McDougall J, Keane JA, Fraser JA, Fryberg J, Payne JA
Source
Original judgment source is linked above.
Judgment (2 paragraphs)
[1]
Judgment (EX TEMPORE - REVISED ON 28 SEPTEMBER 2018)
HIS HONOUR: The plaintiff, principal (Greenwood), seeks a continuation of a stay of an order that I made on 13 September 2018 for payment to the first defendant, builder (DSD), of money paid into court by Greenwood.
The background is set out in my reasons on the substantive dispute, which concerned the validity of an adjudicator's determination pursuant to the Building and Construction Industry Security of Payment Act 1999 (NSW) (the Security of Payment Act): Greenwood Futures v DSD Builders [1] . I shall not repeat any of the background set out in those reasons. Rather, I assume that the unfortunate reader of these reasons will have read my earlier reasons.
The basis on which a stay is sought (more accurately, sought to be continued) is that Greenwood says it has a counterclaim against DSD for an amount in excess of the adjudicated amount. The adjudicated amount was $220,000 including GST. The counterclaim is said to amount to $256,000 exclusive of GST, or about $217,000 if the assessed amount for incomplete as opposed to defective works is subtracted (and I am not quite sure why it should be).
The counterclaim is supported by two reports of an expert in which various alleged defects in the work done by DSD are identified, and by a report of a quantity surveyor costing the recommended rectification works and works necessary to complete presently incomplete works. There is, therefore, evidence of the merits of the claim and of its amount. I accept, of course, that at present that evidence has not been answered. Despite the valiant attempts of Mr Hicks SC, for Greenwood, to persuade me that I should draw some inference from the failure to answer the evidence, I do not agree. The dispute is being dealt with in NCAT. No doubt the time will come for DSD's evidence to be filed. When that happens, the merits could be assessed on a stronger basis.
The motivation for the stay, bearing in mind the counterclaim to which I have referred, is that if it is not granted, and if Greenwood succeeds in obtaining a verdict for anything like the amount of its counterclaim, there is a real risk that it will be unpaid. That is said to be over and above the normal risk of insolvency which, unhappily, is a feature of the building and construction industry.
What might be called the general risk of insolvency was addressed by Keane JA (with whom Fraser JA and Fryberg J agreed) in RJ Neller Building Pty Ltd v Ainsworth [2] at, in particular, [39] to [42]. His Honour's observations have been held to be directly applicable to the equivalent legislation, the Security of Payment Act, in this State. One need do no more than cite the decision of Payne JA in Shade Systems Pty Ltd v Probuild Constructions (Aust) Pty Ltd [3] .
As Keane JA pointed out in RJ Neller at [41]:
The mere existence of the very kind of risk on which the provisions of the [Security of Payment] Act in favour of the builder are predicated would not ordinarily be sufficient of itself to justify a stay of an execution warrant based on the registration of a certificate of adjudication.
His Honour pointed out, in the same paragraph, that there might be other circumstances which, together with that ordinary risk, could justify a stay.
In the present case, Mr Hicks points to a number of circumstances. First of all, he says that the evidence of the financial position of DSD is less than satisfactory. The only evidence of that is found in what purports to be a statement of financial position as at 31 December 2017. That statement is unaudited. However, it has been signed by the director of the company. It shows that, as at 31 December 2017, there was total equity in excess of $471,000. Indeed, I referred to that in another case involving the same builder: Goodwin Street Developments Pty Ltd v DSD Builders Pty Ltd [4] at [45].
I did not have the benefit of any analysis of the financial statements in the earlier case to which I have just referred. However, on analysis today, there are some curious anomalies. The principal one is that they record the proceeds of issue of shares, in the sum of $165,000, in the statement of cash flows. The statement continues to demonstrate that the bulk of that money, $163,000, was used to repay borrowings. Of necessity, that must have happened before 31 December 2017. However, in the statement of financial position at the same date, the contributed equity is shown in full. It cannot be the case that the contributed equity could reflect both the reduction in borrowings which was said to have been effected and, in total, the full amount of equity that was said to have been contributed.
The effect of correcting that apparent error would be to reduce the equity to about $306,000. That is said to be the amount of retained profits in the company. Although that might still be thought to be a reasonable position for a builder, the error in the statements, coupled with the absence of any updating information, gives me some cause to doubt their reliability.
I add that the statements show a profit before tax in the sum of $306,000. They do not show any provision for tax. It is difficult to understand how a company which, on the face of the statements, had no carried forward losses could have earned that profit without being required to pay tax upon it. No income tax return has been produced which could explain this somewhat unusual state of affairs.
In addition, Mr Hicks refers to the history of corporate dealings in which the principals of DSD, Mr Roberts and Mr Shankar, have engaged. It is open to infer that they have engaged in the well-known but opprobrious practice of utilising phoenix companies: consigning insolvent companies to the fires of liquidation, and creating new companies to arise from the ashes and take their place. The history of the corporate searches that was put before the Court could certainly support that inference.
More disturbingly, the evidence in this case is that DSD subcontracted all the work out, but not directly. If the payment claim is to be given any credibility, DSD subcontracted the whole of the work to a related company, BH Constructions. However, the evidence from two of the subcontractors who worked on the projects is that they were engaged not by BH Constructions but, rather, by yet another related company, Blissful Building Procurements. Those subcontractors have given evidence that their claims on the counterparty to their subcontracts remain unpaid, and that the counterparty has been placed into external administration. That is supported by the searches to which I have referred earlier.
There is, in my view, very strong evidence that Mr Roberts and Mr Shankar have engaged in structuring their affairs in such a way so as to avoid, wherever possible, paying their liabilities. That is not something which the Court ought overlook. In addition, there is evidence that DSD engaged in a practice of misusing, if not abusing, the processes put in place by the Security of Payment Act for the recovery of claims. I referred to this in my earlier reasons at [88]. It may also be noted that Mr Roberts was prepared to engage in a flagrant misuse of an authority given in an attempt to gain an advantage for DSD, as I recorded at [25], [26] of my earlier reasons.
There is no evidence that DSD has any ongoing projects that are likely to be prejudiced if it does not have access to the moneys that are presently held in court. Thus, the prospect that withholding payment might enable a healthy, although under-capitalised, business to collapse is not one which, on the evidence, need concern the Court.
I add, referring to the inferences that can be drawn as to Mr Roberts' business practices, that there was some evidence from a Mr Stuart Johnston, a former employee of DSD or of another one of Mr Roberts' related companies, of what purport to be admissions made by Mr Roberts to the effect that he would take the profit and leave creditors lamenting. Mr Roberts has denied those allegations. The evidence has not been tested by cross-examination. I cannot find that what Mr Johnston said is correct. I can say no more than it could well be thought to receive some support from the history of financial and corporate transactions to which I have referred.
I am conscious of the policy of the Security of Payment Act. I am conscious, as Keane JA pointed out in RJ Neller, that more than the usual risk of insolvency is required to keep a successful claimant out of its money. In this case, I think, there is substantially more.
There is the evidence of the counterclaim (accepting, as I have recognised, that DSD has not yet responded). There is the unsatisfactory nature of the financial evidence. One may add to that that this evidence is now almost ten months out of date, and no attempt has been made to put before the Court any evidence in admissible form that might enable the Court to have some satisfaction that the state of affairs as at 31 December 2017 has continued.
In addition to those matters, there is the evidence of the various corporate activities to which I have referred, and the strong suspicion that Mr Roberts and Mr Shankar have adopted the phoenix practices to which I referred earlier.
Putting all those matters together, I am comfortably satisfied that there is a very real risk, well over and above the normal risk of insolvency, that if Greenwood recovers a verdict in NCAT (or in any other tribunal) it may not be paid. On the contrary, I think, there is every reason to think that Mr Roberts and Mr Shankar will do what they can to ensure that it is not paid.
For those reasons, and noting that Greenwood has undertaken to the Court to prosecute its claim in NCAT with all due expedition, I extend until further order the stay granted on 13 September 2018. I reserve liberty to apply on short notice in the event that it becomes apparent that there are circumstances warranting a variation or discharge of the stay.
[2]
Endnotes
[2018] NSWSC 1407.
[2009] 1 Qd R 390.
[2018] NSWCA 33.
[2018] NSWSC 1229.
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Decision last updated: 28 September 2018