Ceerose Pty Limited v A-Civil Aust Pty Ltd [2023] NSWSC 1012 | Case summary

Introduction

These proceedings concern two adjudication determinations obtained by the defendant subcontractor (A‑Civil) against the plaintiff builder (Ceerose) under the Building and Construction Industry Security of Payment Act 1999 (NSW) (the Act) in respect of work done on two projects, one in York Street, Sydney and the other in Greenknowe Avenue, Elizabeth Bay.
In relation to the York Street project, the adjudicator determined that the amount of $2,045,457.97 was payable by Ceerose to A‑Civil. In relation to the Elizabeth Bay project, the adjudicator determined that an amount of $349,324.36 was payable by Ceerose to A‑Civil. The former determination was made on 2 August 2022. The latter was made on 11 July 2022.
Ceerose sought in these proceedings orders quashing the two adjudication determinations on the ground that they were affected by jurisdictional error. It also sought final injunctions restraining A‑Civil from seeking to enforce the adjudication determinations.
The proceedings were heard by Darke J. In judgments delivered on 20 March 2023 (Ceerose Pty Ltd v A‑Civil Aust Pty Ltd [2023] NSWSC 239) and 20 April 2023 (Ceerose Pty Ltd v A‑Civil Aust Pty Ltd (No 2) [2023] NSWSC 401), his Honour held, in respect of the adjudication determination concerning the York Street project, that an adjudicated amount above $1,070,649.27 together with the apportionment of the adjudicator's fees and expenses were affected by jurisdictional error and, in respect of the adjudication determination concerning the Elizabeth Bay project, that an adjudicated amount above $345,210.36 together with the apportionment of the adjudicator's fees and expenses were affected by jurisdictional error. His Honour determined that pursuant to s 32A of the Act only that part of the determinations affected by jurisdictional error should be set aside and that the balance of the determinations should be affirmed. His Honour made orders to that affect.
As is common in such cases, at the time the proceedings were commenced, Ceerose obtained interlocutory injunctions restraining A‑Civil from taking steps to enforce the adjudication determinations. Those interlocutory injunctions were expressed to continue until further order. Consistently with s 25(4)(b) of the Act and the practice of the Court, it was a condition of obtaining those interlocutory injunctions that Ceerose pay the amount the subject of the determinations together with the adjudicator's fees into Court, which it did.

Stay pending the determination of the proceedings on the merits of A-Civil's claim

Mr Robertson SC, who appeared for Ceerose, submitted that the principles applicable to the resolution of this question were the same as the principles applicable to an interlocutory injunction. The Court should ask itself whether Ceerose had an arguable, or possibly seriously arguable case, in the proceedings on the merits (that is, the Contract Proceedings) and, if it did, whether the balance of convenience favours granting a stay. That is said to accord with the fact that, as s 32 of the Act makes clear, the judgment obtained under the Act is in substance an interim judgment pending the final determination of the merits of A-Civil's case.
I do not accept that analysis. The effect of the Act is to permit the beneficiary of an adjudication determination to obtain a certificate from the authorised nominating authority to whom the adjudication application was made and to register that certificate as a judgment for a debt in any court of competent jurisdiction, at which time it becomes enforceable accordingly: see ss 24, 25 of the Act. The result is a final judgment in favour of the beneficiary of the adjudication determination.
The Court has an inherent power to stay the enforcement of such a judgment. But the exercise of that power does not depend on the operation of principles applicable to an interlocutory injunction. Rather, it depends on the application of the principles applicable to the stay of a judgment, although there are common themes that run through the two sets of principles.
As the cases make clear, in the case of the stay of a judgment based on an adjudication determination, the critical question is whether a stay best gives effect to two competing policies of the Act. One policy of the Act is that contractors should be paid the amount of an adjudication determination immediately as a means of ensuring that they are paid promptly for the work that they have done. That policy is evident from the fact that the adjudication process leads to a final judgment of a court of competent jurisdiction. It is reinforced by s 25(4) of the Act, which states: If the respondent commences proceedings to have the judgment set aside, the respondent - (a) is not, in those proceedings, entitled - (i) to bring any cross-claim against the claimant, or (ii) to raise any defence in relation to matters arising under the construction contract, or (iii) to challenge the adjudicator's determination, and (b) is required to pay into the court as security the unpaid portion of the adjudicated amount pending the final determination of those proceedings.
Another policy of the Act, encapsulated in s 32, is that the respondent should be entitled to recover any amount it has paid as a consequence of an adjudication determination if it is subsequently found that the amount was not properly payable under the relevant construction contract. That right will be rendered nugatory if the financial position of the party from whom the money is sought to be recovered is such that it cannot afford to repay the relevant amount.
In balancing these competing considerations, courts have suggested that a number of factors are relevant, including the strength of the claim to recover the amount that has been paid, the basis of the claim, the likelihood that the contractor will be unable to pay the claim and the consequences for the contractor if a stay is granted: see Hakea Holdings Pty Limited v Denham Constructions Pty Ltd [2016] NSWSC 1120 at [6] per Ball J.
However, in the usual case, critical to a conclusion that the Court should grant a stay is a finding that it is likely that the proceedings in which the respondent to the adjudication application seeks to vindicate its contractual rights will be rendered nugatory because the beneficiary of the adjudication determination will not be able to repay the adjudicated amount if ordered to do so. As Keane JA explained in R J Neller Building Pty Ltd v Ainsworth [2009] 1 Qd R 390; [2009] QCA 397 at [40] (with whom Fraser JA and Fryberg J agreed), in a frequently cited passage: The BCIP Act [the Queensland equivalent of the Act] proceeds on the assumption that the interruption of a builder's cash flow may cause the financial failure of the builder before the rights and wrongs of claim and counterclaim between builder and owner can be finally determined by the courts. On that assumption, the BCIP Act seeks to preserve the cash flow to a builder notwithstanding the risk that the builder might ultimately be required to refund the cash in circumstances where the builder's financial failure, and inability to repay, could be expected to eventuate. Accordingly, the risk that a builder might not be able to refund moneys ultimately found to be due to a non-residential owner after a successful action by the owner must, I think, be regarded as a risk which, as a matter of policy in the commercial context in which the BCIP Act applies, the legislature has, prima facie at least, assigned to the owner.
As the Court of Appeal has recently explained in A-Civil Aust Pty Ltd v Ceerose Pty Ltd [2023] NSWCA 144 at [31], that conclusion is reinforced by the insertion into the Act in 2018 of s 32B, which makes it clear that the benefits of the Act are denied to a company in liquidation and not otherwise: These matters lend weight to the conclusion that there is a heavy burden on a party who seeks injunctive relief or a stay pending the outcome of proceedings contemplated by s 32 on the basis that a payment may become unrecoverable due to the possible or even likely insolvency of the payee at a later date. Considerable caution should attend the grant of such an injunction or a stay, as to do so may detract from the primary purpose of the Act. Unless the rights conferred by s 32 of the Act are likely to be rendered nugatory by the financial position of the beneficiary of the adjudication determination, the general policy of the Act to provide a fast and cheap mechanism to ensure contractors are paid promptly for their work strongly favours the refusal of a stay.
Ceerose's claim that a stay would be justified in this case rests principally on two sets of accounts of A-Civil, the report of administrators of A-Civil Contracting Pty Limited (A-Civil Contracting), an associated company of A‑Civil, the sole function of which was to provide staff to A-Civil, and an affidavit sworn by Mr John Melluish, an expert accountant and registered liquidator. A‑Civil Contracting is now the subject of a deed of company arrangement.
The first set of accounts, which were prepared by A-Civil's accountants on the basis of information provided to them by its directors, are for the financial year ended 30 June 2022. Those accounts show that A-Civil earned net profit after tax of $2,122,587 compared to $1,842,245 in the previous year and had total equity, consisting largely of retained earnings, of $5,319,568, compared to an amount of $3,196,981 in the previous financial year. The second set of accounts consists of a draft balance sheet for A-Civil as at 30 September 2022 which was produced in response to a subpoena served by Ceerose on the administrators of A-Civil Contracting. That balance sheet shows total equity of $993,173.17 including $97,424.23 in respect of current year earnings.
The report of the administrators of A-Civil Contracting to creditors relevantly states: Note 2 - Loans According to the management accounts, the Company is owed $884,717 from A-Civil Aust. As mentioned earlier, the Company sole customer is A-Civil Aust pursuant to a service agreement. We have undertaken a review of the loan account and make the following comments: ● It does not appear to be reconciled nor account for all weekly wage payments being made by A-Civil Aust to the Company. ● The current debt owed by the Company to the ATO amounts to c.$2.9m (including interest and penalties). As the Company's sole customer is A-Civil Aust, the loan account does not appear to account for the short payment of wages by A-Civil Aust to cover the amount owed to the ATO. Notwithstanding the above, we have been advised by the Director that the Company's management accounts are not up to date and do not take into account all monies paid to the Company by A-Civil Aust. Furthermore, A-Civil Aust has disputed the amount as being owed on the basis that during the COVID years of FY20 and FY21, it continued to pay the Company's employees their full salaries when there was no works being undertaken and/or delays with projects. In this regard, A-Civil Aust has advised that total payments to Company amount to c.$2.1m and have provided to the Administrators a summary of the payments made during those years which we have confirmed as being received on the Company's bank statements. As mentioned in Section 3.4 of this report, A-Civil Aust has also provided us with copies of its financial statements for FY19 to FY21 which show a 48% and >70% decline in its revenue, respectively. Accordingly, A-Civil Aust has raised the likelihood of a counter-claim against the Company. From our preliminary investigations (see Appendix A, point 4), assuming that that A-Civil Aust owes at least $884,717 to the Company, recovery against them in a liquidation scenario whereby A-Civil Aust is wound up (with the likelihood of receivers appointed), it will yield a return of between nil and 21 cents in the dollar from this asset (being at least c.$183,000).
Mr Melluish expresses the following conclusions in his affidavit: 56. … it is my opinion that considerable uncertainty exists that the Company would be in a position to repay the sum of $1.4 million in September 2023 unless those funds were protected or quarantined in some way upon receipt. 57 Similarly, it is my opinion that a substantial risk exists that the Company would not be in a position to repay $1.4 million or $2.1 million in 2024 or 2025 unless those funds were protected or quarantined in some way upon receipt.
Those opinions are based on several matters. The first is apparent discrepancies between quarterly ATO Activity Statements lodged by A-Civil for the period 1 April 2021 and 30 September 2022, which show the instalment rate as zero, and the accounts for the year ended 30 June 2022. Mr Melluish accepts that the accounts are broadly consistent with a tax return that had been supplied to him. However, he says that he has seen no evidence that the tax return has been lodged or the tax paid. A second matter is the fact that it appears that A-Civil Contracting did not pass on to A-Civil its full costs, including its own tax liability, even though it was a special purpose company established for the sole purpose of providing staff to A-Civil. Consequently, it may be inferred that A-Civil's real costs were substantially more than those stated in the accounts. A third matter is that a comparison between the 2022 accounts and the draft balance sheet for the quarter ended 30 September 2022 suggests that A-Civil incurred a loss of $5,441,143 in the three month period ending 30 September 2022. Mr Melluish expressed the view that these matters indicated that the accounts could not be relied on.
Relying on the maxim stated by Lord Mansfield in Blatch v Archer (1774) 1 Cowp 63; 98 ER 969 that "all evidence is to be weighed according to the proof which it was in the power of one side to produce, and in the power of the other to have contradicted", Ceerose submits that the Court should draw inferences unfavourable to A-Civil, since A-Civil's financial position is something peculiarly within its knowledge but it has made no attempt to refute the natural inferences that arise from the evidence relied on by Ceerose.
In my opinion, there two difficulties with that submission.
First, the submission overlooks the procedural history of the matter. On 30 June 2023, at the time the outstanding issues were set down for hearing, the Court made the following orders: 1. … 2. Fourteen (14) days' prior to the hearing, the Plaintiff is to: (a) notify the First Defendant in writing which paragraphs of Stephanie Saad's affidavits of 25 July 2022 (2022 / 00217806) and 10 August 2022 (2022 / 00236818), Roy Massoud's affidavit of 21 October 2022 (2022 / 00217806) and 3 November 2022 (2022 I 00236818), Jason Cameron's affidavits of 20 October 2022 (2022 I 00217806) and 1 November 2022 (2022 / 00236818), and Vince Battaglia's affidavits of 13 October 2022 (2022 / 00236818) and 13 October 2022 (2022 I 00217806), it intends to read at the hearing; (b) provide a copy of the documents it intends to tender at the hearing. 3. The Plaintiff shall not be entitled to rely on any evidence at the hearing, other than that notified or provided in accordance with order 2 above, without leave of the Court. … At the time order 3 was made, I said to counsel appearing for Ceerose "if your client wants to file some additional evidence they'd better apply for leave very quickly". That comment was made in a context where the hearing of the outstanding questions had already been vacated once and final orders giving effect to the judgment of Darke J had still not been made, even though the proceedings had been on foot for close to a year.
Despite that, Ceerose served Mr Melluish's affidavit on 28 July 2023. It did not apply for leave to rely on the affidavit. Instead, the matter was relisted by A-Civil on 2 August 2023, at which time I stood any application for leave to rely on the affidavit over until 7 August 2023. At that time, Mr Hicks SC, who appeared for A-Civil, indicated that A-Civil may be able to serve evidence from an expert accountant in response to the evidence given by Mr Melluish. Consequently, I stood the application to rely on Mr Melluish's evidence over to the hearing of the outstanding issues. At that time, A-Civil filed an affidavit from Mr Anthony Elkerton, an expert accountant and registered liquidator, who attached an expert report expressing opinions on what conclusions could be drawn from the material provided to Mr Melluish. In the light of that evidence, I admitted both affidavits, although I indicated that the weight that I would place on them would be affected by the circumstances in which they were prepared and served.
In considering what inferences the Court should draw from the absence of evidence from A-Civil, it is necessary bear in mind the limited time it had to respond to the evidence of Mr Melluish and the obvious unacceptability of an application for an adjournment to permit it to do so given the inordinate time the proceedings have already taken.
Second, and more significantly, it is important to pay careful attention to the inferences that are said to arise from the evidence relied on by Ceerose. There is a suggestion in some of the submissions made by Ceerose that the issue before the Court is whether A-Civil is solvent, that A-Civil had ample time to lead evidence on that issue but chose not to and that the Court could draw adverse inferences concerning A-Civil's financial position from that fact. However, put like that, the submission reverses the onus of proof. It was for Ceerose to prove the facts on which it relied to justify a stay. To the extent that those facts were peculiarly within the knowledge of A-Civil and A-Civil did not lead evidence in relation to those facts, the Court can more readily draw inferences from the evidence led by Ceerose (subject to the qualification concerning late service already mentioned). But in that case, the inferences are the inferences reasonably available from the evidence.
In the present case, it is not entirely clear what inference Ceerose seeks to draw from the evidence it has led. One seems to be that the financial statements of A-Civil are unreliable. The other is that there was a rapid deterioration in A-Civil's financial position as a consequence of adjustments made to the draft balance sheet as at 30 September 2022. Those inferences are not entirely consistent, since the second appears to depend on the accuracy of the financial statements, whereas the first suggests that they are not accurate. In any event, at most, the absence of evidence from A-Civil permits one of those two inferences to be drawn. It does not permit the Court to infer that A-Civil is or is likely to become insolvent.
Mr Melluish expresses the opinion that, in the light of the material available to Ceerose, there is "considerable uncertainty" that A-Civil would be able to repay the amounts payable to it as a result of the judgment of Darke J or a "substantial risk" that it would unable to repay those amounts. Mr Melluish appears to treat the quoted phrases as synonyms; and the upshot of his report seems to be that, without more information, it is not possible to be confident that A-Civil will be able to repay the amounts in question. That much may be accepted. But the absence of more information from A-Civil does not permit some different inference to be drawn. And the inference that can be drawn is not sufficient. What is necessary is evidence from which it can be concluded that it is at least more likely than not that A-Civil will not be able to repay the amount it receives if ordered to do so in the Contractual Proceedings. The evidence falls short of proving that and consequently falls short of providing a proper basis for a stay.
It was suggested by Ceerose that a further discretionary reason for granting a stay was the strength of its case in the Contractual Proceedings. There is certainly some authority that suggests that that is an important consideration: see Romaldi Constructions Pty Ltd v Adelaide Interior Linings Pty Ltd (No 2) [2013] SASCFC 124 at [95] per Blue J. However, the position in New South Wales appears to be that that consideration carries limited weight, except to the extent that it is relevant to the question whether there is at least a real risk that prejudice will follow if a stay is not granted: see Veolia Water Solutions v Kruger Engineering [No 3] [2007] NSWSC 459 at [73] per McDougall J. See also A‑Civil Aust Pty Ltd v Ceerose Pty Ltd [2023] NSWCA 144 at [21]ff. Plainly, there is little risk of prejudice if the contractual claim is weak. Here, however, Ceerose has not established that the risk of insolvency is sufficiently great to require consideration of that question.
In weighing the balance of convenience, Ceerose submitted that the Court should have regard to what it contends to be a plain calculation error by the adjudicator. It appears that the supposed error has only recently come to Ceerose's attention. It has raised that error with the adjudicator in a letter dated 31 July 2023. The adjudicator has power to correct the error under s 22(5) of the Act. The application to the adjudicator to correct his determination is opposed by A-Civil.
If the adjudicator accepts that he has made an error of the type that can be corrected under s 22(5) of the Act and he amends his determination accordingly, that may require an amendment to the orders made by Darke J. However, those matters do not provide a discretionary reason for granting a stay. The Act provides a procedure for dealing with the issue raised by Ceerose. Ceerose should not be entitled to obtain through a stay relief that is available to it under the Act. And if that relief is no longer available to Ceerose because of its delay, it should not be entitled to overcome the consequences of that delay through an application for a stay.

Ceerose Pty Limited v A-Civil Aust Pty Ltd

At a glance

Court

Decision date

Before

Source

Judgment (6 paragraphs)

Parties

Legislation Cited (1)

Cases Cited (8)

Cited By (1)