Sam the Paving Man Pty Limited v Berem Constructions Pty Limited

CATCHWORDS : CORPORATIONS - application for leave nunc pro tunc under Corporations Act, s 500(2) - first defendant in liquidation - second defendant was principal contractor - work subcontracted to first defendant and plaintiff - plaintiff sought to recover debts owing by first defendant under Contractors Debts Act - where plaintiff obtained default judgment against first defendant and issue of debt certificate under Contractors Debts Act, s 7 in District Court without leave and served notice of claim on second defendant - where plaintiff reached agreement with liquidators regarding pursuing claim against second defendant at own cost - where second defendant raise defence of set-off - whether to grant leave where liquidators consent to leave and no realistic prospect of recovery for other creditors - whether to refuse leave because interfering with principles of rateable distribution between priority creditors - whether to refuse leave because notice of application not given to other creditors

Corporations Act 2001 (Cth) LEGISLATION CITED : Building and Construction Industry Security of Payment Act 1999 (NSW) Contractors Debts Act 1997 (NSW)

Re Summit Design & Construction Pty Ltd [1999] NSWSC 1136; (2000) 18 ACLC 125 CASES CITED : Belmadar Constructions Pty Ltd v Environmental Solutions International Ltd [2005] VSC 24; (2005) 23 ACLC 337 Emanuele v Australian Securities Commission [1997] HCA 20; (1997) 188 CLR 114 The Bell Group Ltd v Westpac Banking Corporation [2000] FCA 439; (2000) 104 FCR 305

PARTIES : Plaintiff: Sam the Paving Man Pty Limited Defendant: Berem Constructions Pty Limited (in liquidation)

Plaintiff: R McKeand SC COUNSEL : Defendant: n/a Memocorp: D Miller with D Moujalli

SOLICITORS : Plaintiff: Simon Diab & Associates Memocorp: Inhouse Legal

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST

2010/109850 In the matter of Berem Constructions Pty Limited (in liquidation) Pty Limited Sam the Paving Man Pty Limited v Berem Constructions Pty Limited (in liquidation)

JUDGMENT 1 HIS HONOUR: This is an application pursuant to subsection 500(2) of the Corporations Act 2001 (Cth) for leave nunc pro tunc for the plaintiff to proceed against the first defendant in District Court proceedings in which judgment has been obtained by default. The issue arises in the following way. 2 The first defendant, Berem Constructions Pty Limited ("Berem"), entered into a contract with Memocorp Australia Pty Ltd ("Memocorp"), which has been joined to the present application as the second defendant. 3 Berem was contracted to perform building works on a project known as the Strathfield Plaza. Berem subcontracted paving work to be done on that project to the plaintiff. The plaintiff served on Berem a number of payment claims made pursuant to s 13 of the Building and Construction Industry Security of Payment Act 1999 (NSW) (the "Security of Payment Act"). No payment schedule was served by Berem. 4 On 4 September 2008 the plaintiff commenced proceedings number 4009 of 2008 against Berem as first defendant and Memocorp as second defendant in the District Court. The plaintiff claimed against Berem, amongst other things, debts totalling $138,513.20 and interest. It pleaded against Memocorp that Berem had a contract with Memocorp pursuant to which Berem performed work, part of which was the work performed by the plaintiff. The plaintiff alleged that Memocorp was liable to make payments to Berem and it applied pursuant to s 7 of the Contractors Debts Act 1997 (NSW) for the issue of a debt certificate referred to in that section. 5 The scheme of the Contractors Debts Act is that a person, typically an unpaid subcontractor or worker, owed money by a defaulting contractor for work done or material supplied, can obtain payment out of money payable by the principal to the defaulting contractor under a contract between them, if the work done or material supplied are part of, or incidental to, the work to be carried out by the defaulting contractor for the principal (s 5). The means by which this is achieved is that the unpaid person obtains judgment against the defaulting contractor and may then apply for the issue of a debt certificate (s 7). The unpaid person may then serve a notice of claim on the principal (s 6(1)(b)). Service of the notice operates as an assignment to the unpaid person of the moneys owed by the principal to the defaulting contractor up to the amount of the certified debt (s 8). The principal must then pay the amount owed to the defaulting contractor to the unpaid person up to the amount of the assigned debt (s 9). 6 Where there are multiple unpaid persons with multiple assignments the assignments take priority in order of service of notices of claim (s 10). 7 The unpaid person can sue the principal in its own name. The principal can raise any defence that the principal would have had against recovery of the debt by the defaulting contractor had there been no assignment, other than a defence based on something done by the principal after service of the notice of claim on it (s 11(4)). In this way, in the case of insolvent contractors, an unpaid person within the meaning of s 5 of the Act may obtain priority over other creditors. 8 Section 7 is of some significance. It provides: " 7 Certification of debt by court

(1) When judgment is given or entered up in any proceedings relating to the recovery of money owed to a person for work carried out or materials supplied, the court may, by order made on the application of the person in whose favour the judgment is given, issue a certificate (a debt certificate ) in respect of the debt under this section. (1A) If an adjudication certificate within the meaning of the Building and Construction Industry Security of Payment Act 1999 has been filed as a judgment for a debt in accordance with section 25 of that Act, the court may, by order made on the application by the person who filed the adjudication certificate, issue a debt certificate in respect of the debt under this section. (2) If the debt concerned consists of daily, weekly or monthly wages, and the debt exceeds 120 days' wages, the amount certified in the debt certificate is not to exceed 120 days' wages. (3) A debt certificate is not to be issued if the court is satisfied that the work was done on something moveable and it would be practicable for the applicant to exercise a lien by retaining the thing in the applicant's possession. (4) A debt certificate is to be in an approved form. (5) In this section, judgment includes a default judgment. " 9 On 5 September 2008 Messrs Elkerton and Young were appointed as voluntary administrators to Berem. On 10 October 2008 the creditors of Berem resolved that it be wound up. The administrators became the joint liquidators of Berem. 10 Negotiations ensued between the solicitor for the plaintiff and the liquidators. The ultimate result of those negotiations was that Berem filed no defence in the District Court to the plaintiff's claim. The liquidators advised on 14 October 2008 that they had no objection to the plaintiff's applying pursuant to s 471B of the Corporations Act for consent to proceed in its application. (Section 471B applies to companies being wound up with insolvency pursuant to an order of the court. The relevant section applicable to a creditor's voluntary winding-up was s 500(2).) 11 Ultimately an agreement was reached between the plaintiff and the liquidators that the plaintiff could pursue its claim against Memocorp at its cost, and at its risk as to costs, on the basis that the plaintiff would pay $50,000 of any recovery from Memocorp to Berem. 12 The plaintiff did not seek leave to proceed against Berem. Nonetheless, on 17 October 2008 it obtained judgment against Berem for $149,757.42. 13 On that day the judicial registrar of the District Court issued a certificate described as a debt certificate under s 7 of the Contractors Debts Act. It states: " Pursuant to the Contractors Debts Act 1997 I certify that on the 17th day of October 2008 the sum of $149,757.42 was, in proceedings before me, determined to be due and payable by Memo Corporation Australia Limited (ACN 851 213 800) [sic] to Sam the Paving Man Pty Ltd for paving material supplied and work done by it for and upon Strathfield Plaza at Strathfield in the State of New South Wales. "

14 The certificate is in error in stating that the sum was determined to be due and payable by Memocorp to the plaintiff. It should have stated that that sum was payable by Berem to the plaintiff, however nothing turns on that error on the present application. 15 On the same day, the plaintiff served notice of its claim on Memocorp pursuant to ss 6 and 8 of the Contractors Debts Act. The plaintiff contends that Memocorp owes Berem debts of $109,964 and $51,901.10 pursuant to progress certificates number 12 and 13 issued by Memocorp to Berem. It contends that those debts have been assigned to it up to the amount of $149,757.42 referred to in the debt certificate. 16 Memocorp refuses to pay the plaintiff. It says that Berem is indebted to it for liquidated damages of at least $570,000 for failure to bring the works to substantial completion by 19 December 2007. It also claims to be entitled to damages, or extinction of the price payable under the building contract arising from the cost of rectifying allegedly defective work and for the cost of providing rent abatement to tenants affected by what it says was incomplete and delayed work, indemnity in respect of damages ordered to be paid to a tenant, and costs of defending the tenant's claim. 17 It raises those matters as a defence pursuant to s 11(4) of the Contractors Debts Act that it would have against recovery of the claimed debts by Berem had there been no assignment. 18 On 27 April 2009 the plaintiff commenced new proceedings against Memocorp in the District Court claiming the amount in the debt certificate and relying on the assignment under s 8 of the Contractors Debts Act. In an interim judgment of 18 March 2010 his Honour Judge Delaney dealt with a defence that the judgment entered against Berem was not properly entered because s 471B (scil. s 500(2)) of the Corporations Act provides that the proceeding in which judgment was to be obtained should not have been continued against the company except with the leave of the court, and no such leave had been obtained. 19 His Honour Judge Delaney referred to the decision of Austin J in Re Summit Design & Construction Pty Ltd [1999] NSWSC 1136; (2000) 18 ACLC 125 where, in the case of a defaulting contractor that was in provisional liquidation, Austin J in substance refused leave to an unpaid subcontractor to proceed under s 471B of the Corporations Law where the subcontractor was seeking to avail itself of the remedies in the Contractors Debts Act. Austin J considered that for the contractor to proceed in that way would be to give it priority over other unsecured creditors and would interfere with the principles of rateable distribution of a company's assets between creditors in the order of priorities laid down in the Corporations Law. 20 As Judge Delaney noted, this decision was followed by Byrne J in the Supreme Court of Victoria in Belmadar Constructions Pty Ltd v Environmental Solutions International Ltd [2005] VSC 24; (2005) 23 ACLC 337. Judge Delaney stayed the District Court proceedings in order, amongst other things, to enable the plaintiff to seek leave to proceed against Berem. Hence the present application. 21 There is no dispute that leave may be granted nunc pro tunc (Emanuele v Australian Securities Commission [1997] HCA 20; (1997) 188 CLR 114; The Bell Group Ltd v Westpac Banking Corporation [2000] FCA 439; (2000) 104 FCR 305 at [48]-[58]). 22 It appears from the liquidators' accounts lodged with ASIC on 22 November 2009 that the liquidators estimate that Berem has thirteen priority creditors with debts to the value of $44,445 and 303 unsecured creditors with debts totalling $11,308,794. In the accounts the liquidators stated that they did not expect any dividend to be paid to any class of creditor and did not expect to recover any further assets. It is on the cards that if the plaintiff obtains leave to proceed and is ultimately successful in its District Court proceeding against Memocorp and $50,000 is recovered by the liquidators, that money will go towards the liquidators' remuneration and expenses, although it may be that some money might be available to pay priority creditors. There is no realistic prospect of any moneys being recovered for other unsecured creditors. 23 The first question is whether leave to proceed should be refused on the ground addressed in Re Summit Design & Construction Pty Ltd. There is a significant difference between that case and the present. Here, the liquidators consent to leave being given. Mr Elkerton deposes that he consented to the plaintiff's having leave to proceed against Berem in the first District Court proceedings, because he considered it to be in the best interests of the company and its creditors. He deposes that at the present time he considers it to be in the best interests of the company and its creditors for the plaintiff to have leave to proceed. 24 Mr Elkerton does not say why he considers it to be in the best interests of the company and its creditors, except that if the plaintiff is successful, the liquidators will receive $50,000 into the liquidation. 25 The evident position taken by the liquidators is that rather than their causing Berem to seek to recover debts which may be owing pursuant to the progress certificates issued by Memocorp, they do not oppose the plaintiff's seeking to recover those debts to the plaintiff's benefit, provided that if the plaintiff is successful, $50,000 will be paid to Berem. That is a commercial judgment which must have involved the weighing of the costs of an action against Memocorp, the risk of having to meet an adverse costs order, and the likely success of such an action. 26 It is to be borne in mind on this last point that Memocorp raises as an answer to the plaintiff's claim a defence of set-off. I see no reason to doubt the liquidators' commercial judgment that it is in the interests of Berem to allow the plaintiff's claim to proceed at the plaintiff's cost and at the plaintiff's risk as to costs on the basis that if the plaintiff is successful the company will be paid $50,000. Although this disturbs the purity of the underlying principle that a company's assets will be applied rateably between creditors according to their priorities under s 556 of the Corporations Act, it does not appear to me to do so to the prejudice of creditors. 27 I think it a compelling inference that the claim to recover the debts said to be owed by Memocorp to Berem under the progress certificates would be unlikely to be brought by Berem itself through the liquidators. Such a claim would need to be funded. The liquidators' accounts reveal that as of 9 October 2009, they held only $3,074. If such proceedings were brought by Berem, presumably it would be required to provide security for costs. There would also have to be a good answer to Memocorp's off-setting claim. 28 In Re Summit Design & Construction Pty Ltd the company was in provisional liquidation only. It appears that the provisional liquidators opposed the leave there sought. There was no similar arrangement of the kind negotiated by the liquidators in the present case. 29 Counsel for Memocorp also argue that it would be unjust to grant leave because the judgment the plaintiff obtained against Berem was obtained pursuant to s 15 of the Security of Payment Act because Berem had not served a payment schedule indicating why payment was withheld. A judgment obtained pursuant to s 15 of the Security of Payment Act is an interim judgment in the sense that it does not affect the right of a party to the construction contract to bring other civil proceedings to determine the parties' rights and liabilities. In such other proceedings allowance must be made for any payments made pursuant to the Security of Payment Act, and this may involve making orders for restitution. Thus it has been said that the Security of Payment Act does no more than provide an interim, quick solution to progress payment disputes, which does not determine the parties' rights under the underlying construction contract. 30 Counsel for Memocorp argued, correctly, that it is not open to Memocorp to defend the plaintiff's claim against it by putting in issue the debt due by Berem to the plaintiff for which the plaintiff has judgment against Berem. Counsel submit that the plaintiff is now seeking to obtain on a final basis what is the subject of an interim judgment. Memocorp can only defend the claim on the grounds that it has a defence to the debt said to be owed by it to Berem, not on the ground that Berem might have a defence to the claim for which the plaintiff obtained judgment against Berem. 31 In my view this is not a ground for refusing leave. It is simply the result of the policy underlying the Contractors Debts Act that a debt certificate may be issued in respect of a judgment, whether or not the judgment has been given after a hearing on the merits. A "judgment" within s 7 of that Act includes a default judgment. Subsection 7(1A) expressly provides for the issue of a debt certificate after an adjudication certificate within the meaning of the Security of Payment Act has been filed as a judgment in accordance with s 25 of that Act. Such an adjudication certificate also operates only as an interim judgment in the same way as does a judgment entered after failure to serve a payment schedule. 32 In any event, there is no evidence that the liquidators were of mind to dispute the plaintiff's claim of the debt owed to it by Berem. In my view, there is no hardship to Memocorp to be bound by the same position that binds Berem and the plaintiff. If, as Memocorp says, it has a good defence to the claim that it owes Berem money, then it can maintain that defence against the plaintiff. If not, there is no hardship from Memocorp's being required to pay the plaintiff rather than Berem. 33 Counsel for Memocorp also argued that leave should be refused because there is no evidence that notice of the present application has been given to the other creditors. 34 In Re Summit Design v Construction Pty Ltd Austin J, in refusing leave, took into account that there was no evidence that a secured creditor, in that case, and any other subcontractors, had been given notice of the application (at [19]). His Honour added: " [20] Reflection about the position of other subcontractors reinforces the conclusion that I ought not to grant leave in the present case. One can imagine that if leave were granted now, there would be further applications for leave in the event that there are other subcontractors in the same position as the applicant with respect to its third invoice. The race, that is the race to have access to funds in the developer's hands which otherwise would be paid to the company, would be won by the swiftest. Under the Act the victor, the subcontractor who is first to serve a notice of claim and debt certificate on the developer, receives payment to the potential exclusion of the subcontractors who are not quite as quick. I cannot see the justice of that result. " 35 In this case the liquidators have the task of advancing the interests of creditors. In my view it is not necessary for the plaintiff to have served the application or to have given notice of the application to all of the company's creditors. The liquidators speak for them. 36 There is no evidence that any other subcontractor contemplates making a claim under the Contractors Debts Act. If there be any other subcontractors contemplating such claims then, in order to obtain judgment against Berem, they will need to seek leave to bring an action against it, with a view to obtaining a debt certificate under s 7. It will be relevant to whether leave should be given, in those cases, whether any similar arrangements were negotiated with the liquidators as the plaintiff has negotiated in this case. I do not consider that the possibility of such claims, and it is no more than a theoretical possibility, is relevant to the present application. 37 For these reasons, in my view, the plaintiff is entitled to the leave sought. I make the following orders:

1. Order that pursuant to subsection 500(2) of the Corporations Act leave be given to the plaintiff nunc pro tunc to proceed against the first defendant (Berem Constructions Pty Ltd (In liquidation) ACN 003 767 799) in District Court proceedings number 4009 of 2008, including by the obtaining of judgment in those proceedings on 17 October 2008 against the first defendant.

2. Order that, except with the prior leave of the court or by way of proceedings under s 11 of the Contractors Debts Act 1997 against the second defendant, the plaintiff not attempt to execute a judgment obtained in District Court proceedings 4009 of 2008 against the assets of the first defendant.

38 For the reasons ventilated in the course of submissions with counsel, I think the appropriate order is that the costs of the present application be the plaintiff's costs in the proceedings in the District Court number 118 of 2009 in the Parramatta Registry as between the plaintiff and the second defendant. 39 Exhibits JUK1 and JSP1 may be returned.

[Counsel for Memocorp sought a stay.] 40 I order that the operation of these orders be stayed for 28 days. If, prior to the period of 28 days expiring, the second defendant decides that it will not file an appeal, or seek leave to appeal (if leave is necessary) from these orders, then I expect the second defendant's solicitor or counsel, when that is known, promptly to advise the plaintiff of that decision. In that event, the parties can send up to my chambers a consent order to discharge the stay, and I will make such an order in chambers.

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