McLeod v Lane Cove Municipal Council

Supreme Court of NSW|2019-11-07|Before: Ierace J, Brereton J

Solicitors: O'Neill Partners (Defendant) File Number(s): 2019/191450 Decision under appeal Court or tribunal: Local Court Jurisdiction: Civil Date of Decision: 23 May 2019 Before: Atkinson LCM File Number(s): 2018/99755

Judgment

HIS HONOUR: By a summons filed on 20 June 2019, the plaintiff, David McLeod, seeks orders that a judgment made in favour of the defendant, Lane Cove Municipal Council, that was entered in the Local Court on 23 May 2019 by Atkinson LCM, be set aside and instead be entered in favour of him, as well as an order for costs.

The Local Court judgment

The magistrate found that the key issue in the case was when the plaintiff was entitled to take action to enforce the guarantee. The magistrate was satisfied that a reasonable person would have understood the terms of settlement to require the certificate of completion of works to be issued, rather than served, for the two-year period to start running. The magistrate found that the certificate of completion of works was issued on 12 December 2016 which, had Epitome not gone into liquidation, would have allowed it until 11 December 2018 to pay what was due pursuant to the terms of settlement. The magistrate was also satisfied that the terms of settlement made it clear that Epitome owed the defendant the amount in dispute, although it deferred payment pending the completion of works, the issue of a notice and the passage of two years from that date.
The magistrate concluded: "39 Once Epitome went into liquidation, I am satisfied on the balance of probabilities that s.553 [of the Corporations Act] converted its liability under the terms of settlement into a provable debt and that a proof of debt could be lodged even though there had been no breach of the terms of settlement at the time of the winding up order. 40 Section 553 does not state when the proof of debt has to be lodged. Further, s.553D allows for both the formal and informal proof of debts. Formal proof is only required when the liquidator requires it to be formally proved and there is no evidence that Epitome's liquidator required formal proof of the debt in issue in these proceedings. 41 … 42 Although [the plaintiff] has submitted that the judgment entered on 12 December 2017 is invalid as it was entered contrary to the terms of settlement, there is no evidence of any steps being taken to have it set aside under UCPR 39.15 and it remains a judgment of this Court. 43 [The plaintiff] argued that there could not be a debt without a proof of debt being lodged and that no proof of debt could be lodged as there is no debt. 44 As I indicated above, I do not accept that there was no debt. 45 Although [the defendant] did not explicitly submit that the notice to the liquidator was an informal proof of debt, in my view, the notice and annexed judgment could be taken to be an informal proof of debt. It set out the amount that Epitome was liable to pay to [the defendant]. The notice was consistent with Brereton J's orders concerning leave to proceed against Epitome [and] enclosed a copy of the judgment that had been entered against the company. It did not purport to foreshadow the taking of enforcement action against the company. Instead, it stated that action would be taken to recover the money pursuant to the guarantee. 46 [The plaintiff] guaranteed all moneys payable by or recoverable from Epitome arising out of the Sutherland local court proceedings and judgment entered therein. The judgment that was entered on 12 December 2017 clearly arose from the Sutherland proceedings. Epitome has failed to pay the amount that it was ordered to pay. Accordingly, I find on the balance of probabilities that [the plaintiff] is bound by the terms of his guarantee to pay the money owed by Epitome. 47 Accordingly, I am satisfied on the balance of probabilities that [the defendant] has proven its claim and I give judgment accordingly …"

The relevant statutory provisions

The Local Court Act 2007 (NSW) provides, relevantly: "39 Appeals as of right (1) A party to proceedings before the Court sitting in its General Division who is dissatisfied with a judgment or order of the Court may appeal to the Supreme Court, but only on a question of law. (2) … 40 Appeals requiring leave (1) A party to proceedings before the Court sitting in its General Division who is dissatisfied with a judgment or order of the Court on a ground that involves a question of mixed law and fact may appeal to the Supreme Court but only by leave of the Supreme Court. (2) … 41 Determination of appeals (1) The Supreme Court may determine an appeal made under section 39(1) or 40: (a) by varying the terms of the judgment or order, or (b) by setting aside the judgment or order, or (c) by setting aside the judgment or order and remitting the matter to the Local Court for determination in accordance with the Supreme Court's directions, or (d) by dismissing the appeal. (2) …"

The grounds of appeal

In his summons, the plaintiff advanced six grounds. Grounds 1 to 4 concerned the magistrate's interpretation and application of s 553 of the Corporations Act and are considered together. Ground 5 was not developed in submissions and appears to be an acknowledgement by the plaintiff of a finding by the magistrate that the plaintiff submits is of assistance to its case, rather than a ground of appeal. Accordingly, I disregard it as a ground of appeal.
The grounds of appeal are as follows: "(1) Her Honour erred in law by finding that S. 553 Corporations Law 2001 (C'th) applied to the subject settlement agreement dated 26 August 2013. (2) Alternatively to 1., Her Honour erred in law by finding that S. 553 Corporations Law 2001 (C'th) converted the principal liability under the settlement agreement into a provable debt, by failing to find that the 'provable debt' had been proved when such was required in order to have effect. (3) Alternatively and additionally to 1. and 2., Her Honour erred in law by finding that S. 553 Corporations Law 2001 (C'th) converted the principal liability under the settlement agreement into a provable debt, by failing to find the time at which the provable debt was required to be proved. (4) It was an error in law to fail to find that a 'provable debt' is converted into a 'debt' capable of being the subject of a judgement without it being accepted or rejected by a liquidator prior. (5) Her Honour found that, in the absence of the liquidation of the principal debtor, Epitome Holdings Pty Ltd, on 25 March 2015, the plaintiff (as guarantor) would not have had to pay the amount due under the settlement deed until at least 12 December 2018, and perhaps 18 December 2019. (6) It was an error in law to allow reliance on the judgement entered in the Local Court at Sutherland when that judgement was entered; (a) in accordance with the Consent Orders of August 2013, when; (i) those Consent Orders had not been breached as at the time, as they were an independent agreement to the operation of S. 553; (ii) they were not granted by consent in the terms used; (b) In accordance with leave of the Supreme Court, the right to the judgment had not been determined or validated. Merely leave to file in accordance with s 471B of the Corporations Act 2001 ("C'th"); (c) Any leave to file such orders did not validate them; (d) The judgement must be for the basis of an unpaid debt by Epitome Holdings Pty Ltd, a debt which was not payable by it until at least 17 December 2018."
I am satisfied that each of the remaining grounds raises issues of law and therefore leave is not required.
Tendered on the hearing was an affidavit of the defendant's solicitor, which annexed the written submissions of the parties that had been handed up in the Local Court hearing. The defendant is content to rely on its submissions that were handed up below, with little by way of additional submissions.

The parties' submissions

In his written submissions, the plaintiff accepted that "the central matter in contention … is whether a payable debt existed at the time of commencement of these proceedings". Clause 5(c) of the terms of settlement allowed a two-year period for Epitome to pay the debt from the time of "issue" of the certificate of completion. The certificate of completion of works was "created" December 2016 and not served on Epitome until 22 December 2017. If "issue" meant "creation", the two-year period expired in December 2018. [2] If it meant service, that period expired on 23 December 2019. The plaintiff submitted that "issue" must denote awareness of the existence of the certificate and therefore receipt of it by Epitome, but either way, the claim in the Local Court, which commenced with the filing of the statement of claim on 29 March 2018, was premature.
The plaintiff submitted that, as it was a future or contingent debt, s 553 applies. However, the magistrate erred by accepting that s 553 "changed the nature of the claim", as s 553 does not "convert" debts which have not arisen. Its application is limited, as the heading of Pt 5.6 of the Corporations Act and the sub-heading suggests, to "Debts or claims that are provable in winding up", such as when a claim is admissible to proof, but a liquidator rejects a proof of debt: see Re National Express Group Australia (Swanston Trams) Pty Ltd v Smith (2004) 209 ALR 694; [2004] FCA 1155; and Wallace-Smith v Thiess Infraco (Swanston) Pty Ltd (2005) 218 ALR 1; [2005] FCAFC 49.
The plaintiff submitted that it appears to be common ground that this debt was not proved, informally or otherwise, and s 553 could not remedy that. Accordingly, the Local Court judgment of 22 December 2017 was invalid, since no cause of action had yet arisen under the terms of settlement. The magistrate had not ruled on the 22 December 2017 judgment, only the right to file it. The guarantee did not operate, because the "provable claim" was not proved and had not been discounted.
In oral submissions, the plaintiff contended that s 553 rendered the debt provable, but not proved. The debt was not proved thereafter, but could have been, by lodging a formal proof of debt with the liquidator.
As noted, the defendant relied upon the written submissions that it had handed up at the Local Court hearing. On the issue of s 553, the defendant's submissions were: "14. As at the date of commencement of the winding up, on 25 March 2014 the liability under the Terms of Settlement entered into between the Plaintiff and the Company: (a) was clearly an identifiable amount payable in the future according to the timing of the completion: of works as reflected. (b) was converted by operation of s. 553 of the Corporations Act 2001 into a provable debt claimable against the Company in the winding up: Ex parte Llynvi Coal and Iron Co; Re Hyde (1871) 7 LR Ch App 28 at 31-2 and Re National Express Group Australia (Swanston Trams) Pty Ltd (2004) 50 ACSR 434; [2004] FCA 1155, approved on appeal Wallis-Smith v Thiess lnfraco (Swanston) Pty Ltd (2005) 218 ALR 1; [2005] FCAFC 49. (d) [3] The Company was then and thereafter not in a position to satisfy any obligation towards the Plaintiff. (e) Liability to satisfy the obligations of the Company under the terms of the Deed of Guarantee arose as against the Defendant. 15. The ability to lodge a proof of debt and participate in the winding up in respect of that liability existed even though a formal breach of the Terms of Settlement had not occurred at the time of the winding up order: Re Asphaltic Wood Pavement Co (Lee & Chapman's case) (1885) LR 30 Ch D 216 and Wallis-Smith v Thiess lnfraco (Swanston) Pty Ltd (2005) 218 ALR 1; [2005] FCAFC 49 at [47] per French J; 16. Because of the operation of s 533 of the Corporations Act 2001 as to the date for proof [of] debt and the impossibility on the part of the Company to perform the [remaining] obligations under the Terms of Settlement it is submitted that there is no impediment to the Plaintiff seeking recovery from the Defendant under the Deed of Guarantee for the amount claimed and the subject of the present judgment. 17. Consequently, in proceedings in the Local Court at Sutherland, leave having been obtained under the provisions of s. 471B of the Corporations Act 2001 to do so in terms of the bar otherwise existing against the Council to recover a judgement for the debt, a judgement was obtained in the Local Court of New South Wales against the Company and remains unsatisfied."
In this application, the plaintiff relied upon different provisions of the Corporations Act to advance an argument for the first time. The relevant provisions are as follows: "Subdivision B - Computation of debts and claims 554 General rule - compute amount as at relevant date (1) The amount of a debt or claim of a company (including a debt or claim that is for or includes interest) is to be computed for the purposes of the winding up as at the relevant date. (2) Subsection (1) does not apply to an amount admissible to proof under subsection 553(2). … 554B Discounting of debts payable after relevant date The amount of a debt that is admissible to proof but that, as at the relevant date, was not payable by the company until an ascertained or ascertainable date (the future date) after the relevant date is the amount payable on the future date reduced by the amount of the discount worked out in accordance with the regulations."
The plaintiff submitted that s 554B applies to provable debts of the subject kind and, pursuant to its terms, the value of the debt should have been discounted at the rate of 8 per cent per annum, which had not occurred. Regulation 5.6.44 of the Corporations Regulations 2001 (Cth) provides that the rate, for the purposes of s 554B, is 8 per cent per year, "calculated from the declaration of the dividend to the time when the debt would have become payable according to the terms on which it was contracted". It was submitted that since it appears that there was no declaration of the dividend, apparently because no creditor had lodged a proof of debt, the defendant would have difficulty complying with s 554. Alternatively, s 554 requires that the debt is to be calculated as at the "relevant date", which the plaintiff submitted would have been March 2014.

Consideration

I accept that cl 5(c) of the terms of settlement is to be interpreted as meaning that the time runs from the "issue" of the certificate of completion of the upgrade works, but that there is an implication that within a reasonable time, Epitome is to be made aware of the fact of its issue. Accordingly, the two-year period did not commence to run until 22 December 2017 when, following the re-registration of Epitome, notice was served upon the liquidator.
The only contingency associated with the debt owed to the defendant was the passage of two years from the date of the issue of the certificate of completion; the quantum of debt had been agreed between the parties in the terms of settlement. In Re National Express Group Australia (Swanston Trams) Pty Ltd v Smith, Finkelstein J reviewed the applicable principles to the entitlement to "contingent" debts or claims in the insolvency provisions of the Corporations Act. His Honour reviewed s 553 and noted its genesis in bankruptcy law. In the course of that review, his Honour stated: "[9] Since 1869 it has never been doubted that if at the date of bankruptcy the bankrupt was bound by an executory contract the creditor could prove as a contingent creditor for any losses that he might suffer from a past or future breach of that contract. This accords with the evident purpose of bankruptcy which is to permit all creditors to share in the distribution of the assets of the bankrupt and to leave the debtor thereafter free from the liability of previous obligations. As Lord Halsbury observed in Hardy v Fothergill (1888) LR 13 AC 351 at 355: '[T]he legislature has been engaged in the effort to exhaust every conceivable possibility of liability under which a bankrupt might be, to make it provable in bankruptcy against his estate and relieve the bankrupt for the future from any liability in respect thereof'. It would be most unfortunate if persons entitled to the performance of executory agreements on the part of bankrupts were excluded from participation from bankrupt estates and the bankrupts themselves as a necessary corollary were left still subject to action for non-performance in the future although without the property or credit often necessary to enable them to perform those obligations. The categories of claims which are admissible should be as wide as possible so that the financial affairs of the bankrupt are dealt with comprehensively. [10] The view that a future breach of contract could be proved as a contingent claim not only accords with principle, it conforms to the opinions of textbook writers and is supported by the cases. Hardy v Fothergill was a case which arose under the Bankruptcy Act 1869. There the bankrupt, an assignee of a leasehold estate, covenanted to indemnify the lessees against damages for breach of their covenants to repair with the lessors. At the time of the bankruptcy, the covenant to indemnify still had 8 years to run. The lessees did not tender any proof as to the bankrupt's possible liability at the end of their covenant. When the lessor sued the lessee on the covenants for repair, the bankrupt resisted being joined as a third party on a claim for indemnity on the basis that he had been discharged from bankruptcy. The House of Lords agreed as the liability could have been proven in the bankruptcy. According to the Law Lords the only cases which fell outside the proof provisions were: (1) those where the court considered that it was impossible to estimate in any way the amount of the claimant's damage; and (2) possibly, contracts which had an object different from the payment of money and any others for which the proper remedy was an injunction or specific performance."
Neither of those two qualifications arise in the circumstances of this case. Finkelstein J noted, at [13]: "The English provisions allowing proofs by contingent creditors were adopted in Australia with little change from their English counterparts …"
On appeal, in Wallace-Smith v Thiess Infraco (Swanston) Pty Ltd, French J, as his Honour then was, referred to the review of relevant law that had been conducted by Finkelstein J, and observed, at [47]: "His Honour reviewed case law and textbook writings on the topic of contingent debts in bankruptcy and corporate insolvency. He concluded that a claimable debt would arise when, by reason of a company's insolvency, it became impossible for it to perform a contract. This was so notwithstanding that a formal breach of the contract had not occurred at the time of the winding up order - Re Asphaltic Wood Pavement Co (1885) LR 30 Ch D 216 at 224 (Lee & Chapman's case)."
The nature of the debt agreed in the terms of settlement was, in my opinion, one that comes within the ambit of a contingent debt that was considered by Finkelstein J and found to be within the contemplation of the terms of s 553.
I concur with the magistrate's reasoning and conclusion that the effect of s 553 was to convert the debt owed by Epitome to the defendant into a right of proof of it against Epitome, even though the two-year period had not elapsed. The defendant obtained the 2017 Sutherland Local Court judgment, which was not challenged by Epitome or the plaintiff, and was accepted by the liquidator as a sufficient proof of debt, without requiring it to be formally proved.
Having regard to the terms of the deed of guarantee between the parties, the relevant parts of which were summarised by Brereton J in In the matter of Epitome Holdings Pty Ltd at [4] of his Honour's judgment, the plaintiff became liable for the debt, as determined by the magistrate.
In relation to ground 6, I agree with the defendant's submission that, in the absence of an application that the 2017 Sutherland Local Court judgment be set aside, the magistrate was correct to accept it on its face.
Accordingly, having regard to the plaintiff's five grounds of appeal, I find that the magistrate did not err in law in respect of her findings.

Orders

I make the following orders: 1. The summons filed 20 June 2019 is dismissed; 2. The plaintiff to pay the defendant's costs.

Endnotes

Having regard to the primary documents and other amounts in the same sub-paragraph and par (3), the amount should be "$8,500".
The dates in the plaintiff's submissions were inconsistent with the evidence. Whereas the earlier notice was dated 12 December 2016, the plaintiff referred to it as being dated 16 December 2016. The plaintiff said that two years from that date expired on 23 December 2018, presumably meaning 11 December 2018.
There was no "14(c)" in the defendant's submissions. 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: 13 November 2020

Corporations Act 2001(NSW)

At a glance

Court

Decision date

Before

Catchwords

Source

Catchwords

Judgment (10 paragraphs)

Parties

Legislation Cited (4)

Cases Cited (5)