#11482665v2 Insolvency Forum Talk What is stayed in what · PDF fileWhat is stayed in what...

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PRESENTATION TO INSOLVENCY FORUM

2 MARCH 2005

What is stayed in what external administration?

1. Introduction

This paper examines the key provisions of the Corporations Act 2001 that have the effect of staying

proceedings and enforcement processes against a company in external administration. It also

considers some of the policy reasons behind those stays. The second part of the paper looks at

how some of these provisions are applied by the courts.

A company that is insolvent or financially distressed may be faced with various forms of external

administration. These include:

• receivership of the company's assets;

• administration under Part 5.3A of the Corporations Act, with a view to executing a deed of

company arrangement or winding the company up;

• administration under a deed of company arrangement;

• formal schemes of arrangement;

• voluntary liquidation (instigated by the creditors or members); and

• court-ordered liquidation (usually in insolvency).

Under the Corporations Act, certain proceedings against the company and persons associated with

it will be stayed during the term of certain forms of external administration. For both the company's

external administrator and its creditors, it is important to know what types of proceedings are

stayed in the particular form of external administration in which the company finds itself.

Companies under external administration are often faced with the prospect of litigation or

enforcement processes against them, for reasons that can be readily imagined. Among other

things, the company's inability to pay its debts or its deteriorating ability to render services and

complete supplies may give rise to breaches of contract. There will also often be disputes about

ownership and security over property in the company's possession. And there may be disputes

about the validity of the external administrator's appointment and how the administration is

conducted.

From an external administrator's perspective, defending proceedings on behalf of the company is

distracting, will deplete the company's assets available to creditors generally to the extent that the

company's money is spent on legal costs, and may expose the administrator to personal liability for

those costs.

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From a creditor's perspective, however, litigation may be considered necessary to establish or

enforce a charge over the company's assets, determine its status as a creditor or the quantum of

the company's debt to it, or protect its interests from perceived mismanagement of the external

administration.

2. What is stayed in what external administration – overview

2.1 Voluntary administrations

Voluntary administrations (under Part 5.3A of the Corporations Act 2001) occupy a unique

position in the scheme of external administrations. This is because their purpose is to

maximise the chance of an insolvent company, or as much of its business as possible,

remaining in existence. Voluntary administrations are a temporary measure to give the

administrator an opportunity to investigate the company's affairs for the benefit of creditors

to allow them to decide on the company's future. The Act provides tight timeframes in

which the voluntary administrator is required to call a meeting of creditors, investigate the

company's affairs, report on them to creditors and, finally, convene a second meeting of

creditors in which they will resolve either to end the administration, execute a deed of

company arrangement or wind the company up.

The Act places a more or less comprehensive moratorium on external claims against the

company during the period of the administration subject to leave being given by the court

or, in some instances, the administrator giving written consent to pursue such claims. The

policy behind this moratorium is essentially to provide a breather to the administrator to

allow him or her to focus on that task in preparation for more final measures.

The relevant sections of the Corporations Act 2001:

(a) Under s440A, it is prohibited to voluntary wind up of the company, except as

provided for in s446A, that is, in accordance with the usual course of events in the

administration. Under s440A, the Court is also required to adjourn the hearing of

an application to wind the company up or appoint a provisional liquidator if the

court is satisfied that it is in the creditors' interests to continue under administration

rather than one of those things to occur.

(b) Under s440B, a person may not enforce a charge on the property of the company

except with the administrator's written consent or the leave of the Court. However,

under s441A, that prohibition does not apply to the enforcement – during a

restricted period after the administration begins – of a charges held by one person

over the whole or substantially the whole of the company's property. That

prohibition is subject to certain exceptions under sections 441B and 441C, which

relate to the enforcement of charges over the whole, or substantially the whole of

the company's property and the enforcement of charges over perishable property.

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(c) Under s440C, the owner or lessor of the property may not take possession of or

otherwise recover property being used or occupied by the company except with the

administrator's consent or the leave of the Court. That prohibition is also subject to

certain exceptions. Under s441F, that prohibition does not apply where a person

entered into possession of, assumed control of or exercised any power in relation

to the property before the administration began. And under s441G, the prohibition

does not apply to the recovery of perishable property. However, under s441H the

court is able to limit the power of a person receiving such property.

(d) The most commonly encountered provision is s440D. That section provides that,

except for a criminal or other prescribed proceeding, a proceeding "in a court"

against the company or in relation to any of its property cannot be begun or

proceeded with except with the administrator's consent or the leave of the court.

(e) Under s440F, a sheriff or court officer that has received written notice of the fact

that a company is under administration may not take action to sell the company's

property under a process of execution or pay proceeds of sale or money obtained

in connection with the enforcement of an execution process.

(f) Finally, section s440J provides that a guarantee of a company's liability cannot be

enforced against a director (being a natural person) or their spouse, de facto

spouse or relative, and a proceeding to enforce such a guarantee may not be

begun against any of those people.

It has been said that one purpose of this moratorium scheme is to prevent particular

creditors from obtaining a benefit greater than it would obtain if it simply proved in the

winding up of the company. Another purpose that the courts have inferred is to prevent the

administrator from facing a multiplicity of claims during the administration, which would

have the effect of distracting him or her from the main purpose of the administration. In

any event, the courts have kept the purpose of an administration firmly in mind when

considering whether to grant leave to bring proceedings against the company that would

otherwise be stayed during the administration under one of the provisions of Part 5.3A.

2.2 Deeds of company arrangement

A common outcome of a voluntary administration is that the creditors resolve to execute a

deed of company arrangement.

The purpose of a deed of company arrangement is, from a creditor's perspective, to

attempt to achieve a better return than they would get in a liquidation. This is the most

common reason why creditors would choose this option. The deed will bind all creditors in

respect of claims arising on or before the day specified in the deed, which must be the day

the administration began or an earlier day. The deed also binds the company, its officers

and members and the deed's administrator.

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The key stay provision in relation to deeds of company arrangement is s444E. The effect

of that section is that, until the deed terminates, a person bound by the deed cannot:

• make an application for an order to wind up the company; or

• proceed with such an application that was made before the deed became binding

on the person.

In addition, the person bound by the deed cannot, without the leave of the Court:

• begin or proceed with a proceeding against the company or in relation to any of its

property; or

• begin or proceed with any enforcement process in relation to the company.

The effect of this section echoes sections that apply to voluntary administrations, except

that s444E is only applicable to people who are bound by the deed.

2.3 Formal schemes of arrangement

It is appropriate here to mention schemes of arrangement or compromise under Part 5.1 of

the Corporations Act. Such schemes are binding on all creditors and, in some instances,

members of the company if approved by the creditors, members (if applicable) and the

court. There is no statutory stay of proceedings against a company under a scheme of

arrangement. It is a common term of a scheme of arrangement for all or some

proceedings by creditors against the company to be stayed for the duration of the scheme.

However, such terms will be contained in the scheme document and are not legislatively

prescribed.

2.4 Court-ordered liquidation

The purpose of a liquidation, whether court-ordered or voluntary, is to wind up the affairs of

the corporation and provide for a fair and equitable distribution of the corporation's property

among its creditors and, if there is any surplus available, among its members. The

Corporations Act provides for a stay of proceedings in both forms of liquidation.

The purpose behind the stay of proceedings in a winding up has been held to be twofold,

although there has been doubt expressed about the persuasiveness of one of them. In

Ogilvie-Grant v East (1983) 7 ACLR 669, Justice McPherson said the following of the

prohibition on proceedings against a company in liquidation:

From time to time the suggestion had been made that the prohibition exists in order to

effectuate the statutory policy of ensuring that corporate assets are distributed rateably

among all creditors so that none of them will gain an advantage over others… But in

Australia at least it is not often that the institution of proceedings or even the recovery of

judgment operates to confer a priority or advantage on a litigating creditor. A more

convincing explanation is that, without the relevant restriction, a company in liquidation

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would be subjected to a multiplicity of actions which would be both expensive and time

consuming as well as in some cases unnecessary.

Different stay provisions apply on the one hand to court-ordered liquidations and, on the

other, to voluntary liquidations. While those provisions are expressed in similar ways, their

similarities belie certain important differences, which will be considered in more detail.

Two sections are relevant to a court-ordered liquidation. The first applies to the time after

the winding up application has been filed but before the winding up order has been made.

The second applies to the period after the winding up order has been made.

Section 467(7) of the Act reads as follows:

(7) At any time after the filing of a winding up application and before a winding up order

has been made, the company or any creditor or contributory may, where any action

or other civil proceeding against the company is pending, apply to the Court to stay

or restrain further proceedings in the action or proceeding, and the Court may stay

or restrain the proceedings accordingly on such terms as it thinks fit.

It is noteworthy that there is no automatic stay while a winding up order is pending

determination. Rather, this section allows a company, or any creditor or contributory, to

apply to the court for a stay, the granting of which will be in the discretion of the court.

Once the winding up order has been made, section 471B applies. It also applies when a

provisional liquidator is acting for the company. That section provides:

While a company is being wound up in insolvency or by the Court, or a provisional liquidator

of a company is acting, a person cannot begin or proceed with:

(a) a proceeding in a court against the company or in relation to property of the

company; or

(b) enforcement process in relation to such property;

except with the leave of the Court and in accordance with such terms (if any) as the Court

imposes.

However, s471C provides that that prohibition does not affect "a secured creditor's right to

realise or otherwise deal with the security".

The corresponding provision that applies in a voluntary winding up is section 500. So far

as presently relevant, it provides as follows:

(1) Any attachment, sequestration, distress or execution put in force against the

property of the company after the passing of the resolution for voluntary winding up

is void.

(2) After the passing of the resolution for voluntary winding up, no action or other civil

proceeding is to be proceeded with or commenced against the company except by

leave of the Court and subject to such terms as the Court imposes.

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While s440D allows an administrator to provide written consent to proceedings being

brought against a company in voluntary administration, the sections providing for a stay

during a winding up do not contain provision for proceedings to be brought with the

liquidator's consent. Accordingly, a proceeding to which those stays apply will require the

Court's leave to be continued.

2.5 Receiverships

There is no automatic statutory stay on proceedings against a company while a receiver is

appointed (unless there is also some other form of external administrator appointed). This

is because the same policy considerations do not apply to a company in receivership as

apply to a company in other forms of external administration.

Other forms of external administrator owe their prime responsibility to the creditors

generally. Receivers, on the other hand, generally owe their prime responsibility to the

party appointing them, usually the secured lender or supplier. Accordingly, policy

considerations that underlie statutory stays of proceedings against companies in other

forms of insolvency administration, such as preventing the favouring of some creditors over

others and allowing an administrator breathing space to examine the company's affairs on

behalf of all creditors free from the distractions of litigation, do not apply to companies in

receivership.

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3. Voluntary administration and court-ordered winding up – whatproceedings are stayed?

The sections outlined above are directed, on the one hand, to proceedings against the company or

people connected with it, and on the other hand, to the enforcement of certain obligations of the

company. This section focuses in some detail on what proceedings are stayed in an external

administration rather than enforcement processes. It looks in particular at the stay provisions

relating to voluntary administrations and liquidations, as those are the provisions that are most

commonly encountered and productive of dispute.

Sections 440D and 471B will be considered concurrently. Those are the sections that respectively

provide for a general stay of proceedings while a company is in voluntary administration and while

it is in court-ordered liquidation.

Section 440D provides:

(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.

There are currently no 'prescribed proceedings' under the Regulations, so the embargo applies to

all proceedings in a court against the company or in relation to its property, except criminal

proceedings.

Section 471B, the corresponding provision relating to court-ordered liquidations, provides as

follows:

While a company is being wound up in insolvency or by the Court, or a provisional liquidator of the

company is acting, a person cannot begin or proceed with:

(a) a proceeding in a court against the company or in relation to property of the company; or

(b) enforcement process in relation to such company,

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

Leaving aside the question of enforcement processes, certain differences between those sections

are readily apparent:

1. First, when a company is in administration, s440D permits proceedings which would

otherwise be stayed to be pursued with the administrator's written consent. Section 471B

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on the other hand does not contain an equivalent provision allowing a liquidator to give

written consent to proceedings otherwise stayed by that section. Accordingly, proceedings

that are stayed during a court-ordered liquidation may only be continued by the Court's

leave.

2. Second, while s440D excludes criminal proceedings from proceedings that are stayed,

s471B does not expressly do so. On the face of it and on authority outlined later, criminal

proceedings against a company are not stayed when it is in court-ordered liquidation.

While there are differences in the operation of the two sections, they do share the same essential

characteristic. Each section stays "proceedings in a court" either against the company or in

relation to its property.

The phrases "a proceeding in a court" and "against the company" seem pretty plain and

straightforward at first glance. In fact, both phrases have been the subject of considerable dispute

concerning the scope of the relevant stays.

What are "proceedings in a court"?

Fortunately, the Corporations Act defines the term "court" in s58AA and that definition applies to all

instances where the term is used in the act unless a contrary legislative intention appears.

Unfortunately, the definition provided is not particularly illuminating. Where the term "proceedings

in a court" is used in ss440D and 471B, the word "court" is not capitalised. Section 58AA defines

court, spelt as such, as "any court". This is to be distinguished from Court with a capital "C", which

s58AA defines as certain specified courts, including the Supreme Court of State or Territory and

the Federal Court.

Courts have grappled with whether the definition "any court" applies to the relevant embargo

sections and, if so, what this means.

Employee proceedings

The most fertile ground for this debate has been in relation to proceedings brought by employees in

industrial relations tribunals.

One such case was Brian Rochford Ltd v Textile Clothing and Footwear Union of NSW (1999) 17

ACLC 152. Brian Rochford Ltd was a prominent clothing manufacturer and wholesaler which went

into voluntary administration. Catherine Petris, an employee of the company for 3 years, was

dismissed from her employment in September after the company had gone into administration. On

her behalf, her union commenced proceedings in the NSW Industrial Relations Commission under

s84(2) of the Industrial Relations Act 1986 for relief from unfair dismissal. The company filed a

summons in the Supreme Court seeking a declaration that the commencement of proceedings in

the Commission and all steps taken in them were in breach of s440D. The company also sought

an order restraining Ms Petris from taking further steps, including conciliation under the

Commission's auspices.

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To determine whether there was a breach of the stay in s440D, the court had to determine whether

the Commission proceedings were "proceedings in a court" as understood in that section. Justice

Austin considered whether the term "court" in that section had the meaning given in s58AA of the

Corporations Law. At that time, the definition of court in s58AA was more restricted than it is now

and provided that "court means any court exercising the jurisdiction of this jurisdiction". His Honour

concluded that "exercising jurisdiction within this jurisdiction" meant exercising jurisdiction under

the corporations legislation within the geographical jurisdiction of the State – the Corporations Law

was then State-based. Because of the restrictiveness of that definition, he concluded that there

was a clear legislative intention against the s58AA definition being applicable to s440D. It followed

that the word "court" in s440D was used in a more general sense.

His Honour then considered whether the Industrial Relations Commission, in hearing unfair

dismissal proceedings, was a court in the more general undefined sense. In doing so he

concluded that:

• there are no conclusive, generally-applicable criteria for classifying a body as a court;

• that the answer in each case depends on the particular statutory question to be decided;

and

• that the answer is to be supplied in light of a close consideration of the statutory

constitution and functions of the body in question.

He then embarked on a close consideration of the Commission's constitution and functions. He

noted that the Commission has various functions, some of which are exercised as the Commission

in Court Session, such as the hearing of unfair contract claims. The Commission in that capacity is

constituted by Judicial Members and the legislation expressly provides that the Commission in

Court Session is a superior court of record. On the other hand, unfair dismissal applications can be

heard by the Commission generally and the Commission in that capacity can be constituted by any

member, who does not have to be a judicial member. The judge considered the Commission's

processes and functions when hearing unfair dismissal claims specifically, some of which are curial

in nature and some of which are not. He accepted that one such function is to conciliate a dispute

but did not accept that this distinguished it from a court, because that was only one step in the

dispute resolution process over which the Commission has jurisdiction. He noted that, ultimately,

the Commission has the power to determine the dispute by making binding orders.

Taking all of these things into account, Justice Austin concluded that the Industrial Relations

Commission is a court for the purposes of s440D and that leave (in the absence of the

administrator's written consent) was required to commence or continue proceedings for unfair

dismissal in the Commission.

The reasoning in the Brian Rochford case was adopted by the Western Australian Court of Appeal

in Helm v Hansley Holdings Pty Ltd (In Liq) [1999] WASCA 71 when considering the application of

the sections to the WA Industrial Relations Commission. In that case, a former employee of

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Hansley Holdings had filed an application in the WA Industrial Relations Commission claiming relief

against the company for unfair dismissal under the WA Industrial Relations Act 1979. By the time

the claim was brought on for hearing, Hansley Holdings had been placed in liquidation. The

liquidator argued that s471B applied to the Commission proceedings and that the employee

needed leave of the Court to proceed with them. Justice Kennedy, with whom Justices Anderson

and Parker agreed, concluded that the WA Commission is a court within the meaning of s471B and

that leave was therefore required to continue with the proceedings in that Commission. In the

judge's view the insurmountable obstacle the employee faced was that WA's Industrial Relations

Act expressly provides that the Commission is a "court of record" and that, in determining whether

an employee has been unfairly dismissed and whether it should order the employer to pay

compensation, the Commission is acting judicially. So for substantially the same reasons that

Justice Austin in Brian Rochford concluded that the NSW Industrial Relations Commission is a

court for the purpose of s440D, the court concluded that the WA Industrial Relations Commission is

a court for the purposes of s471B.

At Federal level, the judicial power of the Commonwealth has, for constitutional reasons, been

strictly separated from the Australian Industrial Relations Commission since the Boilermakers case.

So are proceedings in the Australian Industrial Relations Commission (AIRC) proceedings in a

court for the purposes of s440D and 471B?

This question was considered in Australian Liquor, Hospitality & Miscellaneous Workers Union v

Home Care Transport Pty Ltd (In Liq), a decision of the Federal Court. In that case, the Union

made an application to the AIRC under s170FA of the Workplace Relations Act. The application

sought leave to give effect to the Termination of Employment Convention, which would give

employees greater retrenchment entitlements than were conferred under their individual contracts

with Home Care. Before the application was made, Home Care was put into voluntary

administration. Later, it was placed in voluntary liquidation following a creditors' resolution. The

Union then sought leave under s471B to proceed with its application in the Commission. This is

odd because, considering that the company was in voluntary liquidation, s500(2) rather than s471B

was presumably the relevant section, but the point was not taken. The Union's primary contention,

however, was that the AIRC was not a court and that therefore no leave was required under s471B.

Justice Merkel considered the various functions and powers of the AIRC, including its primary

conciliation and arbitration functions, and recognised that on the authorities the AIRC clearly

cannot exercise federal judicial functions as conferred by Chapter III of the Constitution. He said

that "given the constitutional and legislative history of the AIRC, and the exclusion of the exercise

of judicial power from its jurisdiction, there is little in the framework or trappings set out above that

would suggest that it is appropriately described as a court". In reasons that referred to and

substantially adopted those in Brian Rochford and Helm v Hansley, his Honour concluded that the

AIRC is a court within the meaning of s471B despite the different constitutional considerations that

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limit its function compared with those of State industrial relations commissions. He emphasised

two factors in coming to this conclusion:

1. that "the legislature can be taken to have assumed that State industrial tribunals of the kindfound to be courts in Rochford and Helm would be courts for the purposes of s440D and471B of the Corporations Act because those sections in their current form were re-enactedafter those decisions". In those circumstances, he said, it is most unlikely that thelegislature would intend to treat in any different manner the AIRC, "which has a broaderpower and capacity to make awards affecting the property and affairs of a corporation thanits State counterparts";

2. his difficulty in discerning any reason for excluding an industrial tribunal such as the AIRCfrom the ambit of the relevant sections given the capacity of such tribunals' awards toprejudice the rights of other unsecured creditors.

However, the judge granted leave to pursue the AIRC proceedings. This was in part because the

result of those proceedings might be that the employees were entitled to compensation under the

Commonwealth government's employee compensation scheme, which the judge did not wish to

deny them.

Contrary to the decision in Home Care, a Full Bench of the AIRC itself in Smith v Trollope

Silverwood & Beck Pty Ltd (In Liquidation) 17/11/03 PR940508 has held that it is not a "court" for

the purposes of s471B. In that case, the Commission was faced with an application by a former

employee of a company in liquidation for remedies under s170CE of the Commonwealth

Workplace Relations Act in relation to the termination of her employment on the ground that it was

harsh, unjust or unreasonable.

The AIRC noted the definition of "court" in s58AA(2) ("court means any court") and concluded that

the body referred to there must be incapable of being vested with the judicial power of the

Commonwealth. The Full Bench referred to constitutional cases establishing that the Commission

has no such capacity. Accordingly, in the Commission's view, it could only be a court within the

meaning of s440D if the legislative intention was that the s58AA definition of court is not applicable

to s440D. Despite the Commission's power to determine applications for a remedy in relation to

what is colloquially known as unfair dismissals, the Commission noted that its main functions were

the prevention and settlement of industrial disputes, the fixing of minimum employee entitlements

and facilitating the making of certain agreements. These functions are not capable of exercise or

direct supervision by the regular courts. The Commission also considered that, had the legislature

intended to include proceedings in the Commission in the prohibition against proceedings in a court

against a company in liquidation, it would have done so expressly.

It therefore declined to follow the authority in the cases discussed previously and concluded that

the AIRC is not a "court" for the purposes of s471B. Accordingly, no leave was required to

continue proceedings in the Commission while the employer company was in liquidation.

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The question whether the AIRC is a court within the meaning of ss440D and 471B was most

recently considered in the Victorian Supreme Court case of Melbourne University Student Union

Inc (In Liq) v Sherriff [2004] VSC 266. Justice Mandie referred to the decisions in Rochford, Helm

and Home Care holding that the NSW, WA and Australian industrial relations commissions

respectively are courts within the meaning of ss440D and 471B. He contrasted those decisions

with the decision of the AIRC itself in Smith v Trollope. He concluded that he should follow the

authority:

as the authorities make plain, this Court ought to follow decisions of intermediate appellate courts in

the Corporations jurisdiction unless they are plainly wrong, and I also think that I should follow the

decision of Justice Merkel [in Home Care].

The decision of Justice Merkel was directly in point, and not only is it in point, but I think that it is

probably correct. So I think that the plaintiff is entitled to the declaration which it seeks.

The result is that there is a divergence of authority on whether the AIRC is a court for the purposes

of s440D and s471B. Courts exercising corporations jurisdiction have held that the AIRC is a court

for the relevant purpose. On the other hand, a Full Bench of the AIRC itself has held that it is not a

court for that purpose. This puts employees in a curious position. On the authorities discussed,

the AIRC itself would not restrain an employee from commencing or continuing proceedings in that

forum against a company in administration or liquidation because it has held that it is not a court for

the purposes of ss440D or 471B. However, if, correctly construed, ss440D and 471B do apply to

AIRC proceedings, it is a capital "C" Court such as a Supreme Court or the Federal Court that must

give leave to continue those proceedings. On the line of authority that has to date been followed in

capital "C" Courts, proceedings in the AIRC are barred by ss440D and 471B without their leave, so

it is open to a defendant, as happened in the Melbourne University case, to seek an injunction in

one of those courts restraining the plaintiff from continuing its proceedings in the AIRC.

Arbitration proceedings

Still on the topic of what constitutes proceedings "in a court" for the purpose of s440D and s471B,

the NSW Supreme Court last year considered whether arbitration proceedings entered into

pursuant to a contractual arbitration clause constituted "proceedings in a court" for the purpose of

s440D.

In Auburn City Council v Austin Australia Pty Ltd [2004] NSWSC 141, Justice Bergin was

confronted with the question of whether, in arbitration proceedings, a cross-claim against a

company in administration constituted proceedings in a court for which leave was required in order

for it to be continued.

The plaintiff, Auburn Council, and the defendant, Austin Australia, had entered into a Construction

Management Contract in March 1999 under which Austin Australia agreed to provide management

services to and exercise certain functions on behalf of the Council in connection with the

redevelopment of the Auburn Civic Centre. The contract contained an arbitration clause referring

disputes to arbitration. A dispute arose between the parties and it was referred to arbitration

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pursuant to the contract. In the arbitration proceedings, Austin Australia was the claimant and

Auburn Council was a cross-claimant.

After the arbitration had been proceeding for about 40 days, administrators were appointed to

Austin Australia. The Council sought the administrators' written consent to continue the cross-

claim against the company. That consent was not given and the Council filed a summons in the

Supreme Court seeking orders for leave to proceed with the summons itself and an order that "to

the extent necessary" it be granted leave under s440D to proceed with its cross-claim in the

arbitration.

The question before Justice Bergin was whether the cross-claim in the arbitration proceedings was,

for the purposes of s440D, "a proceeding in a court against the company or in relation to any of its

property". Justice Bergin considered various authorities, including the decision of Justice Austin in

Brian Rochford. She agreed with Justice Austin's conclusion that there are no conclusive,

generally-applicable criteria for classifying a body as a court, that the answer in each case depends

on the particular statutory question to be decided and that the answer is to be supplied in light of a

close consideration of the statutory constitution and functions of the body in question.

This led Justice Bergin to consider at length the essential features of arbitration under the NSW

Commercial Arbitration Act. Such features include an arbitrator not having, under that Act, any

power to compel the attendance of witnesses, the fact that an arbitrator is not required to adhere to

the rules of evidence agreed and that the enforcement of an award under an arbitration agreement

requires the court's leave.

She also took into account the policy behind sections such as s440B, which she said seemed to

be:

to provide administrators with an immediate breathing space by the imposition of a stay on

proceedings on foot at the time of the administration until leave is sought and possibly granted.

She acknowledged that this policy could be frustrated if proceedings are able to be brought or

continued against the company in administration, in a place other than in a court, but concluded

that "that is what the legislature has permitted to occur".

Finally, she referred to the words of Chief Justice Jordan in Jones v Hall (1942) 42 SR (NSW) 203

in which he said that the authorities establish that if the words in a statute, "when read in their

primary or natural sense would produce the result which, in relation to the provisions of the Statute

itself, are fantastic or absurd, a court is entitled to pay the Legislature the not excessive compliment

of assuming that it intended to enact sense and not nonsense".

Justice Bergin concluded that It is not absurd or fantastic to exclude an arbitrator from the general

definition of "court". She said:

One can understand that the legislature would have been cognisant of the capacity of parties to

agree, privately, to have disputation resolved by resort to a mechanism other than a court, such as

arbitration, conciliation or mediation, whether structured or unstructured. It is also not absurd or

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fantastic to conclude that the legislature would be cognisant of the provisions of the [Commercial

Arbitration] Act and that the exclusion of the Court from the process of arbitration except to a very

limited extent.

Justice Bergin recognised that there are many hallmarks of what some arbitrators do, such as

administering oaths, hearing evidence, deciding facts and giving reasons for decision, that are

similar to what occurs in courts. However, in her view those similarities do not "convert an

arbitrator, who is appointed by reason of the arbitration agreement, into a "court" for the purposes

of s440D". Accordingly, Justice Bergin held that s440D did not apply to the arbitration proceedings

and that no leave was therefore needed to continue the cross-claim against Austin Australia.

However, in order to avoid that uncertainty that might have resulted from the matter being left open

for appeal, her Honour granted leave for the Council to continue its cross-claim.

Interestingly, on a number of occasions in her judgment, Justice Bergin emphasised that the

arbitration proceedings in question were not court-ordered arbitration proceedings but arbitration

proceedings pursuant to contractual terms. While Justice Bergin did not pronounce on the point,

her judgment leaves it open to argue that court-ordered arbitration is in a different category to

private arbitration and that it bears sufficient hallmarks of regular court proceedings to bring it within

the category of "proceedings in a court" for the purposes of s440D.

Mining Warden’s Court

In Van Blitterswyk v Sons of Gwalia and others (in administration) [2005] WAMW 06 an application

was brought on behalf of Sons of Gwalia Ltd and others (in administration) (Sons of Gwalia) to

prevent the plaintiff from pursuing a claim before the Mining Warden sitting in open court. Sons of

Gwalia submitted that s440D prohibited the plaintiff from such action. Section 101 of the Mining

Act 1978 excluded the operation of s471B of the Corporations Act, however there was found to be

no similar provision in relation to s440D:

Had the Western Australian parliament intended to exclude Section 440D it could have enacted

legislation. The reason that the liquidation of a company is not regarded as prohibitive of a litigant

commencing ‘proceedings in a court’ clearly has to do with the fact that liquidation is not such a

sensitive time as is administration. In any event the legislature has taken the express step of

permitting Mining Act litigation in respect of Section 471B but had not done so in relation to 440D – a

section which existed contemporaneously.

However, the question to be determined was whether the Mining Warden sitting in open courtconstituted a ‘court’ for the purposes of s440D. After an examination of the authorities, the powersand functions of the Warden’s Court were considered. The court considered such factors as: theWarden must afford natural justice; the forms used have a similar character to pleadings in judicialproceedings; the Warden may take evidence on oath; and the tribunal is a court of record and theWarden is a judicial officer (a Stipendiary Magistrate). It was found that these attributes weresufficient to make the Mining Warden sitting in open court a court for the purpose of s440D andtrigger a stay of proceedings.

Conclusion

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It can be seen from the preceding cases that, the answer to whether a tribunal is a "court" in which

proceedings are stayed under s440D or s471B is not always readily apparent. The approach the

courts seem to have taken in construing a tribunal as a court or otherwise for the purpose of the

relevant sections is broadly the approach taken by Justice Austin in the Brian Rochford case that:

• there are no conclusive, generally-applicable criteria for classifying a body as a court;

• the answer in each case depends on the particular statutory question to be decided; and

• the answer is to be supplied in light of a close consideration of the statutory constitution

and functions of the body in question.

Proceedings 'against the company'?

Section 440D bars proceedings in a court against the company or in relation to its property. In a

number of cases when a company is in voluntary administration, there may have already been an

application on foot for orders that the company be wound up. In other cases, creditors have sought

orders for the appointment of a provisional liquidator or for the winding up of the company before

the statutory second meeting of creditors where a winding up resolution is customarily considered.

In those situations, the question has been, 'is an application for the winding up of the company or

for the appointment of a provisional liquidator a proceeding "against the company" within the

meaning of s440D?' If so, such an application would be stayed during the administration in the

absence of the administrator's written consent or the Court's leave.

The question of whether s440D applies to applications for winding up or the appointment of a

provisional liquidator also raises the question of the relationship between s440D and s440A(2) and

s440A(3). Those subsections provide that the Court is to adjourn the hearing of an application for

an order to wind up a company, or to appoint a provisional liquidator, if the company is under

administration and the Court is satisfied that it is in the interests of the company's creditors for the

company to continue under administration rather than be wound up.

Hall v Mercury Information Technology (South Australia) Pty Ltd [2002] FCA 272 was a case

concerning an application by the receiver and manager of Laptop Land, a company in the Mercury

IT group. Laptop Land (Laptop) was a creditor of 2 other companies in that group, which were

already in voluntary administration. Laptop's receiver and manager applied for orders that an

independent person be appointed as provisional liquidator of those two companies.

The administrator of the two companies argued that Laptop's receiver needed leave under s440D

to bring the application. Laptop's receiver argued that such leave was not required because the

application was not an application "against the company" or its property, but an application "in

respect of the company". Justice Stone said that, unlike an application to have a deed of company

arrangement held invalid or terminated, the application to appoint a provisional liquidator to the

company in administration affects the whole of the company's affairs and assets and is ultimately

directed to the dissolution of the company. She said "It is difficult to imagine how a proceeding that

seeks such an order could be other than a proceeding "against the company". On that view, leave

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would be required under s440D to proceed with the application to appoint a provisional liquidator.

In further support of this conclusion, the judge noted that the application to appoint a provisional

liquidator was quite different from the kind of application commonly given as an example of a

proceeding "against the company" to which the prohibition in s440D is directed, such as an action

by a former employee or director seeking reinstatement or a proceeding to recover a debt owed by

the company.

In the event, Justice Stone was disposed to grant leave under s440D.

Assuming this case was correctly decided, the leave of the court or the administrator's consent is

needed in order to commence or continue an application to have a provisional liquidator appointed

to a company in administration or, by parity of reasoning, an application for an order that that the

company be wound up.

However, the correctness of that decision was doubted in the later case of APRA v Rural and

General Insurance (2004) 22 ACLC 574, also in the Federal Court. In that case, APRA had

commenced proceedings for the winding up of Rural & General before the company was placed in

administration, but the winding up application had been adjourned. Before the hearing of the

application, Rural & General resolved to appoint an administrator pursuant to s436A of the Act.

When the winding up application came on for hearing, Rural & General argued that, because it was

in administration, APRA needed the administrator’s written consent or the Court’s leave under

s440D to continue with its winding up proceedings. APRA argued that, because s440A(2) deals

specifically with the situation where winding up proceedings have commenced and an administrator

is appointed before the making of the winding up order, the more general provisions of s440D do

not apply and that it therefore did not require leave to continue its winding up proceedings. APRA

also argued that winding up proceedings are not proceedings "against the company" (as

contemplated by s440D) but proceedings “in relation to the company”.

Justice Gyles agreed with APRA. He referred to various authorities, including Hall v Mercury IT

(above), which suggested that winding up proceedings were proceedings “against the company”.

He acknowledged that, if one looked at s440D in isolation, winding up proceedings might be

considered to be proceedings “against the company”. However, he held that when one reads

s440D and s440A(2) in the context of Part 5.3A as a whole, and indeed Chapter 5 as a whole, it is

clear that the legislature distinguished between a winding up proceeding on the one hand and what

he called “external claims” against the company on another. He concluded, therefore, that APRA

did not need leave under s440D to continue with winding up proceedings against the company in

administration. Rather, s440A(2) applied, requiring the court to adjourn the hearing of the winding

up application if it was satisfied that it is in the interests of the company’s creditors for the company

to continue in administration.

It might be thought that the question of whether the APRA decision is correct is of no more than

academic importance. This is because even if s440D does apply to applications for winding up

orders or the appointment of provisional liquidators, the court will still have to apply section 440A

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when those applications are heard and adjourn the applications if it is satisfied that it is in the best

interests of the creditors for the administration to continue. However, the question does have

practical ramifications because if s440D applies to winding up applications, it is more difficult for

that applicant to show why leave should be given to pursue the application than to establish under

s440A why that application should not be adjourned. This is because the onus is on an applicant

for leave under s440D to show why the usual stay should not apply, whereas once the winding up

application is heard, the onus is on the party seeking an adjournment of that application to show

why it is in the interests of creditors for the adjournment to take place.

In TCS Management Pty Limited v CTTI Solutions Pty Limited (2001) NSWSC 830, the New South

Wales Supreme Court refused an application under s440A(2) that a winding up application be

adjourned. Justice Hamilton referred to an earlier decision of the court in Deputy Commissioner of

Taxation v Choice Design Homes Pty Limited (1999) NSWSC 589 in which Justice Young said that

a rule of thumb in such matters is to apply the following four questions:

1. Is the company insolvent?

2. Is the company salvageable?

3. Is the proposed salvation in the interests of creditors?

4. Is the proposed salvation in the public interest?

Justice Hamilton stated that it would be difficult to establish to the satisfaction of the court that an

adjournment is in the interests of creditors unless there is a good case that there will be a greater

return as a result of this action.

4. Voluntary liquidation – what proceedings are stayed?

The general provision concerning stays of proceedings against a company in voluntary

administration is s500(2). It provides that:

After the passing of the resolution for voluntary winding up, no action or other civil proceeding is to be

proceeded with or commenced against the company except by leave of the Court and subject to such

terms as the Court imposes.

At first glance it would appear that this section is equivalent to s471B, which is the general stay

provision in relation to companies in court-ordered liquidation. However, on a closer look it

becomes apparent that there are some key differences.

One is that the section refers to an "action or other civil proceeding". This is different from the

formulation in both s440D and s471B concerning voluntary administrations and court-ordered

windings up. As highlighted above, there has been a lot of debate in relation to ss440D and 471B

about what constitutes a proceeding "in a court" and the scope of the stay imposed by those

sections has been held to turn on it. By contrast, the words "action or civil proceeding" in s500(2)

appear to be capable of a broader interpretation. For instance, while it is questionable whether

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proceedings in the Australian Industrial Relations Commission are proceedings in a court, there

seems little doubt that such proceedings are capable of being characterised as an "action or civil

proceeding" on the ordinary meaning of those words. Similarly, arbitration proceedings pursuant to

a contractual dispute resolution clause may not be proceedings in a court, according to Justice

Bergin in Austin (above), but it is certainly open to conclude that such proceedings would be an

"action or other civil proceeding" for the purposes of s500(2). Indeed, in the case of Re Vassal Pty

Ltd [1983] 2 Qd R 769, Justice Kelly of the Queensland Supreme Court considered this question in

light of a predecessor provision of s500(2) of the Corporations Act, which for relevant purposes

was identical to the current provision. His Honour concluded that a commercial arbitration was a

"civil proceeding" within the meaning of that section of the Code and said "I can see no warrant for

limiting the term to proceedings taking place in a court". In 2002, Santow JA of the New South

Wales Court of Appeal expressly approved that view in Doran Constructions Pty Ltd (In Liq) v

Beresfield Aluminium Pty Ltd [2002] NSWCA 95 and the other judges appeared to proceed on the

assumption that this is correct.

So while arbitration proceedings may be stayed during voluntary administrations and court-ordered

liquidations, as previously discussed, on the authority just considered it appears that arbitration

proceedings would not be stayed while a company is in voluntary liquidation.

On examination of s500(2) it becomes clear that the words "action or other civil proceeding" seem

to imply that criminal proceedings against the company are excluded from the ambit of the stay. If

that is correct, it is akin to s440D, which expressly excludes criminal proceedings against the

company from the stay created during a voluntary administration, but is different from s471B, which

stays "all proceedings in a court" while a company is in court-ordered liquidation. In WorkCover

Authority of NSW (Inspector Maltby) v Josef & Sons Contracting Pty Ltd (In Liq) [2002]

NSWIRComm 226, Justice Schmidt of the NSW Industrial Relations Commission in Court Session

considered this issue. In that case, a prosecutor sought orders effectively summoning the

defendant to appear in summary criminal proceedings. The defendant was a company in voluntary

liquidation. Justice Schmidt was required to consider whether the criminal proceedings against the

company were stayed by virtue of s500(2). After a lengthy consideration of the statutory

construction of both s500(2) and s471B, his Honour concluded that by the use of the word

"proceeding" in s471B without limitation to civil proceedings, and the use of the words "action or

other civil proceeding" in s500(2), the legislature must have intended for s500(2) and s471B to

have different effects. He therefore held that s471B requires leave to begin or proceed with any

proceedings in a court, whether civil or criminal, and that s500(2) only requires leave to proceed

with, or commence, civil proceedings and actions.

Finally, in relation to s500(2), it should be noted that it lies within the Division of Part 5.5 of the Act

headed "Creditors' Voluntary Winding Up". The placement of s500(2) in that division, which

contains provisions generally applicable to creditors' voluntary windings up only, led Justice Barrett

in Awada v Linkdarf Ltd (In Liq) [2002] NSWSC 873 to conclude that the section only applies to a

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creditors' voluntary winding up and not a members' voluntary winding up. Citing Catto v Hampton

Australia Ltd (1998) 29 ACSR 225, a judgment of the South Australian Supreme Court, he also

said that this view is supported by policy considerations, namely, that a members' voluntary

winding up proceeds on the basis of a declaration of solvency under s494. That declaration is to

the effect that, in the directors' assessment, the company will be able to pay its debts in full within

one year after commencing the winding up. The utility of a moratorium on claims against the

company in those circumstances is diminished.

It appears therefore – somewhat anomalously – that during creditors' voluntary liquidations, a

broader range of civil proceedings are stayed than in court-ordered liquidations. On the other

hand, criminal proceedings against the company are not stayed during creditors' voluntary

liquidations, but are stayed during court-ordered liquidations.

5. Leave to proceed

The factors a court will consider in deciding whether to grant leave despite the stay will differ

depending on whether the company is in administration or liquidation.

In Foxcroft v The Ink Goup Pty Ltd (1994) 15 ACSR 203 an employee sought leave under s440D to

commence proceedings in the Industrial Relations Court of Australia against his former employer, a

company under administration. Those proceedings involved a claim for reinstatement of

employment or damages. The employee argued that in considering whether to grant leave, the

court should consider the same factors that it would if it were considering an application for leave to

proceed against a company in liquidation. The judge disagreed and dismissed the application.

Justice Young said:

There is…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…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 circumstance, the members.

In the judge's view, to allow the employee to proceed with his action in the Industrial Relations

Court would not only take the administrator's attention from what he needs to do under the

Corporations Act in a relatively short period of time, but it would also involve costs in running the

legal action on behalf of the administrator, and perhaps give the claimant some advantage over the

other creditors or potential creditors.

With this in mind, Justice Young made the comment which has often been cited since, "it seems to

me that an application under s440D will rarely be granted." He added that where the liability the

subject of the intended proceedings is insured, the administrator would normally consent or the

court will give conditional leave, but that outside this field it was hard to see situations where it

would be proper to grant leave, though doubtless there are such situations.

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Justice Young's reasoning in Foxcroft was echoed to a great extent in the later Federal Court

judgment of Justice Davies in Australian Liquor, Hospitality and Miscellaneous Workers' Union v

Terranora Lakes Country Club Pty Ltd (1996) 19 ACSR 687. But in that case the judge identified

an additional factor militating against the granting of leave – the potential personal liability of the

administrators. The applicant sought leave under s440D on behalf of a large number of employees

of a company in administration, to bring proceedings in the NSW Industrial Relations Court seeking

an injunction restraining the administrator from terminating their employment. Justice Davies

denied the application for leave. In doing so he emphasised the need for an administration to be

conducted promptly. However he also emphasised that administrators are liable under s443A for

debts they incur in the performance of their functions for services rendered, goods bought and

property hired, leased or occupied. In light of this, an order by the Commission that the employees

be retained could make the administrator personally liable for the employees' wages. In his view,

this would be in conflict with the objects of Part 5.3A of the Corporations Act and he refused the

leave sought.

However, the judge indicated that his position might be different if all that had been sought was

leave to bring proceedings to resolve the issue of whether the termination notices were in breach of

the employees' award.

An example of a case in which leave was granted, however, was Patrick Stevedores Operations

No 2 Pty Ltd v Maritime Union of Australia (1998) 16 ACLC 1041. In that case the applicant, the

Maritime Union of Australia, sought interlocutory relief to restore the position of employees whose

rights had been adversely affected by a corporate reorganisation carried out prior to the voluntary

administration of various employer companies. It alleged that the Workplace Relations Act had

been breached in the course of a conspiracy to injure or prejudice MUA members. In granting the

relief, the trial judge took into account various factors including the rights that the Workplace

Relations Act sought to protect and the difficulty of untangling any new arrangements the

employers had made if the relief preserving the pre-reorganisation arrangements were not made.

On the other hand, the judge recognised that an insolvent company would not normally be forced

by a court to continue trading. However, in this case the employees had given undertakings to

refrain from wage claims to the extent necessary to allow the employers to trade profitably and not

to undertake industrial action while the orders were in force.

On appeal to the Full Federal Court, the full court upheld the trial judge's decision and found that

the undertakings given by the employees answered the usual concern in considering whether to

give leave to pursue proceedings for reinstatement or the prevention of termination of employment

without exposing the administrator to personal liability for debts for services rendered by the

employees.

On further appeal, the High Court upheld the orders made by the trial judge, but varied those

orders so as to make them "without prejudice to the powers of the administrators…during the

administration". Thus, while the pre-reorganisation contractual arrangements were restored, the

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varied orders made clear that the administrators were not required to continue the business

activities of the employers.

On the issue of when leave will be given to pursue proceedings against a company in liquidation,

the recent Federal Court decision in Buckingham v Pan Laboratories (Australia) Pty Limited (In

Liquidation) [2004] FCA 597 provides a useful survey of the authorities on which factors and

principles will be taken into account. In summary, the principles espoused in those authorities,

which Justice Jacobson adopted, are as follows:

• "Independent actions by creditors are not encouraged in a winding up. Responsibility for

satisfying the rights of creditors is placed upon the liquidator." Nevertheless, "Leave is not

to be withheld simply and solely as a punishment: the primary consideration is the enabling

of an orderly winding up. If no prejudice, procedural or substantive, will flow to those

having interests in the winding up, an applicant has a strong case for gaining the leave he

seeks." (Re AJ Benjamin (In Liquidation) and the Companies Act (1969) 90 WN (Part 1)

(NSW) 107).

• The intention of s471B (and by inference 500(2)) is to ensure that assets of the company in

liquidation will be administered in accordance with the provisions of the Act and that no

person will get an advantage to which, under those provisions, he is not properly entitled.

(Re Sydney Formworks Pty Ltd [1965] NSWLR 646.

• A company in liquidation should not be subject to a multiplicity of actions, which would be

expensive and time-consuming (Ogilvie-Grant v East (1983) 7 ACLR 669).

• The court should take into account the seriousness of the claim, the complexity of the legal

and factual issues involved and the stage which the proceedings, if already commenced,

have reached (Nommack (No 100) Pty Ltd v FAI Insurances Ltd (In Liq) (2003) 45 ACSR

215.

• The applicant for leave must demonstrate that there is a serious question to be tried in the

proceedings he or she seeks leave to proceed with (Vanguard Pty Ltd (In Liq) v Fielding

(1992-3) 10 ACSR 373 (FCFCA).

That last principle implies also that there must be some utility to the application for leave.

Application for leave to proceed in the NSW Industrial Relations Commission against a company in

liquidation for relief under s106 of the NSW Industrial Relations Act was refused by Master

Macready of the NSW Supreme Court in Silbermann v One.Tel Ltd [2001] NSWSC 895, primarily

on the basis that any liability of One.Tel as a result of an order by the Commission would not be a

provable debt in its winding up. In brief, the reasoning for this was that the Commission's power

under that section is to vary unfair contracts either prospectively or retrospectively. However, even

if the contract is varied retrospectively, with the result that the employer owes money effectively in

arrears to the employee, the actual debt created by that varied contract is only created by, and on

the date of, the Commission's order. Debts provable in a liquidation must be debts that existed,

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even if contingently, on the date the administration began. However, according to the reasoning in

Silbermann, which was subsequently affirmed on appeal by Justice Gzell, no debt exists in relation

to sums payable under a varied contract – contingently or otherwise – until the date the

Commission makes an order. In this case, this was necessarily after the date of the administration.

Any amounts to which One.Tel became liable under the Commission's orders would therefore not

be provable in the liquidation and granting leave was therefore futile.

This case is a reminder that, in determining whether to seek or oppose leave to proceed, or grant

permission to proceed, it should be kept firmly in mind whether the proceeding will have any

practical purpose in any event.

Conclusion

The cases discussed above highlight that there is no defined list of criteria that the courts will take

into account in deciding whether to grant leave to pursue proceedings against a company in

voluntary administration or liquidation. Cases such as Buckingham v Pan Laboratories (above)

provide a useful checklist of factors that will be taken into account. However, ultimately the courts

will assess each application based on the facts and circumstances surrounding the case, keeping

the objects of the usual stay of proceedings against the company in mind. Those objects include

preventing the administrator or liquidator from being faced with a multiplicity of actions while trying

to deal with the creditors' interests in an orderly fashion, and preventing one creditor from gaining

an advantage over another that the creditor would not have if it merely proved in the winding up of

the company.

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