Federal Court of Australia
Bumbak v Dalian Huarui Heavy Industry Group International Co Ltd, in the matter of Duro Felguera Australia Pty Limited (Subject to a Deed of Company Arrangement) [2023] FCA 765
ORDERS
DATE OF ORDER: | 7 July 2023 |
THE COURT ORDERS THAT:
1. The parties bring in orders consistent with these reasons by 4 pm on Friday, 14 July 2023.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
FARRELL J:
Introduction
1 The plaintiffs, John Bumbak, Rahul Goyal and Scott Langdon of KordaMentha were appointed as joint and several administrators of Duro Felguera Australia Pty Limited (subject to a deed of company arrangement) (DFA or Company) by resolution of DFA’s directors under s 436A of the Corporations Act 2001 (Cth) on 28 February 2020 (appointment date).
2 At the adjourned second meeting of DFA’s creditors on 25 September 2020, the creditors resolved to execute a deed of company arrangement. The plaintiffs are the joint and several deed administrators appointed under the deed of company arrangement executed by DFA on 26 October 2020 (DOCA). The parties to the DOCA are DFA, Duro Felguera SA (Duro SA), the deed administrators and the first defendant, Dalian Huarui Heavy Industry Group International Co Ltd (DHHI).
3 The deed administrators seek directions and declarations under s 90-15 of the Insolvency Practice Schedule (Corporations) (being Sch 2 to the Corporations Act) (Insolvency Practice Schedule). The relief they seek relates to the admissibility of some claims forming part of proofs of debt lodged under the terms of the DOCA:
(a) By DHHI on 26 July 2021, for US$25,592,315.48 (see [41] below); and
(b) By the second defendant, Trans Global Projects Pty Ltd (in liquidation) (TGP) on 29 July 2020, for AU$37,611,664.78 (see [24] below).
4 The DHHI Proof of Debt and the TGP Proof of Debt both arise from awards made in arbitrations more fully discussed in the “Background” below. There is no dispute that the amounts of principal and interest accruing before the appointment date owed under the respective awards are admissible to proof under the terms of the DOCA. In summary, the issues which must be addressed on the application are:
(a) Whether the legal and other costs of the TGP Arbitration and the legal and other costs of the DHHI Arbitration (less US$60,567.15 in Administrators’ Costs (see [28] below)) and the corresponding interest awarded in respect of those costs, are:
(i) admissible to proof under cl 9.2 of the DOCA; or
(ii) payable under cl 10(1)(a) of the DOCA as an expense, debt or liability of the administrators or the deed administrators;
having regard to the fact that those Awards were made after the appointment date; and
(b) Whether the interest awarded for the period after the appointment date is provable under the terms of DOCA in circumstances where the deed fund will not wholly satisfy the claims of creditors.
5 I note that Cheeseman J as Commercial and Corporations Duty Judge made consent orders that:
(a) The deed administrators be granted leave nunc pro tunc to proceed against DFA pursuant to s 471B of the Corporations Act; and
(b) TGP be excused from attending any further hearings in these proceedings.
6 Justice Cheeseman also noted that the deed administrators and DHHI would liaise with a view to providing a joint submission on the issue of whether, under s 37M of the Federal Court of Australia Act 1976 (Cth), it was appropriate to proceed under s 90-15 of the Insolvency Schedule. Counsel for the deed administrators prepared submissions that DHHI agreed to. I will refer to those submissions as the joint submissions. This issue is addressed further below under the heading “Joint submissions”.
Background
7 There is no real factual dispute between the parties; what follows under this heading largely derives from a Statement of Agreed Facts.
Dramatis personae
8 DFA was incorporated on 24 July 2013. It is wholly owned by Duro SA, a foreign company incorporated in Spain and listed on the Spanish stock exchange. DFA was established for the purpose of providing engineering and construction services in relation to the Roy Hill Mine project in the Pilbara region of Western Australia (Project).
9 TGP was incorporated under the Corporations Act. It was placed in administration on 30 July 2015 and in liquidation on 15 November 2017. Nigel Mackey of Pilot Partners was appointed as both administrator and liquidator of TGP.
10 DHHI is a foreign company incorporated in the People’s Republic of China.
11 DFA engaged various subcontractors to provide services and equipment to the Project. The Project completed in 2019 but a number of disputes arose between the Company and its subcontractors. All of the disputes were resolved except those involving DHHI and TGP.
Supply Contract
12 On 31 August 2011, Roy Hill Holdings Pty Ltd, as purchaser, entered into an agreement (the Supply Contract) with DHHI pursuant to which, as supplier, DHHI undertook to design and manufacture nine items of equipment. The Supply Contract was novated several times. On 14 March 2014, it was ultimately novated to DFA as purchaser.
Commencement of arbitrations
13 On 23 September 2016, DHHI commenced arbitration proceedings against DFA in Singapore under the International Arbitration Act 1994 (Singapore) and the United Nations Commission on International Trade Law Arbitration Rules 2010 (UNCITRAL rules) (DHHI Arbitration).
14 On 7 May 2018, TGP commenced arbitration proceedings against the Company, by way of service of a request for arbitration in the seat of Perth under the Commercial Arbitration Act 2012 (WA) (WA Commercial Arbitration Act) (TGP Arbitration).
15 On 1 November 2018, TGP, DFA and the TGP Tribunal executed the Arbitrators’ Terms and Conditions (TGP Arbitration Terms).
16 By 18 October 2019, DFA had made payments of $430,000 in aggregate into a trust account held by its former solicitors pursuant to the TGP Arbitration Terms and on account of the fees of the TGP Tribunal.
First and Second DHHI Awards published
17 On 19 December 2019, the arbitral tribunal in the DHHI Arbitration (DHHI Tribunal) published:
(a) The First Partial Final Award (First DHHI Award) which included that:
(i) DFA should pay US$32,898,858.18 to DHHI; and
(ii) the DHHI Tribunal reserved all matters concerning interest and costs until a further Award; and
(b) The Second Partial Final Award (Second DHHI Award) in respect of the DFA’s application for a final order in relation to proceedings commenced by DHHI in the Liaoning Higher People’s Court.
Indication that TGP Tribunal was ready to publish its Award
18 On 19 February 2020, the arbitration tribunal in the TGP Arbitration (TGP Tribunal) advised TGP and the Company that it was “ready to publish its award” but would “withhold publication until payment of the arbitrators’ fees” and ordered that:
(a) The lawyers for TGP pay $85,596 in total from their trust account; and
(b) The lawyers for the Company pay $430,000 in total from their trust account,
to the members of the TGP Tribunal.
Appointment of administrators
19 On 28 February 2020, the administrators were appointed under s 436A of the Corporations Act. On 11 March 2020, the first meeting of DFA’s creditors was held pursuant to s 436E of the Corporations Act. On 24 March 2020, the Federal Court of Australia made orders pursuant to s 439A(6) of the Corporations Act, extending the period for convening a second meeting of DFA’s creditors to 27 September 2020.
20 Between March and August 2020, the administrators participated in the DHHI Arbitration in relation to the question of interest and costs. That question had been reserved for further award in the First DHHI Award. The administrators’ participation predominantly consisted of providing written submissions and reply submissions in relation to costs and interest to the DHHI Tribunal. DHHI says that, relevantly, the administrators submitted that:
(a) Each party should bear its own costs, and challenged DHHI’s claim for interest;
(b) The question of costs fell to be determined by reference to the proper construction of the Supply Contract, including cl 31.1, which were said to disentitle DHHI to its claim for costs; and
(c) In any event, the costs sought were not reasonable or otherwise should be apportioned.
TGP Award
21 On 27 May 2020, after the administrators authorised payment of relevant fees and the fees were paid, the TGP Tribunal published its award (TGP Award). The TGP Award included the following:
(a) A declaration that DFA is liable to TGP in the amount of $27,960,897.52;
(b) An order (as corrected on 12 June 2020) that DFA pay to TGP the sum of $27,960,897.52, together with interest on that sum at the rate of 6% per annum from 13 August 2015 to the date of the TGP Award;
(c) An order that DFA pay interest at the rate of 6% per annum on any unpaid balance of $27,960,897.52 from 21 days after the TGP Award until payment;
(d) An order that DFA pay the whole of the costs of the TGP Arbitration including any reserved costs; and
(e) An order that the costs of the TGP Arbitration to be paid by DFA include TGP’s legal costs to be taxed in the Supreme Court of Western Australia and the fees and expenses of the TGP Tribunal, which were fixed and settled in the sums of $515,596 and $18,521.
22 On 21 July 2020, the former solicitors for TGP sent a letter to the solicitors for the administrators, setting out the basis on which TGP intended to seek recovery of its costs totalling $2,020,889.47, comprising $60,704.13 for the period to 28 February 2020 and other costs awarded on 27 May 2020 for $1,960,185.34. The letter enquired as to whether the administrators required the costs to be assessed by way of taxation in the Supreme Court of Western Australia.
23 On 24 July 2020, the administrators issued a report pursuant to s 75-225 of the Insolvency Practice Rules (Corporations) 2016 (Cth) to all of DFA’s known creditors including DHHI and TGP. Attached to the report was a notice convening the second creditors meeting pursuant to s 439A of the Corporations Act to be held on 31 July 2020. The administrator requested creditors to lodge proofs of debt, including any updated proofs of debt, for voting purposes.
24 On 29 July 2020, TGP lodged an updated proof of debt dated that date for AU$37,611,664.78 (TGP Proof of Debt). That amount was made up of the following sums claimed under the TGP Award:
(a) $27,960,897.52, being the amount awarded on the primary claim;
(b) $7,629,877.79, being the interest awarded on the primary claim from 13 August 2015 to 28 February 2020;
(c) $60,704.13, being the costs awarded in proceedings numbered CACV49/2018 on 11 October 2018;
(d) $143,193.02, being the costs awarded on 7 May 2018 by Tottle J in the Supreme Court of Western Australia in proceedings ARB/5/2018, which the TGP Tribunal subsequently awarded in favour of TGP; and
(e) $1,816,992.32, being the costs awarded in the TGP Arbitration on 27 May 2020.
25 On 31 July 2020, the second meeting of DFA’s creditors was held pursuant to s 439A of the Corporations Act. At the request of DHHI and without objection from TGP, DFA’s creditors resolved to adjourn the meeting.
Third DHHI Award
26 On 14 August 2020, the DHHI Tribunal published its Third Partial Final Award (Third DHHI Award) in the DHHI Arbitration. The Third DHHI Award included findings that DFA was liable to pay DHHI:
(a) US$4,507,562.21 for the costs of the DHHI Arbitration;
(b) US$520,332.86 for the fees and expenses of the DHHI Tribunal;
(c) US$2,021,068.14 for interest on the Security for the period from 15 December 2016 to 19 December 2019; and
(d) US$568,152.14 for interest on the costs awarded for the period from 2 July 2018 to 14 August 2020.
27 DHHI says that it is relevant that, in the Third DHHI Award, the Tribunal:
(a) Rejected the argument that the question of costs was determined by the construction of cl 31 of the Supply Contract. The Tribunal found that cl 31.1 of the Supply Contract did not preclude DHHI from recovering the costs of the Notices of Dispute and that the Tribunal would apply the provisions of art 42 of the UNCITRAL rules in allocating those costs of the arbitration;
(b) Found that a degree of apportionment was appropriate “to reflect a very limited entitlement to costs for [DFA]”. The Tribunal considered that DHHI should be awarded 95% of its costs and that DFA should be awarded costs of Procedural Order No 7 and the Second DHHI Award;
(c) Found that the “overall figure for [DHHI’s] costs does not seem unreasonable for an international arbitration of this type” and the costs are not unreasonable; and
(d) Found the total amounts ordered were costs of US$5,027,895.07 and pre-award interest of US$2,589,220.28.
28 In the Third DHHI Award, the DHHI Tribunal specifically determined that the costs of and incidental to the Third DHHI Award payable by DFA were US$60,567.15 (being 95% of DHHI’s cost claimed of US$63,745.90) (Administrators’ Costs). It is no longer in dispute that those costs were paid in full on 17 September 2020.
DHHI Former Proof
29 On 25 September 2020, DHHI lodged an updated proof of debt bearing that date for an aggregate amount of AU$36,433,625.55 for voting purposes in the administration of the Company (DHHI Former Proof). The sum claimed was made up of:
(a) $24,197,769, being the amount awarded under the First DHHI Award;
(b) $7,613,930, being legal costs awarded under the Third DHHI Award;
(c) $870,865, being interest on costs accrued before 28 February 2020, awarded under the Third DHHI Award;
(d) $9,755, being interest on costs accrued after 28 February 2020, awarded under the Third DHHI Award;
(e) $3,097,897 and $190,640, being interest on the Security for the period from 15 December 2016 to 28 February 2020, awarded under the Third DHHI Award; and
(f) $452,770, being interest on the Security for the period after 28 February 2020 awarded under the Third DHHI Award.
Administrators’ report to creditors
30 On 25 September 2020, the administrators issued a report to DFA’s creditors, including DHHI and TGP. It attached a notice that the reconvened second meeting of creditors would be held on 2 October 2020 and invited creditors to submit proofs of debt, including updated proofs of debt, for voting purposes at the meeting. The deed administrators note that, in that report, the administrators said that:
(a) “[A] costs award made in an arbitration after the date on which the administration began is not admissible proof” and that those “claimants may not be bound by the DOCA in respect of the costs awards made …”; and
(b) The monies available to unsecured creditors under the DOCA were expected to be in the sum of between $15.35 million to $27.45 million, with unsecured creditors receiving between $0.257 and $0.46 per $1.00 for their debts.
Preliminary informal adjudications
31 On 28 September 2020, the administrators advised DHHI’s lawyers by letter of their preliminary informal adjudication of the DHHI Former Proof for voting purposes as follows:
(a) They admitted:
(i) $27,486,306; and
(ii) “for voting purposes only”, $452,770, being interest on the Security for the period after 28 February 2020 awarded under the Third DHHI Award; and
(b) They did not admit for voting purposes the following other amounts awarded under the Third DHHI Award:
(i) $7,613,930, being legal costs awarded after 28 February 2020;
(ii) $870,865, being interest on legal and other tribunal costs accrued before 28 February 2020; and
(iii) $9,755, being interest on legal and other tribunal costs accrued after 28 February 2020.
32 On 28 September 2020, the administrators advised the liquidator of TGP by letter of their preliminary informal adjudication of the TGP Proof of Debt for voting purposes as follows:
(a) They admitted $35,651,479 comprising:
(i) $27,960,898, which the TGP Tribunal declared DFA owed TGP;
(ii) $7,629,878, being interest accrued on $27,960,898 at 6% per annum from 13 August 2015 to 28 February 2020; and
(iii) $60,704, being costs ordered by the Court of Appeal on 11 October 2018; and
(i) $143,193, being costs awarded in the arbitration by Tottle J on 7 May 2018; or
(ii) $1,816,992, being costs awarded in the TGP Arbitration on 27 May 2020.
33 As explained in the administrators’ letters advising of the preliminary informal adjudications, this view was formed on the basis that the awards of legal and other costs of the DHHI and TGP Arbitrations and interest thereon was not admissible because the awards were made after the appointment date. In support, the administrators relied on the decisions in Larkden Pty Ltd v Lloyd Energy Systems Pty Ltd [2011] NSWSC 1567 (Larkden) (Hammerschlag J); and Central Queensland Development Corporation Pty Ltd v Sunstruct Pty Ltd [2015] FCAFC 63; (2015) 231 FCR 17 (Central Queensland Development) (Besanko, Gilmour and Rangiah JJ). They noted that in those cases, the court found that the costs award would not be admissible to proof in a liquidation under s 553(1) of the Corporations Act. That was on the basis that such an order is at the discretion of the tribunal and therefore the circumstances giving rise to the claim did not exist before the “relevant date”, being the appointment date.
DOCA
34 On 2 October 2020, at a reconvened second meeting of DFA’s creditors, the creditors resolved that the Company execute the DOCA pursuant to s 439C(a) of the Corporations Act. DFA, the deed administrators, Duro SA and DHHI executed the DOCA on 26 October 2020.
35 Relevantly to this application, cll 1.1, 9.2 and 10(1)(a) of the DOCA provided as follows:
1 Definitions and interpretation
1.1 Definitions
In this Deed:
…
(3) Admitted Claim means, in relation to a Creditor, the Creditor’s debt payable by or claim against the Company as at the Appointment Date admitted:
(a) by the Deed Administrators; or
(b) pursuant to an order of the Court;
(4) Appointment Date means 28 February 2020;
…
(7) Claim includes a claim, demand, debt, action, proceeding, suit, cost, charge, expense, damage, loss and other liability payable by, or against the Company (present or future, certain or contingent, ascertained or sounding only in damages or by way of fine or penalty or under a guarantee), being debts or claims which arose on or before the Appointment Date or the circumstances giving rise to which occurred before the Appointment Date, and irrespective of how the debt or claim arose by virtue of contract, at law (including in statute), in equity or otherwise;
…
(11) Creditor means any creditor who has or asserts a Claim;
…
9 Admissibility of debts
…
9.2 Determination of Claims
(1) The Deed Administrators are to determine all Deed Creditors’ Claims which are admissible to proof under this Deed, subject to any available rights of appeal to a Court.
(2) Notwithstanding anything in this Deed, a Deed Creditor who is aggrieved by the Deed Administrators’ determination in respect of its Claims which are admissible to proof under this Deed may appeal to a Court against the Deed Administrators’ determination.
(3) For the purpose of the Deed Administrators determining Deed Creditor’s Claims, the following provisions apply to this Deed as follows:
(a) Subdivisions A, B, C and E of Division 6 of Part 5.6 of the Act apply to Claims of Creditors under this Deed as if references to the liquidator were references to the Deed Administrators and references to the winding up were references to this Deed, and with such other modifications as are necessary to give effect to this [Deed], except to the extent that those provisions are varied or excluded expressly or impliedly in this Deed; and
(b) regulations 5.6.11A, 5.6.37, 5.6.39 to 5.6.57 inclusive and regulation 5.6.70A of the Regulations as if references to the liquidator were references to the Deed Administrators and references to the winding up were references to this Deed, and with such other modifications as are necessary to give effect to this Deed, except to the extent that those provisions are varied or excluded expressly or impliedly in this Deed.
(4) The Deed Administrators are to determine the Deed Creditors’ Claims in Australian dollars or the Australian Dollar Equivalent as at the Appointment Date.
(5) For the purposes of section 444DA(1) of the Act, any eligible employee Creditors will be entitled to a priority at least equal to what they would have been entitled to if the property were applied in accordance with sections 556, 560 and 561 of the Act.
10 Distribution of Deed Fund
(1) The Deed Administrators are to apply the Deed Fund in the following order of priority:
(a) first, in payment of the Administrators’ and the Deed Administrators’ remuneration and expenses, including disbursements, any expense, debt or liability incurred by them in the course of the voluntary administration and the administration of this Deed during the Deed Period;
…
15 Remuneration
(1) The Administrators and Deed Administrators will be remunerated and reimbursed out of the Deed Fund for their work as voluntary administrators of the Company and administrators of this Deed and for all costs and expenses incurred in connection with the performance of their duties, obligations and responsibilities in the course of the voluntary administration of the Company and under this Deed. The Deed Administrators will be entitled to employ staff and engage third parties to assist them in the performance and exercise of their duties and powers under this Deed.
…
(3) The Deed Administrators will be paid in accordance with this clause 15 and clause 10(1) of this Deed.
36 On 5 November 2020, the deed administrators sent a circular to all of DFA’s known creditors including DHHI and TGP. The circular confirmed that the DOCA had been executed. It attached a notice inviting creditors to lodge a proof of debt by 26 November 2020 if they had not already done so, and nominated the conversion rate to be applied to claims made in foreign currency.
37 On 10 November 2020, Pilot Partners sent an email to KordaMentha confirming that the deed administrators are to adjudicate on the TGP Proof of Debt.
38 On 16 November 2020, DHHI wrote to the deed administrators to confirm that the condition precedent for the operation of certain clauses of the DOCA had been met by DHHI, and in particular that:
(a) On 10 November 2020, its shareholders passed a resolution approving DHHI’s entry into the DOCA and DHHI in effect agreeing to forego an amount of AU$5 million from the total of its admitted claim in accordance with cl 7.2(1) of the DOCA; and
(b) DHHI considers that the condition precedent in cl 4.1 of the DOCA is satisfied upon receipt of the letter.
39 On 20 November 2020, the solicitors for DHHI sent a letter to the solicitors for the deed administrators. In that letter, DHHI challenged the administrators’ preliminary informal adjudication of the DHHI Former Proof. As explained in the joint submissions, put shortly, that challenge relied on the construction of cl 10(1)(a) of the DOCA, the approach taken in several decisions concerning “post-appointment costs” and s 556(1) of the Corporations Act, and decisions handed down in the United Kingdom and New Zealand.
40 On 17 December 2020, the deed administrators sent a circular to all of DFA’s known creditors, including DHHI and TGP. That circular foreshadowed this proceeding.
41 On 27 July 2021, DHHI lodged with the deed administrators a revised proof of debt in the sum of US$25,592,315.48 (DHHI Proof of Debt) as a substitute for the DHHI Former Proof. The DHHI Proof of Debt comprises the following components:
(a) Outstanding principal from the First DHHI Award in the sum of US$15,786,624.18;
(b) Legal and other costs pursuant to the Third DHHI Award in the sum of US$4,973,475.55, which includes the sum of US$6,147.64 that DHHI claimed was unpaid as a result of the wrong exchange rate being applied in the payment of Administrators’ Costs (see [28] above). I note that DHHI no longer presses the element of the claim relating to underpayment of the Administrators’ Costs;
(c) Pre-award interest on legal and other tribunal costs in the sum of US$568,152.14;
(d) Post-award interest on legal and other tribunal costs until part payment on 17 September 2021 in the sum of US$24,963.15;
(e) Post-award interest on legal and other tribunal costs following part payment on 17 September 2021 to 12 July 2021 in the sum of US$216,426.68;
(f) Pre-award interest on the Security in the sum of US$2,021,068.14;
(g) Post-award interest on the Security prior to the appointment of the deed administrators in the sum of US$124,373.42;
(h) Post-award interest on the Security following the appointment of the deed administrators to 12 July 2021 in the sum of US$818,749.23;
(i) Interest on claims component prior to the appointment of the deed administrators in the sum of US$138,817.44; and
(j) Interest on claims component following the appointment of the deed administrators in the sum of US$919,665.55.
DHHI costs claim
42 Having regard to the concession referred to in [41(b)] I now understand DHHI’s costs claim to be for US$4,967,327.91 made up as follows:
(a) US$4,507,562.21 in respect of legal and other costs incurred by DHHI in relation to the DHHI Arbitration and the reasonable travel and other expenses of witnesses;
(b) Minus the Administrators’ Costs of US$60,567.15; and
(c) Plus US$520,332.86 in respect of the fees of the DHHI Tribunal and the reasonable travel and other expenses incurred by the arbitrators.
43 DHHI says that the DHHI costs claim plus pre-administration interest thereon is:
(a) Provable under cl 9.2 of the DOCA because those claims arose from the Supply Contract and the incorporated UNCITRAL rules, rather than from the exercise of an independent determination of a separate statutory right. DHHI accepts that this requires the Court to accept that its case is distinguishable from Larkden and Central Queensland Development. DHHI says that those cases dealt with costs orders made under statute following the exercise of a statutory discretion while in DHHI’s case, the costs order is purely a creature of the Supply Contract that gave rise to the accepted substantive liability; or
(b) An expense of the administration for the purposes of cl 10(1)(a) of the DOCA because it was incurred following the deed administrators’ decision to continue to conduct the DHHI Arbitration for the benefit of creditors. It says that, notwithstanding that the First DHHI Award was made before the appointment date, the issue of costs remained a live issue after that date. The administrators, properly, took steps to resolve the costs issue, including by making a claim for some of DFA’s costs with the result that, even though the Third DHHI Award was made after the appointment date, the costs and interest order should be treated as expenses of the administration. DHHI relied on White J’s decision in In the matter of Windy Dropdown Pty Limited (Subject to a Deed of Company Arrangement); Green v Equititrust Limited (Formerly Equityloan Limited) [2010] NSWSC 1099 (Windy Dropdown) at [31] and [32]. It also relied on Black J’s decision in Liberty Industrial Pty Ltd v Donald McCarthy Trading Australia Pty Ltd [2013] NSWSC 443; (2013) 276 FLR 121 (Liberty Industrial) at [17].
44 As at 22 September 2021, the quantum of the deed fund under the DOCA was approximately $27,541,395 and the quantum of claims of the Company’s creditors, other than DHHI and TGP was $1,620,323.
45 Although the funds held under the DOCA are insufficient to wholly discharge the sums awarded to DHHI and TGP on their primary claims in the DHHI Arbitration and the TGP Arbitration respectively, the deed administrators estimated that more than $25 million will be available.
Amended originating process
46 At the hearing, the deed administrators sought leave to rely on an amended originating process to which DHHI did not object. The amended originating process sought the following relief.
47 First, a declaration that the costs awarded on 27 May 2020 in the TGP Arbitration totalling AU$1,923,522.34:
(a) Are not admissible to proof under the terms of the DOCA; and
(b) They are not expenses incurred in the administration of the Company within cl 10(1)(a) of the DOCA.
I note that the figure AU$1,923,522.34 is derived from the aggregate of the items set out at [24(d)] and [24(e)] and [32(b)] above, that is, $1,960,185.54 (which the deed administrators’ letter dated 28 September 2020 indicated would not be admitted) less:
(a) $13,652.10, being TGP’s costs pursuant to Procedural Order No 7 dated 18 September 2019; and
(b) $23,010.90, being TGP’s costs pursuant to Procedural Order No 9 dated 8 October 2019).
48 The deed administrators also sought a direction to the deed administrators in that capacity that they would be justified in rejecting any claim by TGP to prove for those costs. While TGP did not appear, the making of those orders was treated as contentious.
49 Second, a declaration that the costs awarded on 14 August 2020 in the Third DHHI Award totalling US$4,967,327.91 and the interest thereon:
(a) Are not admissible to proof under the terms of the DOCA; and
(b) They are not expenses incurred in the administration of the Company within the meaning of cl 10(1)(a) of the DOCA.
50 The deed administrators also sought a direction to the deed administrators in that capacity that they would be justified in rejecting any claim by DHHI for those costs and interest. DHHI opposed those orders.
51 Third, a declaration that the interest awarded in the Third DHHI Award for the period after 28 February 2020 (that is, US$1,738,414.78 being the aggregate of the amounts referred to at [41(h)] and [41(j)] above) and US$364,070.40 in interest on costs as at 12 July 2021) is not admissible to proof under the terms of the DOCA. They also seek a direction to the deed administrators in that capacity that they would be justified in rejecting any claim by DHHI to prove for that interest under the terms of the DOCA. DHHI did not oppose these orders: see T5.37-47. The parties agree, and I accept, that s 563B of the Corporations Act would not permit that interest to be admitted to proof until after all other claims had been met, and it is agreed that that will not be possible having regard to the quantum of the deed fund. Accordingly, I will make those orders.
52 Fourth, a declaration that costs awarded in favour of DHHI totalling US$60,567.15 in respect of the Third DHHI Award (that is, the Administrators’ Costs) was paid in full by DFA on 17 September 2020. They also seek a direction that the deed administrators would, in that capacity, be justified in rejecting any claim by DHHI to prove for those costs under the terms of the DOCA. DHHI did not oppose these orders.
53 I consider it appropriate to make those orders because the evidence discloses that:
(a) The administrators participated in the DHHI Arbitration by making submissions on the question of costs. At [175] of its reasons for the Third DHHI Award, the DHHI Tribunal found that DHHI should get 95% of its costs of the Award. At [176] of its reasons, the DHHI Tribunal noted that DHHI’s claimed costs of US$63,754.90 were recoverable and the Tribunal used $63,754.90 in the calculation of DHHI’s lawyer’s costs at [177]. At [181], the DHHI Tribunal applied the 5% discount to the lawyer’s costs, including the costs of the Award;
(b) On 26 August 2020, the solicitors for the deed administrators sent an email to the solicitors for DHHI, inviting DHHI to issue an invoice to the deed administrators for the Administrators’ Costs;
(c) DHHI provided that invoice to the deed administrators on 15 September 2020; and
(d) The invoice for the Administrators’ Costs was paid in full, on 17 September 2020.
54 Fifth, an order that the deed administrators’ costs of and incidental to the application be expenses in the deed administration and be paid out of the fund in the deed administration. I do not understand that order to be opposed.
55 The deed administrators filed submissions in chief and in reply. Counsel represented by them at the hearing of the application. Counsel for the deed administrators prepared the joint submissions. DHHI filed submissions in response and agreed with the joint submissions. Counsel represented DHHI at the hearing. TGP filed a submitting notice. It neither filed submissions nor appeared by counsel.
Joint submissions
56 The preliminary issue was whether the these proceedings was an appropriate vehicle for determination of objections raised by TGP and DHHI to the manner in which the deed administrators propose to address their claims made in their proofs of debt for legal and other costs and interest awarded in the DHHI Arbitration and in the TGP Arbitration.
57 The joint submissions usefully frame the issue as follows (footnotes generally omitted, some footnotes inserted into text):
C.3 The Parties position
23. The Parties accept that:
(a) the Proofs make up over 90% of all Deed Creditors;
(b) the collective sum that is expected to be available to TGP and DHHI from the Deed Fund is substantial, with current estimates suggesting that approximately $25.3 million will be available;
(c) the Deed Administrators’ assessment of the admissibility of the Proofs “requires legal analysis on legal issues raised which have some complexity”; and
(d) TGP and DHHI have contrasting interests in the resolution of these issues. As Mr Goyal explains in paragraph 53 of his affidavit:
(i) if the Preliminary Assessment is accepted, TGP is likely to receive $13.958 million and DHHI is likely to receive $10.75 million; however
(ii) if the position advanced by DHHI is accepted, TGP is likely to receive $12.596 million and DHHI is likely to receive $12.202 million.
D. The appropriateness of the proceeding
D.1 The Court’s power to give directions
24. The relief sought in paragraphs 2 to 4 of the Process, is sought under section 90-15 of schedule 2 of the Corporations Act (section 90-15). That section “may authorise a broader range of orders than its predecessors” [See Re Octaviar Ltd (in liq) [2019] QSC 235 at [9] (Bradley J); Re Broens Pty Ltd (in liq) [2018] NSWSC 1747 at [41] (Gleeson JA); Re Direct FX Trading Pty Ltd (in liq) [2020] NSWSC 1338 at [17] (Black J); Glenfyne International Holdings Ltd v Glenfyne Farms International AU Pty Ltd (in liq) [2019] NSWCA 304 at [59] to [61]; Pirina, in the matter of Fund Options (Australia) Pty Ltd (in liq) [2020] FCA 1256 at [41] (Farrell J); and Re DSHE Holdings Limited [2021] NSWSC 608 at [58] to [78] (Rees J)] and the Court “will generally make orders where it is just to do so and there is sufficient utility to the external administration” [See Pirina, in the matter of Fund Options (Australia) Pty Ltd (in liq) [2020] FCA 1256 at [41] (Farrell J)]
25. The Court’s power under section 90-15 clearly extends to the giving of directions. The principles relevant to the exercise of that power were summarised by Black J in Re Octaviar Administration Pty Ltd (in liq) [2017] NSWSC 1556 at [7] to [9] (Re Octaviar). That summary has been cited, with approval, on many occasions [See Pogroske, in the matter of Bower Projects Australia Pty Ltd (in liq) [2019] FCA 1688 at [47] (Markovic J), Sheahan, in the matter of B.C.I. Finances Pty Limited (in liq) [2020] FCA 1411 at [7] (Charlesworth J); Hill, in the matter of Autocare Services Pty Ltd (administrators appointed) [2021] FCA 167 at [43] (Farrell J)]. In Re Octaviar, his Honour said, at [7]:
“… The function of a liquidator’s application for directions under this section is to give the liquidator advice as to the proper course of action for him or her to take in the liquidation. … The court may give directions that provide guidance on matters of law and the reasonableness of a contemplated exercise of discretion but will typically not do so where a matter relates to the making and implementation of a business or commercial decision, where no particular legal issue is raised and there is no attack on the propriety or reasonableness of the decision …” (citations omitted).
26. Consistent with these principles, the issue confronting the Deed Administrators, in respect of the admissibility of the Proofs, does not depend on them making a “business or commercial decision”. Rather, it requires the determination of complex “legal issues”.
D.2 The Re Magic issue
27. In Re Magic Aust Pty Ltd (in liq) (1992) 7 ACSR 742 (Re Magic) McLelland J (as his Honour then was) considered an application by a liquidator for directions under the Companies Code, concerning the admission of a proof of debt. His Honour held, at page 745, that such a direction would not be determinative of the validity of the creditor’s claim and would not preclude a subsequent appeal from the liquidator’s determination. Consequently, the Court concluded that it would “normally” be inappropriate to give such a direction.
28. The observations made in Re Magic were qualified by the word “normally”. This qualification is important because in Re G B Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 674 (Re G B Nathan), McLelland J had earlier held, at pages 679 to 680, that whilst the directions procedure under section 479(3) of the Corporations Law, did not enable the Court to make binding orders, the procedures of the Court are “sufficiently flexible” to enable applications for directions to be structured so as to permit the determination of substantive rights and that this is appropriate “in order to avoid the need to commence further proceedings involving additional cost and delay”.
29. In Re Broens Pty Ltd (in liq) [2018] NSWSC 1747 (Re Broens), Gleeson JA dealt with an application by a liquidator for directions under section 90-15, in respect of distributions to creditors in the winding up. His Honour held, at [38], that the power afforded under section 90-15 is “wider than the predecessor provisions” and “accommodates the determination of substantive rights”. However, his Honour also held that the Court would not exercise that power “without affording potentially affected parties an opportunity to be heard”.
30. Gleeson JA, at [40] to [43], then referred to both Re Magic and Re G B Nathan. At [42], after citing (with apparent approval) the observations in Re G B Nathan, his Honour noted that traditional proceedings for directions could be converted into proceedings for the determination of substantive rights “by joining the relevant parties”.
31. In Re Plutus Payroll Australia Pty Ltd (in liq) [2019] NSWSC 1171; (2019) 139 ACSR 536, Black J dealt with an application by a liquidator for directions under section 90-15, in respect of the admission of proofs of debt lodged in the winding up. His Honour observed, at [4], that the Court’s power under section 90-15 “is the same as, or likely wider” than the powers under the former section 479 (3) and held, at [5], with reference to both Re Magic and Re Broens, that the Court can give directions concerning issues arising in determining proofs of debt “in an appropriate case”.
32. In Re Octaviar Ltd (in liq) [2019] QSC 235, Bradley J dealt with an application by a liquidator for directions under section 90-15, in respect of the admission and rejection of proofs of debt lodged in the winding up. His Honour, at [9], held, citing Gleeson JA’s observation in Re Broens at [38], that section 90-15 empowered the Court to give directions affecting the rights of other parties, where those parties had been joined.
33. Other decisions where directions have been given in respect of the admission of proofs of debt include Re Go Energy Group Ltd [2019] NSWSC 558, per Black J at [22] and Re Knight, in the matter of CMG Victoria Holdings Pty Ltd (in liq) [2021] FCA 86, per Greenwood J at [26].
34. The authorities referred to in paragraphs 27 to 31 above, well support the Deed Administrators’ contention that section 90-15 empowers the Court to determine the substantive rights of DHHI and TGP as Deed Creditors and to otherwise give the Deed Administrators directions about the admissibility of the Proofs, provided that DHHI and TGP are afforded the opportunity to be heard.
D.3 The structure of the Proceeding
35. The Deed Administrators have, consistent with the observations made by Gleeson JA in Re Broens, joined both DHHI and TGP as defendants to the Process, in circumstances where those defendants:
(a) are materially affected by the relief sought; and
(b) represent 90% of all Deed Creditors’ claims.
36. Further, the relief sought in the Process includes, not only an application for directions (see paragraph 4 of the Process), but also declaratory relief in respect of first, the debts owed by [DFA] to DHHI and TGP, at the time when it was placed into administration (see paragraph 2 of the Process) and secondly, the amounts that DHHI and TGP are properly entitled to prove for under the [DOCA] (see paragraph 3 of the Process).
D.4 The utility of the proceeding
37. The decision that the Deed Administrators must make in respect of the Proofs requires a resolution of complex legal issues, which are best resolved by the Court.
38. Further, TGP and DHHI have contrasting interests in the resolution of these issues. If the Deed Administrators’ decision is consistent with the Preliminary Assessment, TGP will receive significantly more, and DHHI will receive significantly less, than if their decision is consistent with the position advanced by DHHI. Consequently, there is little doubt that the Court will have to resolve the issue either in this proceeding or in proceedings that would otherwise arise from the Deed Administrators making a decision without the determination of the Process.
39. Further still, the Deed Administrators believe that the determination of the Process, with TGP and DHHI as defendants in the one proceeding, is likely to be determined more quickly (the parties will be inviting the Court to list the Process for hearing, at the next case management hearing) and more cost efficiently, than the alternative path available under sub-clause 9.2(2) of the [DOCA].
58 Having regard to the joint submissions, with which I agree, and the authorities on which they relied, I was satisfied that it was appropriate for this matter to proceed to hearing. In particular, I was satisfied that:
(a) The entities that would be substantially affected by the grant of the relief sought are parties to the proceedings. Although TGP did not play an active role and DHHI and TGP will be differently affected by the outcome (see the joint submissions at [23(d)]), it had the opportunity to provide submissions and the issues raised by the First and Second matters at [47] and [49] above are sufficiently similar for the Court to have the benefit of contradicting argument;
(b) The power to give directions conferred on the Court by s 90-15 of the Insolvency Practice Schedule is sufficiently wide to allow directions of the kind now sought. Further, should any of the parties be dissatisfied by the outcome, there are avenues of appeal from the decision;
(c) In my view, both s 90-15 of the Insolvency Practice Schedule and s 21 of the Federal Court of Australia Act empower the Court to make declarations of the kind now sought to be made; and
(d) Entertaining the application is consistent with the objectives of s 37M of the Federal Court of Australia Act.
Is the DHHI Costs claim and interest thereon admissible to proof under the DOCA?
59 It is useful to set out relevant provisions of the Corporations Act as follows:
(a) Section 444A(4)(i) requires a deed of company arrangement to specify the day (not later than the day when the administration began) on or before which claims must have arisen if they are to be admissible under the deed;
(b) Section 444D(1) provides that a deed of company arrangement binds all creditors of the company so far as concerns claims arising on or before the day specified in the deed under s 444A(4)(i); and
(c) Section 553(1) provides that, subject to Divs 6 and 8 of Part 5.6:
in every winding up, all debts payable by, and all claims against, the company (present or future, certain or contingent, ascertained or sounding only in damages), being debts or claims the circumstances giving rise to which occurred before the relevant date, are admissible to proof against the company.
60 It is not in dispute that:
(a) Having regard to the interaction of ss 444A(4)(i), 444D(1) and s 553(1) of the Corporations Act, the question whether a claim is provable under cl 9.2 of the DOCA is to be determined by considering whether the claim is provable under s 553(1) of the Corporations Act; and
(b) The “relevant date” for the purposes of s 553(1) is the appointment date.
The deed administrators’ submissions
61 The deed administrators submitted that the DHHI costs claim and pre-administration interest relating to those costs are not admissible under cl 9.2 of the DOCA for the reasons summarised by Gilmour J (with whom Besanko and Rangiah JJ) in Central Queensland Development. That decision is a useful vehicle for addressing authorities on which the deed administrators relied.
62 First, Gilmour J said (at [31]-[33]) that the expressions “claims must have arisen” in s 444A(4)(i) and “claims arising” in s 444D(1) refer to claims that, at the date specified in the deed of company arrangement, would have been provable in the winding up of the company under s 553(1) of the Corporations Act: see Brash Holdings Ltd v Katile Pty Ltd [1996] 1 VR 24 at 34-36. Under s 553(1), a claim, which includes a contingent claim, is admissible to proof against the company if “the circumstances giving rise” to it occurred before the relevant date. The Full Court was asked to resolve conflicting authorities as to the meaning of that phrase.
63 Second, in Central Queensland Development at [37]-[41], Gilmour J considered elements of Hayne J’s judgment in Sons of Gwalia Ltd v Margaretic [2007] HCA 1; (2007) 231 CLR 160 (Sons of Gwalia) as follows:
(a) As Hayne J observed at [161], the capacity to prove debts in a company’s winding up under s 553 of the Corporations Act is different to that prevailing under s 82(2) of the Bankruptcy Act 1966 (Cth). What matters under s 553 is whether “the circumstances giving rise to [the debt or claim in question] occurred before the relevant date”;
(b) Justice Hayne’s observation, at [171], that neither the High Court nor any intermediate court had previously considered the question of what is meant in s 553 by “debts or claims the circumstances giving rise to which occurred before the relevant date” but this carried a footnote referring to two first instance judgments, McDonald v Deputy Commissioner of Taxation [2005] NSWSC 2; (2005) 58 ATR 418 (McDonald v DCT) and Environmental & Earth Sciences Pty Ltd v Vouris [2006] FCA 679; (2006) 152 FCR 510 (Environmental & Earth Sciences). Justice Gilmour found that the reference to those cases did not indicate that Hayne J approved them, but rather found that, in context, the reference to them was neutral; and
(c) Referring to Hayne J’s finding at [172], the legislative intention underpinning s 553 is that provable claims in a winding up are to be defined very widely, as is evident from the text of s 553(1).
64 Third, in Central Queensland Development at [42]-[46], Gilmour J then turned to consider the High Court’s decision in Foots v Southern Cross Mine Management Pty Ltd [2007] HCA 56; (2007) 234 CLR 52 (Foots). Justice Gilmour noted that the High Court considered the nature of a costs order made after Mr Foots became bankrupt in the circumstances where judgment had been entered against him two weeks before he became bankrupt. Mr Foots argued that the costs order was a provable debt within the meaning of s 82 of the Bankruptcy Act as it was a debt or liability arising out of an obligation incurred before his bankruptcy because it was an obligation incidental to a provable debt. Relevantly:
(a) Justice Gilmour noted that the language of s 82 of the Bankruptcy Act is not the same as that of s 553 of the Corporations Act. Section 82(1) concerns “debts and liabilities … by reason of an obligation incurred before the date of the bankruptcy”. Section 553(1) by contrast, is in terms of “debts or claims the circumstances giving rise to which occurred before the relevant date” (emphasis added). His Honour referred to Foots at [9] where the majority noted that the classes of provable debts under the Bankruptcy Act are narrower than those encompassed by s 553 of the Corporations Act. His Honour observed that that had earlier been identified in Sons of Gwalia; and
(b) Justice Gilmour (at [45]) noted that a number of characteristics as to the nature of a costs order or claim for such an order emerged from the decision of the majority in Foots:
(i) an award of costs is discretionary: Foots at [25];
(ii) there is no absolute rule that costs follow the event, citing Oshlack v Richmond River Council [1998] HCA 11; (1998) 193 CLR 72 at [40]-[41]: Foots at [26];
(iii) no “obligation” arose until the costs order was made: Foots at [35];
(iv) the risk that an order for costs may be made is not a contingent liability within the meaning of s 82(1) of the Bankruptcy Act: Foots at [36];
(v) the order for costs itself is the source of the legal liability: Foots at [36];
(vi) there is no certainty that the court in question will decide to make an order: Foots at [36]; and
(vii) costs are not an incident of a judgment: Foots at [37].
65 Fourth, in Central Queensland Development at [47]-[57], Gilmour J then turned to consider authorities that addressed the question of whether costs are a “contingent claim” for the purposes of s 553(1) of the Corporations Act. Relevantly:
(a) Justice Gilmour noted that in Expile Pty Ltd v Jabb’s Excavations Pty Ltd [2004] NSWSC 284; (2004) 22 ACLC 667, the relevant costs claim was for costs of winding up. Under s 466(1) of the Corporations Act, the person making the application for winding up must pay their own costs until a liquidator has been appointed. Justice Palmer found (at [35]) that s 466(1) rendered “inapplicable” a claim that such costs were a contingent claim;
(b) Justice Gilmour expressed the opinion that, in FAI Workers Compensation (NSW) Ltd v Philkor Builders Pty Ltd (1996) 132 FLR 213, Young J was correct to find that a cost order made after the relevant date specified it in a deed of company arrangement was not subject to the deed as it was not a “claim arising” within the meaning of s 444D(1) of the Corporations Law then in force and in rejecting the submission that the claim for costs was a contingent debt;
(c) Justice Gilmour noted that the decision of Graham J in Environmental & Earth Sciences was to the contrary effect. In analysing the reasoning in that case, Gilmour J said:
55 Justice Graham in granting a declaration that the administrator’s partial rejection of the plaintiff’s proof of debt was invalid held that as at the date of the appointment of the administrator to the defendant company the plaintiff had a “present claim” for costs to which s 553(1) of the Corporations Act applied.
56 His Honour, adopting the language of Barrett J in McDonald, went on to state that the eventual liability of the defendant company under the costs order following the appointment of the administrator had its “genesis” in the judgment of the Full Court in the plaintiff’s favour. Putting it another way his Honour characterised delivery of the Full Court judgment as “the seeds” of the costs order. His Honour regarded this conclusion as being generally in sympathy with the judgment of the English Court of Appeal in Re British Gold Fields of West Africa [1899] 2 Ch 7 to the effect that a creditor’s costs are incidental to a provable debt and therefore such costs themselves are provable even where the costs order was made after the company was wound up.
57 However, British Gold Fields was the subject of detailed and critical analysis by the majority in Foots: at [38]-[60]. At [60] it was stated that the case should no longer be “accepted as authority for a proposition which compels a construction of s 82 of the Bankruptcy Act whereby an untaxed order for costs made after bankruptcy is a provable debt”.
66 Fifth, in Central Queensland Development at [58]-[68], Gilmour J turned to consider the decision of the New South Wales Court of Appeal in BE Australia WD Pty Ltd v Sutton [2011] NSWCA 414; (2011) 82 NSWLR 336 (BE Australia). His Honour noted that in that case Ms Sutton had commenced an action for relief against her employer under s 106 of the Industrial Relations Act 1996 (NSW). Before the case was heard, her employer was placed in voluntary administration and a deed of company arrangement was approved. Ms Sutton’s action under s 106 was stayed. Ms Sutton lodged a proof of debt in respect of her s 106 claim, but the deed administrators rejected it. She instituted proceedings in the Supreme Court of New South Wales seeking either an order under s 1321 of the Corporations Act, reversing the administrators’ decision, or an order under s 447A enabling the administrators to consider the claim. Justice Gilmour then said:
63 … Justice Campbell (McColl JA agreeing) held that a person had a “claim” within the meaning of s 553 if he or she had a basis, founded on an existing legal right, for asserting a right to participate in the division of the assets of the company.
64 Accordingly an undetermined application to the Industrial Relations Commission under s 106 of the IR Act was not a “claim” under s 553 of the Corporations Act as an applicant for an order under s 106 had nothing more than a right to take proceedings and no legal obligation of the defendant in those proceedings existed until such time as the Commission had made an order pursuant to that provision ([1], [106]-[108], [223]-[224]).
65 That a person has a “claim” at the time administrators are appointed does not, as Campbell JA correctly observed at [105], render it a claim within s 553(1) of the Corporations Act. Thus the respondent’s claim before the Industrial Relations Commission was not a “claim” within s 553(1). Likewise, Hammerschlag J in Larkden (at [63]) held that “only the making of the order itself can constitute circumstances giving rise to the claim”. ...
66 Justice Campbell considered by analogy claims for costs. His observations are helpful in the present matter. His Honour traversed the authorities to which I have referred including Foots as to which he said at [113]-[115]:
[113] In Foots v Southern Cross Mine Management Pty Ltd [2007] HCA 56; (2007) 234 CLR 52, the High Court considered a situation where judgment for damages was given against a man before he became bankrupt, and an order for costs arising from that litigation was made against him after the bankruptcy. The Court held that the costs so ordered were not provable in his bankruptcy. The joint judgment of Gleeson CJ, Gummow, Hayne and Crennan JJ stressed (at [2]) that the decision essentially turned upon the construction of s 82 of the Bankruptcy Act 1966 (Cth). Their Honours also observed (at [9]), that under s 82 “the classes of provable debts are narrower than those encompassed by s 553 of the Corporations Act 2001 (Cth) as regards corporate insolvency”.
[114] Even so, there are some aspects of the judgment of the plurality that expound the nature of costs awards in a way that does not depend upon the text of s 82. Their Honours (at [35]) rejected the proposition that exposure to an adverse costs order arose from an obligation incurred prior to the bankruptcy. Similarly (at [37]) their Honours rejected the proposition that exposure to an adverse costs order is “incidental” to liability for the underlying judgment debt. This rejection was accompanied by a footnote that referred to McCluskey, preceded by a “cf”. I suspect that that indicates disapproval of McCluskey.
[115] There is a strong analogy, in my view, between the position of a litigant who seeks but has not yet obtained an order under s 106 of the IR Act, and that of a person who seeks but has not yet obtained an order for the costs of seeking a winding up order. In each case, whether an order will be made is an exercise of discretion, and that discretion does not arise from any legal right that the applicant has (beyond the bare right to seek the order) before the order is actually made. Until the order is made, the applicant does not have a “claim” that falls within the meaning of s 553.
67 Although obiter, the opinion of the majority that claims for costs ordered after the appointment of an administrator are not “claims” within s 553(1) ought be afforded considerable weight. Indeed I think respectfully that it is correct.
68 The reasons of the majority are in substance akin to those of Hammerschlag J in Larkden at [61]-[62] where his Honour stated:
[61] Section 553(1) of the Corporations Act does not require the existence of a debt or liability at the relevant date as does s 82(1) of the Bankruptcy Act. However, it is no less pertinent to s 553(1) of the Corporations Act than it is to s 82(1) of the Bankruptcy Act that, as the High Court pointed out in Foots at [24] to [37], an order for costs itself is the source of the legal liability. Such orders turn on discretionary considerations that arise independently of the entry of judgment against the losing party. There is no certainty that the Court in question will decide to make the order. Indeed, there is no certainty that any party will move for an order.
[62] However widely one considers the notion of provable claim to be, the substantive obligation under the costs award has only one element, namely, the making of the costs award by the arbitral tribunal in the exercise of its discretion under s 33B(1) of the Commercial Arbitration Act.
69 Again these are views which I would respectfully adopt, as did the primary judge.
67 Sixth, in Central Queensland Development at [70]-[72], Gilmour J then concluded as follows:
70 Where an administrator was appointed after judgment was entered but before a costs order was made it might be thought that where a claim for costs is made in those circumstances this would answer the statutory criterion under s 553(1) of the Corporations Act of whether it was a “present” claim “the circumstances giving rise to which occurred before the relevant date”. This was what occurred in Environmental & Earth Sciences. However, I do not agree with such an analysis. As the majority in Foots observed at [37], when considering the nature of a costs order “it cannot be said that exposure to an adverse costs order is ‘incidental’ to liability for the underlying judgment debt” and that “as a factual and legal matter, costs are no longer an ‘incident’ of either verdict or judgment … the making of an adverse costs order turns upon discretionary considerations that arise independently of the entry of judgment against the debtor”.
71 I agree with the observation by Campbell JA in BE Australia at [114] that the footnote in Foots referring to McCluskey which accompanied the rejection by the High Court in Foots of the “incidental” liability contention rather indicates disapproval of McCluskey on this point.
72 Nor for the same reasons can such a costs claim be properly characterised as a contingent claim: see Foots at [36].
68 The deed administrators’ submissions noted that DHHI’s legal representative’s letter dated 20 November 2020 asserted that the reasoning in both Larkden and Central Queensland Development were liable to challenge because of the decisions of the Supreme Court of the United Kingdom in In re Nortel GmbH [2013] UKSC 52; [2014] AC 209 and the Supreme Court of New Zealand in Bradbury v Commissioner of Inland Revenue [2015] NZSC 80; [2015] 1 NZLR 739 which accepted that a costs order was provable even if made after a liquidator was appointed. DHHI’s written submissions did not address these decisions and counsel submitted orally that they at most, provide a basis for distinguishing the decisions on which the deed administrators rely.
Concerning TGP costs
69 In relation to the costs order made in favour of TGP, the deed administrators submitted as follows:
(a) The entitlement to costs in the TGP Arbitration was governed by s 33B(1) of the WA Commercial Arbitration Act. For convenience, I will set out here s 33B(1) and (4) which are also, in the context of the Commercial Arbitration Act 2010 (NSW) (NSW Commercial Arbitration Act), the subject of some of DHHI’s submissions concerning Larkden:
33B Costs
(1) Unless otherwise agreed by the parties, the costs of an arbitration (including the fees and expenses of the arbitrator or arbitrators) are to be in the discretion of the arbitral tribunal.
…
(4) The arbitral tribunal may, in making an award —
(a) direct to whom, by whom, and in what manner, the whole or any part of the costs that it awards are to be paid; and
(b) tax or settle the amount of costs to be paid or any part of those costs; and
(c) award costs to be taxed or settled as between party and party or as between legal practitioner and client.
(b) Accordingly, the express terms of s 33B(1) make it clear that TGP’s “entitlement” to costs was solely dependent on the TGP Tribunal exercising its discretion to award costs. The decisions in Foots, BE Australia and Central Queensland Development make it “reasonably clear” that TGP would not have a provable claim for its costs until the TGP Tribunal actually made an order for costs. That order was made about three months after DFA was placed in administration;
(c) It should be noted that, while the TGP Award was published after DFA was placed into administration, the TGP Tribunal gave notice before the appointment date that it was ready to publish its award as soon as its fees were paid. There is no evidence of what the TGP Tribunal’s reasons were at the time it gave that notice. Even if it could be inferred that its reasons were identical to those set out in the TGP Award, the reality is that the TGP Tribunal was entitled to change its mind at any time before it handed down its award. More relevantly, for the reasons set out in Foots, DFA could have no legal liability for TGP’s costs until the TGP Tribunal actually made an order for costs; and
(d) Accordingly, TGP’s claim for costs in the TGP Arbitration is not admissible to proof under the DOCA.
Concerning the DHHI costs claim and interest thereon
70 The deed administrators submitted as follows:
(a) The entitlement to costs in the DHHI Arbitration was governed by arts 40 to 42 of the UNCITRAL rules;
(b) Article 40(1) provides that:
The arbitral tribunal shall fix the costs of arbitration in the final award and, if it deems appropriate, in another decision.
(c) The prima facie effect of art 40(1) is that DHHI could not have a legal entitlement to the costs of the DHHI Arbitration until such time as the DHHI Tribunal had fixed those costs.
(d) Article 42(1) provides that:
The costs of the arbitration shall in principle be borne by the unsuccessful party or parties. However, the arbitral tribunal may apportion each of such costs between the parties if it determines that apportionment is reasonable, taking into account the circumstances of the case.
(e) The second sentence of art 42(1) makes it clear that, in fixing costs, the DHHI Tribunal had, at all times, a discretion to either apportion or not apportion the costs of the DHHI Arbitration. That construction is consistent with the view of the DHHI Tribunal expressed in the Third DHHI Award at [107] as follows (emphasis in the submission):
The Tribunal notes that Article 42 of the UNCITRAL Rules starts with the principle that the costs of the arbitration shall be borne by the unsuccessful party but gives the Tribunal discretion to apportion costs …”
(f) In fact, in awarding costs, the DHHI Tribunal did exercise discretion by concluding (at [110] of the Third DHHI Award) that costs should be apportioned on the basis that DFA was liable for 95% of DHHI’s costs;
(g) The entitlement to interest on costs in the DHHI Arbitration was governed by s 20(1) of the International Arbitration Act of Singapore which provides as follows relevantly provides as follows:
Interest on awards
20.—(1) … unless otherwise agreed by the parties, an arbitral tribunal may, in the arbitral proceedings before it, award simple or compound interest from such date, at such rate and with such rest as the arbitral tribunal considers appropriate, for any period ending not later than the date of payment on the whole or any part of —
…
(c) costs awarded or ordered by the arbitral tribunal in the arbitral proceedings.
(h) The express terms of s 20(1)(c) make it clear that DHHI’s “entitlement” to interest on costs in the DHHI Arbitration was solely dependent on the DHHI Tribunal exercising its discretion to first, award costs, and second, to then award interest on the costs. This construction is consistent with the view of the DHHI Tribunal, which said, at [254] of the Third DHHI Award (emphasis in submission):
Under s.20(1)(c) of the IAA the Tribunal has a discretion to award interest on “costs awarded or ordered by the arbitral tribunal in the arbitral proceedings”.
(i) Accordingly, again, having regard to the same High Court and intermediate appellate court authorities, it would seem “reasonably clear” that DHHI would not have a provable claim for its costs of interest in the DHHI Arbitration until the DHHI Tribunal actually made an award for costs and then for interest on the costs. In circumstances where the Third DHHI Award was made almost six months after the appointment date, DHHI’s costs in the DHHI Arbitration and interest on those costs are not admissible to proof under the DOCA.
DHHI’s submissions
71 DHHI contended that:
(a) The DHHI costs claim and to interest thereon is an expense, loss or liability within the meaning of cl 9.2 of the DOCA (see [35] above).
(b) The claim is admissible to proof because all of the circumstances giving rise to it occurred before the appointment date, including the entry into and breach by DFA of the Supply Contract and the steps taken in the DHHI Arbitration. Accordingly, the costs order came about because of DFA’s breach of the Supply Contract leading to the dispute which was arbitrated under UNCITRAL rules which were incorporated into the Supply Contract; and
(c) Therefore the DHHI costs claim was made pursuant to contractual rights and it was an incident of those rights. It was not dependent on some intervening judicial discretion of the kind that we see in many of the cases on which the deed administrators relied.
72 DHHI relied on the following terms of the Supply Contract:
(a) Clause 28.2 which included the following:
If the dispute has not been resolved within 28 days of service of the notice of dispute or such longer period as the parties may agree in writing, that dispute shall be and is hereby referred to arbitration.
(b) Clause 28.3 which included the following:
The arbitration shall be in accordance with the UNCITRAL Arbitration Rules as in force at the date of this Contract.
(c) Clause 31.1 which provided that:
The Supplier shall bear its own legal, accounting and other costs, charges and expenses of and incidental to this Contract.
73 DHHI submitted that cl 28.3 of the Supply Contract is a clear incorporation of the UNCITRAL rules into the Supply Contract.
(a) The use of “shall” not “may” in art 40(1) means that it is mandatory for the DHHI Tribunal to fix costs;
(b) The only discretionary element in art 42(1) is apportionment, and such mandatory language is not accidental;
(c) Article 43(1) provides as follows:
The arbitral tribunal, on its establishment, may request the parties to deposit an equal amount as an advance for the costs referred to in article 40, paragraphs 2(a) to (c).
I note that art 40(2) provides as follows:
The term “costs” includes only:
(a) The fees of the arbitral tribunal to be stated separately as to each arbitrator and to be fixed by the tribunal itself in accordance with article 41;
(b) The reasonable travel and other expenses incurred by the arbitrators;
(c) The reasonable costs of expert advice and of other assistance required by the arbitral tribunal;
(d) The reasonable travel and other expenses of witnesses to the extent such expenses are approved by the arbitral tribunal;
(e) The legal and other costs incurred by the parties in relation to the arbitration to the extent that the arbitral tribunal determines that the amount of such costs is reasonable;
(f) Any fees and expenses of the appointing authority as well as the fees and expenses of the Secretary-General of the PCA.
(d) Counsel for DHHI submitted that the mandatory language in arts 40(1) and 42(1) is in contrast to the discretionary language in art 43(1).
75 In relation to the authorities, DHHI submitted as follows.
76 First, DHHI submitted that, in considering whether circumstances give rise to a debt or claim within the meaning of s 553(1), the consideration focuses on the existence (or lack thereof) of an act or omission on behalf of the company: see Re One.Tel Ltd; Ex parte Walker [2007] NSWSC 1478; (2007) 215 FLR 428 (Re Walker) at [22] (Barrett J).
77 Second, DHHI submitted that Sons of Gwalia concerned a claim for damages for various statutory breaches. Justice Hayne, (with whom Gummow, Heydon and Crennan JJ generally agreed) found (at [170]) that the circumstances said to constitute misleading or deceptive conduct had occurred before the appointment of administrators even though a loss or damage was not then apparent to investors. At [172], Hayne J explained that s 553 is to be given a wide construction having regard to its terms and purpose.
78 Third, DHHI submitted that the decision in Foots turned on the construction of s 82 of the Bankruptcy Act, which (at [9]) the majority of the High Court noted is narrower in its terms than s 553(1) of the Corporations Act. The majority (at [24]) set out several general features of an award of costs including that the award is discretionary and the actual monetary value of an award of costs cannot be ascertained until those costs are taxed or otherwise assessed. The majority held (at [36]) that “[t]he order for costs itself is the source of the legal liability and there is no certainty that the court in question will decide to make an order”. This meant that Mr Foots was not subject to a liability “at the date of the bankruptcy” and he was under “no antecedent obligation to pay costs until the order was made against him”: see Foots at [65]. In contrast, in this case the costs order is an incident of DHHI’s contractual rights.
79 Fourth, DHHI submitted that, in BE Australia, Campbell JA found (at [105]-[107]) that Ms Sutton did not have a “claim” within the meaning of s 553(1) as a result of commencing proceedings under s 106 of the Industrial Relations Act which had not been heard at the time her employer was placed in administration. That is because s 553 required a claim to be “founded on an existing legal right … to participate in the division of the assets of the company”: see BE Australia at [104]. Under s 106 of the Industrial Relations Act (which was then headed “Power of Commission to declare contracts void or varied” (see BE Australia at [58]), Ms Sutton had nothing more than a right to take proceedings. Justice Campbell, quoting Buckingham v Pan Laboratories (Australia) Pty Ltd (in liq) [2004] FCA 597; (2004) 136 FCR 102 at [85], found that it was particularly relevant that s 106 gave the Industrial Relations Commission “a wide discretion to alter, retrospectively, substantive rights and liabilities”. The fact that the discretion in s 106 did not arise from any extant legal right before the order was made was a central component of Campbell JA’s reasoning and an important distinguishing feature to this case.
80 Fifth, DHHI noted that, in McLellan v Australian Stock Exchange Limited [2005] FCA 585; (2005) 144 FCR 327 (McLellan), the issue was whether the Australian Stock Exchange (ASX) was bound by a deed of company arrangement in relation to a fine that it had issued after a listed company went into administration in relation to breaches of ASX’s operating rules which occurred prior to that date: see [5]. By s 793B of the Corporations Act, the operating rules had effect as a contract under seal between ASX and each market participant: see [2]. Justice Finkelstein considered whether the ASX’s discretionary power to impose the fine under contract could be treated as a contingency: see [12]. His Honour said the following at [16] and [17]:
16 ... The possibility that a costs order may be made is a contingency. So also, in my view, is the possibility that a fine may be imposed a relevant “contingency”; it is a future event which may or may not occur out of which a legal liability to pay money will arise. Nevertheless, in Australia, if not in England, it is still necessary to find an underlying legal liability which is the source of the obligation to pay the fine. That underlying liability exists. It is to be found in either the statutory contract with its implied term to pay the fine or in the private contract with ASX which would be the source for an obligation to pay damages suffered by ASX if the fine is not paid.
17 Re Pickering; Ex parte Thornthwaite (1854) 5 De GM & G 367 supports this result. An action for an account was resolved by agreement. An arbitrator was directed to take the accounts and the costs were to abide the result of the award. In due course an award was made in favour of the plaintiff, but before there was any judgment for costs, the defendant committed an act of bankruptcy. The costs were provable in the bankruptcy. Turner LJ (at 372) said that the underlying liability for the costs was to be found in the “valid agreement for valuable consideration, that the amount to be found due by the arbitrator should be the amount to be recovered in the action, and for which judgment should be entered up, and that such judgment, when entered up, should be binding on both parties”.
81 Sixth, DHHI submitted that, in Australian Competition and Consumer Commission v Phoenix Institute of Australia Pty Ltd (Subject to Deed of Company Arrangement) [2016] FCA 1246 (ACCC v Phoenix Institute), Perry J considered an application for leave to proceed against a company subject to a deed of company arrangement in relation to conduct which predated the appointment of administrators which was said to contravene the Australian Consumer Law (being Sch 2 to the Competition and Consumer Act 2010 (Cth)). The ACCC sought relief that included orders for non-party consumer redress under s 239 and an injunction under s 232 of the Australian Consumer Law: see [39]. The ACCC sought to cast these claims as “contingent claims” and therefore provable under the deed of company arrangement. After considering what was said by Finkelstein J in McLellan, at [71], Perry J said:
Nothing in that case suggests that the fact the discretion to grant relief under ss 232 and 239 of the ACL is vested in a Court rather than an adjudicatory tribunal as in McLellan, and involves an exercise of judicial power, constitute relevant points of distinction. To the contrary, the reasoning in [McLellan] suggests that the relevant question is whether the future event which may or may not occur is founded in an underlying legal liability.
82 At [75]-[79], Perry J distinguished BE Australia on the basis that s 106 of the Industrial Relations Act did not confer power to grant relief in relation to an existing legal obligation that the company owed at the relevant date, but rather, it relied on the Industrial Relations Commission forming a view that a contract was unfair. Justice Perry concluded, at [80], that “in contrast to BE Australia, here there were pre-existing obligations under the ACL which were allegedly contravened giving rise to the possibility that the Court may grant the relief sought under ss 232 and 239”. At [81], her Honour found that this broad construction of s 553 of the Corporations Act was confirmed by the approach to the construction of s 553 in Sons of Gwalia.
83 DHHI also relied on Hipages Group Pty Ltd v Reach Aussie Pty Ltd [2017] FCA 112 (Hipages) at [46] in which Perry J accepted that a claim for damages based on the respondent’s pre-existing obligation to comply with the Australian Consumer Law made the plaintiff a contingent creditor.
84 Seventh, DHHI submitted that it is relevant that the costs awards considered in Larkden were made pursuant to s 33B(1) and (4)(b) of the NSW Commercial Arbitration Act. It says that:
(a) At [61], Hammerschlag J relied on the reasoning in Foots at [24]-[37] that the order for costs itself was the source of the legal liability and there is no certainty that the court in question will decide to make an order; and
(b) In reaching his conclusion that the order for costs itself was a source of legal liability, Hammerschlag J (at [70]) distinguished McLellan on the basis that in McLellan the fine was imposed by a party itself acting pursuant to a contractual entitlement to do so. In contrast, the liability of the respondent under the costs award in Larkden arose from the exercise of jurisdiction by the arbitrator. Justice Hammerschlag found that while that presupposed the existence of a valid arbitration agreement, jurisdiction was given to the arbitrator by s 33B(1) of the NSW Commercial Arbitration Act so that it was no different from an order for costs made by a Court.
DHHI submitted that that aspect of the reasoning in Foots is not applicable here because the source of the liability is the Supply Contract.
85 Eighth, DHHI submitted that, in Larkden and Central Queensland Development, an enactment prescribed a discretion as to costs with the result that a costs award made after the relevant date was not a provable claim for the purposes of s 553(1) of the Corporations Act. This case is distinguishable from those cases. DHHI says its submissions are consistent with the Court’s reasoning in McLellan. That is, a costs award resulting from the exercise of a discretion pursuant to a contract is a provable claim under s 553 even if the award is made after the appointment date. In this case, the DHHI Tribunal was required to make an order as to costs. The parties agreed by contract (arts 40 and 42 of UNCITRAL) that there will be a costs award which will fall in a particular way.
86 DHHI’s central contention is that the factors identified by Gilmour J in Central Queensland Development (see [64(b)] above) are not present, or are not entirely present, in relation to the costs order made by the DHHI Tribunal. DHHI says that is because:
(a) It cannot be said in this case that there is no pre-existing obligation to pay costs until an orders is made. The costs determined by the DHHI Tribunal are entirely an incident of a pre-existing contractual obligation. DFA was exposed to the likely cost consequences of a tribunal proceeding on the day that it breached its obligations under the Supply Contract. At every step of the process, DFA’s liability was sourced in the relevant terms of the Supply Contract and the UNCITRAL rules that the contract incorporated by reference. That is sufficient to distinguish Larkden and Central Queensland Development which are decisions that explicitly relied on the fact that there was a distinct statutory basis for the costs order as a source of legal liability. It was correct for Hammerschlag J to distinguish McLellan on the facts of the case. The relevant fact present in Larkden (and not present here) was that the source of the power to order costs employed by Hammerschlag J was s 33B(1) of the NSW Commercial Arbitration Act rather than a pre-existing contractual right;
(b) Unlike a court, an arbitral body applying the UNCITRAL rules must make a costs order under art 40(1). Article 40(2) sets out what the costs may include. Unlike a court (see Larkden at [61]), it cannot be said (having regard to art 40(1)) that there is no certainty that a tribunal will make an order. Further, art 42(1) clearly articulates the principle that costs should follow the event. This must be contrasted with s 33B(1) of the NSW Commercial Arbitration Act. Section 33B(4) provides that the arbitral tribunal “may, in making an award” make directions about who would pay the costs, tax or settle the amount of costs, award costs to be taxed or settle as between party and party or as between legal practitioner and client;
(c) There are no authorities that suggest that a claim made pursuant to a purely contractual liability only arises after the appointment date. The mere existence of a discretionary aspect to the contractual award is insufficient to find that there is no provable claim under s 553. The decisions in McLellan and Ex parte Harding; re Pickering (1854) 5 DG&M 367 (referred to in McLellan at [17] as Re Pickering; Ex parte Thornthwaite) (Ex parte Harding) demonstrate that a discretion exercised under a contract can meet the definition of a “contingent” claim founded on a pre-existing right or obligation; and
(d) If those propositions are not accepted, DHHI formally submits that Central Queensland Development should not be followed to the extent that it suggests that a costs order made pursuant to a pre-appointment contractual right cannot constitute a provable claim.
The deed administrators’ submissions in reply
87 In relation to DHHI’s reliance on Re Walker at [22] (see [76] above), the deed administrators submitted that:
(a) In the same passage, Barrett J observed that a claim for costs awarded after liquidation of a prior winding up application “was not admissible to proof under s 553”;
(b) In Larkden at [55]-[57], Hammerschlag J expressly addressed Re Walker and said:
55 For example, in Re Walker (2007) 215 FLR 428 at [22], Barrett J observed that authorities dealing with “the circumstances” which may give rise to a debt or claim within the meaning of s 553(1) of the Corporations Act, not infrequently refer to some act (or omission) on the part of the company which “carries within it the seed” of the eventual claim, or provides its “genesis”; see too McDonald v Commissioner of Taxation (2005) 187 FLR 461 at [44].
56 However, beyond this, the Court was not referred to an articulation in any of the authorities of the test to be applied in determining whether particular circumstances have given rise to a particular claim.
57 In my view, whether particular circumstances have given rise to a claim requires identification of the elements of the substantive obligation which the claim represents and an assessment of whether those circumstances reveal the existence of a basal fact necessary to bring that substantive obligation into being.
(c) The correct approach is that set out in the subsequent decisions of the Court of Appeal in BE Australia at [105] and the Full Federal Court in Central Queensland Development at [63]. In those cases, it was held that a claim will only be a claim within the meaning of s 553(1) if it is “founded on an existing legal right”.
88 The deed administrators submitted that DHHI sought to qualify the importance of Foots because the High Court’s decision was concerned with provability under s 82 of the Bankruptcy Act, which is narrower than s 553(1) of the Corporations Act. However, that distinction was held to be immaterial to the High Court’s explanation of the “nature of an order for costs” in each of Larkden at [60]-[64], BE Australia at [114] and Central Queensland Development at [43]-[45].
89 The deed administrators say that DHHI sought to explain the decision in BE Australia on the basis that the Court was only concerned with the provability of a claim under s 106 of the Industrial Relations Act. They submitted that at [109]ff, Campbell JA reached the conclusion that a claim under s 106 was not provable by way of an express analogy with claims for costs orders made post-liquidation, which are also not provable. That reasoning was adopted as correct in Central Queensland Development at [66]-[67].
90 The deed administrators said that DHHI cited McLellan (at [16]) as authority for the proposition that the “possibility that a costs order may be made is a contingency”. However, they submitted that:
(a) In McLellan at [13], Finkelstein J expressly accepted that under the earlier bankruptcy acts, “the mere possibility of having to pay costs at the date of bankruptcy was not a provable debt … The reason was that there was no debt, contingent or otherwise, until the order for costs was made”;
(b) While Finkelstein J did observe that the possibility that a costs order may be made is a contingency, that conclusion was based solely on the judgement of Mummery LJ in Glenister v Rowe [2000] Ch 76. However, in Foots at [36] the High Court expressly addressed Glenister v Rowe and said (emphasis in submission):
The most that can be said, as Mummery LJ observed in Glenister, is that “[o]nce legal proceedings have been commenced there is always a possibility or a risk that an order for costs may be made against a party”. But that risk is not a contingent liability within the sense of s 82(1). The order for costs itself is the source of the legal liability and there is no certainty that the court in question will decide to make an order. …”
(c) In McLellan at [16], Finkelstein J held that even though a costs order may be a contingency, “it is still necessary to find an underlying legal liability which is the source of the obligation”.
91 Insofar as DHHI relies on Finkelstein J’s summary of Ex parte Harding in McLellan at [17], the deed administrators submitted that care needs to be taken because:
(a) As the High Court noted in a footnote to Foots at [44], that case was distinguished in Re Weller, Ex parte Weller (1867) 17 LT 125. Footnote 78 to Foots at [44] indicates that the distinction is that in Ex parte Harding, a pre-bankruptcy arbitral award itself had given the creditor costs;
(b) The facts of Ex parte Harding are as follows: On 3 February 1849, an action was tried and a verdict was taken by consent, with the parties expressly agreeing to refer the matter to arbitration to “direct a verdict … as [the arbitrator] should think proper, and the costs of the suit, to be taxed, were to abide the result of the award” and the arbitrator’s award was to be final and binding. On 5 May 1853, the arbitrator delivered his award in favour of the plaintiff, which (presumably) included an order for costs. On 9 May 1853, the defendant committed an act of bankruptcy. On 12 May 1853, “judgment was signed and the costs taxed”. The creditor’s proof was challenged on the ground that judgment was not signed until after the act of bankruptcy. The Court rejected that challenge because the award had been made before the act of bankruptcy and could not be challenged (Knight Bruce LJ) and because the parties had entered into a “valid agreement for valuable consideration” that they would be bound by the arbitrator’s award and that award was delivered before the act of bankruptcy (Turner LJ); and
(c) Accordingly, Ex parte Harding does not appear to be directly concerned with the provability of a costs order made after an act of bankruptcy.
92 In relation to the decisions in ACCC v Phoenix Institute and Hipages confirming that discretionary orders based on pre-administration contraventions of the Australian Consumer Law can constitute a provable claim, the deed administrators submitted that:
(a) That proposition was established in Sons of Gwalia, which was handed down on 31 January 2007, with Foots being handed down in December 2007;
(b) In ACCC v Phoenix Institute at [68]-[71], Perry J cited with approval McLellan, including Finkelstein J’s reliance on Glenister v Rowe;
(c) Unfortunately, her Honour’s attention was not drawn to Sons of Gwalia, Foots, Larkden, BE Australia or Central Queensland Development; and
(d) In Hipages at [46], her Honour held shortly that a claim for damages brought under the Australian Consumer Law “based upon an alleged breach of pre-existing obligations … to comply with the ACL” constituted a contingent claim under the Corporations Act citing only ACCC v Phoenix Institute.
I note that neither ACCC v Phoenix Institute nor Hipages dealt with the issue of costs. Further, the assertion in (c) is not accurate. Those decisions were referred to, other than Central Queensland Development: see ACCC v Phoenix Institute at [50], [55], [75]-[81], [86], [90].
93 In relation to DHHI’s submissions seeking to distinguish the decision in Larkden on the basis that the costs order was made under s 33B of the NSW Commercial Arbitration Act, the deed administrators submitted that:
(a) The parties had clearly agreed to refer the dispute to arbitration; and
(b) Section 1C of the NSW Commercial Arbitration Act establishes that the “paramount purpose” of that Act is to “facilitate the fair and final resolution of commercial disputes”,
and that is the very same purpose as the UNCITRAL rules (see art 1 and resolution 65/22 of the General Assembly).
94 The deed administrators noted DHHI’s submission that, in this case, there was a “pre-existing obligation to pay costs” based on cll 28.2, 28.3 and 31.1 of the Supply Contract and arts 40 and 42 of the UNCITRAL rules (see [70(b)], [70(d)] and [72]-[74] above). They said that exposure to an adverse costs order arising from an obligation incurred before administration or a risk that a costs order might be made is not enough: see Foots at [35] and [36]. Further, exposure to an adverse costs order because of an underlying debt does not establish an “incidental” liability for costs: see Foots at [37]. On that basis they submitted that:
(a) Whatever might be said about cl 31.1, which provides that DHHI would “bear its own legal … costs … of and incidental to” the Supply Contract, it does not give DHHI any right to legal costs and does not assist DHHI. I agree with the deed administrators;
(b) The sole purpose of cl 28.2 is to provide a mechanism (referral to arbitration) by which disputes between the parties about their underlying contractual rights would be resolved without going through court processes. That clause does not give DHHI any right to legal costs and does not assist it;
(c) Clause 28.3 does not incorporate the UNCITRAL rules as terms of the Supply Contract. It simply provides that the arbitration process was to be conducted in accordance with those rules. In so doing, the UNCITRAL rules were to operate in the same way as the various forms of rules that ordinarily govern courts and other arbitrations. This too, does not give DHHI any right to legal costs and does not assist it; and
(d) Even if the UNCITRAL rules were incorporated into the Supply Contract, the terms of arts 40 and 42 do not assist DHHI. The significance of art 40 is that the decision to award costs rests with the DHHI Tribunal and there could be no legal entitlement to those costs until the DHHI Tribunal had fixed those costs. Further, and more importantly, the power in art 40 is qualified by art 42 which confers a discretion on the DHHI Tribunal to apportion or not apportion costs as it saw fit, a discretion which it in fact exercised. Accordingly, those articles did not confer on DHHI a “legal right” to costs. They do nothing more than confer on the DHHI Tribunal a discretionary power to award costs. There is a material difference between an express contractual right to costs and the reservation of a future discretionary power to award or not award a party its costs. The former confers a fixed and certain legal right while in the latter case it is the order for costs itself that is the source of the legal liability: see Foots at [36]. The incorporation of those articles into the Supply Contract is not a basis to distinguish Foots, Larkden or Central Queensland Development; each of those cases were concerned with the characteristics of a discretionary costs order made under relevant procedural rules. The position in this case is no different.
95 The deed administrators submitted that:
(a) McLellan and Ex parte Harding do not assist DHHI. The reasoning in McLellan relied on the decision in Glenister v Rowe which was subsequently qualified in Foots. As noted, Ex parte Harding is not authority for the proposition that a discretion exercised under a contract can constitute a contingent claim; and
(b) As the High Court explained in Foots at [36], the fact that there was a very real possibility or risk that costs would be awarded in favour of DHHI following on from the First DHHI Award did not create a contingent liability. It was the Third DHHI Award which was the “source of the legal liability” for DHHI’s costs and that award was delivered after DFA had been placed into administration.
Consideration
TGP’s claim
96 I am not satisfied that TGP’s claim for legal and other costs of the TGP Arbitration and interest thereon is provable for the purposes of either s 553(1) of the Corporations Act or cl 9.2 of the DOCA.
97 There is no evidence that the contract between TGP and DFA contained any provisions relevant to the issue of the legal and other costs of the TGP Arbitration or interest thereon which would raise the issues on which DHHI relies. There is no evidence of any agreement under which the relevant dispute was referred to arbitration. The TGP Arbitration Terms appear to have no relevance as the arbitrators’ costs were paid in order to procure the release of the TGP Award. There is nothing which would make the facts of TGP’s case distinguishable from those confronting the Court in Larkden.
98 I am satisfied that TGP’s claim is not a provable claim for the reasons submitted by the deed administrators which are summarised at [69] above in light of the decisions in Foots, Larkden, BE Australia and Central Queensland Development and having regard to the terms of s 33B(1) and (4) of the WA Commercial Arbitration Act.
DHHI’s claim
99 I note that Larkden is factually similar to DHHI’s case in that in both cases, the contracts governing the relationship between the company which went into administration and the claimant contained provisions that disputes be referred to arbitration: see [72] above and Larkden at [14].
100 There are, however, differences between the circumstances of Larkden and this case.
101 The parties in Larkden agreed that arbitrations would be conducted under the Commercial Arbitration Act 1984 (NSW): see Larkden Pty Ltd v Lloyd Energy Systems [2011] NSWSC 268; (2011) 279 ALR 772 at [11]. In the event, the terms of s 33B of the NSW Commercial Arbitration Act were found to be relevant in Larkden. It is clear that Foots (at [36]-[37]) was a direct parallel to the situation in Larkden, save that Foots related to s 82 of the Bankruptcy Act and Larkden related to s 553 of the Corporations Act. In Foots, the plurality of the High Court said (footnotes omitted, emphasis added):
36 The most that can be said, as Mummery LJ observed in Glenister, is that “[o]nce legal proceedings have been commenced there is always a possibility or a risk that an order for costs may be made against a party”. But that risk is not a contingent liability within the sense of s 82(1). The order for costs itself is the source of the legal liability and there is no certainty that the court in question will decide to make an order. It should be remarked that in support of his reasoning in Glenister, Mummery LJ referred to what had been said by Kitto J in Community Development Pty Ltd v Engwirda Construction Co and by Tadgell J in Federal Commissioner of Taxation v Gosstray. The first submission by the appellant should be rejected.
“Incidental?”
37 … it is sufficient for present purposes to observe that, as a factual and legal matter, costs are no longer an “incident” of either verdict or judgment. As explained above, the making of an adverse costs order turns upon discretionary considerations that arise independently of the entry of judgment against the debtor.
102 Justice Hammerschlag said the following in Larkden at [61]:
Section 553(1) of the Corporations Act does not require the existence of a debt or liability at the relevant date as does s 82(1) of the Bankruptcy Act. However, it is no less pertinent to s 553(1) of the Corporations Act than it is to s 82(1) of the Bankruptcy Act that, as the High Court pointed out in Foots at [24] to [37], an order for costs itself is the source of the legal liability. Such orders turn on discretionary considerations that arise independently of the entry of judgment against the losing party. There is no certainty that the Court in question will decide to make the order. Indeed, there is no certainty that any party will move for an order.
103 Accordingly, the outcome in both Foots and Larkden turned on the fact that an order for costs was discretionary and there was no certainty that a costs order would be made or even that a party would move for such an order.
104 In contrast, in this case, it was a term of the Supply Contract established by cl 28.3 that the arbitration would be conducted in accordance with the UNCITRAL rules in force as at 31 August 2011, being the date of the Supply Contract. Whether or not the UNCITRAL rules were incorporated into the Supply Contract, the Supply Contract created a circumstance which existed at the appointment date that the issue of costs would fall to be determined in accordance with arts 40(1) and 42(1) of the UNCITRAL rules. I note that the position is different with respect to interest and I will address that separately.
105 Articles 40(1) and 42(1) of the UNCITRAL rules are set out at [70] above. Article 40(1) required the DHHI Tribunal to fix costs; it was not necessary for a party to move for such an order. Accordingly, there was certainty that an order regarding costs would be made.
106 Justice Hammerschlag said the following in Larkden at [58]-[59] in relation to claims based on contracts rather than statutory causes of action:
58 Hence, as Barrett J further pointed out in Re Walker at [20] to [21], in a case of a liability under a contract, it is not necessary that the breach or other event giving rise to the claim must have occurred before the relevant date. A claim which is triggered by an event that occurs after the relevant date is admissible to proof provided that the contract existed at the relevant date. His Honour had regard to the nature of the contract in question which involved the company’s continuing obligation to supply or perform an ongoing service or benefit. The existence of that contract was undoubtedly a basal fact necessary to bring the substantive contractual obligation comprising the claim into being.
59 It is also necessary to bear in mind that, as Hayne J pointed out in Sons of Gwalia v Margaretic (2007) 231 CLR 160 at [172], the words of [s 553(1)] indicate an intention to define provable claims widely.
107 In Re Walker, the factual circumstance was that, before it went into liquidation, One.Tel Ltd supplied telecommunications services to its customers. Accounting records suggested that 143,271 customers had credit balances of $50 or less. Justice Barrett noted that a small number of those customers had credits which were wrongly generated or the credit arose before the “relevant date”: the former could be ignored and the latter were plainly provable claims under s 553(1). The more difficult issue was in relation to 95% of cases in which the credit arose after the “relevant date”. Some of those credits were duplicated or excess payments made by customers or prepayments for services that extended beyond the last date when the company supplied services. Justice Barrett found that the “circumstances giving rise to the [customers’] claim[s]” for the breaches of contract (whenever they occurred) were One.Tel and the customers making contracts for supply of telecommunications and related services. The services were to be supplied on an ongoing basis in consideration of the customers making periodic payments. Neither administration nor winding up terminated the contracts. When One.Tel failed to provide the services, an action for breach of contract accrued. The claims of those customers were provable debts. The following analysis supporting those findings appeared at [17]-[21]:
17 It is then necessary to pay attention to the temporal aspect of s 553(1). The temporal connection is indicated by the words, “being debts or claims the circumstances giving rise to which occurred before the relevant date”. That is a matter to which Hayne J also gave attention in the Sons of Gwalia case. His Honour’s decision (at [175], [176]) was, in essence, that, if the essentials of the cause of action existed at the “relevant date”, even though not then known to the claimant, the temporal connection existed.
18 While the bankruptcy analogy already mentioned is instructive in identifying the kinds of claims that are relevant, it should be emphasised that the temporal aspect of s 553(1) differs significantly from that involved in the analogous bankruptcy provision. Section 82 of the Bankruptcy Act 1966 (Cth) makes provable not only debts and liabilities to which the bankrupt was subject at the date of bankruptcy but also those to which he or she becomes subject before discharge “by reason of an obligation incurred before” the date of bankruptcy. The connection envisaged by the Corporations Act provision pays attention, by contrast, to the time at which the “circumstances” giving rise to the debt or liability occurred, rather than focusing on the point at which any “obligation” was incurred. The recent decision of the High Court in Foots v Southern Cross Mine Management Pty Ltd (2007) 82 ALJR 173 is accordingly of no guidance in the present case.
19 In applying s 553(1) of the Corporations Act in the case of a liability under a contract, it is not necessary that the breach or other event giving rise to the claim must have occurred before the relevant date. A claim which is triggered by an event that occurs after the relevant date is admissible to proof, provided that the contract existed at the relevant date. Obvious examples include post liquidation claims under pre-liquidation insurance policies. It is “the circumstances giving rise to” the debts or claims which must have “occurred before the relevant date”, not the debts or claims themselves.
20 An important element is the nature of the contract in question as one involving the company’s continuing obligation to supply or perform an ongoing service or benefit.
21 In Re Thiess Infraco (Swanston) Pty Ltd and Smith (2004) 209 ALR 694, Finkelstein J (at [15]) drew attention to observations of Cotton LJ in Re Asphaltic Wood Pavement Co (1885) 30 Ch D 216 concerning a claim based on work unperformed by a construction company at the date of its winding up. The company there under consideration had, before the onset of winding up, entered into a construction contract. The work had not been completed. Cotton LJ said:
It is argued that this is not a liability at the time because there was no breach. At the time when the company commenced its liquidation, it was under a contract which implied a liability to maintain the streets if it were required. It is now rendered impossible by the winding up of the company to do that … That is properly a liability the damages for which are capable of being proved.
108 The outcome in McLellan is consistent with that analysis. Justice Finkelstein recognised (at [16]) that in Australia, it was still necessary to find an underlying legal liability which is the source of a provable claim for a fine imposed on the company in administration after the “relevant date” in relation to breach of ASX’s operating rules which occurred before that date. That position is consistent with Foots which was decided after McLellan. Justice Finkelstein identified the source of the provable claim as either an implied term of the statutory contract to observe the ASX operating rules and to pay a fine if those rules are breached or an obligation to pay damages to ASX under the private contract with ASX if the fine was not paid. The statutory and private contracts existed at the “relevant date”. His Honour correctly identified (at [17]) that, in Ex parte Harding, the legal liability underlying a provable claim for a costs order made after bankruptcy was the pre-bankruptcy commitment for valuable consideration to refer the issue of taking an account to an arbitrator and that “costs were to abide the result of the award”.
109 I therefore accept that, consistent with the decisions in McLellan, Ex parte Harding and Re Walker, a discretion exercised after the “relevant date” under a contract entered into before the “relevant date” can give rise to a provable claim under s 553(1) of the Corporations Act.
110 The issue in this case is whether DFA’s obligation to pay DHHI’s legal and other costs of the DHHI Arbitration was an obligation imposed by the Supply Contract or one that arose independently upon the making of the costs award. In my view, the award of DHHI’s legal and other costs was grounded in the Supply Contract which pre-dated the “relevant date”. Given the circumstances of this case, I do not think it matters that the discretion as to the allocation of costs conferred by art 42(1) was exercised by the DHHI Tribunal rather than one of the parties to the Supply Contract, as was the case in McLellan. My reasoning is as follows.
111 The obligation to fix costs in art 40(1) is, subject to art 42(1), unconstrained as to amount or in whose favour costs must be awarded. However, if a tribunal failed to make an order fixing costs, the tribunal would not have met the requirement of cl 28.3 of the Supply Contract. Thus, the costs order is grounded in the Supply Contract. The contractual entitlement to have a costs order fixed was a circumstance which existed at the appointment date, the “relevant date” for the purposes of s 553(1) of the Corporations Act.
112 Further, I accept that art 40(1) must be read with arts 40(2) and 42(1). Accordingly:
(a) The costs of the arbitral tribunal and their reasonable travel and other expenses are “costs” under art 40(2)(a) to (c). It is therefore inconceivable that a costs order would not be made, since the arbitrators’ own remuneration will be included in such an order. The existence of art 43(1) does not obviate the need for the order (see [74(c)] above); and
(b) While art 42(1) states a “principle” that is in effect that costs follow the event, the tribunal has, and DHHI Tribunal used, a discretion to apportion costs as between the parties. Accordingly, while it is not the case that costs must “abide the award”, the discretion is not unlimited either. It is directed to the allocation of costs that the Tribunal is obliged to fix under art 40(1). The award of costs in that manner is therefore grounded in cl 28.3 of the Supply Contract and gives rise to a provable claim for those costs.
113 As regards interest on legal and other costs, s 20(1)(c) of the International Arbitration Act confers an unfettered discretion on the arbitral tribunal with respect to the award of interest, subject only to contrary agreement of the parties. There is no evidence that the parties had any contrary agreement. This is indistinguishable from the position in Larkden. Accordingly, the claim to that interest is not a provable claim.
Is the DHHI costs claim and Pre-appointment interest thereon payable under cl 10(1)(a) of the DOCA?
DHHI’s submissions
114 DHHI claims that the DHHI costs claim and pre-appointment interest thereon are expenses of DFA’s administration (within cl 10(1)(a) of the DOCA) and therefore can be reimbursed in priority under cl 15 of the DOCA: see [35] above.
115 DHHI relies on s 556 of the Corporations Act insofar as it provides as follows:
556 Priority payments
(1) Subject to this Division, in the winding up of a company the following debts and claims must be paid in priority to all other unsecured debts and claims:
(a) first, expenses (except deferred expenses) properly incurred by a relevant authority in preserving, realising or getting in property of the company, or in carrying on the company’s business;
…
(dd) next, any other expenses (except deferred expenses) properly incurred by a relevant authority;
(de) next, the deferred expenses;
…
Definitions
(2) In this section:
…
deferred expenses, in relation to a company, means expenses properly incurred by a relevant authority, in so far as they consist of:
(a) remuneration, or fees for services, payable to the relevant authority; or
(b) expenses incurred by the relevant authority in respect of the supply of services to the relevant authority by:
(i) a partnership of which the relevant authority is a member; or
(ii) an employee of the relevant authority; or
(iii) a member or employee of such a partnership; or
(c) expenses incurred by the relevant authority in respect of the supply to the relevant authority of services that it is reasonable to expect could have instead been supplied by:
(i) the relevant authority; or
(ii) a partnership of which the relevant authority is a member; or
(iii) an employee of the relevant authority; or
(iv) a member or employee of such a partnership.
…
relevant authority, in relation to a company, means any of the following:
(a) in any case—a liquidator or provisional liquidator of the company;
(c) in any case—an administrator of the company, even if the administration ended before the winding up began;
(d) in any case—an administrator of a deed of company arrangement executed by the company, even if the deed terminated before the winding up began.
…
116 DHHI submitted that, although the final award (the First DHHI Award) was made before the administrators were appointed, there remained substantial issues that needed to be resolved as costs and interest had been reserved. It says that the deed administrators properly took steps to address those issues by making submissions; those steps were an exercise of their functions and duties to preserve the fund available to creditors and therefore “properly incurred”. They say that the effect of the deed administrators’ conduct is that the DHHI costs claim and pre-appointment interest thereon, not merely the Administrators’ Costs, are expenses of DFA’s administration within the meaning of s 556(1)(a) Corporations Act and cl 10(1)(a) of the DOCA. I take that to mean that, by causing DFA to make submissions as to costs, the deed administrators thereby adopted the DHHI Arbitration litigation. It says that the expression “properly incurred” is interpreted broadly, by reference to the functions and duties of a liquidator, which are primarily to realise and get in the assets of a company as soon as practicable: see Re HIH Insurance Ltd (in Liq) [2001] NSWSC 997; (2001) 39 ACSR 645 at [15]-[17] (Santow J).
117 DHHI says that position is a logical extension of the principles applied in cases such as Lofthouse, in the matter of Riverside Nursing Care Pty Ltd (subject to deed of company arrangement) [2004] FCA 93 (Re Lofthouse) at [26] (Finkelstein J) and in Edwards v McVeigh [2004] FCA 1374; (2004) 51 ACSR 142 at [13] (Kiefel J). In Edwards v McVeigh at [13], Kiefel J said:
Section 556(1) of the Corporations Act 2001 (Cth) (Corporations Act) provides that certain payments of debts and claims are to be made in priority to other unsecured debts and claims. The first such payments to be made are “expenses (except deferred expenses) properly incurred by a relevant authority in preserving, realising or getting in property of the company, or in carrying on the company’s business”. Within this class of expenses are the costs ordered by the company to be paid in unsuccessful litigation: Re Pacific Coast Syndicate Ltd [1913] 2 Ch 26; Re Beni-Felkai Mining Co Ltd [1934] 1 Ch 406 at 422 and Re Lofthouse Riverside Nursing Care Pty Ltd (subject to deed of company arrangement) (2004) 22 ACLR 215 at [26] and [27] where Finkelstein J said (at [26]):
[26] ... The cases established the following rules. If the liquidator commenced an unsuccessful action in the name of the company any costs ordered against the company were not to be proved as a debt in the winding up. This was because the costs were incurred in the winding up and were payable in full out of the company’s assets. The same position held if the liquidator unsuccessfully defended an action brought against the company. It did not matter whether the action was begun before liquidation and its defence or prosecution (as the case may be) was taken over by the liquidator. Nor did it make any difference whether the liquidation was compulsory or voluntarily. Moreover, if the company was insolvent the costs were to be paid in priority to the general costs of the liquidation and in priority to the liquidator’s remuneration.
118 DHHI noted that these principles have been applied in the context of a deed of company arrangement. Although the terms of s 556(1)(a) are different to the terms of cl 10(1)(a) of the DOCA, in Re Lofthouse at [28], Finkelstein J found that such differences are immaterial. Similarly, those expenses can be recovered by the deed administrators out of DFA’s assets under cl 15 of the DOCA.
119 DHHI relied on aspects of the decision in Windy Dropdown. In that case, deed administrators sought directions under s 447D of the Corporations Act concerning how to treat costs orders made against Windy Dropdown after their appointment. Before the deed administrators were appointed, Windy Dropdown sued Equitiloan Securities Pty Ltd to recover what it claimed was overpaid interest on a loan secured by a mortgage over land that Windy Dropdown was developing. Equititrust Limited brought a cross-claim in those proceedings against Windy Dropdown for what it claimed was its share of profits under a profit sharing agreement in relation to the property development. Following their appointment, the administrators assigned (for value) Windy Dropdown’s claims against Equitiloan Securities to one Mr Franks, who was a director of Windy Dropdown. The deed administrators rejected a proof of debt lodged by Equititrust for its claimed share of profits and Equititrust commenced an appeal against that decision. By consent, that appeal was deferred until the outcome of the proceedings in which Windy Dropdown’s claim and Equititrust’s cross-claim was determined. Mr Franks prosecuted the claim against Equitiloan Securities and defended the cross-claim by Equititrust. Both the claim and the cross-claim were successful.
120 The deed administrators argued that they did not supervise the litigation in which costs orders were made and costs were incurred before their appointment. DHHI notes that White J found as follows at [28], [30]-[32] (emphasis in submissions) before finding (at [42]) that the costs were an “administrators’ disbursement” under the deed of company arrangement and had priority under it:
28 In my view the liability of the company to the costs order arose from the administrators’ decision as to how the cross-claim should be defended. The plaintiffs consented to the order of 6 February 2007 giving Mr Franks leave to defend the cross-claim on behalf of the company and they agreed (as noted in the orders of 7 November 2006) that they would be bound by the findings in those proceedings. In those circumstances it seems to me that on the same reasoning as in Re Lofthouse; Riverside Nursing Care Pty Ltd and by analogy to the cases in a winding-up, the deed administrators are to be taken as having incurred the costs for which the company is liable.
…
30 In my view the question of whether the conduct of the defence was under the administrators’ supervision is a red herring. The question is not whether legal costs incurred in defending the cross-claim were incurred by the deed administrators, but whether the company’s liability under the costs order was incurred by them such that the costs payable under the order are properly characterised as costs or disbursements incurred by them in implementing the deed or performing their duties under it. In my view Re Lofthouse; Riverside Nursing Care Pty Ltd is not distinguishable on the ground of the extent to which the deed administrators supervised the litigation.
31 Counsel for the plaintiffs argued that the costs incurred by Equititrust before the plaintiffs were appointed as voluntary administrators, which are recoverable under the order, could not be considered as costs incurred by the administrators. This was so, it was said, because the administrators at that time had no involvement in the litigation. But that is not the correct question. It was the making of the order that created the liability of the company to pay costs, and it is the plaintiffs’ conduct leading to the making of that order that is to be considered in deciding whether they incurred costs or disbursements in implementing the deed or performing their duties under it. Clearly, defending the claim brought by Equititrust (assuming, as I do, that there were proper grounds for defence) was part of their duties in implementing the deed. That would be so whether the claim was defended by resisting the appeal from the rejection of the proof or by defending the cross-claim. There is nothing surprising in that construction. Had the issue between Equititrust and the company been determined by way of appeal from the rejection of the proof of debt then, given the findings made by Brereton J, the appeal would have succeeded. The consequence would be that the deed administrators would have been made personally liable for the costs of the appeal but their liability would be limited to their right to be indemnified in respect of that liability out of the deed fund (Re Mendarma Pty Ltd (in liquidation) (No 2) [2007] NSWSC 99; (2007) 61 ACSR 601). That was the form of order made in proceedings 2473/2006. It would be strange if there were a different outcome merely because the parties, no doubt for very good reason, adopted what they saw as a more convenient vehicle for resolving the issues between Equititrust and the company, that is by allowing Mr Franks to defend the cross-claim.
32 It is common ground that the costs of Equititrust incurred before the appointment date which were not the subject of an order made prior to that date, in other words which were not the subject of the order of Campbell J of 12 March 2003, were not a provable debt. There is no basis for apportioning the costs recoverable under the order of 4 April 2008 between costs incurred by Equititrust before or after the appointment date. To the extent that the decision in McCluskey v Pasminco Ltd [2002] FCA 231; (2002) 120 FCR 326 at [33], [37] and [41] suggests otherwise, it should not be followed. As Finkelstein J observed in Re Lofthouse; Riverside Nursing Care Pty Ltd at [28] the judge in McCluskey v Pasminco Ltd was not referred to authorities relevant to the question of when legal costs recoverable under an order against the company after liquidation may be recoverable as liquidator’s expenses. Insofar as the view was taken in McCluskey v Pasminco Ltd that legal costs expenses incurred in prosecuting a claim for which no order has been made might nonetheless amount to a contingent claim provable in a winding-up, the reasoning does not appear to be consistent with the High Court’s decision in Foots v Southern Cross Management Pty Ltd [2007] HCA 56; (2007) 234 CLR 52.
121 DHHI submitted that the principle that a costs order can be characterised as an expense has been applied in numerous cases including:
(a) Liberty Industrial at [18] (Black J). DHHI acknowledged that that case relied on the significant role that the liquidator played in the conduct of proceedings;
(b) Hypec Electronics Pty Ltd (in liq) v Mead [2004] NSWSC 731; (2004) 61 NSWLR 69 (Hypec Electronics) at [101] (Campbell J). DHHI acknowledged that the conduct in Hypec Electronics led to a finding (at [102]) that “the bringing of the litigation can be characterised as part of carrying on the company’s business”; and
(c) House of Golf Chatswood Pty Ltd v McManus [2005] NSWSC 1246; (2005) 195 FLR 182 at [23] (White J). DHHI acknowledged that in both this case and Hypec Electronics there was a finding that post-appointment costs cannot be admitted to proof under s 553 of the Corporations Act.
122 DHHI submitted that, contrary to the deed administrators’ submissions, the Court should follow the decisions in Windy Dropdown at [31]-[32] and Liberty at [17] on the basis that those decisions stand for the proposition that once an administrator or liquidator has assumed conduct of litigation, the whole of the consequences of that litigation can be costs of the administration.
123 DHHI accepted that the distinguishing feature of this case is that the deed administrators took no steps before the final award (the First DHHI Award) was made.
Deed administrators’ submissions
124 The deed administrators submitted that:
(a) DFA’s primary liability for breaches of the Supply Contract had been determined by the publication of the First DHHI Award for US$32,898,858.18 before DFA was placed into administration;
(b) The whole of the DHHI’s costs (being approximately US$4.97 million) which it seeks priority for as expenses under s 556(1)(a) of the Corporations Act were incurred by DHHI before DFA was placed into administration; and
(c) Most importantly, the deed administrators’ involvement in the DHHI Arbitration was minimal. It was limited to the making of submissions on interest and costs. That conduct does not constitute a “taking over” of the defence of that litigation. The litigation was already over and DFA had lost.
125 The deed administrators placed reliance on Barrett J’s decisions in:
(a) McDonald v DCT at [16]-[21]. In that case, a company (which was already in voluntary liquidation) had a costs order made against it when an application for its winding up was dismissed. Justice Barrett was required to consider whether the costs order was an “expense” under s 556(1)(a) of the Corporations Act. His Honour concluded that the issue was to be resolved by considering whether the expense was “properly incurred” by the liquidator and found that it was not because the liquidator did nothing to precipitate the costs order; and
(b) Australian Securities and Investments Commission v Krecichwost [2007] NSWSC 1458 (ASIC v Krecichwost). In that case, Barrett J was asked to make an order that costs awarded against the company in liquidation should “rank in priority to unsecured creditors”. After reviewing the authorities, his Honour held (at [47]) that the general principle was that costs awarded against a company in liquidation will be treated as an expense incurred by the liquidator when the company engaged in that litigation “at the behest of its liquidator”. Justice Barrett refused to make that order because no order of the court was necessary to bring such costs within s 556(1)(a).
126 The deed administrators placed significance on the fact that, in ASIC v Krecichwost at [44], Barrett J noted that the “broad proposition” that costs awarded after the appointment of a liquidator will be costs in the liquidation “may well need refinement in relation to costs awarded in relation to matters pre-dating the winding up”. As the deed administrators noted, his Honour referred there to McDonald v DCT. However, that case is of narrow scope as it relates to the costs order made when the winding up order was made; in that limited way, it demonstrates the point made by the deed administrators.
127 The deed administrators submitted that:
(a) In Windy Dropdown, White J concluded (at [27] to [30]) that a claim for costs awarded against a company in administration were expenses of the administrators in circumstances where the administrators, about three years after their appointment, expressly consented to the continuation of litigation and authorised a director to conduct the litigation on behalf of the company, following which it proceeded to hearing for six days which resulted in the costs award;
(b) In Windy Dropdown at [31]-[32], White J rejected an argument that the costs award should be apportioned so as to exclude as “expenses of the administration” costs incurred before the administrators were appointed. His Honour found that the fact that some costs had been incurred before administration was irrelevant. That was because it “was the making of the order that created the liability of the company to pay costs, and it is the plaintiff’s conduct leading to the making of that order that is to be considered in deciding whether they incurred costs or disbursements in implementing the deed or performing their duties under it”;
(c) In Liberty Industrial at [17], Black J refused to apportion costs “for the same reasons” as in Windy Dropdown. It appears that this may have been because of, as his Honour noted at [18], the “liquidator’s significant role in the conduct of the proceedings”; and
(d) It is not clear whether the Judge in either case was refusing apportionment because of the particular facts or because the Judge considered that apportionment was never available because the liability for costs was created after the company was in liquidation and at a time when the liquidator had taken over the conduct of the litigation.
128 The deed administrators submitted that if the decisions in Windy Dropdown and Liberty Industrial rested on reasoning that apportionment was never available where the liability for costs was created after the company was in liquidation and at a time when the liquidator had taken over the conduct of litigation, that reasoning would be incorrect for the reasons given in McDonald v DCT and ASIC v Krecichwost because:
(a) Section 556(1)(a) is concerned only with expenses incurred by the liquidator, not expenses incurred by the company. As Barrett J also observed in McDonald v DCT, in the post-liquidation costs order cases, the costs orders have not been made against the liquidator, they have been made against the company and the liability for those costs always rests with the company;
(b) In McDonald v DCT, Barrett J recognised that a costs order made against the company could not be “treated” as an expense of the liquidator within the meaning of s 556(1)(a) unless, in accordance with the terms of that provision, it was “properly incurred” by the liquidator. As Barrett J observed, the terms of s 556(1)(a) are restrictive and do not apply to all expenses incurred by the liquidator. That is not only because of the express terms of s 556(1)(a) but also because those expenses are paid in priority to, and to the prejudice of, unsecured creditors;
(c) Section 556(1)(a) will only be relevant when the facts demonstrate that the liquidator has taken over and conducted the litigation (see Re Lofthouse at [26]) or the litigation was otherwise conducted at the liquidator’s behest (see ASIC v Krecichwost at [47]); and
(d) It would be wholly inconsistent with the terms, purpose, scope and intent of s 556(1)(a) of the Corporations Act to treat all costs awarded (including material costs incurred in litigation before the appointment of a liquidator) as both an expense of the liquidator and an expense “properly incurred” by the liquidator, simply because the costs award was made after the liquidator had taken over the conduct of the litigation. To do so would unfairly prejudice unsecured creditors.
Consideration
129 I accept the deed administrators’ position that the DHHI costs claim and pre-administration interest on it do not fall within cll 10.1(a) and 15 of the DOCA on the basis that the final award (the First DHHI Award) as to liability had been fully litigated and the Award was made before the appointment date. DHHI’s concession set out at [123] above was properly made.
130 In all of the cases on which DHHI relied, the liquidators/administrators had had significant conduct of the litigation, up to and including the hearing of liability issues: they were responsible for the carriage of the litigation and thereby adopted it. Whether that adoption involved expenses “properly incurred” was a question of fact in all cases. In my view, what is said in Re Lofthouse at [31]-[32] and Liberty Industrial at [17]-[18] should be understood in that context.
131 In contrast, in this case, the issue of legal and other costs and interest thereon was a discrete issue. It is difficult to understand how the administrators/deed administrators could properly adopt that issue if it meant taking on liability for the conduct of DHHI Arbitration up to the First DHHI Award in which they had no hand for the reason given in [128(d)]. In fact, the administrators/deed administrators only adopted the litigation of the issue of costs and interest. The costs relating to the litigation of that issue was properly an “expense” of their administration. To my mind, the deed administrators properly called for invoices and paid the Administrators’ Costs.
Is TGP’s costs claim and Pre-appointment interest thereon payable under cl 10(1)(a) of the DOCA?
132 The TGP Award as to liability, costs and pre-appointment interest was made after the appointment date, even though it appears that the TGP Tribunal was in a position to make its Award before the appointment date. That Award was made against DFA, not the administrators.
133 The only conduct of the administrators was to authorise release of monies held in trust by DFA’s former lawyers for payment of the TGP Tribunal’s fees. They are funds over which the administrators may otherwise have had a lien.
134 I accept the deed administrators’ submission that that the administrators’ conduct does not establish that they took over DFA’s defence in the TGP Arbitration or that it was otherwise conducted at its behest.
135 In those circumstances I accept that TGP’s costs claim and pre-appointment interest thereon cannot be regarded as an expense incurred by the deed administrators in the administration of DFA within the meaning of cl 10(1)(a) of the DOCA.
Disposition
136 I will order that the parties bring in orders consistent with these reasons within seven days.
I certify that the preceding one hundred and thirty-six (136) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Farrell. |
Dated: 7 July 2023
