CIVIL PROCEDURE - Court of Appeal - extension of time to comply with statutory demand for payment
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CIVIL PROCEDURE - Court of Appeal - extension of time to comply with statutory demand for payment
Judgment (4 paragraphs)
[1]
Background
In June 2017, Grandview and Budget entered into a sub-contract for demolition and excavation work in respect of a development being undertaken by Grandview at Villawood. The price of the work to be undertaken pursuant to the sub-contract was approximately $2.5 million. The work commenced in July 2017 and was scheduled for completion on 12 December 2017.
Between July and October 2017, Budget made five progress claims under the Building and Construction Industry Security of Payment Act 1999 (NSW) (the SOP Act). Approximately $1.2 million was paid pursuant to those claims.
By 12 December 2017, the date of completion, the works were still incomplete. Work ceased over the Christmas period and resumed on 3 January 2018. On 4 January 2018, representatives of Grandview communicated to Budget that they were required to cease work on the site immediately or they would call the police.
On 31 January 2018, Budget gave notice to Grandview of suspension of works pursuant to the SOP Act, s 15(2)(b) on the basis of two unpaid progress claims and served the statutory demand on Grandview.
The statutory demand was based on two progress claims, one issued on 21 November 2017 in the amount of $498,045.26 and another issued on 21 December 2017 in the amount of $526,045.26. Grandview served a payment schedule in respect of the November claim, but did not pay the amount. Grand view made no response to the December claim within the ten day period provided for by the SOP Act, s 14(4).
On 20 February 2018, Grandview filed an application to set aside the statutory demand under the Corporations Act 2001 (Cth), s 459G(1), supported by an affidavit of Jason Zhang, a director of Grandview. A number of additional affidavits were filed by both parties and reports from each of the parties' building experts were tendered. At the hearing of Grandview's application to set aside the statutory demand on 2 November 2018, Grandview's counsel accepted that the effect of the SOP Act was that, on 31 January 2018, Grandview owed a debt to Budget in the amounts specified in the two unpaid progress claims.
On its application to set aside the statutory demand, Grandview contended that the evidence established the existence of three separate offsetting claims that exceeded the amount of the statutory demand, as follows: liquidated damages for delay in completing the works; a liquidated damages 'milestones claim; and damages for the costs to complete the works. His Honour considered each of those claims.
As to the claim for liquidated damages for delay in completing the works, the primary judge stated, at [25], that Grandview had a potentially viable claim in the amount of $220,000 for the purposes of the Corporations Act, s 459H(1)(b), being in respect of delay from 13 December 2017 to 31 January 2018 inclusive. His Honour considered that there was no viable claim after that date.
His Honour rejected the liquidated milestone damages claim and the claim for the cost of completing the work: at [29] and [54] respectively.
As to the milestone damages claim, his Honour pointed out that the reference in the contract to these damages had been left blank and no claim for rectification of the contract had been raised in Mr Zhang's supporting affidavit. It followed according, to his Honour, that the Graywinter principle applied. His Honour explained this in his judgment delivered on 2 November 2018: Grandview Ausbuilder Pty Ltd v Budget Demolitions Pty Ltd [2018] NSWSC 1647, at [29]:
"The principle, known as the 'Graywinter principle' from Graywinter Properties Pty Ltd v Gas & Fuel Corp Superannuation Fund (1996) 70 FCR 452; [1996] FCA 822 that it is not open to a plaintiff applying to set aside a statutory demand to introduce at the hearing a new ground not supported by the affidavit filed in support of the applications is well established. This alleged offsetting claim fails in its entirety."
Grandview submitted that his Honour erred in his application of this principle in finding that although the claim had been foreshadowed in Mr Zhang's affidavit, the fact that it had not been quantified meant that Grandview was in breach of the Graywinter principle.
As to the claim for the cost to complete the works, his Honour stated, at [49]-[52], that he did not think that Grandview had an available claim for the costs to complete the work. As a preliminary matter, his Honour observed that Grandview's building expert had assessed an amount to complete the work of approximately $1.1 million. Mr Zhang, in his affidavit, had not included any calculation of the amount claimed under this head. Budget had challenged the calculation of $1.1 million on the basis of a number of arithmetical inaccuracies, claiming that allowing for those errors, Grandview's best claim was in a sum of approximately $425,000. Budget's own assessment of the cost necessary to complete the work was approximately $260,000.
In his Honour's view, there was a more fundamental difficulty with Grandview's claim. If it had validly terminated the contract, it would be entitled to damages which would put it in the same position if the contract had been completed according to its terms. The first integer in the calculation would be the amount required to complete the work to the contractual standard. It would also be necessary to take into account what it would have had to pay under the contract with Budget. His Honour made a calculation of the likely recoverable damages and concluded that any offsetting claim that Grandview had would not exceed the amount it owed to Budget in respect of the unpaid progress claims upon which the statutory demand was based. His Honour's calculation was as follows:
"[53] … Using Mr Brincat's figures, one adds the cost of completion of the works ($1.1 million) to the amount already paid ($1.2 million). But to complete the process, it is necessary to subtract the contract price. This is given by Mr Brincat, including variations assessed, as $2.5 million. On these figures, the figure for loss of bargain damages is negative and nothing is recoverable.
[54] This is consistent with common sense. The amount claimed by Budget is of the same order in magnitude as the amount assessed by Mr Brincat to complete the works. If Grandview paid the amounts demanded, it would be open to it to make a 'true' restitution claim for defective work. If Grandview does not pay, then it cannot, consistently with the SOP Act, make an offsetting claim for that work. To conclude otherwise would be to allow Grandview to evade the decision in Douglas and the decision in Diploma on which it was based. This alleged offsetting claim fails in its entirety."
His Honour earlier, at [10]-[13], had discussed the decisions in Re Douglas Aerospace Pty Ltd (2015) 294 FLR 186; [2015] NSWSC 167; Diploma Construction (WA) Pty Ltd v KPA Architects Pty Ltd [2014] WASCA 91; and Re J Group Constructions Pty Ltd (2015) 303 FLR 139; [2015] NSWSC 1607.
His Honour made a number of other observations to which reference should be made. First, at [66]-[67], his Honour commented upon the unsatisfactory position of Grandview not having commenced proceedings "to vindicate the offsetting claim it has asserted", which as his Honour observed, "Budget cannot force Grandview to pursue". His Honour also observed, at [67], "[t]his is a clear case of what Palmer J referred to in [Macleay Nominees Pty Ltd v Belle Property East Pty Ltd [2001] NSWSC 743] as a creditor being stultified".
His Honour continued:
"[68] … a company facing a statutory demand which it contests on the ground of an offsetting claim should be expected to take immediate action to bring that claim forward for determination in the proper forum. If the company does not do so, it is at risk of the Court concluding that the asserted offsetting claim is not genuine ([John Shearer Ltd & Arrowcrest Group Pty Ltd v Gehl Company (1995) 60 FCR 136; [1995] FCA 1034] at 148). The Court may also exercise its discretion to refuse to set aside the statutory demand even if an offsetting claim is established, or exercise its power under s 459M to impose conditions on the grant of relief.
…
[70] Grandview's liquidated damages claim cannot be characterised as nebulous or vague, as in Macleay Nominees. But its quantum is seriously contestable, particularly for the period after 4 January. I do not propose to make some sort of preliminary analysis of the quantum of the claim. Given Grandview's delay, I will require that it undertake to pay the full amount of the alleged offsetting claim, namely $220,000, into court as a condition of relief."
His Honour also sought an undertaking from Grandview that it should commence proceedings as quickly as reasonably practicable to assert its offsetting claim. His Honour adjourned the matter to give Grandview time to consider whether it wished to accept the terms of his proposed order.
When the matter returned before Parker J on 7 November 2018, Grandview informed the Court that it was not prepared to proffer the undertaking and stated that it was preparing to appeal from his Honour's decision. Grandview requested a stay of his Honour's orders dismissing the proceedings until the hearing of the appeal or extend the time for compliance with the statutory demand under the Corporations Act, s 459F(2)(a)(i).
His Honour stated that he was not prepared to grant an extension under s 459F(2)(a)(i), but that he would extend the time for compliance until 28 November 2018, on terms that Grandview commence an appeal with all due dispatch and provide security for Budget's costs of the appeal in the sum of $30,000: see Grandview Ausbuilder Pty Ltd v Budget Demolitions Pty Ltd (No 2) [2018] NSWSC 1713. This has been done.
[2]
Submissions
Grandview's principal submission as to why it should be granted an extension of time in which to comply with the statutory demand was that his Honour had failed to grapple with the important question of principle as to the time at which an offsetting claim had to have crystallised in order for it to be an available offsetting claim to meet a statutory demand. Grandview submitted that, on the authorities, the relevant time that an offsetting claim be available is at the time of hearing an application under s 459G: see Re Douglas Aerospace; Diploma Construction (WA) Pty Ltd v KPA Architects Pty Ltd; Equuscorp Pty Ltd v Perpetual Trustees WA Ltd (1997) 80 FCR 296; [1997] FCA 1366; Hopetoun Kembla Investments Pty Ltd v JPR Legal Pty Ltd (2011) 286 ALR 768; [2011] NSWSC 1343; Noroton Holdings Pty Ltd v Sydney Land Corp Ltd [1999] NSWSC 192.
Grandview also challenged his Honour's calculation of its likely damages, in that his Honour failed to take into account its offsetting claim to complete the work.
Grandview submitted that in determining the prospects of success of its appeal, it only needed to establish that the test was whether there is "sufficient arguability" to justify the appeal being granted: Creata (Aust) Pty Ltd v Gary Adrian Faull [2017] NSWCA 230 per White JA at [23]. Grandview submitted that it had satisfied that test in respect of its argument as to the point in time that an offsetting claim must crystallise to be entitled to rely upon it as an offsetting claim in response to a statutory demand.
Grandview submitted that an inference could be drawn from his Honour's findings at [34], [46], [47] and [52] that, given the sub-contract had not been terminated at the date that Grandview filed its application to set aside the statutory demand and the amount of its claim was not quantified, it could not be taken into account at the hearing of the application. It submitted that this was contrary to the authorities, which indicate that the claim only needs to exist at the time of the hearing of the application. Grandview submitted that although its offsetting claim was not quantified, the termination of the sub-contract and the offsetting claim was foreshadowed in Mr Zhang's supporting affidavit.
Grandview further submitted that if an extension of time for compliance with the statutory demand was not granted, any appeal it may have will be rendered nugatory with consequential prejudice to it: Creata (Aust) Pty Ltd v Gary Adrian Faull at [6] and [23].
Budget submitted that, as his Honour found, Grandview was not entitled to refuse to pay for work already completed by Budget in the hope it may have a future offsetting claim.
[3]
Legal principles for granting an extension of time for compliance with a statutory demand
In Creata (Aust) Pty Ltd v Gary Adrian Faull, White JA, at [2], set out the well-established principles that the Court is to apply when determining an application under s 459F(2) for an extension of time for compliance with a statutory demand, where the application to set aside the statutory demand has been dismissed. The matters to be addressed by the Court are as follows:
1. First, the general question of the prospects of success in the appeal and whether an arguable case has been shown;
2. Second, whether the appeal will be rendered nugatory unless the extension is granted; and
3. Third, as to the prejudice the respective parties will suffer in the alternative eventualities.
See also Australian Beverage Distributors Pty Ltd v Cranswick Premium Wines Pty Ltd (2004) 50 ACSR 544; [2004] NSWSC 877 at [5] per Barrett J; Jem Developments Pty Ltd v Hansen Yuncken (2006) 60 ACSR 393; [2006] NSWSC 1378 and Aus Asia Minerals Ltd v Ball [2015] WASCA 251 at [21] per Murphy JA.
White JA went on, at [5], to state:
"…in an appeal it is convenient to first consider the other two matters that need to be addressed: namely whether, if an extension is refused, an appeal would be rendered nugatory; and prejudice to the parties if an extension is either refused or granted."
In Australian Beverage Distributors Pty Ltd v Cranswick Premium Wines Pty Ltd, to which White JA referred, Barrett J, at [5], after identifying the three matters to which White JA referred, continued:
"Indeed, the application before me should, I think, be approached by close analogy with the case where a stay of execution is sought pending appeal. In that connection I refer to what was said by the Court of Appeal in Kalifair Pty Ltd v Digi-Tech (Australia) Ltd (2002) 55 NSWLR 737 at paragraph 18:
'Thus the relevant principles are analogous to those which govern the grant of interlocutory relief before trial to protect the status quo. The appellant must show that the appeal raises serious issues for the determination of the appellate court, and that there is a real risk that he will suffer prejudice or damage, if a stay is not granted, which will not be redressed by a successful appeal. This requirement will be satisfied if the appeal will be rendered abortive or nugatory unless a stay is granted. If these pre-conditions are established the Court will then consider the balance of convenience.' "
His Honour pointed out, at [7], that unless an order for extension was made a presumption of insolvency would arise. He was satisfied that the plaintiff had raised a sufficiently arguable prima facie case "to warrant consideration of the other matters relevant to s 459F(2)(a)(i) extension by application of the analogy with a stay pending appeal": see at [11]. Having concluded that an extension of time should be granted and the terms if any that should be imposed in granting an extension of time, his Honour rejected the defendant's argument that the plaintiff should be required to pay the full amount of the demand into court. In this regard, Barrett J stated, at [16]:
"The plaintiff says that the defendant should not be given the form of priority or security that that would entail. I accept the plaintiff's submission. This is, after all, not a debt recovery action. A company on which a statutory demand is served is in no sense required to comply with it. It may, if it wishes, allow the statutory presumption of insolvency to arise (by not paying the demanded sum) and, if a winding up application follows, seek to show that it is in fact in a solvent state so that a winding up order is not justified. The statutory demand process is no more than a process that defines where the burden of proof lies in winding up proceedings."
A similar point was made by Austin J in Jem Developments Pty Ltd v Hansen Yuncken Pty Ltd at [28]. His Honour, at [26], made another point relevant to the present matter, namely, the effect of the statutory provisions should an extension of time not be granted:
"… unless an extension order is made, the plaintiffs will have to choose between paying [the amount of the statutory demand] …and allowing their failure to comply with the demand to create … a presumption that they are insolvent, unless the contrary is proved. That presumption will probably be available to any creditor … who applies for winding up within the time stipulated by s 459C. In any such winding up proceeding, the relevant plaintiff (as defendant in the winding-up proceeding) will bear the burden of demonstrating solvency and will be subject to the restrictions contained in s 459S. These disadvantages will apply to the plaintiffs even if they succeed in their appeal, because under s 459C(2)(a) the presumption of insolvency arises if, during the defined period, the company fails 'as defined by section 459F' to comply with a statutory demand, and under s 459F(1) the company is taken to fail to comply with the demand at the end of the compliance period if the demand is still in effect and the company has not complied with it."
In the present case, given the manner in which his Honour determined the matter, it was not necessary for him to decide the question whether it was open for Grandview to rely upon an offsetting claim that only arose after the statutory demand had been issued and, as was the position in this case, after the application had been made to set aside the statutory demand. This circumstance arose because Grandview did not purportedly terminate the contract until 9 April 2018.
However, Grandview had expressly argued that it has an offsetting claim that it is entitled to raise against the amount subject of the statutory demand. Grandview submitted that the authorities noted at [22] above supported its position and that his Honour had erred in not following those authorities.
As I have also indicated, Grandview disputes his Honour's calculation. It is not necessary for me to determine the correctness of that calculation but I consider that Grandview's point is at least arguable. I am also of the opinion that there was sufficient information relating to the milestone damages claim for Budget to have been on notice of it. Whether that will suffice for the purposes of s 459G is not a matter to be determined on this application.
Given that it contends that it has an arguable case, Grandview's essential point is that if time for compliance with the demand is not extended, the appeal will become nugatory and it will necessarily suffer prejudice.
Budget pointed out that the primary judge had not determined the question of when the offsetting claim but submitted that that question was simply irrelevant in circumstances where Grandview could not, even on an arguable basis, establish an offsetting claim that was greater than the amount of the statutory demand. However, at the end of the day, his Honour did not reject that there was an arguable offsetting claim, although other than for the amount of $220,000, he considered the quantum of any such claim as "seriously contestable".
I am of the opinion that there is at least a sufficient argument for Grandview to advance in support of its application for leave to appeal. As Grandview has pointed out, there are authorities that support its position that it is sufficient for an offsetting claim to be in existence as at the date of the hearing to set aside the statutory demand. It is also arguable that the primary judge's calculation of its claim may not be accurate. Further, there can be no doubt that if an extension of time to comply with the demand is not granted, the application seeking leave to appeal and any appeal will be rendered nugatory. In addition, Grandview's position in any subsequent winding up proceedings would be governed by the provisions of the Corporations Act, including the presumption of insolvency: see s 459C.
These are all considerations that point in favour of a grant of an extension of time. Of particular concern, however, has been the delay in the matter to the present time and the fact that, when the primary judge heard the matter, Grandview had not commenced proceedings to vindicate its claim. However, those proceedings have now been commenced. Had it not been for that, I would have dismissed the application for an extension of time. Whilst that would have resulted in some prejudice to Grandview, there would have been a significant prejudice to Budget, who would have been kept out of its admitted entitlement to the two progress claims for over 12 months. Another matter that I have taken into consideration is that the Court is able to allocate an early hearing date of the summons seeking leave to appeal. In that regard, I will direct that the summons seeking leave to appeal and, if leave be granted, the appeal, be heard concurrently.
I should also add, had the present application been by way of a stay, I would have required the amount of the progress claims to have been paid into court. However, the authorities to which I have referred explain, correctly, why such a condition should not be imposed.
Accordingly, I make the following orders:
1. Extend the time for compliance with the statutory demand served on 31 January 2018 until 7 days after judgment is delivered on the summons seeking leave to appeal and if leave be granted, on the appeal.
2. Costs of the application to be costs of the summons seeking leave to appeal and the appeal.
3. Set the matter down for a concurrent hearing of the summons seeking leave to appeal and, if leave be granted, the appeal on 4 March 2019.
4. Direct the parties to provide a timetable by email to the Registrar by 4pm on Thursday 20 December 2018.
[4]
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Decision last updated: 20 December 2018
Solicitors:
Julie A Orsini (Applicant)
Ziman & Ziman (Respondent)
File Number(s): 2018/346856
Decision under appeal Court or tribunal: Supreme Court of New South Wales
Jurisdiction: Equity
Citation: Grandview Ausbuilder Pty Ltd v Budget Demolitions Pty Ltd (No 2) [2018] NSWSC 1713
Date of Decision: 7 November 2018
Before: Parker J
File Number(s): 2018/56438