In the matter of Shire Lind Developments (NSW) Pty Ltd (in liq)

[2024] NSWSC 1454

Supreme Court

New South Wales

• Amendment notes

Medium Neutral Citation:

In the matter of Shire Lind Developments (NSW) Pty Ltd (in liq) [2024] NSWSC 1454

Hearing dates:

22-25 October 2024

Date of orders:

19 November 2024

Decision date:

19 November 2024

Jurisdiction:

Equity - Corporations List

Before:

Nixon J

Decision:

(1)   The parties are to bring in short minutes of order, by 5pm on 3 December 2024, to give effect to these reasons for judgment, including orders that deal with interest and costs, insofar as those matters can be agreed; and

(2)   If orders to give effect to these reasons for judgment cannot be agreed, the parties are to exchange, by 5pm on 3 December 2024, the form of orders which each party proposes and submissions (limited to 5 pages) on those orders, indicating whether, and if so why, an oral hearing is requested to deal with the matters in dispute.

Catchwords:

CORPORATIONS – winding up – insolvent trading – where company was a special purpose vehicle incorporated for management of a property development – where company entered into construction contract with builder and was unable to pay progress claims – where common ground that company was insolvent before it went into administration, but dispute about date by which the company became insolvent – whether company incurred debt in respect of each progress claim – whether builder agreed to extend payment terms – whether reasonable grounds to suspect insolvency – quantum of loss or damage suffered in relation to debts because of insolvency – whether payments to related party were unfair preference payments

Legislation Cited:

Building and Construction Industry Security of Payment Act 1999 (NSW), s 16

Civil Procedure Act 2005 (NSW), s 100

Corporations Act 2001 (Cth), ss 9, 95A, 286, 588E, 588FA, 588FF, 588G, 588H, 588M, 588V, 588W, 1318

Cases Cited:

Anchorage Capital Master Offshore Ltd v Sparkes (2023) 111 NSWLR 304; [2023] NSWCA 88

Australian Securities and Investments Commission v Edwards (2005) 220 ALR 148; [2005] NSWSC 831

Australian Securities and Investments Commission v Plymin (No 1) [2003] VSC 123

Capital Finance Australia Ltd v Tolcher (2007) 164 FCR 83; [2007] FCAFC 185

Chan v First Strategic Development Corporation Ltd (in liq) [2015] QCA 28

Clifton (Liquidator) v Kerry J Investment Pty Ltd trading as Clenergy [2020] FCAFC 5

Edenden v Bignell [2007] NSWSC 1122

Edwards v Australian Securities and Investments Commission (2009) 264 ALR 723; [2009] NSWCA 424

Hall v Poolman [2007] NSWSC 1330

Hawkins v Bank of China (1992) 26 NSWLR 562

In the matter of ZH International Pty Ltd (in liq) [2022] NSWSC 2

Lords Property Group Pty Ltd v Shire Lind Developments (NSW) Pty Ltd [2019] NSWSC 1818

McLellan, in the matter of the Stake Man Pty Ltd v Carroll (2009) 76 ACSR 67; [2009] FCA 1415

Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 110 ALR 449; [1992] HCA 66

Perrine v Carrello [2017] WASCA 151

Powell v Fryer [2001] SASC 59

Quick v Stoland Pty Ltd [1998] FCA 1200

Quin (in his capacity as liquidator of Roderick Group Pty Ltd (in liq)) v Vlahos (2021) 64 VR 319; [2021] VSCA 205

Re Custom Bus Australia Pty Ltd (in liq) [2021] NSWSC 1036

Re Salfa Pty Ltd (in liq) [2014] NSWSC 1493

Smith v Bone (No 2) (2015) 233 FCR 568; [2015] FCA 389

Re Swan Services Pty Ltd (in liq) [2016] NSWSC 1724

Southern Cross Interiors Pty Ltd (in liq) v Deputy Commission of Taxation (2001) 52 NSWLR 213; [2001] NSWSC 621

Spain v Union Steamship Co of New Zealand Ltd (1923) 32 CLR 138

Tourprint International Pty Ltd (in liq) v Bott (1999) 32 ACSR 201; [1999] NSWSC 581

Treloar Constructions Pty Ltd v McMillan [2017] NSWCA 72

Visbord v Federal Commissioner of Taxation (1943) 68 CLR 354; [1943] HCA 4

Woodgate as liquidator of Marketing Results Pty Ltd v Network Associates International BV [2007] NSWSC 1260

Woodgate v Davis (2002) 55 NSWLR 222; [2002] NSWSC 616

Texts Cited:

M Murray and J Harris, Keay’s Insolvency, Personal and Corporate Law and Practice 10th edition (2018, Thomson Reuters)

Category:

Principal judgment

Parties:

Jason Lloyd Porter in his capacity as liquidator of Shire Lind Developments (NSW) Pty Ltd (in liquidation) (First Plaintiff)
Shire Lind Developments (NSW) Pty Ltd (in liquidation) (Second Plaintiff)
Peter Geoffrey Gribble (First Defendant)
Quantum Management Pty Ltd (Second Defendant)
Quantum Development Management Pty Ltd (Third Defendant)

Representation:

Counsel:
D Woods w J Abednego (Plaintiffs)
A Cameron (Defendants)

Solicitors:
Watson Webb (Plaintiffs)
Longton Legal (Defendants)

File Number(s):

2023/00087304

Publication restriction:

Nil

JUDGMENT

1. This proceeding concerns an insolvent trading claim, which is brought by the First Plaintiff, Mr Jason Porter, in his capacity as liquidator (Liquidator) of the Second Plaintiff, Shire Lind Developments (NSW) Pty Ltd (the Company).

2. The First Defendant, Mr Peter Gribble, is the sole director of the Company. Mr Gribble is also the sole director of the Second Defendant, Quantum Management Pty Ltd, and the Third Defendant, Quantum Development Management Pty Ltd. Each of the Company, Quantum Management, and Quantum Development is a company within the “Quantum Group”.

3. The Company is a special purpose vehicle, which was established in relation to a development of apartments on land situated at 134-146 Linden Street, Sutherland, New South Wales (the Land). This is referred to as the “Linden Development”.

4. All of the shares in the Company were owned by Shire Lind Investments Pty Ltd (in liquidation) (SLI), which was a special purpose vehicle established for the purpose of acquiring and holding the Land. All of the shares in SLI were owned by Quantum Management. Mr Gribble was also sole director of SLI.

5. SLI engaged the Company to manage the Linden Development, and the Company engaged a builder to construct the development.

6. The Company did not have any employees. It entered into an agreement with Quantum Development to provide services for the Linden Development. The fees payable by the Company to Quantum Development were approximately equal to the fees payable by SLI to the Company.

7. By Originating Process filed 16 March 2023, the Plaintiffs make the following claims:

1. insolvent trading claims against Mr Gribble and Quantum Management, seeking compensation pursuant to, respectively, s 588M and s 588W of the Corporations Act 2001 (Cth) (the Act); and

2. an unfair preference claim against Quantum Development, pursuant to s 588FF of the Act.

8. It was common ground that the Company was insolvent before it went into administration. However, there was a substantial dispute regarding the date on which the Company became insolvent which was critical to the quantum of the Plaintiffs’ claims. Before turning to consider that issue, I address below the relevant factual background.

Factual background

Witnesses

9. There were two lay witnesses, namely, the Liquidator and Mr Gribble.

10. The Defendants did not challenge the Liquidator’s credit. His evidence was primarily document-based, although he did express some opinions on the adequacy of the Company’s books and records (which are addressed below).

11. The Plaintiffs challenged Mr Gribble’s credit. They did not advance a submission that his evidence was dishonest, but instead contended that, given various discrepancies between his evidence and the contemporaneous documents, I should rely primarily on the documents in determining the relevant course of events.

12. I deal with some of these discrepancies below. As a general observation, Mr Gribble indicated on a number of occasions that he had a limited recollection of documents which were in evidence. For example, he had difficulties recalling signing documents, or reviewing documents which he had signed, or whether documents had been sent to him (unless this was established by other objective evidence). That is not surprising, given that the events which were the focus of the proceeding occurred more than six years ago, and given that Mr Gribble has been involved in around twenty property developments in the past two decades.

13. One example of the limits of Mr Gribble’s recollection is provided by his evidence in respect of the financial statements of the Company. In cross-examination, he was taken to the accounts for the financial year ending 30 June 2018, which bore his signature and the date 8 October 2018, and was asked when he signed them. Mr Gribble responded: “I don’t recall the actual date I signed it but that was the date the report looks like it was generated and possibly that was the date, I signed it on the same day”.

14. However, in an examination in the Federal Court of Australia in August 2021, Mr Gribble said that the accounts in question were “prepared within a day; were not forwarded to ASIC; were not given to the shareholders and they were purposely done to give a copy to the liquidator as per his request under the forms he requested and they were done in haste”, adding “I signed them all within half an hour”. The Liquidator was appointed in April 2020, such that this evidence was to the effect that the FY2018 report was prepared some time after that date (and well after the date that it bears).

15. After being confronted in the current proceeding with those prior statements, Mr Gribble indicated that the financial statements “were produced by [the Quantum Group finance team] and I signed them. That’s all I recall. And that is my signature on it. Whether I signed it on that date or that’s a date they produce the reports, I can’t recall”.

16. It therefore appears that, by the time that Mr Gribble gave evidence in this proceeding in October 2024, he had forgotten the course of events leading to the creation of these financial statements some time after April 2020, which he had recalled at his examination in August 2021.

17. Mr Gribble’s affidavit evidence largely consisted of a chronological account of events by reference to the contents of exhibited documents. Where Mr Gribble has given evidence of matters which are not recorded in documents, such as evidence of conversations or evidence of his state of mind at particular points in time, I have assessed such evidence in light of the contemporaneous documents and the inherent probabilities.

The Linden Development

18. The Quantum Group is a fund manager based in Sydney. Its business activities include financial advisory services, the provision of financial facilities, property funds management, and development projects.

19. The Quantum Group has completed around twenty development projects since 2000. Those development projects have typically used the following structure:

1. a special purpose vehicle (the “Investment SPV”) is incorporated for the purpose of acquiring the relevant land; and

2. a second special purpose vehicle (the “Development SPV”), which is a wholly owned subsidiary of the “Investment SPV”, is incorporated for the purpose of undertaking the day-to-day management of the particular development project, arranging project finance, appointing a builder, arranging pre-sales and marketing, finalising the strata title, obtaining the occupation certificate, and organising the eventual settlement of the apartments at the conclusion of the project.

20. On 28 August 2015, SLI was incorporated as the “Investment SPV” for the Linden Development. In October 2015, SLI entered into option agreements for the seven lots comprising the Land on which the Linden Development was to be constructed.

21. On 13 January 2016, the Company was incorporated as the “Development SPV” for the Linden Development.

22. In July 2016, SLI applied to Sutherland Shire Council for development consent for the Linden Development. Development consent was granted on 21 March 2017 for SLI (or the Company with the consent of SLI) to demolish existing structures on the Land, to construct two residential buildings comprising approximately sixty-two units, and to strata subdivide the Land.

Engagement of Colliers

23. In May 2017, the Company engaged Colliers International (NSW) Pty Ltd as agent to sell apartments in the Linden Development, pursuant to a written agreement which was signed by Mr Gribble on behalf of the Company (the Agency Agreement). Twelve of the sixty-two apartments in the Linden Development were “Quantum Properties”, which were to be sold by the Quantum Group. The remaining fifty apartments were “Non-Quantum Properties”, which were to be marketed and sold “off-the-plan” by Colliers.

24. Clause 4.6 of the Agency Agreement provided that Colliers must satisfy the “Sales Milestones” set out in Schedule 2, namely:

1. by 17 June 2017, Colliers was to sell twenty-three of the Non-Quantum Properties (45%); and

2. by 17 December 2017, Colliers was to sell fifty of the Non-Quantum Properties (100%).

25. In cross-examination, Mr Gribble agreed that the speed with which contracts could be exchanged for pre-sales was important for the Company’s ability to obtain finance for the construction of the Linden Development. That was because construction finance “typically has some pre-sales hurdles”. Mr Gribble agreed that the terms of construction finance offered in the market generally were to the effect that the pre-sales number depended on the number of contracts that had been unconditionally exchanged.

26. In June and July 2017, several finance brokers were engaged to source funding for the Linden Development.

27. Mr Gribble received weekly reports from Colliers, setting out matters such as the number of units available for sale in the Linden Development, the number of contracts issued, the number of sales advices issued, and the number of contracts exchanged (including the number exchanged unconditionally).

28. On 16 July 2017, one month after the date by which the first of the Sales Milestones was meant to have been achieved (namely, the sale of 45% of the Non-Quantum Properties), Colliers reported that contracts had not been exchanged on any of the units. In cross-examination, Mr Gribble explained that there had been a delay in Colliers gaining access to a display suite, which had affected Colliers’ ability to meet the Sales Milestones.

29. On 26 October 2017, Mr Gribble received a Project Control Group Report in relation to the Linden Development, which was prepared by Quantum Development as “Project Manager”. It stated that a tender for the building contract had been issued on the date of the report (26 October 2017). It also set out a development program which stated that the “current forecast date” for the completion of pre-sales of apartments and for the obtaining of construction finance was 15 December 2017. The report recorded that, as at 26 October 2017, contracts had been exchanged on only seven of the units in the Linden Development.

Letter of Intent

30. On 22 November 2017, Lords Property Group Pty Ltd provided a tender proposal for the Linden Development. In a covering email, the director of Lords, Mr Jad Maroun, stated that Lords was able “to offer a negotiated tender price based upon receiving a Letter of Intent by COB today if possible”.

31. On 23 November 2017, Mr Gribble signed a letter of intent on behalf of the Company, which was accepted by Lords on the following day (the Letter of Intent). The Letter of Intent confirmed that the Company and Lords were “continuing to negotiate the terms of a design and construct contract” for the Linden Development, and that there remained “matters which are not agreed”. In that context, the letter set out the “basis on which the parties’ negotiations will proceed”, including that:

“2.   The Contract and the date of the Contract are subject to and conditional upon the following Conditions Precedent:

i.    [the Company] obtaining finance approval from the Financier on terms acceptable to [the Company];

ii.   the Financier approving the engagement with [Lords];

iii.    [Lords] entering into the Tripartite Deed with [the Company] and the Financier; and

iv.    the issue of a commencement notice confirming the conditions in subparagraphs (i), (ii) and (iii) of this subclause have been satisfied.

3.   Stage 1 of the project is capped at $3,040,816.01 ex GST (CAP). This is anticipated to be drawn down as per Lords Property Group Pty Ltd supplied progress schedule titled ‘Linden – Stage 1 & 2 Cost Break-up 171123’

4.   No agreement will be in place until the lump sum Contract is executed, following the parties’ negotiation and agreement on the contract terms and conditions. The parties will use reasonable endeavours to negotiate and agree these;”

32. By the Letter of Intent, the Company and Lords agreed to continue negotiating the terms of a construction agreement for the Linden Development, while acknowledging that there would be no such agreement in place unless and until a contract was subsequently executed.

33. The Letter of Intent did not define, or otherwise identity, the “Financier” referred to in paragraph 2 of that letter. At this time, the Company had not received any offer of construction finance for the Linden Development.

34. As set out above, paragraph 3 of the Letter of Intent referred to “Stage 1” of the Linden Development, by reference to a schedule entitled “Linden – Stage 1 & 2 Cost Break-up 171123”. The relevant schedule set out a proposed “Stage 1” of the construction (which included design, piling, capping, beam, shotcrete, anchoring, excavation and reinforcement to all footings) and “Stage 2” (which was from “underside of slab on ground to completion”). The payments falling within Stage 1 totalled $3,040,816.01 and within Stage 2 totalled $15,185,943.99, for a total cost excluding GST of $18,226,760.00.

35. During late November and December 2017, Lords commenced design work for the Linden Development.

36. As noted at paragraph [29] above, as at 26 October 2017, it was forecast that the pre-sales of the units in the Linden Development would be completed by 15 December 2017. This forecast was not met. On 17 December 2017, Colliers issued a weekly report stating that contracts had been exchanged for only nine of the units in the Linden Development (with a contract for one further unit having been exchanged conditionally).

SolCap Loan

37. On 12 December 2017, SLI, the Company and Mr Gribble entered into a Loan Deed with Solcap Debt Management Pty Ltd (the Solcap Loan). By this agreement, Solcap agreed to provide a facility in the amount of $7,431,000 to the Company for a one-year term. Provided that there was no default, the interest rate was 11.25% per annum (and otherwise 15.25% per annum). Mr Gribble guaranteed the Company’s obligations under the Loan Deed.

38. In consideration for the facility, Solcap was granted a first-ranking security interest over all of the present and after-acquired property of each of the Company, SLI and Mr Gribble, and a first-ranking real property mortgage over the seven lots comprising the Land.

39. On 15 December 2017, the facility under the Solcap Loan was fully drawn down. The funds advanced by Solcap were used to fund the purchase of the Land by SLI, which was completed on that date.

Quantum Loan

40. On 15 December 2017, the Company (as borrower) and Quantum Group Holdings Pty Ltd (as guarantor) entered into a loan agreement with The Trust Company (Australia) Limited as custodian for Quantum Funds Management Ltd as responsible entity for the Quantum Mortgage Trust (QM Trust) (the Quantum Loan).

41. By clause 3.1 of the Quantum Loan, QM Trust agreed to lend the “Loan Amount” to the borrower. The Loan Amount was defined as “the amount that is not less than $1.5m and not more than $9.0m but which is otherwise determined by the amount which is no greater than 70% of the Gross Realisable Value of the [Linden Development] on its completion or 80% of the Land Value + the Additional Guarantee Amount”.

42. Clause 6.1 provided that the Loan Amount would be used for the completion of the purchase of the Land as required, and that the balance would be used to complete the construction of the Linden Development.

43. Clause 5.1 provided that the Company would pay QM Trust interest at a rate of 12% per annum (unless the interest is not paid on the due date, in which case the rate would be 16% per annum).

40. Clause 4.1 of the Quantum Loan provided that the Company must repay the Loan Amount to QM Trust on the later of (a) two years after the first drawdown of any part of that amount; and (b) six months after notice of practical completion is given under the building contract.

41. Clause 7.1 provided that the money advanced and the interest payable under the Quantum Loan would be secured by a mortgage over the Land; by a registered security interest against the present and future acquired property of the Company and SLI; and by the guarantee given under the loan deed by Quantum Group Holdings.

42. Mr Gribble agreed in cross-examination that, although the Loan Amount was expressed to be in a range of $1.5m to $9.0m, the amount which was available to be advanced depended on the number of “SL class units” which were sold by the QM Trust to investors.

43. A Product Disclosure Statement for the SL class units was issued by QM Trust on 8 December 2017 (Quantum PDS). Part 2 of the Quantum PDS stated that QM Trust would use the funds raised by the issue of SL class units to provide a loan to the Company for the purpose of the Linden Development. It further stated that: “A minimum of $1.5 million up to a maximum of $9 million ‘SL’ Class of Units will be issued by [QM Trust] to investors”. This matched the range of the loan amount specified in the Quantum Loan. However, importantly, the Quantum PDS stated as follows:

“Loan amount:   The maximum loan amount is $9 million and the minimum amount is $1.5 million. The value of the Loan will depend on the value of funds raised from investors pursuant to the issue of SL Class of Units and is within the absolute discretion of the Trust Manager.”

48. The Quantum PDS stated that the “Purpose” of the loan was as follows:

“The Trust Manager will use the funds raised under the SL Class of Units to provide a loan (Loan) to the [Company]. The [Company] will use the Loan to:

(i)    pay part of the purchase price of the Land; and

(ii)    to the extent funds provided under the Loan remain after purchasing the Land, they will be used towards the development and other costs required to complete the [Linden Development].”

49. The Quantum PDS stated that:

“A bank or funder is being [sought] to finance the Land as the senior lender (Senior Lender), which will hold a first ranking mortgage with respect to the Land (including improvements). Before [the Company] is able to enter into the Loan agreement for construction finance, it must have satisfied all conditions precedents of the senior construction finance.”

50. The Quantum PDS further stated that:

“The Senior Lender will provide a loan of approximately $7.5 million to [the Company] which is to be used to fund the purchase of the Land (Land Loan). The [Company] will grant the Senior Lender a first ranking mortgage over the Land.

In order to complete the Project, [the Company] will need to raise additional funds of approximately $13 million, to raise these funds, [the Company] anticipates it will need to enter into additional loan agreement, to refinance the Land Loan, and may need to grant further security interests in relation to the Land (Construction Finance).”

51. It is plain from the reference to “additional funds of approximately $13m” that the Quantum PDS envisaged that total finance of more than $20m would need to be obtained for the Linden Development. (This is confirmed by statements later in the Quantum PDS, which are set out below, regarding the number of pre-sales required in order to secure the finance required.)

52. Accordingly, even if the maximum amount of the SL class units were issued ($9m), with the result that the maximum amount of the Quantum Loan was advanced ($9m), those funds would be insufficient to fund these construction costs. In that regard, the Quantum PDS stated that the purpose of the Quantum Loan was “to partially fund the Project”.

53. Part 2 of the Quantum PDS described the Linden Development as having two stages, as follows (emphasis added):

“The development of the Project involves two stages: (i) stage one involves: (a) the purchase of the Land; (b) obtaining sufficient pre-sales of apartments made ‘off the plan’ to obtain the financing required to commence construction; (c) obtaining a Construction Finance, term sheet/s; and (d) entering into a fixed price construction contract; and

(ii) stage two involves the drawdown of the Secured Loan and eventually the Construction Finance to finance the development of the Project; the completion of the construction contract; the sale of each of the 62 apartments constructed; the repayment of the Land Loan and Construction Finance including any interest owed in relation thereto; the payment of all other fees and expenses associated with the Project; and the making of distributions of income and capital to the holders of the SL Class of Units in accordance with the trust deed establishing the Trust.”

54. As this passage indicates, it was planned that sufficient pre-sales of apartments would have to be completed in order to obtain construction finance, before a construction contract was entered and the construction of the Linden Development would commence.

55. The Quantum PDS stated that the “marketing of the 62 apartments for sale has commenced”, and provided the following further information regarding the level of pre-sales required in order to achieve construction finance (emphasis added):

“The estimated number of pre-sales required to secure the additional funding needed to finance the construction of the Project (i.e. the Construction Finance) is equivalent to a value of at least 100% of senior debt cover. [SLI] and [the Company] expect that it will need to make approximately 29 pre-sales of apartments equal to a gross sales value of approximately $22,700,000 (including GST) in order to obtain the Construction Finance”

56. The above passage indicates that the required level of senior debt for the Linden Development was some $22.7m. As at the date of the issue of the Quantum PDS, the pre-sales necessary to obtain this level of finance was nowhere near being achieved. The Quantum PDS reported that contracts had been exchanged on only eight units, with a total value of $5.635m.

Construction Contract

57. In December 2017 or January 2018, the Company entered into a contract with Lords for the design and construction of the Linden Development (the Construction Contract). This agreement was signed by Mr Gribble on behalf of the Company.

58. The Construction Contract was dated 20 December 2017. Mr Gribble gave evidence that it was in fact executed on 31 January 2018. He did not refer to any document supporting this later date for the contract, and it is unlikely that, almost seven years after the event, he would have an unaided recollection of the precise date on which he signed this agreement. However, it is unnecessary to resolve this issue, as nothing turns on the date of execution.

59. The Construction Contract comprised, inter alia, the Formal Instrument of Agreement and the General Conditions attached to that document.

60. Clause 5.1 of the Formal Instrument of Agreement provided as follows:

“The Contract Documents constitute the entire agreement between the parties in respect of the Works and the WUC and the Contract supersedes all previous agreements, undertakings, communications and any tender, whether written or oral, relating to the subject matter of the Contract.”

61. Accordingly, insofar as the Letter of Intent (which, as outlined above, specified a framework for ongoing negotiations) had any contractual effect, it was superseded by the parties’ entry into the Construction Contract.

Provisions regarding commencement of works

62. Clause 2.7 of the General Conditions provided as follows:

“(a)    The parties acknowledge no Works are to commence or be performed except as provided by this clause.

(b)    Upon execution of the Contract [Lords] is to commence early design development of the Works.

(c)   Except as provided by subclause (b), [Lords] must not perform any WUC nor incur any liability in respect of the WUC until and unless a commencement notice is issued pursuant to this clause.

(d)    [The Company] may in its absolute discretion at any time issue [Lords] with a notice (‘commencement notice’) directing [Lords] to commence performing all of the WUC (including the WUC comprised within subclause (b)).

(e)   Without limitation, [the Company] may have regard to any factor in considering whether to issue the commencement notice and the timing for issuing such notice, including but in no way limited to:

(i)    [The Company] obtaining finance for the [Linden Development] on terms acceptable to [the Company] in its sole and absolute discretion;

(ii)    the status of the WUC comprised within subclause (b);

(iii)    the status of the Development Application Approval and conditions contained within the Development Application Approval; and

(iv)    [Lords] having executed the tripartite deed.

(f)    [Lords] must do all things necessary to assist [the Company] in obtaining finance for the [Linden Development] including to execute any tripartite deed the Financier requires.

(g)    If [the Company] has not issued the commencement notice by the date three months after the date the Contract is executed, [the Company] may (in its sole and absolute discretion) at ay time after that date:

(i)    suspend the performance of all or any of the WUC until [the Company issued the commencement notice; and

(ii)    terminate the Contract by issuing a written notice to [Lords], in which case the terms of clause 40 will apple as if the Contract has been frustrated on the date of the termination.

(h)    Prior to the date the commencement notice is issued [Lords] must not:

(i)    perform any Work or WUC or incur any costs, except for the Works provided by subclause (b), until [Lords] receives a commencement notice; and

(ii)    incur any liability for any Work or WUC other than as required by subclause (b).

(i)    The parties agree and acknowledge that any entitlement for the WUC comprised within subclause (b) forms part of the contract sum.

(j)    The rights provided by this clause 2.7 are in addition to, and do not prejudice, any other right provided by this Contract.

(k)    The parties acknowledge that this clause 2.7 is inserted for the sole benefit of [the Company], which may at any time give written notice to [Lords] waiving any condition within this clause.

(l)    Except as provided by clause 2.7(g)(ii) [Lords] shall have no Claim in respect of this clause or the commencement notice (including in respect of the date the commencement notice is issued).”

63. The effect of this provision was, in broad terms, to give the Company the sole and absolute discretion as to whether and when the works would commence on the project (other than the early design development works). The evident purpose was to ensure that the Company was able to be satisfied that it had sufficient finance in place for the works before any substantial costs were incurred.

64. The “tripartite deed” was defined as meaning “the deed or deeds required to be executed by [the Company], [Lords] and the Financier as a prerequisite to entering into this Contract, or which may be required by the Financier from time to time, including the deed at Annexure Part M” . The “Financier” was defined as meaning Westpac Banking Corporation.

65. Clause 53 of the General Conditions was headed “Tripartite Deed” and provided, relevantly, as follows:

“[Lords] agrees to enter into a Tripartite Deed with [the Company] and the Financier on or before the issue of the commencement notice and as a condition precedent to payment. …”

Provisions regarding progress payments

66. The Construction Contract specified the contract sum to be $18,226,760.00 (excluding GST). This matched the sum which had been specified at the time of entry into the Letter of Intent. However, the Construction Contract did not divide the sum into “Stage 1” and “Stage 2”.

67. Clause 2.2 of the Formal Instrument of Agreement provided that the Company must pay Lords the contract sum at the times and in the manner provided for in the Construction Contract.

68. Clause 37.1 of the General Conditions provided that, if Lords complied with its obligation to deliver certain documentation to the Company, Lords was entitled to serve a progress claim on the Superintendent once every month up to the date of practical completion, together with supporting material.

69. Clause 37.2 provided that the Superintendent must, within 10 business days after receiving a progress claim, issue to Lords a progress certificate “evidencing the Superintendent’s opinion of the moneys due from the [Company] to [Lords] pursuant to the progress claim and reasons for any difference”, taking into account, inter alia, “the cost to rectify work which is defective or does not comply with the requirements of the Contract”. The Superintendent was Mr Hazim Najar, who was employed by the Quantum Group.

70. The Company was required, subject to certain conditions, to pay Lords “the amount certified by the Superintendent in a progress certificate under subclause 37.2 within 15 business days after the date a payment claim meeting the requirements of the Contract is validly received by the Superintendent”: cl 37.2A(b).

Provisions regarding consequences of breach

71. Clause 39.7 of the General Conditions defined a substantial breach of the Construction Contract as being “a failure by the [Company] to make payment which is payable to [Lords] pursuant to the Contract”, and provided that if the Company commits a substantial breach, Lords may give the Company a written Show Cause Notice, requiring the Company to show cause why Lords should not exercise a right referred to in clause 39.9.

72. Clause 39.9 of the General Conditions provided that:

1. if the Company fails to show reasonable cause by the stated date and time, Lords may, by written notice to the Company, “suspend the whole or any part of” the works; and

2. if the Company fails within 28 days of the date of any such suspension:

1. to remedy the breach; or

2. if the breach is not capable of being remedied, to make other arrangements to the reasonable satisfaction of Lords,

then Lords may, by written notice to the Company, terminate the Construction Contract.

73. Clause 39.9 further provided that:

“Damages suffered by [Lords] by reason of the suspension shall be assessed by the Superintendent, who shall certify them as moneys due and payable to [Lords].”

74. In addition, clause 33.4 of the General Conditions provided that, other than where Lords was required to bear the cost of a suspension (that is, other than where the suspension is due to an act or omission of Lords or its associates, agents or employees):

“if the suspension causes [Lords] to incur more cost than otherwise would have been incurred, [Lords] is entitled to make a claim for additional costs actually incurred by [Lords] on that day by reason of the suspension, subject to the limitation that the total amount of compensation payable for each day of suspension under this subclause 33.4 and under subclause 34.9 will not exceed the amount stated in Item 31 [being an amount of $5,100 per day].”

75. Clause 34.9 of the General Conditions provided as follows:

“For every day the subject of an EOT [Extension of Time] for a compensable cause and for which [Lords] gives the Superintendent a claim for delay damages pursuant to subclause 41.1, [Lords] shall (unless otherwise expressly provided in the Contract) be entitled to be paid the cost actually incurred by the [Lords] on that day by reason of the delay, subject to the limitation that the total amount of compensation payable under this subclause 34.9 and under subclause 33.4 for any one day will not exceed the amount stated in Item 31.

[Lords] agrees that the compensation provided for in this subclause 34.9 and in subclause 33.4 is the only amount which it may recover from [the Company] for any exclusion, suspension, delay or disruption, including any delay or disruption arising from a breach of the Contract by [the Company].”

Agreements between the Company and SLI

76. On 1 February 2018, the Company entered into two agreements with SLI, the first entitled a “Development Manager Agreement” and the second entitled a “Project Manager Agreement”. These agreements were executed by Mr Gribble on behalf of each of the Company and SLI.

77. Clause 5.5 of the Development Manager Agreement relevantly provided as follows:

“(a)    [SLI] must procure that the:

(i)    Land is available for demolition, site and building works, reconfiguration and titling as required for the execution of the Project; and

(ii)    [the Company] pays all Project Costs incurred in carrying out the Works.

(b)    [The Company] must cause the Works to be carried out:

(i)    in accordance with the Project DA

(ii)    in accordance with all Approvals, all statutory or governmental requirements, the law (including any occupational health and safety laws) and good building practices;

(iii) in accordance with the Building Code of Australia and otherwise be fit for purpose and using good quality materials;

(iv)    at all times subject to budgets approved by [SLI]; and

(v)    otherwise in accordance with this Agreement.”

78. Clause 5.3 of the Project Manager Agreement was in relevantly identical terms.

79. The main distinction between the two agreements appears to be that the Development Manager Agreement was intended to cover the period up to the commencement of construction, while the Project Manager Agreement was to cover the period from commencement to completion of construction. For example, the Development Manager Agreement contained provisions relating to the obtaining of approvals for the works, and regarding any appeal to Land and Environment Court (which did not have any counterpart in the Project Manager Agreement).

80. Clause 3.4 of the Development Manager Agreement provided as follows:

“From the date of the exchange of the land option or 30/06/2016, which ever earlier until Completion, [SLI] must pay to [the Company] a fee being equal to $13,888.88 plus GST per month in consideration for [the Company] entering into this Agreement and carrying out the Project in accordance with the terms of this Agreement, up to a maximum amount of $250,000 (plus GST). This amount is to be paid on the first day of each month, in advance and forms part of the Project Costs.”

81. The date of the exchange of the land option was around 7 June 2016. By reason of the cap on fees in clause 3.4, there were a total of eighteen monthly amounts payable under that clause, with the result that the last of those monthly amounts was payable in December 2017.

82. From around that point in time, the amounts due under the Project Manager Agreement were payable. Clause 3.4 of the Project Manager Agreement provided as follows:

“From the date of first works starting on the land or the site, until Completion, [SLI] must pay to [the Company] a fee being equal to $15,000 (plus GST) per month in consideration for [the Company] entering into this Agreement and carrying out the Project in accordance with the terms of this Agreement, up to a maximum amount of $180,000 (plus GST). This amount is to be paid on the first day of each month, in advance and forms part of the Project Costs.”

83. Clause 4.2 of the Development Manager Agreement provided as follows:

“(a)    [SLI] acknowledges and agrees that [the Company] may cause another entity associated with or nominated by [the Company] to be appointed as development / Project Manager pursuant to a Project Manager Agreement to assist [the Company] to carry out the Project, subject to obtaining the prior approval of [SLI].

(b)    The terms of that appointment will be set out in a Project Manager Agreement on such terms and conditions agreed by [SLI] (acting reasonably).”

Clause 4.2 of the Project Manager Agreement was in relatively identical terms.

84. The Company did not have any employees. In order to perform its obligations under the Development Manager Agreement and the Project Manager Agreement, it engaged Quantum Development to provide those services to SLI.

Commencement of construction

85. On 15 December 2017, a construction certificate was issued for the demolition of the existing structures on the Land. On 8 February 2018, a further construction certificate was issued for bulk excavation and shoring.

86. As at February 2018, the sales of units in the Linden Development remained well below the targets specified in the Agency Agreement and in the Quantum PDS. A report from Colliers for the week ending 4 February 2018 stated that a total of ten contracts had been exchanged (with a further three contracts exchanged conditionally).

87. As at February 2018, the Company had not received an indicative term sheet for any construction finance facility.

88. Despite those matters, on 14 February 2018, the Company issued a “Commencement Notice” to Lords in respect of the Linden Development. This notice was copied to Mr Gribble and stated relevantly as follows:

“Pursuant to the general Conditions of Contract clause no. 2.7, This letter will serve to instruct the builder to commence performing all the WUC (including the WUC comprised within sub clause b).”

89. Mr Gribble gave evidence in his affidavit that, on or about 14 February 2018, he was informed by Mr Najar that:

“(a)    [Mr Najar] issued a letter of commencement on 14 February 2018;

(b)    construction would proceed in two stages;

(c)   the budget for Stage 1 works was expected to be $3,040,000;

(d)    the budget for Stage 2 works was expected to be $15,180,000;

(e)   Stage 1 would end on 29 May 2018;

(f)    pursuant to the letter of commencement, Lords was to complete Stage 1 works only and a further letter or notice would be issued when Stage 2 works could commence;

(g)    Stage 1 works would be paid by funds raised by QMT;

(h)    Stage 2 was always subject to final construction finance.”

90. In circumstances where Mr Najar was not called as a witness in this proceeding, this evidence was admitted subject to an agreed ruling under s 136 of the Evidence Act 1995 (NSW) that it be limited to evidence of what was said to Mr Gribble, and not as the truth of the matters stated.

91. There is no contemporaneous document which records the matters which Mr Najar is said to have told Mr Gribble.

92. The Commencement Notice, which was issued by Mr Najar and was copied to Mr Gribble, did not refer to Stage 1 or Stage 2. It did not state that Lords was to commence only Stage 1 of the works, or that a separate notice would be issued in respect of Stage 2.

93. The Construction Contract which was signed by Mr Gribble did not divide the works into Stage 1 and Stage 2, and did not provide for separate commencement notices to be issued for separate stages.

94. The Commencement Notice did not contain any statement that any part of the works was “subject to final construction finance”. Clause 2.7 of the Construction Contract provided that the issue of a commencement notice was in the absolute discretion of the Company, and that the Company could, in deciding whether and when to issue a commencement notice, take into account whether it had obtaining finance for the Project on terms which it regarded as acceptable, and whether Lords had executed a tripartite deed with the Financier. However, this clause was for the sole benefit of the Company, and could be waived by the Company: subclause 2.7(k). As matters eventuated, the Company elected to issue the Commencement Notice before it had obtained construction finance, or had even obtained an indicative term sheet for such finance, and before it had reached the level of sales in the Linden Development which (according to the Quantum PDS) were required in order to obtain construction finance.

95. Mr Gribble was aware of those matters. In particular, he was aware of the terms of the Commencement Notice (which was copied to him) and of the Construction Contract (which he signed); he was aware of the statements made in the Quantum PDS regarding the level of pre-sales required in order to obtain construction finance; and he was aware, as at 14 February 2018, of the level of pre-sales that had been achieved and the lack of any offer of construction finance.

96. Significantly, in the correspondence which ensued with Lords over the coming months regarding payments due under the Construction Contract, Mr Gribble did not, on any occasion, state to Lords that any amounts claimed by Lords above the sum of $3.04m were not payable because they comprised a “Stage 2” of works which Lords was not authorised to undertake without the issue of a further notice under the contract.

97. In those circumstances, I find that it is unlikely that Mr Najar said, or that Mr Gribble believed as at 14 February 2018, that the Commencement Notice was issued only in respect of “Stage 1” of the Linden Development; or that a separate commencement notice was going to be issued in respect of “Stage 2”; or that the issue of the Stage 2 commencement notice and the commencement of the Stage 2 works was subject to finance being obtained.

Progress Claim No 1

98. On 28 February 2018, Lords sent the Company its first progress claim in relation to the Linden Development (Progress Claim No 1). In the covering email, Mr Maroun stated that:

“As per our agreement and as a sign of good faith based on our working relationship, Lords Group commenced works as per the letter of intent on the 27^th of November 2018 and agreed not to submit a Progress claim until works onsite commenced and the first months’ work was completed. We have been paying for and cash flowing all design works/ Lords Group overheads and construction works up until this point.

Therefore please find attached Progress Claim No.01 which is for design and construction works from the commencement of the project in November up until end of month February.”

99. Lords plainly did not regard the Letter of Intent as a binding agreement to perform works, since it described the works done following the signing of the Letter of Intent and prior to the issue of the Commencement Notice, as having been performed “as a sign of good faith based on our working relationship”. As noted above, the Commencement Notice issued on 14 February 2018 had included authorisation for Lords to perform the works specified in clause 2.7(b) of the General Conditions, being the “early design development of the Works” (being work which Lords had already performed). Following the issue of the Commencement Notice, Lords raised Progress Claim No 1 for the cost of those early design works.

100. Following the issue of Progress Claim No 1, the parties exchanged emails, in which Lords confirmed that it had submitted the documentation required by clause 37.2A of the General Conditions (which had to be supplied before the Company was obliged to make any payment to Lords).

101. Progress Claim No 1 was for an amount of $1,023,156.07. Mr Najar, as Superintendent, issued a payment schedule in respect of Progress Claim No 1 in the amount of $694,752.49. Pursuant to the terms of the Construction Contract, the Company was obliged to pay the amount set out in the Superintendent’s payment schedule by 21 March 2018. Lords issued a tax invoice for this amount.

102. On 21 March 2018, being the due date for payment, Mr Maroun sent an email to Mr Najar, asking: “Can you please also confirm when we can expect Linden St payment of Tax Invoice No. 1”. This was the commencement of a pattern which would continue throughout the dealings between the Company and Lords, whereby Lords was consistently enquiring after, and pressing for, payment by the due date.

103. Later that day, Kim Jin, who was a Financial Controller at the Quantum Group, responded to Mr Maroun stating: “For our new project on Linden, we will talk to peter for further instruction”. Mr Gribble confirmed in cross-examination that he was the only “Peter” at the Quantum Group. It is apparent that, from the first request for payment by Lords, instructions were sought from Mr Gribble. Further, as set out below, he was subsequently copied into much of the correspondence between Lords and the Quantum Group regarding late payments.

104. It appears that no response to Mr Maroun’s request was forthcoming, from Mr Gribble or otherwise. On 23 March 2018, Mr Maroun sent a further email in the same email chain, again seeking confirmation as to when Lords would receive payment for their first invoice.

105. On 3 April 2018, the Company made a part payment of $400,000 to Lords in respect of Progress Claim No 1. Later that day, Mr Gribble sent an email to Mr Maroun in the same email chain, stating as follows: “Sorry Jad made part payment we’re still waiting for $300000 from the ATO we are chasing them daily now and then can pay the balance of your claim”. Mr Maroun replied to Mr Gribble shortly afterwards, again pressing for payment of the outstanding balance, stating as follows:

“We can probably hold for a few more days but we will need the balance paid by COB Friday please so that we can also pay our contractors, mainly earthworks contractor who is close to finished.

I am working with Hazim [Mr Najar] to try and keep claims generally as tight as possible from our end but this is on the basis that they get paid on the due date or close to the due date otherwise it starts to put too much pressure on us from a cash flow point of view if they are right and we are also waiting, which I’m sure you could appreciate.”

106. On 9 April 2018, the Company paid the balance of the amount due in respect of Progress Claim No 1 (being $294,752.49).

Raising of money by QM Trust

107. On 23 March 2018, Mr Maroun sent Mr Hajar a cash flow forecast for the Linden Project, noting that the figures were indicative, and would most likely fluctuate depending on progress on site. The monthly and total cash flow for the Linden Development was as follows:

Monthly Cash Flow	Total Cash Flow
February 2018	$701,770.19	$701,770.19
March 2018	$1,300,000.00	$2,001,770.19
April 2018	$900,000.00	$2,901,770.19
May 2018	$950,000.00	$3,851,770.19
June 2018	$1,000,000.00	$4,851,770.19
July 2018	$1,450,000.00	$6,301,770.19
August 2018	$1,400,000.00	$7,701,770.19
September 2018	$1,215,000.00	$8,916,770.19
October 2018	$1,150,000.00	$10,066,770.19
November 2018	$1,100,000.00	$11,166,770.19
December 2018	$1,000,000.00	$12,166,770.19
January 2019	$1,000,000.00	$13,166,770.19
February 2019	$1,000,000.00	$14,166,770.19
March 2019	$900,000.00	$15,066,770.19
April 2019	$850,000.00	$15,916,770.19
May 2019	$750,000.00	$16,666,770.19
June 2019	$700,000.00	$17,366,770.19
July 2019	$450,000.00	$17,816,770.19
August 2019	$409,989.81	$18,226,760.00

108. As this cash flow forecast showed, Lords expected that by the end of June 2018, it would have issued over $4.851m in progress claims. There was no reference in this cash flow forecast to Stage 1 and Stage 2, and no indication that any part of the works would not be performed unless a further commencement notice was issued or unless construction finance was obtained. As at March 2018 (when this cash flow forecast was prepared), Lords was plainly intending to perform substantial works on the Linden Development every month for the coming 18 months, in an average amount of around $1m per month.

109. Mr Najar did not, in response to this email dated 23 March 2018 (or at any other time), state that no works should be performed by Lords beyond “Stage 1” or beyond an amount of $3.04m, unless a further commencement notice was issued or unless construction finance was obtained.

110. As at the end of March 2018, the amount of funds being raised by the sale of SL class units, which was thereby available to be advanced to the Company pursuant to the Quantum Loan, was not keeping pace with the cost of the works being performed.

111. Part 1 of the Quantum PDS stated that, upon receipt of application moneys by QM Trust, the moneys would be held in trust for the applicant in a bank account established by the QM Trust in the name of the SL class units. The Quantum PDS further stated that: “No contributions will be released from this account for any purpose, other than to refund cancelled applications, until the minimum subscription has been received”.

112. Part 2 of the Quantum PDS stated that:

“Should the minimum of $1.5 million not be raised in SL Class of Units within 4 months of the issue of this Part Two PDS, [QM Trust] will return Investors funds plus interest earn based upon the interest rate from the designated bank account less any bank fees”.

113. As foreshadowed in the Quantum PDS, in December 2017 the QM Trust opened a bank account with Westpac in the name of the SL class units. The first deposit into that account was on 23 January 2018. In January 2018, there were two deposits into the account totalling $229,253.87. In February 2018, there were no deposits into the account. In March 2018, there was one deposit of $50,000.

114. It follows that, by the end of the March 2018 (being around the time that the Company received the cash flow forecast from Lords set out above), QM Trust had raised a total of $279,253.87 in the three months since the issue of the Quantum PDS, which appears to have been raised from only three investors.

115. Despite the statements in the Quantum PDS that no amount would be withdrawn from the SL class unit bank account “for any purpose, other than to refund cancelled applications, until the minimum subscription [of $1.5m] has been received”, an amount equal or approximately equal to the amount of each deposit into the bank account was, within a day or two of that deposit, withdrawn from that account.

116. Those moneys were transferred to a bank account in the name of SLI, which in turn transferred them into a bank account in the name of the Company.

117. According to a schedule which was prepared by QM Trust in support of a proof of debt lodged in the liquidation of the Company in respect of the amount owing by the Company under the Quantum Loan, the cumulative total of the amount transferred to the Company by QM Trust was $279,000 as at the end of March 2018; $1,079,000 as at the end of April 2018; $2,089,000 as at the end of May 2018; and $2,689,000 as at the end of June 2018.

118. Those amounts were well short of the amounts which were certified as due to Lords in respect of the progress claims for those corresponding months. As set out below, the total amount certified as due to Lords in respect of Progress Claims No 1 to No 5, covering the period from February to June 2018, exceeded $5m.

“Loan Agreement” between SLI and the Company

119. The fact that the moneys raised from the sale of SL class units were transferred from QM Trust to SLI, and then from SLI to the Company may explain why a document was prepared which was described as a “Loan Agreement” between SLI as Lender and the Company as Borrower. This agreement, which was dated 13 March 2018, was executed by Mr Gribble on behalf of each of the parties.

120. Clause 2.1 of this document provided that SLI agreed to lend the “Loan Amount” to the Company. The “Loan Amount” was defined as “the total amount shown on the schedule attached to this agreement, and which is $1,200,000 or thereabouts as at the date of this agreement but in any case, that is not more than $8,000,000”. This was similar to, but lower than, the range of the Quantum Loan ($1,500,000 to $9,000,000).

121. Clause 5.1 provided that the Loan Amount would be used to complete the works.

122. Clause 8.1(e) gave, in effect, SLI a discretion as to whether or not to advance any amount to the Company. It provided that SLI was not required to make any advance of the Loan Amount “if [SLI] becomes aware of any information, or any event occurs (including, an event of default under this agreement and/or any Security) which in the reasonable opinion of [SLI], would render the advancing of the Loan Amount materially prejudicial to [SLI’s] interests”.

123. Each of QM Trust and SLI lodged a proof of debt in the liquidation of the Company, in precisely the same amount ($4,889,037), which in each case was said to be a loan to the Company.

124. The QM Trust proof of debt attached minutes of a meeting of QM Trust, which were dated 27 March 2020 and signed by Mr Gribble, recording that: “[QM Trust] has lent monies to [the Company], via SLI which has a loan account with [the Company].”

125. Mr Gribble acknowledged in cross-examination that the separate proofs lodged by QM Trust and SLI related to the same loan, being the amount which QM Trust had advanced to the Company, and that the two proofs were a “double up”.

126. The Plaintiffs submitted that the loan agreement between SLI and the Company was a “sham”, and noted that it was not referred to in the evidence of Mr Gribble.

127. It is unnecessary to determine whether or not this document was a sham. It is sufficient for present purposes to note that, having regard to the evidence set out above regarding the proofs of debt, it appears that no amount was advanced to the Company by SLI which was separate from or additional to the amount which was advanced to the Company by QM Trust. Accordingly, the “Loan Agreement” between SLI and the Company did not represent a facility to which the Company could have access in the event that it was not possible to raise Construction Finance in respect of the Linden Development.

Replacement PDS

128. On 12 April 2018, QM Trust issued a replacement Part 2 Product Disclosure Statement in relation to the SL class units (the Replacement PDS). The parties did not identify any substantive amendments between this version and the original version of the Quantum PDS (other than an update on the level of pre-sales), and Mr Gribble indicated in cross-examination that he could not recall why a replacement was issued. Relevantly, the statements made in the original Quantum PDS (which are quoted in paragraphs [47]-[53] above) appeared, in largely identical terms, in the Replacement PDS.

129. The Replacement PDS provided an update on the pre-sales. It repeated the statement that the estimated number of pre-sales required to secure the additional funding needed to finance the construction of the Linden Development was approximately twenty-nine pre-sales with a gross sales value of approximately $22.7m. The Replacement PDS reported that, as at 12 April 2018, contracts had been exchanged on nineteen units.

130. Around this time, Lords was aware that the Company had not yet obtained construction finance. On 19 April 2018, an assistant project manager at the Quantum Group sent an email to Mr Maroun, with the subject “Linden Requested Info”, asking him for a corporate profile for Lords and explaining that a “prospective financier of the project is asking for information on our Builders”. Mr Maroun responded that the prospective financier should be encouraged to undertake “a site visit which we can lead for you and we will show them how we operate, our attention to detail onsite and how well the project is positioned for success at the moment considering the progress of works onsite”.

The “Linden Report” of 16 April 2018

131. There was in evidence a document described in submissions as the “Linden Report”. It appears to have been a report which was automatically generated by a software system, with a footer “Run date: 16/4/2018 15:18:5”. None of the witnesses, including the expert witnesses, was familiar with the system which was used to produce the report.

132. Mr Gribble gave evidence that the report was probably generated so that some of the data in the report could be used in the preparation of a “Project Control Group Report” for the Linden Development, which also appears to have been drafted on 16 April 2018.

133. The Linden Report included a section headed “Unpaid Invoices”, which contained information relating to each of SLI and the Company. The information relating to the Company indicated that the Company had in excess of fifty outstanding invoices, with dates over the past two years, and that the total outstanding amount was $1,491,977.65. Of this sum, $294,752.49 was owed to Lords, $633,831.74 was owed to Sutherland Shire Council, $264,726.00 was owed to Quantum Development, with the remainder being split between various creditors.

131. The significance of this report is addressed below when dealing with the issue of solvency.

Payments to Quantum Development

135. On 20 April 2018, only a few days after the date of the Linden Report, SLI transferred an amount of $264,726 to Quantum Funds Management Pty Ltd. This represented the total of the amount which was shown in the Linden Report as owing by the Company to Quantum Development, in respect of fourteen invoices stretching back to November 2016.

136. On 8 May 2018, SLI transferred a further $28,457 to Quantum Development. This represented the total amount of two invoices dated 30 April 2018 which had been issued by Quantum Development to the Company.

137. A letter sent from Quantum Development to the Liquidator on 2 September 2020 provided further information about this transfer of funds from SLI to Quantum Development, explaining that the “amounts … due” by the Company to Quantum Development “were … cleared through intercompany accounts”. This letter attached a reconciliation which showed, inter alia, payments in the amounts of $264,726 and $28,457 being made on 20 April and 8 May 2018, in respect of the amounts owing by the Company to Quantum Development.

138. Accordingly, the payments which were made by SLI on 20 April 2018 and 8 May 2018 appear to have been treated as payments in respect of fees due by SLI to the Company, which were effected by being made to the Company’s nominee, Quantum Development, thereby discharging to the extent of those payments the Company’s liability for fees due to Quantum Development.

139. I address below the Plaintiffs’ claim that these payments to Quantum Development were unfair preference payments.

Progress Claim No 2

140. On 30 March 2018, Lords issued a second progress claim in the amount of $547,479.77 (including GST) (Progress Claim No 2). Mr Najar, as Superintendent, issued a payment schedule certifying that the amount claimed by Lords was payable.

141. Pursuant to the terms of the Construction Contract, the Company was obliged to pay the amount set out in the Superintendent’s payment schedule by 18 April 2018.

142. On 11 April 2018, Lords issued a tax invoice for this amount. In his covering email to Mr Najar, Mr Maroun requested that payment “be made on the due date”.

143. On Friday 27 April 2018 at 5.51pm, Mr Maroun sent an email to Mr Gribble stating that Lords was still waiting for payment of this tax invoice of $547,479.77 for the Linden Development, and requested that Mr Gribble confirm that this payment could be made on Monday (being the following business day).

144. On Monday 30 April 2018, Mr Maroun sent an email to Mr Najar, again requesting payment of the tax invoice in relation to Progress Claim No 2.

145. On Friday 4 May 2018, Mr Gribble responded to Mr Maroun’s messages, stating that he “was hoping to transfer $200k today … then balance Mo-Tue … the funds are in transit … so wont be today but will clear the a/c we hope on M-W next week”. Shortly afterwards, Mr Maroun sent an email in response to Mr Gribble, stating: “I really am pushing it at the moment to assist for Linden by not claiming as much as I should be but I cannot afford to have payments delayed too long.”

146. Mr Gribble’s reference to “funds in transit” was likely a reference to the moneys which had been raised by the sale of SL class units, and which were subsequently transferred by QM Trust to the Company via SLI. For example, the statements for the SL class units bank account show that an amount of $100,000 was deposited into the account on Friday, 4 May 2018, and the same amount was transferred out of the account on Monday, 7 May 2018.

147. Two payments of $100,000 each were made to Lords by the Company on 7 and 9 May 2018.

148. The full amount of those payments ($200,000) was not credited by Lords to Progress Claim No 2 in its reconciliation. The Defendants submitted that this indicated that the amounts paid by the Company to Lords had been understated, with the result that the Plaintiffs’ claim in respect of the outstanding value of the debts incurred to Lords during the period of alleged insolvent trading was overstated.

149. However, there was evidence which appeared to explain the reason why the full amount of these two payments was not credited by Lords to Progress Claim No 2. In relation to the first of these payments, the following narrative is given on the Company’s bank statement “Pymt Lords Prop Inv104/Inv105(Bal)”. It therefore appears that this payment to Lords was in respect to two distinct invoices, numbered 104 and 105 (with the payment in respect of the latter being a payment for the outstanding balance). Invoice 104 was the invoice issued by Lords in relation to Progress Claim No 2. Invoice 105 was not an invoice which was issued by Lords in respect of the Linder Development. Instead, it appears to have been an invoice in respect of another development which Lords was constructing for the Quantum Group, namely, the Adelong Development. On the morning of 10 May 2018, the day after the second of the payments totalling $200,000 was received, Mr Maroun sent an email to Mr Gribble confirming that “Full payment” had been “received” for an outstanding invoice in respect of the Adelong Development and that, in addition, an amount of $144,715.79 had been received in respect of Progress Claim No 2 for the Linden Development.

150. Having regard to the evidence set out above, I am satisfied that the Company received full credit from Lords for the payments totalling $200,000 which were made from the Company’s bank account on 7 and 9 May 2018, with part of that sum being attributed to payment of the outstanding balance of an invoice issued by Lords in respect of the Adelong Development, and the remainder being attributed to Progress Claim No 2 in respect of the Linden Development. It follows that there has not been, in this respect, any understatement of the amounts received by Lords.

151. On 10 May 2018, at the same time as acknowledging receipt of the payments in respect of the invoices for the Adelong and Linden Developments, Mr Maroun informed Mr Gribble that a balance of $402,763.98 including GST remained outstanding in respect of Progress Claim No 2 for the Linden Development, and chased up payment of this amount, asking: “Can you please confirm if balance can be paid today?”

152. The outstanding balance in respect of Progress Claim No 2 was not paid in full until 30 May 2018. This payment was made by a series of payments as follows: $100,000 on 18 May 2018; $150,000 on 23 May 2018; $100,000 on 25 May 2018; and the balance on 30 May 2018.

153. It is likely that the timing of these payments was determined by the receipt of moneys by QM Trust in respect of SL Class Units, and the transfer of those moneys to the Company via SLI. In particular, in the period from 18 May 2018 to 31 May 2018, the only dates on which moneys were transferred by the QM Trust to SLI matched the only dates on which moneys were paid by the Company to Lords (namely, 18, 23, 25 and 30 May 2018).

154. Throughout this period, Lords continued to push the Company – and, in particular, Mr Gribble – for payment of the outstanding balance of Progress Claim No 2. For example:

1. on 17 May 2018, Mr Maroun asked Mr Gribble to provide an update on payment for the balance of this claim;

2. on Sunday, 20 May 2018, Mr Gribble responded by saying that he was interstate on Monday (the following day), but that “balance is due I hope on Tuesday [22 May] as waiting on funds transfer from OS [overseas]”, and by thanking Mr Maroun for his patience;

3. on Monday, 21 May 2018, Mr Maroun asked Mr Gribble to “confirm the funds being received tomorrow [22 May] will close out” the outstanding balance of Progress Claim No 2; and

4. on Friday, 25 May 2018, Mr Maroun sent an email to Mr Gribble and others, asking when Lords could expect to receive the outstanding balance of $152,763.98 for Progress Claim No 2, “as I need certainty on these payments as soon as possible”. Mr Taylor of the Quantum Group responded later that evening, copied to Mr Gribble, that the Company had “transferred $100k tonight and will work through the remaining amounts next week”.

155. The Defendants submitted that there was a further discrepancy regarding the final payment made in respect of Progress Claim No 2, which again meant that the total amount received by Lords had been understated. On 30 May 2018, an amount of $52,763.98 was paid from the Company’s bank account to Lords, with the narrative “Lords Prop 104 last install” (that is, final instalment in respect of Invoice 104 for Progress Claim No 2). However, Lords credited, in their reconciliation, an amount of only $46,814.36 to Progress Claim No 2.

156. As set out above, on 25 May 2018, Mr Maroun stated that an amount of $152,763.98 including GST was outstanding in respect of Progress Claim No 2. Later that day, as foreshadowed by Mr Taylor, a further amount of $100,000 was paid to Lords and credited to Progress Claim No 2. However, on 30 May 2018, Mr Maroun stated that the balance remaining in respect of this claim was now $46,814.36 including GST. Mr Taylor responded by sending Mr Maroun confirmation of a payment of $52,763.98 in respect of Progress Claim No 2. (This matched the amount that was said to be owing several days earlier, less the payment of $100,000 that was subsequently made, but was higher than the amount stated by Mr Maroun as owing earlier that day.) In forwarding this payment notification, Mr Taylor commented as follows: “Small discrepancy with the $52k amount as looks like we may have overpaid a claim for Adelong that has been offset against the Linden St outstanding balance on your end. Our accounts term can work through the detail later”.

157. It therefore appears that the discrepancy between the amount paid from the Company’s bank account in respect of the outstanding balance of Progress Claim No 2 ($52,763.98) and the amount credited by Lords to that claim ($46,814.36) was due to an adjustment, worked out by the accounting teams of Lords and the Company, as between amounts credited to, respectively, the Adelong and Linden Developments. In those circumstances, it has not been established that there is any understatement in the amount credited by Lords to the progress claims for the Linden Development.

Progress Claim No 3 and Correspondence with Lords in May 2018

158. Meanwhile, on 30 April 2018, Lords had issued its third progress claim in respect of the Linden Development in an amount of $894,343.91 (Progress Claim No 3).

159. On 14 May 2018, Mr Najar, as Superintendent, issued a payment schedule in respect of Progress Claim No 3. The payment schedule certified that the quantity surveyor, Mitchell Brandtman, had verified the completed works which were valued at $894,343.91 including GST; that the Quantum Group had reviewed the quantity surveyor’s report and approved this verification; and therefore that the full amount of Progress Claim No 3 was approved and should be processed to be paid to Lords by the due date of 21 May 2018.

160. Lords issued Invoice No 108 in respect of Progress Claim No 3 in the amount of $894,343.91 including GST.

161. Mr Maroun commenced chasing Mr Gribble for confirmation regarding payment of Progress Claim No 3 before it was due. On 17 May 2018, he sent an email to Mr Gribble asking him to “confirm when we can anticipate” receiving payment of the amount of $894,393.91 for this claim.

162. On 21 May 2018, which was the date when payment of Progress Claim No 3 was due, Mr Maroun sent an email to Mr Gribble asking him to confirm that funds would be received on the following date to “close out” the amount of this claim.

163. On 25 May 2018, Mr Maroun sent an email to Mr Gribble and others, stating that Lords required “certainty” on the payment of Progress Claim No 3 “as soon as possible”, adding:

“I have significantly large expenses going out the door to keep the projects running efficiently and the delays are putting stress on our operations.”

164. This email was sent in a context where, on 11 May 2018, a construction certificate was issued in respect of the Linden Development for “Construction of structure”, and the cash flow forecast which had been prepared by Lords and provided to the Company in April 2018 anticipated substantial costs in the near future of $1m in June, $1.45m in July and $1.4m in August (see paragraph [106] above).

165. On 30 May 2018, Mr Maroun sent a further email to Mr Gribble regarding Progress Claim No 3. Mr Maroun noted that Mr Taylor had been unable to provide him with “a date for Linden invoice of $894,343.91”, and asked Mr Gribble to “advise when we can expect to receive this payment”, requesting a response “as soon as possible”.

166. On the following day, 31 May 2018, Mr Maroun sent another email to Mr Gribble regarding this claim (emphasis added):

“Can you please confirm when we can expect to receive payment of the attached Tax Invoice for the amount of $894,343.91 which is overdue.

We have submitted a progress claim today for the May period which is also attached for your reference as well.

With ground floor slab being poured on Tuesday, we will be progressing into the construction of the 2 x buildings with slab pours anticipated every 8 days. With almost 3 x slabs being poured per month the monthly progress claims will be large.

Can you please call me to discuss urgently if there are any issues with the progression of payments.

I trust you understand my concern.”

Correspondence with Colliers in May 2018

167. Around the same time, the Company was being pressured by Colliers for payment of its outstanding invoices.

168. On 24 May 2018, Mr Peter Kerras, who was Director of Project Marketing at Colliers, wrote to Mr Gribble, referring to a discussion between Mr Gribble and representatives of Colliers regarding “our outstanding invoices” in which Mr Gribble had “made a commitment to sort this out next week”. Mr Kerras stated that he had received “firm instructions from my National Managing Director to remove Andrew [the Colliers agent responsible for pre-sales] from The Linden next week if we don’t receive payment in full”.

169. On the same day, Mr Gribble responded, confirming that the Company was “working to bring the outstanding Colliers debt up [to] date and aim to make a payment next week on Monday as requested”. In this email, he acknowledged that the level of pre-sales was hampering the Company’s ability to raise finance for the Linden Development:

“the financing of the project has been difficult due in part to the pre-sales target as per the agency agreement not being me[t] on time and thus the delay in funding.”

170. As at the end of May 2018, the Company did not have any construction finance in place, and had neither received any indicative term sheet in respect of such finance nor met the pre-sales targets which were specified in the Quantum PDS as necessary in order to obtain such finance.

Progress Claim No 4 and Correspondence with Lords in June 2018

171. As at 30 May 2018, Lords had not yet received any payment in respect of Progress Claim No 3 (for April). The outstanding balance of Progress Claim No 2 (for March) had been paid on that day.

172. On 30 May 2018, Lords issued a fourth progress claim in the amount of $2,450,838.39 including GST (Progress Claim No 4).

173. On 8 June 2018, Mr Najar, as Superintendent, issued a payment schedule in respect of Progress Claim No 4. This payment schedule certified that the quantity surveyor, Mitchell Brandtman, had verified the completed works in May 2018 and valued them at $2,038,510.46 including GST; that the Quantum Group had reviewed the quantity surveyor’s report and had approved this verification; and therefore that the amount of $2,038,510.46 should be processed to be paid to Lords by the due date of 15 June 2018.

174. On 11 June 2018, Lords issued invoice No 110 to the Company in respect of Progress Claim No 4, with a specified due date of 15 June 2018. (There was an unexplained, but trivial, difference between the amount specified in the payment schedule issued by the Superintendent, $2,038,510.46, and the amount of this invoice, $2,038,511.20.)

175. On 12 June 2018, Mr Taylor sent an email to Mr Maroun, informing him that the Company had transferred $50,000 to Lords, and would “be in a position to send some more tomorrow once the funds have come through from the trust account”. A payment summary which was attached to the email indicated that this payment was described as for Invoice No 108, this being the invoice in the amount of $894,343.91 which had been issued in respect of Progress Claim No 3 (for April). Payment for Progress Claim No 3 had been due on 21 May 2018. This payment of $50,000, more than three weeks after the due date, was the first payment made in respect of that invoice. It was made on the same day as an amount of $100,000 was transferred by QM Trust to SLI from the SL class unit bank account.

176. It is apparent from the text of Mr Taylor’s email that he had not met Mr Maroun face-to-face prior to 12 June 2018, stating as follows: “Great to meet you today and put a face to the name and voice on the phone”. As outlined above, Mr Maroun had been dealing predominantly with Mr Gribble in respect of the outstanding invoices.

177. On 13 June 2018, Mr Maroun sent an email to Mr Gribble, setting out the “plan for payments” which they had “discussed”. This plan was as follows:

“APRIL TAX INVOICE 108 - CURRENT OVERDUE - $744,343.91 Inc GST

●   By COB Wednesday 13/06 - $50,000 + $50,000

●   By COB Friday 15/06 - $294,000

●   7-10 days from 12/06 – $350,000

○   Best case scenario by 20th

○   Worst case scenario by 23rd

MAY TAX INVOICE 110 - $2,038,511.20 Inc GST:

●   By 29th June or earlier if possible - $1,000,000 (Crucial Payment and cannot be delayed - Noting extent of works in month of May to ensure payments can be made to suppliers/contractors)

●   By 30th July or earlier if possible - Balance”

178. After setting out this payment plan, Mr Maroun stated as follows (emphasis added):

“As discussed, we are proceeding with works onsite in good faith and placing a lot of trust with Quantum on the above commitments being achieved, as we are essentially expending further to progress. If the above is unable to be achieved it will put us in a position where we will unfortunately have to cease works onsite and in this case we will have to be discuss the delay costs we will incur.”

179. The Company could not meet the payment plan stipulated by Lords. This plan required the payment of an amount of $100,000 on 13 June 2018, and a payment of a further amount of $294,000 on 15 June 2018. The Company did not pay those amounts, or any amount, to Lords in the period 13 to 15 June 2018.

180. On 15 June 2018, Mr Gribble sent an email to Mr Maroun in which he “confirm[ed] fund flows as follows”, namely, that payments would be made on 18 June 2018 ($50,000); on 20 June 2018 ($200,000); and on 22 June 2018 ($400,000). The total amount proposed to be paid on those dates ($650,000) was less than the outstanding amount due in respect of Progress Claim No 3 for April ($744,343.91).

181. This was, in effect, a different payment plan, which was at odds with the payment plan which Lords had required. In any case, it was not met.

182. On 19 June 2018, Mr Maroun sent an email to Mr Gribble and Mr Taylor, asking for an update on the payments which had been set out in Mr Gribble’s email, and noting that the payment of $50,000 which had been promised for 18 June 2018 had not been received. Later that day, Mr Taylor sent an email to Mr Maroun (copied to Mr Gribble) stating that the amount of $50,000 was being transferred “today”, and that he would provide an update on the other amounts referred to by Mr Gribble “but at this stage they are still scheduled to arrive per the dates below”; and Mr Najar sent an email to Mr Maroun (also copied to Mr Gribble) stating that the Company was now trying to push “harder to get the pending payments as promised by Peter at least 1M before the end of this month”.

183. At the end of his email, Mr Najar added: “Hopefully by mid of next month we will have the finance approval in place”. This confirms that, as at 19 June 2018, the Company did not have any finance in place, and it remained a “hope” that finance would be in place by the middle of July.

378. Accordingly, it has been established that Quantum Management contravened s 588V(1) of the Act.

Compensation under ss 588M and 588W

383. Section 588M of the Act relevantly provides as follows:

Recovery of compensation for loss resulting from insolvent trading

(1)    This section applies where:

(a)    a person (in this section called the director) has contravened subsection 588G(2) or (3) in relation to the incurring of a debt by a company; and

(b)    the person (in this section called the creditor) to whom the debt is owed has suffered loss or damage in relation to the debt because of the company's insolvency; and

(c)    the debt was wholly or partly unsecured when the loss or damage was suffered; and

(d)    the company is being wound up;

…

This section applies whether or not the director has been convicted of an offence relating to the contravention or a civil penalty order has been made against the director for the contravention.

(2)    The company's liquidator may recover from the director, as a debt due to the company, an amount equal to the amount of the loss or damage.

384. Section 588W(1) of the Act provides as follows:

Recovery of compensation for loss resulting from insolvent trading

(1)    Where:

(a) a corporation has contravened section 588V in relation to the incurring of a debt by a company; and

(b)    the person to whom the debt is owed has suffered loss or damage in relation to the debt because of the company's insolvency; and

(c)    the debt was wholly or partly unsecured when the loss or damage was suffered; and

(d)   the company is being wound up;

the company's liquidator may recover from the corporation, as a debt due to the company, an amount equal to the amount of the loss or damage.

385. Since I have determined that Mr Gribble contravened s 588G(2) of the Act and Quantum Management contravened s 588V(1) of the Act, the requirements of each of s 588M(1)(a) and s 588W(1)(a) are satisfied. Further, because the Company is in liquidation, and each of the debts which is the subject of the insolvent trading claim was unsecured, the requirements of each of s 588M(1)(c)-(d) and s 588W(1)(c)-(d) are satisfied.

386. In order to determine the Plaintiffs’ claim for compensation, it is necessary to determine the following matters:

1. what debts were incurred by the Company while it was insolvent;

2. whether the person to whom each such debt was owed has suffered loss or damage in relation to that debt because of the Company’s insolvency; and

3. what is the amount of such loss or damage.

Creditors other than Lords

387. As regards the debts incurred to persons other than Lords, these issues are straightforward. The Defendants accepted, in their opening written submissions, that the Company incurred the following debts to other creditors:

1. a debt of $3,667 to BTPM on 31 August 2018;

2. a debt of $22,000 to Stornoway on 12 December 2018; and

3. a debt of $880 to RUK Australia on 23 January 2020.

388. Further, the Defendants accepted that, if (as I have found) the Company was insolvent when each of these debts was incurred, the creditors have suffered loss and damage, with the amount of such loss and damage being equal to the amount of the debt outstanding in respect of each of them as at the date the Company entered into administration.

389. It was common ground that an amount of $5,500 was paid by the Company to Stornoway, leaving an unpaid balance of $16,500, and that the other debts remain unpaid.

390. It follows that the amount of loss and damage suffered by the creditors in respect of these debts is, in total, $21,047.

Lords

391. As far as Lords is concerned, I have determined that the Company, while it was insolvent, incurred debts to Lords in respect of Progress Claims No 5 to No 8, and that those debts were in the following amounts:

1. Progress Claim No 5 – an amount of $833,913.24, due and payable on 23 July 2018;

2. Progress Claim No 6 – an amount of $842,858.42, due and payable on 15 August 2018;

3. Progress Claim No 7 – an amount of $130,323.70, due and payable on 20 September 2018; and

4. Progress Claim No 8 – an amount of $130,323.70, due and payable on 18 October 2018.

Unpaid balance of Progress Claims No 5 to 8

392. No amount has been paid in respect of Progress Claims No 6 to No 8. There was a dispute regarding the total amount that has been paid in respect of Progress Claim No 5. In particular, the Defendants noted that, in respect of two particular payments made to Lords by the Company, there was a discrepancy between the amount shown on the Company’s bank statement as having been transferred to Lords and the amount recorded by Lords as having been received in respect of the invoices issued for the Linden Development. I have addressed this issue at paragraphs [147]-[149] and [154]-[156] above, and have determined that the apparent discrepancy is explained by communications between Lords and the Quantum Group as resulting from amounts paid to Lords being apportioned as between amounts due in respect of the Linden Development and amounts due in respect of the Adelong Development. Accordingly, I am satisfied that the information contained in the Lords reconciliation accurately reflects amounts received by Lords in respect of the Linden Development.

393. It follows that the unpaid balance in respect of Progress Claim No 5 is $221,479.45, and the total amount which remains unpaid in respect of Progress Claims No 5 to No 8 is $1,324,985.27.

Interest included in Judgment Debt

394. On 11 December 2019, judgment was entered against the Company in favour of Lords in the amount of $1,511,244.06.

395. The Judgment Debt comprised the outstanding balance due in respect of Progress Claims No 5 to 8 ($1,324,985.27), together with pre-judgment interest pursuant to section 11(2) of the Building and Construction Industry Security of Payment Act in an amount of $186,258.79.

396. The Company incurred a debt for this amount of interest on the date that judgment was entered.

Delay Damages Claims No 1 and No 2

397. The Plaintiffs argued that, in addition to these debts to Lords totalling $1,511,244.06, the Company incurred further debts to Lords in respect of Delay Damages Claim No 1 ($953,700) and Delay Damages Claim No 2 ($173,910). The Defendants disputed that these claims by Lords for damages constituted debts incurred by the Company on the date that those claims were issued.

398. Mr Bailey expressed the opinion in his expert report that any claim for insolvent trading would reasonably consist of:

“(i)    Genuine trade creditor debts demonstrated as being incurred after the date upon which the Company became insolvent; and

(ii)    Liquidated damages (including but not limited to interest and other costs of proceedings) brought against the Company by a creditor, which have been acknowledged in a judgment of a court; and

(iii)    Any other damages where the relevant creditor has demonstrated that it is contractually entitled to certain damages, their amount is calculated in line with agreed terms within said contract, and has provided supporting documentation to verify the accuracy of the calculation.”

399. Mr Bailey further expressed the view that any claim for insolvent trading must reasonably exclude “[u]nliquidated damages brought against the Company by a creditor that have not reasonably been assessed or scrutinised by a court”.

400. The debts incurred by the Company to Lords in respect of Progress Claims No 5 to 8 fall within subparagraph (i) above. The debt incurred to the Company to Lords in respect of pre-judgment interest on the unpaid balance of those Progress Claims falls within subparagraph (ii) above.

401. Delay Damages Claims No 1 and No 2 do not fall within either of those subparagraphs. The Plaintiffs contended that they fell within subparagraph (iii) above.

402. Mr Bailey’s opinion in respect of Delay Damages Claims No 1 and No 2 was as follows:

“I acknowledge that the contract between the Builder and the Company has a relevant clause pertaining to the Builder's entitlement to delay damages, and have accordingly sighted two (2) delay damages claim notice documents in which the methodology for calculating these damages is evidenced. I can therefore infer that these claims are reasonable with regard to contractual entitlement of the Builder. However, I acknowledge that this component of the Builder's claim does not directly relate to a debt raised by the Company in the continuing course of business and must be separated from other debts that are not damages for the purpose of this exercise.”

403. Mr Bailey described the Delay Damages Claims as “damages incurred as a consequence of the insolvency of the Company, as opposed to additional debts positively incurred by the Company after the date on which its insolvency was apparent, or ought to have been apparent, to the Director”.

404. In cross-examination, Mr Bailey was taken to this part of his report and confirmed that he had treated the Delay Damages Claims separately from the Progress Claims. He gave the following evidence:

“Q. That's because that isn't an additional debt incurred by the company during the period of insolvency; is that correct?

A. That's correct. It's a consequence rather than direct debt.”

405. Mr Bailey also confirmed that, in order for the Delay Damages Claims to fall within subparagraph (iii) above, there would need to be supporting documentation for those claims. He also agreed that, if costs caused by delay had already been claimed in respect of earlier Progress Claims, then it would be necessary to remove any such costs to avoid “double charging”.

406. The Delay Damages Claims were expressed to be advanced pursuant to clause 39.9, or alternatively clause 34.9, of the General Conditions of the Construction Contract. Neither of those clauses gave rise to an entitlement to claim a liquidated sum.

407. Clause 39.9 gave Lords the right to claim “damages suffered” by reason of a suspension of works, with such damages to “be assessed by the Superintendent, who shall certify them as moneys due and payable to [Lords]”. Clause 34.9 provided that, for every day which was the subject of an extension of time for a “compensable cause” and for which Lords gave the Superintendent a claim for delay damages pursuant to subclause 41.1, Lords was “entitled to be paid the cost actually incurred by [Lords] on that day by reason of the delay, subject to the limitation that the total amount of compensation payable under this subclause 34.9 and under subclause 33.4 for any one day will not exceed the amount stated in Item 31 [being $5,100 per calendar day]”. Clause 34.9 further stated as follows :

“[Lords] agrees that the compensation provided for in this subclause 34.9 and in subclause 33.4 is the only amount which it may recover from [the Company] for any exclusion, suspension, delay or disruption, including any delay or disruption arising from a breach of the Contract by [the Company].”

408. Accordingly, in order to show any contractual entitlement to payment under clause 39.9 or clause 34.9, it was necessary for Lords to establish, respectively, that it had suffered damage as a result of a suspension of works, or that it had incurred costs as a result of a delay.

409. In each of the Delay Damages Claims, Lords stated that it had “sustained” the “following costs and damages” during the period covered by the claim (which, as between the two claims, covered July 2018 to January 2019):

1. hire costs for a tower crane, site amenities, formwork, scaffolding, temporary fencing and crane radios, as well as daily costs for electricity bill and construction work zone;

2. costs of Contract Works & Public Liability Insurance and Professional Indemnity Insurance;

3. costs of the Lords Project Team, consisting of five individuals whose rates ranged from $375 to $1,000 per day; and

4. Lords Group overhead costs relating to the project accounts team, an estimator and a director (each allocated on the basis of 50% of their time), with the resultant rates being from $325 to $550 per day.

410. The Construction Contract did not specify rates for any of these items, including for the members of Lords’ team.

411. Lords did not provide, with either of the Delay Damages Claims, any rental agreements or invoices to establish the daily hire costs, or any documents to establish the daily cost of the insurance policies. Moreover, it did not provide any documents to substantiate the costs of the Lords project team or to establish that these persons were unable to be redeployed to other projects in the period from July 2018 to January 2019.

412. In addition, Delay Damages Claim No 1 was expressed to be incomplete, in that Lords claimed that it had suffered other damage, and incurred other costs, which could not be quantified as at the date of that Claim. It stated as follows:

“This delay damages claim does not include the following items which at this stage, cannot be ascertained until re-mobilisation on site. It is anticipated that those damages will crystallise once works recommence after the current suspension ends. For completeness, those damages include:

•   Damages associated with any further EOT notices

•    Remediation costs associated with dilapidated construction details as a result of the suspended period of works (ie. Rusted reinforcement starter bars etc.)

•    Damages costs from Lords Group sub-contractors.”

413. Finally, it appears that there is a significant degree of overlap between Delay Damages Claim No 1 and Progress Claims No 6 to No 8.

414. The period covered by Delay Damages Claim No 1 is a period of 157 days up to 24 December 2018. It therefore covers all of August and September 2018, and a significant portion of July 2018, presumably from around the time that work ceased on site. Costs incurred by Lords in July, August and September 2018 were the subject of, respectively, Progress Claims No 6, No 7 and No 8. In particular, each of Progress Claims No 7 and No 8 was for precisely the same amount, and each was a claim in respect of Preliminaries and Overheads.

415. Having regard to the matters set out above, I am not satisfied that it has been demonstrated that Lords was contractually entitled to the amount of damages sought in Delay Damages Claims No 1 and No 2, or that Lords provided supporting documentation to verify the accuracy of the calculation. Instead, I consider that the claims for delay damages were claims for unliquidated damages which were brought by Lords against the Company and which have not reasonably been assessed or scrutinised by a court. In accordance with the views of Mr Bailey which I have set out above, it follows that the claim for insolvent trading must reasonably exclude such damages.

The amount of the loss or damage suffered by Lords in relation to the debts

416. The final issue for determination is what is the amount of loss or damage suffered by Lords in relation to the debts which were incurred while the Company was insolvent.

417. Both parties relied on the following observations by Barrett J in Edenden v Bignell [2007] NSWSC 1122 at [30]:

“[Section 588M] does not allow recovery of the amount of the creditor’s debt as such. Rather, it is a provision allowing recovery of compensation measured by reference to loss or damage suffered by the creditor in relation to the debt because of the debtor’s insolvency. In some cases – perhaps most cases - this will be the equivalent of the amount of the debt: see, for example, Powell v Fryer (2001) 37 ACSR 589. In others – for example where a proof of debt is admitted and a substantial payment is made to all creditors rateably – the relevant loss or damage may be less than the amount of the debt. There may perhaps be circumstances in which the amount of the loss or damage exceeds the amount of the debt. The separateness of the debt, on the one hand, and the loss and damage, on the other, is emphasised by the statement in s.588M(3) that an amount equal to the loss or damage may be recovered ‘as a debt due to the creditor’.”

418. The Plaintiffs submitted, in reliance on this passage, that the amount of the compensation should be the unpaid amount of the relevant debts owing to Lords, totalling $1,511,244.06. The “quantum of loss or damage to which the creditor is entitled under s 588M is usually the amount of the debt owed by the insolvent company to the creditor”: Treloar at [53]. As noted above, the Defendants accepted that this approach should be applied in respect of the creditors other than Lords. The Plaintiffs noted that the evidence confirmed that no dividend had been paid, and that there were no funds available to pay a dividend to creditors of the Company.

419. The Defendants submitted that the above passage from Edenden recognises that there may be exceptions to the usual approach of calculating compensation by reference to the face value of the unpaid debts. In particular, the Defendants referred to the following remarks made by Brereton J in Re Salfa Pty Ltd (in liq) [2014] NSWSC 1493 at [24], immediately after quoting (at [23]) the passage from Edenden set out above:

“Thus, s 588M makes recoverable the loss or damage suffered by the creditor in relation to the debt because of the insolvency, not the original amount of the debt. Although the amount of the debt will be the starting point and will often - but not always - be the amount of the loss, the cases do not state that the loss or damage will invariably be equivalent to the debt. Indeed, this could not be so where the creditor would in any event receive a dividend in the winding up. While Powell v Fryer rightly rejects the notion that most of the inquiries suggested in that case would be necessary, it seems to me that assessment of the loss or damage must necessarily bring to account any dividend paid or likely to be paid to the creditor.”

420. The Defendants submitted that, just as it is necessary to take account of any dividend in a winding up, calculation of the loss or damage suffered by Lords in relation to the debts in question “must, as a matter of principle, take into account credits for payments made to Lords (to the extent that they have not been recovered as preferences, which they have not) following the date of insolvency so as to reduce the quantum of ‘loss or damage’ that can be claimed by the liquidator”.

421. In that regard, the Defendants contended that “the ‘debt’ owed to Lords was ‘substantially reduced’ after the date of insolvency”.

422. This submission was advanced on the basis of Mr Cavanagh’s report.

423. Mr Cavanagh’s primary position on loss and damage was that the quantum of such loss was $880, by reason that the date of insolvency was 11 December 2019 and only one unpaid debt was incurred after that date (being the debt of $880 to RUK). For reasons given above, I have rejected Mr Cavanagh’s conclusion on the date of insolvency.

424. Mr Cavanagh further expressed the view that, if he was wrong on the date of insolvency and the Company was (as Mr Bailey opined, and as I have found) definitively insolvent by 13 June 2018 and remained insolvent thereafter, then no loss or damage was suffered as a result of the insolvent trading. The basis for this opinion was that, as at 13 June 2018, the Company owed $2,782,855.11 to Lords, and as at the date the Company entered administration, the net asset deficiency was around $1.519m, “meaning that the Company did not incur a loss from continuing to trade after 13 June 2018”.

425. There are two main flaws in this approach.

426. First, the issue is not whether the Company incurred a loss from continuing to trade while insolvent. Instead, the issue is whether “the person … to whom the debt is owed has suffered loss or damage in relation to the debt because of the company’s insolvency”: s 588M(1)(b).

427. Secondly, Mr Cavanagh considered the total indebtedness of the Company to Lords, and whether the level of that total indebtedness decreased between 13 June 2018 and the date that the Company entered into administration.

428. In adopting this approach, Mr Cavanagh focussed on the requirement in s 588M to identify loss or damage “because of the company’s insolvency” and asked whether the overall level of indebtedness to the creditor decreased between the date that the company became insolvent and the date that it went into administration. He explained in his evidence in chief that “when you’re quantifying a loss that … happened because of an event, and in this case it’s the alleged insolvent trading”, then his “methodology for calculating that loss” was to ask “What position are you in now after that supposed event, and what position would you have been in if that event or thing didn’t happen?”

420. However, s 588M does not ask whether the position of the creditor overall has worsened or improved “because of the insolvency”, but whether the creditor has suffered loss or damage “in relation to the debt [which was incurred while the company was insolvent] because of the company’s insolvency” (s 588M(1)(b), s 588W(1)(b)). The amount of compensation to which the liquidator is entitled is the amount of such loss or damage (s 588M(2), 588W(1)).

421. The debts to Lords which were incurred when the Company was insolvent were those in respect of Progress Claims No 5 to No 8, as well as the interest subsequently awarded on those debts which was included in the Judgment Debt. It is therefore necessary to determine whether Lords suffered loss or damage in relation to those debts because of the Company’s insolvency, and the amount of such loss or damage.

422. In Perrine v Carrello [2017] WASCA 151 at [40]-[41], the Western Australian Court of Appeal explained that this question will usually be answered along the following lines, “as at trial, the creditor of the insolvent company will get nothing; if the company were not insolvent, the creditor would be paid the amount of the debt; consequently, the loss is the amount of the debt”, adding (citations omitted):

“That is why the cases state that, in ascertaining the creditor’s loss or damage, the amount of the debt is the starting point and will often, if not normally, reflect the quantum of the loss. If the creditor has received or is receiving a dividend in the winding up, the loss suffered by the creditor is reduced accordingly.”

432. This passage was quoted with approval in Quin v Vlahos at [267].

433. For those reasons, Mr Cavanagh’s report does not address the correct statutory test regarding compensation for an insolvent trading claim.

434. I accept that, in assessing the loss or damage suffered by the creditor “in relation to the debt because of the company’s insolvency”, it is necessary to take into account any payments made by the company to the creditor in respect of the debt during the period that the company was insolvent. However, all such payments made by the Company to Lords after 13 June 2018 have been taken into account in determining the outstanding balance due to Lords in respect of Progress Claims No 5 to No 8.

435. The ordinary rule with respect to appropriation of payments is that the debtor has a right when making a payment to appropriate the money to any of the debts owing to the creditor and, if the creditor takes the money, the creditor is bound to recognise this appropriation; and if the debtor does not make any such appropriation, the creditor is then entitled to make an appropriation: Visbord v Federal Commissioner of Taxation (1943) 68 CLR 354 at 371; 371 per Latham CJ; [1943] HCA 4. When making payments to Lords, the Company did not appropriate the payments to any particular debt. Instead, Lords informed the Company of the particular debts to which particular payments were appropriated, and the resultant outstanding balance of each particular debt.

436. Lords generally chose to appropriate the payments received from the Company to the payment of the oldest outstanding debt, until that debt was paid in full. By this approach, the amounts due by the Company to Lords in respect of Progress Claims No 1 to 4 were paid in full, and the amount due by the Company to Lords in respect of Progress Claim No 5 was reduced from $833,913.24 to $221,479.45 (with the full amount due in respect of Progress Claims No 6 to 8 remaining outstanding).

437. It follows that all amounts received by Lords in payment of the debts owing by the Company in respect of Progress Claims No 5 to 8 have been taken into account in determining the outstanding balance of those debts.

Conclusion on Compensation

438. For those reasons, I find that:

1. the amount of loss or damage suffered by Lords in respect of the debts incurred while the Company was insolvent is $1,511,244.06 (comprising the outstanding balance due in respect of Progress Claims No 5 to No 8, together with the award of interest made by the Court on 11 December 2019);

2. the amount of loss or damage suffered by other creditors in respect of debts incurred while the Company was insolvent is $21,047; and

3. the amount which the liquidator is therefore entitled to recover from Mr Gribble (pursuant to s 588M(2)) and from Quantum Management (pursuant to s 588W(1)) is $1,532,291.06, being an amount equal to the amount of such loss or damage.

Unfair Preference Claim

439. The unfair preference claim can be dealt with briefly.

440. There were four payments in issue, each of which was a payment made to Quantum Development. The date and amount of each payment were as follows:

1. 20 April 2018, a payment of $264,726;

2. 8 May 2018, a payment of $28,457;

3. 18 September 2018, a payment of $16,500; and

4. 20 September 2018, a payment of $66,000.

441. It was common ground that Quantum Development was a related entity of the Company. It was also common ground that the relation-back day in respect of the Company is 19 March 2020, and that the relevant relation-back period runs from 19 March 2016 to 19 March 2020.

442. Each of the four payments in issue was made to Quantum Development between April and September 2018. It follows that each was a payment made to a related entity during the relation-back period.

443. Section 588FA(1) of the Act provides as follows:

Meaning of unfair preference

(1)    A transaction is an unfair preference given by a company to a creditor of the company if, and only if:

(a)    the company and the creditor are parties to the transaction (even if someone else is also a party); and

(b)    the transaction results in the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor, more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company;

even if the transaction is entered into, is given effect to, or is required to be given effect to, because of an order of an Australian court or a direction by an agency.

444. Quantum Development was a creditor of the Company, and the payments in issue were made in respect of amounts due to Quantum Development (see paragraphs [134]-[137] above). Each of the payments resulted in Quantum Development receiving from the Company in respect of its unsecured debt, more than Quantum Development would have received from the Company in respect of the debt if the transaction were set aside and Quantum Development were to prove for that debt in the winding up of the Company. When the Company went into administration, Quantum Development was not a creditor of the Company. In contrast, as noted above, no dividend has been paid to unsecured creditors and there are no funds to pay any such dividend.

445. It follows that the payments were unfair preferences within the meaning of section 588FA.

446. The Plaintiffs contended that each of these payments was an insolvent transaction within the meaning of section 588FC, which provides as follows:

Meaning of insolvent transaction

A transaction of a company is an insolvent transaction of the company if, and only if, it is an unfair preference given by the company, or an uncommercial transaction of the company, and:

(a)    any of the following happens at a time when the company is insolvent:

(i)    the transaction is entered into; or

(ii)    an act is done, or an omission is made, for the purpose of giving effect to the transaction; or

(b)    the company becomes insolvent because of, or because of matters including:

(i)    entering into the transaction; or

(ii)    a person doing an act, or making an omission, for the purpose of giving effect to the transaction.

447. The first two payments to Quantum Development were made on 20 April 2018 and 8 May 2018, and the third and fourth payments were made on 18 and 20 September 2018.

448. For reasons given above, I have accepted Mr Bailey’s opinion that the Company was likely insolvent by 30 May 2018, was definitely insolvent by 13 June 2018, and remained insolvent at all times thereafter until it entered into administration.

449. It follows that the Plaintiffs have not established that the first two payments to Quantum Development were made, or that an act was done for the purpose of giving effect to the payments, at a time when the Company was insolvent. Nor have they established that the Company became insolvent as a result of those payments being made.

450. However, the Plaintiffs have established that the third and fourth payments to Quantum Development were made at a time when the Company was insolvent. It follows that each of those payments was an insolvent transaction.

451. It also follows that each of the third and fourth payments, being an insolvent transaction with a related party during the relation-back period, was a voidable transaction: s 588FE(4).

452. Accordingly, the Liquidator is entitled to an order pursuant to s 588F(1) of the Act that Quantum Development pay to the Company an amount equal to the money that the Company paid pursuant to those transactions, being an amount of $82,500.

Conclusion and Orders

453. For the reasons given above, I have determined that the insolvent trading claims against Mr Gribble and Quantum Management have been established, and that the amount of compensation which the Liquidator is entitled to recover against each of them pursuant to, respectively, s 588M and s 588W is $1,532,291.06.

454. The Plaintiffs also sought pre-judgment interest under s 100 of the Civil Procedure Act 2005 (NSW). The making of a demand is not a pre-requisite to a cause of action for insolvent trading and, as a matter of convenience, the award of interest is usually taken to run from the date of the appointment of the liquidator: Powell v Fryer [2001] SASC 59 at [115] per Olsson J (Duggan and Williams JJ agreeing); Smith v Bone (No 2) (2015) 233 FCR 568; [2015] FCA 389 at [14]-[17] (Gleeson J). Accordingly, the Plaintiffs are entitled to interest on this sum from 21 April 2020 to the date of judgment.

455. I have also determined that the payments made to Quantum Development in September 2018 were voidable transactions, and that the Liquidator is entitled to an order under s 588FF(1) that Quantum Development pay the Company the amount of $82,500.

456. The Plaintiffs also sought an order for pre-judgment interest on this sum under s 100 of the Civil Procedure Act from the date that the demand for payment was made by the Liquidator (being 10 February 2023) to the date of judgment. I am satisfied that an award of pre-judgment interest for this period is appropriate in respect of the unfair preference claim: Woodgate as liquidator of Marketing Results Pty Ltd v Network Associates International BV [2007] NSWSC 1260 at [33] (Barrett J); Capital Finance Australia Ltd v Tolcher (2007) 164 FCR 83; [2007] FCAFC 185 at [150] per Gordon J (Heerey J agreeing).

457. Finally, as the Plaintiffs have been successful in their claims against each of the Defendants, the Plaintiffs are entitled to an order for their costs.

458. I will direct the parties to bring in short minutes of order to give effect to these reasons, including dealing with interest and costs. If there is any dispute about the form of those orders, including as to calculation of interest, or if any party seeks a different costs order, or a costs order other than on the ordinary basis, the parties will have an opportunity to be heard on these matters.

459. Accordingly, I make the following orders.

1. The parties are to bring in short minutes of order, by 5pm on 3 December 2024, to give effect to these reasons for judgment, including orders that deal with interest and costs, insofar as those matters can be agreed; and

2. If orders to give effect to these reasons for judgment cannot be agreed, the parties are to exchange, by 5pm on 3 December 2024, the form of orders which each party proposes and submissions (limited to 5 pages) on those orders, indicating whether, and if so why, an oral hearing is requested to deal with the matters in dispute.

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Amendments

19 November 2024 - Updated counsel details

Decision last updated: 19 November 2024