Superb Build Pty Ltd v Petrosyan

Chronology

1. In February 2020, the Property was affected by a landslide which caused sufficient damage for the Petrosyan family to be required to evacuate the Property. Northern Beaches Council ("Council") required remedial structural works to be carried out on the Property and Mr Petrosyan spoke to Boulos Isaac (Mr Isaac is also known under several other names, including Paul Boulos, which is the name under which Mr Petrosyan knew him) about installing temporary propping. That work was carried out in February/March 2020, and NSW Civil Engineering Pty Limited, a company associated with Mr Isaac, invoiced and was paid for it.
2. Council issued a further work order on 25 September 2020 requiring the applicants to carry out further stabilisation works at the Property. Mr Petrosyan asked Mr Isaac to carry out those works and Mr Isaac agreed. Council required the preparation of a Safe Work Method Statement, which was prepared in the name of Superb on 14 August 2021. Mr Isaac sent Mr Petrosyan an email in which he indicated that the works would be performed by Superb and he would manage them. Works commenced in December 2021 (the "Works").
3. Mr Petrosyan alleges that before work started, he and Mr Isaac had a conversation in which Mr Isaac said he could do the job and would charge what it cost him plus 15% on top. Mr Petrosyan says he agreed to that proposition. In his affidavit evidence, Mr Isaac does not dispute this conversation.
4. The Works commenced in about December 2021 and on 12 July 2022 the Petrosyans moved back into the Property. The applicants were uninsured and paid for the works themselves, primarily in cash. There is a dispute as to how much was paid - the applicants say they paid $164,100 in cash to Mr Isaac and a further $43,700 was transferred to two accounts nominated by Mr Isaac, being an account numbered xxx795 and an account of Dynamic Dwelling Earthworx Pty Limited, a company controlled by Mr Isaac. Superb says that the Petrosyans made further payments of $56,640.10 directly to contractors for works and materials. In total, therefore, the applicants say they have paid $207,800 to Superb and a further $56,640.10 to third parties for work and materials.
5. Superb says that the total amount due to it was $303,453.51, and acknowledges receipt of $129,000, leaving a balance due of $174,453.15. It says the $56,640.10 did not form part of the monies claimed by it.
6. Mr Isaac is neither a director, secretary nor shareholder in Superb. Superb is operated by Ms Eva Mouawad, Mr Isaac's sister. Mr Isaac described himself in his first affidavit as an employee of Superb, which Ms Mouawad agreed with in her first affidavit. Ms Mouawad resiled from that position in her second affidavit, describing Mr Isaac as a contractor and saying that she used those terms interchangeably. I do not, however, need to resolve Mr Isaac's status for the purpose of this application.
7. It is not disputed that there was no written contract for the performance of the Works. As the Works were obviously residential building work within the meaning of the Home Building Act 1989 (NSW) (the "HBA"), this appears to be a clear breach of s 7 with the effect that, under s 10, the builder (Superb) is not entitled to damages or to enforce any other remedy for any breach committed by any other party, and any contract is unenforceable at its suit. Similarly, there is no dispute that there was no insurance in relation to the Works as required by s 92 of the HBA.
8. On 30 June 2022 Superb issued a payment claim under the SOP Act in respect of the Works in the sum of $174,453.51. On 17 July 2022 Superb served a notice under s 17(2) of the SOP Act requiring a payment schedule within 10 business days. The Petrosyans, then unrepresented, did not provide any such schedule and on 5 August 2022, Superb lodged an adjudication application under s 17(3) of the SOP Act for the full amount of the 30 June 2022 payment claim. Because the Petrosyans had failed to provide a payment schedule, the adjudicator did not take into account submissions made by Ms Petrosyan on 15 August 2022. On 17 August 2022 an adjudication determination was issued in favour of Superb in the sum of $179,464.27.
9. Superb registered the adjudication determination in the District Court on 7 September 2022 under s 25 of the SOP Act and obtained the Judgment thereby against the applicants in the sum of $179,464.27. A writ of levy of property was obtained on 9 September 2022.
10. The applicants listed the Property for sale in October 2022. On 24 October 2022, Superb lodged a caveat over the Property in circumstances where it had no caveatable interest. The description in the caveat of the relevant interest as a "statutory charge" based on the writ of levy on property of 9 September 2022 was plainly untenable. On 11 November 2022 the applicants were also served with bankruptcy notices.
11. The Property was sold on 16 November 2022. After some correspondence and service of a Lapsing Notice, the caveat was withdrawn and settlement took place on 14 December 2022.
12. The Related Proceedings were commenced on 29 November 2022. At the same time, the current Notice of Motion was filed. By consent and without admissions, the enforcement of the Judgment was stayed until the hearing of this application. A timetable for filing and service of evidence on this application was agreed. The applicants agreed to pay the sum of $179,464.27 from the proceeds of sale of the Property into Court and did so the day after settlement.

Principles

1. There was no debate as to the Court's power to make the orders sought and no real dispute as to the principles to be applied in the exercise of discretion. A stay will be granted where the Court determines that the interests of justice require it. In most contexts, the relevant evaluation requires an assessment of where the balance of convenience lies: Team Dreegan Pty Limited v Symich Building Pty Limited [2021] NSWDC 825 at [6]-[7].
2. Where a stay is sought in respect of a judgment arising from an adjudication determination under the SOP Act, stays are generally less readily available: J & Q Investments Pty Ltd v ZS Constructions (NSW) Pty Ltd [2008] NSWCA 203 at [23]. That is because the policy of the SOP Act is to ensure that progress payments on account are made promptly, and any disputes over the final amount due are determined separately. In the meantime, a claimant's entitlement is determined on an interim basis by an adjudicator so that the claimant's cashflow is not unduly interrupted. The object of the legislation specifically refers to the recovery of progress payments in relation to the carrying out of construction work: s 3(1) SOP Act.
3. In practice, this has the effect that an applicant must show a risk that it will suffer irreparable prejudice if a stay is not granted: Shade Systems Pty Ltd v Probuild Constructions (Aust) Pty Ltd [2018] NSWCA 33 at [31]-[32]; TFM Epping Land Pty Ltd v Decon Australia Pty Ltd [2020] NSWCA 118 at [72]. Both parties referred to the non-exhaustive summary of relevant factors set out by Ball J in Hakea Holdings Pty Limited v Denham Constructions Pty Ltd; BaptistCare NSW & ACT v Denham Constructions Pty Ltd [2016] NSWSC 1120 at [6]. The factors are: 1. the strength of the applicant's case, which is obviously an important criterion; 2. the basis of the applicant's claim, including whether the applicant challenges the adjudicator's determination and whether the applicant challenges the debt the subject of the adjudication determination; 3. the likelihood that the contractor will be unable to repay the amount the subject of the determination, bearing in mind the policy of the SOP Act generally to place the risk of insolvency on the applicant; and 4. the risk that the contractor will become insolvent if a stay is granted.
4. Where there is a certainty that the party seeking the stay would suffer irreparable prejudice, it would be a proper exercise of the Court's discretion to grant a stay. Nevertheless, the extent or certainty of the risk of prejudice must be closely examined in each case: Shade Systems at [32].

Strength of applicants' case

1. The applicants' case is articulated in the Statement of Claim in the Related Proceedings. In short, they say that the oral contract on which Superb relies (and on which it relied for the purpose of the adjudication) does not entitle Superb to seek, or enforce, payment for the Works. Accordingly, Superb has been unjustly enriched in the sum of $207,800, which it is liable to repay. If this claim succeeds (and if no cross-claim for a quantum meruit is made), Superb will be liable to repay to the applicants the monies paid to date and will not be entitled to the monies paid into Court.
2. Mr Corsaro SC, for the applicants, submitted that they have a strong case, relying on s 7, and the absence of insurance as required by s 92, of the HBA. Accordingly, under s 10 of the HBA, Superb is not entitled to rely on any contractual provision to enforce payment, its only available remedy being a quantum meruit claim.
3. Much of the evidence before the Court was directed to the strength of the applicants' case. On Mr Corsaro's submission, the Court did not need to form a view as to that evidence other than with respect to their contentions relating to ss 7, 92 and 10 of the HBA.
4. Mr McDonald for Superb also took a practical approach and conceded, for the purpose of this application only, that the applicants had crossed the relevant threshold with respect to the first factor in Hakea Holdings. He did not wish to be heard in respect of the strength of the applicants' case.
5. The Statement of Claim in the Related Proceedings goes on to make a number of further and alternative allegations. The applicants allege that, even on the basis of a cost plus agreement, Superb is in breach because it failed to provide evidence of underlying costs and cannot therefore have made any valid claim for payment under it. They allege defective Works which will cost between $100,000 and $140,000 to make good. They allege double claims of at least $45,750 and a failure to give credit for the $56,640.10 in payments made by the applicants to third parties. In apparent anticipation of a possible cross-claim on the quantum meruit, they say the maximum just and equitable value of the Works is $140,168.96, including margin and GST (to which they do not concede Superb would be entitled in any event). Even on this basis, the applicants say there is no net debt owing to Superb, which would still be liable to the applicants in the sum of at least $16,471.14. If the monies paid into Court were released to Superb, that sum would presumably be $195,733.41.
6. Evidence in support of the further and alternative claims was read on the application, although neither counsel referred to it in their closing submissions. Generally, Mr Isaac denies the allegations.
7. No quantum meruit cross-claim in the Related Proceedings has been foreshadowed, even though one might be expected in due course when Superb files its defence. For the purpose of this application, the parties appeared content for the question of whether a strong case had been demonstrated to be determined according to the s 7, s 92 and s 10 HBA contentions of Mr Corsaro. On that basis, I accept that the applicants have demonstrated a strong case with respect to the claim they advance in the Related Proceedings. I regard this as an important factor in deciding the current application.

Basis of the applicants' claim

1. The applicants challenge the underlying debt the subject of Superb's claim. On the basis of Mr Corsaro's submissions and the Statement of Claim in the Related Proceedings, I am satisfied that they have demonstrated that the basis of their claim satisfies the second factor in Hakea Holdings.

Ability of contractor to repay determination sum and risk of contractor insolvency

1. The third and fourth Hakea Holdings factors overlap. Together, they go to the heart of the question of whether the applicants can demonstrate a sufficient risk of irreparable prejudice if the stay is not extended.
2. Ms Mouawad is the managing director of Superb and owns substantially all of its issued shares. Ms Mouawad is also the managing director of Rem Co Pty Ltd ("Rem Co"), a related entity of Superb. Ms Mouawad says Rem Co and Superb are directly involved in many "mutual" projects and that Rem Co on many projects incurs debts on its own behalf as well as on behalf of Superb. On those occasions, Rem Co incurs debts to suppliers and then seeks reimbursement from Superb.
3. According to its 2022 financial statements, as at 30 June 2022 Superb had a paid up capital of $164,746.00 in respect of 164,746 fully paid ordinary shares at $1.00 each. It does not have the capacity, therefore, to call for capital contributions in respect of issued shares. It also recorded retained earnings of $56,854.65 at that time, which appears to be a balancing entry.
4. The 2022 financial statements only record current assets. On the evidence, therefore, Superb holds no non-current assets. No trade receivables as at 30 June 2022 are recorded in respect of any project, including those described at [41] below. There is no evidence of any project being undertaken by Superb where the contract was signed any later than September 2021.
5. Superb made its payment claim on the applicants, which formed the basis of the adjudication, in the sum of $174,453.51 on 30 June 2022. That is not recorded as a receivable, however, in the 30 June 2022 financial statements.
6. The only receivables that are recorded in the accounts are the loans to directors in the sum of $249,189.12. There was no evidence as to the terms of those loans, when or to whom they were made, or when they are repayable. As they are recorded as current assets, I infer that Superb considers the loans can be called up within one year.
7. There is no evidence, however, as to the recoverability of those loans. As they are loans to its own directors, Superb is in a position to provide evidence as to their recoverability and I expect that, in the circumstances, it would have done so to defeat the applicants' submission that they would be prejudiced if the judgment sum were released to Superb. It did not do so. While current assets are generally to be valued at fair market value, in the circumstances of this case, and in the absence of evidence, I am not satisfied that they would be available to meet any obligation to repay the adjudication sum if the applicants succeed in the Related Proceedings.
8. A category of the Notice to Produce called for production of all current contracts under which Superb is engaged to do any work from July 2020 to date. Five documents were produced: 1. A contract in the sum of $775,000.00 with REM Corporate Pty Limited for work at Power Ridge, Oran Park. REM Corporate Pty Limited is controlled by Ms Mouawad. 2. Two contracts dated 20 December 2020 in the sum of $387,500.00 each with Roger Mouawad for building on adjacent properties at Genner Street, Oran Park. Roger Mouawad is a former director, secretary and shareholder (one share only) of Superb. He is also Ms Mouawad's son. 3. An unsigned contract dated 7 September 2021 with a Don A Roberts in the sum of $153,175.00, which does not specify an address where the work is to be done; and 4. An unsigned contract dated 22 June 2021 in the sum of $250,000.00 with a Daria Sakic in respect of what appears to be the demolition and replacement of a kitchen and wet areas at a unit in Marine Parade, Maroubra.
9. In her second affidavit, Ms Mouawad responds to a letter from the applicants' solicitors in which certain categories of documents were sought. Ms Mouawad deposed that the only document that recorded any liability as at 25 January 2023 was an invoice from Rem Co dated 31 December 2022 in the sum of $58,167.67, which attached copies of invoices to Rem Co from third parties in respect of the projects at Power Ridge and Genner Street, Oran Park referred to above. Those works were for members or entities controlled by the Mouawad family. There is no evidence of any outstanding liabilities in respect of either the 7 September 2021 Roberts contract or the 22 June 2021 Sakic contract.
10. Although they had been sought, no tax returns, business activity statements or notices of assessment were produced, although an activity statement and tax statement, each dated 20 October 2022, recorded no transactions for the period 20 October 2021 to 20 October 2022. The most recent bank account statement in evidence shows a balance of $2,479.62 standing to Superb's credit in account number xxx568 on 29 July 2022. No statements were provided in respect of a second account, identified in Superb's financial statements as account number xxx576, which according to that statement at 30 June 2022 held another $50.00.
11. Superb has no tangible assets, no real property, no equipment and, according to one version of its evidence, no employees. Substantially all of its income, in each of financial year 2021 and 2022, according to its profit and loss statement, was derived from professional fees, and substantially all of its expenses are comprised of contract work and materials and supplies. It appears that Rem Co contracts with suppliers and sub-contractors and invoices Superb in respect of payments due by Rem Co under those contracts.
12. Superb's only liabilities recorded in the 30 June 2022 financial statements are trade and other payables of $9,585.96 and tax liabilities of $19,245.20. The notes to the statements indicate the trade payable is, in fact, a tax clearing account. The accounts, therefore, record no ordinary trade debts outstanding as at 30 June 2022.
13. The evidence of Superb's financial position does not indicate that it is at any risk of becoming insolvent if the stay is granted. The only evidence of any current liability is to Rem Co in respect of Rem Co's own liability to two third party contractors in relation to projects it appears to be conducting for Superb. It does very little building work and minimal building work for parties who are not members or entities controlled by the Mouawad family.
14. In respect of each of those projects, Superb has an entitlement to progress payments from the owner pursuant to the contract. In the case of the project at Power Ridge, Rem Co has invoiced Superb, which is entitled to progress payments from Rem Corporate. There is no evidence that Rem Corporate cannot or will not make such progress payments as are due to Superb, if a demand is made, which can then be passed on to Rem Co. Similarly, in relation to Genner Street, there is no evidence that Mr Roger Mouawad cannot or will not make such progress payments as are due to Superb, if a demand is made, which can then be passed on to Rem Co. There is no evidence of a demand being made, but that is a matter of choice, not a question of solvency.
15. Further, the Works were complete many months ago and there is no evidence of any outstanding liabilities in respect of them. Any such liabilities would have been identified in Ms Mouawad's second affidavit.
16. On the other hand, there appears to be a real likelihood that if the monies are released to Superb, they will be dissipated and the applicants will be unable to recover the adjudicated sum should they succeed in the Related Proceedings. Ms Mouawad stated that the monies, if received, will be paid into Superb's bank account to pay its liabilities and subcontractors, and, somewhat vaguely, "for use in the ordinary course of business at [her] direction". This suggests it will not retain the monies pending determination of the Related Proceedings.
17. Superb does not generate sufficient net income to repay that sum out of revenue. There appear to be few, if any, continuing projects that could generate such revenue. It has no assets against which a judgment might be enforced, other than the directors' loans, which I do not regard as a satisfactory basis on which to conclude that the monies could be repaid.
18. Accordingly, I find there to be a significant risk of irreparable harm to the applicants if the stay is not extended to the date of the hearing of the Related Proceedings. In my view, there is a significant risk that failure to extend the stay would have the practical effect of making permanent that which the legislature intended to be only interim.
19. On the other hand, there does not appear to be any risk that Superb will become insolvent if the stay is extended. Its only creditor is Rem Co, which is controlled by Ms Mouawad. The evidence does not establish the terms of its indebtedness to Rem Co, nor that Rem Co has either the right or the appetite to take enforcement action against it. The evidence does not establish that Rem Co needs payment of any sum due to it by Superb to pay its own creditors in respect of projects unrelated to the Works. Nothing in the evidence suggests that the operations of Superb will be impeded if it is deprived of access to the monies paid into Court pending determination of the Related Proceedings. To the extent it is relevant, nothing in the evidence suggests that Rem Co's operations would be impeded either.
20. The policy under the SOP Act, however, places the risk of insolvency on the applicant and generally provides a "pay now, argue later" regime for the determination of progress payments and the ultimate determination of the legal rights of the parties. That is not an insignificant factor: see Ceerose Pty Ltd v A-Civil Aust Pty Ltd [2022] NSWSC 1487. Nevertheless, given the strength of the applicants' claim, and the risk that any judgment they may obtain in the Related Proceedings would be rendered nugatory in light of the asset and trading position of Superb, in my view, the balance of convenience favours the extension of the stay. In the exercise of my discretion, therefore, I will make the order sought by the applicants and extend the operation of the present stay to the hearing of the Related Proceedings.

Conclusion and orders

1. For the above reasons, I am satisfied that the applicants should succeed on the present application. The stay ordered by the Court on 5 December 2022 will be extended subject to two conditions.
2. First, the applicants have already proffered the usual undertaking as to damages, which is to continue.
3. Secondly, the applicants must give an undertaking to prosecute the Related Proceedings with due despatch. The monies paid into Court will obviously remain in place until further order.
4. As the applicants have been successful, they are entitled to their costs of the motion.
5. The orders of the Court are: 1. On the continuation of the usual undertaking as to damages by the defendants, and on the undertaking by the defendants to prosecute District Court proceedings 2022/360925 with due despatch, the enforcement of the judgment in these proceedings, any garnishee orders made against the defendants and the writ of levy of property against the defendants be stayed until 5.00pm on the first day of the hearing of District Court proceedings 2022/360925 or otherwise ordered. 2. The plaintiff/respondent pay the costs of the defendants/applicants of the Notice of Motion filed on 30 November 2022.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 16 February 2023