Yesterday, the Supreme Court of New South Wales handed down a decision of relevance to insolvency practitioners confronted with an unliquidated, unlitigated creditor claim.

The matter involved an appeal against a decision made by the administrators of a Deed of Company Arrangement (“DOCA”) to reject a Proof of Debt because the claim had not crystallised prior to the Administrators’ appointment date.

The Court agreed that the claim was inadmissible, and that the DOCA Administrators were correct to reject it. However, instead of leaving the creditor without relief, the Court then proceeded to re-write the DOCA so that the claim would be admissible.

This decision has ramifications for all Administrators considering claims that were yet to crystallise as at the appointment date.

Case summary

The matter of Sutton v. BE Australia WD Pty. Limited (Administrators Appointed) [2010] NSWSC 772 concerned the administration of BE Australia WD Pty. Limited (“BEA”).

This company was part of the “BearingPoint” group of companies. The US holding company (BearingPoint Inc.) and several international subsidiaries had collapsed early in 2009. BEA, one of the Australian subsidiaries, appointed administrators (Tony Sims and Alan Hayes of PPB) on 1 October 2009.

As at the date of the appointment, Mary Sutton had asserted a claim against BEA that was just about to go to hearing. Ms. Sutton had been engaged by BEA as a “taxation consultant” in August 2004 but was summarily dismissed in October 2005, without any notice or any pay in lieu of notice. Aggrieved by this, Ms. Sutton commenced proceedings against BEA in the Industrial Relations Commission (“IRC”), alleging that her arrangement with BEA was an “unfair contract” for the purposes of section 106 of the Industrial Relations Act 1996 (NSW), because it did not provide for notice or pay in lieu of notice. Her claim was listed for hearing on 23 November 2009.

If she were successful in her case, the IRC would re-write her contract with BEA so that provision for notice (or pay in lieu of notice) were included. However, because the Administrators were appointed on 1 October 2009 (prior to the hearing of Ms. Sutton’s claim), her case was never heard – the claim was statute-barred pursuant to section 440D(1) of the Corporations Act 2001 (Cth.) (“the Act”).

However, the Administrators were happy to recognise the claim, at least in the early stages. PPB’s Section 439A Report categorised the claim as “a potential contractor claim for personal grievance” and at various creditors meetings in October, November and December 2009 and January 2010, the claim was admitted for voting purposes in the amount of $330,000.00.

The major meeting of creditors was ultimately held on 13 January 2010. At the meeting a DOCA proposal put forward by a related company was put to the vote. Ms. Sutton was admitted to vote and voted against the DOCA, however she was easily outnumbered by related-party creditors (with claims exceeding $122M), and the DOCA was approved.

With little else to do, Ms. Sutton sought to prove her claim for the purpose of receiving a distribution under the DOCA. When this occurred, the DOCA Administrators inspected Ms. Sutton’s claim more rigorously than they had done when the claim was only being considered for voting purposes. As a result of this increased scrutiny, the DOCA Administrators altered their position and decided to reject the claim.

Ms. Sutton appealed to the Supreme Court of New South Wales to overturn this decision. The matter was heard by Palmer J. At the commencement of the hearing, the DOCA Administrator’s barrister stood up and pointed out that the claim would not have been admitted in a winding-up, and in those circumstances the DOCA Administrators were correct to reject it. Palmer J. reviewed the facts and agreed, concluding “that no part of Ms Sutton’s Proof of Debt lodged on 9 February 2010 was admissible”.

Because the claim was never admissible in the first place, the Administrators never reached the point of needing to make an estimate of its value for the purpose of section 554A of the Act. It was not an “admissible claim of uncertain value” – it was simply an inadmissible claim.

However, fortunately for Ms. Sutton, that was not the end of it. Ms. Sutton’s Counsel argued that the fact that the claim was not admissible was not because the claim was deficient, it was because the DOCA was deficient. He said the Court should use its power under section 447 of the Act to re-write the DOCA so that the claim could be admitted.

In light of that argument Palmer J. was required to determine:

1. whether the Court actually had the power to do what Ms. Sutton wanted; and if so,
2. whether it should (as a matter of discretion) exercise that power.

As regards the first matter (whether or not the Court had the power to make an inadmissible claim admissible), Palmer J. analysed the authorities and reached the conclusion: – …that the Court has power under s 447A(1) to vary the operation of s 444D(1) and s 444A(4)(i) so that the Deed Administrators are able to admit to proof under the DOCA Ms Sutton’s claim… notwithstanding that that claim was not, as at the Appointment Date specified in the DOCA, a claim or debt of the nature which could have been proved in the winding up of the company.

Having decided that the Court could tinker with the DOCA, it then fell to be determined whether as a matter of discretion the Court should do so. After weighing up the competing considerations, Palmer J. considered that the Court should act to assist Ms. Sutton. In reaching this decision he took into account the following matters:

1. that at least two of the elements required to make out the claim were present prior to the appointment date (so that, even though the IRC had not actually re-written Ms. Sutton’s contract by the appointment date, the grounds based upon which it could do so were already in existence by then);
2. that the admission of the claim would not have a particularly significant impact on the distribution to other creditors; and
3. that, if the Court did not come to Ms. Sutton’s aid, she would “suffer substantial prejudice” because she would be left without recompense for what appeared to be a legitimate grievance.

Consequently, the Court ordered (in summary) that Part 5.3A of the Act was to operate so that Ms. Sutton’s claim would be admissible under the DOCA, “notwithstanding that that claim was not, as at the Appointment Date specified in the DOCA, a claim or debt of the nature which could have been proved in the winding up of the company”.

What does this mean for Administrators?

As a result of this decision, Administrators will need to tread carefully in matters where unliquidated, unlitigated claims have been made. In such cases, the Administrator will need to give consideration (and if appropriate, seek legal advice) as to whether the DOCA should be drafted so as to allow such claims to be admitted – even though they might not be admissible under the traditional test (which requires crystallisation of the claim prior to the appointment date).

It is clear from the decision summarised above that failure to allow for such claims in appropriate circumstances may result in costly and time-consuming litigation. Administrators would be well advised to bring this risk to the attention of any director or other party who intends to propose a DOCA in such circumstances.

The “standard provision” concerning the admission of claims may need to be amended to allow for such claims to be admitted, even though they would be inadmissible in a liquidation.

Where can I turn for assistance?

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