Deluxe Developments Pty Ltd (In Liq) v Downer EDI Engineering Pty Ltd; In the matter of Downer EDI Engineering Pty Limited

Supreme Court of NSW|2017-07-03|Before: Ball J

Introduction

Before the court are two proceedings. In one (2017/140147) (the Appeal Proceeding), Downer EDI Engineering Pty Limited (Downer) seeks an order extending the time in which it may appeal against the rejection by the liquidators (the Liquidators) of Deluxe Developments Pty Ltd (In Liq) (Deluxe) of a proof of debt Downer lodged in the winding up of Deluxe in the sum of $1,928,390.68 (including GST) (the Proof of Debt). The Proof of Debt relates to amounts claimed by Downer as damages in completing certain building work that Deluxe had undertaken to perform pursuant to a subcontract entered into in 2010 between Downer as head contractor and Deluxe as subcontractor in relation to the Wallerawang power station following termination of the subcontract.
In the other proceeding in the Technology & Construction List (2016/256357) (the T&CL Proceeding), Deluxe claims amounts allegedly due to it under the subcontract. It also pleads an alternative claim that it is entitled to recover a quantum meruit for the building work it did. The total amount claimed by Deluxe on both bases is $547,583.81 (excluding GST) plus interest. Downer has raised a number of defences to those claims. One defence is that it is entitled under s 553C of the Corporations Act 2001 (Cth) to set-off the amount that is the subject of the Proof of Debt against the amount claimed by Deluxe.
By a notice of motion filed on 3 March 2017 in the T&CL Proceeding, Deluxe sought to have determined separately the question whether Downer is entitled to set-off the amount that is the subject of the Proof of Debt against the amount claimed by Deluxe. Deluxe's original case on that issue was that Downer is not entitled to a set-off because, in circumstances where the Liquidators rejected the Proof of Debt and Downer had neither appealed against that rejection nor applied for an extension of time within which to do so, Downer was bound by the decision of the Liquidators in relation to the claim the subject of the Proof of Debt. Downer commenced the Appeal Proceeding in response to that contention.

Background

In December 2009, Downer was engaged by TransGrid as the principal contractor to undertake civil and electrical works in connection with the Wallerawang sub-station upgrade.
In or around May 2010, Downer subcontracted out parts of that work to Deluxe. There is a dispute between the parties concerning the precise terms of that contract and, in particular, whether it incorporates Downer's purchase order terms and conditions.
On or about 18 January 2011, Deluxe served on Downer progress claim no 9 for the amount of $426,011.08 (including GST). On or about 18 January 2011, Downer served on Deluxe a payment schedule certifying that the amount of $313,074.15 (including GST) was payable to Deluxe in respect of that claim.
On 27 January 2011, Downer sent Deluxe a letter asserting that Deluxe had committed a substantial breach of the subcontract by reason of an alleged departure by Deluxe from the construction program.
On 2 February 2011, Deluxe served on Downer a notice of intention to suspend work, purportedly given under s 27 of the Building and Construction Industry Security of Payment Act 1999 (NSW).
On 3 February 2011, Deluxe served on Downer progress claim no 10 in the amount of $176,331.11 (including GST). On the same day, Downer wrote to Deluxe alleging that by suspending work Deluxe had repudiated the contract and stating that Downer would engage third parties to complete the work that was originally to have been performed by Deluxe and seek to recover the cost of that work from Deluxe.
Also on 3 February 2011, the members of Deluxe resolved that Deluxe be wound up voluntarily and that the Liquidators be appointed joint and several liquidators of Deluxe.
On 16 February 2011, Downer wrote to the Liquidators asserting that it was a creditor of Deluxe by reason of Deluxe's alleged breaches of the subcontract. Following further correspondence between Downer and the Liquidators' then solicitors, Mills Oakley, on 24 February 2012, Downer lodged the Proof of Debt with the Liquidators together with supporting documents.
As at April 2012, Deluxe's realisable assets consisted of cash in the bank in the amount of $359,770.96. Its total liabilities were estimated to be $3,049,939.10. That amount consisted of Downer's claim of $1,928,390.68, a liability to the Australian Taxation Office in the sum of $470,000 and a liability of just over $300,000 to Deluxe's officers, George and Bernadette Georgiou. There was protracted correspondence in relation to Downer's Proof of Debt. Ultimately, it was rejected on 20 December 2013.
The letter rejecting the Proof of Debt gave a number of reasons, which were: ● Insufficient information received. We note further requests for further information from Downer EDI Engineering Power Pty Ltd have been made. The information you have provided does not make clear what, if any, aspect of your claim, may be allowable; ● Discrepancies between the creditor's proof of debt and the liquidator's calculations arising as a result of our investigations; ● The proof of debt includes claims not provable against the company as they pertain to costs not the subject to the original contract but which appear to be variations agreed or entered into after Deluxe Developments Pty Limited (In Liquidation) ceased work on the Wallerawang Sub Station project ("the Project'); ● The proof of debt includes claims not provable against the company as they appear to pertain to costs not the subject of the Project; ● The proof of debt consists of vague terms, is lacking in precision and not capable of being understood on its terms; and ● The claim would defeat the fair, just and equitable distribution of assets among the admitted creditors. The letter went on to state that Downer could appeal against the rejection within 14 days after service of the notice or such further time as allowed by the court.
Downer did not lodge an appeal within the 14 day period. Mr Matthew Waller, a high voltage construction manager with Downer, gave a number of reasons including: 1. the likelihood of any substantial return from the liquidation was low; 2. any appeal would be opposed by the Liquidators and would result in expenditure of significant further costs and resources; 3. Downer's resources were better used elsewhere.
On or about 21 August 2014, Mills Oakley on behalf of the Liquidators notified Downer that Deluxe maintained its claim for unpaid amounts in respect of progress claim no 9 and progress claim no 10. The letter included a draft statement of claim and invited Downer to meet to discuss a possible settlement. The reasons for the delay in pursuing the claim in respect of the two payment claims are not explained in the evidence.
On 2 September 2014, Downer responded to that letter in the following terms: We strenuously deny any liability of payment to your client. As you are aware, Downer has suffered $1,928,390.68 as a result of your client's repudiation of the Contract and has lodged a formal proof of debt on 24 March 2012 in relation to that claim. In the event that proceedings are commenced by your client, we will vigorously defend those proceedings. In addition, we reserve our right to make an application for security for costs and to pursue our claim for damages against your client.
On 10 September 2014, Mills Oakley responded to that letter saying relevantly: We note the rejection of any claim by Downer against Deluxe by the Liquidator of Deluxe as part of the proof of debt process ("Adjudication Process"). Notice of this rejection was provided to your office on 20 December 2013, in accordance with your request dated 1 November 2011, and is also enclosed herewith for your reference. This Adjudication Process was conducted pursuant to the Corporations Act (2001) Cth ("the Act") and has been undertaken by the liquidator pursuant to the Act. The liquidator is deemed by law to be in a quasi-judicial role. The statutory remedy available to a creditor aggrieved by the liquidator's decision to a rejection of a proof of debt is an application pursuant to Regulation 5.6.54(2) of the Corporations Regulations 2001. Downer has not appealed the Adjudication Process within the mandatory time frame, yet continues to impermissibly assert a set off against Deluxe. This letter, along with our previous correspondence, will be relied upon on questions of costs in the event that any claim is asserted as a set off or any similar claim is made by Downer.
There was then correspondence between Mills Oakley and Downer on whether Downer was entitled to maintain a right of set-off. That issue remained unresolved between the parties and, on 10 October 2014, Downer wrote to Mills Oakley saying relevantly: We reserve the right to seek from the Court an extension of time pursuant to regulation 5.6.54 and will do so in the event that the Company commences proceedings against Downer.
In the meantime, on 5 September 2014, the committee of inspection for Deluxe gave its approval to the Liquidators to enter into a funding agreement with Macleay Capital Pty Ltd (Macleay) as manager and a number of funders, including Macleay, in respect of the claim against Downer. The relevant resolution was proposed by Mr Georgiou and seconded by Mrs Georgiou. Under the terms of that agreement, which was dated 29 August 2014, the funders agreed to fund the claim against Downer up to a maximum amount of $250,000 and to pay any adverse costs orders up to a maximum amount of $250,000. If the proceedings are successful, the Liquidators and Deluxe are required to pay the funders the total funding provided by them plus an uplift fee of 25 percent. The Liquidators and Deluxe are also required to pay Macleay as manager 50 percent of the balance recovered from Downer.
On 27 February 2017, the funding agreement was amended to increase the funding limit to $400,000.
On 14 April 2015 and 11 September 2015, the Liquidators conducted public examinations of a senior employee of Downer pursuant to s 596B of the Corporations Act 2001 (Cth).
On 25 August 2016, the Liquidators commenced the T&CL Proceeding. Downer filed its Response on 16 November 2016. As I have said, it raised various defences. One of them was the set-off defence.
Downer applied for an extension of time to appeal against the rejection of the Proof of Debt on 10 May 2017.

Relevant legal principles

Section 1321 of the Corporations Act 2001 (Cth) relevantly gives a person aggrieved by any decision of a liquidator a right to appeal to the Court in respect of that decision. Regulation 5.6.54 of the Corporations Regulations 2001 (Cth) relevantly provides: Grounds of rejection and notice to creditor (1) … (2) A person may appeal against the rejection of a formal proof of debt or claim within: (a) the time specified in the notice of the grounds of rejection; or (b) if the Court allows--any further period. (3) The Court may extend the time for filing an appeal under subregulation (2), even if the period specified in the notice has expired. (4) If the liquidator has admitted a formal proof of debt or claim, the notice of dividend is sufficient notice of the admission.
In considering whether to grant an extension under these provisions, the court must consider: 1. the delay, including the length and nature of the delay, the responsibility and reasons for it; 2. prejudice to the respective parties; and 3. whether the claim is arguable. See In the matter of Pan Pharmaceuticals Ltd (in liq); Brennan v McGrath [2011] NSWSC 561 at [7] per Ward J; Derwinto Pty Ltd (In Liq) v Lewis (2002) 42 ACSR 645 at 655; [2002] NSWSC 731 per Austin J.

Consideration

There is no dispute that Downer has an arguable claim. The focus of the parties' submissions was in relation to delay and prejudice. It is convenient to deal with the question of prejudice first.
Downer will suffer prejudice because, if the extension is not granted, it may not be able to pursue a right of set-off in relation to Deluxe's claim, which is its principal defence to that claim, because that right of set-off may be the subject of a res judicata estoppel in Deluxe's favour as a result of the Liquidators' rejection of the Proof of Debt: see K R Handley, Spencer Bower and Handley Res Judicata, (4th ed, 2009, LexisNexis) at paras [2.03], [2.20]. The consequence would be that, even if Downer could establish that Deluxe wrongfully repudiated the subcontract by suspending work, with the result that Downer suffered substantial losses in completing the work for which Deluxe was responsible, Downer may still be liable to make further payments to Deluxe under the contract.
Deluxe submits that it will suffer four types of prejudice if an extension is granted. Three are related and are said to be financial. First, Deluxe submits that at the time the Proof of Debt was rejected, it had sufficient cash to pay the costs of an appeal and now it does not. Second, it submits that it will have to bear the ongoing costs of the liquidation. Third, it submits that had the appeal been determined earlier there would have been a substantial recovery for unsecured creditors if the appeal had failed and a significant recovery for priority creditors even if it had succeeded.
I do not accept any of those submissions. The first depends on the fact that as at 4 January 2014 Deluxe had approximately $200,000 cash in the bank whereas as at 3 March 2017 it only had $12,314. The evidence is that the costs of defending an appeal are likely to be in the order of $150,000. Accepting that, it is submitted that Deluxe was in a position to meet the costs of an appeal in early 2014 and before but is not in a position to do so now. However, the difficulty with that submission is that there is no evidence of what other costs have been incurred in the liquidation and how those costs could have been avoided in the event of an appeal by 4 January 2014. In the absence of any evidence to the contrary, it may be assumed that the Liquidators did not incur costs unnecessarily. Consequently, absent any other evidence, it seems likely that the costs incurred between 4 January 2014 and 3 March 2017 would have been incurred in any event, at least if the appeal failed. As a result, it is difficult to see how the amount expended would have been available to fund the costs of an appeal.
Mr Ipp, who appeared for Deluxe, submitted that part of the costs were incurred in conducting the public examination of the Downer employee and those costs would not have been incurred if the appeal had been brought earlier. But there are two difficulties with that submission. First, there is no evidence that the costs of the public examination were funded from Deluxe's cash reserves. The evidence suggests that they were funded from the amount available under the funding agreement. Second, there is no reason to believe that the public examination would have been unnecessary if the appeal had been heard earlier and failed.
As to Deluxe's second point, there is no reason to believe that the ongoing costs of the liquidation would have been substantially greater if the appeal had been heard earlier. There is no evidence of precisely what the ongoing costs of the liquidation have been. However, whether the appeal was heard earlier or not, if it had failed there would still be ongoing costs of the liquidation associated with Deluxe's claim against Downer. If an extension of time is granted, the appeal is likely to be heard at the same time as Deluxe's claim. Consequently, it is difficult to see how the delay in the appeal is likely to extend substantially the liquidation. It may be that if Downer had successfully appealed shortly after the Proof of Debt had been rejected, Deluxe would not have pursued its claim and incurred costs in doing so. I accept that that is likely. But, as will become apparent, there is no reason to believe that unsecured creditors would have been significantly better off if that had been the position.
As to Deluxe's third point, that submission is based on a table prepared by the Liquidators showing the expected returns at various points in time. According to that table, the expected returns as at 4 January 2014 and 3 March 2017 were as follows:

The table is not evidence of the figures it contains; and there is no reason to accept that the figures it contains give a true indication of the expected outcomes if the appeal had been lodged on 4 January 2014 (or before) rather than on 3 March 2017 (and after). The table does, however, provide a useful framework in which to analyse the Liquidators' contentions.
I have already explained why the amount shown as "Cash at Bank" at the different dates is not a fair indication of the position resulting from Downer's delay in lodging the appeal. As at 4 January 2014, some provision would also have had to be made for costs of the liquidation that were likely to be incurred between 4 January 2014 and 3 March 2017. In the absence of any evidence, there is no reason to think that that provision would be substantially less than the actual costs incurred.
The table produced by the Liquidators indicates a smaller claim against Downer in March 2017 compared to January 2014. It appears that the explanation for that is that the Liquidators now propose to limit Deluxe's claim to the amount of the payment claims plus interest, which is said to be a straightforward claim. But if the Liquidators are proceeding on that basis now, it is difficult to see why they would not have proceeded on the same basis in January 2014. There is no obvious connection between that claim and the timing of the appeal. Moreover, there is no evidence concerning the basis of the additional claim and whether it was likely to succeed. For those reasons, the appropriate assumption to make is that the amount of Deluxe's claim at both dates, leaving interest aside, would be the same.
The other major difference between the two dates is the amount payable to the litigation funders. The underlying assumption appears to be that if the appeal had been determined well before Deluxe pursued its claim against Downer in Downer's favour, Deluxe would not have pursued its claim. On the other hand, if the appeal had been determined against Downer, Deluxe's claim would have succeeded without the need to incur any costs. The first limb of that proposition may be accepted, with the result that if the appeal had been pursued much earlier and succeeded, it is possible that there could have been a small distribution to priority shareholders as the table indicates, although even that conclusion depends on the accuracy of the other figures in the second column of the table.
The second limb of the proposition is far less obvious. If the appeal had failed, Downer would presumably still have defended Deluxe's claim. Although Downer's principal defence may be the set-off, it has other defences. Moreover, it may well still have sought to rely on the set-off defence and, if it had done so, presumably Deluxe would have made an application for the availability of that defence to be determined as a separate question, which may or may not have succeeded. The result is that Deluxe would still have required litigation funding and is likely to have incurred similar liabilities to the litigation funders as it has actually incurred prior to 3 March 2017. In that event, it is far from obvious that there would have been anything left for creditors, just as, on the Liquidators' figures, there would be nothing left for creditors if Deluxe's claim had succeeded in March 2017.
I accept that the delay in appealing against the rejection of the Proof of Debt is likely to have caused some increase in costs, simply because increased costs are a normal incidence of delay. I also accept that some costs may have been saved if the appeal had been heard separately and succeeded, since in that case the Liquidators are unlikely to have pursued Deluxe's claim. However, on the evidence I am not satisfied that the increased costs are substantial. And I am not satisfied that the creditors would have been significantly better off if Downer's appeal had been heard earlier.
The fourth type of prejudice relied on by Deluxe is access to witnesses. The principal witnesses that Deluxe is likely to rely on are Mr and Mrs Georgiou. They were generally available to the Liquidators in 2012 and 2013, but now their availability is far more restricted because of other commitments. Moreover, their value as witnesses is likely to have diminished because their memories of relevant events are likely to have faded with the passage of time. Again, I accept that there is some force in this submission. However, it cannot be a decisive consideration for three reasons.
First, it is not suggested that Mr and Mrs Georgiou are not available. They are substantial unsecured creditors and have an interest in seeing the claim against Downer succeed, assuming that it will produce a return for unsecured creditors.
Second, it is likely that Mr and Mrs Georgiou will be required to give evidence in relation to Deluxe's claim and so would be required in any event. That evidence may be relevant to identifying the terms of the subcontract. It may also be relevant to Deluxe's claim for a quantum meruit.
Third, it is not plain what assistance will be required from Mr and Mrs Georgiou to meet Downer's claim. The Liquidators presumably conducted some investigations in relation to that claim before rejecting the Proof of Debt and were presumably able to obtain assistance from Mr and Mrs Georgiou at that time. It is not clear what further assistance is now required. Moreover, the principal issue in relation to Downer's claim appears to be the costs it incurred in completing the work and whether those costs were reasonably necessary to complete the work that Deluxe had contracted to perform. It is not clear how Mr and Mrs Georgiou could give relevant evidence in relation to those matters.
The remaining issue is the delay. Deluxe points out that the delay has been very substantial and that it has resulted from Downer's deliberate decision.
The question of delay needs to be examined in relation to three periods. The first is the period before 21 August 2014. The second is the period between 21 August 2014 and 25 August 2016. The third is the period between 25 August 2016 and 10 May 2017.
In relation to the first period, it was apparent, at least by the time the Proof of Debt was rejected, if not before, that the real value in Downer's claim was that, if it succeeded, it would provide a set-off that would extinguish any claim that Deluxe might bring against Downer. Consequently, unless Deluxe's claim was brought, there was little utility either in Downer incurring the costs of pursuing an appeal or in the Liquidators incurring the costs of resisting the appeal. All that was in a context where the only other assets available to the Liquidators was the cash held in Deluxe's bank account and the only other significant creditors were the Australian Taxation Office and Deluxe's proprietors (Mr and Mrs Georgiou).
At the time the Proof of Debt was rejected, there was no indication that the Liquidators intended to pursue a claim against Downer. That is despite the fact that the Liquidators had presumably investigated the facts concerning the subcontract over the period from February 2011 to December 2013 in connection with their investigation of Downer's original claim for damages for breach of the subcontract and the Proof of Debt. The Liquidators waited until 21 August 2014 to notify Downer that Deluxe maintained its claim under the subcontract. No explanation is given for that delay. In my opinion it was reasonable up until that time for Downer to proceed on the basis that the Liquidators did not intend to pursue Deluxe's claim against it and that, in those circumstances, there was no utility in pursuing an appeal against the rejection of the Proof of Debt, and that such an appeal would simply waste both Downer's and Deluxe's resources.
The position changed on 21 August 2014, when the Liquidators notified Downer that they intended to pursue Deluxe's claim. However, the Liquidators did not commence proceedings immediately. Downer responded to the Liquidators notification promptly on 2 September 2014 saying that if Deluxe's claim was pursued then Downer would pursue its claim for damages. Downer did not specifically say at that time that it would apply for an extension of time in which to appeal against the rejection of the Proof of Debt, but that must be implicit in what it said, as became apparent in the subsequent correspondence between Mills Oakley and Downer. Consequently, the Liquidators were on notice that Downer would apply for an extension of time if they pursued Deluxe's claim. Two things follow from that. First, it is difficult to see how the Liquidators could have acted to their detriment on the basis that no extension of time had been sought when they knew an extension of time would be sought if they pursued Deluxe's claim. Second, knowing that, the timing of any application for an extension of time was tied to the timing of Deluxe's claim. To that extent, the Liquidators had some control over the timing.
Implicit in the position taken by the Liquidators is that, notwithstanding the fact that Downer's claim and Deluxe's claim arose out of the same set of facts, Downer's claim should be determined separately and in advance of Deluxe's claim. That may have been a reasonable approach to take on the assumption that Downer's claim succeeded, since it seems likely that if the appeal in relation to the Proof of Debt was determined in Downer's favour, the Liquidators would not have pursued Deluxe's claim, with the result that the costs of bringing it could have been saved. But the same is not true if Downer's appeal failed. Deluxe would still have needed to pursue its claim and, as the current proceedings demonstrate, that claim may still have raised complicated questions concerning the relationship between the two claims. It may also have required some of the same witnesses to give evidence twice and for different judges to consider overlapping factual issues. It is for those reasons that the position sought to be achieved by the Liquidators could not have been achieved in normal court proceedings. Stepping back from the detail, the position taken by Downer was that the two claims should be determined together whereas the position of the Liquidators was that Downer's claim should have been determined first. The Liquidators seek to achieve that result by insisting that Downer should have pursued its appeal promptly and by maintaining that Downer should lose its rights altogether because it did not do so. Looked at in that way, the position taken by Downer was not unreasonable and the delay by Downer in making an application for an extension of time in which to appeal must be considered in that light.
The Liquidators did commence proceedings on 25 August 2016. Despite that, Downer did not file an application for an extension of time until 10 May 2017. However, the Liquidators could have been in no doubt that Downer intended to pursue its claim as a defence to Deluxe's claim. That was made plain by its Response. The delay in filing the application for an extension of time is explained by the dispute between the parties on whether that defence could be raised without also pursuing an appeal against the rejection of the Proof of Debt and the complicated issues that that dispute raised.
It follows from what I have said that the position taken by Downer was reasonable. It has always been plain to the Liquidators that Downer intended to assert its claim as a defence to any claim pursued by the Liquidators. The Liquidators must have acted in that knowledge. The prejudice that they may have suffered as a consequence of the delay is minor compared to the prejudice that Downer will suffer if an extension is not granted. In those circumstances, Downer is entitled to the extension that it seeks.

Costs

That leaves the question of costs.
Downer seeks the costs of both applications.
So far as the application for a separate question is concerned, I do not think Downer is entitled to its costs. It is true that the application must be dismissed. However, that is only because, in response to the application, Downer filed the application for an extension of time. Prior to that time, it was not unreasonable for Deluxe to make the application it did. After that time, the position taken by Downer at least until the day of the hearing was that the separate question was still appropriate but that it should be answered unfavourably to Deluxe because Downer was entitled to raise the set-off point as a defence without pursuing its rights of appeal. That issue has not been resolved by the court.
It follows that Deluxe should have its costs of the motion up until the time that Downer filed its application for an extension of time and that each party should bear its own costs from that time.
So far as the application for an extension of time is concerned, Downer was successful in the application, which was opposed by Deluxe. The application was opposed in circumstances where the appeal was tied to the Liquidators' decision whether to pursue Deluxe's claim. In my opinion, it was not reasonable of the Liquidators to oppose the application in those circumstances. Consequently, Downer should have its costs of the application. However, in circumstances where those costs are tied up with the costs of Deluxe's motion, there is no basis for an order that those costs should be paid forthwith.

In 2016/256357 1. The notice of motion filed on 3 March 2017 be dismissed; 2. The defendant pay the plaintiffs' costs of the motion up until 10 May 2017 and each party bear his or its own costs thereafter;

In 2017/140147 1. Pursuant to section 1321 of the Corporations Act 2001 (Cth) and reg 5.6.54(2)(b) of the Corporations Regulations 2001 (Cth) order that the time within which the plaintiff may appeal against the rejection by the defendants of its proof of debt in the winding up of Deluxe Developments Pty Ltd (in liq) ACN 113 583 949 be extended to 11 May 2017; 2. The defendants pay the plaintiff's costs of the plaintiff's application for an extension of time.

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: 07 July 2017

Corporations Act 2001(Cth)ss 553C, 596B

Corporations Regulations 2001(Cth)reg 5.6.54(2)(b)

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