This week’s TGIF considers the decision of In the matter of THO Services Limited [2016] NSWSC 509 in which the Court exercised its general power to extend the voluntary administration moratorium period to a commercial arbitration.

BACKGROUND

THO Services Limited (theCompany) entered into a contract with the Commonwealth of Australia (the Commonwealth) for the construction of a fitness complex. The contract provided for any dispute between the parties to be referred to arbitration. The Company carried out the works and the Commonwealth subsequently notified the Company of a number of alleged defects. 

In September 2015, the Commonwealth commenced arbitration proceedings and claimed damages in excess of $12 million. In January 2016, the Company appointed voluntary administrators pursuant to the Corporations Act 2001 (Cth) (the Act).

PROCEEDING

The administrators of the Company sought an order to stay the commercial arbitration for six weeks until the second creditors’ meeting.   

Section 440D of the Act provides that:

During the administration of a company, a proceeding in a court against the company or in relation to any of its property cannot be begun or proceeded with, except with the administrator’s written consent or with the leave of the Court.  (Emphasis added).

Brereton J considered two questions:

  1. Whether the order sought could be made; and

  2. Whether if the order could be made, it ought to be made. 

COULD THE ORDER BE MADE?

Section 440D of the Act uses the words “in a court”, thus prima facie limiting its application only to proceedings which take place in a court. 

Brereton J confirmed that an arbitration does not fall within the stay under s 440D. 

The administrators therefore sought relief pursuant to the Court’s general power to make orders under s 447A of the Act, to extend the application of s 440D and the stay to the arbitration.  Section 447A permits the Court to make a broad range of orders that it sees appropriate regarding how Part 5.3A is to operate in relation to a particular company. 

Whilst Brereton J proceeded on the basis that arbitration is excluded from s 440D, he was not convinced that this reflected a conscious policy decision that arbitration should be permitted to proceed despite an insolvency administration. 

Accordingly, His Honour held that the order sought was within the Court’s power.

SHOULD THE ORDER BE MADE?

The policy that informs s 440D is founded on avoiding disruption and distraction of administrators from performing their functions and duties. Brereton J held that to continue with arbitration proceedings appeared to be inconsistent with the scheme of a moratorium associated with voluntary administration.

His Honour stated that another element of the underlying policy is the avoidance of expenditure of an insolvent company’s limited resources in the defence of claims. 

The Court also added that it is not clear why a potential creditor should be afforded a preferred position over other creditors whose claims are stayed.  Moreover, as a stay would only be for a short period, it would not involve any jeopardy to the Commonwealth’s ultimate right.   

DECISION

Weighing all the circumstances, considering that a stay would only be for six weeks, and that in any event, it will remain open to the Commonwealth to apply for leave under s 440D, Brereton J held that the purpose of Part 5.3A of the Act will be better achieved by extending the operation of s 440D to catch the arbitration proceedings in the company’s circumstances.

COMMENT

The decision confirms that s 440D of the Act does not apply to arbitration proceedings. However, in appropriate circumstances, a Court can use its general power under s 447A of the Act to extend the operation of s 440D to obtain a stay on commercial arbitrations.