McPherson Thom & Co v Coomb

Supreme Court of NSW|2013-08-07|Before: Hammerschlag J

background 1HIS HONOUR: This is a four cornered interpleader contest about who is entitled to $217,481.72 held by the plaintiff, the New South Wales Land and Housing Corporation ("Housing"), in a retention fund ("the fund") which, by agreement between all interested parties, will be disbursed as ordered by the Court. 2The facts are not in dispute. Questions of principle are involved. 3In about May 2011, August 2011 and November 2011 respectively, Housing entered into contracts with DJ's Home and Property Maintenance Services Pty Ltd ("DJ's") (now in liquidation) under which DJ's carried out repair and maintenance work on properties owned by Housing at Wilcannia, Weilmoringle and Bourke in the State of New South Wales. As at 1 June 2012 Housing owed DJ's a net amount of $217,481.72 for work done under the contracts. 4On 13 June 2013 DJ's was placed under a creditors' voluntary winding up. R. Moody and A. Barnden were appointed liquidators ("the Liquidators"). By all accounts there are about 40 creditors in DJ's owed in total some $2 M and the only potential asset available for distribution is the fund. 5The second defendant, Mr Zed Dujkovic ("Zed"), a licensed builder from Dubbo, was a sub-contractor retained by DJ's and is owed money for work done. 6The third defendant, Phontos Legal ("Phontos"), are solicitors who did work for Zed in claims against DJ's. 7The fourth defendant, YHY Building Services Pty Ltd ("YHY") is a building and maintenance contractor, also retained by DJ's as a sub-contractor and also owed money for work done. 8The fifth defendant did not press its claim.

The relevant statutory enactments 9Resolution of the issues turns on various statutory enactments which are appropriate to set out here.

The Corporations Act 2001 (Cth) 10Section 500(1) of the Corporations Act 2001 (Cth) ("the Corporations Act") provides: Any attachment, sequestration, distress or execution put in force against the property of the company after the passing of the resolution for voluntary winding up is void. 11Section 501 of the Corporations Act provides: Subject to the provisions of this Act as to preferential payments, the property of a company must, on its winding up, be applied in satisfaction of its liabilities equally and, subject to that application, must, unless the company's constitution otherwise provides, be distributed among the members according to their rights and interests in the company. 12Section 569(1) of the Corporations Act provides: Where: (a) a creditor has issued execution against property of a company, or instituted proceedings to attach a debt due to a company or to enforce a charge or a charging order against property of a company, within 6 months immediately before the commencement of the winding up; and (b) the company commences to be wound up; the creditor must pay to the liquidator an amount equal to the amount (if any) received by the creditor as a result of the execution, attachment or enforcement of the charge or the charging order, less an amount in respect of the costs of the execution, attachment or enforcement of the charge or the charging order, being an amount agreed between the creditor and the liquidator or, if no agreement is reached, an amount equal to the taxed cost of that execution, attachment or enforcement.

The Building and Construction Industry Security of Payment Act 1999 (NSW) 13The Building and Construction Industry Security of Payment Act 1999 (NSW) ("the SoP Act") contains provisions under which a person who undertakes construction work under a construction contract is entitled to receive, and is able to recover, progress payments. It contains provisions for the making of progress claims and for their adjudication by eligible adjudicators who are appointed by an authorised nominating authority. 14Under s 24 of the SoP Act, if a respondent to a payment claim fails to pay an adjudicated amount, the claimant may obtain from the authorised nominating authority an adjudication certificate which, under s 25, may be filed as a judgment for a debt in any court of competent jurisdiction and is enforceable accordingly. 15Section 26A of the SoP Act provides: (1)A claimant who has made an adjudication application for a payment claim can require a principal contractor for the claim to retain sufficient money to cover the claim out of money that is or becomes payable by the principal contractor to the respondent. (2)Such a requirement is made by serving on the principal contractor a request (a payment withholding request) in the form approved by the Director-General of the Department of Services, Technology and Administration. (3)A payment withholding request must include a statement in writing by the claimant in the form of a statutory declaration declaring that the claimant genuinely believes that the amount of money claimed is owed by the respondent to the claimant. (4)A principal contractor for a claim is a person by whom money is or becomes payable to the respondent for work carried out or materials supplied by the respondent to the person as part of or incidental to the work or materials that the respondent engaged the claimant to carry out or supply. (5)A person who is served with a payment withholding request must, within 10 business days after receiving the request, notify the claimant concerned if the person is not (or is no longer) a principal contractor for the claim. Maximum penalty: 5 penalty units. 16Section 26B of the SoP Act provides: (1)A principal contractor who has been served with a payment withholding request must retain, out of money owed to the respondent, the amount of money to which the payment claim relates (or the amount owed by the principal contractor to the respondent if that amount is less than the amount to which the payment claim relates). (2)The amount is only required to be retained out of money that is or becomes payable by the principal contractor to the respondent for work carried out or materials supplied by the respondent to the principal contractor as part of or incidental to the work or materials that the respondent engaged the claimant to carry out or supply. (3)The obligation to retain money under this section remains in force only until whichever of the following happens first: (a)the adjudication application for the payment claim is withdrawn, (b)the respondent pays to the claimant the amount claimed to be due under the payment claim, (c)the claimant serves a notice of claim on the principal contractor for the purposes of section 6 of the Contractors Debts Act 1997 in respect of the payment claim, (d)a period of 20 business days elapses after a copy of the adjudicator's determination of the adjudication application is served on the principal contractor. (4)A part payment of the amount claimed to be due under the payment claim removes the obligation under this section to retain money to the extent of the payment. (5)When the claimant's adjudication application is determined, the claimant must serve a copy of the adjudicator's determination on the principal contractor within 5 business days after the adjudicator's determination is served on the claimant. Maximum penalty: 5 penalty units. 17Section 26C of the SoP Act provides: (1)If a principal contractor discharges the principal contractor's obligation to pay money owed under a contract to the respondent in contravention of a requirement under this Division to retain the money, the principal contractor becomes jointly and severally liable with the respondent in respect of the debt owed by the respondent to the claimant (but only to the extent of the amount of money to which the contravention relates). (2)The principal contractor can recover as a debt from the respondent any amount that the claimant recovers from the principal contractor pursuant to a right of action conferred by this section.

The Contractors Debts Act 1997 (NSW) 18Section 5 of the Contractors Debts Act 1997 (NSW) ("the CD Act") provides: (1)A person (the unpaid person) who is owed money for work carried out for or materials supplied to some other person (the defaulting contractor) can obtain payment of that money in accordance with this Act out of money that is payable or becomes payable to the defaulting contractor by some other person (the principal) for work or materials that the principal engaged the defaulting contractor to carry out or supply under a contract. (2)However, the unpaid person can obtain payment from the principal under this Act only if the work carried out or materials supplied by the unpaid person are, or are part of or incidental to, the work or materials that the principal engaged the defaulting contractor to carry out or supply. 19Section 6 of the CD Act provides: (1)The following procedure must be followed to obtain payment of the money owed: (a)firstly, a debt certificate must have been issued for the money owed (as provided for by section 7), (b)secondly, the unpaid person must serve a notice of claim on the principal. (2)A notice of claim is a notice in an approved form together with a copy of the debt certificate. 20Section 7 of the CD Act provides: (1)When judgment is given or entered up in any proceedings relating to the recovery of money owed to a person for work carried out or materials supplied, the court may, by order made on the application of the person in whose favour the judgment is given, issue a certificate (a debt certificate) in respect of the debt under this section. (1A) If an adjudication certificate within the meaning of the Building and Construction Industry Security of Payment Act 1999 has been filed as a judgment for a debt in accordance with section 25 of that Act, the court may, by order made on the application by the person who filed the adjudication certificate, issue a debt certificate in respect of the debt under this section. (2)If the debt concerned consists of daily, weekly or monthly wages, and the debt exceeds 120 days' wages, the amount certified in the debt certificate is not to exceed 120 days' wages. (3)A debt certificate is not to be issued if the court is satisfied that the work was done on something moveable and it would be practicable for the applicant to exercise a lien by retaining the thing in the applicant's possession. (4)A debt certificate is to be in an approved form. (5)In this section, judgment includes a default judgment. 21Section 8 of the CD Act provides: (1)Service of a notice of claim on the principal operates to assign to the unpaid person the obligation of the principal to pay the money owed under the contract to the defaulting contractor. (2)The assignment is limited to the amount of the unpaid person's certified debt. (3)The assignment is subject to any prior assignment under this Act that is binding on the principal and the defaulting contractor. 22Section 9(1) of the CD Act provides: After a notice of claim is served on a principal in accordance with this Part, the principal must pay the money owed to the defaulting contractor to the unpaid person. 23Section 11(1) of the CD Act provides: An assignment effected by operation of this Act is valid at law.

Housing 24Mr D. Jury, solicitor, appeared for Housing. 25Housing seeks payment out of the fund of its legal costs incurred in motivating these interpleader proceedings. 26The contestants agreed that Housing's costs should be assessed at $20,000.

Zed 27Zed was self represented. 28Between late 2011 and mid 2012 Zed served on DJ's a number of payment claims under the SoP Act. 29On 6 August 2012, after a somewhat tortured course of events, Zed succeeded in obtaining an adjudication determination in his favour against DJ's for $796,297.56. The preceding events included DJ's obtaining an ex parte injunction restraining the adjudication and Zed having the injunction discharged. However, because Zed only paid the adjudicator's costs on 12 June 2013, he first received a copy of it at that time and then apparently emailed it to Housing. 30On 16 July 2012 Zed served a payment withholding request under Div 2A of the SoP Act on Housing (as principal contractor) requiring it to retain sufficient money to cover his claim out of money payable by it to DJ's. 31On 24 June 2013 (that is after the commencement of the winding up of DJ's) Zed obtained an adjudication certificate under s 24(1) of the SoP Act for $891,006.70 and on the same day judgment in this Court was entered in favour of Zed against DJ's for that amount. 32On 26 July 2013 a Deputy Registrar of this Court issued a debt certificate under s 7 of the CD Act certifying that on 24 June 2013 the said sum was due and payable by DJ's to Zed. 33Also on 26 July 2013 Zed served on Housing a notice of claim under s 6 of the CD Act together with the debt certificate. 34Zed lays claim to the whole of the fund. He contends that his payment withholding request of 16 July 2012 or his notice of claim of 26 July 2013 had the effect of creating a charge over the fund securing the debt owing to him. 35He accepts that out of his entitlement Phontos are to be paid their fees.

Phontos 36Mr R. Freeman of counsel appeared for Phontos. 37Phontos provided legal services to Zed, with the assistance of counsel, with respect to the preparation Zed's payment claims, payment withholding request and submissions for the adjudication and in the Supreme Court proceedings. 38Phontos estimates that Zed owes them legal fees of $98,871.05. 39Phontos contends that by their efforts the fund was preserved and that they have a fruits of the action lien, giving them security over the fund for their outstanding legal fees and disbursements.

YHY 40YHY was represented by a director, Mr Yuhua Yu. 41In about May 2011 YHY contracted with DJ's to do part of the work for Housing at Wilcannia. It did work for which DJ's has failed to pay it. It is owed $135,154.02. 42On 27 March 2013 YHY sued DJ's in the District Court of New South Wales for the debt. 43On 24 April 2013 the Registrar of the District Court issued an attachment order under s 14 of the CD Act requiring Housing to retain in its hands until judgment was given in the proceedings or as that Court otherwise ordered all monies payable or becoming payable from Housing to DJ's. 44On 17 May 2013 YHY moved the District Court for default judgment against DJ's. 45On 21 May 2013 Olsson DCJ issued a debt certificate under s 7 of the CD Act certifying that on 21 May 2013 the sum $135,154.02 was due and payable by DJ's to YHY for materials supplied and work done by it in carrying out residential building maintenance work in regional NSW, including Wilcannia. 46On 31 May 2013 YHY served on Housing a notice of claim under s 6 of the CD Act. 47YHY lays claim to $135,154.02 of the fund on the grounds that its notice of claim operated to assign to it the obligation of Housing to pay DJ's that amount, and conferred on it security to that extent.

The Liquidators 48At the commencement of the hearing the Liquidators were joined as defendants and, insofar as is necessary, the other contestants were given leave to proceed against DJ's. Mr T. Lynch of counsel appeared for DJ's and the Liquidators. 49Subject to the two exceptions dealt with below regarding the costs of Housing and YHY's costs of its attachment, the Liquidator's position is that the fund is property of the company and is to be applied in satisfaction of its liabilities equally in accordance with s 501 of the Corporations Act. 50The Liquidators do not oppose payment out to Housing of its legal costs. 51As to Zed, the Liquidators submit that Zed's claim is unsecured. They submit that a payment withholding request under s 26A of the SoP Act does not create a charge over the monies which the principal contractor becomes obliged to retain. They submit that a notice of claim under s 6 of the CD Act is an attachment within the meaning of s 500(1) of the Corporations Act, and that, coming as it did, after the passing of the resolution for the voluntary winding up of DJ's, Zed's notice of claim is void. 52The Liquidators submit that Phontos have no claim to the fund because any lien which Phontos may have prevails only as against their client, Zed, and not as against any other person. 53The Liquidators concede that YHY's notice of claim of 31 May 2013 was effective to assign to YHY to the amount of its certified debt, Housing's obligation to pay YHY the retained money. The effect of this concession is that $135,154.02 of the fund is to be paid to YHY. 54However, the Liquidators submit that the procurement of and service by YHY of its notice of claim was the institution of proceedings to attach a debt due to DJ's within 6 months immediately before the commencement of the winding up of DJ's, and that payment to YHY out of the fund will be the receipt by it of an amount as a result of the attachment, with the consequence that under s 569(1) of the Corporations Act, YHY is required to immediately pay an equivalent amount to the Liquidators less an amount in respect of the costs of the attachment. 55There is agreement between the Liquidators and YHY that the costs of YHY's attachment are $3,000.

Housing 56Ordinarily an interpleader is entitled to an indemnity for its costs if it has acted reasonably: McPherson Thom & Co v Coombie Pastoral Co Pty Ltd [1929] VLR 295 at 301. 57In my view Housing has acted reasonably and is entitled to payment of its costs out of the fund.

Zed 58Whether Zed is entitled to any payment out of the fund depends on whether a payment withholding request under s 26A of the SoP Act creates a charge over the monies which the principal contractor must retain. 59The Court's attention was not drawn to any authority on the point. 60In my view a payment withholding request does not create a charge because the consequences of serving it lack essential features of a charge. 61A charge (or hypothecation) entails the transfer by assignment in securitatem debiti of proprietary rights in the subject matter of the charge (here the monies retained by the principal contractor) to the chargee, thereby enabling the chargee to recover the secured debt out of it: see Edward I Sykes and Sally Walker, The Law of Securities, 5th ed (1993) The Law Book Company at 17. 62In a well known passage, Lord Esher said in Re Potts; Ex parte Taylor [1893] 1 QB 648: A charge is a well known thing. If one man owes a debt to another, a creditor of the latter can, by bringing in the debtor, charge the debt in his hands so as to prevent him from paying it to his own creditor, and oblige him to pay it to the creditor who obtains the charge. Why is that a charge? Because it charges the debt in the hand of the man who has to pay it. See Clyne v Deputy Commissioner of Taxation (1981) 150 CLR 1 at 26 per Brennan J; Commissioner of Taxation v Donnelly (1989) 25 FCR 432 at 436 per Lockhart J and at 457 per Hill J; Commissioner of Taxation v Macquarie Health Corporation Ltd (1998) 88 FCR 451 at 469 and following per Emmett J. 63The two essential features of a charge which are missing after service of a payment withholding request, and which Div 2A of the SoP Act (ss 26A - 26F) does not supply, are a right in the claimant serving the payment withholding request to resort to the money withheld, and an obligation on the principal contractor to pay it to the creditor who obtains the charge. 64The obligation imposed on the principal contractor under the SoP Act is to retain the money. This is not surprising because Div 2A of the SoP Act is intended to work before an adjudication determination is made and therefore before liability between the claimant and the respondent is determined. 65A notice of claim under the CD Act works, by effecting an assignment, to oblige the principal contractor to pay the money preserved to the claimant (or unpaid person referred to in s 5 of the CD Act i.e. the ultimate creditor). Section 9(1) of the CD Act expressly requires the principal to pay the money owed to the defaulting contractor to the unpaid person. A notice of claim thus creates a charge in favour of the ultimate creditor. 66In this way the two enactments work congruently. 67Thus, under s 26B(3)(c) of the SoP Act, one circumstance which brings to an end the principal contractor's obligation to retain money, is service on the principal contractor of a notice of claim for the purposes of s 6 of the CD Act in respect of the payment claim. 68If it were needed, another consideration against concluding that Div 2A creates a right in rem to the money retained is that under s 26C of the SoP Act, if the principal contractor discharges its obligation to pay money owed under a contract to the respondent in contravention of a requirement under the Division to retain the money, the principal contractor becomes jointly and severally liable with the respondent for the debt owed to the claimant. This presupposes that the respondent (the defaulting contractor) has given good discharge to the principal for the debt owed to it, which it could not do if a charge had been created. 69DJ's was wound up on 13 June 2013. Zed served his notice of claim under the CD Act after this date. 70I observe that under s 471B of the Corporations Act, while a company is being wound up in insolvency, a person cannot begin or proceed with a proceeding in a court against the company or in relation to property of the company or begin or proceed with enforcement process in relation to such property except with the leave of the court. It does not appear as though Zed obtained leave either to obtain judgment on 24 June 2013 or the debt certificate obtained on 26 July 2013. 71In any event, a notice of claim is a means by which the debt owed by the principal to the defaulting contractor is frozen or seized and is an attachment against the property of the defaulting contractor within the meaning of s 500(1) of the Corporations Act: see Bruton v Commissioner of Taxation (2009) 239 CLR 346 at 355 and following. 72Coming after the winding up, Zed's notice of claim is void. 73It follows that Zed's claim was and remains unsecured and he has no entitlement to the fund.

Phontos 74A solicitor whose efforts result in the recovery of money for his client has an equitable right to have his proper costs and disbursements paid from the money so received: see Firth v Centrelink (2002) 55 NSWLR 451 at 462 and following. This is sometimes referred to as the solicitor's fruits of the action lien. 75Zed's claim to the money has failed. He has never had any proprietary interest in or to the fund. Phontos' efforts, whatever they may have been, have not resulted in recovery of money for their client. They thus have no lien.

YHY 76Having regard to the Liquidators' concession that YHY is entitled to payment of its debt out of the fund, the only issue is whether s 569(1) of the Corporations Act would apply to the payment. 77Two questions arise: firstly, whether YHY's invocation of the machinery in the CD Act constituted the institution of proceedings to attach a debt due to DJ's; secondly, whether payment out of the fund to YHY will constitute an amount received by YHY as a result of the attachment. 78As to the first question, s 6 of the CD Act stipulates the procedure that must be followed to obtain payment of the money owed. The procedure is the obtaining of a debt certificate and then service of a notice of claim together with the debt certificate. This undoubtedly brings about the attachment of the debt. 79Under s 7(1) of the CD Act, when judgment is given or entered in any proceedings relating to the recovery of money owed to a person for work carried out or materials supplied, the court may, by order made on the application of the person in whose favour the judgment is given, issue a debt certificate. 80The principal, if not the only, purpose for the application is to obtain payment of the judgment amount through the operation of the machinery in the CD Act. This is effected by way of attachment of a debt due to the judgment debtor. 81It follows, in my opinion, that the application qualifies as the institution of proceedings to attach a debt due to a company within s 569(1) of the Corporations Act. 82In this case those proceedings were instituted within 6 months immediately before the commencement of the winding up of DJ's. 83But for that attachment, YHY would have no claim to the amount. Hence, if it is received by YHY, it will be received as a result of the attachment. 84It follows that s 569(1) of the Corporations Act applies to the payment which the Liquidators concede must be made to YHY and YHY must pay it back to the Liquidators with the deduction permitted by the section. 85The net effect of this is that YHY is entitled to receive $3000.

Conclusion 86The fund is to be disbursed as follows: (a)$20,000 to Housing; (b)$3,000 to YHY; and (c)the balance to the Liquidators.

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: 23 August 2013

Corporations Act 2001(Cth)ss 500(1), 501, 569(1)

Contractors Debts Act 1997(NSW)ss 5, 6, 7, 8, 9(1), 11(1)

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