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Where am I now? Lawlink > Supreme Court > Speeches > Remarks at the launching of the Allens Arthur Robinson Annual Review of Insolvency & Restructuring Law, 2006
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Remarks at the launching of the Allens Arthur Robinson Annual Review of Insolvency & Restructuring Law, 2006
Remarks at the launching of the Allens Arthur Robinson Annual Review of Insolvency & Restructuring Law, 2006 The Hon Justice RP Austin,
Supreme Court of New South Wales
13 March 2007
It is a pleasure to join you this afternoon for the launching of the 2006 Insolvency & Restructuring Law Review. It is a privilege to accept your invitation to say a few words to mark the occasion.
The Review, which I have inspected in draft, is a very useful collection of cases decided by the Australian courts in 2006 (plus one case from 2007), together with a spicy leavening of foreign cases from such jurisdictions as the Court of Appeal of England, the High Court of Ireland and the Hong Kong Special Administrative Region Court of Appeal. I enjoyed the succinct discussion of Australian and other law reform proposals, which you will find in the last section of the publication, and also the discussion of changes to the law of foreign jurisdictions.
Some of you may need to know that agricultural entrepreneurs do not fall within the ambit of the reformed Italian Bankruptcy Law, that the new Czech Insolvency Act requires that all potential debts must be taken into account in assessing whether an entity's debts exceeded its liabilities, that Danish corporations law at last allows for floating charges (only 120 years too late), and that Hungary's government has acted to stop debtors evading creditors' claims (something no one else has yet managed to do). In my case, knowledge of those matters has simply made me a better person.
The short essay on the Legend case drew attention to the Hong Kong Court of Appeal's disapproval of the use of provisional liquidation for corporate rescue. Perhaps I should stand duly chastened for taking a different approach in the United Medical Protection case. But as far as I can recollect it, in that case the initial appointment of a provisional liquidator was an application of orthodox principles about the risk of insolvency and protection of assets. It was only later, when the prospect of a rescue with assistance from the Commonwealth Government emerged and there was evidence that the making of a winding up order might trigger default provisions in some reinsurance contracts, with disadvantageous consequences for the company's creditors, that I was persuaded to extend what had become the status quo, while the workout evolved. The provisional liquidator was in office for a very long time, but the outcome appeared on the evidence to be very satisfactory.
An overall impression created by the Review is of intense activity in the Australian courts, leading to the determination of many points that are of legal and commercial significance. There is no court in which that activity is more intense than in the Supreme Court of New South Wales.
When I arrived at the court in 1998, Corporations Law applications before a judge (as opposed to those dealt with by a Master or by the Registrar) were heard each Monday. Pressure of work led to the establishment, a few years later, of a Friday list as well as the Monday list. Then last year, as the caseload continued to increase, we established a "full-time" Corporations List. Therefore there is now a judge sitting in corporations matters every day, with control of his own diary, available to hear urgent applications whenever they are ready to be made (non-urgent applications are still channelled through the Monday list). That is in addition to the hearing of "fixtures" by other Equity judges in matters that may well have a corporations flavour, such as preference and oppression cases. So the volume of corporations work is large and expanding.
Some of the cases heard by the Corporations Judge are factual disputes where it is necessary to hear conflicting oral evidence and make decisions on matters of credit, with many contentious rulings on evidence along the way. Let me supplement the Review by offering some further examples from 2006: the disputes about examination summonses and privilege in the Bauhaus and Southland Coal litigation, and the argument about the receiver’s powers over the assets of aboriginal corporations in Hillig v Darkinjung. I suspect that those fact-oriented kinds of cases are increasing, and that they will continue to increase in number as well as intensity, as the litigation funding industry matures and liquidators make use of it - especially by applications in and around the process of liquidators' examinations.
However, many cases that come before the court in the corporations area are not disputes about what has happened in fact, but instead they are about the application of the Corporations Act or the exercise of some discretion under it. There is normally a dispute, perhaps hotly contested, as to whether the court should make the orders that are sought, but often the factual circumstances in which the question arises are not contested. If you flick through the Review you will find very many examples of such cases. What unites cases of this kind is that they raise questions of construction of a statute, namely the Corporations Act.
Over the last 40 years there has been a gradual, but in the end dramatic, change in the approach of Australian judges to questions of statutory interpretation, a change that applies with full force to the construction of the Corporations Act. The technique of "literal construction" is no longer used, except by hopeful counsel. The construction of the Corporations Act is to be approached upon the foundation of a sound historical understanding, which should reveal where the provision under consideration came from and what it was and is trying to do. Once the historical perception is achieved, the construction of the provision tends to fall into place. Sometimes it is a construction that would not be expected by someone wedded to the literal approach. Let me briefly give two examples.
One is the Sons of Gwalia case, the only 2007 case mentioned in the Review. You will remember that Mr Margaretic's claim against the company was a claim for damages for the loss he suffered when he bought shares on market, at a time when the company had not disclosed its true financial circumstances to the market. It was a statutory claim based on the company's alleged failure to meet its continuing disclosure obligation and on its alleged misleading and deceptive conduct. The High Court had to consider the application to that claim of s 563A. Section 563A says that payment of a debt owed by a company to a person in the person's capacity as a member of the company, whether by way of dividends, profits or otherwise, is to be postponed to the claims of external creditors.
A literalist might have expected the court to say that the statutory claim for damages was a claim by Mr Margaretic in his capacity as a member, "whether by way of dividends, profits or otherwise", with emphasis on the latter words. But the High Court reached the opposite conclusion upon the basis of historical analysis.
For Hayne J, the court's task of construing the statutory provision required "an understanding of the legislative history that lies behind the particular provisions and the other provisions which together form its context" (at [148]). That was his Honour's starting point. He referred to the UK Companies Act of 1862, which famously adopted the principle of limited liability. He noted a qualification to that principle, which declared that no sum due to a member in his character of a member would be deemed to be a debt of the company payable in competition with other creditors. That was the earliest ancestor of the present s 563A, but seemed to cover provability as well as priority. That appears to have led to the confusion displayed in the earlier High Court case of Webb Distributors. Importantly, Hayne J showed that in 1992, when the Corporations legislation was amended as a result of the Harmer reforms, different wording was adopted which severed the question of priority from the question of provability, making it clear that s 563A dealt only with the priority question.
These are important insights. They led directly to the High Court's robust affirmation of the proposition that Mr Margaretic's statutory claims did not fall within s 563A. In the judgment of Gummow J, the same historical technique was called in aid to demonstrate that the so-called rule in Houldsworth's case, according to which a member was precluded from recovering damages from his company and could only rescind the contract of allotment (a remedy not available in liquidation) no longer exists. That, in turn, heralds a fundamental shift in thinking about company law, because it expunges the idea that paid-up capital is a "fund" to be preserved for the protection of creditors.
The historical approach is not confined to appellate decisions. Unresolved questions of construction of the Corporations Act arise with surprising frequency in the Supreme Court and other courts of first instance. Sensitivity to the history of the provision under consideration is a mark of properly prepared submissions. For example, in Simms & anor as liquidators of Enron Australia Finance Pty Ltd (in liq) v TXU Electricity Ltd (2003) 48 ACSR 266 I had to construe s 568(1B) in the modern context of ISDA swap documentation. Section 568 permits a liquidator to disclaim the company's onerous property, and then s 568(1A) says that the liquidator cannot disclaim a contract (other than an unprofitable contract or lease of land) except with the leave of the court. Subsection (1B) says that on an application for the leave of the court, the court may grant leave subject to conditions, and may make other orders in connection with the contract.
At the commencement of its voluntary administration, Enron Australia was a party to some open electricity swap contracts with TXU. The liquidators of Enron Australia made an application to the Supreme Court for leave to disclaim the swap contracts, and invited the court to make ancillary orders that would ensure that they could recover the net value of the contracts. I was asked to determine whether s 568(1B) empowered the court to make orders causing the disclaimer to take effect as the occurrence of an early termination date under the swap contracts. If it did, the contracts would provide for the valuation of Enron's open positions and would consequently give the liquidator a right to recover that value from TXU.
Clearly enough, s 568(1B) allowed the court to make an order imposing conditions amounting to obligations on the applicant for leave. The question was whether the section allowed the court to make orders imposing obligations on the contractual counterparty.
Section 568(1B), like s 563A, has a long pedigree. Senior counsel for the liquidator endeavoured to persuade me that the historical antecedents of the modern section had been treated as permitting the court to alter the rights of the counterparty to the disclaimed contract, and so the modern equivalent should be construed in equally broad terms. I rejected the argument because I was not persuaded that the ancestors of the modern section had been used in that fashion. I was taken the provisions about disclaimer of onerous property by a trustee in bankruptcy contained in the UK Bankruptcy Act of 1869. My decision turned in part upon an analysis of 19th-century cases under that statute, dealing with such matters as whether, when a contractual tenancy was disclaimed by the trustee in bankruptcy of a tenant, the landlord could be compelled to pay for improvements to the land and for mown hay; and as to the appropriate formal order to be made, upon disclaimer, in respect of tenants' fixtures. The Court of Appeal dismissed the liquidators' appeal: (2005) 53 ACSR 295.
I am privileged to work in possibly the most interesting jurisdiction in the world, for someone who enjoys pure law while also responding to the challenge of resolving human conflict through the process of reasoning. The most intensely absorbing, stressful and exhausting part of our work in the Equity Division happens where individuals find themselves in disastrous predicaments - where what is at stake is more than mere money and the court is the last resort to help them: intervention as parens patriae to save a child from life-threatening danger; to help a family through the corrosive effects of inter-generational conflict; to provide a foundation of fairness that might enable neighbours to live in harmony.
But the bread-and-butter work for me and the other Corporations Judges (Justices Barrett and White) is the Corporations List, where many cases (though not all) involve commercial circumstances where money and reputations are at stake. These cases lend themselves to analysis and the application of clearly articulated legal rules. Certainty and predictability are paramount. The primary rules are in the Corporations Act, and so a robust, predictable approach to statutory construction is required. The literal approach to statutory construction has failed because it does not provide criteria for solving cases of ambiguity. An approach that is sensitive to the historical origins of the statutory provisions looks to be our best option for achieving our goals.
I congratulate Allens for this useful publication, and I look forward to many more editions of it.
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