Section 440D imposes a stay on “proceedings in a court” against a company whilst it is in administration under Part 5.3A of the Corporations Act. It is well established that the term “proceedings in a court” does not include an arbitration proceeding: see Larkden Pty Limited v Lloyd Energy Systems Pty Limited [2011] NSWSC 1305 at [42] (Hammerschlag J). Notwithstanding this, can the Court use its general power to make orders under s447A to extend the reach of s440D in order to impose a stay on an arbitration against a company in administration?

That was the essential question in the recent Supreme Court of New South Wales case In the matter of THO Services Limited (administrators appointed) (ex tempore judgment delivered 21 March 2016), in which McCabes acted for the plaintiff administrators.

Background facts

In 2008 the Commonwealth of Australia (acting through the Department of Defence) as principal and THO Services Limited (the company) as contractor entered into a contract for the construction of a physical fitness complex, including swimming pool, at a RAAF Base in Queensland.

In July 2015, the Commonwealth sent a letter of demand to the company in relation to alleged defects arising out of the contracted works. The Commonwealth’s claim was quantified in the amount of approximately $12.7 million.

In September 2015, the Commonwealth exercised a right under the construction contract and referred its claim to the ICC Court of Arbitration in Hong Kong. In late December 2015, an arbitrator was appointed.

On 25 January 2016, with the company’s insurers yet to confirm their position in relation to granting indemnity, the board of directors of the company appointed Paul Gerard Weston and Geoffrey Trent Hancock of Pitcher Partners NSW Pty Ltd as joint administrators of the company pursuant to section 436A of the Corporations Act (the administrators).

On or about 1 February 2016, the arbitrator set a procedural timetable for each step in the arbitration up to and including a 5 day hearing on liability in Melbourne in November 2015.

In the absence of s440D imposing a stay on any arbitration, the administrators were compelled to actively defend the arbitration in order to avoid any risk that a failure to defend the arbitration would adversely affect the company (including any insurance policy held by the company).

The administrators subsequently sought relief from the Supreme Court of New South Wales, using its broad power to make orders about how Part 5.3A of the Act is to operate in relation to a particular company, to extend the application of s440D so that the arbitration commenced by the Commonwealth against the company would be stayed.

The Commonwealth opposed the making of the orders on the basis that (among other things):

  1. The Court’s power in s447A cannot be used in the way proposed by the administrators;
  2. And if the power can be used in this way, the Court ought not exercise its discretion in the manner sought.

Section 447A

Part 5.3A of the Corporations Act is entitled ‘Administration of a company’s affairs with a view to executing a deed of company arrangement’. Section 447A(1) provides that the Court may make such order as it deems appropriate about how the Part is to operate in relation to a particular company.

The High Court observed in Australasian Memory v Brien [2000] HCA 30; 200 CLR 270 at [17] et seq that there is nothing on the face of s 447A(1) that suggests that it should be read down, that the reference to “this Part” is to be understood as a reference to each of the provisions in it, that “the orders contemplated are orders that alter how the Part is to operate in relation to a particular company”, and that s447A is “an integral part of the legislative scheme provided for by Pt 5.3A”.

Goldberg J said in In the matter of Ansett Australia Limited and Mentha [2001] FCA 1806; 115 FCR 376 at [52]-[53] that any exercise of power under s 447A must be consistent with the object of Pt 5.3A found in s4 35A, and that there is no limitation on the power under s 447A that the alteration to the way in which Pt 5.3A is to operate cannot affect or impinge upon creditors (that issue being relevant to the exercise of discretion rather than the existence of the power).

Issues in dispute

The two questions for the Court to determine in the present case were: (1) does the Court have power to make the order proposed by the administrators under s447A; and, if it can be made (2) should the Court make the order in the exercise of its discretion.

As to whether the Court has power to make the proposed order, the administrators acknowledged that s447A did not appear to have been employed for this specific purpose previously. However, the administrators pointed to the breadth of the power under 447A and submitted that the proposed exercise of the power was consistent with the objects of Part 5.3A.

The Commonwealth submitted that the Court did not have power as the proper characterisation of the order sought by the administrators was not an order about how Part 5.3A is to operate in relation to a particular company but rather an order relating to arbitral proceedings, being a matter or right which (it was said) is not addressed at all in Part 5.3A. The Commonwealth also submitted that the broad power in s447A cannot be interpreted as allowing that which is not specifically provided for in s 440D; or, put another way, it cannot be used to “re-write the legislation” to stay a non-curial proceeding.

Determination

On 21 March 2016, Justice Brereton of the Supreme Court of New South Wales delivered an ex tempore judgment upholding the administrators’ application and granting the order proposed, thus staying the arbitration proceeding instituted by the Commonwealth against the company. In reaching the conclusion that the order proposed by the administrators was within the power of s447A, his Honour observations included:

  1. the authorities (Australasian Memory and Ansett referred to above) run contrary to the proposition that s447A cannot be used to enlarge the scope of operation of Pt 5.3A (or “re-write the legislation”) in a particular case.
  2. it is not accurate to say that arbitrations stand outside Part 5.3 For example, s444E, which applies to stay a “proceeding” against a company until a deed of company arrangement terminates, captures an arbitration.
  3. There is no policy reason as to why a creditors’ voluntary winding up should operate to stay an arbitration against a company (s500) but a court ordered winding up should not (s471B), or why a deed of company arrangement should operate to stay an arbitration against a company (s444E) but an voluntary administration should not (s440D). This requires the attention of an appropriate law reform commission or agency to ensure consistency.

Brereton J went on to conclude that the order proposed by the administrators should properly be made in the exercise of the Court’s discretion.

Take home points

  1. Section 447A permits the Court to make a wide class of orders. The fact that it may not have been used in a particular way previously should not be viewed as an impediment. The critical issue is whether the proposed use is consistent with the object of Part 5.3A.
  2. The appointment of voluntary administrators is designed to provide the company with ‘breathing space’ while the company’s future is resolved. In light of the fact that arbitral proceedings “may be as distracting, time consuming and expensive for an administrator as curial ones” (Larkden at [42) per Hammerschlag J], the decision by Brereton J in the present case appears an eminently sensible one and in the interests of all creditors of the company.