Alora Property Group Pty Ltd as trustee for Alora Property Group Trust v Henry McKenna

Court of Appeal (NSW)|2022-06-02|Before: Ward P, Macfarlan JA, Brereton JA, Williams J

[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]

HEADNOTE [This headnote is not to be read as part of the judgment] The company Alora Davies Developments 104 Pty Ltd was wound up in insolvency on 6 May 2020. It had been the vehicle for a joint venture between its two shareholders "Alora" and "Davies" to develop real property. The arrangements between the shareholders were contained in a shareholders agreement, which inter alia provided for a fee of $8000 plus GST per lot for project managing the development "to be paid as an expense by the Company to Alora (or its nominee), prior to the disbursement of funds via dividends or profit share between the Shareholders". On 7 December 2021, the primary judge dismissed an appeal brought by the appellant "APG" (Alora's nominee and related entity) from a rejection of its proof of debt for project management fees, essentially on the basis that as the development had not been completed and there were no proceeds available for distribution, no entitlement to any fees had accrued. On appeal by APG: Held, per Brereton JA at [26] (Ward P and Macfarlan JA agreeing at [1]; [2]) dismissing the appeal:

Judgment

WARD P: I agree with the reasons of Brereton JA, which I have had the advantage of reading in draft, and with the order his Honour proposes.
MACFARLAN JA: I agree with Brereton JA.
BRERETON JA: The company Alora Davies Developments 104 Pty Ltd was wound up in insolvency on 6 May 2020. It had been the vehicle for a joint venture between its two shareholders Alora Developments Pty Ltd ("Alora") and Davies Property Developments Pty Ltd ("Davies"), to develop real property at 42 and 60 Greenacre Drive, Tahmoor. The arrangements between the shareholders were contained in a shareholders agreement of 18 July 2017, which inter alia provided for a fee of $8000 plus GST per lot for project managing the development "to be paid as an expense by the Company to Alora (or its nominee), prior to the disbursement of funds via dividends or profit share between the Shareholders". On 7 December 2021, Williams J in the Equity Division dismissed an appeal brought by Alora's nominee, the appellant Alora Property Group Pty Ltd as trustee for Alora Property Group Trust ("APG", a related entity of Alora), from a rejection of its proof of debt for project management fees, essentially on the basis that as the development had not been completed and there were no proceeds available for distribution, no entitlement to any fees had accrued. [1] APG now appeals to this Court. In this Court, as before the primary judge, the liquidator filed a submitting appearance.

Background

In May 2017, the company entered into an option for the purchase of the Tahmoor land, initially for a period of 18 months, which was subsequently extended to April 2019. The Shareholders Agreement of 18 July 2017 recited that "the parties have agreed to enter into this agreement for the purpose of regulating their rights between one another and to ensure orderly succession to the control of the company" (recital C). The scope of the agreement was confined to the Tahmoor land; clause 2 provided: "This agreement is associated and/or intended only for the said property(s) as set out (address and DP number) in schedule 3 of this agreement. Upon the completion of the development or the sale of the property(s) as set out in schedule 3, any further property(s) require a new shareholders agreement". Schedule 3 contained particulars, including the folio identifiers, for each of the two Tahmoor lots.
The agreement provided that neither shareholder could be required to advance further funds to the company to fund its operations; clause 14(i) stated that: "The company and each shareholder acknowledges and agrees that nothing herein must create an obligation or duty on any shareholder to contribute or lend or otherwise provide any further or future money to the company …".
Clause 16 provided for the project management fees: "The parties agree that Alora (or its nominee) shall be entitled to be paid fees for project managing the Company's property development(s) including but not limited to managing the development application process. The fees payable shall be calculated at $8,000 plus GST per lot, to be paid as an expense by the Company to Alora (or its nominee), prior to the disbursement of funds via dividends or profit share between the Shareholders. The Company shall sign a development agreement on terms reasonably required by Alora, if required by Alora." There is no evidence that any such development agreement was ever signed.
Development consent was granted on 2 August 2018 for the subdivision of the Tahmoor land into 63 lots, public road construction, demolition of existing structures and associated works. On 5 February 2019, APG issued two invoices addressed to the company: the first was for a development management fee of $8,000 in respect of 63 lots, totally $554,400 (including GST), and the second was for "DM fees for CC, marketing" (referring to development management fees for the construction certificate, and marketing) of $5,000 in respect of 63 lots, totalling $346,500 (including GST).
At some time prior to April 2019, the company exercised the option, and a contract was prepared for sale of the Tahmoor land to the company. As the primary judge said, [2] and notwithstanding the appellant's contrary submission, it is not clear from the evidence whether the contract was exchanged but terminated by the vendor due to the company's inability to complete, or whether the contracts were never exchanged. Regardless, the company never acquired the Tahmoor land.
After the company was wound up in insolvency, APG on 5 June 2020 lodged a formal proof of debt with the Liquidator, in the sum of $1,084,983.82. On 22 February 2021, the Liquidator admitted APG's proof to the extent of $166,599.62, comprising a loan of $135,628, unspecified expenses paid by the appellant on behalf of the company amounting to $28,897, and further itemised expenses paid on behalf of the company amounting to $2,074. However the following components (as identified by the Liquidator, though not specified as such in the proof) totalling $918,165 were rejected, and were the subject of the appeal to the Court below and, at least initially, the appeal to this Court: 1. development management fees of $554,400 (as claimed in the first invoice of 5 February 2019), for the development application, at the rate of $8,000 per lot for 63 lots; 2. further development management fees of $346,500 (as claimed in the second invoice of 5 February 2019), for obtaining a construction certificate and marketing the development, at the rate of $5,000 per lot for 63 lots; and 3. other expenses said to have been paid on behalf of the company, amounting to $17,265, being the balance of a total amount claimed of $46,162 after deducting the $28,897 which was allowed.

The project management fees

APG's entitlement to the project management fees turns on the proper construction of clause 16 of the Shareholders Agreement. The first four grounds of appeal complain that the primary judge: 1. erred in construing clause 16 before then considering whether to accept the evidence of Ms Raphael about the operation of the Shareholders Agreement; 2. erred in construing clause 16 as requiring "funds available for distribution to the shareholders as profits or dividends" prior to there being a liability for the payment of fees for project management; 3. erred in construing clause 16 as requiring the payment of fees for project management only when "all services necessary to project manage the development had been completed"; and 4. should have construed clause 16 so that the $8,000 per lot became a liability of the company upon the development application being approved and as such was to be treated and paid as an expense.
APG submits that the terms of clause 16 are clear and unambiguous, to the effect that APG (as Alora's nominee) was entitled to fees for its project management services; did not stipulate that those fees were contingent on any event such as completion of all of the services; and that the fees were to be paid in time before and priority ahead of the payment of dividends or profit share to the shareholders; but not that they could be paid only when there were profits or dividends available. APG relied on the evidence of Ms Raphael, who deposed: "The property development at the time the shareholders agreement was signed consisted of obtaining a development application. Alora was tasked with obtaining the development application (see clause 16 of the shareholders agreement). We regarded the obtaining of the development consent as the success of the development."
Ms Raphael's subjective views as expressed in her affidavit are not relevant to the construction of clause 16. Moreover, they cannot be right, as her Honour said, because obtaining the development application for land that is not owned achieves absolutely nothing, unless and until one is in a position to market the land, directly or indirectly, whether in its subdivided form, or entire but with the benefit of the DA. The project had to involve acquiring the land, obtaining the DA, and selling it, and the project would be complete - or as Ms Raphael puts it, successful - only upon sale. [3]
It is true that payment is not expressly made conditional on completion of all project management services, but it is expressed to be "for project managing the company's property development including but not limited to managing the development application process". The fees payable of $8,000 per lot were for the whole of the project management work, expressly not limited to managing the development application process. Project management would not be completed until the project was completed. In other words, clause 16 contemplated that there would be project management work beyond the development application process, a matter which is obvious enough. As the consideration of $8,000 expressly was inclusive of but not limited to managing the development application process, managing the development application alone could not be enough to earn the fee. There is no provision for an interim or partial payment. Before the fee was earned, the appellant had to do whatever else was involved in project managing the property development, which required that the project be brought to completion.
Moreover, in circumstances where the company was the corporate vehicle for the joint venture to develop the Tahmoor land, and the Shareholders Agreement provided that the shareholders had no obligation to provide further funds, there could not have been in contemplation any source of funds for payment of expenses, other than the proceeds of the development project. A reasonable businessperson with knowledge of those matters would have understood that clause 16, in providing for the payment of the fees "as an expense by the Company … prior to the disbursement of funds via dividends or profit share between the shareholders" contemplated the payment of the fees out of the proceeds of the project, as an expense of the Company (as distinct from an expense of either of the shareholders), in priority to division between the shareholders. The purpose of the provision that the fees are to be paid "prior to the disbursement of funds via dividends or profit share" was to ensure that Alora's fees would be paid in priority to distribution of any surplus between the shareholders, once funds were available - a situation which would only arise upon completion of the project by sale of the land, whether with the benefit of the DA or in subdivided form.
The conclusion that under cl 16 the $8,000 fee per lot was inclusive of all project management services and payable only upon completion of the development suffices to dispose not only of the complaint in respect of the first component rejected by the Liquidator but also of the second. The agreement included no other provision for fees to be payable to Alora. Obtaining a construction certificate and marketing the development is within the notion of "project management". Clause 16 does not admit of the appellant's interpretation that there were two separate phases, one being to obtain development consent, and the second a construction certificate and marketing for which an additional fee would be payable. As, according to the terms of clause 16, "project managing the company's property development" included but was not limited to managing the development application process, there was no entitlement to an additional $5,000 per lot for obtaining a construction certificate and/or marketing as claimed in the second invoice, since that was part of "project management".
Ms Raphael deposed that at a meeting between representatives of Alora and Davies on 5 February 2019: [4] "it was agreed by both parties that there would be a further invoice issued by Alora Property Group Pty Limited of $5,000 plus GST per lot for work done for this further section of the development management. By that time, the development consent had been obtained, and in addition, work was being undertaken by Alora to obtain a construction certificate".
However, as the primary judge pointed out, there is no documentary (or other) corroboration of any such agreement, [5] and Ms Raphael's evidence "does not rise above the level of bare assertion". [6] Notably, there is no evidence of any consideration for an additional payment of $5,000 per lot, in circumstances where Alora was already obliged to project manage the whole of the development to completion for $8,000 per lot. There was no evidence that a construction certificate had ever been obtained. Nor was there any evidence that marketing services were provided: although APG referred to a document entitled "Alora Property Group Detailed Breakdown of Marketing", as evidence of the marketing work done, that document does not purport to be a record of work actually done, but appears to be a statement of what would be required to be done to market the development.
Finally, APG relied on an entry in the list of "amounts the company owes to its creditors" in a report on company activities and property (ROCAP), which included amongst the creditors listed "the trustee for Alora Property Group" for a sum of $903,194. That document was prepared by Mr David Raphael and Ms Priscilla Raphael, as former directors of the company, both of whom are persons associated with APG and/or Alora, on 1 June 2020, five days before APG lodged its proof of debt. The bare assertion it contains by interested persons is of practically no probative value.
For all those reasons, but fundamentally because on the proper construction of clause 16 the fee of $8000 per lot was for all project management work to complete the development and was payable only upon funds becoming available upon completion of the development project by sale, the judge was right to hold that no entitlement to the first and second components was established.

The $17,000

Towards the conclusion of the hearing of the appeal, senior counsel for APG stated that the claim for the $17,265 was no longer pressed. [7] This occurred in the light of issues which emerged in the course of argument. It suffices to record the following.
APG was never able satisfactorily to explain the composition of the sum of $17,265. As has already been noted, it was said to be the balance of a total amount claimed of $46,162 after deducting the $28,897 which the liquidator had allowed.
APG relied on a document entitled "Expenses Paid by APG on behalf ADD104 transactions" which showed an opening balance of nil, and five payments respectively of $9,152, $8,305, $11,440, $14,104, and $3,160, totalling $46,162, and a closing balance of $46,162. The sum of $11,440 is supported by an invoice as is the sum of $3,160. The sum of $14,104 comprised a series of 'realestate.com' invoices. Though said to be a "ledger" of the company, it was not self-evidently so, and there was no evidence or explanation of its provenance. Moreover, just what it evidences is opaque. "General Ledger Summary" for the Trustee of the Alora Davies Development 104 Unit Trust for the period from 1 July 2016 to 30 June 2020 contains the following: DR CR Net movement Expenses Paid by APG on behalf of ADD104 (28892) $28,897 $75,059 ($46,162)

From this, it appears that the sum of $46,162 does not represent a balance stated to be due to APG, but that over the relevant period there were debits totalling $28,897 and credits totalling $75,059 to the ledger account in question, with the "net movement" being $46,162. The amount of $28,897 admitted by the liquidator appears to correspond with the total of the debits to the account during the period. APG may have been fortunate to be admitted for the $28,897 for which it was in this respect.
Apart from these records, which provide no satisfactory proof of the debt claimed, APG endeavoured to rely on an affidavit of David Raphael of 4 May 2020, which had been attached to the proof of debt and as such was included in an exhibit to the affidavit of Cecilia Rose of 8 March 2021, which annexed and purported to summarise invoices said to be outstanding to APG by the company. Mr Raphael's affidavit was filed in the winding up proceedings, not in the proceedings concerning the proof of debt. It was not read before the primary judge. UCPR r 31.9 restricts the use of evidence taken or an affidavit filed in other proceedings, "saving all just exceptions and unless the court orders otherwise", and provides that leave may be granted only to allow such evidence to be used "in relation to the proof of particular facts". Even if it be regarded as earlier evidence in the same proceedings, to which UCPR r 31.8 would apply, it could not be used without leave in the proof of debt proceedings. No application was made before the primary judge for leave, and no "otherwise order" was made. Leave to rely on the affidavit was sought, and refused, in this Court. [8] The "particular facts" in relation to which it was to be used were not apparent, and save for the two invoices for development management fees, the relationship between the invoices referred to and the amounts claimed was not apparent.
APG also submitted that the primary judge erroneously rejected unchallenged "evidence" contained in correspondence between its solicitor and the Liquidator, as "evidence of nothing more than the plaintiff's instructions to the solicitor". [9] It was submitted, invoking Taupau v HVAC Constructions (Queensland) Pty Limited, [10] and Hull v Thompson, [11] that in the absence of cross-examination of the author, who was also the deponent of the affidavit which annexed it, there needed to be a reasonable basis for rejecting the "evidence" in the letter. However, the primary judge's statement that it merely rehearsed the plaintiff's instructions was plainly correct. The correspondence was in any event in the nature of submissions, not evidence. Moreover, such communications are not admissible as business records, as they are made in contemplation of litigation: the winding up of an insolvent company by a court-appointed liquidator is a proceeding in the Court, and the representations made in the correspondence in question were therefore made "in connection" with an Australian proceeding. [12] The absence of opposition, and thus objection, at the hearing, does not oblige a court to treat inadmissible evidence as probative.

Conclusion

The appeal must be dismissed. There is no reason why the unsuccessful appellant should not pay the respondent's costs, such as they are, albeit that they will be limited to the costs of filing a submitting appearance. Accordingly, the order that I propose is that the appeal be dismissed with costs.

Endnotes

In the matter of Alora Davies Developments 104 Pty Ltd [2021] NSWSC 1583 ("Primary judgment").
Primary judgment at [15]. The appellant contends that it was the former.
Cf Primary judgment at [27].
Primary judgment at [36].
Primary judgment at [38].
Primary judgment at [39].
Appeal tcpt, 2 June 2022, p 20(27)-(29).
Appeal tcpt, 20 June 2022, p 11(46).
Primary judgment at [23].
[2012] NSWCA 293 at [135] (Beazley JA).
[2001] NSWCA 359 at [21] (Rolfe AJA; Sheller JA and Davies AJA agreeing).
Rosseau Pty Ltd (in liq) v Jay-O-Bees Pty Ltd (in liq) [2004] NSWSC 818; (2004) 50 ACSR 565 (Campbell J) at [54] (Campbell J); De Bortoli Wines Pty Ltd v HIH Insurance Ltd (in liq) [2011] FCA 645 at [29]; (2011) 200 FCR 253 at [261] (Stone J). 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. Decision last updated: 05 October 2022

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Judgment (9 paragraphs)

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Cases Cited (6)