Chadmar Enterprises Pty Ltd (in liquidation) v Iga Distribution Pty Ltd [2006] ACTSC 32 (13 April 2006)

Last Updated: 22 May 2006

CHADMAR ENTERPRISES PTY LIMITED (IN LIQUIDATION) v IGA DISTRIBUTION PTY LTD [2006] ACTSC 32 (13 April 2006)

PRACTICE AND PROCEDURE - writ of fieri facias - issuing party a company in liquidation - application for stay of execution - claimed right of set-off.

Corporations Act 2001 (Cth), ss 513B, 513C, 553C, 444D(1)

Bankruptcy Act 1996 (Cth), s 86

Court Procedures Act 2004 (ACT), s122

Australian Capital Territory (Self-Government) Act 1988 (Cth), s48A

Supreme Court Rules, O65 r10

Re ACN 007537 Pty Ltd (in liq); Ex parte Parker (1997) 150 ALR 92

GM and AM Pearce and Co Ltd v RGM Australia Pty Ltd (1998) 16 ACLC 429

Gye v McIntyre [1982] HCA 34; (1991) 171 CLR 609

Hiley v Peoples Prudential Assurance Co. Ltd. [1938] HCA 40; (1938) 60 CLR 468

In re British Gold Fields of West Africa [1899] 2 Ch 7

Expile Pty Limited v Jabb's Excavations Pty Ltd [2004] NSWSC 284; (2004) 22 ACLC 667

McLuskey v Pasminco Ltd (Administrators appointed) [2002] FCA 231; (2002) 120 FCR 326

Brash Holdings Ltd (Administrator appointed) v Katile Pty Ltd [1996] 1 VR 24

McDonald v Commissioner for Taxation [2005] NSWCS 2

No. SC 657 of 2004

Judge: Crispin J

Supreme Court of the ACT

Date: 13 April 2006

IN THE SUPREME COURT OF THE )

) No. SC 657 of 2004

AUSTRALIAN CAPITAL TERRITORY )

BETWEEN: CHADMAR ENTERPRISES PTY LIMITED (INLIQUIDATION)

ACN 008 613 974

Plaintiff

AND: IGA DISTRIBUTION PTY LTD

ACN 004 391 422

Defendant

ORDER

Judge: Crispin J

Date: 13 April 2006

Place: Canberra

THE COURT ORDERS THAT:

1. Execution of the writ of fieri facias issued on 7 November 2005 herein be stayed pending further order.

1. The defendant seeks an order staying the execution of a writ of fieri facias issued on 7 November 2005.

2. On 7 September 2004 the defendant issued a notice of statutory demand purporting to require the plaintiff to pay a debt of $1,275,425.66. The plaintiff promptly applied for an order setting the statutory demand aside, and Higgins CJ heard that application on 22 and 23 November 2004. Judgment was reserved.

3. On 15 March 2005 an administrator was appointed to the plaintiff.

4. On 10 May 2005 his Honour delivered judgment and ordered that the statutory demand be set aside. The defendant was ordered to pay the plaintiff's costs of the application.

5. A liquidator was appointed to the plaintiff some time after that date but it is common ground that the winding must be taken to have commenced upon the appointment of the administrator on 15 March 2005 (see ss 513B and 513C Corporations Act 2001 (Cth)).

6. The writ of the fieri facias was issued on 7 November 2005 in an attempt to enforce payment of the sum of $42,136.49 owing to the plaintiff by reason of the cost order made on 10 May 2005.

7. The defendant maintains that execution should be stayed because the plaintiff is in debt to it in the amount that was claimed, albeit unsuccessfully, in the statutory demand and that it is entitled to set-off that debt against the amount that the plaintiff seeks to recover under the writ.

8. The right to set-off the debt claimed by the defendant is said to arise under

s 553C of the Corporations Act, s 122 of the Court Procedures Act 2004 (ACT) Order 65 r 10 of the Supreme Court Rules, s 48A of the Australian Capital Territory (Self-Government) Act 1988 (Cth), or in equity. For reasons that will become apparent, I have formed the view that it is necessary to deal only with the first of these contentions, which was the argument upon which counsel for the parties concentrated during their submissions.

9. Section 553C of the Corporations Act provides as follows:

(1) "Subject to Subsection (2), where there have been mutual credits, mutual debts or other mutual dealings between an insolvent company that is being wound up and a person who wants to have a debt or claim admitted against the company:

(a) an account is to be taken of what is due from the one party to the other in respect to those mutual dealings; and

(b) the sum due from the one party is to be set off against any sum due from the other party; and

(c) only the balance of the account is admissible to proof against the company, or is payable to the company, as the case maybe.

(2) A person is not entitled under this section to claim the benefit of a set off if, at the time of giving credit to the company, or at the time of receiving credit from the company, the person had notice of the fact that the company was insolvent."

10. This section was apparently enacted with a view to adopting the concepts underlying s 86 of the Bankruptcy Act 1996 (Cth): Re ACN 007537 Pty Ltd (in liq); Ex parte Parker (1997) 150 ALR 92; see also GM and AM Pearce and Co Ltd v RGM Australia Pty Ltd (1998) 16 ACLC 429. Hence, it is appropriate to have regard to the principles laid down by the High Court of Australia in the following passage from Gye v McIntyre [1982] HCA 34; (1991) 171 CLR 609 at 618-619;

It has often be pointed out that the object of set-off in bankruptcy is, in the words of Parke B in Forster v Wilson (1843) 152 ER 1165, "to do substantial justice between the parties, where a debt is really due from the bankrupt to the debtor to his estate". Where there are genuine mutual debts, credits or other dealings, it would be unjust if the trustee in bankruptcy could insist upon having 100 cents in the dollar upon the whole of the debt owed to the bankrupt but at the same time insist that the bankrupt's debtor must be satisfied with a dividend of some few cents in the dollar on the whole of the debt owed by the bankrupt to him. It was to prevent such injustice that the "mutual credits" and "mutual debts", and later "mutual dealings", provisions were introduced into bankruptcy legislation...To the extent necessary to achieve that legislative purpose of "substantial justice" to the parties, it is established by authority that a provision such as s 86 of the Act should be given "the widest possible" scope...

On the other hand, "substantial justice" requires that the operation of set-off in bankruptcy be confined within limits which protect the creditors of the bankrupt from being disadvantaged by a set-off being allowed in circumstances where debts, credits or other dealings have not been genuinely mutual as a matter of substance, such as where beneficial ownership is not the same or where, after bankruptcy or notice of an act of bankruptcy, a debtor of the bankrupt has brought up liabilities of the bankrupt at a discount for the purpose of setting them off against his own indebtedness. (citations omitted).

11. Their Honours went on to explain the concept of mutuality at 623:

In the context of s.86, the word "mutual" conveys the notion of reciprocity rather than that of correspondence. It does not mean "identical" or "the same". So understood, there are three aspects of the section's requirement of mutuality. The first is that the credits, the debts, or the claims arising from other dealings be between the same persons. The second is that the benefit or burden of them lie in the same interests. In determining whether credits, debts or claims arising from other dealings are between the same persons and in the same interests, it is the equitable or beneficial interests of the parties which must be considered...The third requirement of mutuality is that the credits, debts or claims arising from other dealings must be commensurable for the purposes of set-off under the section. That means that they must ultimately sound in money. (citations omitted)

12. It was not disputed that the debt claimed by the defendant had arisen, if at all, from mutual dealings between the parties, and Mr Mossop, who appeared for the defendant argued that the liability under the costs order must also be regarded as having arisen from those mutual dealings because it was made as an incident of litigation concerning that claimed debt. He accepted that a set-off could only arise from mutual dealings at "the relevant date" for the purposes of s 553(1), and that this had been 15 March 2005, which was, of course, before the costs order was made. However, he relied upon the principle explained in the following statement by the High Court in Gye v McIntyre at 623-624:

The requirement that the credits, the debts or the claims arising from other dealings be commensurable does not mean that they must be vested, liquidated or enforceable at the decisive date .... Provided they exist as contingent at that date and are of a kind which will ultimately mature into pecuniary demands susceptible of set-off, the requirement of the section may be satisfied in relation to them.

13. The High Court also cited, at 624, the following passage from the judgment of Dixon J in the earlier case of Hiley v Peoples Prudential Assurance Co. Ltd. [1938] HCA 40; (1938) 60 CLR 468 at 496-497:

...the general rule does not require that at the moment when the winding up commences there shall be two enforceable debts, a debt provable in the liquidation and a debt enforceable by the liquidator against the creditor claiming to prove. It is enough that at the commencement of the winding up mutual dealings exist which involve rights and obligations whether absolute or contingent of such a nature that afterwards in the events that happen they mature or develop into pecuniary demands capable of set-off.

14. Mr Mossop submitted that the transactions that had given rise to the debt claimed by the defendant, the statutory demand for payment, the application to have it set aside, the hearing of that application, and hence the incurring of the costs that formed the subject of the costs order, had all constituted "mutual dealings" that had occurred prior to the relevant date. These dealings had given rise to certain rights, including a contingent right to reimbursement of the costs incurred in pursuing the application to have the statutory demand set aside, and those rights had existed at the relevant date. It did not matter that the order for costs had actually been made after that date or that, until that order was made, there had been no basis for a pecuniary demand capable of being set-off against the debt claimed by the defendant.

15. Mr Erskine, who appeared for the defendant, submitted that, whilst the order for costs might have arisen from the litigation, it could not be regarded as having arisen from any antecedent business dealings between the parties because it was a new liability that came into existence only upon the exercise of judicial discretion by Higgins CJ. I accept that submission.

16. Mr Erskine also submitted that the application to have the statutory demand set aside, and the subsequent hearing of that application, could not be regarded as falling within the concept of mutual dealings described in Gye v McIntyre. Whilst the High Court had (at 625) said that "dealings" had been used in the section in a non-technical sense, it had been construed as having a commercial or business flavour. It extended to "the communings, the negotiations, verbal and by correspondence, and other relations which exist in that setting". It did not extend to an injury sustained due to assault or negligence because that was not a "dealing". Whilst I accept that this difference must be borne in mind, I must say that I am unable to see why litigation concerning a claimed debt, said to have been incurred during the course of commercial dealings between the parties, should not be regarded as having a commercial or business flavour.

17. He also submitted that the litigation demonstrated, ipso facto, that the relationship between the parties had come to an end. I do not accept this submission. There is nothing in s 553C to suggest that the concept of "mutual dealings" should be confined by reference to such considerations as whether any transactions were harmonious or likely to continue into the future. In any event, the perceived truism relied upon by Mr Erskine, even if accurate, would not warrant a conclusion that litigation could not constitute a mutual dealing between the parties.

18. However, Mr Erskine's primary argument was not dependent upon either of these contentions but, rather, on the proposition that the costs order was not a contingent debt as at the relevant date. He submitted that it had been recognised for more than a century that the mere prospect of obtaining an order for costs against an opposing litigant did not constitute a contingent debt at any time. He relied upon the old case of In re British Gold Fields of West Africa [1899] 2 Ch 7 in which Lord Lindley MR said at 11-12:

...if an unsuccessful action is brought by a man who becomes bankrupt then, if he is ordered to pay the costs, or if a verdict is given against him before he becomes bankrupt, they are provable ... On the other hand, if no verdict is given against him and no order is made for payment of costs until after he becomes bankrupt, they are not provable. In such a case there is no provable debt to which the costs are incident, and there is no liability to pay them by reason of any obligation incurred by the bankrupt before bankruptcy; nor are they a contingent liability to which he can be said to be subject as at the date of his bankruptcy.

19. He also relied upon the more recent decision of the Supreme Court of NSW in Expile Pty Limited v Jabb's Excavations Pty Ltd [2004] NSWSC 284; (2004) 22 ACLC 667 in which Palmer J was obliged to consider whether a claim for the costs of litigation fell within the scope of s 444D(1) of the Corporations Act, and said at par [33]:

... I think it is stretching somewhat the accepted concept of a contingent liability to say that, from the moment that the company puts the ultimately successful claimant to proof of his or her case, the company is under an existing obligation to pay the claimant's legal costs. Whilst the `association and connection' between the claimant's substantive claim and the costs of establishing that claim certainly exist ... the substantive claim depends on the existence of a legal right while the award of costs is always in the discretion of the Court, even though the way in which the discretion will be exercised will be fairly predictable in most cases.

20. Mr Erskine maintained that, whilst made in different statutory contexts, these observations were equally apposite to the present case. The debt owed to his client as a consequence of the costs order made on 10 May 2005 had not been contingent at the relevant date and, accordingly, could not have been set-off against the provable debt claimed by the defendant.

21. In answer to these contentions, Mr Mossop submitted that the authorities relied upon by Mr Erskine had to be understood in the context of the legislation in question. In re British Gold Fields of West Africa had involved an issue as to whether liability to pay costs pursuant to an order made after the winding up of a company was a provable debt under legislation which provided that any unliquidated claim was not provable. Hence, as Goldberg J observed in McLuskey v Pasminco Ltd (Administrators appointed) [2002] FCA 231; (2002) 120 FCR 326 at [44], that case, and others that had been mentioned in argument, had not been concerned with the question of whether claims for unliquidated damages and accrued legal costs and expenses incurred in prosecuting such claims, which had not been the subject of any order before the relevant date, would otherwise have been provable debts or claims. His Honour said, at [41] that:

Although the liability to pay costs arising out of a court order arises separately from the liability to pay injury compensation, the costs order is an incident of the claim for injury compensation. It follows that any claim for legal costs and expenses incurred in prosecuting a claim for injury compensation prior to the date of the commencement of the administration is admissible to proof as a contingent claim because of its association and connection with the primary claim for injury compensation, even though there has not been any costs order obtained, or agreement reached, for the payment of those legal costs and expenses prior to the commencement of the administration.

22. Whilst in that case his Honour was concerned with a claim under a deed of company arrangement rather than a claim provable in a winding up, it has been held that they are of the same nature and extent: see Brash Holdings Ltd (Administrator appointed) v Katile Pty Ltd [1996] 1 VR 24. Hence, Mr Mossop argued, the judgment in Pasminco is authority for the proposition that a liability to pay costs pursuant to orders made after the relevant date may be a provable debt under s 553C of the Corporations Act.

23. Mr Mossop also pointed out that, in deciding Expile Pty Ltd v Jabb's Excavations Pty Ltd, Palmer J had not rejected the reasoning of Goldberg J in Pasminco, but had distinguished claims for costs that had arisen in actions for damages for wrongdoing from claims for costs that had arisen in applications to wind up companies on the ground of insolvency. Indeed, in the later case of McDonald v Commissioner for Taxation [2005] NSWCS 2, Barrett J referred to both cases and made the following observations:

The essential feature of a contingent debt or claim is its source in some existing obligation or state of affairs that may or may not mature into a present date. In Re Pasminco, Goldberg J held that a claim for legal costs of litigation pending at the date made relevant by s 444D(1) was one "arising on or before" that day. The relevant proceedings there were proceedings by employees for damages for personal injury suffered in the course of employment before the relevant day. The claim for costs was seen as inherent in the claim for compensation and therefore as arising out of the events giving rise to the compensation claim...

In my opinion, the distinction drawn by Palmer J in (the relevant passage) from Expile v Jabb's is a valid and logical distinction. Where some act or omission of a company occurring before winding up carries with it the seeds of substantive relief in proceedings in which an adverse costs order is likely if the claim against the company is made out, the eventual liability under such a costs order may be seen to have its genesis in the original act or omission. But where the proceedings if for a winding up order which does not, of its nature, entail substantive relief grounded in any particular anterior act or omission of the company, no such link is apparent.

24. In the present case the relevant costs order was, of course, made in favour of the company in liquidation, but neither party submitted that this distinction was of any real relevance. The issue raised by the application is simply whether there was, at the relevant date, a contingent claim against which the defendant could set-off the debt allegedly owed to it by the plaintiff. In the light of the admonition by the High Court in Gye v McIntyre that s86 of the Bankruptcy Act, and hence, presumably, s 553C of the Corporations Act, should be given "the widest possible scope", I accept that there is an arguable case to that effect.

25. Mr Erskine submitted that I should make a final determination of this question but, as both counsel conceded during argument, that submission raised competing considerations and I have ultimately concluded that it would be preferable not to do so. The liquidator of the plaintiff has indicated that the debt claimed by the defendant may be subject to "vigorous dispute", and there is no evidence before me as to the likelihood of it eventually being established. There appears to be no binding authority directly on point and a final determination might create a dilemma for the losing party, in that it would either have to institute an appeal in the knowledge that it would be a waste of time and money should the debt claimed by the defendant ultimately be rejected, or to await the determination of that issue, in the knowledge that by then the appeal period would almost certainly have elapsed.

26. In my opinion, the balance of convenience clearly favours the granting of the stay of execution.

27. I will hear counsel as to costs.

I certify that the preceding twenty-seven (27) numbered paragraphs are a true copy of the Reasons for Judgment herein of his Honour, Justice Crispin.

Associate:

Date: 13 April 2006

Counsel for the plaintiff/respondent to motion: Mr C M Erskine

Solicitor for the plaintiff/respondent to motion: Gillespie-Jones & Co

Counsel for the defendant/applicant to motion: Mr D J C Mossop

Solicitor for the defendant/applicant to motion: Kelly & Co Lawyers

Date of hearing: 23 March 2006

Date of judgment: 13 April 2006