Appellant v First Respondent

1 The Appellant appeals against the order of an Associate Judge of the Court dated 22 August 2018 adjourning the Appellant's application for leave to proceed against 2 Nails Pty Ltd (in liquidation) (Company) pursuant to s 500(2) of the Corporations Act 2001 (Cth) (Act).

2 In essence, the Appellant submits that the discretion exercised by the Associate Judge under s 500(2) of the Act miscarried, as the Associate Judge erroneously determined that:

(a) Leave to proceed would serve no purpose and/or was unnecessary; and

(b) There were no funds available in the Company until such time as the development has concluded.

3 The Appellant seeks an order that leave to proceed against the Company be granted.

4 The Respondents submit that the Associate Judge was correct in his approach and that the appeal should be dismissed.

5 On 7 June 2015 the Appellant and 2 Nails Pty Ltd (Company) entered into a contract for the construction of two triple storey town houses on the land situated at 130 The Boulevard, Aberfeldie (Property) (Building Contract).

6 On 3 March 2016 and before construction was completed, the Company was wound up voluntarily by its members. Malcolm Kimbal Howell and Glenn Anthony Crisp (the Liquidators) were appointed Liquidators of the Company.

7 Despite the liquidation, by a Management and Indemnity Deed (Deed) dated 8 March 2016 the Liquidators on behalf of the Company elected to affirm the Building Contract and Pure Development & Project Management Pty Ltd (Pure Development) was appointed as a progress manager.

8 On this basis, the Appellant continued construction and received numerous payments pursuant to the terms of the Deed.

9 In January 2017, the parties fell into dispute regarding the Appellant's entitlement to progress payments under the Building Contract.

10 To resolve the dispute, on or about 27 February 2017, the Appellant and Pure Development on behalf of the Company, entered into a further agreement regarding the construction at the Property (Further Agreement).

11 Construction continued pursuant to the Building Contract, Deed and Further Agreement until approximately August 2017, when further disputes between the parties arose.

12 Ultimately, by notices dated 15 August 2017 and 4 September 2017, the Company purported to bring the Building Contract to an end.

13 On 21 December 2017, the Appellant sent a letter of demand to the Company claiming the sum of $601,514.40 being the balance owing by the Company under the Building Contract.

14 Enclosed with the letter of demand were the underlying invoices representing the claim, together with a spread-sheet cross-referencing items of the claim against individual invoices

15 On 8 January 2018, the Liquidators through their solicitors responded to the Appellant's claim as follows:

(a) the Building Contract was terminated on 4 September 2017 due to a failure of the Appellant to perform its obligations;

(b) the balance of $601,514.40 was out of proportion to the estimated cost of the relevant stage (fit-off works);

(c) there was considerable uncertainty as to the amount claimed by the Appellant;

(d) the fit-off works were incomplete;

(e) the Liquidators required time to consider the Appellant's claim and quantify any offsetting amounts; and

(f) that to the extent the claim was accepted, Emperor Homes would be afforded the relevant priority pursuant to s 556(l)(a) of the Act.

16 As no further steps were taken by the Liquidators, the Appellant commenced proceedings seeking leave to proceed on 23 April 2018.

17 The application for leave to proceed was heard and judgment, in effect adjourning the application, was delivered on 22 August 2018. At [19] his Honour said that:

... at some stage in the future, it may need to bring on a proceeding if there cannot be a resolution with the Liquidators. The application should be adjourned pending completion of the development and sale of the properties.

1. At paragraph [18] of the Reasons, the learned Associate Justice erred by determining that it would serve no purpose to grant the Appellant leave to proceed against the first respondent as at 22 August 2018.
2. At paragraph [18] of the Reasons, the learned Associate Justice erred by determining that there were no funds available until such time as the development was concluded.
3. At paragraph [18] of the Reasons, the learned Associate Justice erred by determining that the Appellant's foreshadowed proceeding at the VCAT was unnecessary as at 22 August 2018.
4. The learned Associate Justice erred in the exercise of his discretion by failing to grant the Appellant leave to proceed against the first respondent pursuant to s 500(2) of the Corporations Act 2001 (Cth).

19 Section 500 of the Act provides:

Execution and civil proceedings

(2) After the passing of the resolution for voluntary winding up, no action or other civil proceeding is to be proceeded with or commenced against the company except by leave of the Court and subject to such terms as the Court imposes.

20 The purpose behind s 500 of the Act was discussed by McPherson J (in the context of the analogous provision 471B) in Re Gordon Grant & Grant Pty Ltd,[1] where he said:

The precise purpose and function of provisions similar to s 230(3) [the relevant predecessor to s 471B of the Corporations Act] have seldom been explained. From time to time the suggestion has been made that the prohibition exists in order to effectuate the statutory policy of ensuring that corporate assets are distributed rateably amongst all creditors so that none of them will gain an advantage over others: see eg Re Sydney Formworks Pty Ltd [1965] NSWR 646 at 649050. But in Australia at least it is not often that the institution of proceedings or even the recovery of judgment operates to confer a priority or advantage on a litigating creditor. A more convincing explanation is that, without the relevant restriction, a company in liquidation would be subjected to a multiplicity of actions which would be both expensive and time-consuming, as well in some cases as unnecessary. This explanation has been accepted in a number of Canadian cases and appears also to have been adopted by Street J in Re A J Benjamin Ltd (1969) 90 WN (NSW) 107 at 109. It is consistent with this that there should be no automatic prohibition upon proceedings against a company in members' voluntary winding up, where the company is solvent and therefore less likely to be the target of numerous actions.

21 McPherson J continued in Re Gordon Grant & Grant Pty Ltd:[2]

As a matter of history, a winding up by the court was, and it remains today, an administration conducted by the court; Re Phoenix Oil & Transport Co Ltd (No 2) [1958] 1 Ch 565 at 370 [sic]. Both because of this, and because it was before the Judicature Act an administration conducted in Chancery, it was inevitable that there should be restrictions on the bringing of proceedings, whether at common law or otherwise, during the course of that administration. What is substituted for litigation in the ordinary form is a procedure by which a claim lodges a verified proof of debt with the liquidator, who admits or rejects it wholly or in part, and from whom an appeal lies to a judge, who determines that appeal de novo primarily on affidavit material: Re Kentwood Constructions Ltd [1960] 1 WLR 646. There can be no doubt that ordinarily such a procedure is, and is designed to be, much more expeditious and less expensive than ordinary proceedings by way of action. If this means that it occasionally has the consequence that the attainment of perfect justice is sacrificed to expedience, it may be justified by the circumstances that on appeal it is possible under modern rules of procedure for the judge in appropriate cases to make orders for discovery and even for the delivery of pleadings where it appears necessary or desirable to do so. The question whether a claimant should be permitted to proceed by action, or should be required to submit his proof of debt and, if dissatisfied, appeal to a judge, is therefore reduced largely to one of choosing to adopt the course of lodging proof of debt unless he can demonstrate that there is some good reason why a departure from that procedure is justified in the case of the particular claim in dispute. This is really all that is meant in this context by expressions such as 'convenience' and 'balance of convenience' that appear in judgments on the matters. [emphasis added].

22 Other relevant considerations are wide ranging.[3] Although the discretion is not 'fettered by rigid rules', its exercise will depend upon the circumstances disclosed in each particular case and in accordance with what justice seems to require.[4]

23 The Appellant submitted that the relevant matters which support the granting of leave and allowing the appeal include the following: [5]

(a) the proof of debt mechanism is unavailable[6] and the Appellant is a priority creditor for 'expenses properly incurred by the liquidators in preserving property of the Company or in carrying on the Company's business';

(b) accordingly, the Appellant's proposed claim is not 'unnecessary';

(c) the parties have been unable to resolve the dispute despite the Company being in possession of the relevant invoices since 21 December 2017;

(d) the defences raised by the Company invoke the exclusive domestic building jurisdiction at the VCAT. Only the VCAT is empowered to determine whether the estimate recorded in the Building Contract was fair and reasonable;

(e) the approach adopted by the liquidators is misconceived. A liquidator has no statutory power to assess and adjudicate claims under s 556(l)(a) of the Act. If a dispute arises over such a claim, the office of the liquidator is largely irrelevant. In such circumstances, a liquidator is akin to any other litigant.

(f) the Appellant's proposed claim amounts to a 'serious question to be tried'. In fact, drafts points of claim[7] have been circulated to the Company and the Court;

(g) accordingly, the purpose of the Appellant's proposed claim is to quantify the Appellant's claim to unpaid invoices under the Building Contract (which is currently disputed by the Company); and

(h) finally, it is implicit in the evidence before the Court that there is equity in the property development such that a return to the Appellant is likely.

24 The Respondents emphasised that the Associate Judge did not dismiss the application but instead adjourned or deferred it in the circumstances until facts were available and following an assessment the amount can be paid. It was contended that any proceeding would be disruptive in circumstances where there was no certainty of any return to creditors, and in particular the Appellant. There was no point, it was contended, in wasting time and money on a case where it was not established that there would be funds available to pay any priority claims under s 556(1)(a) of the Act.

25 In my opinion, the Appellant should now be permitted to 'bring on a proceeding' in order to determine the amount owing to the Appellant if it is unable to be agreed, which appears to be the case. The time has come for that amount to be determined so as to avoid any further delay. Accordingly, in my opinion it is not strictly necessary to resolve the appeal. There is simply no reason why the Appellant has to wait any longer, particularly in circumstances where the development is likely to be completed in February next year and there is likely to be funds available to pay priority creditors.[8] It is difficult to understand why the Liquidators would complete the development if this were not the case. Clearly, there is a real dispute between the parties and the Appellant has a prima facie case in circumstances where it is unable to lodge a proof of debt.

26 In any event, and insofar as may be necessary or relevant, I would allow the appeal. Given the attitude of the Liquidator, and the consequent need for the matter to be resolved by some form of proceeding, it is both unnecessary and unreasonable to expect the Appellant to wait until the development has been completed (that is marketing and sale) before commencing a proceeding, likely to take many months given its nature and scope. Rather, in my opinion, the better course is to permit the Appellant to commence a proceeding but restrain any enforcement thereof as is the usual form of order in applications of this kind. This course is also of benefit to the creditors and the administrators generally. It reduces any further delay and will permit an earlier winding up of the company.

27 It follows that it is unnecessary to deal with each ground of appeal. However, I will deal with each ground briefly.

28 Ground 1. In my view granting leave to proceed will serve a purpose. It will enable a contested matter to be dealt with at a time beneficial to the administration for the reasons set out above. Further, as there is likely to be equity available to pay priority creditors, there is utility in not waiting.

29 Ground 2. The fact that there are no funds presently available is not to the point. It is in everyone's interests to achieve a position where the money owing to the Appellant is determined before or proximate to the time that funds are available and not a much later date for the reasons set out above.

30 Ground 3. Grounds 1 and 2 answer this ground.

31 Ground 4. Grounds 1 and 2 answer this ground.

32 Accordingly the appeal will be allowed and orders made accordingly. The leave to proceed will however be subject to conditions designed to isolate and clarify precisely the substance of the case sought to be made. The parties will need to cooperate in this regard. I propose to reserve all costs.

[1] [1983] 2 Qd R 314 at 316-7.

[2] Ibid at 317, to similar effect see Ogilvie-Grant v East (1983) 7 ACLR 669 per McPherson J at 672-673.

[3] Timbercorp Finance Pty Ltd (in liq) v Vivian [2016] VSC 338 at [21].

[4] Witten v Lombard Australian Ltd [1968] 2 NSWR 529 at 534-5.

[5] The submission is taken directly from the Appellant's submissions.

[6] Commonwealth v Davis Samuel (No 5) 68 ACSR 336 at [33]; Re David Lloyd & Co (1877) 6 CH D 339 at 344; OD Transport (Aust) Pty Ltd (in liq) v OD Transport Pty Ltd (1997) 80 FCR 290 at 294; Chahwan v Euphoric Pty Ltd t/as Clay & Michel [2006] NSWSC 1002 at [40].

[7] Exhibit MKH-1 to the affidavit of Malcolm Kimbal Howell sworn 11 May 2018.

[8] To this extent the position may be different to the position that obtained before the Associate Judge. I am satisfied on the evidence that it is more probable than not that there will be equity available to satisfy claims over and above the secured creditor. I am not prepared to ignore or disregard the affidavit of Phillip Barravecchio sworn 30 October 2018 which exhibits a kerbside valuation from Woodards, experienced estate agents in the area, opining that the current market value of the properties substantially exceed the amount owing to the secured creditors and indeed other creditors. The kerbside valuation for each property is dated 24 October 2018.