Federal Court of Australia

Hamilton, in the matter of Aquagenics Pty Ltd (in liq) v Tasmanian Water & Sewerage Corporation Pty Ltd [2022] FCA 530

ORDERS

THE COURT ORDERS THAT:

1.    The proceeding be adjourned to a date to be fixed.

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

REASONS FOR JUDGMENT

O’CALLAGHAN J:

Introduction

1    This application is brought by the plaintiffs’ originating process filed 14 September 2021 under s 90-15 of Schedule 2 to the Corporations Act 2001 (Cth) (the Act) (the Insolvency Practice Schedule (Corporations) (Schedule)), s 447A of the Act and/or the inherent jurisdiction of the court. The first plaintiff, Mr Barry Hamilton (the liquidator or Mr Hamilton), is the sole liquidator of the second plaintiff, Aquagenics Pty Ltd (Aquagenics).

2    The application concerns the recovery and distribution of:

(a)    a judgment sum of $1,695,082 and an award of pre-judgment interest of $90,946 awarded to Aquagenics by order of this court on 26 June 2017 in proceeding TAD 57 of 2015; and

(b)    party/party costs of $125,000 and post-judgment interest of $89,179.06 which was, by agreement between the parties, quantified and paid to Aquagenics in the same proceeding,

collectively, the Disputed Pool.

3    In the proposed form of order handed up during the hearing, the plaintiffs seek orders and directions, among others, that the liquidator is justified and acting reasonably in causing Aquagenics to:

(a)    apportion the awards of interest:

(i)    73.81% as to the defendant, Tasmanian Water & Sewerage Corporation Pty Ltd (TasWater), pursuant to s 562 of the Act; and

(ii)    26.19% as to Aquagenics;

(b)    recover from TasWater, including commencing proceedings against TasWater within 28 days (or such other time as agreed between the liquidator and TasWater) for the recovery of the amounts of:

(i)    $443,901.86 from the judgment sum; and

(ii)    $23,816.61 from the pre-judgment interest sum;

less a deduction by way of set-off of the amounts of:

(iii)    $65,825.17 of the post-judgment interest sum; and

(iv)    $125,000, being the entirety of the costs award.

4    The plaintiffs also seek an order pursuant to s 90-15 of the Schedule, or further and alternatively s 447A of the Act, that the deed of company arrangement between Aquagenics, Mr William Day and Mr Alan Hayes (DOCA) be reinstated and that any funds retained and recovered by Aquagenics are to form part of the “Deed Fund”.

5    The plaintiffs also seek an order pursuant to s 90-15 of the Schedule, or further and alternatively s 447A of the Act, that Mr Hayes cease to be the deed administrator of Aquagenics and that Mr Hamilton be appointed as the deed administrator of Aquagenics.

6    At the hearing, all parties agreed that I should decide three preliminary questions (which relate to the fundamental matters in dispute), and having done so, relist the matter for further hearing about the precise form of orders, including mathematical calculations of one sort or another, whether the DOCA should be reinstated (and if so, what consequential amendments to it may be required) and costs, if the parties cannot otherwise reach agreement. The three preliminary questions are:

(1)    Did TasWater validly allocate the security realisation proceeds firstly in satisfaction of that part of its claim for which Aquagenics was uninsured?

(2)    If no, how should the insurance proceeds be apportioned across TasWater’s claim?

(3)    As to the funds remaining with Aquagenics, what if any further advantage should be given to TasWater pursuant to s 562 or s 564 of the Act?

The facts

7    The relevant facts were deposed to by the liquidator (who was appointed as the sole liquidator of Aquagenics by an order of the court on 19 May 2015) in his affidavit affirmed on 6 September 2021. They are uncontroversial.

8    In February 2006, Aquagenics and Break O’Day Council entered into a contract titled “Formal Instrument of Agreement for Design and Construct” (the contract). The contract was, among other things, for Aquagenics to design and construct a wastewater treatment plant at St Helens in Tasmania for the Council.

9    In July 2009, the tasks and functions of water treatment and management for the Council were assumed by Tasmanian Water and Sewerage Corporation (Northern Region) Pty Ltd (known as Ben Lomond Water). In July 2013, Ben Lomond Water merged with two other regional water entities to create TasWater pursuant to the Water and Sewerage Corporation Act 2012 (Tas). Since that time, TasWater has held all of the rights and entitlements originally granted to Break O’Day Council under the contract.

10    In June 2007, a dispute arose between TasWater and Aquagenics in relation to the design and construction of the St Helens wastewater treatment plant. In 2008, Aquagenics commenced a proceeding in the Supreme Court of Tasmania alleging, among other things, breach of the contract and seeking the return of security from TasWater in the form of:

(1)    a bank guarantee in the amount of $325,785; and

(2)    a retention of 10% from each progress payment, totalling $202,669.60.

11    On TasWater’s application, on 2 October 2009 Blow J (as his Honour then was) stayed that proceeding pursuant to s 53 of the Commercial Arbitration Act 1986 (Tas) so that the matter could be referred to arbitration, in accordance with an arbitration clause in the contract. See Aquagenics Pty Ltd v Break O’Day Council (No 2) [2009] TASSC 89.

12    The dispute between TasWater and Aquagenics was duly referred to arbitration before Mr Keyran Pitt QC. On 3 May 2013, Mr Pitt found that Aquagenics had breached its design and construction obligations to TasWater under the contract. The final arbitration award (the award) was:

13    Following receipt of a statutory demand from TasWater, Aquagenics appointed Mr Alan Hayes as voluntary administrator pursuant to s 436A of the Act on 5 June 2013. At a meeting convened pursuant to s 439A of the Act, Aquagenics’ creditors resolved that it enter into the DOCA.

14    The DOCA was executed on 25 September 2013, and had the effect of extinguishing creditors’ claims against Aquagenics upon their claims being paid pursuant to the terms of the DOCA.

15    Mr Hayes proceeded to administer the DOCA. His realisations were insufficient to make a distribution to creditors according to its terms. By early 2015, all relevant parties believed that the DOCA had been fully effectuated and all creditors’ claims, save for TasWater’s claim against Aquagenics’ insurer, had been extinguished.

16    TasWater was dissatisfied with Mr Hayes’ investigation of Aquagenics’ entitlement to make claims against a professional indemnity policy of insurance that it held in respect of the award, and applied to this court for relief pursuant to ss 445D, 447A and 447E of the Act.

17    On 19 May 2015, Middleton J made orders which:

(1)    terminated the DOCA pursuant to s 445D(1)(g) of the Act;

(2)    notwithstanding the effect of the DOCA, provided that the claims of TasWater against Aquagenics not be extinguished;

(3)    provided that TasWater pay Mr Hayes’ remuneration and expenses as deed administrator of Aquagenics relating to insurance claims for the benefit of TasWater, in such amount as agreed between TasWater and Mr Hayes or as approved by the court pursuant to s 449E(1A)(c) of the Act, excluding the legal costs of that particular application; and

(4)    appointed Mr Hamilton as liquidator.

See Tasmanian Water and Sewerage Corporation Pty Ltd v Hayes [2015] FCA 506.

18    A notation to those orders provided that:

The Deed of Company Arrangement between [Mr Hayes] and [Aquagenics] dated 25 September 2013 has been fully effectuated, but [Aquagenics] has potential claims against insurers, the sole beneficiary of which, under s 562 of the Corporations Act 2001 (the Act), is [TasWater].

19    Mr Hamilton deposed that, at that point, he understood that his role as liquidator was confined to investigating Aquagenics’ ability to make a claim on a professional indemnity policy of insurance with respect to the damage for which it was liable to TasWater under the award, and to prosecute that claim.

20    In June 2015, Mr Hamilton and TasWater entered into a funding agreement whereby TasWater agreed to indemnify him for his costs, expenses and disbursements (including legal fees) for pursuing Aquagenics’ claim against CFC Underwriting Ltd (a division of Lloyds of London) (the insurer).

21    Mr Hamilton then commenced a proceeding on behalf of Aquagenics in this court seeking, among other things, an indemnity pursuant to the contract of insurance between Aquagenics and the insurer for the period 18 April 2007 to 18 April 2008 (the insurance contract) in the sum of $1,091,726.19 (the amount of the award, after deducting the bank guarantee and retention money), and interest pursuant to s 57 of the Insurance Contracts Act 1984 (Cth).

22    At trial, Aquagenics claimed that individual “parts” of the award which fell within the indemnity under the insurance contract amounted to $1,695,082, being:

(a)    $1,127,082 for items relating to “design” defects rather than “construction” defects (the latter which was said to be specifically excluded from the indemnity) – this amount came to 84% of the overall damages of $1,346,111.57 identified at [12] above; and

(b)    $568,000 as a proportionate percentage of ancillary awards which spanned both design and construction defects – this amount was calculated by taking 84% of total ancillary awards ($676,145), comprising the interest, arbitrator’s fees and legal costs and disbursements that were incurred as part of the arbitration identified at [12] above, as well as additional fees that Mr Pitt accepted that TasWater paid to the superintendent of the works as a consequence of Aquagenics’ breach.

23    The proceeding was heard in April 2017. Justice Davies delivered reasons for judgment on 5 June 2017. Her Honour awarded the amount claimed ($1,695,082) plus interest from 26 February 2016 pursuant to s 57 of the Insurance Contracts Act. See Aquagenics Pty Ltd (in liq) v Certain Underwriters at Lloyd’s Subscribing to Contract Number NCP106108663 [2017] FCA 634.

24    Following further submissions, Davies J ordered that judgment for Aquagenics (inclusive of interest pursuant to s 57 of the Insurance Contracts Act) be entered in the sum of $1,786,028, representing the amount claimed of $1,695,082 and an interest component of $90,946. Her Honour also ordered that the insurer pay Aquagenics’ costs on a party/party basis.

25    The insurer appealed. On 18 July 2017, the orders made by Davies J were stayed until such time as the appeal was heard and determined.

26    The appeal was unsuccessful. See Certain Underwriters at Lloyd’s Subscribing to Contract Number NCP106108663 v Aquagenics Pty Ltd (in liq) [2018] FCAFC 9; (2018) 352 ALR 131. The insurer subsequently paid $1,786,028 to the liquidator.

27    On 1 March 2018, the liquidator paid $1,786,028 to TasWater. Mr Hamilton deposed that when he made the payment, he did so believing that he was obliged to do so under s 562 of the Act.

28    The liquidator subsequently received $89,179.06 and $125,000 from the insurer by way of post-judgment interest and costs, respectively. He retains those sums.

29    Mr Hamilton deposed, and it was not disputed, that Aquagenics’ total party/party costs of the proceedings were $156,860.25. TasWater paid for these costs pursuant to the funding agreement.

30    Less some remuneration, costs and expenses that Mr Hamilton has drawn, he presently holds $151,417.89.

31    On 7 July 2020, Mr Hamilton sent a letter to TasWater. In that letter, he stated that he believed that the amount which was paid to TasWater on 1 March 2018 ($1,786,028) exceeded the amount to which it was entitled. He invited TasWater to consider his claim and respond accordingly.

32    On 15 December 2020, Mr Hamilton instructed his solicitors, Dobson Mitchell Allport, to send a letter to TasWater. That letter stated, among other things, that:

(1)    when Mr Hamilton paid TasWater $1,786,028 on 1 March 2018, he did not discount amounts which TasWater had already received on account of the bank guarantee ($325,785) and retention from the progress payments ($202,669.60), totalling $528,454.60;

(2)    in the circumstances, it would be fair and reasonable to apportion the bank guarantee and retention money to the claim the subject of the indemnity awarded by Davies J, being 84% representing items relating to “design” defects, such that $443,901.86 should be deducted from the amount paid to TasWater;

(3)    section 562 of the Act did not appear to entitle TasWater to the amount of interest which Mr Hamilton received from the insurer, in the amount of $90,946, pursuant to the 18 July 2017 orders of Davies J; and

(4)    taking into account a further costs order to which Aquagenics was entitled in the amount of $32,000 for its successful stay application, TasWater was thus overpaid $566,847.86 and Aquagenics was entitled to a refund in that amount.

TasWater’s claim

33    TasWater has applied under s 564 of the Act for an order that, being a creditor which provided an indemnity within the meaning of s 564, it “be given an advantage or priority over all other unsecured creditors from funds received by [Aquagenics] from, or in connection with, Federal Court proceedings numbered TAD 57 of 2015”, being the proceeding determined by Davies J. See [20]–[30] above. TasWater submitted that it was entitled to the entire Disputed Pool on the basis of its entitlement under ss 564 and 562, although it did not make any formal application under s 562. That provision was only raised in written and oral submissions.

34    If the court gives the directions sought by Mr Hamilton about the distribution of pre- and post-judgment interest, Mr Hamilton has deposed that Aquagenics will commence a proceeding for the recovery of the overpayment TasWater received ($467,718.47). That amount will be reduced by any valid counterclaim which TasWater has, which will include:

(a)    amounts of post-judgment interest to which it is entitled; and

(b)    any amounts awarded to it pursuant to s 564 of the Act.

35    However, TasWater agrees that such litigation will not be necessary, and that the parties will in all likelihood be able to agree on the form of orders after the determination of the questions of principle referred to at [6] above.

Mr Hayes’ claim

36    At the case management hearing on 8 October 2021, I made orders that Mr Hayes and Mr William Day (the director of Aquagenics) be given leave to be heard in this proceeding as interested persons without becoming a party to the proceeding, pursuant to r 2.13(1) of the Federal Court (Corporations) Rules 2000 (Cth).

37    Mr Hayes, by interlocutory process dated 15 November 2021, sought orders under ss 449E(1A)(c) and 1581(1) of the Act and r 9.2 of the Federal Court (Corporations) Rules 2000 (Cth) for the determination of his remuneration, and ancillary orders.

38    On 25 November 2021, Registrar Stone ordered by consent that TasWater pay Mr Hayes $23,730.50 plus GST for his remuneration and $433 plus GST for his expenses, which were sums agreed pursuant to the 19 May 2015 orders of Middleton J (see [17(3)] above). TasWater paid these amounts shortly after the Registrar made her order.

39    On 16 December 2021, Registrar Stone made a further order that “[t]he remuneration for work done by Alan Hayes as Deed Administrator of [Aquagenics] in the period 1 February 2014 to 19 May 2015 for work defined as ‘General Work’ in the affidavit of Alan John Hayes sworn on 22 October 2021 be determined in the sum of $54,107 plus GST”.

40    Mr Hayes says he has not been paid remuneration and expenses as deed administrator (with the unpaid sums totalling $110,128.95 plus GST, including the $54,107 amount which is the subject of Registrar Stone’s December orders), and that to the extent that TasWater seeks any payment in addition to the funding payments it made to Aquagenics, he is afforded priority over TasWater in respect of his remuneration and expenses by virtue of the priority payments provision contained in s 556(1) of the Act.

41    It was agreed that the making of any order in relation to Mr Hayes’ claim should also await the determination of the three questions of principle I have been asked to decide.

Mr Day’s position

42    Mr Day filed no documents in the proceeding. Mr P Zeeman of counsel appeared for Mr Day at the hearing and did not “have any additional submissions other than to support the submissions by Mr [C] Groves and Mr [J] Hamilton” (who appeared for the plaintiffs and Mr Hayes, respectively).

The first and second questions:

Did TasWater validly allocate the security realisation proceeds firstly in satisfaction of that part of its claim for which Aquagenics was uninsured?

If no, how should the insurance proceeds be apportioned across TasWater’s claim?

43    The first question is easily resolved. It did not.

44    The plaintiffs submitted that:

(1)    The bank guarantee and the retention monies were securities held by TasWater in respect of the entirety of Aquagenics’ liabilities under the contract. The effect of TasWater realising those securities was, as set out in Mr Pitt’s arbitration award, to reduce the entirety of the amount otherwise payable by Aquagenics to TasWater. That is, the bank guarantee and retention monies were deducted pro rata from Mr Pitt’s damages award (across both “design” and “construction” defects), interest, fees and costs.

(2)    The amount which Davies J ordered the insurers to pay to Aquagenics made no such deduction. Aquagenics was entitled to, and obtained, indemnity for $1,127,082 in design defects (being 84% of the overall damages award) and $568,000 as a proportionate percentage of the ancillary awards. Justice Davies expressly affirmed the 84% global apportionment of those “general items” at [67] of her Honour’s reasons.

(3)    It follows that $443,901.86, representing 84% of the bank guarantee and retention amounts, has been incorrectly paid to TasWater twice: first in it realising the bank guarantee and the retention amounts, and second when payment of the insurance proceeds was made by the liquidator on 1 March 2018.

45    TasWater did not contend that it is entitled to “double dip”. It contended, however, that it has an “apportionment” or “election” point, as follows:

The arbitrator, Mr Pitt, determined that TasWater could have recourse to the Bank Guarantee and Retention, which were each held as security under the design and construct contract with the Company (totalling $528,454.60), in partial satisfaction of the Company’s liability to TasWater.

…

When TasWater received the securities pursuant to the Award of the arbitrator, it was, in the circumstances of the arbitrator’s award matter, entitled to apply the total sum of those securities in whatever way it saw fit against the Company’s liability under the Award. This is the position consistent with Simson v Ingham (1823) 2 B & C 65 at 107 [citing also Batrouney v Forster [2015] VSC 230; SNL Group Pty Ltd v CMA Corporation Ltd [2011] NSWSC 464; Commonwealth Bank of Australia v Davies [2003] QSC 470] that:

a.    Where a debtor owes a creditor multiple debts and makes a payment in part satisfaction of those debts, the debtor may give a direction to the creditor as to how that payment is to be applied against the debts, however, if the debtor fails at the time of making the payment to inform the creditor of an allocation of that payment, the creditor may make the allocation.

b.    Further, where an allocation falls to be made by the creditor, the creditor is free to change that allocation at any time up until the point that the allocation is confirmed to the debtor.

TasWater was therefore free to elect, and has so elected, to apply the securities first to discharge the Company’s entire liability under the Award in respect of workmanship defects (totalling $219,029.57). The balance of the securities ($309,425.03) was then applied against the Company’s liability in respect of design defects (being the Company’s insured liability).

46    I mean no disrespect to Mr B Cassidy, who appeared for TasWater at the hearing, but that submission did not survive exposure to sunlight.

47    The following exchanges took place:

MR CASSIDY: So the liquidator and all other parties say that we shouldn’t be double paid or we shouldn’t get [the] double advantage for the securities. We agree with that. The defendants agree on that point. And the point of that being, your Honour, is that at some point the defendant had recourse to both the retention and the bank guaranteed securities and used those in part-payments of the damages that it was ultimately owed.

…

HIS HONOUR: Where’s the evidence of the allocation whenever it occurred?

MR CASSIDY: What you have, your Honour, is the submissions that have been made on behalf of TasWater in this proceeding to say how they’ve allocated …

HIS HONOUR: When you say the election is made in the submission.

MR CASSIDY: Yes. On behalf of TasWater, they – through counsel they have, in this proceeding, determined how to allocate that debt.

48    This was the first time that the contention had been made that the election to allocate the insurance payment in the manner claimed was one effected by the terms of TasWater’s written submission filed in this proceeding.

49    I do not accept that submission.

50    First, the cases dealing with legal principles concerning “appropriation” cited by TasWater (Simson v Ingham (1823) 107 ER 307; (1823) 2 B & C 65; Batrouney v Forster [2015] VSC 230; SNL Group Pty Ltd v CMA Corporation Ltd [2011] NSWSC 464; Commonwealth Bank of Australia v Davies [2003] QSC 470) are not to the point. Here, the retention monies and the amount recoverable pursuant to the bank guarantee were deducted from the total damages awarded by the arbitrator. The award thus created a new right of action. Questions of later “appropriation” of those sums thus do not arise.

51    Secondly, TasWater’s own (informal) proof of debt, filed with Mr Hayes when he was the administrator, deducted the retention monies and the amount recoverable pursuant to the bank guarantee from the total sum claimed in exactly the way that the arbitrator did. So if there had been an election, that was it. The demand presumed that the retention monies and the amount recoverable pursuant to the bank guarantee had been recovered.

52    As to interest, the plaintiffs’ submission was that the amount of pre-judgment interest paid by Aquagenics to TasWater on 1 March 2018 also included a payment representing interest on 84% of the bank guarantee and retention monies which should not have been paid, and accordingly should be returned to Aquagenics. The plaintiffs similarly submitted that the same proportionate deduction should be made from the post-judgment interest which has yet to be paid by Aquagenics to TasWater.

53    As I have formed the view that the amount of the bank guarantee and retention monies are properly to be deducted from the amount paid by Aquagenics to TasWater, I also accept the plaintiffs’ submissions regarding interest. That is, because 84% of the bank guarantee and the retention monies should have been deducted from the 1 March 2018 payment to TasWater, the amount of pre- and post-judgment interest should be apportioned relative to the percentage which the overpayment (84% of the bank guarantee and retention monies) bears to the overall indemnity.

54    Because the answer to the first question is no, the answer to the second question is:

(1)    the insurance proceeds should be apportioned 84% to TasWater and 16% to Aquagenics; and

(2)    both pre- and post-judgment interest should be apportioned 73.81% to TasWater and 26.19% to Aquagenics.

55    Costs were awarded to TasWater on a party/party basis and were agreed by the parties at $125,000 (including GST and disbursements). That sum remains in the hands of the liquidator. There is no dispute, and I agree, that the whole of that sum should be paid to TasWater, in accordance with s 562 of the Act.

The third question: As to the funds remaining with Aquagenics, what if any further advantage should be given to TasWater pursuant to s 562 or s 564 of the Act?

56    Section 562 of the Act provides:

Application of proceeds of contracts of insurance

(1)     Where a company is, under a contract of insurance (not being a contract of reinsurance) entered into before the relevant date, insured against liability to third parties, then, if such a liability is incurred by the company (whether before or after the relevant date) and an amount in respect of that liability has been or is received by the company or the liquidator from the insurer, the amount must, after deducting any expenses of or incidental to getting in that amount, be paid by the liquidator to the third party in respect of whom the liability was incurred to the extent necessary to discharge that liability, or any part of that liability remaining undischarged, in priority to all payments in respect of the debts mentioned in section 556.

(2)     If the liability of the insurer to the company is less than the liability of the company to the third party, subsection (1) does not limit the rights of the third party in respect of the balance.

(3)     This section has effect notwithstanding any agreement to the contrary.

57    Here, TasWater provided a complete indemnity to the liquidator for his cost and expenses, including remuneration, in respect of pursuing the claim against the insurer. The costs of getting in the sum from the insurer were paid directly by TasWater pursuant to the funding agreement.

58    Unsurprisingly, the actual costs and expenses incurred by TasWater pursuant to the funding agreement were substantially greater than the party/party costs. The costs and expenses paid directly by TasWater and not accounted for in the party/party costs were said to be:

(a)    $3,504.04, being the balance of the legal costs paid to Mr McElwaine SC (as his Honour then was), plus disbursements of $19,305;

(b)    $41,089.42, being fees paid to Simmonds & Bristow for Mr David Bristow’s engagement as an expert in the proceeding before Davies J; and

(c)    $33,788.81, being the liquidator’s remuneration.

59    TasWater also said that it paid $27,056.15 to Mr Hayes for his costs of progressing the claim against the insurer while he was deed administrator.

60    TasWater submitted that it is entitled to recover those costs pursuant to s 562 of the Act, because the section “provides that the proper expenses of and incidental to getting in an insurance sum will be paid in priority to any distribution of that sum”.

61    I do not agree. As Mr Groves submitted, s 562 relevantly concerns the liquidator’s obligation to deduct his or her “expenses of or incidental to getting in” an “amount in respect of” a liability in respect of which the company was insured – not amounts incurred and paid by a litigation funder.

62    Such amounts are instead the province of s 564 of the Act, which provides:

Power of Court to make orders in favour of certain creditors    

Where in any winding up:

(a)    property has been recovered under an indemnity for costs of litigation given by certain creditors, or has been protected or preserved by the payment of money or the giving of indemnity by creditors; or

(b)    expenses in relation to which a creditor has indemnified a liquidator have been recovered;

the Court may make such orders, as it deems just with respect to the distribution of that property and the amount of those expenses so recovered with a view to giving those creditors an advantage over others in consideration of the risk assumed by them.

63    TasWater has applied for an order under s 564 of the Act, seeking an advantage over other creditors as to those funds to which it is not immediately entitled.

64    As Campbell J explained in Jarbin Pty Ltd v Clutha Ltd (in liq) [2004] NSWSC 28; (2004) 208 ALR 242, 259–260 [68]:

The exercise of the power under s 564 needs to be conducted bearing in mind the statutory scheme of which s 564 is part. Under that statutory scheme, except to the extent that the Corporations Law provides otherwise, all debts proved in the winding up rank equally, and if the property of the company is insufficient to meet them in full, they are paid proportionately (s 555 Corporations Law). Certain classes of payment are given priority under s 556(1) and, pursuant to s 559, debts of any of the classes created by s 556(1) rank equally between themselves and are paid in full, unless the property of the company is insufficient to meet them, in which case they are paid proportionately. Section 564 operates as an exception to the prima facie equality of treatment of all unsecured creditors within the respective classes which s 556 recognises. The onus of proving the facts which ground any departure from equal treatment of the creditors, and of persuading the Court of the extent to which any such departure is just, lies on the creditor who seeks the exercise of the power under s 564.

65    To come within the scope of the section, all that is needed is that the property which has been recovered, protected or preserved be property which is ultimately distributable in the liquidation of the company. See Jarbin Pty Ltd v Clutha Ltd (in liq) [2004] NSWSC 28; (2004) 208 ALR 242 at 258 [58].

66    Here, it is clear, and the parties did not dispute, that property has been recovered by means of an indemnity for costs of litigation. That is sufficient to establish that the court has jurisdiction under s 564(a).

67    In Re Ken Godfrey Pty Ltd (in liq) (1994) 14 ACSR 610 at 612, Hayne J said that: “… the discretion … is a broad and general discretion and one that is to be exercised having regard to the desirability in the public interest of encouraging creditors to indemnify liquidators who desire to pursue claims in the winding up of companies”.

68    And in Household Financial Services Pty Ltd v Chase Medical Centre Pty Ltd (1995) 18 ACSR 294, Brownie J, at 296–297, said:

The last words of s 564 provide for, and the authorities accent the need to assess the risk run by the indemnifying creditors, for whose benefit an application is made, but the authorities show that it is also appropriate to look to the sum recovered (or the value of the property recovered), the failure of other creditors to provide the indemnity, the proportions between the debts of the indemnifying creditors and the other debts, the public interest in encouraging creditors to provide indemnities so as to enable assets to be recovered, and, generally, the totality of the circumstances; and there has been a tendency in recent times to adopt a more liberal approach, in favour of indemnifying creditors.

69    Here, TasWater contends that it would be just in the circumstances to award it 100% of the balance of the Disputed Pool for the following reasons:

(1)    the Disputed Pool has only come into existence as a consequence of Aquagenics’ liability to TasWater, and the loss and damage suffered by TasWater;

(2)    TasWater undertook the whole of the proceedings to recover the sum from the insurer, including the initial proceedings resulting in the DOCA being set aside, and bore the entire costs and risks of those proceedings;

(3)    contrary to the plaintiffs’ submission, the proceedings involved risk and complexity and required TasWater to fund a defence against an appeal;

(4)    having regard to the total costs and expenses outlaid by TasWater pursuant to the funding agreement ($203,382.27) plus additional costs paid to Mr Hayes ($27,382.27), the degree of risk assumed by TasWater was not insubstantial, and had the claim not succeeded, TasWater would have been required to pay the insurer’s costs;

(5)    TasWater was the only party who pushed for and progressed the claims against the insurer, and it is relevant to note that:

(a)    TasWater voted against the DOCA, which extinguished the right for Aquagenics to pursue the insurer;

(b)    no other creditor joined in the funding, including Mr Day who, whilst a director, did not make any notification of a claim;

(c)    it was only on 9 May 2014, after the administrator was appointed, that a formal notification of the claim was made, which resulted in additional complexity in the proceedings against the insurer; and

(d)    neither the administrator nor the liquidator issued proceedings (or presumably would have issued proceedings) until the indemnity was provided by TasWater; and

(6)    the other creditors’ debts have been dealt with in accordance with the DOCA – in terminating the DOCA, Middleton J found that “the DOCA has been fully effectuated, save that [Aquagenics] has potential claims against insurers, the sole beneficiary of which, under s 562 of the Act, is [TasWater]”, and it was therefore not anticipated by the other creditors that any further amount would become available for general distribution as a consequence of the claim against the insurer, that claim arising as it did from Aquagenics’ insured liability to TasWater.

70    The plaintiffs submitted that:

(1)    the obvious reason that TasWater agreed to indemnify the liquidator was to recover moneys payable to TasWater under s 562, which is a statutory priority in itself;

(2)    TasWater assumed litigation risk to further its own recoveries – it was never the discernible intention of TasWater to recover funds for the body of general creditors;

(3)    accordingly, there was no genuine opportunity for, or relevant failure by, other creditors to indemnify the liquidator;

(4)    the sum recovered is the 16% balance of the recovery made by the liquidator at the behest of TasWater, and TasWater has already, in satisfaction of its assumption of risk, been paid its 84% insured loss together with party/party costs;

(5)    while there is an inherent risk to all litigation, the proceedings (including the appeal) were not overly long or complex; and

(6)    it is appropriate to return to TasWater the disparity between the benefit of the liquidator’s costs recovery and TasWater’s costs indemnity, together with the liquidator’s remuneration paid by TasWater.

71    The plaintiffs thus agree that in the particular circumstances of this case it is an appropriate exercise of the discretion under s 564 of the Act that TasWater be paid an advantage from the Disputed Pool in the amount of the total of the expenses referred to in [58] and [59] above. For the reasons advanced by the plaintiffs, I agree. (I should add that counsel for Mr Hayes and Mr Day also agreed with the plaintiffs’ submissions in this regard.)

72    In my view, and as the plaintiffs also submitted, it is not appropriate that TasWater should receive any further amount from anything that remains in the Disputed Pool, including because to do so would effectively mean that TasWater would rank above the deed administrator’s costs, and the general pool of unsecured creditors would miss out altogether. As Hodgson JA said in State Bank of New South Wales v Brown [2001] NSWCA 223; (2001) 38 ACSR 715 at 728 [91]:

I accept that it is not the object of the section to encourage litigation for the sake of litigation, or for the private benefit of creditors who provide the indemnity or the funds. In my opinion, there are two public purposes involved in the encouragement of pursuit of claims by liquidators, namely to benefit creditors and shareholders generally, and to recover property from wrong-doers and thus discourage misconduct in relation to corporations.

(Emphasis added)

73    As Mr Groves put it in this exchange with me:

HIS HONOUR: Well, how do you say I should exercise the discretion under 564?

MR GROVES: Your Honour, if TasWater’s costs are returned to it, that allowance puts it in the position that it got everything that it could have ever possibly got in pursuing litigation against the insurer. And, in my submission, it’s then a situation where there is some money left which can flow through into the deed of company arrangement, which, [were] it not for the bank guarantee and the retention monies being cashed years ago, would have been assets of the company if they had been left alone.

74    Mr Groves also submitted, and I agree, that to order that TasWater receive the whole of the remaining Disputed Pool would mean that the statutory priority given to the liquidator’s costs under s 556 would be displaced and that that is an inappropriate exercise of the discretion under s 564 for the following reasons:

First … it’s the liquidator who we say brought this overpayment to the attention of TasWater, and it’s the liquidator who has spent considerable time and costs addressing that. We’re here today on the liquidator’s application which then saw a cross-application by TasWater, not the other way around.

Second, the work that the liquidator performed was necessary to identify the pool that we are now concerned with. And, were it not for that work, the application under section 564 couldn’t be properly made. One needs to identify what’s left to then pursue [an] advantage. Next, your Honour, while TasWater correctly points to the proposition that your Honour does have the power to escalate its priority above the liquidator, there’s not really submissions put to your Honour as to why that should be the case. And that is particularly so given that Mr Hamilton is a liquidator appointed by this court. He holds a court ordered and statutory office. So the work he has done is necessary and one would expect him to be remunerated for it in the ordinary way.

Finally, I make the point that if TasWater were elevated above Mr Hamilton, his costs and remuneration would ultimately need to come back to him by operation of the deed of indemnity because he’s entitled to his ordinary remuneration and he’s entitled to his costs in respect of the litigation, which, in my submission, would encompass everything up to and including today. So I don’t think it’s helpful to have a circuitous scenario where monies are going across to TasWater because it gets some elevated priority and we then need to deal with, somehow, clawing those back under the previous funding agreement.

Disposition

75    As I have already explained, the parties agreed that I should not make any substantive orders at all, and that I should instead publish my reasons in relation to the three questions. As was suggested, it may be that these reasons will enable the parties to reach agreement about the precise form of orders. If not, the matter will be relisted for further hearing, on a date to be fixed, which is the only order I shall make.

76    It may also be the case, because of some confusion at the hearing about the form of orders that might ultimately be sought, that I have missed a point somewhere along the way, and if I have, any party may raise any such issue at any subsequent hearing.

Associate:

Dated:    10 May 2022

SCHEDULE OF PARTIES