Denham Constructions Pty Ltd v Islamic Republic of Pakistan (No 4)
[2016] ACTSC 288
•7 September 2016
SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY
Case Title: | Denham Constructions Pty Ltd v Islamic Republic of Pakistan (No 4) |
Citation: | [2016] ACTSC 288 |
Hearing Date: | 7 September 2016 |
DecisionDate: | 7 September 2016 |
Before: | Mossop AsJ |
Decision: | See [45] |
Catchwords: | PRACTICE AND PROCEDURE – Application for a stay after judgment – Plaintiff successful in bringing claim for debt arising under the Building and Construction Industry (Security of Payment) Act 2009 (ACT) – Whether order preventing enforcement of judgment should be continued on the ground that plaintiff is insolvent – Set-off under s 553C of the Corporations Act 2001 (Cth) claimed – Where judgment amount likely to go directly to receiver – Risk that defendant could be left as a creditor of a company without assets – Execution of judgment stayed until 21 days following the liquidator’s determination of proof of debt |
Legislation Cited: | Building and Construction Industry (Security of Payment) Act 2009 (ACT), ss 29, 38 Building and Construction Industry Security of Payment Act 1999 (NSW) Foreign States Immunities Act 1985 (Cth), ss 30-35 |
Cases Cited: | Alexander v Cambridge Credit Corporation Ltd (1985) 2 NSWLR 685 Brodyn Pty Ltd v Dasein Constructions Pty Ltd [2004] NSWSC 1230 Veolia Water Solutions & Technologies (Australia) Pty Ltd v Kruger Engineering Australian Pty Ltd (No 3) [2007] NSWSC 459 |
Parties: | Denham Constructions Pty Ltd (Plaintiff) Islamic Republic of Pakistan (Defendant) |
Representation: | Counsel P Walker SC (Plaintiff) A Greinke (Defendant) |
| Solicitors KWS Legal (Plaintiff) Meyer Vandenberg (Defendant) | |
File Number: | SC 428 of 2016 |
MOSSOP AsJ:
Procedural history
I gave my principal judgment in these proceedings on 12 August 2016. On 17 August 2016 I gave judgment for the plaintiff in the sum of $1,062,886.78. On that date I granted a stay of any enforcement of the judgment for a period of seven days.
On 23 August 2016 the defendant filed an application seeking a continuation of that stay.
On 24 August 2016 I heard the defendant's application for a stay. An interim continuation of the stay was opposed by the plaintiff. For the reasons I gave at the time, I continued the stay until further order and listed the matter again today. I made directions relating to the filing and service of additional evidence and outlines of submissions. Those orders were not complied with in circumstances which I will refer to shortly.
When the proceedings were before me on 24 August 2016 the principal issue in contention was whether or not the plaintiff was insolvent. The principles applicable to a stay of a judgment or an injunction restraining the enforcement of a judgment based on an adjudication certificate are outlined in Hakea Holdings Pty Ltd v Denham Constructions Pty Ltd [2016] NSWSC 1120 at [4]-[6], a judgment which was given shortly before the hearing on 24 August.
Since the granting of those interim orders, the plaintiff has been the subject of a winding‑up order. That order was made on 1 September 2016. There is no issue on the present application that the plaintiff is not insolvent.
Present orders sought
On 2 September 2016 receivers were appointed over all present and after acquired property of the plaintiff pursuant to a mortgage. Thus the effect of payment of the judgment sum will be to benefit a secured creditor. The orders which are presently sought differ from the orders originally sought in the defendant's application as a consequence of the change in circumstances. The orders sought by the defendant are as follows:
Upon the undertaking of the defendant by its counsel to lodge a formal proof of debt with the liquidator of the plaintiff on or before 21 September 2016, the Court orders that:
1. execution of the judgment pronounced on 17 August 2016 be stayed until 21 days following the liquidator's determination of this proof of debt;
2. the plaintiff pay the defendant's costs of and incidental to the application to be agreed or assessed on a party and party basis.
Submissions
I will outline the respective submissions of the parties before turning to my determination in relation to the application.
Defendant’s submissions
The defendant pointed to two relevant amounts. They were the judgment debt of $1,062,886.78, which I will refer to as the judgment amount, which results from the order of the Court made on 17 August 2016. The second amount is an amount said to be due under a certificate given by the architect under the contract dated 18 May 2016, which requires payment by the plaintiff of the sum of $503,780.65.
The defendant pointed to the decision as to stays of orders of the New South Wales Court of Appeal in Kalifair Pty Ltd v Digi-Tech (Australia) Ltd [2002] NSWCA 383; (2002) 55 NSWLR 737 (Kalifair) in which the Court at [17] and [18] referred to the decision of Alexander v Cambridge Credit Corporation Ltd (1985) 2 NSWLR 685 and then continued at [18]:
Thus the relevant principles are analogous to those which govern the grant of interlocutory relief before trial to protect the status quo. The appellant must show that the appeal raises serious issues for the determination of the appellate court, and that there is a real risk that he will suffer prejudice or damage, if a stay is not granted, which will not be redressed by a successful appeal. This requirement will be satisfied if the appeal will be rendered abortive or nugatory unless a stay is granted. If these pre-conditions are established the Court will then consider the balance of convenience.
The plaintiff contended that those principles could be applied by analogy to the circumstances of this case where a stay is sought pending the determination under s 553C of the Corporations Act2001 (Cth) of who owes what as a result of firstly, its challenge to its liability to the judgment amount, as well as secondly, its alleged entitlement to the amount due under the architect's certificate.
The defendant contended that if the judgment amount was required to be paid at this stage then it would go straight to the receiver and if the defendant was ultimately successful in establishing a net entitlement then there would be at least a risk that, having paid money which went straight to the receiver, it would be left as a creditor of a company without assets.
The defendant submitted that s 553C of the Corporations Act requires the net amount payable by either the plaintiff or defendant to be determined by mutual credit and set off. Section 553C provides:
(1)Subject to subsection (2), where there have been mutual credits, mutual debts or other mutual dealings between an insolvent company that is being wound up and a person who wants to have a debt or claim admitted against the company:
(a) an account is to be taken of what is due from the one party to the other in respect of those mutual dealings; and
(b) the sum due from the one party is to be set off against any sum due from the other party; and
(c) only the balance of the account is admissible to proof against the company, or is payable to the company, as the case may be.
(2)A person is not entitled under this section to claim the benefit of a set-off if, at the time of giving credit to the company, or at the time of receiving credit from the company, the person had notice of the fact that the company was insolvent.
The defendant points to two decisions which articulate the relationship between the New South Wales payment legislation and s 553C. In Brodyn Pty Ltd v Dasein Constructions Pty Ltd [2004] NSWSC 1230 Young CJ in Eq considered whether there was an entitlement to set off under s 553C amounts payable under the Building and Construction Industry Security of Payment Act 1999 (NSW). His Honour considered the respective submissions at [82] to [87] and recorded his conclusions as follows:
There is a conflict of legislative provisions in the instant case and the scheme set out in the BCISP Act and the scheme set out in the Corporations Act where a company is under a DOCA do conflict. However, in my view, the two methods of approaching the problem each give the same result, and that is that the scheme set out in section 553C of the Corporations Act prevails.
The first reason is section 109 of the Australian Constitution. It provides that, 'When a law of a state is inconsistent with a law of the Commonwealth, the latter shall prevail, and the former shall, to the extent of the inconsistency, be invalid.' The Corporations Act is a Commonwealth Act, the BCISP Act is a state Act, so if there is any inconsistency, the former prevails.
In Demir Pty Ltd v Graf Plumbing Pty Ltd [2004] NSWSC 553, Campbell J said that if a person obtains a judgment under the BCISP Act and "the judgment debtor does not pay it voluntarily, then the judgment creditor can use the range of remedies open to a judgment creditor. It is not possible, however, for the terms of a Commonwealth Act, the Corporations Act 2001 (Cth) to be construed, or limited, by reference to the intention implicit in a state Act. The provisions of Division 3 of Part 5.4 of the Corporations Act 2001 (Cth) set out a regime whereby a statutory demand is set aside whenever there is an offsetting claim as defined."
The second approach is to construe the BCISP Act itself. It is clear that the mischief addressed by the Act was to assist subcontractors and others who depended on cash flow for their continued existence. The Act was to alter the effect of delays in adjudicating claims between head contractors and subcontractors by compelling the payment of monies to the subcontractors in advance of settling the real dispute so that the subcontractor would have cash flow so that his business could continue …In the instant case the head contractor has already been in three courts and spent $130,000 and has not been able to have its claim adjudicated upon because, as soon as it did raise its claim, the subcontractor went into voluntary administration.
It is now faced with a situation where although it has established its claim on the evidence before me, the administrator is arguing that it is necessary for it to pay the full amount of the provisional District Court judgment to the administrator who will then use it to pay his own fees and to fund further litigation and there will not be a ghost of a chance of the just claim of the head contractor ever being paid.
To my mind the Act does not go that far. It only intends to operate when the head contractor and the subcontractor are going concerns. Once the subcontractor ceased to be a going concern, it no longer needs cash flow and the mischief to be covered by the Act is not present in that situation. No-one forced the subcontractor to go into voluntary administration. It elected to do so and in my view the protection of the BCISP Act ceased at that point and the Commonwealth law as to adjustments of rights under administration and later under a DOCA came into play.
A slightly different approach was taken by McDougall J in Veolia Water Solutions & Technologies (Australia) Pty Ltd v Kruger Engineering Australian Pty Ltd (No 3) [2007] NSWSC 459 (Veolia). In that case his Honour referred to the decision of Young CJ and said that he did not, however, consider that there was any conflict between the relevant provisions of the two Acts. At [24] to [26] his Honour said:
Nor do I think there is anything in this reasoning that is inconsistent with the underlying policy of the Security of Payment Act which is concerned with ensuring that those who undertake to carry out construction work or to supply related goods and services under a construction contract should receive prompt payment of progress claims. The effect of the application of s 553C (in a case where the offsetting claim exceeds the amount of progress claim) is that the progress claim is satisfied by set-off. The person entitled to the progress claim has received the benefit of payment. That is so regardless of whether the progress claim has given rise to an adjudication determination or a judgment debt. Operation of the statutory schedule of set-off under the Corporations Act does not impeach the progress claim (or any adjudication determination or judgment founded on it). On the contrary, the effect of the progress claim is accepted, because its amount is brought to account in the process of set-off. It may be that the process of satisfaction through set-off rather than satisfaction through payment has an adverse effect on other creditors. But that is a necessary consequence of the application of the scheme of set‑off that the legislature, in s 553C, saw fit to enact.
I must say that the factors referred to in the preceding paragraph lead me to question why it is appropriate to set aside the judgment once it has been satisfied by set-off pursuant to s 553C. A judgment may be satisfied by a number of means, including payment accord and satisfaction and set-off under s 553C. Satisfaction by payment, or by accord and satisfaction, does not impeach the validity of the judgment. Nor, I think, does satisfaction by set-off pursuant to s 553C. But since this point was not argued, it is unnecessary for me to express a concluded view.
The defendant submitted that a similar approach should be taken in relation to the relationship between s 553C and the Building and Construction Industry (Security of Payment) Act 2009 (ACT) (SOP Act), namely, that the judgment amount may be satisfied by mutual set-off under s 553C. The defendant pointed to s 38 of the sSOP Act, which provides:
(1) Nothing in this part affects any right that a party to a construction contract –
(a) may have under the contract; or
…
(c)may have apart from this Act for anything done or omitted to be done under the contract.
(2) Nothing done under this part affects any civil proceeding arising under a construction contract, whether under this part or otherwise, except as provided by subsection (3).
(3) In any proceeding before a court or tribunal in relation to any matter arising under a construction contract, the court or tribunal–
...
(b) may make the orders it considers appropriate for the restitution of any amount so paid, and any other orders it considers appropriate, having regard to its decision in the proceeding.
In those circumstances the defendant contended that if according to the underlying contract there was no entitlement to payment of the judgment amount, then it would be entitled to restitution of the whole of the judgment amount or such part as the plaintiff was not entitled to under the contract. It contended that in accordance with the terms of the underlying building contract there was no entitlement on the part of the plaintiff to the judgment amount, because:
(a)the certificates issued by the architects under the contract were not challenged in time because the architect had rejected the plaintiff's claim under DCV075; and
(b)there was no challenge to the architect's determination of the variation claims.
The defendant submitted that it had paid the amount that was certified as owing by the architect, namely $750.18. Therefore, so far as the judgment is concerned, it contended that there is no net liability under the building contract and hence it would be entitled to set off its entitlement to restitution against the plaintiff's entitlement to judgment.
It contended that by notice dated 4 May 2016 it validly terminated the contract as a result of various insolvency events identified in that notice. Arising from that termination it makes a claim based on an architect's certificate dated 18 May 2016 for various amounts said to arise pursuant to the terms of the contract. They are:
(a)an amount of $151,923.65, identified as the cost to the owner of completing the works;
(b)an amount of $2257.00, being an amount paid directly by the owner to a subcontractor or supplier and not already paid to the contractor; and
(c)an amount of $436,600.00, being an amount of liquidated damages due since the previous certificate up to the date of termination.
As a consequence, because the defendant contended that under the contract it is not liable to pay the judgment amount, and pursuant to the architect's certificate it is entitled to some $503,000, it submitted that it is entitled overall to a net amount of $503,000. The defendant also submitted that it may have a claim arising out of the provision of documents purporting to be security under the contract when, in fact, they were not. No significant reliance was placed upon that matter for the purpose of the present application.
Plaintiff’s submissions
The plaintiff, on the other hand, submitted that it should not be assumed for the purposes of the present application that there was any entitlement to avoid the judgment amount, or that there was no contest about the defendant's claim for the additional amount of $503,000. It submitted that each of these matters was in contention. In relation to the judgment amount, the plaintiff says in answer to the defendant's contentions about the notice and time requirements that the parties conducted themselves in a manner that did not require insistence upon the notice and time requirements of the contract and that this is reflected in its defence to the proceedings brought by the defendant in Queensland.
It submitted that no inference should be drawn from the circumstances in which no payment schedule was served to the effect that this resulted from an error or oversight of the architect under the contract, as opposed to being a considered decision not to serve such a payment schedule.
In relation to the architect's certificate and the amount disclosed therein, it raised the operation of s 29(4) of the SOP Act and submitted that this had the effect of protecting the plaintiff against the claims referred to in the architect's certificate. In support of that contention it pointed to the notice to suspend work given by the plaintiff on 27 November 2015. Section 29(4) provides:
A claimant who suspends construction work or the supply of related goods and services under this section is not liable for loss or damage suffered by the respondent or by any person claiming through the respondent because the claimant did not carry out that work or supply the goods and services during the period of suspension.
It submitted that this had the effect of protecting it against the claims for the amounts set out in the three categories within the architect's certificate. It submitted that notwithstanding the winding‑up, the policy of the Act was still in favour of quick payment and that if a stay was granted it should only be on the basis at the very least of payment of the judgment sum into court. It submitted that the policy of the Act in favour of speedy payment extended to circumstances where the company was in liquidation because there remained creditors of the company who should be paid as quickly as possible.
It submitted that the orders that should be made were:
(a)that the application be dismissed and the existing stay vacated; or
(b)alternatively that the amount of $503,780, being the amount referred to in the architect's certificate, be paid into court within seven days and the balance of the judgment amount be paid to the plaintiff within seven days; or
(c)alternatively that the whole of the judgment amount be paid into court pending the decision of the liquidator on the defendant's proof of debt.
Defendant’s submissions in reply
In reply the defendant pointed to the terms of the architect's certificate. Notwithstanding the typographical error in the certificate, the defendant contended that the amount for liquidated damages related to the period prior to any suspension of works. The liquidated damages amount arose in the period 26 September 2014 up to 25 June 2015, and the notice of suspension was only given on 27 November 2015. As a consequence it contended that s 29(4) of the SOP Act could not be a defence or otherwise a basis for not allowing that aspect of the architect's certificate.
So far as work to complete the contract was concerned, these were amounts which the defendant submitted were incurred post‑termination and, so long as the termination was valid, s 29(4) did not prevent those amounts from being claimed. That was distinct from the position of amounts that might have been incurred during the period of suspension and prior to the termination of the contract. Counsel for the defendant accepted that there may be a dispute about the amount of $2,257.00 paid directly to subcontractors.
In relation to the policy of the Act, the defendant contended that even if, contrary to the authorities, the policy of the Act in favour of rapid payment continued during the period when the company was in liquidation, then it was relevant to take into account that as part of payment claim 26, which led to the judgment to the plaintiff, the plaintiff had certified as follows:
We hereby declare that all wages and other entitlements including building industry superannuation, long service leave levies, subcontractors and supplies included in this application for payment have been paid all moneys which as at the date of this progress claim are due and payable by Denham Constructions Pty Ltd. All insurances required by the conditions of the contract are current.
As a consequence the defendant submitted that given the insolvency and liquidation of the plaintiff, any policy designed to ensure prompt payment of the subcontractors on this project had no application.
So far as payment into court was concerned, counsel submitted that the defendant had the benefit of the Foreign States Immunities Act 1985 (Cth) and hence there may be barriers to the enforcement of a judgment against it: see ss 30 - 35 of that Act.
Counsel pointed to the judgment in Kalifair which emphasised that money may be required to be paid into court in order to protect the successful party from a change in the position of the paying party pending the Court's determination in that case upon an appeal, and that payment into court was not designed to improve the successful party's position by ensuring that security for the judgment was provided in circumstances where the judgment was otherwise worthless. At [28] and [29], the Court said:
A successful party is prima facie entitled to the fruits of his judgment. He is entitled to be protected, as far as practicable, from the risk that if the appeal fails assets which earlier were available to satisfy the judgment will no longer be available for that purpose. The Court will endeavour to see that a stay does not cause that kind of prejudice to a judgment creditor. An appellant may be required to provide appropriate security as the price of a stay which may make the judgment creditor a secured creditor. Otherwise a requirement for security is only intended to protect the status quo, that is the existing value of the judgment and not to improve the position of the judgment creditor by increasing that value.
Security for these judgments is not needed to protect the judgment creditor from the risk of loss caused by the stay. The judgments are already worthless and the judgment creditor is not entitled to have conditions imposed on the appellants for the purpose of increasing their value. These appellants are therefore entitled to orders staying execution on the judgments without any conditions requiring security.
Counsel for the defendant submitted that here where there were barriers to the enforceability of the judgment against the defendant, the defendant should not be required to surrender those advantages as a condition of the stay in circumstances where there was no evidence of a risk of an adverse alteration of the defendant's position pending a determination by the liquidator.
Decision
In my view, it is appropriate to make orders in the form sought by the defendant essentially for the reasons articulated by the defendant. It is appropriate that the balance of the obligations between the parties be determined by the liquidator in accordance with s 553C of the Corporations Act. To the extent that leave is necessary under s 471B to make this application, it appears to me to be consistent with the policy behind that section that leave be granted so as to permit the application of s 553C.
On the key issues in contention between the parties, my conclusions and the reasons for those conclusions are as follows.
The operation of section 553C
I accept the reasoning of McDougall J in Veolia is equally applicable in relation to the SOP Act. On that view there is no necessary inconsistency between the Corporations Act and the provisions of the SOP Act in that the judgment may be satisfied by the operation of any relevant set‑off under s 553C.
The arguability of the defendant's claim that there will be a net balance in its favour
The elements of the defendant's entitlement are firstly the entitlement to restitution of any amount paid on an interim basis of the judgment amount, and secondly an entitlement based on the certificate of the architect.
I accept that both of these entitlements are matters which are in contest. However, in my view, the position of the defendant is reasonably arguable. So far as the judgment amount is concerned, I accept that the proceedings in the Supreme Court of Queensland identified issues between the parties, and it was not a case where the proceedings were not properly contested by the plaintiff.
The position of the defendant is to rely upon the time and notice requirements of the building contract. The position of the plaintiff is to contend that those requirements were waived, or there is an estoppel preventing reliance upon them by reason of the course of dealings between the parties. A party relying upon written terms of a commercial contract clearly starts at an advantage. I accept that by reason of the terms of that contract the defendant's position is arguable.
Further, I also take into account that the judgment came to be entered under the SOP Act because of the failure of the architect appointed under the contract to serve any payment schedule. While counsel for the plaintiff contended that no inference should be drawn as to the reasons for that, and that it was equally open to infer that the failure to file the schedule was a considered decision on the architect's part, in my view, the evidence is more consistent with it being an error or oversight. That is demonstrated by the terms of the letter that in fact was sent, which indicated that the portion of the claim based on DCV075 could not be accepted and the subsequent formal assessment of the payment claim and rejection of it entirely except for a sum of $750.18. Those facts are consistent with the failure to follow the process under the SOP Act for disputing the plaintiff’s claim being an oversight rather than a deliberate decision.
So far as the argument of the plaintiff based on the operation of s 29(4) is concerned, while I accept that the operation of that provision is a matter in contention, having regard to the fact that the claim for liquidated damages relates on its face to a period prior to the notice of suspension, a challenge to the validity of that aspect of the architect’s certificate does not appear to be strong.
So far as the argument based on s 29(4) seeks to attack the claim for costs to complete the work, the certificate on its face does not identify that as being work postdating the termination. I was told from the bar table that it did so relate. If it did relate to amounts incurred after the valid termination of the contract then the position of the defendant would be very clearly arguable, it making little sense to extend the prohibition in s 29(4) to amounts incurred after a valid termination.
The risk if money is paid over
In my view, having regard to the appointment of a receiver over all of the assets of the company, there is a risk that if an amount is paid pursuant to the judgment then the amount will go immediately to the secured creditor and that if the defendants proof of debt is ultimately accepted it will be left as a creditor of a company without assets. While the Act generally places the risk of insolvency upon the paying party, the underlying rationale for that approach within the Act dissipates upon the company being put into liquidation.
Payment into court
I do not accept the plaintiff’s submission that I should require as a condition of any stay that the whole or part of the money the subject of the judgment be paid to the plaintiff or paid into court.
So far as part payment of the judgment amount is concerned, that would be subject to the risk of being lost to the defendant if it’s proof of debt was accepted. In the circumstances of this case, where there is a reasonably arguable case that there is a net balance in favour of the defendant, it does not appear to me to be appropriate to expose the defendant to that risk.
So far as payment into court is concerned, I accept the defendant’s submission based upon the judgment in Kalifair. The defendant has a prima facie immunity from execution under s 30 of the Foreign States Immunities Act. There is no evidence that the immunity has been waived: s 31. There is no evidence that it has commercial property which would not be the subject of immunity: s 32. In those circumstances a requirement to pay money into court would have the effect of improving the security position of the plaintiff rather than protecting it from an adverse change pending the determination under s 553C by the liquidator. In those circumstances I do not consider it appropriate to require as a condition of a stay payment into court. That conclusion is reinforced by the certification in payment claim 26 which I have quoted above. Because of that certification there is no evidence that there are unpaid subcontractors on this project awaiting the outcome of the liquidation. In any event, having regard to the appointment of a receiver, the entitlements of any unpaid subcontractors on this or other projects are subject to the entitlements of the secured creditor. Thus, even if the policy of the Act extended into liquidation, it would not be relevant in the present circumstances.
Orders
The orders of the Court are:
1. Upon the undertaking given by the defendant by its counsel to lodge a formal proof of debt with the liquidator of the plaintiff on or before 21 September 2016, the Court orders that execution of the judgment pronounced on 17 August 2016 be stayed until 21 days following the liquidator’s determination of this proof of debt.
2. The plaintiff pay the defendant’s costs of the application in proceeding dated 23 August 2016.
| I certify that the preceding forty-five [45] numbered paragraphs are a true copy of the Reasons for Judgment of his Honour Associate Justice Mossop. Associate: Date: 22 September 2016 |
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