Reported Decision : 53 ACSR 699 (2005) 23 ACLC 707 New South Wales Supreme Court CITATION : Australian Winch & Haulage Co Pty Ltd v State Debt Recovery Office [2005] NSWSC 423 HEARING DATE(S) : 29 April, 2005 JUDGMENT DATE : 29 April 2005 JURISDICTION : Equity Division JUDGMENT OF : Palmer J DECISION : Summons dismissed. CATCHWORDS : CORPORATIONS - DEED OF COMPANY ARRANGEMENT - PENALTY - Whether a penalty or fine imposed by a Court is provable under a Deed of Company Arrangement - construction of s.553B(1) Corporations Act. Bankruptcy Act 1966 (Cth) - s.82(3) LEGISLATION CITED : Corporate Law Reform Bill 1992 - para 85 Corporations Act 2001 (Cth) - s.435A, s.553B CASES CITED : Victoria v Mansfield (2003) 130 FCR 376 Australian Winch & Haulage Co Pty Ltd (subject to a Deed of Company Arrangement) - Plaintiff PARTIES : State Debt Recovery Office - Defendant FILE NUMBER(S) : SC 4752/04 T.L. Lee (Sol) - Plaintiff COUNSEL : R.J. Bromwich - Defendant Terence Lockyer Lee - Plaintiff SOLICITORS : State Crown Solicitor - Defendant LOWER COURT JURISDICTION : Ex tempore 1 The Plaintiff in this case raises a short but novel point as to the construction and effect of s.553B of the Corporations Act 2001 (Cth) in the context of a Deed of Company Arrangement. Section 553B provides: " Insolvent companies—penalties and fines not generally provable (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." 2 The question which the Plaintiff raises is this: if a Deed of Company Arrangement has the effect of making an insolvent company solvent, does s.553B(1) no longer apply, so that a penalty or fine otherwise within the subsection now becomes provable under the Deed and liable to be extinguished upon the receipt of the dividend payable to creditors under the Deed? 3 The Plaintiff contends that the answer to this question is "yes". By its Summons it seeks an order which, in effect, restrains the State Debt Recovery Office ("SDRO") from recovering a substantial fine imposed upon the Plaintiff by the Industrial Relations Commission except by way of proof and receipt of a dividend under the Plaintiff's Deed of Company Arrangement. 4 The facts have been agreed between the parties and may be stated very shortly. 5 In 1999, the WorkCover Authority of New South Wales commenced a prosecution against the Plaintiff in the Industrial Relations Commission of New South Wales. The matter was heard on 14 August 2001 and judgment was reserved. On 9 September 2002, while judgment in the prosecution was still reserved, an administrator was appointed to the Plaintiff under Pt 5.3A of the Corporations Act . On 12 November 2002, the Plaintiff entered into a Deed of Company Arrangement. On 31 December 2003 the Industrial Relations Commission delivered judgment in the prosecution and imposed on the Plaintiff a fine of $150,000. Both parties agree that the fine is "imposed by a court in respect of an offence against a law" , within the meaning of those words in s.553B(1) of the Corporations Act . 6 On 5 July 2004 the Deed administrator wrote to SDRO saying: "The company has paid all that is required into the Deed Fund. There is now certainty that the debts provable under the Deed will be extinguished once I have declared and paid the first and final dividend. The Deed will be wholly effectuated. I believe that Section 553B no longer applies as the Company is solvent. In light of the above, I now believe the State Debt Recovery Office is entitled to participate in the Deed. Attached is a Formal Proof of Debt (Form 535) to be completed and returned to this office as soon as possible. I intend to declare a first and final dividend shortly." 7 The proposition advanced by the administrator in this letter is the argument which has been advanced by Mr Lee, solicitor, who appears on behalf of the Plaintiff in support of the Summons. Mr Lee submits, in addition, that the administrator's construction of s.553B(1) is reinforced by the policy of Pt 5.3A of the Act as expressed in s.435A which is, he says, that after entry into a Deed of Company Arrangement a company should be free to start again with a clean slate. 8 I am unable to accept these submissions. I begin with an examination of the rationale of s.553B(1), a section taken directly from s.82(3) of the Bankruptcy Act 1966 (Cth). The rationale was stated thus in the Exploratory Memorandum produced at the time of the introduction of the predecessor of s.553B(1) in the Corporate Law Reform Bill 1992 [paragraph 854]: "Under subs 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." 9 In Victoria v Mansfield (2003) 130 FCR 376, at 386, the Full Court of the Federal Court of Australia said of s.82(3) of the Bankruptcy Act: "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.)" 10 It will be seen at once that, if the argument of the Plaintiff in the present case is correct, the rationale behind s.553B(1) would be defeated utterly. The burden of the fine imposed by the Industrial Relations Commission on the Plaintiff will be borne, not by the Plaintiff and its shareholders, but by the Plaintiff's creditors, whose dividend from the Deed Fund will be diminished substantially. Further, if the Plaintiff's argument is correct, the deterrent effect of a fine or penalty imposed upon a company by a court may be very easily negated by the simple expedient of entering into a Deed of Company Arrangement. 11 The argument of the Plaintiff is fatally flawed because it pays no attention to the provisions of the Deed of Company Arrangement. Clause 17 of the Deed provides that upon payment by the administrator to the "Deed Creditors" of the "Creditor Entitlements", all of the Deed Creditors' debts are extinguished. "Deed Creditor" is defined to mean: "… any person who is or claims to be owed a debt by the Company on the Appointed Date other than the Secured Creditor, the Related Creditors and the Continuing Employees." "Debt" is defined to mean: "…any debt owing by the Company or claim or right of action whatsoever against the Company arising out of or having its origin in any act, omission, transaction, situation, relationship or other occurrence on or prior to the Appointed Date, and a) whether secured or unsecured; b) whether arising at law or in equity; c) whether arising out of contract, statute or tort; d) whether present or future, contingent, liquidated or unliquidated; and e) includes all assigned rights and rights of indemnity and subrogation." "Appointed Date" means 9 September 2002. "Creditor Entitlement" is defined to mean the amount to be paid to each Deed Creditor pursuant to Clause 7. Clause 7(b) provides that the administrator is to pay the Deed Fund "to all Deed Creditors whose debts are proven and admitted by the Administrator in accordance with the terms of this Deed" . Clause 14.1 provides: "Subdivisions A, B, C and E of Division 6 of Part 5.6 of the Corporations Act and Regulations 5.6.37 to 5.6.57 inclusive and 5.6.63 to 5.6.70A inclusive of the Corporations Regulations apply to claims made under this Deed with such modifications as are necessary and as if the references to the liquidator were references to the Administrator of this Deed." 12 Section 553B is within Subdivision A of Division 6 of Part 5.6 of the Corporations Act and is therefore made to apply to, and therefore to define, claims made and provable under the Deed. 13 The effect of clause 14.1 is to remove from the definition of "Deed Creditor" a creditor entitled to a fine or penalty within the meaning of s.553B(1). This is because whether or not a person is a Deed Creditor is determined as at the Appointed Date, that is, 9 September 2002. As at that date, the Plaintiff was in voluntary administration but the Deed had not yet been executed and the moratorium and extinguishment provisions of Clauses 15 and 17 had not yet taken effect. Accordingly, as at the Appointed Date the Plaintiff was insolvent so that as at the Appointed Date, by s.553B(1), SDRO was not entitled to claim or prove for the fine in the Plaintiff's insolvent administration. 14 Clause 14.1 of the Deed expressly requires that the words of s.553B(1) be modified, as necessary, to accommodate and reflect the fact that the insolvent administration of the Plaintiff is being effected not in a liquidation but under a Deed of Company Arrangement. The effect of Clause 14.1 is that if, by s.553B(1) a claim is not provable in a liquidation, then neither is it provable under the Deed. 15 Accordingly, the SDRO is not, and never could be, a Deed Creditor bound by the provisions of the Deed whose debt is provable within the terms of the Deed and whose debt is liable to extinguishment in accordance with clause 17 of the Deed. This result is entirely in accordance with the rationale and purpose of s.553B(1), as explained in Victoria v Mansfield and in the Explanatory Memorandum which introduced s.553B into the corporations legislation. 16 For these reasons, the Plaintiff is not entitled to the declaration as sought in the Summons, and the Summons will be dismissed. 17 The Plaintiff will pay the Defendant's costs of the Summons. ~ oOo ~ 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. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.