FEDERAL COURT OF AUSTRALIA Mathers & Anor v Commonwealth of Australia [2004] FCA 217 CORPORATE INSOLVENCY – whether penalty imposed under s 76 Trade Practices Act 1974 (Cth) admissible to proof against insolvent company – whether contravention of ss 46 or 47 of the Trade Practices Act constitutes an 'offence against a law' within the meaning of s 553B Corporations Act 2001 (Cth) WORDS AND PHRASES – 'offence' – 'offence against a law' Corporations Act 2001 (Cth)s 553B Trade Practices Act 1974 (Cth)ss 46, 47, 76 Bankruptcy Act 1966 (Cth) s 82(3) Re Bradbury; Ex parte The King; Official Receiver (1931) 3 ABC 204 approved Re Pascoe; Ex parte Trustee of the Bankrupt v Lords Commissioners of HM Treasury [1944] 1 Ch 310 considered Re Curtis; Ex parte The Deputy Commissioner of Taxation; the Official Receiver [1951] St R Qd 240 considered Victoria v Mansfield (2003) 199 ALR 395 at [32] applied Kingswell v The Queen (1985) 159 CLR 264 at 276 applied Brown v Allweather Mechanical Grouting Co Ltd [1954] 2 QB 443 at 447 applied CEO Customs v Labrador Liquor Wholesale Pty Ltd (2003) 201 ALR 1 applied KAREN MAREE MATHERS AND ADRIAN STEWART DUNCAN AS ADMINISTRATORS OF FILA SPORT OCEANIA PTY LTD (ADMINISTRATORS APPOINTED) v COMMONWEALTH OF AUSTRALIA NO 271 OF 2004 HEEREY J 12 MARCH 2004 MELBOURNE IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V271 OF 2004 BETWEEN: KAREN MAREE MATHERS AND ADRIAN STEWART DUNCAN AS ADMINISTRATORS OF FILA SPORT OCEANIA PTY LTD (ADMINISTRATORS APPOINTED) (ACN 078 405 202) APPLICANT AND: COMMONWEALTH OF AUSTRALIA RESPONDENT JUDGE: HEEREY J DATE OF ORDER: 12 MARCH 2004 WHERE MADE: MELBOURNE THE COURT ORDERS THAT: 1. Pursuant to s 447D(1) of the Corporations Act the Court directs that the applicants may properly refuse to accept a Proof of Debt from the Australian Government Solicitor in respect of any penalty imposed by the Court for a contravention of sections 46 or 47 of the Trade Practices Act. 2. The costs of all parties who have appeared in this proceeding be costs in the administration of Fila Sport Oceania Pty Ltd (Administrators Appointed). Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V271 OF 2004 BETWEEN: KAREN MAREE MATHERS AND ADRIAN STEWART DUNCAN AS ADMINISTRATORS OF FILA SPORT OCEANIA PTY LTD (ADMINISTRATORS APPOINTED) (ACN 078 405 202) APPLICANT AND: COMMONWEALTH OF AUSTRALIA RESPONDENT JUDGE: HEEREY J DATE: 12 MARCH 2004 PLACE: MELBOURNE REASONS FOR JUDGMENT 1 The applicants were on 9 December 2003 appointed joint and several administrators of Fila Sport Oceania Pty Ltd (administrators appointed) (Fila) pursuant to s 436A of the Corporations Act 2001 (Cth). They seek directions under s 447D(1) of that Act in the light of proceedings (the TPA proceedings) which have been brought by the Australian Competition and Consumer Commission (ACCC) against Fila alleging contraventions of ss 46 and 47 of the Trade Practices Act 1974 (Cth). 2 The directions sought are: "(a) whether a deed of company arrangement entered into by (Fila) will bind the Commonwealth, within the meaning of section 444D of the [Corporations] Act, so far as concerns any penalty imposed on Fila under section 76 of the Trade Practices Act 1974 on or before the day specified in the deed; (b) whether a deed of company arrangement entered into by (Fila) will bind the Commonwealth, within the meaning of section 444D of the [Corporations] Act, so far as concerns any penalty imposed on (Fila) under section 76 of the Trade Practices Act 1974 after the day specified in the deed, in respect of conduct of (Fila) before the day specified in the deed; (c) whether any penalty imposed on (Fila) under section 76 of the Trade Practices Act 1974 will be a provable debt in the winding up of (Fila); (d) whether the Commonwealth is entitled to vote at a meeting of (Fila's) creditors convened under section 439A of the Act; and (e) Such further or other orders as may be just and necessary." 3 Argument was conducted on the basis that the answers to these questions would depend on whether or not penalties imposed for any contravention would be within s 553B of the Corporations Act, which provides: "(1) Subject to subsection (2), penalties or fines imposed by a court in respect of an offence against a law are not admissible to proof against an insolvent company. (2) An amount payable under a pecuniary penalty order, or an interstate pecuniary penalty order, within the meaning of the Proceeds of Crime Act 1987, is admissible to proof against an insolvent company." Fila 4 Fila was incorporated on 2 May 1997 as a wholly owned subsidiary of Fila Nederland BV. Its principal activity was the manufacture and sale by wholesale of sporting apparel throughout Australia. 5 As at the date of the applicants' appointment Fila had assets of $770,000 and liabilities of almost $3 million. These liabilities do not include contingent liabilities, and in particular potential liabilities under the TPA proceedings. The TPA proceedings 6 On 5 September 2002 the ACCC commenced the TPA proceedings (V926 of 2002) against Fila and certain of its directors and officers seeking declarations, injunctions and pecuniary penalties in relation to alleged contraventions of ss 46 and 47 and also other relief. 7 Fila defended the TPA proceedings but on 27 November 2003 orders were made by consent which included an order that Fila be given leave to withdraw its defence. The defence was subsequently withdrawn on the following day. The proceedings were adjourned for hearing on the issue of quantum of penalty. Following further adjournments, that hearing will now take place on 24 March 2004. Jurisdiction 8 The Commonwealth is the appropriate respondent both as the creditor, or contingent creditor, whose right to prove is in issue and also as the government responsible for the administration of the relevant legislation. It was not suggested that the Court lacked jurisdiction because of any hypotheticality or lack of justiciable controversy. The Explanatory Memorandum 9 At the outset it must be acknowledged that strong support for the applicants' construction is provided by the Explanatory Memorandum produced at the time of the introduction of the predecessor of s 553 in the Corporate Law Reform Bill 1992. Paragraph 854 stated: "Under subsection 82(3) of the Bankruptcy Act, penalties or fines imposed by a court in respect of an offence against the law, whether the law of the Commonwealth or not, are not provable in a corporate winding up. The Harmer Report recommended that fines imposed before or after the commencement of a winding up should be admissible in corporate insolvency. The Report also recommended that costs ordered to be paid in respect of the proceedings for the offence should also be admissible. The rationale for the recommendation was that in relation to a corporate insolvency a fine should be admissible because, after the company has been wound up, there is no-one against whom the fine can be claimed and the fine is a claim by the community as a whole. The recommendation of the Harmer Report is not implemented in the Bill on the basis that although the fine may be a claim by the community, fines are by their nature generally intended to be a deterrent. In the case of a corporate insolvency, it is difficult to justify 'penalising' creditors for a wrong committed by the company. Proposed section 553B provides that penalties or fines imposed by a court are not admissible to proof against an insolvent company." 10 Section 82(3) of the Bankruptcy Act 1966 (Cth) relevantly provides: "(3) … penalties or fines imposed by a court in respect of an offence against a law, whether a law of the Commonwealth or not, are not provable in bankruptcy." 11 While corporate insolvency and bankruptcy have some different features, their similarities are obvious. Quite apart from the express terms of the Explanatory Memorandum, one would need strong textual and policy grounds for imputing to Parliament an intention that a creditor with a debt of exactly the same nature would be entitled to prove in a corporate insolvency but not in a bankruptcy. The reason which was proffered by the Harmer Committee, and rejected by the drafters of the legislation, is not persuasive. Corporate insolvency need not inevitably end in liquidation, and even liquidation need not end in dissolution. The bankruptcy experience 12 Prior to the introduction of s 82(3) when the present Bankruptcy Act was enacted in 1966 there was no equivalent provision in Australian bankruptcy legislation. 13 In Re Bradbury; Ex parte The King (1931) 3 ABC 204, Lukin J held that a fine upon conviction under the Game Act 1928 (Vic) was not provable in bankruptcy. 14 One of the arguments advanced to Lukin J was based on s 121 of the Bankruptcy Act then in force which provided that an order of discharge should not without the consent of the Treasurer of the Government concerned release the bankrupt from "any debt with which the bankrupt is chargeable at the suit of the Crown or of any person for any offence against any Act." It was contended that because this provision used the word "offence", which referred to a criminal act, the section implicitly recognised that a debt due to the Crown in regard to criminal acts is provable in any bankruptcy. His Honour observed (at 214): "The fallacy in that argument lurks in the assumption that the word 'offence' is attributable to a criminal act only." 15 I shall return to this point. Before leaving Bradbury, I note that in the course of a comprehensive and learned judgment his Honour referred to a number of American cases and texts, including a statement by an author called Brandon as follows (at 217): "Judgment to recover a fine imposed in the nature of punishment is not a debt contemplated by bankruptcy law." 16 A contrary result was reached by the English Court of Appeal in In re Pascoe; Ex Parte Trustee of the Bankrupt v Lords Commissioners of HM Treasury [1944] 1 Ch 310 where it was held that a fine imposed on a conviction for bribery was provable in bankruptcy. The court held the fine to be "debt" within the meaning of the relevant statute. 17 In Re Curtis; Ex parte The Deputy Commissioner of Taxation; the Official Receiver [1951] St R Qd 240 a penalty imposed upon a conviction for sales tax avoidance was held to be a provable debt in bankruptcy. Stanley J held (at 251) that the proceedings under the statute in question were civil. His Honour considered he did not need to decide whether Bradbury was correct. 18 In Victoria v Mansfield (2003) 199 ALR 395 the Full Court of the Federal Court held that infringement penalties for parking offences were not provable in bankruptcy and hence no stay should be granted to the respondent against any legal process for enforcement. By this time, of course, s 82(3) was in force. Their Honours noted (at [32]): "…There was no provision equivalent to s 82(3) of the current Act in the draft Bill produced following the Spicer Report [1962]. Section 82(3) was introduced into the Bill prior to its second reading on 20 May 1965. The then Attorney-General, Senator [sic] Sneddon, did not refer to s 82(3) in his second reading speech. The researches of counsel have not disclosed the immediate occasion for the inclusion of s 82(3). It may be assumed, however, that it constituted a legislative adoption of the approach espoused by Lukin J in Re Bradbury in 1931. [33] Section 82(3) is framed on the premise, first, that a penalty or fine in respect of an offence is imposed by a court to meet the public interest in punishing the offender for his or her offence; and secondly, that the interests of ordinary creditors should not be adversely affected by the criminal or quasi-criminal conduct of the bankrupt. (If fines or penalties were to be treated as provable debts, then the funds available to ordinary creditors would be diminished: see M Murray 'Fines and Penalties – Provable in Bankruptcy?' (2000) 10(3) New Directions in Bankruptcy 13 at 13-14.)" 19 As has been already noted, the second of these reasons was explicitly relied on as a rationale for the introduction of s 553B. "Offence against a law" in s 553B(1) – respondent's argument 20 On behalf of the respondent Mr Murray submitted that the answer to the question under consideration is to be found in the Trade Practices Act itself. That Act, so to speak, provides its own dictionary. Since its inception, the Trade Practices Act has distinguished between the consumer protection provisions of Pt V (other than s 52), which attract criminal sanctions, and the competition law provisions of Pt IV, which do not. 21 In its present form, the Act contains Pt VC, introduced in 2001, headed "Offences". Pt VC was introduced to make the relevant provisions of the Act conformable with the Criminal Code Act 1995 (Cth). There are many sections in Pt VC which take the form "A corporation must not …". The proscribed conduct is then defined and a penalty, in terms of penalty units, is fixed. 22 By contrast, s 76(1) provides that where the Court is satisfied that a person has contravened a provision of Pt IV, or engaged in ancillary conduct such as attempting, aiding or abetting etc, the Court: "… may order the person to pay to the Commonwealth such pecuniary penalty, in respect of each act or omission by the person to which this section applies, as the Court determines to be appropriate having regard to all relevant matters including the nature and extent of the act or omission and of any loss or damage suffered as a result of the act or omission, the circumstances in which the act or omission took place and whether the person has previously been found by the Court in proceedings under this Part or Part XIB to have engaged in any similar conduct." The ACCC on behalf of the Commonwealth may institute a proceeding in the Court for the recovery on behalf of the Commonwealth of such a pecuniary penalty: s 77(1). 23 Section 78 provides that "criminal proceedings do not lie against a person by reason only that the person has contravened" a provision of Pt IV or engaged in relevant ancillary conduct. Conclusion 24 In my opinion what must be construed is the expression "offence against a law" in s 553B(1) of the Corporations Act. The Trade Practices Act does not purport to say what is the construction to be put on language used in other legislation. 25 The word "offence" has no fixed technical meaning in the law: Kingswell v The Queen (1985) 159 CLR 264 at 276. A failure to do something prescribed by a statute may be described as an offence although Parliament does not impose a criminal sanction upon it, but a mere pecuniary sanction which is to be recovered as a civil debt: Brown v Allweather Mechanical Grouting Co Ltd [1954] 2 QB 443 at 447. 26 In ordinary speech "offence" does not necessarily connote criminal conduct. According to the Shorter Oxford, "offence" can be: "A breach of law, duty, propriety, or etiquette; a transgression, sin, wrong, misdemeanour or misdeed." "Criminal offence" is therefore a species of the genus offence. 27 In any event, there is no infallible litmus test which can reliably determine which offences or proceedings are "civil" and which are "criminal". 28 In CEO Customs v Labrador Liquor Wholesale Pty Ltd (2003) 201 ALR 1 the High Court was concerned with a question as to the appropriate standard of proof in proceedings under the Excise Act 1901 (Cth) and the Customs Act 1901 (Cth). Hayne J, with whom Gleeson CJ and McHugh J agreed, said (at [114]): "Arguments founded on classification of the proceedings as 'civil' or 'criminal' as determinative of the standard of proof, must fail. As reference to the historical matters mentioned earlier reveals, the classification proposed is, at best, unstable. It seeks to divide the litigious world into only two parts when, in truth, that world is more complex and varied than such a classification acknowledges. There are proceedings with both civil and criminal characteristics: for example, proceedings for a civil penalty under companies and trade practices legislation. The purposes of those proceedings include purposes of deterrence, and the consequences can be large and punishing." 29 In my opinion, a contravention of ss 46 or 47 of the Trade Practices Act is an "offence against a law" within the meaning of s 553B(1) of the Corporations Act. Plainly those provisions of the Trade Practices Act answer the description of "a law". A contravention of those sections is an "offence" against that law. The following features demonstrate that a contravention of ss 46 or 47 has much in common with the public law aspects of criminal offences in the strict sense: · a contravention of ss 46 or 47 is a breach, or as the Shorter Oxford tells us, a violation or transgression of that law · that law takes the form of a general prohibitory norm - "A corporation shall not…" - · the sanction authorised by s 76 is a pecuniary penalty payable to the Commonwealth; it is not a compensation for a person wronged, as is provided in the separate remedies for damages (s 82) or compensation (s 87(1A)) · a penalty fixed under s 76 is discretionary; the Court has regard to public interest aspects, such as general deterrence, and features of moral blameworthiness, such as previous contraventions · a s 76 penalty is in truth a punishment, designed to deter conduct which Parliament has determined is contrary to public welfare 30 The parties agreed that in the event of the applicants' contentions succeeding the appropriate orders should be as follows: 1. Pursuant to s 447D(1) of the Corporations Act the Court direct that the applicants may properly refuse to accept a Proof of Debt from the Australian Government Solicitor in respect of any penalty imposed by the Court for a contravention of sections 46 or 47 of the Trade Practices Act. 2. The costs of all parties who have appeared in this proceeding be costs in the administration of Fila Sport Oceania Pty Ltd (Administrators Appointed). I certify that the preceding thirty (30) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Heerey. Associate: Dated: 12 March 2004 Counsel for the Applicants: M Sifris SC and M Galvin Solicitors for the Applicants: Corrs ChambersWestgarth Counsel for the Respondent: M Murray Solicitors for the Respondent: Australian Government Solicitor Date of Hearing: 9 March 2004 Date of Judgment: 12 March 2004