FEDERAL COURT OF AUSTRALIA

Mentha v Epic Energy South Australia Pty Ltd, in the matter of ACN 004 410 833 Limited (formerly Arrium Limited) (No. 2) [2018] FCA 925

ORDERS

THE COURT ORDERS THAT:

1.    The first defendant’s interlocutory process filed 7 November 2017 and its amended interlocutory process filed 22 December 2017 be dismissed without adjudication on the merits.

2.    The proceedings be dismissed.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

DAVIES J:

1    On 15 December 2017, I published reasons for decision on a preliminary question arising in this proceeding: Mentha v Epic Energy South Australia Pty Ltd, in the matter of Arrium Finance Ltd [2017] FCA 1530. The decision on the preliminary question rendered any further trial of the proceeding unnecessary in respect of the relief sought by the plaintiffs in this proceeding and the plaintiffs have applied for an order dismissing the proceeding, including the interlocutory process of the first defendant (“EPIC”) filed on 7 November 2017, and EPIC’s amended interlocutory process filed on 22 December 2017. The orders sought by the plaintiffs are supported by the second defendant (“MML”), but EPIC has opposed the dismissal of its interlocutory processes.

2    For context, the first plaintiffs are the joint and several administrators of deeds of company arrangement executed by the second plaintiffs on 4 November 2016. The second plaintiffs comprise the companies in the Arrium group which went into voluntary administration on 7 April 2016. From 12 April 2016 to 4 November 2016, the first plaintiffs were also the joint and several administrators of the second plaintiffs.

3    EPIC is one of approximately 4,000 general creditors of the second plaintiffs and, in this proceeding, was appointed to represent the interests of those creditors, other than the lenders and noteholders (“the Financiers”) to the Arrium group under various unsecured syndicated facilities, bilateral facilities and note agreements. MML was joined as a defendant to this proceeding to represent the interests of the Financiers.

4    The background to the proceeding is that at the time the second plaintiffs went into administration, the broader group of Arrium companies also included a number of indirect subsidiary entities that were not placed into external administration. Those companies (“the Moly-Cop entities”) carried on a mining consumables business known as Moly-Cop. Some of the Moly-Cop entities had guaranteed the financier debt by way of “whole monies” guarantees under two deeds. On 4 November 2016, the first plaintiffs (then as administrators) executed a contract for the sale of a number of the Moly-Cop entities for US$1.23 billion. Upon completion of the sale on 3 January 2017, they distributed US$1.024 billion of the net transaction proceeds (approximately A$1.4 billion) to the Financiers with respect to the group guarantees.

5    The Financiers have lodged proofs of debt for the full amount owing to them, without making a deduction for the amounts received by them from the sale of the guarantor Moly-Cop entities. On 18 September 2017, the plaintiffs commenced this proceeding by Originating Process for an order pursuant to s 90-15 of the Insolvency Practice Schedule (Corporations) (“IPS”) in Schedule 2 to the Corporations Act 2001 (Cth) (“the Corporations Act”), or alternatively a declaration, that the first plaintiffs are justified in admitting the Financiers’ proofs of debt without deducting the value of any partial repayment made to the Financiers under the group guarantees. Initially, the plaintiffs sought that order on the basis of the rule against double proofs in insolvency but MML, by its Concise Statement, put into issue whether the first plaintiffs are contractually bound to admit their proofs of debt in full without deducting the proceeds from the Moly-Cop transaction. The following preliminary question was listed for hearing:

On a proper construction of the [contractual documents]:

(i)     are each of the Financiers entitled to prove under the Arrium Distribution Deed of Company Arrangement dated 4 November 2016 (DOCA) for the amount (if any) of its Arrium Group Claim (as defined in the DOCA), without deducting the amount of its share of the Moly-Cop Proceeds or any part thereof?; and

(ii)     are the First Plaintiffs justified in admitting the Financiers to proof accordingly?

6    The Court answered “yes” to both questions and, in light of the Court’s answers, the plaintiffs do not seek any further relief in the proceeding and, accordingly, submit that the proceeding should now be dismissed.

7    EPIC filed its first interlocutory process on the day before the hearing of the preliminary question (which took place on 8 November 2017). By its interlocutory process, EPIC seeks an order pursuant to s 90-5, or alternatively s 90-10, of the IPS that the Court inquire into the external administration of the Arrium group in relation to matters set out in an affidavit of Richard Lyne sworn 7 November 2017. Mr Lyne is a special counsel in the employ of the solicitors for EPIC. In his affidavit he stated that the affidavit “has been prepared to identify and establish the basis upon which EPIC asserts that the principle relief claimed, in the proceeding, should not be granted and that the relief sought by EPIC [in its representative capacity] is appropriate”. The affidavit detailed various matters relating to the first plaintiffs’ conduct of the administration of the Arrium companies, including the entry into the contractual documents which were the subject of the preliminary question.

8    The hearing on 8 November 2017 solely related to the construction question listed for determination. A week after the delivery of judgment on the preliminary question, EPIC filed an amended interlocutory process supported by a statement of claim. The statement of claim broadly traverses the same factual matters detailed in Mr Lyne’s affidavit and alleges that the first plaintiffs have breached various duties owed as officers under ss 180, 181 and 182 of the Corporations Act. By the amended interlocutory process, EPIC seeks in addition to an order pursuant to s 90-5 and/or s 90-10 of the IPS that the Court inquire into the external administration of the Arrium group:

(a)    an order pursuant to ss 447A and 447B(2) of the Corporations Act that special purpose administrators be appointed as deed administrators to carry out the functions specified in an annexure to the amended interlocutory process (which details 28 functions);

(b)    an order pursuant to s 90-15 of the IPS that the first plaintiffs personally compensate each of the creditors of the Arrium group represented by EPIC in the proceeding for any loss sustained by reason of their [alleged] breaches of duty;

(c)    in the alternative, an order pursuant to s 90-15 of the IPS that the first plaintiffs personally compensate each of the companies in the Arrium group for any loss sustained because of their [alleged] breaches of duty.

9    In applying for the relief sought by interlocutory process in this proceeding, EPIC relies on r 2.2 of the Federal Court (Corporations) Rules 2000 (Cth) (“the Rules”). Rule 2.2 relevantly provides:

(1)    Unless these Rules otherwise provide, a person must make an application required or permitted by the Corporations Act to be made to the Court:

(a)    if the application is not made in a proceeding already commenced in the Court – by filing an originating process; and

(b)    in any other case, and whether interlocutory relief or final relief is claimed – by filing an interlocutory process.

(2)    Unless the Court otherwise directs, a person may make an application to the Court in relation to a proceeding in respect of which final relief has been granted by filing an interlocutory process in that proceeding.

10    The plaintiffs contend that EPIC’s interlocutory processes should be dismissed either because the relief sought cannot be made in this proceeding under r 2.2, or it is not appropriate for such relief to be sought by EPIC by way of interlocutory process in this proceeding. Succinctly stated, the plaintiffs argued that the relief sought by EPIC by interlocutory process is not ancillary to the plaintiffs’ action but “at the heart of it” is a new action and should have been brought by new proceedings. The plaintiffs also relied on the fact that if EPIC now made its application under s 90-5 and s 90-10 of the IPS, r 4.2 the Rules would require the application to be made by originating process. Rule 4.2 came into effect on 6 December 2017, about three months after s 90-5 and s 90-10 of the IPS became operative and one month after EPIC filed its interlocutory process.

11    Rule 4.2 provides as follows:

Order or inquiry in relation to registered liquidator or external administration of a company.

An application to the Court:

(a)    under section 45-1 of the Insolvency Practice Schedule (Corporations) for an order in relation to a registered liquidator; or

(b)    under section 90-10 of that Schedule for an inquiry into the external administration of a company; or

(c)    under section 90-20 of that Schedule for an order in relation to the external administration of a company;

must be made:

(d)    in the case of a winding up by the Court—by an interlocutory process seeking the inquiry or order; or

(e)    in any other case—by an originating process seeking the inquiry or order.

Note:    An application for an order or inquiry in relation to the external administration of a company ordered to be wound up by a Court is normally made to the Court that made the winding up order.

12    The plaintiffs submitted that there should be procedural consistency with the Rules by requiring EPIC to makes it application by originating process. In further support, the plaintiffs referred to r 7.11 of the Rules as in force at the time that EPIC filed its interlocutory application.

13    Rule 7.11 provided that:

Inquiry into conduct of liquidator (Corporations Act) s 536(1) and (2)

(1)    A complaint made to the Court under paragraph 536(1)(b) of the Corporations Act must be made:

(a)    in the case of a winding up by the Court – by an interlocutory process seeking an inquiry; and

(b)    in the case of a voluntary winding up – by an originating process seeking an inquiry.

14    It was argued that the inquiry that EPIC seeks into the conduct of the plaintiffs as administrators is analogous to an inquiry in the case of a voluntary winding up and the “temporal ‘lacuna’ between the introduction of the IPS and the revised Rules should not be allowed to create an aberrant result”.

15    MML advanced the further contentions that:

(a)    EPIC’s application for orders pursuant to s 90-5, or alternatively s 90-10, of the IPS is misconceived because the Court lacks power to order an inquiry into the administration (as opposed to the deed administration) of the Arrium companies;

(b)    the phrase “made in a proceeding already commenced in the Court” in r 2.2 connotes and requires a substantive connection between the relief sought in the application, and the subject matter and scope of the proceeding that has already been commenced and, it was argued, no such connection exists between the directions sought by the first plaintiffs and the orders sought by EPIC by its first interlocutory process;

(c)    if the application amounts to a cross-claim, it was filed out of time and leave to file ought to be refused as the subject matter of the cross-claim has no, or no sufficient, connection with the primary relief sought by the plaintiffs.

16    EPIC contended, on the other hand, that its procedural approach was in accordance with r 2.2 of the Rules and also that it was appropriate that its claims be made in the existing proceeding. The arguments, in summary, were that:

(a)    the parties are common as the claims made by EPIC are against the first plaintiffs;

(b)    the claims have a factual and legal nexus with the subject matter of the existing proceeding, namely the conduct of the first plaintiffs in entering into the contracts which were the subject of the preliminary question;

(c)    the issues raised by the judicial advice sought by the plaintiffs are broader than just the question of construction;

(d)    there is a considerable volume of material already filed in this proceeding by the plaintiffs which is relevant to EPIC’s application, but which EPIC would be unable to use in a separate proceeding without the leave of the Court;

(e)    EPIC should not be put to the expense, inconvenience and waste involved in bringing a separate action to make the same claims which are already before the Court, taking into account also that it would have to make an application for Harman relief.

17    Under the Rules as they were at the time EPIC filed its application by interlocutory process, there was no rule, as there is now, requiring that application to be made by way of originating process. Further, there is authority to support the proposition that r 2.2 simply prescribes the process to be used in bringing an application in an existing proceeding, not the kinds of applications that can be made in an existing proceeding: see Phillips v Walsh (1990) 20 NSWLR 206 which concerned a cognate rule in Part 19 r 1 of the Supreme Court Rules 1970 (NSW). However, Phillips v Walsh is also authority that the use of the interlocutory process in an existing proceeding is inappropriate “where substantial matters are involved beyond the ambit of the proceedings as originally constituted, or where, in the interests of justice, disposition of the matter on summary application is inappropriate”. In Re Jay-O-Bees; Rosseau v Jay-O-Bees [2004] NSWSC 818 Campbell J at [63]–[72] referred to Phillips v Walsh and other cases as authority that relief which is sought in an interlocutory application must always be relief which is sought for the purpose of advancing claims which either a plaintiff or a defendant makes in the principal proceedings. To like effect, in Adplan Pty Ltd v Gerblich [2011] SASC 118 Judge Lunn, a Master of the Supreme Court of South Australia, held that an interlocutory process was not “interlocutory” to the relief sought in the originating process and thus could not be filed under r 2.2(1)(b) unless the application was “adjectival or ancillary to the determination of the originating process”.

18    Applying these principles, I am not persuaded that EPIC’s procedural approach was in accordance with r 2.2 of the Rules. In this case, at the time of the filing of the application, the only controversy for adjudication in the originating process was the contract construction question. EPIC’s interlocutory process had no connection with, and had no bearing upon, the determination of that question but, rather, by that interlocutory process EPIC advanced claims against the plaintiffs which did not depend on the outcome of the preliminary question and which were outside the scope of the judicial advice sought by the first plaintiffs in the proceeding. The application, at the time of filing, was not “interlocutory” in the sense of seeking relief ancillary to the relief sought by the plaintiffs in this proceeding but rather EPIC, by the process filed, is seeking substantive relief against the first plaintiffs on claims that involve factual and legal matters that do not arise out of the judicial advice sought by the first plaintiffs in the proceeding.

19    But even if the use of the interlocutory process is permitted by r 2.2 of the Rules, I am of the view that the interlocutory process was not appropriate for the application which EPIC has made in this proceeding.

20    First, the nature and subject matter of the claim and lack of interrelationship with these proceedings make it more appropriate for the application to be brought in a separate proceeding.

21    Secondly, where (as in this case at the time of filing the first interlocutory application) there is no express rule prescribing which type of application should be used, the factual and legal nexus between the existing proceeding and the application and the length and complexity of the application are matters which a party is directed by the Federal Court Commercial and Corporations Practice Note to consider in deciding whether to bring an application by filing an interlocutory process, rather than to commence a new proceeding. In the present case both those considerations should have indicated that it was not appropriate to file an interlocutory process (rather than an originating process) in this proceeding. As stated, EPIC’s initial application had nothing to do with the preliminary question and, having regard to the nature of the claims made, EPIC’s claims will undoubtedly initiate long and complex litigation which would, or should, have been apparent at the time EPIC filed its first interlocutory process.

22    Thirdly, EPIC’s claims cannot be conveniently determined in this proceeding, which is another matter that would, or should, have been apparent at the time EPIC filed its first interlocutory process. The inappropriateness of the interlocutory process procedure has been magnified by the amended interlocutory process filed after judgment was delivered on the preliminary question, which, in the result, has finally disposed of the relief that the plaintiffs seek in this proceeding. The additional claims, like the original claims, raise substantive claims against the plaintiffs that do not depend on the judicial advice sought by the plaintiffs.

23    I should add for the sake of completeness that I would not hold that EPIC’s application should be brought in a separate proceeding simply because the Rules that have since come into force prescribe that such an application should be brought by originating process. Nor do I think that the plaintiffs’ “aberrant result” argument can have any real force if (contrary to my conclusion) the use of the interlocutory process was permitted by r 2.2 of the Rules. However, for the reasons given, I am of the view that the interlocutory process was not appropriate for the application which EPIC has made in this proceeding.

24    I accept that this ruling does mean that EPIC must incur wasted expense, time and inconvenience in commencing a new proceeding. I also accept that EPIC may need to apply to be released from its implied undertaking not to use documents and affidavits filed by the plaintiffs in this proceeding other than for the purposes of this proceeding. However, neither of those matters dictates that EPIC should be allowed to pursue its claims in this proceeding, where, as I have concluded, the interlocutory process could not be filed relying on r 2.2 of the Rules, either because the application was not “interlocutory” or because the interlocutory process was not appropriate in this proceeding having regard to the nature of the application brought by EPIC.

25    There are two final matters I should deal with. One is MML’s contention that EPIC’s application for orders pursuant to s 90-5 and/or s 90-10 of the IPS is misconceived because the Court lacks power to order an inquiry into the administration (as opposed to the deed administration) of the Arrium companies. Given that this contention was not the subject of oral argument and only briefly dealt with in the written submissions, it is not appropriate, nor is it necessary, to reach any view on the correctness of that contention. The other is a contention, also advanced by MML, that the Court should infer that EPIC’s true purpose in using the interlocutory process to bring its application in this proceeding was to obtain “the same favourable position as to legal expenses which EPIC obtained from its … contradictor role” in in this proceeding. There is no simply warrant at all for drawing such an inference and I do not impute any collateral purpose on EPIC’s behalf in using the interlocutory process.

26    For these reasons, EPIC’s interlocutory process filed 7 November 2017 and its amended interlocutory process filed 22 December 2017 should be dismissed without adjudication on the merits.

Associate:

Dated:    18 June 2018

SCHEDULE