There is a first time for everything: voluntary administrators successfully apply to stay arbitral proceedings using s 447A

Background

In In the matter of Tho Services Limited [2016] NSWSC 509 (Tho Services Limited) the voluntary administrators applied to the Court for a stay of contractually mandated arbitral proceedings.

Facts

Until 2014, Tho Services Limited (the Company) carried on a construction engineering business.  They were contracted by the Commonwealth of Australia to construct a recreation facility at an RAAF base in Queensland. 

The contract contained an arbitration clause stipulating that disputes be resolved by way of arbitration seated in Victoria, Australia and conducted in accordance with the International Chamber of Commerce Rules. 

In January 2015 the Company appointed voluntary administrators and in September of 2015 the Commonwealth commenced arbitration proceedings under the contract for more than $12 million in unliquidated damages.

The timetable had the hearing of the arbitration set for November 2016.  

In February this year, the Commonwealth submitted a proof of debt to the administrators for more than $14 million (the next largest proof of debt was $14,000 and the aggregate of all other proofs of debt was only $45,000). 

These proceedings concerned the administrators’ application for orders under section 447A that the words “proceeding in a Court” in section 440D be read to include arbitration in respect of this Company.

The Court in Tho Services Limited agreed with previous authorities[1] that section 440D(1) does not extend to arbitration (as it is presently drafted).

The key reason that this judgement (and two previous judgments of the Court[2]) provided that section 440D(1) does not extend to arbitrations is the use of the wording “proceeding in a Court”.  In other sections of the Corporations Act 2001 (Cth) broader terms which may encompass arbitration are used (such as “proceeding” in section 471B), whereas, “proceeding in a Court” tends to exclude arbitral proceedings. 

The Court considered whether the general power of the Court given by section 447A of the Corporations Act 2001 (Cth) could be used to alter the operation of s 440D(1).  The practical result of this construction of the Act would be the Court having the power to stay the arbitration on the application of the voluntary administrators.

In coming to its decision, the Court relied on the construction of section 447A as enunciated by the High Court in Australasian Memory Pty Ltd v Brien (2000) 200 CLR 270.  In summary, the key principles in relation to section 447A are:

• orders under the section are subjective (ie they are about how part 5.3A is to operate in relation to a particular company[3]);
• the use of the words “this Part” in the section refers to the entirety of Part 5.3A.  The examples given in the section are not exhaustive but instead “make it clear that orders under the section can alter the operation of other provisions of the part;”[4] and
• the legislative intention of including section 447A appears to be to “permit alterations to the way in which the Part operates in the case of a particular company”[5].

Should the power be exercised in this case?

The Court decided that extending the operation of section 440D to arbitration is within the powers of section 447A. The next question the Court considered was whether or not it should exercise its discretion to do so.

The Court considered policy implications including the practicalities of voluntary administration.  It commented:

Absent a stay, the administrators will be required to expend their limited resources – which might otherwise be available for creditors generally – on the defence of the claim of one potential creditor.

The Court did not consider it appropriate to prefer the Commonwealth’s claim (even though it was for some $12 million and the next largest claim was only $14,000) because the Commonwealth’s claim was only an “unestablished, unliquidated claim for damages for alleged breach of a construction contract”[6].

The short length of the stay requested (6 weeks) also played into the Court’s use of its discretionary power under section 447D.

Ultimately the Court decided it was appropriate in the circumstances to use its power under section 447A to extend the operation of section 440D to include arbitral proceedings.

Reform

The Court reviewed the inconsistencies in the Corporations Act 2001 (Cth) in relation to staying proceedings in creditors’ voluntary winding up, court ordered windings up, voluntary administrations and companies under a deed of company arrangement[7] and made the following comments:

…review of the current legislative situation reveals a situation which is ripe of the attention of an appropriate corporations law reform agency.[8]

There were policy arguments made by counsel for the Commonwealth in relation to Court interference in arbitral proceedings.  However, in light of the inconsistencies in the way arbitral proceedings are currently dealt with in the Corporations Act 2001 (Cth), the Court was unpersuaded that the drafting of section 440D reflected a “conscious policy decision that arbitration should be permitted to proceed notwithstanding an insolvency administration”[9].

Lavan Legal comment

• It is clear that section 440D does not apply to arbitrations.
• Importantly, the case highlights the broad discretionary powers of the Court under section 447A.
• Even if section 447A has not been used in a particular way previously, this should not be viewed as an impediment.
• The question to ask when considering making an application under section 447A is whether the proposed use is consistent with the objects of Part 5.3A.