WESTMEX OPERATIONS PTY LTD (IN LIQ) and ORS y WESTMEX LTD (IN LIQ) SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CLARKE, HANDLEY and SHELLER JJA 11 June 1993, 11 June 1993 [1993] NSWCA 286 CONSTRUCTION OF DEEDS — Parent and subsidiary companies enter into a deed whereby parent guarantees to meet liabilities of subsidiaries in the event of their being wound up and subsidiaries guarantee to met parent's liabilities in the event of its being wound up — Both parent and subsidiaries in the process of being wound up — issue as to operations of the deed — literal reading results in a situation of 'infinite regress' in the proving of debts in the winding up. HELD: The infinite regression results from the changing of tense in the deed — the Court is entitled to depend from the literal meaning of the words in order to avoid an absurdity — in this case by aligning the tenses in which the deed is expressed the absurdity could and should be avoided. Grey v Pearson (1857) 6 HLC 61 (10 ER 1216). In re Gulbenkian's Settlements [1970] AC 508. Re J N Taylor Holdings Ltd (In Liq) (1991) 6 ACSR 187. ORDERS Appeal is dismissed with costs. Handley JA This is an appeal by the liquidator of the subsidiary companies in the former Westmex Group against orders made by McLelland J in which he determined questions arising in the liquidation of those subsidiaries and the parent company. Problems arose as a result of the deeds which the former National Companies and Securities Commission (NCSC) required the companies in the group to enter into as a condition of exempting them from preparing and filing group and individual accounts in accordance with the provisions of the then Companies Code. As a result of the requirements of the NCSC, the subsidiaries and the parent company entered into the various deeds between 15 April 1988 and 10 May 1989. The last deed is in a slightly different form, but Mr Coles QC, who appeared for the appellants, has taken no point based on this difference and the appeal has been conducted on the basis that if the appellants fail in respect of the earlier deeds, then they will also fail in relation to the deed of 10 May 1989. The clauses which are relevant are as follows: "1. In the event that any of the subsidiaries is wound up and there is a deficiency in the dividends available for distribution to creditors of such subsidiary to the intent that those creditors whose debts and claims have been admitted have not received payment of such admitted debt or claim in full at the time the affairs of such subsidiary are fully wound up, then the holding company hereby severally unconditionally and irrevocably guarantees to and undertakes with any such subsidiary to pay on demand from the liquidator of any such subsidiary the amount of any such deficiency. 2 UNREPORTED JUDGMENTS 2. In the event that the holding company is wound up and there is a deficiency in the dividends available for distribution to creditors of the holding company to the intent that those creditors whose debts and claims have been admitted have not received payment of such admitted debt and claim in full at the time the affairs of the holding company are fully wound up, then each of the subsidiaries hereby severally unconditionally and irrevocably guarantees to and undertakes with the holding company to pay on demand from the liquidator of the holding company the amount of any such deficiency". The parent company, Westmex Ltd, is in liquidation and the liquidator has received claims substantially in excess of $200 million and has no assets of any significance under his administration out of which to pay dividends. The liquidator of the parent appeared to submit to the order of the court and took no active part in these proceedings. The appellants are the former subsidiaries which are also in liquidation, being administered by a different liquidator. Some of these companies have assets and but for the deeds would be able to pay substantial dividends to their creditors. As a result of the construction of the deeds accepted by McLelland J the liquidator of the subsidiaries is faced with claims by the liquidator of the parent in excess of $200 million which will reduce the dividends to the separate creditors of the subsidiaries to vanishing point. It is this result which has given rise to the present controversy and to the appeal. The argument in support of the appeal was that on the true construction of CL1 and CL2 of the deeds the obligations were incapable of operating in a sensible or meaningful manner once both the parent and any subsidiary are insolvent and in liquidation. The appropriate conclusion, as a matter of construction, was that the deed was not intended to operate in such an event. This argument, based on similar deeds, was accepted by Debelle J of the Supreme Court of South Australia in Re J N Taylor Holdings Ltd (In Liq) (1991) 6 ACSR 187. However, the point was not litigated in that case and all parties accepted that this was the proper construction of the deeds. The point was fully argued before McLelland J and his Honour reached a different conclusion. The construction accepted by Debelle J was that once both the parent and the subsidiary are insolvent and in liquidation the claim of each against the other under CL1 and CL2 generate on the one hand an asset and on the other a liability. The resolution of the resulting assets and liabilities produces a situation of infinite regress and hence an unworkable and absurd result. In other words, the proof by the first company alters the deficiency in the second company and increases its proof in the liquidation of the first company which then alters its deficiency, and so on. Undoubtedly such a result is absurd and unworkable and cannot have been intended by the parties to the instrument, or for that matter by the NCSC. The conclusion accepted by Debelle J was that it followed that the parties could not and did not intend the deed to operate in those circumstances. On the other hand it is clear that the parties to the deeds and the NCSC, which required their execution, must have had in contemplation as a realistic possibility that if the parent was in liquidation and insolvent, the subsidiaries would also be in liquidation and insolvent and vice versa. Yet in that very situation it is contended by the appellant that the deeds are inoperative. In my opinion a construction producing such a result should only be adopted if no other construction is reasonably open. WHSSTMEX OPERATIONS PTY LTD (IN LIQ) and ORS v WESTMEX LTD (IN LIQ) (Handle$ JA) McLelland J held that the situation of infinite regress could be avoided by a construction which required the deficiency of a CL1 company to be calculated without regard to any liability or asset arising from any cross-claim by or against a CL2 company and vice versa. On this construction there was no situation of infinite regress, no mathematical difficulties, and the deeds had a sensible operation. If a construction of these deeds is fairly open which produces a workable result, as opposed to an unworkable result, a court should adopt that construction. The problem in CL1 and CL2 flows from the use of the past tense to refer to the receipt of dividends and the companies being fully wound up. The opening language of each clause refers to a present state of affairs. It refers to the event that a subsidiary is wound up and there is a deficiency in the dividends available for distribution to the creditors. This language, considered in isolation, is concerned with a situation before the dividends have been distributed, when the liquidator has in his hands a fund from which dividends could be distributed. However, the clause then goes on to state: "... to the intent that those creditors whose debts and claims have been admitted have not received payment of such admitted debt or claim in full". The tense in this part of the clause is the past tense. If the fund in the hands of the liquidator is still available for distribution, it follows automatically that the creditors whose debts and claims have been admitted will not yet have received any payment, let alone payment in full. Nevertheless the person responsible for drafting the deed has shifted the tense from the appropriate present in the first four lines to the inappropriate past in the language which then follows. The clause continues by referring to "the time that the affairs of such subsidiary are fully wound up", again, referring to a situation which has already occurred. However, if the liquidator still has in his hands a fund available for distribution to the creditors the affairs of the company could not possibly have been fully wound up. I agree therefore with McLelland J that in these circumstances the winding up referred to is a notional one. This view is reinforced by the fact that when the clause operates, it brings into existence a further asset, namely a right to recover the deficiency from the other company, which may require a further distribution to the creditors. If the company was fully wound up, then there could be no question, in the ordinary course, of a further recovery and a further distribution. The clause concludes by conferring upon the liquidator of the subsidiary the right to recover the amount of "such deficiency" from the parent. This deficiency is that spoken of at the start of the clause by reference to the dividend available for distribution to creditors. The clause therefore concludes by reverting to a present situation which necessarily precedes the completion of the winding up of the subsidiary. The difficulty arises because of this internal inconsistency in the tenses in the clauses. If instead of the words "have not received payment", the clauses had read "will not receive payment" there would have been no difficulty whatever. The established principle of construction is that the literal and grammatical meaning of the words is to be adopted unless this will lead to some absurdity or repugnancy. The literal meaning of the words "have not received payment" will produce the absurdity of the infinite regress recognised by both Debelle J and McLelland J and also an inconsistency with the rest of the clause which refers to a present and not a past state of affairs. 4 UNREPORTED JUDGMENTS It has been established ever since Grey v Pearson [1857] 6 HLC 61 AT 106 (10 ER 1216 at 1234) where Lord Wensleydale enunciated his golden rule, that a court is entitled to depart from the literal or grammatical meaning of the words in order to avoid a construction which would produce some absurdity or inconsistency. This is still the position today, as was made clear by Lords Reid and Upjohn in In Re Gulbenkian's Settlements [1970] AC 508. At 517 Lord Reid said: "This clause does not make sense as it stands... But the client must not be penalised for his lawyer's slovenly drafting. Under modern conditions it may be necessary to relax older and stricter standards. If I adopt methods of construction appropriate for commercial documents and documents inter rusticos I must consider whether underlying the words used any reasonably clear intention can be discerned". At 522 Lord Upjohn said: "There is no doubt that the first task is to try to ascertain the settlor's intention,... The court... starts by applying the usual canons of construction... But very frequently, whether it be in wills, settlements or commercial agreements, the application of such fundamental canons leads nowhere. The draftsman has used words wrongly, his sentences border on the illiterate and his grammar may be appalling. It is then the duty of the court by the exercise of its judicial knowledge and experience in the relevant matter, innate commonsense and desire to make sense of the settlor's or party's expressed intentions, however obscure and ambiguous the language that may have been used, to give a reasonable meaning to that language if it can do so without doing complete violence to it". In my opinion these principles, ancient and modern, entitle this court to read the words "have not received payment" as a draftsman's blunder for "will not receive payment" in conformity with the present or future tenses which are evident in the rest of the clause. Once this step is taken, it seems to me that the rest of the difficulties disappear. lI agree therefore with McLelland J that the CL1 deficiency is to be calculated without reference to any cross-obligations which may arise under CL2 and vice versa. This seems to me to be the necessary effect to be given to the language of the two clauses. One calculates the deficiency by applying the language of the clause, and having done so one reaches the amount for which the liquidator of the subsidiary can prove in the winding up of the holding company and vice versa. How then are these cross-claims to be dealt with in the two insolvent administrations. McLelland J followed the decision of Giles J in AWA Ltd v Exicon Australia Pty Ltd (1990) 19 NSWLR 705 espec at 712. The claims flowing out of CLI of any deed are inseparably connected with the dealings and transactions that give rise to the claims flowing out of CL2 of the same deed in accordance with the principles accepted and applied by Giles J in that case. If equitable set off is available only the net balance after applying that set off can be proved in any liquidation. Moreover it seems that the cross-claims are within s86 of the Bankruptcy Act 1966 as applied to the administrations of insolvent companies by s438 of the former Code which was in force at the relevant times. In any event I cannot see how set off on some basis can be avoided once both companies are insolvent and in liquidation. The construction that I have accepted of the deeds and the conclusion that set off on some basis is available for cross-claims between companies in this group, resolve all the difficulties other than that arising from the rule against double proof. WHSSTMEX OPERATIONS PTY LTD (IN LIQ) and ORS v WESTMEX LTD (IN LIQ) (Clark6 JA) It is a well established principle that in a given insolvency, there cannot be more than one proof for the same debt. The typical situation in which this principle applies is where there is a guaranteed debt and it operates to exclude any proof by the surety in competition with the principal creditor. This point does not appear to have been raised before McLelland J but Mr Coles QC was able to point to some evidence in the affidavit of Mr Sherlock which establishes an evidentiary foundation for it. It was submitted that the rule against double proof applies in the present case because some external creditors of companies in the group had guarantees from another company in the group. Such external creditors could prove in the liquidations of the principal debtor and the surety and receive dividends in both provided they did not exceed 100c in the $. Up to this point the rule against double proof would not be infringed. However, the proof in the liquidation of the principal debtor would count towards the calculation of its deficiency and this would lead to a claim under the deeds and further right of proof against another member of the group. Equally the proof against the surety would also count towards the calculation of its deficiency which would give rise to a claim under the deeds and a further right of proof against the same company in the group. In that situation a component of the proofs of two or more liquidators in the winding up of a given company in the group would include amounts referrable to the proofs of debt by a principal creditor in the liquidations of the principal debtor and the surety. In this way, it is suggested the rule against double proof would be infringed. It is not clear whether this submission was put in aid of the argument on construction or was put as a legal obstacle to the construction adopted by McLelland J. In my opinion the rule against double proof does not contradict the construction accepted by McLelland J nor does it raise an insuperable legal obstacle to proofs of debt being lodged under CLI and CL2 of the deeds in respect of the relevant deficiencies. The rule requires the liquidator of a CL1 company to exclude any guaranteed debt when calculating its deficiency for the purpose of claiming against another company which has already received a proof in respect of the same debt. In other words, where there have been proofs against a principal debtor and one or more guarantors, it will be necessary, because of the rule against double proof, to adjust the further proofs by a given liquidator against other companies to exclude any element of double counting forbidden by the rule against double proof. This is a matter of calculation and the complexities do not demonstrate that the deed as construed by McLelland J is incapable of operation if all companies are in liquidation and insolvent. Moreover, in my opinion, these complexities do not cast any doubt on the construction of these deeds accepted by his Honour. For these reasons I would propose that the appeal should be dismissed with costs. Clarke JA I agree. Sheller JA I also agree. Clarke JA The order of the Court will be that the appeal is dismissed with costs. Appeal is dismissed with costs. UNREPORTED JUDGMENTS Representation: Counsel for the Appellant: BA Coles QC and JT Svehla Solicitors for the Appellant: Baker and McKenzie Counsel for the First Respondent: M O'Neill (Solicitor) Solicitors for the First Respondent: Corrs Chambers Westgarth Counsel for the Third Respondent: GA Palmer QC and JE Thomson Solicitors for the Third Respondent: Minter Ellison Counsel for the Fourth Respondent: N Korner (Solicitor) Solicitors for the Fourth Respondent: Blake Dawson Waldron