Lynch v Drysdale
[2005] FMCA 446
•14 April 2005
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| LYNCH & ANOR v DRYSDALE & ANOR | [2005] FMCA 446 |
| BANKRUPTCY – Appeal against rejection of proof of debt by trustee – liquidated and unliquidated contractual claims – claim against bailee of goods – acceptance of part of the claims – apportionment of costs. |
| Bankruptcy Act 1966 (Cth), ss.104, 105 |
| Rogers & Rogers; ex parte CMV Parts Distributors Pty Ltd v Anthony Christopher Matthews (Nos 5 and 6) (unreported, 8 March 1989) Tanning Research Laboratories Inc v O’Brien (1990) 91 ALR 180 |
First Applicant: Second Applicant: | RICHARD LYNCH CHRISTOPHER SHEEHAN |
| First Respondent: Second Respondent: | RUSSELL JOHN DRYSDALE JASON BETTLES |
| File Number: | SYG3748 of 2004 |
| Judgment of: | Driver FM |
| Hearing date: | 8 April 2005 |
| Delivered at: | Sydney |
| Delivered on: | 14 April 2005 |
REPRESENTATION
| Counsel for the Applicants: | Mr M Rollinson |
| Solicitors for the Applicants: | Stephen Friend & Co |
| Solicitors for the Second Respondent: | Ms S Nash Sally Nash & Co |
ORDERS
The applicants’ proof of debt be accepted in the sum of $5,780.
Fifty per cent of the costs and disbursements of the applicants of and incidental to the proceedings shall be paid out of the bankrupt estate.
The costs and disbursements of the trustee of and incidental to these proceedings shall be paid out of bankrupt estate.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
SYG3748 of 2004
| RICHARD LYNCH |
First Applicant
CHRISTOPHER SHEEHAN
Second Applicant
And
RUSSELL JOHN DRYSDALE
First Respondent
| JASON BETTLES |
Second Respondent
REASONS FOR JUDGMENT
Introduction and background
This is an application under s.104 of the Bankruptcy Act 1966 (Cth) (“the Bankruptcy Act”) being an appeal against a decision of a trustee in bankruptcy rejecting a proof of debt. There are two applicants whose proof of debt was rejected by the trustee. Both applicants were represented in the proceedings by Mr Rollinson, although only Mr Lynch took an active part in the proceedings. The first respondent was the bankrupt but the proceedings have been discontinued against him. Oral notice of discontinuance was given at the time of trial of this matter on 8 April 2005 and I directed that a notice of discontinuance be filed and served as against the first respondent within seven days.
The evidence
The applicants proceed on the basis of their amended application filed on 24 February 2005. This is supported by two affidavits by Mr Lynch filed on 2 February 2005 and on 24 February 2005. The affidavits are accompanied by extensive annexures.
I also accepted as exhibits the record of the respondent trustee’s decision rejecting the proof of debt: exhibit A1 and the form of proof of debt lodged: exhibit A2. The respondent trustee tendered a bundle of documents additional to those relied upon by the applicants and apparently relevant to the resolution of the issues in dispute: exhibit R1.
Submissions
Mr Rollinson presented oral submissions which were essentially an explanation of the basis for the debts sought to be proved in the bankruptcy by the applicants. In the course of dealing with the matter it became apparent both to Mr Rollinson and me that there were significant errors in the applicants’ calculations. I amended annexure A to the first affidavit of Mr Lynch in order to correct those errors. As corrected, the applicants seek orders accepting as provable debts:
a)a claim for unliquidated damages for breach of contract in the sum of $39,761;
b)a claim for liquidated damages under contract in the sum of $3,780;
c)a claim for damages for breach of a bailment agreement in the sum of $2,000.
Total claim: $45,541.
Mr Rollinson conceded that a claim for interest in the sum of $13,324.05 was unsustainable and he withdrew it.
Ms Nash, for the respondent trustee, provided written submissions. In oral argument she presented documents apparently relevant to the issues in dispute and submissions on the nature of the proceedings and the role of the respondent trustee, as well as some short submissions on the merit as she saw it in the applicants’ claim. Ms Nash submits, and I accept, that the proceedings are adversarial. Ms Nash took me to the decisions of the High Court of Australia in Tanning Research Laboratories Inc v O’Brien (1990) 91 ALR 180 and of the Federal Court of Australia in Rogers & Rogers; ex parte CMV Parts Distributors Pty Ltd v Anthony Christopher Matthews (Nos 5 and 6) (unreported, 8 March 1989) which establish the adversarial nature of the proceedings, as well as that an appeal under s.104 is not a review of the legal or factual merits of the decision of the trustee, but a rehearing of the issue of whether the proof of debt should be accepted. It is open to the applicants to produce fresh evidence in support of their proof of debt and that is indeed what has occurred.
Ms Nash submits that, on the material now available, it is certainly arguable that the claim of liquidated damages under the contract in issue should be accepted. She submits that the claim for unliquidated damages is “unfathomable” and that the claim for damages for breach of bailment is not sustainable on the available evidence.
Ms Nash submits that, whatever the outcome of the proceedings in relation to the debts sought to be proved, there should be no order for costs made against the trustee as the applicants did not put sufficient material before the trustee to permit their proof of debt to be accepted, and, if it is now to be accepted, it would be on the basis of the additional material now advanced. In any event, Ms Nash submits that the trustee is entitled to be indemnified out of the bankrupt estate for costs of appearing in the matter.
Reasoning
The claimed debts arise out of two building contracts between the applicants and the bankrupt. The evidence establishes that the building work required to be undertaken pursuant to the first contract by the bankrupt was partly performed and that under that contract the sum of $215,550 was payable to the bankrupt. The applicants assert, and I accept, that they made a series of payments pursuant to the first contract totalling $146,573.
For reasons that are not entirely clear, the parties entered into a supplementary contract on 28 August 1999 for the completion of the building. It appears that by this stage some difficulties had occurred which resulted in the supplementary contract. That contract required payment of an amount of $138,400 of which the sum of $60,126 was to be paid by the applicants and the sum of $78,274 was to be paid by an insurer (HIA). It is noteworthy that on 18 August 1999 HIA Insurance had admitted liability on behalf of the bankrupt for faulty building work and it is possible that the reference to the insurer’s contribution relates to that admission of liability. It is also possible that the insurance contribution related to hail damage[1]. It is also noteworthy that the amount payable under the supplementary contract and the amounts paid under the first contract total $284,973, which significantly exceeds the original contract price of $215,550.
[1] See paragraph 15 below
The supplementary contract required the building work to be completed within 12 weeks and provided in clause 30 for the payment of liquidated damages of $35 for every day after that deadline. Mr Rollinson conceded in argument that the applicants’ calculations in relation to the claim for liquidated damages were incorrect in that they should have allowed for weekends and public holidays. That concession may have been unduly generous given that the words “per working day” are struck through in item 13 of schedule 1 to the supplementary contract and replaced with the words “for each and every day”. To that extent the schedule conflicts with the body of the contract. Nevertheless, given that there were numerous errors in the applicants’ calculations and that the calculations were amended several times in argument to attempt to arrive at a correct figure, I will rely on the figure finally produced by Mr Rollinson.
It is common ground that the work was not completed pursuant to the supplementary contract. The applicants assert, and I accept, that $31,191 was paid by them under the second contract. The contract was terminated on 27 April 2000. It was necessary for a third contract to be entered into with another builder[2] to complete the work for the sum of $60,800 (annexure I to Mr Lynch’s second affidavit). The applicants assert that that amount was paid in full. However, they assert that that work was limited to rectification work and in order to complete the building it was necessary to enter into a fourth contract with the same builder to complete the construction for a sum of $165,688. Further, the applicants assert they had to pay an additional $8,950 for electrical works remaining uncompleted. Thus, the applicants claim that they paid $177,764 to the bankrupt under the first two contracts as well as $60,800 for rectification works and $165,688 for completion works to Seeto and $8,950 to an electrician. The total payments claimed are $413,202. The applicants claim the difference between what they paid and the original contract price under the first contract of $215,550. This is the amount of $197,652. The insurer paid the applicants $157,891 on 4 December 2000 on the basis of its acceptance of liability on behalf of the bankrupt for faulty building work. The applicants assert that the difference of $39,761 is a provable debt for unliquidated damages under their contracts with the bankrupt[3].
[2] Lawrence Seeto
[3] An alternative claim for a fair market price to complete the building works as originally contracted was not seriously pressed and is not supported by reliable expert evidence.
A miscalculated amount of $40,161 in respect of unliquidated damages was claimed in the applicants’ proof of debt.
Exhibit A1 shows that the trustee rejected this claim on the basis that the payment made by the insurer was based upon an expert assessment of what work was required and that the additional claim did not appear to be substantiated by the building contracts and additional works. However, the trustee does not assert and the available evidence does not indicate that the settlement between the applicants and the insurer discharged the bankrupt of liability under the first two contracts. Further, the trustee noted that the insurer’s total potential liability was $200,000 under the insurance contract with the builder and the tender by Seeto to rectify and complete the works exceeded $220,000. An earlier tender, some $35,000 cheaper than that of Seeto, had been withdrawn by that builder[4]. In the circumstances, the higher tender was accepted by the applicants.
[4] GFI Builders
I find that the applicants had a claim for unliquidated damages against the bankrupt in respect of his uninsured liability for the works that had been necessary to rectify and complete the building. The question is, what was the fair cost of the work necessary to rectify the building defects and complete the building? I do not know why the lower tender from GFI Builders was withdrawn. Another imponderable factor is that, on 14 April 1999, a severe hailstorm damaged the partially constructed roof of the building. This was before the second contract. Under clauses 23 and 25 of the supplementary contract the builder bore the risk of that damage and was required to insure against it. Part of the payment from HIA may have been to make good that damage. A further imponderable factor is that, on their own evidence, the amount the applicants were personally obliged to pay to the bankrupt under the first two contracts was not the original contract price of $215,550 but $206,699 and HIA was contractually obliged to pay a further $78,274. It is not clear to me whether that insurance liability formed part of, or was additional to, the insurance payout of $157,891. Neither is it clear why the insurer contractually committed itself to pay the amount it was obliged to pay under the supplementary contract. It may have been because of the hailstorm. Arguably, the contract price required to be deducted from the payments actually made by the applicants is not the original contract price but the supplementary contract price, including the insurance contribution.
If that were the case there would be no claim for unliquidated damages.
The claim for electrical work forming part of the claim for unliquidated damages is also dubious. It is not clear whether that work was the responsibility of the bankrupt, Mr Seeto or the applicants. Logic would suggest that if Mr Seeto tendered to rectify and complete the building work, that would have included necessary electrical work. Finally, the applicants make a claim for consequential loss, due to delay in completion but pursuant to clause 30 of the contract that loss appears to be covered as liquidated damages.
On balance, the applicants have failed to satisfy me that the amount of $39,761 represents the uninsured liability of the bankrupt to rectify and complete the construction work. I therefore reject that claim.
The claim for liquidated damages under the second contract was, on the calculations ultimately relied upon by Mr Rollinson, significantly overstated. The proof of debt claimed $5,565, whereas the amount ultimately relied upon by Mr Rollinson is $3,780. The trustee rejected the claim on the basis that no contract had been provided to support it. The contract is, however, available to me and does support the claim. The claim for liquidated damages for $3,780 should be accepted as a provable debt. Likewise, the claim for damages for breach of bailment in the sum of $2,000 should be accepted as a provable debt. The trustee rejected it on the basis that there was insufficient evidence to support ownership of the goods (two windows) allegedly bailed and no evidence of the alleged bailment. I, however, have the benefit of the first applicant’s affidavit evidence. He was not required for cross-examination and his evidence is uncontested. It is not contradicted by any available documentary evidence. In the circumstances, the evidence should be accepted and I do so.
As to costs, the applicants have been successful in two of the three components of the claim for acceptance of the proof of debt but those components comprised a significantly lesser amount than the component in respect of which they have been unsuccessful. At least in relation to the claim of liquidated damages, the proceedings could have been avoided if sufficient material had been presented to the trustee at the time the proof of debt was lodged. In circumstances where a party has been only partially successful and the litigation was partly avoidable, the Court may properly apportion costs. I consider that it would be appropriate to do so on this occasion. It would not be appropriate to burden the estate with the full amount of the applicants’ costs and the trustee is not personally liable[5]. I will order that the costs of the trustee and 50 per cent of the costs of the applicants be paid out of the estate.
[5] Section 105, Bankruptcy Act.
I certify that the preceding nineteen (19) paragraphs are a true copy of the reasons for judgment of Driver FM
Associate:
Date: 14 April 2005
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