03 Sep 2012

Section 447A: is it still the elixir of voluntary administration? Sutton v BE Australia WD Pty Ltd

by Orla McCoy

Ongoing debate about the outer limits of section 447A will continue until that issue is ultimately clarified by the High Court.

Perhaps the most interesting aspect of the recent High Court decision in Sutton v BE Australia WD Pty Ltd [2012] HCATrans 167 was what the Court did not say.

The Court was hearing an application for special leave to appeal brought by Ms Sutton. Her main argument was that an application pursuant to section 106 of the Industrial Relations Act 1996 (NSW) (IR Act) commenced against the respondent company (Company) (but not heard or otherwise determined) prior to the relevant date, made the applicant a creditor of the Company. Ms Sutton's alternative argument was that, if she was not a creditor, the scope of section 447A of the Corporations Act 2001 (Cth) was sufficiently broad to permit a Court to make her a creditor (and that the NSW Court of Appeal was therefore in error in determining otherwise).

Section 447A(1) of the Corporations Act provides that the Court "may make such order as it thinks appropriate about how [Part 5.3A] is to operate in relation to a particular company."

The High Court dismissed the special leave application, finding that there were "not sufficient prospects of establishing error in the construction in the Court of Appeal of certain provisions in [the Corporations Act], particularly Part 5.3A and concerning the scope of section 447A". In a sense, that is a pity because it would have been the first time the Court revisited the scope of section 447A since it opened the floodgates in Australasian Memory v Brien.[1] It would have been useful, particularly in the context of matters like Sutton, for there to be definitive guidance as to the outer limits of a section 447A order. Until then, practitioners will continue to have conflicting interpretations of the ambit of the section.

This is important, because section 447A has become the elixir of voluntary administration. It is used widely by Courts to fix everything from time limits to invalid appointments of administrators. It has also been invoked by applicants seeking to expand the existing statutory parameters. Those applications have not been universally successful.[2]

Apart from sotto voce murmurings that the section may be constitutionally invalid, the most common observation about it is that its boundaries are very unclear. The missed opportunity to have that issue reconsidered by the High Court means that the leading authority is now the NSW Court of Appeal decision[3] that sparked the special leave application.


Between 3 August 2004 and 7 October 2005, Ms Sutton performed work as a taxation consultant for the benefit of the Company. She had no direct contractual relationship with the Company, rather, the relevant contracts for Ms Sutton's services existed between the Company and successive labour hire companies. The contract between the Company and the relevant labour hire company contained no requirement that it be terminated on notice, entitling the Company to terminate it at will, which it did on 7 October 2005.

After the contract was terminated, although not a party to the contract, Ms Sutton applied pursuant to section 106 of the IR Act for, amongst other relief, an order that the contract by which her services were provided to the Company be varied to require the Company to provide 12 months prior notice of termination of the contract, or payment in lieu of such notice. If granted, the effect of such an order would have been to vary the contract ab initio.

Section 106 of the IR Act is a provision which confers power on the IRC to declare contracts void or varied. Pursuant to section 106(1) the IRC may make an order declaring wholly or partly void, or varying, any contract whereby a person performs work in any industry if the IRC finds that the contract is an unfair contract. Notably, section 106(3) provides that a contract may be declared wholly or partly void, or varied, either from the commencement of the contract or from some other time.

On 1 October 2009, before the section 106 application was heard, the Company went into administration. Ms Sutton sought the administrators' consent (pursuant to section 440D of the Corporations Act) to the continuation of her Industrial Relations Commission (IRC) application. The administrators declined to give that consent. Ms Sutton then commenced proceedings in the Supreme Court of New South Wales pursuant to section 440D(1)(b) of the Corporations Act for leave to continue with her IRC proceedings against the Company. A deed of company arrangement (DOCA) was subsequently executed and Ms Sutton submitted a proof of debt in respect of her section 106 claim, interest and costs. The deed administrators rejected the proof of debt on the ground that a section 106 claim which had not been determined by the IRC prior to the relevant date was not admissible to proof in the DOCA. Ms Sutton amended her Supreme Court proceedings to seek either:

(a) an order pursuant to section 447A of the Corporations Act, the effect of which would justify the deed administrators admitting her proof of debt in the DOCA; or

(b) alternatively, an order under section 1321 of the Corporations Act reversing the deed administrators' decision to reject her proof of debt.

At first instance, the deed administrators' rejection of the proof of debt was upheld. The Court (Palmer J) determined, following a line of authorities in relation to the nature of a section 106 claim,[4] that a claim under section 106 of the IR Act which is unadjudicated as at the relevant date, was not provable. This was because the claim did not seek to enforce any existing right, obligation or liability, but merely to invoke the IRC's jurisdiction under section 106 to create a new right from the date of the IRC's order - that was not enough to make her a creditor in the sense contemplated in section 444D(1) of the Corporations Act.

However, the Court was prepared to make an order pursuant to section 447A of the Corporations Act that a ‘creditor’ of the Company was deemed to include Ms Sutton for the purposes of Part 5.3A, with Ms Sutton’s claim deemed to have arisen no later than the relevant date.

Both sides appealed:

  • the deed administrators appealed against the primary judge's finding that there was power under section 447A to make an order by which Ms Sutton was deemed a creditor of the Company and against the Court's decision that it was an appropriate exercise of discretion to make such an order; and
  • Ms Sutton cross-appealed against the decision to uphold the deed administrators' rejection of her proof of debt.

The extent of the section 447A power

The issue in the above proceedings of most interest and relevance to practitioners is the limit (if any) on the Court's power under section 447A.

The Court of Appeal noted that the High Court's remarks (in Australasian Memory v Brien) about the width of the power in section 447A were tempered by other parts of the judgment, notably the finding that: "the powers under section 447A are wide but [not necessarily] entirely without limit".[5] It held that the extent of those powers has to be determined by reference to the objects of the legislation (in this case, Part 5.3A). The Court also noted the limitation on the operation of section 447A identified by Brereton J in Honest Remark,[6] namely that "an order under section 447A must have a nexus with how Pt 5.3A is to operate in relation to a particular company".

Ms Sutton relied on Re Motor Group.[7] There, section 447A was used to affirm the status, as contingent creditors, of persons who had bought cars with warranties from an importer which had subsequently become subject to a DOCA. Even though the owners had no present claim under the warranties, the Court used section 447A to make an order that Part 5.3A was to operate in relation to the company so as to include the warranty creditors as creditors whose claims had arisen before the relevant date. Hely J held:

"[14] Even if it be correct to characterise the claims of warranty creditors as 'mere expectancies', section 447A empowers the court to make an order that Pt 5.3A is to operate in relation to [the company] so as to include the warranty creditors whose claims arose no later than [the relevant date]."[8]

The effect of this order was to make the DOCA binding on the warranty creditors and to enable the deed administrator to deal with their claims, if they were to later arise.

The majority of the Court of Appeal distinguished Motor Group on the basis that the warranty holders had actually been contingent creditors of the importer. This distinguished them from Ms Sutton, who had no legal rights against the company at all:

"Re Motor Group was correctly decided if Hely J is read as saying that:

  • he was satisfied that the `warranty creditors' were `creditors' within the meaning of Part 5.3A because they were contingent creditors;
  • because they were creditors, section 435A(b) made it possible, in deciding whether to exercise the power under section 447A, to take into account the interests of the warranty creditors; and
  • the DOCA was justified because both the trade creditors and the warranty creditors would be better off under the DOCA than on a liquidation.

If the intended meaning of the reasons for judgment in Re Motor Group was other than this, then in my respectful view it was mistaken. It is not possible to use section 447A to require someone who is not a creditor to be treated as though he or she is a creditor." [emphasis added][9]

Since Ms Sutton was not even a contingent creditor, section 447A could not be used to grant her creditor status. To do so would be to use section 447A for a purpose outside the statutory purposes of Pt 5.3A (as listed in section 435A) or the Corporations Act itself:

"When Ms Sutton is not a 'creditor', making the order could not fall within any of the objectives identified in section 435A. Nor is any wider objective that emerges from other parts of the Corporations Act able to be found to justify the order. … If it is a contravention of a deeply rooted principle of company law for a court to assist one creditor to improve its position vis-à-vis another creditor after it enters an insolvency regime, it is at least equally a contravention of such a principle for a court to assist a non-creditor to improve its position vis-à-vis actual creditors."

In dismissing the application to appeal from the Court of Appeal decision, the High Court did not comment on the section 447A aspect other than to conclude that the Court was not satisfied that there were sufficient prospects of establishing error in the Court of Appeal's construction of, inter alia, section 447A of the Corporations Act.

Isn't the law settled now?

In the Court of Appeal, Young JA, in dissent, disagreed with the majority's "reconstruction" of the Motor Group decision. As far as he was concerned, it is better to read Hely J in Motor Group as meaning to say what he did in fact say. In Young JA's view, both Motor Group and the first instance decision in favour of Ms Sutton were within the bounds of the powers conferred on the Courts by section 447A:

"The result reached by Hely J and Palmer J accords with the general principles of administration by the court of insolvent companies that the administration is to be done fairly and equitably even to the extent of the court directing liquidators as its officers to act honourably and equitably even though the legalities might point in another direction."

In purely technical terms, the decision of the majority of the Court of Appeal is now the law in New South Wales. Outside that State and in the Federal Court, individual judges will be required to follow it unless they are convinced that it is plainly wrong.[10] Young JA's dissent is likely to reinforce the view of judges who entertain doubts about the correctness of the majority's reasoning and, notwithstanding the clarity of reasoning of the majority in Sutton, lead to ongoing debate about the outer limits of section 447A until that issue is ultimately clarified by the High Court.

The practical consequence for practitioners is that, consistent with the spirit of the provision, opportunities will remain to test its boundaries. Some may succeed if the application has a relevant nexus with Part 5.3A, and is in alignment with the objects of that part. On the flip side, since the Court of Appeal's decision in Sutton confirmed that even a person who had no legal claim against the company at the date of the administrators’ appointment may be an 'interested person' for the purposes of section 447A(4), the ambiguity will mean that administrators and companies in external administration may be forced to defend applications for section 447A orders which attempt to push the boundaries of the section. Some of those applications may ultimately be unsuccessful and, like the Sutton proceedings, would have gone through a series of appeals before the final determination is handed down. From a policy perspective, litigation of this nature potentially deprives the companies' creditors of funds which would otherwise be distributed to them (particularly if costs prove difficult to recover).

No administrator wants to find him or herself having to advance or defend the "test case" in which the outer limits of section 447A are determined, and the Sutton case might not have been the correct vehicle in which to test the limits (indeed the High Court clearly thought it was not), but definitive guidance from the High Court as to the outer limits of a section 447A order is warranted.

This article was first published in the Australian Insolvency Journal [2012] Volume 24 Number 3, September 2012

[1] Australasian Memory Pty Ltd v Brien [2000] HCA 30; (2000) 200 CLR 270. [back]

[2] See, for example: Hedge as Administrator of Goldfields Medical Fund Inc. (No 2) (2002) 196 ALR 557; [2002] FCA 1498; Re Switch Telecommunications Pty Ltd; Ex parte Sherman (2000) 157 FLR 158; [2000] NSWSC 794; Re Sydney Appliances Pty Ltd (in liq) (1998) 27 ACSR 725; DCT v ACN 001 330 203 Pty Ltd [1999] NSWSC 798. [back]

[3] BE Australia WD Pty Ltd v Sutton (2011) 256 FLR 67 [PDF]; [2011] NSWCA 414. [back]

[4] See: Majik Markets Pty Ltd v Brake & Service Centre Drummoyne Pty Ltd (1991) 28 NSWLR 443; Fisher v Madden (2001) 54 NSWLR 179; Silberman v One.Tel Ltd (in liq) (2002) 167 FLR 274 and Buckingham v Pan Laboratories (Aust) Pty Ltd (in liq) (2004) 136 FCR 102 [back]

[5] Australasian Memory Pty Ltd v Brien [2000] HCA 30; (2000) 200 CLR 270 at [20]. [back]

[6] Re Honest Remark Pty Ltd v Allstate Explorations NL [2006] NSWSC 735; (2006) 201 FLR 456. [back]

[7] Re Motor Group Australia Pty Ltd [2005] FCA 985; (2005) 54 ACSR 389. [back]

[8] Re Motor Group Australia Pty Ltd [2005] FCA 985; (2005) 54 ACSR 389 at [14]. [back]

[9] The majority [at paragraph 201] also cast doubt on the correctness of the Full Federal Court's obiter statement in Lam Soon Australia Pty Ltd v Molit (No 55) Pty Ltd (1996) 70 FCR 34 – that a right to sue for damages for a particular breach of a covenant (to keep leased premises in repair) was not even a contingent claim. [back]

Australian Securities Commission v Marlborough Gold Mines Ltd [1993] HCA 15; (1993) 177 CLR 485; (1993) 10 ACSR 230; (1993) 112 ALR 627; (1993) 67 ALJR 517 (6 May 1993) [back]

Related Knowledge

Get in Touch

Get in touch information is loading


Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.