Lawrence v Ciantar

Applicable principles

1. An appeal against a liquidator's decision in relation to a proof of debt was previously brought under s 1321 of the Corporations Act 2001 (Cth) but is now made under s 90-15 of the Insolvency Practice Schedule in Schedule 2 to the Corporations Act. However, the case law in relation to appeals under the now repealed s 1321 remains relevant: Re Azmac Pty Ltd (in liq) (2020) 146 ACSR 113; [2020] NSWSC 204 at [41] and the authorities there cited. I respectfully adopt Black J's summary of the principles emerging from those authorities in Re St Gregory's Armenian School Inc (2015) 109 ACSR 27; [2015] NSWSC 1465 at [34]-[35]: "34 In Tanning Research Laboratories Inc v O'Brien (1990) 169 CLR 332 at 339, Brennan and Dawson JJ observed that the principles that determine the enforceability of a liability to which a proof of debt relates are, in the main, the same as the principles which would be applied in an action brought directly against the company to enforce that liability. Their Honours also observed (at 340-341) that such proceedings are to be heard as a matter de novo, so that the Court must consider the plaintiff's claim and decide for itself as to the existence and amount of the debts, and described the role played by a liquidator or administrator in such an appeal as follows: 'In such a proceeding, a liquidator who defends his decision to reject a proof of debt is no longer acting in a quasi-judicial capacity; he is cast in the role of an adversary, defending the assets available for distribution against a liability which, according to the view he formed when acting quasi-judicially, is not legally enforceable. The liquidator may defend those assets against the creditor's claim on any ground on which the company might have defended the claim had it been sued by the creditor. … The issue in the proceeding is whether the liability referred to in the proof of debt is a true liability of the company enforceable against it. The issue is contested between the putative creditor on the one hand and the liquidator on the other; the liquidator is a party litigant. And none the less so though the liquidator is required to act fairly in conducting the litigation.' 35 A person appealing against rejection of a proof of debt must present a case which identifies an alleged debt or liability that corresponds with that originally sought to be conveyed by the proof of debt: Johnston v McGrath (2008) 67 ACSR 169 at [26]. The party appealing against the liquidator's decision to reject the proof of debt has the onus of showing that decision was wrong, and that question is determined by reference to the evidence before the Court when it considers whether or not to affirm the liquidator's decision: Westpac Banking Corp v Totterdell (1998) 20 WAR 150; 29 ACSR 448 at 451; Brodyn Pty Ltd (t/as Time Cost and Quality) v Dasein Constructions Pty Ltd [2004] NSWSC 1230 at [33]. Ms Taylor also points out that the liquidator may properly reject a proof of debt if a liability, although enforceable against an entity, is not a true liability of the entity in the sense that it is founded on an act or omission on the part of the entity which unjustly prejudices the interests of creditors or contributories in the assets available for distribution: Tanning Research Laboratories Inc v O'Brien above at 338 - 340; Re Jay-O-Bees Pty Ltd (in liq) [2004] NSWSC 818 (2004) 50 ACSR 565 at [35] - [45]; Re Young in his capacity as Liquidator of Great Wall Resources Pty Ltd (in liq); Capocchiano v Young [2013] NSWSC 879."
2. In this case, the Liquidator was aware of the hearing, had served affidavit evidence for the purpose of the hearing and had been notified by the plaintiff's solicitor that he was required for cross-examination. The Liquidator's solicitor informed the plaintiff's solicitor that the Liquidator did not intend to appear at the hearing. The Liquidator did not appear and his evidence was therefore not read.

Facts

1. The plaintiff relied on the affidavit of its solicitor, Ms Cecilia Rose, affirmed on 8 March 2021 and the affidavit of Ms Priscilla Raphael, a former director of the Company and a director of the plaintiff, affirmed on 12 May 2021. The following account of relevant factual matters is drawn from those affidavits, and from the Liquidator's description in his statutory report to creditors of the Company's operations and the circumstances in which it failed.
2. The Company was a special purpose vehicle incorporated on 20 April 2017 for the purpose of a joint venture between Alora Developments Pty Ltd (Alora) and Davies Property Developments Pty Ltd (Davies) to undertake a residential property development on land at 42 and 60 Greenacre Drive, Tahmoor, New South Wales (the Tahmoor land).
3. In May 2017, the Company entered into an option agreement for the purchase of that land. The option was for a period of 18 months, but was this subsequently extended to April 2019.
4. On 18 July 2017, the Company entered into a Shareholders Agreement with its two shareholders, Alora and Davies.
5. Clause 2 of the Shareholders Agreement provided that the agreement applied only to the Tahmoor land and that, on "completion of the development or the sale" of that land, any future property to be developed by the Company would require a new shareholders agreement.
6. Clause 16 of the Shareholders Agreement provided: "The parties agree that Alora (or its nominee) shall be entitled to be paid fees for project managing the Company's property development(s) including but not limited to managing the development application process. The fees payable shall be calculated at $8,000 plus GST per lot, to be paid as an expense by the Company to Alora (or its nominee), prior to the disbursement of funds via dividends or profit share between the Shareholders. The Company shall sign a development agreement on terms reasonably required by Alora, if required by Alora."
7. There is no evidence of any development agreement having been entered into between the Company and Alora.
8. Development consent was issued on 2 August 2018 for the subdivision of the Tahmoor land into 63 lots, public road construction, demolition of existing structures and associated works.
9. On 5 February 2019, the plaintiff issued two invoices to the Company: 1. an invoice for a development management fee of $8,000 in respect of 63 lots, totalling $554,400 (including GST); and 2. a further invoice for "DM Fees for CC, Marketing" of $5,000 in respect of 63 lots, totalling $346,500 (including GST).
10. At some stage prior to April 2019, the Company exercised its option to purchase the land under the agreement referred to at [8] above and a contract was prepared for the sale of the Tahmoor land to the Company. However, the Company was unable to raise sufficient funds to complete its acquisition of the land by mid-2019. It is not clear from the evidence whether the contract was entered into and terminated by the vendors due to the Company's inability to complete, or whether the Company failed to enter into the contract that had been prepared and the option expired. In any event, the Company ceased trading without having acquired the Tahmoor land and was unable to develop or on-sell the land with the development consent. The construction certificate was never issued.
11. This Court made orders winding up the Company in insolvency and appointing the Liquidator on 6 May 2020.
12. On 5 June 2020, the plaintiff submitted a formal proof of debt in the winding up of the Company for $1,084,983.82. The proof of debt did not provide particulars of the alleged debts, but merely attached various invoices, ledgers and an affidavit of Mr David Raphael affirmed on 4 May 2020 in the winding up proceedings. I note that Mr Raphael's affidavit was not read at the hearing of these proceedings.
13. In the course of adjudicating the proof of debt, the Liquidator prepared a breakdown of the plaintiff's claim which the plaintiff adopted in oral submissions during the hearing. The breakdown included the following claims which were rejected by the Liquidator and are the subject of the plaintiff's claims for relief in these proceedings (as amended informally during the hearing): 1. development management fees in respect of 63 lots at $8,000 per lot, totalling $554,400 including GST (being the fees that were the subject of the plaintiff's first invoice referred to at [14] above); 2. "DM Fees for CC, Marketing" for 63 lots at $5,000 per lot, totalling $346,500 including GST (being the fees that were the subject of the plaintiff's second invoice referred to at [14] above); and 3. various claims for reimbursement of expenses said to have been paid by the plaintiff on behalf of the Company totalling $17,265.
14. Those three categories of claims were the only claims addressed in the plaintiff's evidence and submissions in these proceedings. They amount to $918,165.
15. The Liquidator admitted the plaintiff's proof of debt in the amount of $166,599.62. The claims admitted related to $135,628 owing by the Company to the plaintiff in respect of a loan, $28,897 of expenses paid by the plaintiff on behalf of the Company (the specific expenses comprising this amount were not identified or itemised in the proof of debt or in the liquidator's preliminary or final ruling), and further itemised expenses for a Xero accounting subscription and Facebook marketing paid for by the plaintiff on behalf of the Company totalling $2,074.62.

Observations about the evidence relied on by the plaintiff

1. As the authorities referred to above make plain, the plaintiff bears the onus of: 1. establishing an alleged debt of the Company that corresponds with debts claimed in its proof of debt and rejected by the Liquidator; and 2. demonstrating that the Liquidator's decision rejecting the claim in respect of those debts was wrong.
2. In order to demonstrate that the Liquidator's decision was wrong, the plaintiff must adduce evidence establishing that the debts in question were true liabilities of the Company as at the date of winding up. The Court must be satisfied of this on the balance of probabilities before the Liquidator's decision rejecting the proof of debt will be set aside. That requires the Court to feel actual persuasion that the alleged debts were true liabilities of the Company: Warner v Hung; In the matter of Bellpac Pty Ltd (receivers and managers appointed) (in liquidation) (No. 2) (2011) 297 ALR 56; [2011] FCA 1123 at [48].
3. Although counsel for the plaintiff acknowledged that the plaintiff bore the onus of establishing that the alleged debts were true liabilities of the Company, the substance of the submissions proceeded for the most part on the basis of an erroneous assumption that it was for the Liquidator to adduce evidence that the alleged debts were not true liabilities of the Company and that the Court must necessarily accept statements made by the plaintiff's solicitors in correspondence with the Liquidator and invoices issued by the plaintiff to the Company as conclusive evidence of the Company's liability in the absence of any contrary evidence from the Liquidator. In my opinion, statements made in correspondence by the plaintiff's solicitor are evidence of nothing more than the plaintiff's instructions to the solicitor. Invoices issued by the plaintiff to the Company are evidence that the plaintiff charged the amount in the invoice to the Company for work or services described in the invoice that the plaintiff claimed to have performed. That fact is relevant to, but not necessarily conclusive of, the question whether the amount in the invoice was a true liability of the Company to the plaintiff. By themselves, invoices do not establish that the amount charged corresponds with an amount included in the plaintiff's proof of debt and rejected by the Liquidator.

Claim for development management fees

1. As referred to above, a development fee of $8,000 per lot was payable by the Company to Alora (or its nominee) pursuant to clause 16 of the Shareholders Agreement for project managing the Company's development of the Tahmoor land, including but not limited to managing the development application process. Clause 16 provided that those fees would be paid to Alora (or its nominee) as an expense of the Company prior to the disbursement of funds via dividends or profit share between the Alora and Davies as the shareholders.
2. Ms Raphael deposed that: "The property development at the time the Shareholders Agreement was signed consisted of obtaining a development application. Alora was tasked with obtaining the development application (see clause 16 of the Shareholders Agreement). We regarded the obtaining of the development consent as the success of the development. It was never the intention of the parties to physically develop the Land. It was anticipated that the land would be sold with the benefit of the development consent. Davies Developments Pty Ltd was tasked with finding investors for the project and obtaining all funds for the operation of the Company. Alora was tasked with obtaining the development consent, and later a construction certificate. Alora was not tasked with negotiating the purchase of the Land, as that was an issue that arose after the Shareholders Agreement was executed. Alora did participate in the negotiations to try to obtain the Land however the vendors did not agree to reasonable terms to complete the contract."
3. I reject Ms Raphael's evidence that the purchase of the Tahmoor land was an issue that arose after the Shareholders Agreement was executed. The purchase of the land was clearly integral to the development plan that Ms Raphael describes as involving obtaining development consent and on-selling the land with the development consent. The Company's intended purchase of the Tahmoor land was the subject of the option agreement that the Company entered into prior to the Shareholders Agreement.
4. I also reject Ms Raphael's evidence that "we" regarded the obtaining the development consent as the success of the development. That evidence is fundamentally inconsistent with her evidence that the parties intended to sell the Tahmoor land with the development consent. That intention could not be achieved without the Company acquiring the land in addition to obtaining development consent. The Company never acquired the Tahmoor land.
5. Counsel for the plaintiff submitted that successful development of the land occurred, entitling Alora (or its nominee) to the fee of $8,000 per lot, on the Company exercising the option to acquire the land and the development consent being issued. I reject that submission for the same reasons as I have rejected Ms Raphael's evidence referred to above.
6. I reject that submission as inconsistent with clause 16 of the Shareholders Agreement, read as a whole in the manner in which it would have been understood by a reasonable businessperson with knowledge of circumstances known to all parties at the time the agreement as entered into. Those circumstances are that the object of the agreement was to govern the relationship between the shareholders and the Company, that the Company was established as the corporate vehicle for a joint venture between the shareholders to develop the Tahmoor land, that this was the sole business of the Company, and that the clause 14(i) of the Shareholders Agreement expressly provided that the shareholders had no obligation to fund the Company. In my opinion, a reasonable businessperson with knowledge of those matters would have understood clause 16 of the Shareholders Agreement to mean that the development management fee was not payable by the Company unless and until all services necessary to project manage the development had been completed (consistent with the express words of the first sentence of clause 16) and there were funds available for distribution to the shareholders as profits or dividends. Counsel for the plaintiff submitted that the second sentence of clause 16 means nothing more than that the development management fee was an expense of the Company. I reject that submission. The sentence does indeed stipulate that the fee is an expense of the Company (as opposed to Davies as the other shareholder). However, the sentence goes further and stipulates that the fee is to be paid prior to distribution of dividends or profits to shareholders. That aspect of the sentence is superfluous and has no work to do, unless it is understood as stipulating that the development management fee will not be paid unless and until the Company has generated profits to be distributed to shareholders, and that the fee must then be paid before those profits are distributed. In my opinion, that is how a reasonable businessperson would have understood clause 16 in the context of the matters that I have referred to: Lawrence v Ciantar [2020] NSWCA 89 at [98]-[101] and the authorities there referred to.
7. Ms Raphael gave evidence about shareholders agreements entered into between Alora and Davies in relation to three different special purpose companies that were established as the corporate vehicle for different property development joint ventures between Alora and Davies. Those shareholders agreements included clauses in terms similar to clause 16 of the Shareholders Agreement between the Company, Alora and Davies. Ms Raphael gave evidence that development management fees were paid to Alora under those clauses of those agreements, and that those payments occurred after the approval of the development application in relation to two of the three developments. In the case of the third development, the development management fee was paid to Alora after initial work was done for the development application, even though the application was not pursued.
8. I do not regard this evidence as having any relevance to the question whether development management fees of $8,000 per lot in relation to the Tahmoor development was a liability of the Company to the plaintiff immediately upon the development consent being issued for the subdivision of the land as the plaintiff contends. That question turns on the proper construction of clause 16 of the Shareholders Agreement in the events that happened. Only one of the payments under the previous agreements referred to above was made to Alora before the Shareholders Agreement relating to the Tahmoor development was entered into. It is only that payment which is potentially relevant to the construction of clause 16 of the Shareholders Agreement as a circumstance known to both parties at the time they entered into the Shareholders Agreement. There is no evidence of the circumstances in which that payment was made under the earlier shareholders agreement relating to the earlier development, except that the payment was made "after the approval of the development application". In particular, there is no evidence about the scope of that development, whether or when the land was on-sold by the joint venture vehicle once development consent was obtained, or whether there were profits available for distribution to Alora and Davies as shareholders in the relevant special purpose company at the time the development management fee was paid to Alora.
9. Ms Raphael's evidence also addressed the subjective intentions of the directors of Alora and Davies in relation to the development management fee in respect of other developments and in respect of the Tahmoor land. Those subjective intentions are irrelevant to the question of whether the Company was liable to pay a development management fee to the plaintiff under clause 16 of the Shareholders Agreement in the events that happened.
10. For those reasons, the plaintiff has failed to establish that the development management fee of $554,400 (including GST) invoiced on 5 February 2019 was a liability of the Company to Alora (or to the plaintiff as Alora's nominee) in circumstances where the Company had not acquired the land that was the subject of the intended development and the development consent, and the Company was not in a position to disburse any funds to its shareholders as dividends or profit share.
11. That conclusion means that is not necessary to address the plaintiff's failure to adduce any evidence of what work was in fact done by Alora or the plaintiff in managing the Company's development of the Tahmoor land. Ms Raphael's affidavit was silent about this, referring only to the work allocated to Alora and not describing any work that was in fact done. Nor was the work described in the invoice issued to the Company on 5 February 2019. The invoice simply stipulated a total amount for "development management fees" at the rate of $8,000 per lot for 63 lots.

Claim for marketing fees

1. This aspect of the plaintiff's proof of debt related to the second invoice issued on 5 February 2019 referred to at [14] above.
2. Ms Raphael gave evidence that, at a meeting between representatives of Alora and Davies on 5 February 2019, "it was agreed by both parties that there would be a further invoice issued by Alora Property Group Pty Ltd of $5,000.00 + GST per lot for work done for this further section of the Development Management. By that time, the development consent had been obtained, and in addition, work was being undertaken by Alora to obtain a construction certificate".
3. Ms Raphael also gave evidence of the tasks undertaken by Alora to market the subdivided lots and stated that the work was time consuming and detailed. Ms Raphael did not describe the work undertaken by Alora in relation to the construction certificate, but stated that it was "significant" and "involved managing consultants and project timelines similar to that of obtaining development consent."
4. Ms Raphael's affidavit referred to numerous email communications between representatives of Alora and representatives of Davies in the period from February 2019. None of those email communications refer to an additional fee of $5,000 per lot to be paid to Alora (or its nominee) in addition to the fee of $8,000 per lot specified in clause 16 the Shareholders Agreement.
5. It will be recalled that clause 16 of the Shareholders Agreement described the fee of $8,000 per lot as being for project managing the Company's property development, "including but not limited to the development application process". Ms Raphael's evidence that an agreement was reached in February 2019 to pay an additional $5,000 per lot for "this further section of Development Management" does not rise above the level of bare assertion. There is no evidence of what was said at the meeting to which she refers to constitute the alleged agreement. There is no evidence of any consideration moving from Alora (or the plaintiff) for an additional payment of $5,000 per lot in circumstances where Alora was already obliged to project manage the whole of the development and the Shareholders Agreement did not limit the scope of the development to on-selling the Tahmoor land with development consent. Nor is there any evidence of any circumstances existing as at February 2019 that resulted in the shareholders allegedly agreeing to change their agreement (and the Company's agreement) in clause 16 of the Shareholders Agreement that Alora would be paid $8,000 per lot for project managing the whole of the development. Nor is there any evidence that the meeting on 5 February 2019 was a general meeting of the Company. It is not described as such in Ms Raphael's affidavit or in the outlook invitation to which she refers as the communication by which the meeting was arranged. There is no apparent reason why the plaintiff could not have adduced evidence of these matters, if they existed. Having regard to the evidence as a whole, and particularly the terms of clause 16 of the Shareholders Agreement, Ms Raphael's bare assertion does not satisfy me on the balance of probabilities that the Company had a liability to pay Alora (or the plaintiff as its nominee) an additional fee of $5,000 per lot over and above the $8,000 per lot referred to in clause 16 of the Shareholders Agreement.

Claim for expenses paid by the plaintiff on behalf of the Company

1. The plaintiff failed to identify the specific expenses comprising the alleged debts totalling $17,265 in respect of which the Liquidator rejected the plaintiff's proof of debt.
2. The plaintiff relied on a general ledger for the Company that recorded a net debit amount of $28,897 for expenses paid by the plaintiff on behalf of the Company during the period from 1 July 2016 to 30 June 2020. However, the Liquidator admitted the plaintiff's proof of debt insofar as it relates to this amount of $28,897: see [20] above. No evidence was adduced casting doubt on the reliability of the accuracy of the ledger, which is a business record of the Company. Indeed, the plaintiff relied on it as an accurate record; citing In the matter of Fixed Interest Pty Ltd [2017] NSWSC 1872 at [22]-[23]. The ledger supports the Liquidator's decision to admit that part of the plaintiff's proof of debt that related to $28,897 of expenses incurred on behalf of the Company. It provides no support for the plaintiff's contention in these proceedings that it incurred further expenses on behalf of the Company for which it is entitled to be reimbursed.
3. The plaintiff also relied on a list of five expenses totalling $46,161.82 paid by the plaintiff on behalf of the Company. Counsel for the plaintiff referred to this document as a ledger, but it is prima facie merely a list of expenses and the amounts of those expenses. It contains no debit or credit entries. In correspondence between the plaintiff's solicitors and the Liquidator in relation to the proof of debt, the document was described as a summary of expenses and was not described as a ledger. This may explain the discrepancy between the Company's ledger referred to immediately above and the $46,161.82 amount in the plaintiff's summary. The Company's ledger accounts for debits and credits between the two companies, whereas the plaintiff's document simply lists expenses. The summary of expenses casts no light on which, if any, of the expenses listed correspond with the $17,265 in respect of which the Liquidator rejected the plaintiff's proof of debt.
4. During the hearing, counsel for the plaintiff was reminded of the requirement to identify specifically the payments that the plaintiff claimed to have made on behalf of the Company that were included in the plaintiff's proof of debt and rejected by the Liquidator in his adjudication that is challenged in these proceedings. This exercise was not undertaken. The plaintiff merely directed the Court to a bundle of invoices, some of which correspond with the plaintiff's summary of expenses document and some of which do not, without making any attempt to identify the invoices that comprise the $17,265 in issue, to demonstrate that they were included in the plaintiff's proof of debt, to demonstrate that they are included in the claims rejected by the Liquidator, and to demonstrate that they in fact represent true liabilities of the Company to the plaintiff.
5. For those reasons, the plaintiff has failed to demonstrate that the Liquidator wrongly rejected $17,265 of its proof of debt.

Conclusion and orders

1. For the foregoing reasons, the plaintiff has failed to establish that the Liquidator was wrong in any aspect of his decision challenged by the plaintiff. The proceedings will therefore be dismissed.
2. Ordinarily, costs would follow the event. However, the Liquidator did not appear and seek any order for costs. The only costs that the Liquidator appears to have incurred are the costs of preparing his affidavit that was filed and served, but was not read due to the Liquidator's decision not to appear at the hearing. There is no reason why the plaintiff should pay those costs.
3. The order of the Court is as follows: 1. Order that the proceedings are dismissed with no order as to costs.

Amendments 08 December 2021 - typographical error in cover page. 'it's' to 'its' 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: 08 December 2021