Appellant v First Respondent

2 In the proceeding, MKB alleged that the First Respondent, 36 Warrigal Road Pty Ltd ('WAR'), the owner of property at 36 Warrigal Road Parkdale, had breached a building contract entered into with MKB for the construction of four townhouses,[2] as well as a joint venture agreement to share the profits upon the sale of the townhouses.[3] The Second Respondent, Mr Taky Kaplan, guaranteed the obligations of WAR under the building contract.[4] The Third Respondent, Mondland Pty Ltd, was named in the joint venture agreement as the nominee of WAR to undertake the administration of the building contract and to act as its representative for all matters required under the building contract.[5]

3 The four townhouses were completed in 2007 and were subsequently sold.[6] MKB commenced proceedings on 8 October 2012 at the Tribunal, claiming that it was owed money under the building contract and that it had not received its share of the profits of the sale under the joint venture agreement. Among other things, MKB claimed the sum of $479,621, plus interest from the Respondents.[7]

4 The Respondents applied, pursuant to s 75 of the Victorian Civil and Administrative Tribunal Act 1998 (Vic) ('VCAT Act'), for orders that the claims against each of them be summarily dismissed or struck out on the grounds that they were vexatious, misconceived, lacking in substance or were otherwise an abuse of process.[8]

5 The Respondents relied upon the following matters (which are uncontentious):

(a) on 5 May 2009, the directors of MKB appointed Joseph Lobenstein as an administrator of MKB;

(b) on 12 May 2009, WAR provided Mr Lobenstein with details of its claim against MKB in the sum of $100,000;

(c) on 20 May 2009, Mr Lobenstein was replaced by two new administrators;

(d) on 21 July 2009, a Deed of Company Arrangement was executed and the new administrators were appointed as the Deed Administrators;

(e) on 28 September 2010, WAR lodged a formal proof of debt of $50,000 (being half of the amount of $100,000 originally claimed) with the Deed Administrators; and

(f) on 7 October 2010, a first and final dividend of 0.549 cents in the dollar was declared by the Deed Administrators in favour of the unsecured creditors of MKB. WAR was paid a dividend of $274.29 in respect of an admitted debt of $50,000.[9]

6 At the Tribunal, the Respondents contended that the effect of the Deed of Company Arrangement and s 553C of the Corporations Act 2001 (Cth) ('the Act') was to cause an automatic set-off of the respective claims of MKB and WAR, with the result that the original choses in action ceased to exist and were replaced by WAR's claim to a net balance of $274.29.

7 The Tribunal found in favour of the Respondents and concluded that the automatic set-off and accounting required by s 553C of the Act had resulted in a payment to WAR such that there was no 'balance' owing to MKB; that any claim that MKB had against WAR had been extinguished by the Deed of Company Arrangement; and that MKB's claims against WAR were misconceived and lacking in substance.[10]

(2) dismissing the proceeding between MKB and the Second Respondent (in so far as it related to a breach of guarantee); and

(3) otherwise striking out the proceeding between MKB and the Second Respondent; and

(4) striking out the proceeding between MKB and the Third Respondent.[11]

9 MKB appeals to this Court against those orders under s 148(1) of the VCAT Act, which permits a party to appeal from an order of the Tribunal on a question of law. MKB sought, and was granted, leave to appeal by Mukhtar AsJ with respect to Orders 1 to 4 on the following questions:

1. Did the Deputy President err in law when she found that after the automatic set off and accounting required by s553C of the Act there was no 'balance' owing to MKB?

2. Did the Deputy President err in law when she found that any claim MKB might have had against WAR had been extinguished by the Deed of Company Arrangement?[12]

10 At the hearing of the Appeal no separate submissions were made with respect to the findings of the Tribunal that part of the claim against the Second Respondent and the claim against the Third Respondent ought be struck out for want of jurisdiction. Presumably this was because the Appeal was confined to the two identified questions of law. I will return to this issue later in these reasons

The incorporation of s 553C into the Deed of Company Arrangement

11 It is common ground between the parties that the set-off provisions in s 553C of the Act were incorporated into the Deed of Company Arrangement, and that they applied with respect to the 'mutual credits, mutual debts or other mutual dealings' between MKB and WAR.[13]

Subject to subsection (2), where there have been mutual credits, mutual debts or other mutual dealings between an insolvent company that is being wound up and a person who wants to have a debt or claim admitted against the company:

(a) an account is to be taken of what is due from the one party to the other in respect of those mutual dealings; and

(b) the sum due from the one party is to be set off against any sum due from the other party; and

(c) only the balance of the account is admissible to proof against the company, or is payable to the company, as the case may be.

13 It is well established that, in this context, the reference to 'an insolvent company that is being wound up' in s 553C(1) is to be understood as a reference to a company being administered under a deed of company arrangement.[14]

14 It is also common ground between the parties that the set-off applies automatically and does not require any procedural step to be undertaken (such as lodgement of a proof of debt).[15]

The date that automatic set-off operates under a deed of company arrangement

15 The parties differ on when the automatic set-off under s 553C occurred. MKB submits that the set-off was automatically effected upon the execution of the Deed of Company Arrangement on 21 July 2009,[16] whereas the Respondents submit that it was automatically effected upon the appointment of the first administrator on 5 May 2009.[17] This is a difference without a consequence in this case, because any amounts that might have been due from one party to the other on 5 May 2009 are identical to amounts that might have been due on 21 July 2009. The Tribunal did not purport to determine when the administration began, and the reasons neither depended on whether the administration began at the time Mr Lobenstein was appointed administrator on 5 May 2009 nor on the date the Deed of Company Arrangement was executed. In my view, it is unnecessary to answer this question for the purposes of determining the appeal.

16 The critical issue in this appeal relates not to the timing, but to the effect of the automatic set-off under the Deed of Company Arrangement on the respective claims.

Ground 1 - Did the Deputy President err in law when she found that after the automatic set off and accounting required by s 553C of the Act there was no 'balance' owing to MKB?

1. The Administrators declared a First and Final Dividend to Unsecured Creditors of 0.549 cents in the dollar. Warrigal Road's Proof of Debt was admitted in or about October 2010 and it was paid $274.29 calculated at the dividend rate. In circumstances where, after the automatic set-off and accounting required by s553C resulted in a payment to Warrigal Road, there is no 'balance' owing to MKB.
2. Accordingly, I am satisfied that any claim MKB might have had has been extinguished by the DOCA and its proceeding, insofar as it relates to claims against Warrigal Road, is clearly misconceived and lacking in substance.[18]

18 Similarly, the Respondents submit that the Deed Administrators did what s 553C required of them through the process of determining WAR's formal proof of debt; namely, they took an account of what was due between WAR and MKB and ascertained a balance for the purpose of the section and (after applying the dividend rate of 0.549 cents in the dollar) paid the balance to WAR, amounting to $274.29.[19] The Respondents contend that, since the Deed Administrations were unable to say whether the uninvoiced work in progress claims against WAR were genuine and complained about the lack of information regarding the merits of the claims, they were not in a position to assess MKB's claim and 'could do no more than put zero' into MKB's side of the ledger.[20]

19 The Respondents submit that, even though the Deed Administrators did the accounting on a later date, the set-off is deemed to have been effected automatically on the date the administration commenced. As a result, as at the commencement of the administration, the balance of the account was $274.29 in favour of WAR and, upon payment of WAR's 'full entitlement', WAR and MKB's claims were extinguished.[21]

20 In Gye v McIntyre (in the context of bankruptcy), the High Court notes that the object of statutory set-off is:

..."to do substantial justice between the parties, where a debt is really due from the bankrupt to the debtor to his estate". Where there are genuine mutual debts, credits or other dealings, it would be unjust if the trustee in bankruptcy could insist upon having 100 cents in the dollar upon the whole of the debt owed to the bankrupt but at the same time insist that the bankrupt's debtor must be satisfied with a dividend of some few cents in the dollar on the whole of the debt owed by the bankrupt to him.[22]

21 In order for a set-off to occur, there must be a 'sum due from the one party' and a 'sum due from the other party' within the meaning of s 553C(1).

22 In Stein v Blake, Lord Hoffman considers the meaning of 'due' in the context of equivalent set-off provisions under English bankruptcy law as follows:

It is clear, therefore, that when section 323(2) speaks of taking an account of what is "due" from each party, it does not mean that the sums in question must have been due and payable, whether at the bankruptcy date or even the date when the calculation falls to be made. The claims may have been contingent at the bankruptcy date and the creditor's claims against the bankrupt may remain contingent at the time of the calculation, but they are nevertheless included in the account.[23]

23 In Derham on The Law of Set-off, the learned author makes the following observations on the requirement in set-off legislation that a sum is 'due':

The requirement of a sum due would be satisfied in relation to a claim which has accrued and which is presently payable at that date. It would also be satisfied in relation to a debt which is presently existing but which is expressed not to be payable until a future date. It would be appropriate in that regard to interpret "due" as including "owing, although not payable until some future date". It may also be accepted that "due" would encompass a liability which has accrued but which remains to be unquantified.[24]

24 Accordingly, sums 'due' include sums that are due and presently payable, sums that have accrued but are not presently payable, and sums that are contingent.

25 In its First Report to Creditors dated 2 June 2009, the Deed Administrators outlined MKB's financial position, including its trade debtors and work in progress, based on MKB's books and records. The Deed Administrators stated that they had undertaken preliminary investigations into the company's books and records, and reported that they appeared to have been 'adequately maintained'.[25] The Deed Administrators noted that they had 'not verified the accuracy of the information provided', nor had they 'undertaken an audit'.[26]

26 In relation to MKB's trade debtors, the Deed Administrators relevantly stated:

36 Warrigal Road Pty Ltd - Advice received indicates that this project was completed in June 2007. Approximately, $255,349 remains recorded in WIP as a claim that has yet to be invoiced. Given the time that has elapsed and the significant quantum of WIP that had not been invoiced, significant uncertainty exists as to the collectability of this receivable.[27]

27 In relation to work in progress, the Deed Administrators relevantly stated:

The director's breakdown of the company's Work in Progress at the date of the appointment of the Administrator is as follows:

36 Warrigal Road Parkdale ([WAR]) 549,046 Nil Unknown

As noted above, given the uncertainties associated with the collectability of this uninvoiced WIP, further investigations and analysis would need to be undertaken in the first instance to determine what amounts (if any) may be invoiced.

At this juncture we are not in a position to provide any definitive comment as to the collectability of any of the receivables recorded in the company's books and records.[28]

28 In its Supplementary Report to Creditors dated 24 June 2009, the Deed Administrators provided further comments in relation to its trade debtors:

36 Warrigal Road Pty Ltd ("Warrigal Road") - The company's records do not reflect any invoices as being outstanding and we have not been provided with any further information in this regard. We are of the opinion that the only amounts that may remain to be invoiced are those amounts included in WIP (as discussed in our previous [report] and as detailed below) in the amount of $549,046. However, it must be noted that due to the aging of the WIP, and that no recovery action has been taken prior to our appointment, it could be assumed that significant difficulties maybe experienced in attempting to realise any outstanding amounts that may be due to the company in this regard.[29]

29 Further, the Deed Administrators referred to the claims from WAR:

We have also been provided with details of a claim from 36 Warrigal Road Pty Ltd ("Warrigal Road") in the amount of $100,000. Warrigal Road claims that the company breached the terms of the building contract by failing to provide documentation for work performed, variations, materials, costs and expenses. Furthermore, Warrigal Road claims that a payment in the amount of $100,000 was paid in the absence of substantiation by the company. Warrigal Road is claiming the reimbursement of this payment. The company's directors dispute Warrigal Roads claim. We have not been provided with any documentation to provide any comment as to the validity of this claim.

In light of the above, and given the general lack of information about the merits of the company's claims for outstanding WIP/debtors together with the lack of detail pertaining to the contingent claims submitted, it would appear unlikely that any recoveries would be achieved for the benefit of creditors.

Advice received also indicates that the potential costs associated with any recovery/assessment proceedings may well exceed $200,000.

Furthermore, given that there are disputed matters, it would be unlikely that litigation funding could be obtained. In the absence of better and more certain information about the merits of the claims, it would be difficult to procure solicitors to undertake work on a speculative basis.[30]

30 In cross-examination at the Tribunal hearing of the summary dismissal application, Mr Lofthouse (one of the Deed Administrators) agreed that the figure of $549,046 for uninvoiced work in progress that was attributed to the WAR project at 36 Warrigal Road had been mistakenly transposed with the figure for uninvoiced work in progress attributed to another project (Beaumaris Project) and that the 'true figure' for WAR was $255,349.[31] During re-examination, Mr Lofthouse clarified this response, saying that he was 'unsure at this stage which figure in fact belongs to which particular entity' and that he would need to confirm with his file.[32]

31 It seems to me that the state of the evidence is that, at the commencement of the administration, MKB had an unverified 'work in progress claim' against WAR of either $255,349 or $549,046 that had not yet been invoiced. While the Deed Administrators expressed concern about a perceived difficulty and uncertainty in recovering this amount from WAR, there is no evidence in the reports or otherwise to suggest that the Deed Administrators had formed the view that the claim was not genuine. On the contrary, the Deed Administrators reported that they did not have information about the merits of the MKB claim for work in progress and stated that they could not comment on the validity of the WAR claim.[33] Further, while the amount of work in progress had not been invoiced, and presumably was not payable until it had been invoiced, the reports to the creditors indicate that a receivable in the nature of work in progress had accrued to the Appellant.

32 The evidence before me suggests that there was a 'sum due' from WAR to MKB within the meaning of s 553C of the Act immediately prior to the moment of automatic set-off. Whether the debt was indeed genuine, and whether the amount was $255,349 or $549,046 or any other amount, are questions that would need to be considered and determined based on a proper assessment of all the evidence. This would include evidence as to whether the Deed Administrators inadvertently transposed the figure for an amount due from WAR with a figure for an amount due on the Beaumaris Project. The result of such inquiries have no significance for determining the issues on this appeal. It is sufficient to note that, on the evidence before me, there was prima facie a debt due from WAR to MKB of either $255,349 or $549,046, both of which substantially exceed WAR's claim of $100,000.

33 Critical to the decision of the Tribunal is that 'the accounting required by s 553C' resulted in a payment to WAR, meaning that there was no 'balance' owing to MKB. This reasoning assumes that the Deed Administrators performed the necessary accounting to determine the balance due.

34 It is well established (and accepted by the parties) that the operation of s 553C is automatic, without any steps having to be taken by either party.[34]

35 In Stein v Blake, in relation to the equivalent section in the UK, Lord Hoffman stated:

The language of section 323(2) suggests an image of the trustee and creditor sitting down together, perhaps before a judge, and debating how the balance between them should be calculated. But the taking of the account really means no more than the calculation of the balance due in accordance with principles of insolvency law. An obvious occasion for making this calculation will be the lodging of a proof by a creditor against whom the bankrupt had a cross-claim. Indeed, it might have been thought from the words 'any creditor of the bankrupt proving or claiming to prove for a bankruptcy debt' in section 323(1) that the operation of the section actually depended upon the lodging of a proof. But it has long been held that this is unnecessary and that the words should be construed to mean 'any creditor of the bankrupt who (apart from section 323) would have been entitled to prove for a bankruptcy debt.'

...

Once one has eliminated any need for a proof in order to activate the operation of the section, it ceases to be linked to any step in the procedure of bankruptcy or litigation... The 'account' in accordance with section 323(2) must be taken whenever it is necessary for any purpose to ascertain the effect which the section had...[35]

36 The taking of an account under s 553C is neither dependent nor necessarily connected to the process of lodging a proof, but must be taken at any time whenever it is necessary to determine the effect of the set-off provision, including during the process of proof or by a court after litigation. Whether the Deed Administrators actually took an account pursuant to s 553C depends on whether they calculated the balance due in accordance with the principles of insolvency law.

37 In their reports to creditors, the Deed Administrators estimated the amounts of assets and liabilities of the company pursuant to s 476 of the Act, including an estimation that MKB's uninvoiced work in progress claims were $255,349 (or $549,046). The Deed Administrators also noted WAR's claim of $100,000.

38 On 28 July 2010, Mr Lofthouse wrote to all the creditors, including WAR, and notified them that they would be required, by 30 August 2010, to prove their debts or claims against the company by a formal proof of debt or claim, together with supporting documentation to substantiate their claim.[36] On 28 September 2010, WAR lodged with the Deed Administrators a formal proof of debt stating that 'this amount [$50,000] represents 50% of the original debt agreed to be reduced 28/9/10 without prejudice to expedite settlement.'[37] On 7 October 2010, Mr Lofthouse sent WAR a letter and a notice of declaration of first and final dividend to unsecured creditors, which states:

A first and final dividend of 0.549 cents in the dollar has been declared in favour of unsecured creditors with respect to the company and a cheque is attached in the sum of $274.29 calculated at that rate on your debt as admitted to rank for dividend in the sum of $50,000.[38]

39 The Respondents assert that the Deed Administrators were 'alert to the question of set-off' because the Supplementary Report to Creditors stated that '[a] right of set off may exist as against the amounts due to the company' with respect to another trade debtor, 420 Balcombe Road Pty Ltd.[39] Later on the same page, the Deed Administrators stated:

We also refer to our comments at Section 5.3 below with respect to counter-claims of Balcombe Road and Warrigal Road and the potential right of off-set against what may be owed to the company.[40]

40 On this basis, the Respondents submit that the WAR claim was 'plainly an offsetting claim and the Deed Administrators had recognised it as such.'[41]

41 The Appellant denies that the Deed Administrators considered the issue of set off when determining WAR's proof of debt claim, relying upon the evidence of Mr Lofthouse, who deposed that '[o]n the basis of my file it would not appear that the matter of set-off was ever canvassed'.[42] The Appellant further submits that the exclusion of clause 2 of Schedule 8A of the Regulations meant that the Deed Administrators did not have the power to prosecute proceedings on behalf of the company or in the name of the administrators, or to compromise any debts or claims brought by or against the company,[43] and that the commercial purpose of the Deed of Company Arrangement was to allow the company to pursue the recovery of assets at its own expense rather than at the expense of the creditors.[44]

42 If, by the Respondent's submission that the WAR claim was 'plainly an offsetting claim and the Deed Administrators have recognised it as such', the Respondents seek to contend that the Deed Administrators performed the necessary calculation of the effect of the statutory set-off, then I reject that submission.

43 Even if the Deed Administrators were alert to the question of set-off (which had already occurred automatically) there is no evidence to suggest that they calculated the net balance due in accordance with the principles of insolvency law.

44 The Deed Administrators declared a dividend to unsecured creditors of 0.549 cents in the dollar. WAR proved for the (reduced) amount of $50,000. The dividend paid to WAR of $274.29 is .549 cents in the dollar of $50,000. It would appear from the amount of this dividend that no account has been taken of MKB's work in progress, unless one assumes that a value of $0 was attributed to MKB's recorded work in progress receivable. In my view, that would be a perverse assumption to make in circumstances where the Deed Administrators have stated that the company's books and records appear to have been adequately maintained and where they have ventured no opinion as to the merits of MKB's claim.

45 It is evident from the reports to the creditors that the Deed Administrators were cognisant of what each party claimed was due from the other with respect to their mutual dealings in relation to the relevant building project. In my view, there is no evidence that the Deed Administrators formed any view as to whether the claim for work in progress was genuine, or took any steps to ascertain the effect of s 553C on the mutual claims.

46 If the Deed Administrators had taken an account and had calculated the set-off according to the principles of insolvency law at the time, one would expect that they would have set off MKB's claim for work in progress of $255,349 (or $549,046) against WAR's claim of $100,000 and arrived at a net balance in favour of MKB of $155,349 (or $449,046). In my view, it cannot be inferred from payment of the dividend that the Deed Administrators took an account and calculated the set-off pursuant to s 553C of the Act, particularly in light of the unchallenged evidence of Mr Lofthouse that on the basis of his file it would not appear that the matter of set-off was ever canvassed. There is no reference to this aspect of Mr Lofthouse's evidence in the reasons of the Tribunal. The amount of the dividend, based as it is on the full amount of the proof lodged, tends to suggest that the issue of set-off for work in progress was not canvassed.

47 In my opinion, the Tribunal erred in law, as there was no evidentiary basis for the finding that 'the accounting required' by s 553C of the Act had taken place or that 'there was no balance owing to MKB'. Whether either matter is established will depend on evidence adduced at the hearing of the proceeding. Further, it seems to me that the Tribunal failed to take into account relevant evidence namely that aspect of Mr Lofthouse's evidence which appears to positively support the proposition that the matter of set-off was not canvassed. This also amounts to an error of law.[45] Accordingly, ground 1 of the appeal is allowed.

Ground 2 - Did the Deputy President err in law when she found that any claim MKB might have had against WAR had been extinguished by the Deed of Company Arrangement?

48 Given my finding to the effect that there is no evidence the Deed Administrators took an account pursuant to s 553C of the Act, the question remains as to the effect of the payment of $274.29 from the Deed Administrators under the Deed of Company Arrangement.

49 The Respondents submit that upon payment of $274.29 to WAR as determined by the Deed Administrators, the parties' claims were extinguished. They rely upon clause 6 of Schedule 8A of the Regulations (incorporated through clause 1.3 of the Deed of Company Arrangement), which provides:

If the administrator has paid to the creditors their full entitlements under this deed, all debts or claims, present or future, actual or contingent, due or which may become due by the company as a result of anything done or omitted by or on behalf of the company before the day when the administration began and each claim against the company as a result of anything done or omitted by or on behalf of the company before the day when the administration began is extinguished.[46]

50 The Appellant submits that, if the Deed Administrators made the payment of $274.29 to WAR by mistake, any such payment could not extinguish MKB's chose in action, since the object of s 553C is 'to do substantial justice between the parties', and it cannot have been intended that the provisions would operate in such a 'capricious way'.[47]

51 Further, the Appellant submits that MS Fashions Ltd v Bank of Credit and Commerce International SA (in liq) (No. 2)[48] supports the proposition that, where a dividend payment has been made, the court is entitled to work out what the proper figure should have been and, if the creditor has been given a distribution, then to give credit for it.

52 Finally, the Appellant submits that a set-off under s 553C can be recalculated by the Court for the purpose of this appeal, taking into account all events that have occurred since the date of the deed of administration (including the parties' current pleadings) to determine the effect of the set-off on the parties' claims. As MKB's claim is larger than WAR's claim, the Appellant contends that the automatic set-off leaves a balance in its favour, which would revert to the directors of MKB under the Deed of Company Arrangement, pursuant to clauses 2.2 and 5.6 of the Deed of Company Arrangement.[49]

53 In Stein v Blake,[50] Lord Hoffman held that, if an automatic set-off results in a net balance owing, the cross-claims cease to exist from the date of bankruptcy, however, where there is litigation to determine the amount to which each party is entitled, for the purpose of ascertaining the balance, the respective claims are treated as if they continue to exist.[51] In this sense, Lord Hoffman explained that 'litigation is merely part of the process of retrospective calculation...' [52]

54 In Arcfab Pty Ltd v Boral Ltd,[53] Austin J had to consider whether, following a set-off that reduced but did not extinguish a company's claim against the other person, the net claim could be pursued after termination of the deed of company arrangement. In that case, the administrator did not pursue net claims against the defendants, and a clause in the deed of company arrangement gave the administrator the discretion to recover any claim that he determined to be commercially feasible. Austin J held that, regardless of whether the administrator exercised the discretion or did not consider the issue, the company was entitled to recover the net amount following termination of the deed.

55 In MS Fashions (in the context of discussing contingent claims), Hoffman LJ stated:

I suppose it may happen that the contingency occurs long after the winding up has been completed and the company is then restored to the register and brings an action. The defendant may have proved for his cross-claim and received a small dividend. Can he still rely on the full claim as a set-off, giving credit for the dividend? For my part, I do not see why not.[54]

56 In Derham on the Law of Set Off, the learned author said:

But what if the creditor, before asserting the set-off is paid a dividend? It may be said in such a case that the debt has been paid, so that there is nothing 'due' to the creditor within the meaning of the set-off section, and that therefore the creditor has lost the right to set-off...However, under the automatic theory of insolvency set-off approved by the House of Lords in Stein v Blake, the analysis now would be that a set-off took place automatically at the date of bankruptcy, in which case the subsequent receipt of a dividend should not affect the position. Consistent with that view, Hoffman LJ (as he then was) in MS Fashions v Bank of Credit and Commerce International SA suggested that the receipt of a dividend would not preclude the creditor from relying on the full claim as a set-off, although credit would have to be given for the dividend received.[55]

57 Based on the above authorities, and consistent with the commentary in Derham and the terms of the Deed of Company Arrangement, in my view, the payment of a dividend to WAR by the Deed Administrators under the Deed of Company Arrangement neither automatically extinguishes the Appellant's claim against the Respondents nor precludes the Appellant from pursuing its claim for any balance that may be outstanding. The mandatory nature of s 553C(1) means that the automatic set-off occurred, such that the original claims were extinguished and only the claim for the balance remained. It will be a matter for the Appellant to demonstrate in the litigation that a retrospective calculation of legitimate claims would result in a balance being due to it, although credit would need to be given for the dividend received if the retrospective calculation produced a balance in favour of WAR. In this regard, counsel for the Appellant properly conceded that the WAR had proved for its debt on a without prejudice basis and would be entitled to claim the full amount of its claim (presumably $100,000) in the litigation.[56]

58 Assuming for the purpose of this appeal that the balance was in favour of MKB, the cause of action would fall under the definition of an 'Asset' under the Deed of Company Arrangement, which would revert to MKB on its execution on 21 July 2009. Pursuant to clause 2.2 of the Deed of Company Arrangement, upon execution of the Deed on 21 July 2009, control and management of MKB reverted back to its directors. I can see no reason why a payment by the Deed Administrators to WAR would extinguish a surviving chose in action in favour of MKB. Consistent with Arcfab, the claim prima facie survives the termination of the Deed of Company Arrangement.

59 Further, at this stage it is not possible to say whether WAR had any entitlement to payment of a dividend or whether clause 6 of Schedule 8A of the Regulations was engaged. If it should be determined on a taking of account that WAR's claim was extinguished by automatic set-off under s 553C, it would follow that WAR had no entitlement under the Deed of Company Arrangement. These issues will depend on findings made in light of evidence given at the hearing of the proceeding at the Tribunal.

60 In my view, the Tribunal erred in law by finding that any claim MKB might have had (against WAR) has been extinguished by the Deed of Company Arrangement. It is premature to make a finding that any claim of MKB has been extinguished until it is demonstrated by admissible evidence that there has been a taking of account in accordance with insolvency law and the outcome of that accounting is determined.

61 It follows from my findings above that MKB's appeal against Orders (1) and (2) of the Tribunal made on 12 March 2013 must be allowed. Those orders should be set aside and in lieu thereof, there should be orders allowing the appeal and dismissing the summary applications made pursuant to s 75 of the VCAT Act with respect to the First Respondent and the Second Respondent (insofar as it relates to a breach of the guarantee) I will hear counsel on whether any relief should be granted with respect to Orders (3) and (4) and as to the appropriate form of orders to give effect to these reasons.

[1] Orders, 12 March 2013, Appeal Book ('AB'), 736-7.

[2] Building contract, 25 January 2006, AB 306-72.

[3] Joint Venture Agreement; 1 February 2006, AB 374-5.

[4] Deed of Guarantee and Indemnity, contained in Building contract, 25 January 2006, AB 360-1.

[5] Clause 4, Joint Venture Agreement, 1 February 2006, AB, 374.

[6] First Report to Creditors, 2 June 2009, AB, 448; Reasons, 12 March 2013, AB, 723.

[7] MKB Application, 8 October 2012, AB, 1-3.

[8] Respondents' Amended Application, 22 November 2012, AB 272-5.

[9] Affidavit of Brett Lodding, 20 December 2012, AB 280-3; Respondents' Amended Application, 22 November 2012, AB 272-5.

[10] MK Builders Pty Ltd v 36 Warrigal Road Pty Ltd & Ors (Domestic Building) [2013] VCAT 267 (12 March 2013)

[12] Orders, 5 June 2013, AB 742-3; Amended Notice of Appeal, 5 August 2013, AB, 738-41.

[13] Appellant's outline of submissions, 5 August 2013, [13]-[15]; Respondents' Outline of Submissions, 20 November 2013, [18]-[19]; Transcript 12:26-14:7. Section 444A(5) of the Act provides that, where a company's creditors resolve that a company execute a deed of company arrangement, the deed is taken to include the 'prescribed provisions, except so far as it provides otherwise.' The prescribed provisions are found in Schedule 8A of the Corporations Regulations 2001 (Cth). Clause 1.3 of the Deed of Company Arrangement provides that Schedule 8A applies, except for clauses 2 and 10. Clause 8 of schedule 8A has the effect of incorporating s 553C of the Act into the Deed of Company Arrangement.

[14] GM & AM Pearce v RGM Australia [1998] 4 VR 888, 901 (Batt JA).

[15] Appellant's outline of submissions, 5 August 2013, [16]; Respondents' Outline of Submissions, 20 November 2013, [22]; Gye v McIntyre [1991] HCA 60; (1991) 171 CLR 609, 622; GM & AM Pearce and Co Pty Ltd v RGM Australia Pty Ltd [1998] 4 VR 888, 890-1 (Callaway JA), 898-9; Stein v Blake [1995] UKHL 11; [1996] AC 243, 253.

[16] Appellant's outline of submissions, 5 August 2013, [16]-[18].

[17] Respondents' Outline of Submissions, 20 November 2013, [22].

[18] Reasons, 12 March 2013, AB, 723-735, 730.

[19] Transcript: 49:13-19; Respondents' Outline of Submissions, 20 November 2013, [29].

[20] Respondents' Outline of Submissions, 20 November 2013, [23]-[24]; Transcript: 51:14-21.

[21] Respondents' Outline of Submissions, 20 November 2013, [26], [30].

[22] Gye v McIntyre [1991] HCA 60; (1991) 171 CLR 609, 618-9.

[23] Stein v Blake [1995] UKHL 11; [1996] AC 243, 252.

[24] Rory Derham, Derham on the Law of Set-Off (Oxford, 4th ed, 2010) 328 (citations omitted).

[25] First Report to Creditors, 2 June 2009, AB 442.

[26] First Report to Creditors, 2 June 2009, AB 443.

[27] First Report to Creditors, 2 June 2009, AB 448.

[28] First Report to Creditors 2 June 2009, AB 448-9.

[29] Supplementary Report to Creditors, 24 June 2009, AB 500-1.

[30] Supplementary Report to Creditors, 24 June 2009, AB 502-3.

[31] Transcript of the Tribunal hearing, AB 646-8; see First Report to Creditors 2 June 2009, AB 448-9; Supplementary Report to Creditors, 24 June 2009, AB 501.

[32] Transcript of the Tribunal hearing, AB 649-50.

[33] Supplementary Report to Creditors, 24 June 2009, AB 502.

[34] Appellant's outline of submissions, 5 August 2013, [16]; Respondents' Outline of Submissions, 20 November 2013, [22]; Gye v McIntyre [1991] HCA 60; (1991) 171 CLR 609, 622; GM & AM Pearce and Co Pty Ltd v RGM Australia Pty Ltd [1998] 4 VR 888, 890-1 (Callaway JA), 898-9; Stein v Blake [1995] UKHL 11; [1996] AC 243, 253.

[35] Stein v Blake [1995] UKHL 11; [1996] AC 243, 253.

[36] Letter to creditors from MKB, 28 July 2010, AB 546.

[37] Formal Proof of Debt, 28 September 2010, AB 550.

[38] Notice of Declaration of First and Final Dividend to Unsecured Creditors, 7 October 2010, AB 591.

[39] Supplementary Report to Creditors, 24 June 2009, AB 501.

[40] Supplementary Report to Creditors, 24 June 2009, AB 501.

[41] Respondents' Outline of Submissions, 20 November 2013, [29].

[42] Affidavit of David J Lofthouse sworn 17 January 2013, AB, 580.

[43] Appellant's outline of submissions, 5 August 2013, [12]; see clause 2 of the Regulations, specifically clause 2(j) and 2(zd).

[44] Appellant's outline of submissions, 5 August 2013, [10]; see clause 2.1 of the Deed of Company Arrangement, AB, 533.

[45] Macedon Ranges Shire Council v Romsey Hotel Pty Ltd [2008] VSCA 45; (2008) 19 VR 422, 436 [49].

[46] Respondents' Outline of Submissions, 20 November 2013, [30]-[32]. See also clause 8.9 of the Deed of Company Arrangement.

[47] Transcript: 6:20-7:13; Gye v McIntyre [1991] HCA 60; (1991) 171 CLR 609, 618-619. See also clause 8.10 of the Deed of Company Arrangement.

[48] [1993] Ch 425 (MS Fashions); Transcript 8:28-9:18.

[49] Appellant's outline of submissions, 5 August 2013, [31]-[33].

[50] [1995] UKHL 11; [1996] AC 243, 255.

[53] [2002] NSWSC 1188; (2002) 43 ACSR 573 ('Arcfab').

[54] [1993] Ch 425, 435.

[55] Rory Derham, Derham on the Law of Set-Off (Oxford, 4th ed, 2010), 328 (citations omitted).