Should I stay or should I go?

Should I stay or should I go? The clash between external administration and stay of proceedings 1. Stay While the Night is (Still) Young - Introduct...
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Should I stay or should I go? The clash between external administration and stay of proceedings

1.

Stay While the Night is (Still) Young - Introduction

This paper examines the key provisions of the Corporations Act 2001 that have the effect of staying proceedings and enforcement processes against a company in external administration. We will also consider some of the policy reasons behind those provisions and how they have been applied by the courts. There are various forms of external administration. These include:



receivership of the company's assets;



administration under Part 5.3A of the Corporations Act, with a view to executing a deed of company arrangement or winding the company up;



administration under a deed of company arrangement;



formal schemes of arrangement;



voluntary liquidation (instigated by the creditors or members); and



court-ordered liquidation (usually in insolvency).

Companies under external administration are often faced with the prospect of litigation or enforcement processes against them, for reasons that can be readily imagined. Under the Corporations Act, certain proceedings against the company and persons associated with it will be stayed during the term of certain forms of external administration. For both the company's external administrator and its creditors, it is important to know what types of proceedings are stayed in the particular form of external administration in which the company finds itself. From an external administrator's perspective, defending proceedings on behalf of the company is distracting, will deplete the company's assets available to creditors generally to the extent that the company's money is spent on legal costs, and may expose the administrator to personal liability for those costs. We will not be discussing the last issue in this paper and refer you to a paper 1

contained on our website covering the key points in relation to the personal liability of insolvency practitioners.

1

"Personal Liability of Insolvency Practitioners: What not to do" can be found at http://www.aar.com.au/pubs/insol/index.htm

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2.

Staying Alive – an overview of what is stayed in what type of external administration

2.1

Voluntary administrations Voluntary administrations (under Part 5.3A of the Corporations Act 2001) occupy a unique position in the scheme of external administrations. This is because one of their express statutory purposes is to maximise the chance of an insolvent company, or as much of its business as possible, remaining in existence. Voluntary administrations are a temporary measure to give the administrator an opportunity to investigate the company's affairs for the benefit of creditors to allow them to decide on the company's future. The Act places a more or less comprehensive moratorium on external claims against the company during the period of the administration subject to leave being given by the court or, in some instances, the administrator giving written consent to pursue such claims. Section 440D of the Corporations Act provides that, except for a criminal or other prescribed proceeding, 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 consent or the leave of the court. Importantly for administrators, section 440E provides that an administrator cannot be held personally liable for refusal to give consent. It has been said that one purpose of the moratorium is to prevent the administrator from having to face numerous claims during the administration, which may distract him from the administration's main purpose. Another purpose of the moratorium that the courts have inferred is to prevent particular creditors from obtaining a benefit greater than they would obtain if they simply proved in the winding up of the company. In any event, the courts have kept the purpose of an administration firmly in mind when considering whether to grant leave to bring proceedings against the company that would otherwise be stayed during the administration under one of the provisions of Part 5.3A.

2.2

Deeds of company arrangement The key stay provision in relation to deeds of company arrangement is s444E. The effect of that section is that, until the deed terminates, a person bound by the deed cannot, without the leave of the Court:



begin or proceed with a proceeding against the company or in relation to any of its property; or



begin or proceed with any enforcement process in relation to the company.

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The effect of this section echoes sections that apply to voluntary administrations, except that s444E is only applicable to people who are bound by the deed. It also only refers to “a proceeding against the company” as distinct from a “proceeding in a court” under s440D. 2.3

Formal schemes of arrangement It is appropriate here to mention schemes of arrangement or compromise under Part 5.1 of the Corporations Act. Such schemes are binding on all creditors and, in some instances, members of the company if approved by the creditors, members (if applicable) and the court. There is no statutory stay of proceedings against a company under a scheme of arrangement. It is a common term of a scheme of arrangement for all or some proceedings by creditors against the company to be stayed for the duration of the scheme. However, such terms will be contained in the scheme document and are not legislatively prescribed.

2.4

Liquidation The purpose of a liquidation, whether court-ordered or voluntary, is to wind up the affairs of the corporation and provide for a fair and equitable distribution of the corporation's property among its creditors and, if there is any surplus available, among its members. A winding up can be court-ordered or voluntary. A court-ordered winding up is usually ordered on the ground that the company is insolvent. There are 2 types of voluntary winding up: a creditors' voluntary winding up and a members' voluntary winding up. The Corporations Act provides for a stay of proceedings against the company during all court-ordered liquidations, but only one form of voluntary liquidation, namely, a creditors' voluntary winding up. The reasons for this will be discussed in more detail later. The purpose behind a stay of proceedings in a liquidation (where it applies) has been held to be twofold, although there has been doubt expressed about the persuasiveness of one of them. That twofold policy echoes the policy behind stays in voluntary administrations discussed earlier. In Ogilvie-Grant v East (1983) 7 ACLR 669, Justice McPherson said the following of the prohibition on proceedings against a company in liquidation: From time to time the suggestion had been made that the prohibition exists in order to effectuate the statutory policy of ensuring that corporate assets are distributed rateably among all creditors so that none of them will gain an advantage over others… But in Australia at least it is not often that the institution of proceedings or even the recovery of judgment operates to confer a priority or advantage on a litigating creditor. A more convincing explanation is that, without the relevant restriction, a company in liquidation would be subjected to a multiplicity of actions which would be both expensive and time consuming as well as in some cases unnecessary.

There are separate sections of the Corporations Act providing for a stay during courtordered liquidations and a stay during creditors' voluntary windings up. Those sections are dnss S0111504633v1 150520

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similarly but not identically expressed, and their similarities belie certain important differences in scope, which will be considered in more detail later. Court-ordered winding up Two sections are relevant to a court-ordered winding up. The first applies to the time after the winding up application has been filed but before the winding up order has been made. The second applies to the period after the winding up order has been made. Section 467(7) allows the company or any creditor or contributory at any time after the filing of a winding up application and before a winding up order has been made to apply to the Court to stay or restrain further proceedings in the action or proceeding. The Court may then stay or restrain the proceedings accordingly on such terms as it thinks fit. It is noteworthy that there is no automatic stay while a winding up order is pending determination. Once the winding up order has been made, section 471B applies. It also applies when a provisional liquidator is acting for the company. That section prevents a person, without the leave of the Court, from beginning or continuing with a proceeding in a court or an enforcement process against a company while it is being wound up. However, s471C provides that that prohibition does not affect "a secured creditor's right to realise or otherwise deal with the security". Creditors' voluntary winding up The corresponding provision that applies in a creditors' voluntary winding up is section 500. So far as presently relevant, it provides as follows: (1)

Any attachment, sequestration, distress or execution put in force against the property of the company after the passing of the resolution for voluntary winding up is void.

(2)

After the passing of the resolution for voluntary winding up, no action or other civil proceeding is to be proceeded with or commenced against the company except by leave of the Court and subject to such terms as the Court imposes.

2.5

Receiverships There is no automatic statutory stay on proceedings against a company while a receiver is appointed (unless there is also some other form of external administrator appointed). This is because the same policy considerations do not apply to a company in receivership as apply to a company in other forms of external administration. Other forms of external administrator owe their prime responsibility to the creditors generally. Receivers, on the other hand, generally owe their prime responsibility to the party appointing them, usually the secured lender or supplier. Accordingly, policy considerations that underlie statutory stays of proceedings against companies in other

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forms of insolvency administration, such as preventing the favouring of some creditors over others and allowing an administrator breathing space to examine the company's affairs on behalf of all creditors free from the distractions of litigation, do not apply to companies in receivership.

3.

Stay Away Voluntary administration and court-ordered winding up – what proceedings are stayed?

In this section considers in greater detail the operation of some of the Corporations Act's stay provisions, which were outlined above. Sections 440D (which provides for a stay of proceedings against a company in voluntary administration) and 471B (which provides for a stay of proceedings against a company in courtordered liquidation) are considered concurrently because of the questions they raise. Section 440D provides: (1)

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: (a)

with the administrator's written consent; or

(b)

with the leave of the Court and in accordance with such terms (if any) as the Court imposes.

(2)

Subsection (1) does not apply to: (a)

a criminal proceeding; or

(b)

a prescribed proceeding.

There are currently no 'prescribed proceedings' under the Regulations. Section 471B, the corresponding provision relating to court-ordered liquidations, provides as follows: While a company is being wound up in insolvency or by the Court, or a provisional liquidator of the company is acting, a person cannot begin or proceed with: (a)

a proceeding in a court against the company or in relation to property of the company; or

(b)

enforcement process in relation to such company,

except with the leave of the Court and in accordance with such terms (if any) as the Court imposes.

Leaving aside the question of enforcement processes, certain differences between those sections are readily apparent: First, when a company is in administration, s440D permits proceedings which would otherwise be stayed to be pursued with the administrator's written consent. Section 471B on the other hand does not contain an equivalent provision. Accordingly, proceedings that are stayed during a courtordered liquidation may only be continued by the Court's leave; and dnss S0111504633v1 150520

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Second, while s440D expressly excludes criminal proceedings from proceedings that are stayed, s471B does not expressly do so. On the face of it, and on authority outlined later, criminal proceedings against a company are not stayed when it is in court-ordered liquidation. While there are differences in the operation of the two sections, they do share an essential characteristic. Each section stays a "proceeding in a court" either "against the company" or in relation to its property. The phrases "a proceeding in a court" and "against the company" seem pretty straightforward at first glance but they have been the subject of considerable dispute concerning the scope of the relevant stays. What are "proceedings in a court"? Fortunately, the Corporations Act defines the term "court" in s58AA and that definition applies to all instances where the term is used in the act unless a contrary legislative intention appears. Unfortunately, the definition provided is not particularly illuminating. Where the term "proceedings in a court" is used in ss440D and 471B, the word "court" is not capitalised. Section 58AA defines court, spelt as such, as "any court". This is to be distinguished from Court with a capital "C", which s58AA defines as certain specified courts, including the Supreme Court of State or Territory and the Federal Court. Courts have grappled with whether the definition "any court" applies to the relevant embargo sections and, if so, what this means. Employee proceedings The most fertile ground for this debate has been in relation to proceedings brought by employees in industrial relations tribunals. The following table outlines some of the more pertinent decisions in this area:

Forum

Case name

Section

Court – yes/no

NSW Industrial Relations Commission

Brian Rochford Ltd v

440D

yes

471B

yes

471B

yes

Textile Clothing and Footwear Union of NSW (1999) 17 ACLC 152 WA Industrial Relations Commission

Helm v Hansley Holdings Pty Ltd (In Liq) [1999] WASCA 71

Australian Industrial Relations

Australian Liquor,

Commission

Hospitality & Miscellaneous Workers

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Union v Home Care Transport Pty Ltd (In Liq) (2002) 117 FCR 87 Australian Industrial Relations

Smith v Trollope

Commission

Silverwood & Beck Pty

471B

no

yes

Ltd (In Liquidation) 17/11/03 PR940508 Australian Industrial Relations

Melbourne University

440D

Commission

Student Union Inc (In Liq)

and

v Sherriff [2004] VSC 266

471B

Brian Rochford Ltd v Textile Clothing and Footwear Union of NSW (1999) 17 ACLC 152, was a case in which Justice Austin was asked to determine whether the NSW Industrial Relations Commission, when hearing unfair dismissal proceedings, is a court for the purpose of s440D. He concluded that:



there are no conclusive, generally-applicable criteria for classifying a body as a court;



the answer in each case depends on the particular statutory question to be decided; and



the answer is to be supplied in light of a close consideration of the statutory constitution and functions of the body in question.

Justice Austin noted that the Commission has various functions and some are exercised as the Commission in Court Session. On the other hand, unfair dismissal applications can be heard by the Commission generally and by a non-judicial member. Importantly, however, the Commission has the power to determine unfair dismissal disputes and make binding orders. After weighing up the Commission's curial and non-curial features, Justice Austin concluded that the NSW Commission is a court, so that the court's leave or the administrator's consent is required in order to commence or continue proceedings in the Commission for unfair dismissal. Helm v Hansley Holdings Pty Ltd (In Liq) [1999] WASCA 71 was a decision of the Western Australian Full Supreme Court that considered whether the WA Industrial Relations Commission is a court for the purpose of s471B. The judges in that case adopted the reasoning in Brian Rochford and found that the WA Commission, in deciding unfair dismissal disputes, is a court for the relevant purpose. In particular, the employee faced the insurmountable obstacle was that WA's Industrial Relations Act expressly provides that the Commission is a "court of record" and that, in determining whether an employee has been unfairly dismissed and whether it should order the employer to pay compensation, the Commission is acting judicially. The question whether the Australian Industrial Relations Commission is a court for the purposes of relevant stay provisions has been the subject of conflicting authority. In Australian Liquor, dnss S0111504633v1 150520

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Hospitality & Miscellaneous Workers Union v Home Care Transport Pty Ltd (In Liq) (2002) 117 FCR 87 Justice Merkel of the Federal Court concluded that the AIRC is a court for the purpose of s471B. His central reasons were, first, that the legislature is unlikely to have intended that the AIRC be treated differently from State industrial tribunals, which had been judicially held to be courts at the time that s440D and s 471B were enacted in their present form. Secondly, his Honour saw no good reason to treat the AIRC differently given its capacity to prejudice the rights of unsecured creditors. Contrary to the Federal Court decision in Home Care, the AIRC itself has held that it is not a court for the purpose of s471B. In Smith v Trollope Silverwood & Beck Pty Ltd (In Liquidation) 17/11/03 PR940508 the Commission noted that its main functions were the prevention and settlement of industrial disputes and the fixing of minimum employee entitlements, which are not capable of exercise or direct supervision by the regular courts. The Commission also considered that if the legislature had intended to stay proceedings in the AIRC, it would have done so expressly. The AIRC itself therefore concluded that it is not a court for the purpose of s471B. So the position of the AIRC is unclear, but the better view is that it is a court for the purposes of s440D and 471B. In the recent decision in Melbourne University Student Union Inc (In Liq) v Sherriff [2004] VSC 266, Justice Mandie of the Victorian Supreme Court referred to the conflicting authority and concluded courts exercising corporations jurisdiction ought to follow intermediate appellate courts exercising that jurisdiction unless they are plainly wrong. Accordingly, he followed the HomeCare decision rather than the AIRC's decision in holding that he AIRC is a court for the purpose of s471B. Arbitration proceedings Still on the topic of what constitutes proceedings "in a court" for the purpose of s440D and s471B, the NSW Supreme Court last year considered whether arbitration proceedings entered into pursuant to a contractual arbitration clause (and, in particular, a cross-claim made in those proceedings) constituted "proceedings in a court" for the purpose of s440D. In that case, Auburn City Council v Austin Australia Pty Ltd [2004] NSWSC 141, Justice Bergin was took into account the functions of an arbitration and the policy behind sections such as s440B, which she considered to be: to provide administrators with an immediate breathing space by the imposition of a stay on proceedings on foot at the time of the administration until leave is sought and possibly granted.

Justice Bergin held that arbitration proceedings are not proceedings in a court so those proceedings are not stayed under s440D. But Justice Bergin did emphasise that the arbitration proceedings in question were not court-ordered arbitration proceedings but arbitration proceedings pursuant to contractual terms. Her judgment leaves it open to argue that court-ordered arbitration is in a different category to private arbitration, bearing sufficient hallmarks of regular court proceedings to bring it within the category of "proceedings in a court" for the purposes of s440D. dnss S0111504633v1 150520

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Mining Warden’s Court The up-to-the-minute case of Van Blitterswyk v Sons of Gwalia and others (in administration) [2005] WAMW 06 involved an application brought on behalf of Sons of Gwalia Ltd and others (in administration) (Sons of Gwalia) to prevent the plaintiff from pursuing a claim before the Mining Warden sitting in open court. The administrators submitted that s440D prohibited the plaintiff from such action. Section 101 of the Mining Act 1978 expressly excludes the operation of s471B of the Corporations Act, but not s440D. The court said that: Had the Western Australian parliament intended to exclude Section 440D it could have enacted legislation. The reason that the liquidation of a company is not regarded as prohibitive of a litigant commencing ‘proceedings in a court’ clearly has to do with the fact that liquidation is not such a sensitive time as is administration.

But, after considering the authorities and the functions and powers of the Mining Warden's Court, it was found that the court-like attributes were sufficient to characterise the Mining Warden sitting in open court as a court for the purpose of s440D and trigger a stay of proceedings. Dust Diseases Tribunal Section 5F of the Corporations Act allows a State or Territory parliament to exclude matters from the operation of the Corporations Act. Section 10(6) of the NSW Dust Diseases Tribunal Act 1989 (DDT Act) excludes the operation of s471B and s500(2) in relation to proceedings brought or transferred under sections 11 or 12 of the DDT Act, which are dust diseases claims brought in or transferred to the DDT. The subsection reads as follows: (6)

The following matters are declared to be excluded matters for the purposes of section 5F of the Corporations Act 2001 of the Commonwealth in relation to the provisions of sections 471B and 500(2) of that Act: (a) proceedings under section 11 of this Act, (b) proceedings transferred under section 12 of this Act, being proceedings that, but for this subsection, could not be commenced or proceeded with without the leave of the Court referred to in section 471B or 500(2) of the Corporations Act 2001 of the Commonwealth.

The effect of this section is that proceedings brought in or transferred to the Dust Diseases Tribunal against a company in a court-ordered or creditors' voluntary winding up are not stayed (even though they might have been but for that section). But section 10(6) of the DDT Act does not mention s440D of the Corporations Act, implying that s10(6) does not prevent DDT proceedings from being stayed under s440D. This does not of itself mean that DDT proceedings are necessarily stayed during a voluntary administration. Whether they are depends on whether DDT proceedings are "proceedings in a court" within the meaning of s440D. If not, those proceedings would not be stayed (regardless of dnss S0111504633v1 150520

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whether s10(6) DDT Act applies). The question whether DDT proceedings are proceedings 'in a court' has yet to be determined in any case law concerning s440D. However, considering s4 of the DDT Act, which establishes the DDT as a court of record, and s10(4), which provides that the DDT has the same powers in relation to dust diseases matters as the Supreme Court would have had but for the section, it is highly likely that the DDT would be interpreted as a court for s440D purposes and that DDT proceedings against a company in voluntary administration would be stayed. Conclusion The question of what is a “court” for the purposes of s440D and s471B is not always clear. The approach the courts seem to have taken in construing a tribunal as a court or otherwise for the purpose of the relevant sections is broadly the approach taken by Justice Austin in the Brian Rochford case that:



there are no conclusive, generally-applicable criteria for classifying a body as a court;



the answer in each case depends on the particular statutory question to be decided; and



the answer is to be supplied in light of a close consideration of the statutory constitution and functions of the body in question.

Proceedings 'against the company'? Sections 440D and 471B bar proceedings in a court against the company or in relation to its property. In a number of cases when a company is in voluntary administration, there may have already been an application on foot for orders that the company be wound up. In other cases, creditors have sought orders for the appointment of a provisional liquidator or for the winding up of the company before the statutory second meeting of creditors. In those situations, the question has been, 'is an application for the winding up of the company or for the appointment of a provisional liquidator a proceeding against the company'? If so, such an application would be stayed during the administration in the absence of the administrator's written consent or the Court's leave. The question of whether s440D applies to applications for winding up or the appointment of a provisional liquidator also raises the question of the relationship between s440D and s440A(2) and s440A(3). Those subsections provide that the Court is to adjourn the hearing of an application for an order to wind up a company, or to appoint a provisional liquidator, if the company is under administration and the Court is satisfied that it is in the interests of the company's creditors for the company to continue under administration rather than be wound up. In Hall v Mercury Information Technology (South Australia) Pty Ltd [2002] FCA 272 a receiver applied for the appointment of a provisional liquidator to two companies in administration. He argued leave was not required to bring the application because the application was not an application "against the company" or its property, but an application "in respect of the company". Justice Stone said that the application to appoint a provisional liquidator affects the whole of a dnss S0111504633v1 150520

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company's affairs and assets and is ultimately directed to the dissolution of the company. She said "It is difficult to imagine how a proceeding that seeks such an order could be other than a proceeding ‘against the company’” and granted leave to proceed. Assuming this case was correctly decided, the leave of the court or the administrator's consent is needed in order to commence or continue an application to have a provisional liquidator appointed to a company in administration or, by parity of reasoning, an application for an order that the company be wound up. However, the correctness of that decision was doubted in the later case of APRA v Rural and General Insurance (2004) 22 ACLC 574, also in the Federal Court. In that case, APRA had commenced proceedings for the winding up of Rural & General before the company was placed in administration, but the winding up application had been adjourned. When the winding up application came on for hearing, Rural & General argued that, because it was in administration, APRA needed the administrator’s written consent or the Court’s leave under s440D to continue with its winding up proceedings. APRA argued that winding up proceedings are not proceedings "against the company" (as contemplated by s440D) but proceedings “in relation to the company”. Justice Gyles agreed with APRA. He held that when one reads s440D and s440A(2) in the context of Chapter 5 as a whole, it is clear that the legislature distinguished between a winding up proceeding on the one hand and what he called “external claims” against the company on another. He concluded, therefore, that APRA did not need leave under s440D. Rather, s440A(2) applied, requiring the court to adjourn the hearing of the winding up application if it was satisfied that it is in the interests of the company’s creditors for the company to continue in administration. In TCS Management Pty Limited v CTTI Solutions Pty Limited (2001) NSWSC 830, the New South Wales Supreme Court refused an application under s440A(2) that a winding up application be adjourned. Justice Hamilton referred to an earlier decision of the court in Deputy Commissioner of Taxation v Choice Design Homes Pty Limited (1999) NSWSC 589 in which Justice Young said that a rule of thumb in such matters is to apply the following four questions: 1.

Is the company insolvent?

2.

Is the company salvageable?

3.

Is the proposed salvation in the interests of creditors?

4.

Is the proposed salvation in the public interest?

Justice Hamilton stated that it would be difficult to establish to the court's satisfaction that an adjournment is in the interests of creditors unless there is a good case that there will be a greater return to creditors as a result of the adjournment.

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4.

Stay With Me ‘til Dawn Voluntary liquidation – what proceedings are stayed?

As outlined above, there are 2 types of voluntary liquidation: a creditors' voluntary winding up and a members' voluntary winding up. The difference between the two is important when considering stays. In summary, a members' voluntary winding up is a winding up initiated by a special resolution of the company's members that the company be wound up after a declaration under s494 has been made. A s494 declaration is a declaration by a majority of the company's directors that, in their opinion, the company will be able to pay its debts within 12 months of the winding up beginning. A members' voluntary winding up cannot proceed without that declaration. Any other form of winding up that is not ordered by the court is a creditors' voluntary winding up. The most common ways in which a creditors' voluntary winding up are initiated are:



by a resolution of the creditors under s439C following a voluntary administration;



by a resolution of creditors under s445E on the termination of a DOCA; and



under s446A if a company defaults in executing a DOCA after the creditors have resolved to do so.

The general provision concerning stays of proceedings against a company in voluntary liquidation is s500(2). It provides that: After the passing of the resolution for voluntary winding up, no action or other civil proceeding is to be proceeded with or commenced against the company except by leave of the Court and subject to such terms as the Court imposes.

The first thing to note about this section is that it is contained in the Division of Part 5.5 of the Act headed "Creditors' Voluntary Winding Up". Not so surprisingly, this led Justice Barrett in Awada v Linkdarf Ltd (In Liq) [2002] NSWSC 873 after lengthy statutory analysis to conclude that the section only applies to a creditors' voluntary winding up and not a members' voluntary winding up. He also said that this view is supported by policy considerations, namely, that a members' voluntary winding up proceeds on the basis of a declaration of solvency under s494. So according to Awada, there is no statutory stay of proceedings against a company in a members' voluntary winding up and s500(2) only stays proceedings against a company in a creditors' voluntary winding up. The next thing to note about s500(2) is that there are key differences between its language and the language in ss400D and 471B - the stay provisions that apply to voluntary administrations and court-ordered liquidations respectively. One is that s500(2) refers to an "action or other civil proceeding". This is different from the formulation in both s440D and s471B and appears to be capable of a broader interpretation. For instance, while it is questionable whether proceedings in the Australian Industrial Relations dnss S0111504633v1 150520

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Commission are proceedings in a court, such proceedings are probably capable of being characterised as an "action or other civil proceeding". Similarly, arbitration proceedings pursuant to a contractual dispute resolution clause are not proceedings in a court, but are most likely to be stayed under this section as "an action or other civil proceeding" . Indeed, in the case of Re Vassal Pty Ltd [1983] 2 Qd R 769, Justice Kelly concluded that a commercial arbitration was a "civil proceeding" within the meaning of the predecessor of that section and said "I can see no warrant for limiting the term to proceedings taking place in a court". In 2002, Santow JA of the New South Wales Court of Appeal expressly approved that view in Doran Constructions Pty Ltd (In Liq) v Beresfield Aluminium Pty Ltd [2002] NSWCA 95. On the other hand, it is clear that the words "action or other civil proceeding" imply that criminal proceedings against the company are excluded from the ambit of the stay. In WorkCover Authority of NSW (Inspector Maltby) v Josef & Sons Contracting Pty Ltd (In Liq) [2002] NSWIRComm 226, the NSW Industrial Relations Commission in Court Session considered whether criminal proceedings against a company were stayed by virtue of s500(2). His Honour concluded that by the use of the word "proceeding" in s471B without limitation to civil proceedings, and the use of the words "action or other civil proceeding" in s500(2), the legislature must have intended for s500(2) and s471B to have different effects. Justice Schmidt therefore held that s471B stays proceedings in a court, whether civil or criminal, but that s500(2) only stays civil proceedings and actions. It appears therefore – somewhat anomalously – that during creditors' voluntary liquidations, a broader range of civil proceedings are stayed than in court-ordered liquidations. On the other hand, criminal proceedings against the company are not stayed during creditors' voluntary liquidations, but are stayed during court-ordered liquidations. And no proceedings are statutorily stayed during members' voluntary liquidations.

5.

Oh Won’t You Stay (Just a Little Bit Longer) - Leave to proceed

The stay provisions relating to voluntary administrations and liquidations all allow proceedings that would otherwise be stayed to be commenced or continued with the court's leave. The factors a court will consider in deciding whether to grant leave despite the stay will differ depending on whether the company is in administration or liquidation. In Foxcroft v The Ink Goup Pty Ltd (1994) 15 ACSR 203 an employee sought leave under s440D to commence proceedings in the Industrial Relations Court of Australia against his former employer (under administration) arguing that the court should examine the same factors that it would if it were considering an application for leave to proceed against a company in liquidation. The judge disagreed and dismissed the application saying: There is…quite a big difference between a company in administration and a company in liquidation. A company in administration is seeking to continue to trade and is…seeking to maximise the chance

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of it remaining in business. A company in liquidation is one where the liquidator is seeking not to trade but to realise the company's assets as soon as possible for the best price, in order to be able to distribute the net available funds to the creditors and in some circumstance, the members.

In the judge's view, to allow the employee to proceed with his action would not only take the administrator's attention from what he needs to do under the Corporations Act in a relatively short period of time, but it would also involve costs in running the legal action on behalf of the administrator, and perhaps give the employee some advantage over other creditors or potential creditors. With this in mind, Justice Young made the comment which has often been cited since, "it seems to me that an application under s440D will rarely be granted." He added that where the liability the subject of the intended proceedings is insured, the administrator would normally consent or the court will give conditional leave, but that outside this field it was hard to see situations where it would be proper to grant leave, though doubtless there are such situations. Justice Young's reasoning in Foxcroft was echoed to a great extent in the later Federal Court judgment of Justice Davies in Australian Liquor, Hospitality and Miscellaneous Workers' Union v Terranora Lakes Country Club Pty Ltd (1996) 19 ACSR 687. But in that case the judge identified an additional factor militating against the granting of leave – the potential personal liability of the administrators under s443A for debts they incur in the performance of their functions for services rendered, goods bought and property hired, leased or occupied. On the issue of when leave will be given to pursue proceedings against a company in liquidation, the recent Federal Court decision in Buckingham v Pan Laboratories (Australia) Pty Limited (In Liquidation) [2004] FCA 597 provides a useful survey of the authorities and the principles espoused in those authorities, which Justice Jacobson adopted and summarised as follows:



"Independent actions by creditors are not encouraged in a winding up. Responsibility for satisfying the rights of creditors is placed upon the liquidator." Nevertheless, "Leave is not to be withheld simply and solely as a punishment: the primary consideration is the enabling of an orderly winding up. If no prejudice, procedural or substantive, will flow to those having interests in the winding up, an applicant has a strong case for gaining the leave he seeks": Re AJ Benjamin (In Liquidation) and the Companies Act (1969) 90 WN (Part 1) (NSW) 107.



The intention of s471B (and by inference 500(2)) is to ensure that assets of the company in liquidation will be administered in accordance with the provisions of the Act and that no person will get an advantage to which, under those provisions, he is not properly entitled: Re Sydney Formworks Pty Ltd [1965] NSWLR 646.



A company in liquidation should not be subject to a multiplicity of actions, which would be expensive and time-consuming: Ogilvie-Grant v East (1983) 7 ACLR 669.

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The court should take into account the seriousness of the claim, the complexity of the legal and factual issues involved and the stage which the proceedings, if already commenced, have reached: Nommack (No 100) Pty Ltd v FAI Insurances Ltd (In Liq) (2003) 45 ACSR 215.



The applicant for leave must demonstrate that there is a serious question to be tried in the proceedings he or she seeks leave to proceed with: Vanguard Pty Ltd (In Liq) v Fielding (1992-3) 10 ACSR 373 (FCFCA).

That last principle implies also that there must be some utility to the application for leave. Application for leave to proceed in the NSW Industrial Relations Commission against a company in liquidation for relief under s106 of the NSW Industrial Relations Act was refused by Master Macready of the NSW Supreme Court in Silbermann v One.Tel Ltd [2001] NSWSC 895, primarily on the basis that any liability of One.Tel as a result of an order by the Commission would not be a provable debt in its winding up. Debts provable in a liquidation must be debts that existed, even if contingently, on the date the administration began. In Silbermann it was reasoned that the Commission's power under s106 of the Industrial Relations Act is to vary unfair contracts either prospectively or retrospectively. But even if the contract is varied retrospectively, so that the employer effectively owes money in arrears to the employee, the actual debt created by that varied contract is only created by, and on the date of, the Commission's order. In this case, this was necessarily after the date of the administration. Any amounts to which One.Tel became liable under the Commission's orders would therefore not be provable in the liquidation. Leave was therefore futile and denied. This reasoning was affirmed by Justice Gzell on appeal. This case is a reminder that, in determining whether to seek leave to proceed, it should be kept firmly in mind whether the proceeding will have any practical purpose in any event.

6.

CONCLUSION



Different types of proceedings are stayed in different forms of external administration.



In some forms of external administration (such as voluntary administrations, court-ordered liquidations and creditors' voluntary windings up), most forms of proceedings against the company are stayed, but the exact scope of the stay will differs even among those sorts of administration.



In other forms of external administration, the stay only applies to proceedings by certain people. For instance, when a company is under a DOCA, only proceedings by people bound by the deed are stayed.



In yet other external administrations (such as receiverships, schemes of arrangement and members' voluntary liquidations) there is no automatic stay at all.



Both the language of each particular stay provision and the case law interpreting it will provide guidance as to whether particular forms of proceedings are stayed, such as criminal proceedings, proceedings in particular tribunals, arbitration proceedings and

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proceedings 'in relation to the company' rather than 'against it'. There are many grey areas and differences between the different stay provisions.



The tenor of the case law suggests leave to proceed against a company in voluntary administration will rarely be given, and more rarely than leave to proceed against a company in liquidation. Buckingham v Pan Laboratories (discussed above) provides a useful synopsis of the principles the courts will take into account in deciding whether to grant leave to proceed.



In seeking leave, careful consideration should be given to whether or not leave would be futile having regard to whether the fruits of any litigation would be a provable debt in the winding up of a company.

Type of administration Voluntary administration

Section 440D

Stayed Proceedings “in a court” against the company or in relation to its property.

Deed of company arrangement

444E

Formal scheme of arrangement

n/a

Receiverships Court ordered liquidation

n/a 471B

For persons bound by the deed: i) commencing or proceeding with application to wind up the company; ii) proceedings “against the company” or in relation to its property. No automatic stay but commonly a term of the scheme that proceedings are stayed. None. Proceedings “in a court” against the company or in relation to its property (including criminal proceedings).

Creditors’ voluntary liquidation

500(2)

Members’ voluntary liquidation

n/a

Any “action or other civil proceeding” against the company. None.

Not stayed Criminal proceedings. Proceedings with Court’s leave or administrators consent. Arbitration proceedings (query courtordered arbitration). Many industrial relations tribunal proceedings. DDT proceedings? (uncertain) Proceedings by persons not bound by the deed.

Any proceedings unless scheme provides otherwise. All. Proceedings with Court’s leave. Arbitration proceedings (query courtordered arbitration). Many industrial relations tribunal proceedings. DDT proceedings. Criminal proceedings. DDT proceedings. All.

A number of cases on what is stayed in different forms of external administration have been considered in the Allens Arthur Robinson Annual Review of Insolvency and Restructuring Law 2

together with indispensable information relating to insolvency practice in Australia and beyond .

2

available at www.aar.com.au/pubs/arir/

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