).

22. In Mead Corporation v Carbonless Papers (Australia) Pty Ltd,[7] Hasluck J held that s 440D(1) operated to stay the counterclaim brought by the company in administration. His Honour did so primarily on the basis that the counterclaim formed part of the proceedings against the company. However, his Honour added that the counterclaim was in any event itself a proceeding in relation to the property of the company. I agree with the reasoning and conclusion of Hasluck J on this issue, and consider that the same conclusion would be applicable in the present case. However, I do not need to consider that issue in any detail because the administrators in this case do not seek to advance the defendant’s counterclaim in these proceedings, and have conceded that it is stayed by reason of the operation of s 440D(1).

    [7]    Mead Corporation v Carbonless Papers (Australia) Pty Ltd [2002] WASC 268 at [84]-[85].

23. I accept that if the defendant was permitted to, and was seeking to, actively pursue its counterclaim – either pursuant to a grant of leave to proceed, or on the basis that leave was not required – then this would be a strong consideration in favour of granting the plaintiff leave to proceed to not only defend the counterclaim (for example, by seeking to strike it out) but also to proceed with its own claim.  There is support for this view in the reasoning of Black J in Re Pool & Spa Builders (Aust) Pty Ltd.[8]

    [8]    Re Pool & Spa Builders (Aust) Pty Ltd [2013] NSWSC 185 at [23].

24. However, that is not that case.  As I have mentioned, the administrators concede that the counterclaim is stayed and have not sought to advance it in these proceedings.  It is true that the administrators, on behalf of the defendant, continue to assert the existence of the counterclaim, and to deploy it as an asset of value to be balanced against the plaintiff’s claim, for the purposes of attempting to obtain a purchaser of the company’s assets and in attempting to prepare a DOCA.  However, that is not the same as the defendant attempting to advance its counterclaim in these proceedings.  Only the latter would suffice to warrant characterisation of what the plaintiff seeks to do as a defensive step within the proceedings, and hence weigh in favour of a grant of leave to proceed.

25. Indeed, there is a curious aspect to the plaintiff’s application. On a strict view it might be said that it is seeking leave to proceed with the defendant’s counterclaim (rather than its own claim), for the purpose of defeating it. I doubt whether that is a purpose for which s 440D was intended. However, I accept that in substance the plaintiff is treating its claim and the defendant’s counterclaim as connected, and is seeking to defeat the counterclaim so as to expose the true value of its claim. While it is accurate to characterise the claim and counterclaim as connected, particularly given that the latter mirrors the set-off pleaded by way of defence, this focus on the substance tends to reveal that the plaintiff’s intentions are not merely defensive. The plaintiff is seeking to defeat the counterclaim so as to expose the value of, and in that sense advance, its own claim.

26. A further matter emphasised by the plaintiff is the circumstances of the appointment of the administrators, and their lack of response or attention to the plaintiff’s claim since that time.  The plaintiff contends that I should take a somewhat cynical view of the administrators’ conduct in light of the timing of the appointment and their attitude to the plaintiff’s claim since that time.  The plaintiff contends that I might infer from the history of the proceedings that the defendant had been attempting to forestall the striking out of its counterclaim by the last minute appointment of administrators; and that the administrators, and then receivers and managers, had taken a tactical, if not high-handed, approach since that time in treating the counterclaim as an asset and declining to face up to its lack of merit (and corresponding merit in the plaintiff’s claim) for commercial or strategic reasons in connection with their desire to sell the company’s assets and prepare a DOCA.

1. While I understand the plaintiff’s frustration in light of the history of its claim, and accept that it finds itself in an unfortunate position, I am not able to draw any inference of significance to the outcome of this application. 

2. The evidence reveals that the appointment of the administrators was at the behest of a very significant partially secured creditor, and after attempts to achieve a recapitalisation had failed.  There is no basis for me to infer that the timing had anything to with the interlocutory argument that was imminent at the time the company was placed into voluntary administration, or with these proceedings more generally.

3. The evidence also reveals something of the scale of the task to be undertaken by the administrators in respect of their appointment to the defendant company, and the corporate group of which it forms part.  The fact of the Federal Court’s postponement of the date by which the second meeting is to be held is some recognition of the amount of work to be done by the administrators.  In the circumstances, I do not think there is a basis for me to infer that there has been any inappropriate failure by administrators to face up to the plaintiff’s claim.

4. In short, and like Hasluck J in Mead Corporation v Carbonless Papers (Australia) Pty Ltd,[9] I am not satisfied that there is an evidential basis for me to conclude either that the fact or timing of the appointment of the administrators, or their conduct in relation to the plaintiff’s claim since that time, has been for the purpose of forestalling the plaintiff’s claim or otherwise so as to secure some advantage vis-à-vis the plaintiff. 

   [9]    Mead Corporation v Carbonless Papers (Australia) Pty Ltd [2002] WASC 268 at [97]-[99].

5. In my view, a significant consideration weighing against a grant of leave to proceed in the present case is the limited utility in what the plaintiff seeks to do.  The plaintiff contends that there will be significant utility, and advantage to it, in having its strike out application determined.  It contends that if it is successful in that application, then that will leave the administrators having to address its claim without the distraction of the counterclaim (and, by inference, without the distraction of the set off that relies upon the same matters).  It anticipates that the administrators will then acknowledge the merit of its claim.

6. I do not share the plaintiff’s optimism as to the utility of what it seeks to do.  First of all, there is of course the prospect that the plaintiff might lose its strike out application.  If that were to occur, then nothing would have been achieved.  The Court would merely have determined that the counterclaim is arguable and has been properly pleaded.  This is unlikely to be of much, if any, assistance to the administrators in determining whether the plaintiff’s claim should be acknowledged, and if so, to what extent. 

7. Secondly, even if the strike out application were to succeed, and the counterclaim was struck out, this would be of limited assistance.  The plaintiff has brought a strike out application; not a summary judgment application.  Success on a strike out application does not necessarily bring any finality of outcome.  There will often, if not ordinarily, be an opportunity to replead.  Depending upon the reasoning of the Court, there is a chance that it might expose that, practically speaking, the defendant has no prospect of succeeding in its counterclaim or in otherwise defending the plaintiff’s claim; that there is a fundamental defect in the defendant’s case that cannot be addressed by repleading it.  But given the nature of the issues in dispute in these proceedings, and the nature of the strike out application, I do not think that there is more than a chance of this occurring.  The more likely outcome, even assuming the application is successful, is that the defendant would be given an opportunity to replead.

8. In summary, while the Court’s determination of the proposed strike out argument may well provide some general guidance or assistance to the administrators in their consideration of the plaintiff’s claim, and the defendant’s counterclaim, I am not persuaded that there is likely to be much utility in the limited grant of leave sought by the plaintiff.

9. I am also not persuaded that declining to grant the leave sought would greatly disadvantage the plaintiff.  It is not as though the administrators can ignore the plaintiff’s claim.  To the contrary, given the time frame imposed by the (extended) convening period, and the administrators’ apparent intention to put a DOCA toegether before that date, the administrators will soon be required to reach a view as to the value of the claim and counterclaim.  The administrators will be required to act fairly and impartially in forming that view, and there is no basis for me to think that they will not do as they are obliged in that respect.

10. Further, in the event the plaintiff is aggrieved by the view taken by the administrators, they will be entitled to challenge the administrators’ decision in the Federal Court.  While the plaintiff complains that this procedure may put it on the back-foot procedurally, and under significant time pressure, I am not satisfied this is a relevant disadvantage.  It is the procedure that the legislature has envisaged for the determination of the monetary claims of unsecured creditors such as the plaintiff.  It anything, granting the plaintiff leave to proceed in this Court at this time would tend to provide the plaintiff with an advantage over other unsecured creditors.

11. Taking account of all of the above considerations, I am not satisfied that it is appropriate to grant the plaintiff the leave to proceed that it seeks.  It was for these reasons that I dismissed the plaintiff’s application.