Plaintiff v Defendant [2012] VSC 112 | Case summary

Supreme Court of Victoria|2012-03-30|Before: SIFRIS J

CORPORATIONS LAW - Set-off provisions for insolvent companies under s 553C - Meaning "mutual credits, debts or other mutual dealings" - To be construed widely.

CORPORATIONS LAW - Set-off provisions for insolvent companies under s 553C - Whether funds were trust funds thereby precluding mutuality and set-off.

CORPORATIONS LAW - Set-off provisions for insolvent companies under s 553C - Whether notice of insolvency precludes set-off under s 553C(2) - Relevant time that creditor must have such notice.

CORPORATIONS LAW - Insolvent companies - Whether costs and expenses were properly incurred and are priority claims under s 556(1)(a) Corporations Act.

AMENDMENT AND LEAVE TO RE-OPEN CASE - Whether late amendment should be permitted - No prejudice to plaintiff - Matter raised early in proceeding - Aon Risk Services Australia Ltd v Australian National University [2009] HCA 27; (2009) 239 CLR 175 applied.

1 Between February 2009 and 19 December 2009 ("the relevant period"), Grape Exchange Management Euston Pty Ltd ("Grape Exchange") provided cultivation, maintenance, harvesting, processing, marketing and selling services in relation to vines and grapes on the Bella Vista Vineyard. Grape Exchange alleges that the work was done and services were rendered pursuant to a Management Agreement with Grapecorp Management Pty Ltd (in liq) ("Grapecorp"). It is this work, and services rendered that give rise to the present dispute between the parties.

2 During the relevant period, Grape Exchange collected the sum of $2,831,796.87 from the sale of grapes harvested from the Bella Vista Vineyard as part of the 2009 harvest, but only paid $475,313.48 to Grapecorp. The balance of $2,356,483.40 was retained by Grape Exchange ("Unpaid Net Proceeds") and has been used to fund its costs and expenses (including management fees it claimed to be owed) which totalled $2,711,995. Grape Exchange asserts that it is still owed $355,512, being the difference between the Unpaid Net Proceeds and the costs incurred. It is common ground that Grapecorp had paid in full all expenditure and management fees owed to Grape Exchange for the period ending 23 April 2009.

3 Grapecorp sues Grape Exchange to recover the Unpaid Net Proceeds and other money it says was overpaid to Grape Exchange. Grape Exchange does not dispute that it collected the proceeds or that ordinarily, it would have to pay the amount collected to Grapecorp. However, Grape Exchange claims that it has a right of set-off under s 553C of the Corporations Act 2001 ("the Act"). It asserts that the amount received as proceeds of the sale of grapes can be set off against the expenditure incurred in performing services on the Bella Vista Vineyard (most of which occurred after Grapecorp's liquidation). The liquidators dispute that Grape Exchange is entitled to any set off and contend, amongst other things, that s 553C has no operation in the present case.

4 Grape Exchange claims further that irrespective of whether any set-off is available, it is a priority creditor under s 556(1)(a) of the Act and is entitled to be paid its costs, expenses and management fees in priority to the other creditors of Grapecorp.

5 Grapecorp contends that s 556(1)(a) is not applicable and, in any event, denies that any work was done pursuant to the Management Agreement during the relevant period. Grapecorp contends further that amounts received by Grape Exchange comprise trust funds. It makes a further claim against Grape Exchange for monies had and received.

6 The facts are, for the most part, common ground and are taken from the submissions filed by the parties.

7 The plaintiff, Grapecorp, was a member of the Timbercorp group of companies. The Timbercorp group operated some 33 managed investment schemes.

8 On 23 April 2009 Mark Anthony Korda ("Korda") and Leanne Kylie Chesser ("Chesser") were appointed administrators of a number of companies in the Timbercorp Group, including Grapecorp. On 29 June 2009 creditors resolved to wind up a number of companies in the Timbercorp Group, including Grapecorp. Korda and Chesser were appointed liquidators.

9 This case primarily concerns the 2004 Timbercorp Table Grape Project and the 2005 Timbercorp Table Grape Project ("Projects").

10 Timbercorp Securities Limited (in liq) ("TSL"), another member of the Timbercorp Group, was the responsible entity of the Projects. The Projects were conducted on land known as the "Bella Vista Vineyard", which was leased by Timbercorp Limited from Align Funds Management Ltd ("Align"). Timbercorp Limited then sub-leased the land to TSL and TSL licensed the use of it to investors ("Growers").

11 In 2004 and 2005 respectively, Grapecorp entered into agreements with TSL in respect of each of the Projects ("TSL Management Agreements"). Under the TSL Management Agreements, TSL engaged Grapecorp (amongst other things) to manage the Bella Vista Vineyard, harvest and sell the grapes and pay the proceeds to TSL. In return, TSL agreed to pay management fees to Grapecorp.

12 Grapecorp's only business was the performance of the services under the TSL Management Agreements. It had no other role in the Timbercorp group and did not perform work or services outside the Timbercorp group. Its only source of funding was the payments from TSL. Grapecorp was however, an integral part of the complex structure that gave effect to and implemented the Projects.

13 The defendant, Grape Exchange, is and was at all relevant times part of the Costa Exchange group of companies, whose parent company was CostaExchange Ltd ("Costa Exchange"). The business of the Costa Exchange group involves the growing, packing, marketing and distribution of fresh produce.

14 On 17 January 2008, Grapecorp and Grape Exchange entered into a management agreement ("Management Agreement"). The Management Agreement was, in effect, a back-to-back agreement with the TSL Management Agreement. Grapecorp subcontracted its obligations under the TSL Management Agreements to Grape Exchange.

Management Agreement between Grapecorp and Grape Exchange

15 Under the Management Agreement, Grape Exchange was engaged:

(a) as an independent contractor to provide the "Vines and Vineyard Services" in relation to the Projects. The Vines and Vineyard Services were defined to include the cultivation, maintenance, harvesting and management of the grapevines and Bella Vista Vineyard;[1] and

(b) as agent, to carry out the "Marketing Services". These services included the marketing and sale of the harvested grapes.[2] Grape Exchange's obligations in respect of the "Marketing Services" included obligations to pay the "Net Proceeds" from the sale of grapes to Grapecorp and to remit the "Growers Price" (less the "Marketing Fee") to Grapecorp. The "Net Proceeds" were the "Gross Proceeds" less the "Marketing Fee" and any freight costs, levies and royalty fees.[3] The "Growers Price" was the amount invoiced and payable by the ultimate purchasers of the grapes (less any discount or rebate).

16 At no time did title to the grapes pass to Grape Exchange which, in marketing and selling the grapes, acted as agent for Grapecorp.

17 The Management Agreement also provided for certain fees and expenses to be paid to Grape Exchange, namely:

(a) the "Management Fee" (calculated by reference to the acreage of the land used for the Projects), which was payable in monthly installments in arrears, invoiced at month's end; and

(b) "Direct Costs and Expenses", being all the direct expenditure associated with Grape Exchange providing the services.

18 The "Direct Costs and Expenses" were paid monthly in advance as follows:

(a) at the beginning of each month, Grape Exchange invoiced Grapecorp for the "Budgeted Costs and Expenses" for that month; and

(b) at the end of the month, Grape Exchange invoiced Grapecorp for that month's "Direct Costs and Expenses" and provided a reconciliation of the "Budgeted Costs and Expenses" for the previous month against the actual "Direct Costs and Expenses" for that month.

19 The 2009 harvest commenced in early 2009, and was due to be completed by about mid-May. By the time administrators were appointed to Grapecorp on 24 April 2009, Grape Exchange had commenced harvesting, marketing and selling grapes from the 2009 crop and collecting proceeds from those sales. On or around 16 April 2009, Grape Exchange paid Grapecorp $475,303.48, on account of the Net Proceeds of the 2009 harvest. However, as noted above, this was not the entire Net Proceeds received by Grape Exchange for the 2009 harvest.

Voluntary administration and liquidation of Grapecorp

20 Following their appointment on 24 April 2009, the administrators of the Timbercorp group suspended the operations of all the companies (including Grapecorp) because they did not have the funds to pay for continuing operations. In particular, TSL was not able to make payments to Grapecorp under the TSL Management Agreements.

21 The administrators also commenced investigations of all the managed investment schemes conducted by the Timbercorp group. Those investigations revealed that the Projects were the worst performing of all the Timbercorp horticultural schemes, that their performance had been poor for several years and that each of them was forecast to lose money until 2020.

Meetings between Grape Exchange and the administrators

22 Between April and June 2009, there were several discussions and meetings between (variously) representatives of the administrators, representatives of Grape Exchange, and representatives of Align concerning the 2009 harvest.

23 During the course of the meetings and discussions:

(a) Mr Mano Babiolakis ("Babiolakis"), the Chief Executive Officer of Costa Exchange Ltd, said that Grape Exchange was interested in buying the Bella Vista Vineyard in due course, or interested in continuing to manage the vineyard, even if the assets were sold to a third party;

(b) Trevor Moyle ("Moyle"), the Chief Executive Officer of Align, explained that Align and Costa Exchange were negotiating a long term solution regarding the ongoing ownership and management of the Bella Vista Vineyard and other land leased by Timbercorp group companies ("citrus land").

(c) Babiolakis and Moyle said that they were confident that an agreement could be reached whereby an entity in the Costa Exchange group would pay a reduced rental to Align on the Bella Vista Vineyard and the citrus land; and

(d) there was discussion about a proposed tripartite agreement concerning the Bella Vista Vineyard and citrus land (which eventually became the Costa Heads of Agreement, discussed below). The administrators' representatives said that, on the basis that such an agreement was made, they would hold back on disclaiming the agreements in respect of the Bella Vista Vineyard once they were appointed as liquidators.

(e) There was specific discussion about the 2009 grape harvest and in particular the continuation of services and work by Grape Exchange. There is some dispute about aspects of these discussions.

24 On or about 24 July 2009, TSL, Timbercorp Limited, Align, Grapecorp, Grape Exchange, Costa Exchange and the liquidators entered into a written agreement styled the "Costa Heads of Agreement". This agreement assumed much importance for both Grapecorp and Grape Exchange.

25 Rent for the lease of the Bella Vista Vineyard had been prepaid to 30 June 2009. The Costa Heads of Agreement sought to deal with several of the Timbercorp group managed investment schemes, which were conducted on land owned by Align and in respect of which Costa Exchange companies (including Grape Exchange) provided services. It contained several provisions concerned specifically with the Projects, including clauses to the effect that:

(a) the parties acknowledged and agreed that the liquidators did not adopt or ratify the head lease in respect of the Bella Vista Vineyard or the Management Agreement, and would not use, occupy or be in possession of the land as from 1 July 2009;

(b) Grape Exchange would pay rent to Align of $1.00 as contribution towards the rent for the Bella Vista Vineyard;

(c) Grape Exchange would comply with its "Management Obligations" in relation to the Bella Vista Vineyard. The Costa Heads of Agreement defined Management Obligations to include all management obligations imposed on Grape Exchange in respect of the Projects, the Management Agreement and as specified in schedule 4 to the Costa Heads of Agreement;

(d) Grape Exchange would undertake all such Management Obligations in accordance with the Management Agreement and the Costa Heads of Agreement;

(e) Align would reimburse Grape Exchange for all costs and expenses (including outgoings) which it incurred from 1 July 2009 in carrying out its Management Obligations in relation to the Bella Vista Vineyard, to the extent that such costs and expenses were not recovered by and paid to Grape Exchange pursuant to the Management Agreement or otherwise;

(f) Grape Exchange agreed and acknowledged that it would be responsible, as part of its Management Obligations, for the repairs and maintenance of the Bella Vista Vineyard including waterways, dams, irrigation and pumping equipment, fences, fire-breaks and farm equipment. Pursuant to the Management Agreement, Grape Exchange would be entitled to be reimbursed by Align for all such costs and expenses (including outgoings) to the extent that they were not recovered by and paid to Grape Exchange pursuant to the Management Agreement or otherwise;

(g) Align acknowledged and agreed that Grape Exchange was entitled to obtain access to the Bella Vista Vineyard for the purpose of performing its Management Obligations. Timbercorp group entities (including TSL) and the liquidators acknowledged and agreed that they would not exercise any rights under the head lease of the Bella Vista Vineyard or any other occupancy arrangements, to refuse Grape Exchange's access to the vineyard;

(h) Grape Exchange represented and warranted to Align that its budget in respect of the Bella Vista Vineyard had been prepared on the basis of the terms set out in the Management Agreement;

(i) Grape Exchange agreed and acknowledged that it would obtain Align's approval before incurring any costs and expenses (other than those included in the budget and certain others);

(j) Grape Exchange would keep books and records that accurately showed the monthly costs and expenses of managing the Bella Vista Vineyard and would make them available for inspection and audit by Align; and

(k) The "Management Fees" to be paid to Grape Exchange were "$nil".

26 The Costa Heads of Agreement was due to expire on 30 September 2009. On 28 September 2009, Grape Exchange wrote to Align making recommendations as to the ongoing management of the Bella Vista Vineyard.

27 On 22 October 2009, Align went into receivership. Stephen Longley ("Longley") and Paul Kirk were appointed as receivers and managers. Longley was later replaced by Michael Fung ("Fung").

28 In around November 2009, one of the receivers visited the Bella Vista Vineyard and observed that the vines had not been pruned and there was substantial weed growth. In late November 2009, Grape Exchange quoted to undertake pesticide spraying and irrigate the vineyard. The receivers accepted the quote, the work was done and it was paid for.

29 From the time of their appointment, the receivers conducted a marketing campaign for the sale of the Bella Vista Vineyard. Costa Exchange submitted an expression of interest in purchasing the land (although ultimately, it did not make a formal bid). In November 2009, the receivers identified Costa Holdings Investments Pty Ltd ("Costa") as the a preferred bidder. Costa is not related to Grape Exchange or the Costa Exchange Group.

30 On 21 December 2009, the liquidators, Timbercorp, TSL, Grapecorp, the receivers and Costa entered into an Interim Management Agreement ("the IMA"). Under the IMA, Costa agreed to undertake management services to preserve the Bella Vista Vineyards pending finalisation of its negotiations with the receivers to purchase the land. The receivers eventually sold the Bella Vista Vineyard to Costa in July 2010.

31 From mid-August 2009, the liquidators of Grapecorp demanded payment of the Unpaid Net Proceeds from Grape Exchange. Correspondence between the parties and their solicitors followed. Grape Exchange refused to pay and Grapecorp issued these proceedings.

32 There are three principal issues that arise in this case. The first issue is whether Grape Exchange is entitled, under s 553C of the Act, to set off all of the Direct Costs and Expenses and Management Fees allegedly owed to it by Grapecorp against the amount that it received from the sale of the grapes from the 2009 harvest (being the Unpaid Net Proceeds). This issue involves complex factual and legal matters, including whether the proceeds are trust funds.

33 The second issue is whether, and apart from the first issue, Grape Exchange is entitled to be paid the amount it claims is owed by Grapecorp for Direct Costs and Expenses and Management Fees in priority to other creditors under s 556(1)(a) of the Act. This issue itself raises a number of factual and legal issues mainly associated with the liquidation expenses principle. This issue will only have any practical relevance if Grape Exchange does not succeed on the first issue.

34 The third issue (not unrelated to the first issue) is a claim made by Grapecorp for monies had and received.

D. The first issue - Set-off under s 553C of the Act

35 The issue of set-off under s 553C was raised by Grape Exchange at the end of the case. However, for reasons referred to later and not without some hesitation, I have decided (subject to an appropriate costs order) to permit Grape Exchange to argue the matter. In advance of my ruling, full submissions were made by both parties.

36 Section 553C of the Act provides:

553C Insolvent companies - mutual credit and set-off

(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.

37 Grape Exchange contends that its claim for unpaid Direct Costs and Expenses may be set off against the claim by Grapecorp for the Unpaid Net Proceeds of the 2009 harvest. It contends, by reference to authority, that the set off under s 553C is automatic.[4] It submits further, by reference to authority, that the relevant date at which the set off takes effect is the date of the winding up.[5] In this case, it is common ground that the date of commencement of the winding up, namely 24 April 2009, is the relevant date.

38 Grape Exchange contends that the claims in the present case satisfy the requirement of mutuality, in that:

(a) they are between the same parties, namely Grapecorp and Grape Exchange;

(b) each party makes its claim in the capacity in which it is sued by the other; and

(c) the claims arise out of a dealing to which both Grapecorp and Grape Exchange were parties, namely, the Management Agreement.

39 It is further contended by Grape Exchange that set-off under s 553C(1) extends not only to debts which are due at the date of winding up, but also debts which were contingent at that date and ultimately, mature into pecuniary demands. Grape Exchange submits, relying on a number of authorities, that a company can have a contingent claim or a contingent debt if, as a result of an existing obligation, it will be liable to pay or be entitled to receive a sum of money on the occurrence of a future event which may happen, not which must happen.[6]

40 Grapecorp disputes mutuality and indeed any indebtedness capable of set-off. Further, it contends that Grape Exchange could not claim the benefit of a set-off under s 553C(1) because at the time the amounts it claimed became owing, it was aware of Grapecorp's insolvency. Under s 553C(2) such knowledge precludes a right of set off.

41 Grape Exchange contends however, that it extended credit to Grapecorp when the Management Agreement was entered into in January 2008 and not when specific marketing and management services were performed. It submitted further that there was no suggestion that Grapecorp was insolvent at that stage, or that Grape Exchange had any awareness of such insolvency.

42 Accordingly, it is necessary to consider whether there was mutuality as at the date of the winding up, whether post-liquidation expenses can be set off and further, the effect of s 553C(2) of the Act.

43 There are a number of matters which are relevant to the question of whether the claims made by Grapecorp and Grape Exchange exhibit the requisite degree of mutuality to enable a set-off. The first issue, whether the proceeds are trust funds, is also relevant to one of Grapecorp's principal claims in the proceeding.

44 Grapecorp contends that all amounts received by Grape Exchange referable to the sale of grapes under the Management Agreement are trust moneys and should be paid to Grapecorp without any deduction or set off. Further, as a result of Grapecorp being the beneficial owner of such trust funds, it is submitted that a key element of set-off, being mutuality, is absent.

45 Grape Exchange contends that the proceeds are not trust funds and that it received them as agent for Grapecorp, not as trustee.

46 In Walker v Corboy,[7] the New South Wales Court of Appeal rejected a claim that an agent who sold farm produce at market held the proceeds of sale on trust for its principals. Meagher JA[8] posed the test as follows:

The question whether an agent for sale holds the proceeds of sale on trust for his principal, so that the relationship between them is that of trustee and cestui que trust, on the one hand, or he simply owes to his principal whatever sum of money is then due on account between them, so that the relationship between them is simply that of creditor and debtor, on the other hand, is one which is not easy to answer in many factual contexts. Basically, as Scott says, the answer must depend on the intention of the parties: Scott on Trusts, 4th ed (1987) at 133_._ This must be so because, except in the case of constructive trusts where a trust is thrust on the parties irrespective of their intentions and as a matter of policy, an intention to create a trust is an essential element of a trust. If the parties expressly spell out that their arrangements do or do not involve a trust, a trust comes into existence or does not come into existence accordingly. However, this consideration is of little assistance where, as in the present case, the parties to the transaction are silent as to their intentions.

When, as here, the parties have no expressed intention, it then becomes necessary to see, in all the circumstances of the case, what intention the law should impute to them: see Trident General Insurance Co Ltd v McNiece Bros Pty Ltd [1988] HCA 44; (1988) 165 CLR 107 at 120-121 per Mason CJ, Wilson J (at 146-147) per Deane J. In the case of a single transaction the position is clear enough. In the absence of any other factors, the law will take the view that he who beneficially owns the tree also beneficially owns the fruit: the agent will be a trustee of the proceeds of sale.

47 The Management Agreement is silent in this regard. It does not specifically constitute Grape Exchange as trustee of any sale proceeds. Accordingly, it is necessary to assess the presumed intention of the parties by reference to the Management Agreement and surrounding circumstances. The Court must examine the nature of the relevant transactions to ascertain whether a relationship of trustee and beneficiary exists between the parties.[9]

48 Grape Exchange was not required to hold and keep the proceeds received from time to time in a separate bank account. The obligation was only to deposit the money into an account nominated by Grapecorp, which nomination did not occur. All amounts received by Grape Exchange were deposited into its one bank account and mixed with other funds received. Although not critical, this is an important consideration. Further, the funds were not earmarked for Grapecorp. Rather, Grape Exchange was entitled to adjust its expenses (against the expenses paid in advance) and only remit the Net Proceeds to Grapecorp. Grapecorp did not own the vines or the grapes, nor did it have a proprietary interest in the proceeds of sale, except insofar as it might claim a lien over them for expenses it might incur in the performance of its management obligations under the TSL Management Agreements. It was merely entitled to collect the proceeds from Grape Exchange, before passing them on to TSL, after deduction of its own entitlement.

49 In my opinion, neither the language used nor the surrounding circumstances support a clear presumed intention on the part of Grapecorp and Grape Exchange that any proceeds would assume the character of trust funds. Rather, the circumstances point the other way. None of the usual indications of a trust are present.

50 Further, I do not consider that in relation to the mutual debts, mutual credits and mutual dealings, the parties were acting in different capacities so as to destroy the element of mutuality for the purposes of s 553C(1).

51 The next question is whether the Direct Costs and Expenses incurred by Grape Exchange after the relevant date, 24 April 2009, are capable of set-off.

52 The principle is clear and is endorsed by high and, for the most part, consistent authority. Post-liquidation receipts, payments and debts are capable of set-off provided they existed as contingent claims at the commencement of the winding-up and are of a kind that ultimately mature into pecuniary demands capable of set-off.

53 In Hiley v The Peoples Prudential Assurance Co Ltd (in liq)[10] Dixon J stated: [11]

It is enough that at the commencement of the winding up mutual dealings exist which involve rights and obligations whether absolute or contingent of such a nature that afterwards in the events that happen they mature or develop into pecuniary demands capable of set off. If the end contemplated by the transaction is a claim sounding in money so that, in the phrase employed in the cases, it is commensurable with the cross-demand, no more is required than that at the commencement of the winding up liabilities shall have been contracted by the company and the other party respectively from which cross money claims accrue during the course of the winding up...

54 In the same case, Rich J stated that for there to be mutual dealings:[12]

Rights must be vested in the creditor and in the company which, without any new transaction, grow in the natural course of events into money claims capable of forming items in an account or capable of settlement by set-off.

55 Starke J stated that the dealings on each side must be such as "would end in a money claim."[13] His Honour said that:

[t]here are cases in the books in which sureties who have been compelled to pay a principal debt after bankruptcy have been allowed to set-off the sum so paid against debts due to the bankrupt ... But the obligation of the surety in those cases arose before bankruptcy and was an obligation which might and did in fact end in a money claim.[14]

56 Hiley was followed and applied by the High Court in Day & Dent Constructions Pty Ltd (in liquidation) v North Australian Properties Pty Ltd (Provisional Liquidators Appointed).[15] Gibbs CJ referred extensively to Hiley and the surety cases referred to by Starke J therein all with approval so far as the contingency point was concerned. The Chief Justice referred to other cases supporting what his Honour considered to be the principle, that:

... it is enough that at the date of the liquidation there existed on the one hand a debt and on the other hand a liability which in due course might mature into a debt... [16]

57 Mason J agreed with the Chief Justice for substantially the same reasons. In relation to the policy or purpose which underlies the statutory set-off provisions (in the context of bankruptcy legislation) his Honour said:

[t]he essential notion of s 86 is the protection of those who engage in mutual dealings with the bankrupt. The section protects the surety by relieving him from the necessity of proving in the bankruptcy for the debt owed to him with the likelihood of receiving only a proportion of it, whilst he remains fully liable for the debt he owes to the bankrupt...[17]

58 To the same effect are the statements of a Full Bench of the High Court (Mason CJ, Brennan, Deane, Dawson, Toohey, Gaudron and McHugh JJ) in Gye v McIntyre:[18]

The requirement that the credits, the debts or the claims arising from other dealings be commensurable does not mean they must be vested, liquidated or enforceable at the decisive date, that is to say, at the time of the sequestration order or special resolution accepting the composition. Provided they exist as contingent at that date and are of a kind which will ultimately mature into pecuniary demands susceptible of set-off, the requirement of the section may be satisfied in relation to them...

59 According to the Full Court in Gye, the concept of "mutual credits", "mutual debts" and later "mutual dealings"[19] was introduced to do "substantial justice" between the parties and should be given "the widest possible scope."[20] The rhetorical question was this: why should a liquidator insist on 100 cents in the dollar, but at the same time insist that the debtor - engaged in mutual dealing - be satisfied with a dividend of a few cents in the dollar.[21] The High Court pointed out the potential for abuse in the circumstances where set-off would not be available whether because of manipulation, knowledge or otherwise.[22]

60 In Community Development Pty Ltd v Engwirda Construction Co,[23] the High Court considered whether a builder, who had a building contract which entitled it to be paid for work when performed, was a "contingent or prospective creditor" of the other contracting company at the relevant date. It was held that the builder was a contingent creditor from the time the building contract was made. In this regard, Kitto J (Barwick CJ, Taylor, Windeyer and Owen JJ agreeing) stated:

Not much assistance is to be gained, I think, from observations that are to be found in reported cases as to the import of the word "contingent", and I shall refer to one only. In In re William Hockley Ltd[24] Pennycuick J suggested as a definition of "a contingent creditor" what is perhaps rather a definition of "a contingent or prospective creditor", saying that in his opinion it denoted "a person towards whom, under an existing obligation, the company may or will become subject to a present liability upon the happening of some future event or at some future date". The importance of these words for present purposes lies in their insistence that there must be an existing obligation and that out of that obligation a liability on the part of the company to pay a sum of money will arise in a future event, whether it be an event that must happen or only an event that may happen. A building contract creates, as soon as it is entered into, an obligation upon the building owner to pay the contract price, either as a whole upon a future event or, more usually, by progress and final payments each of which is to be made on a future event. The event or events may not happen, but if and when one of them does happen the building owner, by force of the contractual obligation, must pay the builder a sum of money. It is, I think, nothing to the point that the event may be complex, as where the payment is agreed to be made when the whole or some part of the work has been done to the satisfaction of an architect as expressed in a certificate or to the satisfaction of an arbitrator as expressed in an award: the building owner is bound from the time the contract is made to pay money to the builder upon a contingency; and that in my opinion makes the builder a contingent creditor of the owner.[25]

61 In National Bank of Australasia Ltd v Mason[26] Barwick CJ referred to the judgment of Kitto J in Engwirda and his Honour's reliance on the definition of a contingent creditor in Re William Hockley Ltd,[27] in the following terms:

As was emphasized in that judgment, the importance of that definition is its insistence on the presence of an existing obligation out of which the ultimate liability will grow.

62 In Federal Commissioner of Taxation v Gosstray[28] Tadgell J referred to Engwirda and continued:

The notion that a contingent debt must be founded on an existing obligation is strengthened when it is realised that a monetary claim for it, if made the subject of a proof, is to be stated as on the date of the bankruptcy... If when the proof is lodged the contingency has not happened, the amount of the claim must be estimated as accurately as possible... see s. 82(4) of the Bankruptcy Act 1966. If the value of the claim cannot be fairly estimated s. 82(6) provides that the debt or liability should be deemed not to be provable. Of course, it is open to the court to assess the value of a claim at nil... If, however, a claim were made not founded on an obligation of the bankrupt existing at the date of bankruptcy which could ripen into a debt upon a contingency, the proper conclusion, in my view, would be not that the provable claim should be assessed at nil but that there was no claim on the bankrupt estate at all.[29]

63 In Old Style Confections Pty Ltd v Microbyte Investments Pty Ltd (in liq),[30] Microbyte Investments Pty Ltd ("Microbyte") had licensed the use of a machine to Old Style Confections Pty Ltd ("Old Style"). When it interfered with Old Style's use of the machine, Old Style commenced an action for damages and specific performance. The Court made orders for specific performance and damages to be assessed. Before the damages were assessed, Microbyte was wound up. The liquidators subsequently made a claim against Old Style for licence fees which had fallen due for payment after the commencement of the liquidation. The liquidators accepted that Old Style could set off its claim for damages against pre-liquidation licence fees, but denied its claim to set off against post-liquidation licence fees. Hayne J held[31] that no distinction could be drawn between the two. In reaching this conclusion, his Honour said the following:[32]

Hiley, Day & Dent and Gye v McIntyre...make plain that the mere fact that performance of the contract made before liquidation may not take place until after liquidation does not determine whether the debt due under that contract may be set-off against other dealings with the company. The question is not whether both claims are vested, liquidated or enforceable at the decisive date but whether they exist as contingent at that date and "are of a kind which will ultimately mature into pecuniary demands susceptible of set off" (see Gye v McIntyre at 624 and Hiley's case at 497). That question is not answered by enquiring simply when performance of the contract occurred.

64 In JLF Bakeries Pty Ltd (in liq) v Baker's Delight Holdings Ltd[33] the Court applied Hiley and Gye and held that moneys payable on the exercise after liquidation of an option agreement entered into prior to liquidation (for the purchase of fixtures, fittings, plant and equipment) could be set-off against moneys owed by the company in liquidation as a result of a loan.

65 In JLF Bakeries, White J did not consider that the post-liquidation exercise of the option was a fresh event. His Honour considered that s 553C should be given the widest possible scope.[34]

66 The effect of the cases discussed above is that a contingent right or liability will only exist where there is a vested or existing right or obligation out of which, on the happening of a contingency (an event which may or may not occur), there will arise a right to be paid or an obligation to pay, a sum of money, which sum of money may be liquidated or sounding only in damages.[35] The contingency is usually performance of an obligation.

67 The critical matter therefore is the existing or vested right or obligation as at the date of the winding-up. This well established concept introduces a sufficient state of certainty and recognises that commerce does not stop when a company goes into liquidation. In many cases, there is a reasonably lengthy and sometimes complex process from administration (if this occurs) to liquidation and through the winding up process to final dissolution and distribution to creditors. During the process, liquidators have various rights and duties and must make elections regarding contracts that remain executory. Put simply, transactions, or to use a more neutral word, activity, continues. Debts are incurred and amounts may be owed to the company. Although not a code, the Act deals with most of these post-liquidation matters.

68 The policy behind the legislation requires a notional account to be taken as at the commencement of the winding-up. However, account must be taken of activity continuing after such date so far as such activity - eventually sounding in money - is underpinned by pre-liquidation obligations. Post-liquidation debts (and credits) that are entirely fresh transactions are dealt with differently. Whether any equitable set-off is available in such a case is not a matter that needs to be dealt with in the present case. However, as the authorities establish, it is proper and just that activity undertaken post-liquidation pursuant to antecedent pre-existing obligations that remain on foot should be brought to account and set off in the manner contemplated.

69 That a notional account is taken as at the date of commencement of the winding up (and indeed, that any set-off is automatic) is important. This retroactivity or hindsight underpins a fundamental principle of insolvency law, namely, that the liquidation and distribution of assets of an insolvent company notionally take place on the date of the winding-up order.[36]

70 In Stein v Blake,[37] Lord Hoffmann referred to the hindsight principle in the context of contingent claims:[38]

How does the law deal with the conundrum of having to set off, as of the bankruptcy date, "sums due" which may not yet be due or which may become owing upon contingencies which have not yet occurred? It employs two techniques. The first is to take into account everything which has actually happened between the bankruptcy date and the moment when it becomes necessary to ascertain what, on that date, was the state of account between the creditor and the bankrupt. If by that time the contingency has occurred and the claim has been quantified, then that is the amount which is treated as having been due at the bankruptcy date. An example is Sovereign Life Assurance Co v Dodd [1892] 2 Q.B. 573, in which the insurance company had lent Mr Dodd £1,170 on the security of his policies. The company was wound up before the policies had matured but Mr Dodd went on paying the premiums until they became payable. The Court of Appeal held that the account required by bankruptcy set-off should set off the full matured value of the policies against the loan.

But the winding up of the estate of a bankrupt or an insolvent company cannot always wait until all possible contingencies have happened and all the actual or potential liabilities which existed at the bankruptcy date have been quantified. Therefore the law adopts a second technique, which is to make an estimation of the value of the claim. Section 322(3) says:

"The trustee shall estimate the value of any bankruptcy debt which, by reason of its being subject to any contingency or contingencies or for any other reason, does not bear a certain value".

This enables the trustee to quantify a creditor's contingent or unascertained claim, for the purposes of set-off or proof, in a way which will enable the trustee safely to distribute the estate, even if subsequent events show that the claim was worth more. There is no similar machinery for quantifying contingent or unascertained claims against the creditor, because it would be unfair upon him to have his liability to pay advanced merely because the trustee wants to wind up the bankrupt's estate.

71 In my opinion, as at the relevant date, in this case the appointment of administrators on 24 April 2009, all relevant payment obligations on each side were existing and vested so as to provide a proper foundation for set off in relation to the amounts that subsequently matured and crystallised and indeed ended in money claims. Both proceeds received and expenses incurred by Grape Exchange were pursuant to the terms of the Management Agreement, which specifically remained on foot post-liquidation. Although new work was done by Grape Exchange, there was no new or fresh transaction in the relevant sense. The fact that there was fresh activity is not to the point and confuses the analysis. The events giving rise to the debits and credits took place in the natural course of events and in the ordinary course of business. Further, in my opinion and for reasons referred to below, the Costa Heads of Agreement did not have any real relevant impact on the underlying obligations of the parties that gave rise to the mutual debts, mutual credits and mutual dealings, save perhaps in relation to management fees which are expressed to be 'NIL'.[39] I propose to hear further argument in relation to this aspect in due course.

72 The next matter relates to s 553C(2) of the Act. Is Grape Exchange precluded from relying on s 553C(1) because of its knowledge of Grapecorp's insolvency.

73 In Old Style, the liquidators also contended that Old Style could not have the benefit of set-off against post-liquidation fees because it had notice of Microbyte's insolvency. Hayne J dismissed that contention:[40]

The third point put forward on behalf of the liquidators, namely that old (sic) Style had notice of the company's insolvency before 6 June 1994 when the first payment fell due after the liquidation, assumes that each instalment of licence fee arises from a fresh dealing in the sense that at each date for the payment of an instalment due under the licence agreement Microbyte in some way gives credit to Old Style. While it may be accepted that as soon as Microbyte had provisional liquidators appointed, Old Style new that Microbyte was insolvent, I do not accept that there was a giving or allowing of credit by Microbyte to Old Style after commencement of the liquidation. In this case, the transactions which constituted the giving and receiving of credit for the mutual dealings, both occurred before liquidation.

74 According to Goode,[41] the relevant time for assessing notice of insolvency "is not when the debt became payable, but when the obligation which arose from it was incurred." This is usually the date of the underlying antecedent pre-liquidation contract that underpins the contingency.

75 In JLF Bakeries, White J referred to Old Style and held that the relevant date, so far as notice was concerned, was the date of the franchise agreement. His Honour also referred with approval (and to similar effect) to the decision of Hodgson J (as his Honour then was) in Shirlaw v Lewis.[42]

76 In my opinion and consistent with the abovementioned authorities, any notice or knowledge of Grapecorp's insolvency must be considered as at the date the Management Agreement was executed. There is no suggestion that Grapecorp was insolvent at that earlier date in 2008. Accordingly, s 553(2) does not operate to preclude the set-off by Grape Exchange.

The second issue - Were the Direct Costs and Expenses and Management Fees liquidation expenses under s 556(1)(a)?

77 Section 556(1)(a) of the Act provides that in a winding up of a company "expenses (except deferred expenses) properly incurred by a relevant authority in preserving, realising or getting in property of the company, or in carrying on the company's business" must be paid first, in priority to all other unsecured debts and claims. A "relevant authority" includes an administrator or a liquidator.[43] Consequently, administrators' expenses, as defined in s 443A of the Act, are covered by s 556(1)(a).

78 Grape Exchange contends that the Direct Costs and Expenses and Management Fees due to it for the period after 24 April 2009 and totalling $2,711,995.00, have the character of expenses within the meaning of s 556(1)(a). Grape Exchange contends that the Direct Costs and Expenses and Management Fees were incurred:

(b) by relevant authorities, being Korda and Chesser in their capacities as administrators and then liquidators of Grapecorp; and

79 Grape Exchange contends further that although the Management Agreement was entered into before liquidation - which would normally give rise to a requirement to prove in the ordinary way - the position is different where a liquidator uses property or services under a pre-liquidation contract for the purpose of the liquidation and without disclaiming that contract. Grape Exchange submits that this so-called exception applies in this case. Reference was made to a number of cases.

80 Grapecorp does not dispute the existence of the principle. It submits however, that the principle does not apply in the present case because the expenses were not incurred in carrying on Grapecorp's business. The administrators had decided to cease Grapecorp's operation and therefore, it is submitted, there was no business carried on. Further, Grapecorp submits that the expenses were not for the benefit of the winding-up, but either for the benefit of the landlord, Align, or for Grape Exchange's own benefit.

81 In the usual case, debts arising under contracts entered into with a company prior to liquidation are provable in the winding up and are, therefore, crucially different from normal liquidation expenses.[44] However, a line of cases which may be traced to In re Exhall Coal Mining Co Ltd[45] and In re Lundy Granite Co; Ex parte Heavan[46] has established that there are exceptions to this rule where a liquidator continues to make use of property for the purposes of the liquidation. The principle has come to be known as the "liquidation expenses principle."[47] In Toshoku Finance UK Plc (In liq),[48] Lord Hoffman defined it in the following terms:

The principle evolved from the Exhall Coal Mining Co Ltd [1864] EngR 439; 4 De GJ & S 377 and Lundy Granite Co (19871) LR 6 CH App 462 is thus one which permits, on equitable grounds, the concept of a liability incurred as an expense of the liquidation to be expanded to include liabilities incurred before the liquidation in respect of property afterwards retained by the liquidator for the benefit of the insolvent estate. Although in (sic) was originally based upon a statutory discretion to allow a distress or execution against the company's assets, the courts quickly recognised that its effect could be to promote a creditor from merely having a claim in the liquidation to having a prior right to payment in full. By the end of the 19th century, the scope of the Lundy Granit Co principle was well settled. [49]

82 The principles were more fully stated by Lindley LJ in In re Oak Pits Colliery Company:[50]

If the liquidator has retained possession for the purposes of the winding-up, or if he has used the property for carrying on the company's business, or has kept the property in order to sell it or to do the best he can with it, the landlord will be allowed to distrain for rent which has become due since the winding up ...
But if he has kept possession by arrangement with the landlord and for his benefit as well as for the benefit of the company, and there is no agreement with the liquidator that he shall pay the rent, the landlord is not allowed to distrain ...

83 In the lease cases, whether the liquidator has elected to retain possession will be determined objectively by what she or he has said and done.[51] The fact that the liquidator retains possession of the land is not, of itself, sufficient to render the rent an expense of the winding-up. The possession must be for the benefit of the winding up. Thus, it will not be sufficient that possession was maintained if it was also for the benefit of the landlord. Furthermore, not offering to surrender or simply doing nothing will not be regarded as retaining possession for the benefit of the estate.[52]

84 Commonly, a liquidator may elect to continue occupation of rented premises in order, for example, to continue the company's business pending its sale as a going concern, or as a place to store or auction stock or plant and equipment. In such cases, the incidental liabilities, including rent, rates and other taxes, will be incurred by the liquidator as if they were an expense of the liquidation, notwithstanding that the lease of the premises was entered into prior to the liquidation.[53]

85 The test is clear for when a pre-liquidation obligation will attract the priority under s556(1)(a): the relevant expense must have been incurred for the benefit of the winding-up. Professor Goode has stated the test, together with some useful examples, as follows:[54]

the test is whether (and if so, when) the liquidator adopts the transaction, in the sense that he takes it over for the benefit or convenience of the winding up, for example to run the business or with a view to disposing of it, or merely continues in passive possession of the land or goods without disclaiming the transaction. In the former case the post-liquidation rent or other liability accruing after such adoption is an expense of the liquidation, whereas that accruing after winding up but before adoption is merely a provable debt; in the latter case, the post-liquidation liability is provable only, not payable.

86 The term "expenses" is s 556(1)(a) has a wide meaning.[55] It includes any expenses which the liquidator may be compelled to pay in respect of preserving, realising or getting in the property of the company, or in carrying on its business.[56] Typical examples of expenses covered by s556(1)(a) include the costs of recovering or realising assets, liabilities incurred during the winding-up in carrying on the company's business (such as employee wages, rent or rates on premises occupied by the company during the liquidation, at least where the liquidator has elected to retain possession for the purposes of the winding-up), costs orders in respect of litigation brought, continued or defended by the liquidators, and tax liabilities on profits earned during the period when the business is carried on by the liquidators.[57]

87 The identification of an expense arising under a pre-liquidation contract is a matter of fact and law, not discretion.[58]

88 In Timbercorp Securities, Finkelstein J[59] considered cases where landlords had been permitted to distrain for rent incurred after the tenant's liquidation. His Honour concluded that the point of those cases was that "distress for rent is allowed when the liquidator has 'elected' to retain possession of the leased land."[60] Ordinarily, the election will be evidenced by what the liquidator has said and done.[61]

89 The application of the principle is not limited to distress.[62] Nor is it confined to cases where a liquidator continues to occupy land. In Re Mesco Properties Ltd[63] Brightman J held that a liability for capital gains tax from the sale of property prior to liquidation was a cost in the liquidation. Further, and more relevantly, a liquidator's election not to disclaim an ongoing contract for services may result in the charges for those services being liquidation expenses.[64]

90 A resolution of the question of whether pre-liquidation expenses are covered by s 556(1)(a) involves a necessary consideration of what was done, why or pursuant to what agreement (if any) and for whose benefit the work was done. In this regard, the conduct of the liquidators, evidenced by what they said and did, is of critical importance.

91 Evidence was given at trial as to what was done by Grape Exchange on the Bella Vista Vineyard after the appointment of Korda and Chesser as administrators. The evidence of Mr Richard Hamley ("Hamley") is most instructive in this regard and was either not contradicted or confirmed by other witnesses. Hamley was the general manager of Grape Exchange and was responsible for the management of farms including the Bella Vista Vineyard. He majored in environmental biology as part of his Bachelor of Science degree and has 26 years experience in the horticulture industry.

92 Hamley gave evidence that he visited the Bella Vista Vineyard at least once a month during the relevant period and was in constant contact with the relevant farm manager. He gave evidence that during the harvest period, which took place from March to May, much activity was undertaken to produce high quality product. After the harvest and during the period May to December, Grape Exchange continued to perform essential and necessary services on the Bella Vista Vineyard. Without these ongoing maintenance services the vines would have died. I accept Hamley's evidence that although he was required to spend as little as possible on the Bella Vista Vineyards after the appointment of the administrators, irrigation, fertilisation, weed control, pest and disease control and pruning were necessary ongoing services that were provided.

93 Hamley went through the ongoing maintenance program for the Bella Vista Vineyard in some detail by reference to the seasons and also the various codes contained in the general ledger of Grape Exchange, which was used for recording and itemising expenditure.

94 The business of cultivating vines and selling table grapes is conducted in an annual seasonal cycle. The time and cost of tending vines varies according to the stage of the cycle. The pruning of vines in winter was a particularly labour intensive exercise and needed to be concluded by the end of June in readiness for spring, when irrigation and weed control began in earnest. By September, buds began bursting on the vines. Various chemical treatments were applied to control the dormancy of the buds. Irrigation, fertilisation and weed control continued through summer as needs required. With the arrival of late-summer rains, covers were placed over the vines to protect the fruit. Harvesting of the grapes by hand took place between February and June. This, too, was labour intensive. Once picked and packed, the grapes were stored in the Grape Exchange's distribution centre before dispatch to customers.

95 It is unnecessary to set out the evidence of the work done by Grape Exchange in further detail. It is sufficient to state that work was done by Grape Exchange on the Bella Vista Vineyard after 24 April 2009, the work was necessary and all relevant parties (including the liquidators) knew it was being done. The precise calculation of the expenses (which took up a not insubstantial amount of time at trial) is not relevant at this stage.

96 Evidence was given on behalf of Grapecorp by Korda and Andrew Malarkey ("Malarkey"), another partner of the firm KordaMentha Pty Ltd who assisted Korda and Chesser in dealing with the Timbercorp group's horticultural managed investment schemes, including the Projects. The evidence of Korda and Malarkey was that they were aware that work was being done and expenditure incurred in relation to ongoing maintenance work on the farms, including the Bella Vista Vineyard. Darren Lipton ("Lipton"), who prior to the administration was the General Manager- Horticulture of the Timbercorp Group, gave evidence to similar effect. In fact on 18 June 2009 the liquidators advised creditors and Growers of the completion of the 2009 harvest and the continuing maintenance work performed by Grape Exchange.

97 I accept the evidence of Babiolakis to the effect that he told Malarkey in or about April 2009 that Grape Exchange would continue to harvest and sell grapes provided it was reimbursed for its costs and expenses the expected source being the sale proceeds. According to Babiolakis, Malarkey's concern was that the administrators not be required to pay any further amounts. Although Malarkey does not entirely agree with the version given by Babiolakis he does not deny the critical matter raised by Babiolakis, namely the intention to recoup costs and expenses effectively by way of set off.

98 Further relevant matters in relation to the nature and extent of work done by Grape Exchange are set out below.

99 By performing the necessary ongoing maintenance, albeit to a lesser extent than would otherwise have been the case, the vines remained intact and able to be used for further harvesting.

100 A number of parties benefited from the ongoing maintenance program. The landlord and the registered proprietor of the Bella Vista Vineyard benefited, as did potential purchasers. However, the important question in the context of s 556(1)(a) of the Act is whether Grapecorp, the company in liquidation, benefited.

101 Grapecorp was entitled to receive the Net Proceeds of sale after the harvest and was the beneficiary of various obligations under the Management Agreement. It in turn had obligations to TSL. In its own right, it had an asset the preservation of which would enure for its benefit and enable it to comply with its contractual obligations.

102 Korda and Chesser wanted to continue to maintain the vines, as well as harvest, pack and sell the grapes. They saw fit specifically and deliberately not to terminate the various leasing arrangements or the Management Agreement and chose rather to ensure that the necessary cultivation and maintenance would continue until a convenient sale of the scheme assets could be accomplished. It is reasonable to assume that the liquidators incurred the time and cost in dealing with Align and Costa in relation to the sale of the Bella Vista Vineyard, and the costs of harvesting and selling the grapes, in contemplation of some potential benefit to the Timbercorp companies (including Grapecorp) and the Growers.

103 As noted above, Grapecorp was in essence an intermediary company. It was engaged by TSL to manage the Bella Vista Vineyard. That was its business. It then engaged Grape Exchange to perform that same function. Nonetheless, its rights and obligations under the management agreements were real and integral. Had Grape Exchange not continued to provide its services after the appointment of the administrators, Grapecorp would have been in breach of its obligations to TSL. By continuing to perform its obligations under the Management Agreement, Grape Exchange (to the knowledge and indeed with the consent of Grapecorp and Korda and Chesser) ensured the performance of Grapecorp's own obligations under the TSL Management Agreements. Grapecorp thereby averted any liability for failure to carry out its obligations under the TSL Management Agreement and preserved its entitlement to fees, and an equitable lien over the proceeds of sale of grapes. If this had not occurred TSL, in turn, would have been in breach of its obligations to Growers. This may have led to claims by Growers in the liquidation of TSL, and TSL's corresponding claim in the liquidation of Grapecorp. The business of Grapecorp cannot be looked at in isolation. It was an essential part of a complex arrangement and must be viewed as such.

104 Accordingly, in my opinion, Grapecorp benefited from the continuation of the necessary work on the Bella Vista Vineyard in the relevant legal sense. The work enabled Grapecorp's assets to be preserved and its business, as a relevant intermediary company in a complex group, to be carried on pending further determination or sale of the land. This conclusion is supported by a number of other matters discussed below.

105 On 11 February 2010, the liquidators, Timbercorp, TSL, Grapecorp, the receivers and Costa entered into a crop sale agreement ("Crop Sale Agreement") providing for the sale by TSL (as agent for the Growers in the 2004 project) to Costa of the grapes harvested in the 2010 harvest. There was no crop sale agreement with respect to the 2005 project. The recitals to the Crop Sale Agreement record that:

Q. The RE and TSL have determined that, to maximise returns to Participant Growers, they will put the 2010 Table Grapes to commercial use by selling them to Costa on the terms and conditions of this Agreement.

Any net proceeds of sale of the grapes were, after deduction of Costa's costs of managing the vineyards, to be divided between Align and TSL (as responsible entity for the 2004 project).

106 In the meantime, the TSL Management Agreement dated 19 April 2004 was expressly to remain on foot and the liquidators were not to disclaim it or the head lease over the Bella Vista Vineyard, the sublease, the Growers' licences or the Grapelot Management Agreement.

107 As noted above, on 23 July 2010, the receivers sold the vineyards (including the Bella Vista Vineyard) to Costa. Pursuant to orders of Davies J made on 7 February 2011, the sale proceeds are held on trust by Align pending an order of the Court apportioning them between Align's secured creditors and the Growers.

108 Although Align may have stood to gain the most from the sale of the Bella Vista Vineyard, including the vines planted on that land, it is not the case that the companies in the Timbercorp group did not stand to benefit from the continuation of the maintenance of the vines and sale of grapes. As pointed out, the Crop Sale Agreement specifically provided for a financial return to TSL. The liquidators' purpose in entering into the Crop Sale Agreement was expressly "to maximise returns to Participant Growers." Whether or not that purpose was or might ultimately be achieved, is not to the point. It is plain that by their actions in facilitating the continued work on the Bella Vista Vineyard and preserving the existence of the Management Agreement, the liquidators perceived there to be a benefit to Grapecorp.

109 Under the Crop Sale Agreement, the liquidators (as liquidators of TSL) reserved for TSL and Growers an entitlement to a share of the net proceeds of sale of the produce. Similarly, the liquidators brought their application under s 511 in contemplation of a return to Growers. It was a stated object of the application, in the context of a sale of the land with vines in situ, "to ensure that the Growers receive consideration for the surrender of their rights." It is not to the point that an ultimate return to creditors under these agreements may be in doubt. It was nonetheless in Growers' interests that these rights be reserved. But for the work done by Grape Exchange, those interests would have no value. In my opinion, Korda rightly conceded when giving evidence that in these circumstances, the continuance of the Management Agreement was "convenient".

110 That Grapecorp had become indebted to TSL under the 2004 TSL Management Agreement was acknowledged by the parties in recital N of the Crop Sale Agreement. This could only be a result of the continuation of the management agreements of which Grapecorp was a party.

111 Grapecorp's role and business was to provide Vines and Vineyard Services to TSL, and ultimately, for the benefit of Growers. The liquidators expressly elected to continue the Management Agreement, thereby continuing Grapecorp's business. Grape Exchange's work facilitated the fulfilment of Grapecorp's obligations under the TSL Management Agreement. But for that work:

(a) the 2009 harvest would not have been completed;

(b) the collection of proceeds of realisation of the 2009 harvest would not have been carried out, or efficiently concluded;

(d) the value of the land and the growers' interests in the land, would have been diminished;

(e) Grapecorp would have been in breach of its obligations under the TSL Management Agreements;

(f) Grapecorp would not have been entitled to recover any fees and expenses under the TSL Management Agreements.

112 In my opinion, it is clear that services were rendered and the work was done pursuant to the Management Agreement. At no stage was this agreement terminated or disclaimed. In fact, the contrary is the position.

113 Grapecorp submits that the fact that the Management Agreement was not terminated, disclaimed or surrendered could not, without more, bring the Management Fees and Direct Costs and Expenses within s 556(1)(a). Otherwise, it is submitted, amounts due under any pre-liquidation contract accruing after the date of the liquidation would fall within the section.

114 However, the Costa Heads of Agreement specifically confirmed the continued operation of the Management Agreement. It did not alter the rights and obligations of the parties, save to the limited extent set out hereunder. Further and more importantly, it was (to the knowledge of all relevant parties) acted on.

115 The understanding recorded in clause 1.10 of the Costa Heads of Agreement to the effect that the liquidators did not personally "adopt or ratify" the Management Agreement does not detract from the proper characterisation of the Direct Costs and Expenses and Management Fees as liquidation expenses within the meaning of s 556(1)(a) and under the liquidation expenses principle. This is because, notwithstanding that the liabilities were incurred under a pre-liquidation contract, the liquidators elected that they be incurred by Grapecorp, initially for the purposes of the administration and then the liquidation. They manifested that election when they specifically agreed to the Management Agreement remaining "on foot and in full force and effect." All of Grape Exchange's rights and remedies under the Management Agreement were expressly preserved. This was not a novation of the Management Agreement, by which Align was substituted for Grapecorp as the obligor to Grape Exchange. The Management Agreement continued in force, with the same parties having substantially the same rights and obligations as before.

116 Although the Management Agreement was not disclaimed, Grapecorp contends - and this was the effect of Korda's evidence - that the Costa Heads of Agreement had this effect so far as the liability of the liquidators is concerned. While the liquidators may have limited their liability, this is not necessarily the same and does not go so far as disclaiming the agreement or agreeing that no right of set-off could take place. I accept the evidence of Malarkey and Korda to the effect that they did not have any money in Grapecorp and did not wish to spend any more money on the vines. However, they were happy for the work to continue and were indeed aware that work was to be, and was being, performed by Grape Exchange. Their position as communicated was that they did not have the funds and would not pay for the work. Yet although they were not required to pay in the ordinary sense, the Management Agreement specifically and intentionally remained on foot.

117 As a matter of construction, in my opinion there is no merit in Grapecorp's point that under the Costa Heads of Agreement, Align was to be exclusively responsible for Grape Exchange's fees and expenses. Under clause 4.4 of the Costa Heads of Agreement, Align was only liable to the extent that Grape Exchange's fees and expenses were "not recovered by and paid to [Grape Exchange] under the [Management Agreement] or otherwise". Align was effectively in the position of a guarantor and Grapecorp remained the principal obligor under the Management Agreement.

118 Accordingly, in my opinion, the Direct Costs and Expenses incurred by Grape Exchange during the relevant period were expenses properly incurred by the liquidators in accordance with s 556(1)(a) of the Act and Grape Exchange is entitled to priority. I will hear from the parties in relation to Management Fees.

119 It follows from these reasons that Grapecorp's claim for moneys had and received must fail. The amount received has presumably been taken into account in the set-off calculations made by Grape Exchange.

120 Grape Exchange's application to amend its pleading was made on the last day of the trial. By the proposed amendment Grape Exchange seeks to rely on s 553C of the Act, rather than its claim for equitable set-off under the Supreme Court (General Civil Procedure) Rules 2005. The lateness does not, of itself, preclude the granting of leave to amend. It is ultimately a matter for the court's discretion taking into account the interests of both parties.

121 Grape Exchange submitted that it was in the interests of justice and the resolution of all issues of controversy between the parties that leave be granted. It was submitted that no significant prejudice would be caused to Grapecorp by the amendment and that the proposed amendment was very far from being "a wholesale restructuring and revision" of Grape Exchange's case.[65] To the contrary, it was submitted that the amendment would not require the adducing of further or different evidence and would not occasion any significant delay or cost. The issue was a legal one that requires only the construction of the Act and its application to documents and facts already in evidence.

122 Grapecorp opposes the application. Its main ground is the lateness of the application and the specific indication by Grape Exchange at a directions hearing that it did not propose to rely on s 553C. Grapecorp submits that Grape Exchange should be bound by such a decision. However, Counsel for Grapecorp properly conceded that there would be no real prejudice in the event that the amendment was permitted.

123 The question of set-off under s 553C is not raised for the first time by the proposed amendment. It was pleaded in the original defence. Although reliance on s 553C was abandoned, a claim to a set-off has always been maintained. Grape Exchange does not seek to run an entirely new case or an entirely new cause of action. As in Queensland v JL Holdings Pty Ltd,[66] it seeks to raise a clearly arguable matter, which depends on the terms of a statute the true effect of which had been overlooked in the course of the litigation. This aspect of the case was not disapproved in Aon Risk Services Australia Ltd v Australian National University.[67] In the latter case, Gummow, Hayne, Crennan, Kiefel and Bell JJ made the following statement regarding the granting of leave to amend a pleading at a late stage:

The need for amendment will often arise because of some error or mistake having been made in the drafting of the existing pleading or in a judgment about what is to be pleaded in it. But it is not the existence of such a mistake that founds the grant of leave under rules such as r 501(a), although it may be relevant to show that the application is bona fide. What needs to be shown for leave to amend to be given, as the cases referred to above illustrate, is that the controversy or issue was in existence prior to the application for amendment being made. It is only then that it is necessary for the court to allow it properly to be raised to enable a determination upon it. [68]

124 There is nothing amongst the factors identified by the High Court as being relevant to the exercise of the discretion that precludes the granting of leave to amend in the present case.

125 Accordingly, in my opinion and subject to an appropriate costs order, leave to amend should be granted.

126 It follows that the plaintiff's claim must be dismissed.

127 The defendant is entitled to such declarations and orders that give effect to these reasons.

128 I will hear from the parties as to the precise form of order, any further directions and costs.

[1] The Vines and Vineyard Services are defined by reference to clause 5 of the Management Agreement.

[2] The "Marketing Services" are defined by reference to clause 6 of the Management Agreement.

[3] The "Marketing Fee" was 6.5% of the Growers Price: see clause 12.2.

[4] Gye v McIntyre [1991] HCA 60; (1991) 171 CLR 609, 622; GM & AM Pearce and Co Pty Ltd v RGM Australia Pty Ltd [1998] 4 VR 888, 891, 896.

Plaintiff v Defendant

At a glance

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Judgment (249 paragraphs)

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Legislation Cited (16)

Cases Cited (13)