Reported Decision : 41 ACSR 466 New South Wales Supreme Court CITATION : Metal Manufactures Ltd v Hall [2002] NSWSC 298 FILE NUMBER(S) : SC 5057/01 HEARING DATE(S) : 11/04/02 JUDGMENT DATE : 16 April 2002 Metal Manufacturers Ltd - plaintiff PARTIES : Gregory Winfield Hall - 1st defendant Transtate Limited - 2nd defendant JUDGMENT OF : Gzell J COUNSEL : D J Hammersclag SC with P T Newton for the plaintiff P M Lane for the second defendant Doyles Construction Lawyers SOLICITORS : Heard McEwan Lawyers Cunich Business Lawyers CATCHWORDS : Corporation Law - deed of company arrangement - incorporation of mutual set-off by reference - self-executing upon commencement of administration - creditor's cross-claim to company claim in District Court proceedings not barred - exceptional case for declaratory relief - variation of deed to provide for set-off unnecessary. Corporations Act 2001 (Cth) LEGISLATION CITED : Corporations Regulations 2001 (Cth) Bankruptcy Act 1966 (Cth) Winterton Constructions Pty Ltd v MA Coleman Joinery Co Pty Ltd (1996) 20 ASCR 671 at 675 Forster v Wilson (1843) 12 M & W 191 at 204 (152 ER 1165 at 1171 Gye v McIntyre (1990-1991) 171 CLR 609 at 622 Re Deveze; ex parte Barnett (1874) 9 Ch App 293 at 295 Re Capel; Ex parte Marac Finance Australia Ltd v Capel (1994) 48 FCR 195 CASES CITED : Stein v Blake [1994] Ch 16 Stein v Blake [1996] AC 243 Citicorp Australia Ltd v Official Trustee in Bankruptcy (1996) 71 FCR 550 at 567 G M & A M Pearce and Co Pty Ltd v RGM Australia Pty Ltd (1997) 26 ACSR 639 at 642, 648, 651-652 AWA Ltd v Exicom Australia Pty Ltd (1990) 19 NSWLR 705 at 711 Forster v Jododex Australia Pty Ltd (1972) CLR 421 Willesee v Willesee [1974] 2 NSWLR 275 at 282-283 DECISION : See par 14 IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION ENTER LIST HERE LIST GZELL J TUESDAY 16 APRIL 2002 5057/01 METAL MANUFACTURES LIMITED v GREGORY WINFIELD HALL as the ADMINISTRATOR OF TRANSTATE PTY LTD JUDGMENT 1 The first defendant was the administrator of the second defendant which came out of the administration on 15 May 1998. On 15 September 1999 the second defendant commenced an action against plaintiff in the District Court of New South Wales. On 2 December 1999 the plaintiff filed a notice of grounds of defence and a notice of cross-claim in an amount in excess of the second defendant's claim. On 10 July 2001 the second defendant was granted leave to amend its notice of grounds of defence to cross-claim to allege that the cross-claim was barred in terms of a deed of company arrangement ("Deed") executed by the second defendant on 21 December 1995. 2 By its originating process the plaintiff sought a declaration that it was not bound by the Deed, a declaration pursuant to the Corporations Act 2001 (Cth), s 445G that the Deed was void in so far as it prevented it from prosecuting the cross-claim or, alternatively, an order pursuant to s 447A that the Deed be varied to allow the plaintiff to set off its claim or to insert a provision that nothing in the Deed affected the right of any creditor to set off any debt against any claim by the second defendant. The first defendant entered an appearance by which he submitted to the orders of the court except as to costs. It was common ground between the plaintiff and the second defendant that the provisions of the Corporations Act 2001 (Cth) applied. During the hearing an argument as to the proper construction and effect of the Deed arose. I granted leave to amend so that the first declaration read that on the proper construction of the Deed the plaintiff was not precluded from exercising any right of set-off or cross-action in the District Court proceedings and a further declaration was added that on the proper construction of the Deed the Corporations Act 2001 (Cth), s 553C operated to set off against the claim of the second defendant in the District Court proceedings, the plaintiff's cross-claim therein. 3 The Deed provided for the admission of claims by the first defendant. A "claim" meant a debt owing by, or a claim subsisting against the second defendant, whether presently, in the future or contingently, irrespective of whether it arose by virtue of contract, at law, in equity or under statute which arose, or the circumstances giving rise to which occurred, before 23 August 1995, the date of appointment of the first defendant as administrator. Clause 5.1 of the Deed provided that except as expressly included, the prescribed provisions in the Corporations Regulations 2001 (Cth), sch 8A were expressly excluded. The Corporations Act 2001 (Cth), s 553C provides that, subject to an exception irrelevant for present purposes, 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, an account is to be taken of what is due from one party to the other, the sum due from one party is to be set off against any sum due from the other party and only the balance of the account is admissible to proof. Section 444A (5) provides that a deed of company arrangement is taken to include the prescribed provisions except so far as it provides otherwise. Schedule 8A, cl 8 provides that subdivisions A, B, C and E of division 6 of part 5.6 apply to claims made under a deed as if the reference to liquidator were a reference to the administrator of the deed. Section 553C is with subdivision A. Were it not for cl 5.1 of the Deed, therefore, a creditor of the second defendant would have been entitled to the statutory right of set-off in s553C. 4 Clause 7.3(d) of the Deed was in the following terms: "During the Arrangement Period, a Creditor shall not: … (d) except in the case of Disputed Debtors, exercise any right of set-off or cross-action to which a Creditor would not (sic) have been entitled had the Company been wound up at the day when the administration of the Company began." It is common ground that the plaintiff was a Disputed Debtor. Mr Hammerschlag SC, senior counsel for the plaintiff, submitted that this provision incorporated by reference the Corporations Act 2001 (Cth), s 553C so far as the Disputed Debtors were concerned. Ms Lane, who appeared for the second defendant, considered that it would be hard to give it meaning otherwise. Clause 7.1 of the Deed provided that it bound all creditors having a claim to the full extent of that claim. Clause 7.6 provided that once the administrators had paid to the creditors their entitlements under the arrangement, all claims were extinguished. 5 The claim and cross-claim in the District Court arose out of a contract for the construction by the second defendant of an upgrade of part of the plaintiff's plant including an upgrade of its 7B conveyor. In 1994 a dispute arose as to why two elevating tables had failed on first commissioning. In June 1994 it was agreed that the second defendant would undertake certain works in modification of the elevating tables and the plaintiff would undertake other works to assist in a speedy resolution. The 7B conveyor was made operational in 1995. Joseph Burns, a project engineer for the plaintiff was cross-examined. He said that he first became aware of the administration in mid 1995, that is, before the Deed was executed. Correspondence between the plaintiff and the first defendant was in evidence. Suffice it to say that the first defendant asserted that the plaintiff owed the second defendant just under $150,000. The plaintiff's position was that only $35,000 odd was owing and it was being withheld until contractual requirements were met. If the claim for $150,000 odd was prosecuted, the plaintiff would reverse its decision and claim $100,000 odd for the work it did to assist speedy rectification of the 7B conveyor. The plaintiff did not lodge a claim in the administration. 6 The claim and cross-claim in the District Court proceedings were sent to a referee who reported on 6 August 2001. He allowed just over $50,000 to the second defendant on its claim, comprising $31,000 odd for work done prior to the failure of the lifting tables and $20,000 odd for variations after re-commencement of the works in 1993. The referee found that the plaintiff's cross-claim was barred by the Deed. In case he was wrong in that respect he assessed the cross-claim at $72,000 odd comprising $66,000 odd for re-design and work in accordance with it and $6,000 for the provision of manuals by the others. 7 The first question which arises under the amended originating process is the proper construction of the Deed. The plaintiff argues that the clause 7.3(d) of the Deed incorporated the Corporations Act 2001(Cth), s 553C by reference and it is not precluded from exercising the right of set-off in the District Court proceedings. Further, it is argued that s 553C has already operated to set off against the claim of the second defendant in the District Court proceedings, the plaintiff's cross-claim. The second defendant argues that right of set-off was only available to the plaintiff during the Arrangement Period, defined to mean the period which commenced on the date of execution of the Deed, 21 December 1995 and ended on the date of termination of the Deed, 15 May 1998. It is argued that since the right of set-off was not exercised in that period the plaintiff's claim was extinguished under clause 7.6 of the Deed. If the deed has this effect it goes against the purpose of s 553C. As Young J said in relation to a similar submission in Winterton Constructions Pty Ltd v M A Coleman Joinery Co Pty Ltd (1996) 20 ACSR 671 at 675 this appears to be a rather bizarre result. In my view, the submission fails. 8 The Corporations Act 2001 (Cth), s 553C is the equivalent of the Bankruptcy Act 1966 (Cth), s 86 (1). It was said by Parke B in Forster v Wilson (1843) 12 M & W 191 at 204 (152 ER 1165 at 1171) that the object of set-off in bankruptcy is: "to do substantial justice between the parties, where a debt is really due from the bankrupt to the debtor to his estate". In Gye v McIntyre (1990-1991) 171 CLR 609 at 622 the High Court said: "Section 86 is a statutory directive ("shall be set off") which operates as at the time the bankruptcy takes effect. It produces a balance upon the basis of which the bankruptcy administration can proceed. Only that balance can be claimed in the bankruptcy or recovered by the trustee. If its operation is to produce a nil balance, its effect will be that there is nothing at all which can be claimed in the bankruptcy or recovered in proceedings by the trustee. The section is self-executing in the sense that its operation is automatic and not dependent upon "the option of either party": see, per Lord Selborne LC, In re Deveze; Ex parte Barnett (1874) 9 Ch App 293 at 295." Drummond J in Re Capel; Ex parte Marac Finance Australia Ltd v Capel (1994) 48 FCR 195 followed the decision of the Court of Appeal in Stein v Blake [1994] Ch 16 to conclude that the above passage did not mean that before an account was actually taken a claim by the bankrupt against a debtor and a cross-claim by a debtor against the bankrupt were extinguished. The House of Lords in Stein v Blake [1996] AC 243 confirmed the appeal but on a different basis. At 255-256 the view of the Court of Appeal that under bankruptcy set-off the separate causes of action survived the bankruptcy and could be assigned subject to the "equity" of set-off was rejected, Lord Hoffmann concluding: "It is true that bankruptcy set-off does cover much wider set of claims than legal set-off. But for present purposes the important difference is that the latter must be pleaded and is given effect only in the judgment of the court, whereas the later (sic) is self-executing and takes affect on the bankruptcy date." This line of reasoning is similar to that in Gye and in C iticorp Australia Ltd v Official Trustee in Bankruptcy (1996) 71 FCR 550 at 567 a Full Court of the Federal Court concluded that it should follow the reasoning of the House of Lords. In G M & A M Pearce and Co Pty Ltd v RGM Australia Pty Ltd (1997) 26 ACSR 639 at 642, 648, 651-652 the Court of Appeal of Victoria took a similar view and held that the same principle applies to the Corporations Act 2001 (Cth), s 553C. 9 In the circumstances of this case where the cross-claim by the plaintiff was greater than the claim by the second defendant, I conclude that the upon the execution of the Deed on 21 December 1995, the second defendant's claim against the plaintiff was extinguished as was the plaintiff's cross-claim against the second defendant to the extent of the second defendant's claim. The plaintiff was left with a claim for the balance to be ascertained. Since it failed to lodge a proof with the first defendant, its claim to the balance was extinguished on 15 May 1998 by operation of clause 7.6 of the Deed. 10 Because of the view I hold as to the proper construction and effect of the Deed, it is unnecessary for me to consider the applications under the Corporations Act 2001 (Cth), s 445G that it be declared that the Deed is void in so far as it prevents the plaintiff from prosecuting its defence and cross-claim in the District Court proceedings and for an order under s 447A that the Deed be varied to allow the plaintiff to set off its claim against the claim by the second defendant in the District Court proceedings or, more generally, to insert a provision that nothing in the Deed affects the right of any creditor to set off any debt against any claims by the second defendant or any assignee from the second defendant. 11 If I be wrong in my view of the construction and effect of the Deed, I consider this relief. In Winterton a deed of company arrangement incorporated the mutual set-off provision in the Corporations Act 2001 (Cth), s 553C. The plaintiff had a claim against the company which, had it been dealt with in the administration, would have attracted the operation of s 553C. Subsequently, the company brought proceedings against the plaintiff to which the plaintiff raised a cross-claim. The company sought to strike out the cross-claim on the grounds that it was barred by the deed of company arrangement. Young J varied the deed to provide that nothing in it affected the right of any creditor to set off a debt against any claim by the company. Counsel for the second defendant submitted that Winterton was distinguishable in that the plaintiff in that case had no knowledge of the administration, whereas Mr Burns said in cross-examination that he was aware of the administration on a date before the execution of the Deed. That is a difference but not a point of distinction, in my view. Had I taken a different view of the construction and effect of the Deed, I would have made a similar variation to the Deed as Young J did in Winterton. 12 Counsel for the second defendant argued that the plaintiff had in correspondence sought a contractual right to set off the $35,000 odd which it had not pursued. Counsel for the plaintiff, in reply, said no submissions were made with respect to contractual set-off and the matter was not before the Court. I agree with him. 13 There was some debate as to equitable set-off and the need for the set off to go to the root of, so as to "impeach" the title of the plaintiff (AWA Ltd v Exicom Australia Pty Ltd (1990) 19 NSWLR 705 at 711; Meagher, Gummow & Lehane, Equity Doctrines and Remedies, 1992, 3rd ed, Butterworths, par 3709 (h)). Counsel for the second defendant submitted that the plaintiff's claim for redesign and work thereunder and the cost of manuals produced by the third parties did not go to the root of the second defendant's claim for the payments due under the construction contract prior to its re-activation. Were it necessary to do so, I would have concluded that the equity of the case required that the plaintiff should not be entitled to proceed with its claim without there being determined and set off against it, the plaintiff's claim. Both claim and cross-claim were inextricably bound up together, arising as they did under a construction contract and disputes arising thereunder. 14 The Court would not ordinarily grant declaratory relief with respect to matters pending before the District Court which could be cured in the ordinary way by appeal. In this case, however, the matter came before me as an application to declare the Deed void or to vary it. During the course of argument it appeared that the Deed in its present form might provide for the set-off and I granted leave to amend to seek declarations with respect to its construction and effect. I regard these circumstances as enabling me to exercise my discretion in favour of granting declarations with respect to the proper construction and effect of the Deed (Forster v Jododex Australia Pty Ltd (1972) 127 CLR 421; Willesee v Willesee [1974] 2 NSWLR 275 at 282-283). I will hear the parties on the form of the declaration or declarations and on costs. Last Modified: 04/22/2002 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. 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