Litig8: Staying commercial arbitrations

July, 2016

By Hannah Carne, Associate and Danielle Gorman, Lawyer

Each month as a part of Mills Oakley’s Litig8, we bring to you snapshots of eight key cases, legislative changes or other legal events. The summaries are not comprehensive and do not constitute legal advice. You should seek professional advice before taking any action based on the content of this email.

Part 8 of Litig8 Edition 3

The New South Wales Supreme Court has used its general power under s 447A of the Corporations Act 2001 (Cth) (Act) to stay a commercial arbitration, in circumstances where administrators had been appointed to the defendant company and in doing so has highlighted the inconsistences in how the Act operates when proceedings are on foot against a company which becomes subject to external administration.

In the recent decision of In the matter of THO Services Limited [2016] NSWSC 509, the administrators of THO Services Limited (Company), the defendant to arbitration proceedings brought against it by the Commonwealth (claiming damages in excess of $12 million), sought an order pursuant to s 447A of the Act, that Pt 5.3A of the Act should operate in relation to the Company as if, for the purposes of s 440D(1), a “proceeding in a Court” included an arbitration proceeding.

The case raised two issues, namely whether the Court had the power to make the proposed order under s 447A and if so, should the Court exercise its discretion to make the order sought?

The Court  proceeded on the basis that arbitration is excluded from the prima facie effect of s 440D. After summarising the law on section 447A, and noting that the section was intended to permit a wide class of orders that may indeed alter the operation of Part 5.3A in a way that affects or impinges on creditors, his Honour found that the order sought by the administrators was within the Court’s power. 

The policy which informs s 440D is founded on avoiding disruption to and distraction of administrators from performing their functions and duties during the relatively short period available to them.

With this in mind, the Court found that the continuation of arbitration appeared to be inconsistent with the scheme of a moratorium associated with voluntary administration. His Honour also noted that, absent a stay, the administrators would be required to expend their limited resources, which might otherwise be available for creditors generally, on the defence of the claim of one potential creditor. His Honour also took into account that the Commonwealth’s claim in the arbitration was no more than a contested, as yet unestablished, unliquidated claim for damages for alleged breach of a contract.

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