1. The Second and Third Respondents, 420 Balcombe Road Pty Ltd and Mr Taky Kaplan are, respectively, a Developer and its director. On 9 March 2012 they applied under s75 of the Victorian Civil and Administrative Tribunal Act 1998 ("VCAT Act") to have the proceedings against each of them struck out or dismissed. The grounds for striking out or dismissal describes the proceeding against them as:

(a) frivolous, vexatious, misconceived or lacking in substance; or

1. During his submissions on 19 April 2012, Mr Styring of Counsel for the Developer and Mr Kaplan said that he would demonstrate that the Builder's pleadings against his clients are hopeless and reveal no question to be tried; that even if every factual pleading is proven against them, they would have no case to answer.

1. According to the Applicant's Amended Points of Claim of 20 February 2012 ("APoC"), the Applicant is a builder. It entered a contract dated 9 February 2007 with the Developer to construct two townhouses. Mr Kaplan executed a guarantee on behalf of the Developer. The "Deed of Guarantee and Indemnity" is at pages 47 and 48 of the Master Builders Association's standard-form contract, HC-5 (Edition 3 - 2001).
2. The First Respondent ("Insurer") issued the relevant domestic builders' warranty policy for the project. It did not appear at the hearing of the s75 application.
3. The parties who did appear agree that on 5 May 2009 the Builder's directors appointed an external administrator, the First Administrator. In their report of 2 June 2009 the Second Administrators said on page 4 that there were disputes between the Builder and Developer, final payments were withheld by the Developer and:

As a consequence of the protracted dispute between the [Builder] and the [Developer], the [Builder's] directors became concerned as to the company's capacity to continue to trade and meet its liabilities.

1. On 12 May 2009 the Developer gave the First Administrator details of its claim of against the Builder, totalling $885,144. On 20 May 2009 the Second Administrators were appointed in substitution for the First Administrator.
2. In the report to creditors of 2 June 2009 the Second Administrators reported that there was uninvoiced WIP (work in progress) for the project. Although there is a typographical error on page 11 of the report, I accept the WIP in question was $255,349, and the project was recorded as completed in December 2008. The entry records:

The developer has also submitted a claim against the company in the amount of $885,144 relating to costs associated with delays in the completion of the project as well as costs incurred for rectification work that had to be undertaken.

1. At page 13 of the report of 2 June 2009 the Second Administrators said, under "Contingent Claims",:

The director has identified one (1) contingent liability against the [Builder]. The contingent liability relates to a claim from [the Developer] in the amount of $191,428.57 for breaches of its building contract with the [Builder].

An informal proof of debt has been received from the [Developer] for claims totalling $885,144. A breakdown of this claim is detailed below:

There follows a list of alleged losses, $40,366 of which is the cost of rectification of defective work. $504,560 is for loss of property value and a substantial proportion of the remainder is delay-related, including $179,428 for liquidated damages. The report continues:

As indicated previously, advice received from the [Builder's] directors indicates that an amount of $605,839.44 remains due from [the Developer] with respect to outstanding invoices and uninvoiced WIP.

At this juncture, we are unable to provide any comment as to the veracity of this contingent claim nor whether any right of offset exists between the [Builder] and this contingent creditor [the Developer].[Emphasis added]

It is unclear how the sum of $191,428.57 was calculated, as $885,144 less $605,839.44 is $179,304.56.

1. The Second Administrators made a supplementary report to creditors dated 24 June 2009. The report mentioned the project at page 6 under "Work In Progress", repeating that the directors (of the Builder) claimed that the Developer owed the Builder $255,349. They continued:

We also refer to our comments at Section 5.3 below with respect to the counter-claims of [the Developer, and parties to another contract] and the potential right of off set against what may be owed to [the Builder].

With respect to [the Developer's] claim, we have sought preliminary legal advice (based on the limited information to hand). Our advice indicates that there may potentially be some basis to this claim (in part) with respect to the liquidated damages portion in the amount of $179,428 (pursuant to the terms of the building contract). However, the other alleged breaches are more difficult to assess. We have been advised that a detailed review by a quantity surveyor and/or building expert would be required to form a better view as to the validity of this claim and conversely any amounts that may be due to the [Builder] (if any).[sic]

In light of the above, and given the general lack of information about the merits of the [Builder's] claims for outstanding WIP/debtors together with the lack of detail pertaining to the contingent claims submitted, it would appear unlikely that any recoveries will be achieved for the benefit of creditors.

Advice received also indicates that the potential costs associated with any recovery/assessment proceedings may well exceed $200,000.

Furthermore, given that there are disputed matters, it would be unlikely that litigation funding could be obtained. In the absence of better and more certain information about the merits of the claims, it would be difficult to procure solicitors to undertake work on a speculative basis. [Emphasis added]

1. It is noted that no specific mention was made of amounts claimed by the Builder. It repeated that the Builder's director's "ERV"(Estimated Realisable Value) of WIP was $255,349 and gave the "Administrators ERV" as "low" equal to nil, and "high" equal to "unknown". It is further noted that an exhaustive examination of the competing rights of the Builder and Developer was NOT undertaken by the Second Administrators. I infer that the Second Administrators chose not to undertake such an examination because it would not have been commercially sensible to do so.
2. On 21 July 2009, on the recommendation of the Second Administrators, a Deed of Company Arrangement ("DOCA") was entered by the Builder. The Developer lodged a formal proof of debt dated 28 September 2010 for $442,572. It is signed by Mr Kaplan and includes, in hand-writing:

This amount represents 50% of the original debt agreed to be reduced 28/9/10 without prejudice to expedite settlement.

1. No-one other than Mr Kaplan signed the document and there is no indication of with whom the Developer might have made an agreement to reduce the debt, nor is there any mention of amounts alleged to be owing to the Builder by the Developer.
2. On 7 October 2010 the DOCA administrator declared a first and final dividend of 0.549 cents in the dollar, and sent the Developer a cheque for $2,427.47 "on your debt as admitted to rank for dividend in the sum of $442,500".
3. As pleaded by the Builder "in or about February 2011" the Developer lodged a claim with the Insurer, which conveyed its decision to solicitors for the Builder by letter from the Insurer's solicitors dated 26 May 2011.
4. By 26 May 2011 the Builder was no longer under administration, but as the letter stated at paragraph 2.3:

the [DOCA] released your client from any liability resulting from breaches of section 8 [of the Domestic Building Contracts Act 1995] implied into the [building] contract and thus, by virtue of your client being insolvent within the meaning of the policy, the [Developer] is unable to recover compensation from your client in relation to the claimed defects.

1. The letter continued:
   1. It is also [the Insurer's] position that, based on the material it has seen, [the Builder] has failed to substantiate that it was owed any money by the [Developer] under the relevant building contract. The administrator's supplementary report to creditors noted that:

3.1 [the Builder's] directors alleged that $255,349 was owed to it by the [Developer] ...

3.2 [the Developer] alleged that it had a damages claim of $885,144 against [the Builder] ...

1. The [Developer's] claim far exceeds [the Builder's] alleged claim. Further, [the Insurer] instructs us that the information on its file suggests that the [Developer] did not owe [the Builder] any money under the contract and that, despite a number of requests, [the Builder] has failed to provide any evidence in support of this assertion. In any event, the [DOCA] extinguished the [Developer's] and [the Builder's] respective claims against each other.[Emphasis added]
2. At paragraph 5 the letter stated that the Developer was entitled to indemnity for defects in relation to a quotation from Jacobson Construction - $39,000 inclusive of GST for the relevant defects, plus defective items totalling $3,601.
3. On 20 June 2011 the Builder commenced this proceeding against the Insurer and the Developer, to appeal the Insurer's decision. The relief it sought was that the Insurer's decision be set aside.
4. On 15 December 2011 orders were made joining Mr Kaplan to the proceeding as Third Respondent and for the APoC. The same relief is sought as in the original points of claim, but in addition, the Applicant seeks $445,473.55 plus interest and costs against the Developer and/or Mr Kaplan as guarantor. The claim is for alleged breach of the contract, or for work and labour done and materials supplied, or for quantum meruit. Regardless of the basis upon which the Builder claims, it alleges the sum was payable to it as of 31 December 2008, therefore before it entered the DOCA.

1. In their outline of submissions of 28 March 2012 the Developer and Mr Kaplan submitted that:

The central issue on the application, and the essential point to be made is that the mandatory and automatic operation of s553C of the Corporations Act 2001 has extinguished the debt claimed by [the Builder] against [the Developer]. By reason of the principle of co-extension, [Mr Kaplan] is also discharged.

1. Section 553C provides:

(1) Subject to subsection (2), where there have been mutual credits, mutual debts or other mutual dealings between an insolvent company that is being wound up and a person who wants to have a debt or claim admitted against the company:

(a) an account is to be taken of what is due from the one party to the other in respect of those mutual dealings; and

(b) the sum due from the one party is to be set off against any sum due from the other party; and

(c) only the balance of the account is admissible to proof against the company, or is payable to the company, as the case may be.

(2) A person is not entitled under this section to claim the benefit of a set-off if, at the time of giving credit to the company, or at the time of receiving credit from the company, the person had notice of the fact that the company was insolvent. [Emphasis added]

1. This section specifically concerns a company being wound up, rather than one entering a DOCA. In Mr Styring's further submissions he described the manner in which he says that s553C applies to DOCAs as well as to winding up.
2. I accept Mr Styring's submissions that under s444G of Corporations Act 2001 the DOCA binds the administrators, the Builder, its officers and members, and under s444D(1), so far as it concerns claims arising on or before the day specified in the deed. The Appointment Date under the DOCA was 20 May 2009.
3. I accept his submission that, by virtue of s444A(5) of the Corporations Act 2001 this DOCA is taken to include all of Schedule 8A of the Corporations Regulations 2001, with the exception of clauses 2 and 10.
4. Mr Styring submitted at paragraph 26:

By clause 1.3 of the [DOCA] and clause 8 of schedule [8]A, the set off provisions in s553C in Subdivision A of Division 6 in Part 5.6 of the Act applied to the [DOCA].

Clause 8 is headed "Making Claims". The relevant provision is in sub-clause 8(1):

Subdivisions A, B, C and E of Division 6 of part 5.6 of the Corporations Act 2001 apply to claims made under this deed as if the references to the liquidator were references to the administrator of this deed.

1. Mr Styring drew my attention to a case where the Court of Appeal considered a dispute with similar facts, although the company not entering the DOCA had not attempted to prove its debt in the administration. It is G.M. & A. M. Pearce and Co Pty Ltd v R.G.M. Australia Pty Ltd [1998] 4 VR 888 ("Pearce"). Batt JA said:

[The] relevant effect [of clause 8] is to make s. 553C applicable (whether unconditionally or only where a proof of debt has been submitted) to administration of the deed, for s. 553C is found in Subdiv. A of Div. 6 of Pt 5.6 of the [Corporations Act].

1. Section 444H is entitled "Extent of release of company's debts" and provides:

A deed of company arrangement releases the company from a debt only in so far as:

1. I accept Mr Styring's submissions that Pearce is authority for the view that s553C essentially reproduces s86 of the Bankruptcy Act 1996 and that it should be interpreted in the same way as s86 of the Bankruptcy Act, applying the reasoning of the High Court in Gye v McIntyre [1991] HCA 60; (1991) 171 CLR 609. Batt JA said, approving an aspect of the judgement of the primary judge who was considering an appeal from the Magistrate who heard the case at first instance:

[Section 86 of the Bankruptcy Act] is a statutory directive which operates as at the time the bankruptcy takes effect, producing a balance upon the basis of which the bankruptcy administration can proceed and which alone can be claimed in the bankruptcy ir recovered by the trustee; and that section is self-executing in the sense that its operation is automatic and not dependent upon the option of either party. Finally his Honour acknowledged that the object of s86 was, as the High Court had said, to do substantial justice between the parties where a debt is really due from the bankrupt to the debtor to his estate.

1. I accept Mr Styring's submissions, at paragraph 30 of his written submissions, which I reproduce in part:

(a) Provided that a claim is provable in the administration of a company, it needn't be a liquidated sum.

(b) The time for determining whether a right to set-off exists will be at the "relevant date" referred to in s553C. In an administration, that is the "appointment date", here 20 May 2009.

(c) Although the claims sought to be set-off need not be liquidated, they must be "commensurable" at the relevant date. That is, the claims must ultimately sound in money.

(d) The characteristics of "mutuality" must be present:

(i) The claims arising must be between the same persons.

(ii) The benefit or burden of the claims must lie in the same equitable or beneficial interests.

(e) Section 553C is mandatory and self-executing in the sense that the set-off occurs automatically on the relevant date and is not dependent upon the option of either party.

(f) The effect of a s553C set-off is to extinguish the respective claims and to substitute a "nil-balance" or claim a "net-balance" and, as to the latter, is the amount for which either the creditor is entitled to prove in the administration or which can be claimed by the company.

(g) Whilst the section requires an account to be taken, the account is deemed to have been taken, and the sums due from one party set-off against the other, as at the "relevant date". It is a "retrospective calculation".

1. Mr Watts of Counsel, who appeared for the Builder, said at paragraphs 7 and 8 of the written submissions for the Builder:
   1. The [Builder] concedes that the effect of section 553C when set-off applies only the balance of the claims is admissible to proof against the company, or is payable to the company, as the case may be.
   2. In the present case the Administrators admitted a claim by [the Developer] in the sum of $442,500, and therefore prima facie under section 553C there is a claim for the balance, $2,973.55, that may be pursued against [the Developer].
2. I understand that the sum of $2,973.55 referred to by Mr Watts is the difference between $442,500 and the amount the Builder now claims is (or was) owing to it of $445,473.55.
3. Paragraph 8 of Mr Watts' submission could only have merit if I do not accept paragraph 30(e) of Mr Styring's submissions. Rather, I note the emphatic words of Ormiston JA in Pearce at:

The only remarkable aspect of this case is that the reproduction of s. 86 of the Bankruptcy Act 1966 in the Corporations Law and what was seen in 1992 to be its necessary redrafting for that purpose should have permitted the respondent successfully to assert below that it was entitled to sue for its debt without regard to the operation of s. 553C of the Law.

1. Paragraph 33 of Mr Styring's written submissions was:

It is ... expected to be common ground [between the Developer and Builder] that the mandatory and automatic operation of s553C extinguished the original chose(s) in action and was/were replaced by a claim to the net balance.

1. From Mr Watts' oral submissions it appears that this was not the case - the Builder did not accept as a matter of fact that there had been a set-off, but as in Pearce I find that this is the result of an untenable interpretation of the way s553C operates. It follows that any claim the Builder might have had against the Developer was extinguished in the set-off that took place under s553C on 20 May 2009. The Builder's claim to recover against the Developer is therefore hopeless.
2. Under s75 of the VCAT Act I strike out the particulars to paragraph 7 of the APoC, paragraphs 9 to 14 and the prayer for relief against the Developer alone, but not the prayer for relief against the Insurer or alternatively the Developer. The Developer should be bound by or have the benefit of the Tribunal's decision concerning the Builder's appeal, and for that purpose alone the Developer will remain a party to the proceeding.

1. Somewhat surprisingly, Mr Watts quoted s444J of the Corporations Act, which provides:

Section 444H does not affect a creditor's rights under a guarantee or indemnity.

1. Having regard to the context of this provision, "creditor" refers to the creditor of an insolvent company, not a creditor that IS an insolvent company.
2. I accept the submission of Mr Styring that as guarantor, Mr Kaplan's liability to the Builder is co-extensive with that of the Developer; in accordance with Sunbird Plaza Pty Ltd v Maloney (1988) 166 CLR 245 at 246, a guarantee is a promise to be answerable for the debt or obligation of another. As I have found that the Developer has no liability to the Builder, neither does Mr Kaplan.
3. I dismiss the proceeding against Mr Kaplan. In consequence, I strike out paragraphs 15 to 17 of the APoC and the prayer for relief against him.

1. Although I have found that the Builder can no longer claim a sum from the Developer, and therefore from Mr Kaplan, this is not the same as a finding that the sum admitted by the administrators represented the actual loss (if any) suffered by the Developer.