McLeod v Lane Cove Municipal Council

Case •

[2020] NSWSC 1582

•

13 November 2020

No judgment structure available for this case.

Supreme Court


New South Wales

Medium Neutral Citation: McLeod v Lane Cove Municipal Council [2020] NSWSC 1582
Hearing dates: 7 November 2019
Decision date: 13 November 2020
Jurisdiction:Common Law
Before: Ierace J
Decision:

1. The summons filed 20 June 2019 is dismissed;

2. The plaintiff to pay the defendant’s costs.

Catchwords:

APPEALS – appeal from the Local Court to the Supreme Court – whether a payable debt existed at the time of the commencement of the proceedings – whether s 553 of the Corporations Act 2001 (NSW) operated to convert the debt owed into a right of proof – where the debt is due two years after the issue of a certificate of completion for upgrade works – where the two-year period had not yet elapsed

Legislation Cited:

Corporations Act 2001 (Cth), ss 9, 471B, 553, 553D, 554, 554B

Corporations Regulations 2001 (Cth), reg 5.6.44

Local Court Act 2007 (NSW), ss 39, 40, 41

Cases Cited:

In the matter of Epitome Holdings Pty Ltd [2017] NSWSC 1533

Re National Express Group Australia (Swanston Trams) Pty Ltd v Smith (2004) 209 ALR 694; [2004] FCA 1155

Wallace-Smith v Thiess Infraco (Swanston) Pty Ltd (2005) 218 ALR 1; [2005] FCAFC 49

Category:Principal judgment
Parties: David John McLeod (Plaintiff)
Lane Cove Municipal Council (Defendant)
Representation:

Counsel:
T Stuart (Plaintiff)
J T Johnson (Defendant)

Solicitors:
O’Neill Partners (Defendant)
File Number(s): 2019/191450
 Decision under appeal 
Court or tribunal:
Local Court
Jurisdiction:
Civil
Date of Decision:
23 May 2019
Before:
Atkinson LCM
File Number(s):
2018/99755

Judgment

  1. HIS HONOUR: By a summons filed on 20 June 2019, the plaintiff, David McLeod, seeks orders that a judgment made in favour of the defendant, Lane Cove Municipal Council, that was entered in the Local Court on 23 May 2019 by Atkinson LCM, be set aside and instead be entered in favour of him, as well as an order for costs.

The background

  1. The dispute between the parties concerns a licence granted to a café proprietor over a section of council-owned footpath. At all material times, the plaintiff was the sole director and shareholder of Epitome Holdings Pty Limited (“Epitome”), which operated the café in question, in a plaza known as the Lane Cove Plaza (“the Plaza”). Epitome licensed an adjoining part of the footpath from the defendant, for the outdoor seating of its customers.

  2. Between 21 March 2011 and 15 June 2011, the defendant upgraded the Plaza and footpath. During that period, the plaintiff failed to pay licence fees that were due. In 2013, the defendant commenced proceedings in the Local Court at Sutherland to recover the unpaid licence fees, together with interest and costs (“the 2013 proceedings”). The plaintiff filed a defence and cross-claim.

  3. The parties resolved the proceedings by terms of settlement which, together with ensuing events, were summarised by Brereton J (as his Honour then was) in a judgment of this Court, In the matter of Epitome Holdings Pty Ltd [2017] NSWSC 1533, as follows:

“3   … Those proceedings were settled by Terms of Settlement dated 27 August 2013, which were to the effect that:

(1)   Epitome agreed to pay

(a)   $61,887.98 (arrears) and costs of $9,500 [1] making a total of $70,387.98 for the outstanding moneys claimed in the statement of claim, and

1. Having regard to the primary documents and other amounts in the same sub-paragraph and par (3), the amount should be “$8,500”.

(b)   separately to pay to the Council $1,368 per month for current rental, the first such payment to be made on 1 September 2013, and in this respect time to be of the essence;

(2)   if the amount of $61,887.98 was paid in full, the Council would discontinue the proceedings;

(3)   if the amount of $61,887.98 was not paid, or the monthly instalments of $1,368 were not paid in accordance with the agreement, then upon 14 days’ notice given by the Council to Epitome of the default, the Council could enter a consent judgment for $61,887.98 plus costs of $8,500, making a total of $70,387.98, less credit for any payments made on account;

(4)   if the arrears were paid in full, then the Council would waive its entitlement to costs of $8,500;

(5)   it was also agreed that:

(a)   Epitome would pay the arrears in full within 2 years of completion of the upgrade works referred to below, as well as ongoing rental in full;

(b)   the Council would not charge approval fees during the period of upgrade works at the Lane Cove Plaza precinct adjacent to Epitome’s restaurant, and in that respect a certificate of the Council’s Executive Manager – Open Space and Urban Services stating that the works were completed would be prima evidence to that effect; and

(c)   after completion of the upgrade works and the issue of the certificate, Epitome would have a further two years to pay the arrears.

4   Concurrently with those terms of settlement, on 27 August 2013 Mr McLeod executed a deed of guarantee in favour of the Council, by which he unconditionally guaranteed to the Council the due and punctual payment of all moneys now or in the future payable by or recoverable from Epitome arising out of (a) the Sutherland Local Court proceedings and judgment entered therein; (b) future fees payable by Epitome to the Council for occupation of the relevant footpath area; and (c) all fees due now or in the future by Epitome to the Council which Epitome does not pay (clause 1). The Deed provided that if any of the obligations guaranteed were at any time not enforceable against Epitome, it should be construed as an indemnity, and Mr McLeod indemnified the Council in respect of any failure by Epitome to make any payment referred to in clause 1 (clause 4).

5   It appears that the upgrade works were completed on 1 November 2014. On that basis, the ‘arrears’ referred to in the terms of settlement would not become payable before 1 November 2016 at the earliest. However, it seems that no such notice or certificate as referred to in (5)(c) above was then given, and under that provision of the terms of settlement, time ran from the issue of the Certificate.

6   By 1 November 2014, Epitome had gone into liquidation (on 25 March 2014), and had been deregistered (on 12 October 2014).

7   In 2015, the Council brought proceedings (2015/234226) in the Local Court at Hornsby against Mr McLeod, apparently founded on the theory that the deregistration of Epitome somehow dispensed with the preconditions or accelerated the obligations of the guarantor. These proceedings resulted in a judgment in favour of Mr McLeod as defendant. The Magistrate appears to have concluded that (1) there was no judgment in the Sutherland proceedings, because although the terms of settlement contemplated entry of judgment in certain circumstances, that had never been done; (2) there was no money presently owing by Epitome, because the two year period had not expired; and (3) because there was at that stage no money payable by Epitome, the guarantee/indemnity was not engaged.

8   On 12 December 2016, the Council sent to ASIC a certificate of the completion, on 1 November 2014, of the upgrade works, over the signature of its Executive Manager – Open Space and Urban Works. … A copy of the certificate was also sent to Mr McLeod, whose barrister responded to the effect that Mr McLeod denied that any moneys were owing by him pursuant to a guarantee, that proceedings against him would be baseless, and that ASIC was a mere repository of any assets. Further correspondence did not advance the position.”

  1. The application by the defendant before Brereton J was for an order that ASIC reinstate Epitome to enable the defendant to obtain a judgment against Epitome following on from the 2013 proceedings, and then enforce that judgment against the plaintiff as a guarantor. The defendant also sought leave pursuant to s 471B of the Corporations Act 2001 (Cth) to continue the Sutherland proceedings against Epitome.

  2. Brereton J concluded:

“21 As the deregistration of Epitome prevents the Council not only from proceeding to enter judgment, but also from enforcing the guarantee, the Council is a person aggrieved by the deregistration of Epitome, and has standing to apply under s 601AH(2) for its reinstatement. Given the prejudice to the Council of the inability to enforce its rights while the company remains deregistered, and the apparent absence of substantive prejudice to anyone else from reinstating the company, it is just that the company's registration be reinstated. Leave to continue the Sutherland proceedings up to entering judgment should be granted.

22   The Court orders that:

(1)   these proceedings be consolidated with proceedings 2014/042276, and the originating process herein have effect as an interlocutory process in those proceedings, as if the plaintiff were an applicant on the interlocutory process and the defendant a respondent thereto;

(2)   pursuant to Corporations Act, s 601AH(2), upon the applicant Lane Cove Council by its counsel undertaking to the court that it will indemnify the liquidator Scott Darren Pascoe in respect of his costs and remuneration consequent upon the reinstatement of the company up to a limit of $2,000, the respondent ASIC reinstate the registration of the company Epitome Holdings Pty Ltd (ACN 147 700 230);

(3)   pursuant to Corporations Act, s 601AH(3), Scott Darren Pascoe be re-appointed liquidator of the company; and

(4)   pursuant to Corporations Act, s 471B, the applicant have leave to continue proceedings 2013/084371 in the Local Court at Sutherland against the company, up to and including the entry of judgment in those proceedings.”

  1. By correspondence dated 22 December 2017, the defendant gave notice, which was expressed to be pursuant to “Supreme Court Order made 13 November 2017”, to the re-appointed liquidator of Epitome, of a certificate of completion. On the same date, on the application of the defendant, judgment was entered against Epitome by the Local Court in the Sutherland Registry, in the sum of $70,387.98 (“the 2017 Sutherland Local Court judgment”).

  2. On 22 January 2018, the defendant gave notice to the plaintiff of the Supreme Court orders, the completion of the footpath works, the issue of the certificate of completion and its service upon the liquidator, and requested that he pay the debt of $70,387.98, pursuant to the deed of guarantee. Attached to the letter giving notice was a copy of the 2017 Local Court judgment.

  3. On 29 March 2018, the defendant filed a statement of claim in the Local Court against the plaintiff, seeking judgment in the sum of $72,756.47, which comprised the settlement sum of $70,387.98, together with interest in the amount of $1,145.49 and fees in the amount of $1,223.00. The matter was heard on 13 March 2019 and judgment was delivered on 23 May 2019.

  4. The Local Court hearing involved consideration of further provisions of the Corporations Act, which were as follows:

“Part 5.6—Winding up generally

Division 6—Proof and ranking of claims

Subdivision A—Admission to proof of debts and claims

553   Debts or claims that are provable in winding up

(1)   Subject to this Division and Division 8, in every winding up, all debts payable by, and all claims against, the company (present or future, certain or contingent, ascertained or sounding only in damages), being debts or claims the circumstances giving rise to which occurred before the relevant date, are admissible to proof against the company.

(1A)   Even though the circumstances giving rise to a debt payable by the company, or a claim against the company, occur on or after the relevant date, the debt or claim is admissible to proof against the company in the winding up if:

(a)   the circumstances occur at a time when the company is under a deed of company arrangement; and

(b)   the company is under the deed immediately before the resolution or court order that the company be wound up.

This subsection has effect subject to the other sections in this Division.

Note 1:   See Division 10 of Part 5.3A (sections 444A 444H) for the provisions dealing with deeds of company arrangement.

Note 2:   See paragraph 513A(d) for deeds that are followed immediately by court ordered winding up. See paragraphs 513B(c), (d) and (da) for deeds that are followed immediately by voluntary winding up. Subsections 446A(2) and 446AA(2) and section 446B provide that companies are taken in certain circumstances to have passed resolutions that they be wound up.

Note 3:   A debt or claim admissible to proof under subsection (1A) will only be covered by paragraph 556(1)(a) if the administrator of the deed is personally liable for the debt or claim (see subsection 556(1AA).

(1B)   For the purpose of applying the other sections of this Division to a debt or claim that is admissible to proof under subsection (1A), the relevant date for the debt or claim is the date on which the deed terminates.

(2) Where, after the relevant date, an order is made under section 91 of the ASIC Act against a company that is being wound up, the amount that, pursuant to the order, the company is liable to pay is admissible to proof against the company.

…

553D   Debts or claims may be proved formally or informally

(1)   A debt or claim must be proved formally if the liquidator, in accordance with the regulations, requires it to be proved formally.

(2)   A debt or claim that is not required to be proved formally:

(a)   may be proved formally; or

(b)   may be proved in some other way, subject to compliance with the requirements of the regulations (if any) relating to the informal proof of debts and claims.

(3)   A debt or claim is proved formally if it satisfies the requirements of the regulations relating to the formal proof of debts and claims.”

  1. The “relevant date” as stated in s 553(1) is defined in s 9 as follows:

“relevant date, in relation to a winding up, means the day on which the winding up is taken because of Division 1A of Part 5.6 to have begun.

Note:   Subsection 553(1B) modifies the operation of this definition for debts and claims that arise while a company is under a deed of company arrangement if the deed terminates immediately before the winding up.”

  1. In her judgment, the magistrate referred to the parties’ submissions. The defendant submitted that once Epitome went into liquidation, the debt was converted into a provable debt pursuant to s 553 of the Corporations Act, which had the effect that the debt could be proved even though there had not been a formal breach of the terms of settlement at the time of the liquidation.

  2. The plaintiff submitted that the terms of settlement only created an agreement to pay and that the debt would only arise after the two-year period following the issuing or serving of the certificate of completion of the works, so that the defendant did not have the right to enter consent judgment until the two-year period had elapsed. He submitted that s 553 did not convert debts that had not arisen, and therefore it had no application. Accordingly, the judgment entered in the Sutherland proceedings was invalid and, since the moneys referred to in the deed of guarantee must arise from those proceedings, there was no judgment or debt payable to found liability.

  3. The defendant, in reply, submitted that the necessary preconditions were satisfied by the terms of settlement, which included an agreed fixed amount, coupled with the “ability and necessity to prove in the winding up and inability to recover otherwise”.

The Local Court judgment

  1. The magistrate found that the key issue in the case was when the plaintiff was entitled to take action to enforce the guarantee. The magistrate was satisfied that a reasonable person would have understood the terms of settlement to require the certificate of completion of works to be issued, rather than served, for the two-year period to start running. The magistrate found that the certificate of completion of works was issued on 12 December 2016 which, had Epitome not gone into liquidation, would have allowed it until 11 December 2018 to pay what was due pursuant to the terms of settlement. The magistrate was also satisfied that the terms of settlement made it clear that Epitome owed the defendant the amount in dispute, although it deferred payment pending the completion of works, the issue of a notice and the passage of two years from that date.

  2. The magistrate concluded:

“39 Once Epitome went into liquidation, I am satisfied on the balance of probabilities that s.553 [of the Corporations Act] converted its liability under the terms of settlement into a provable debt and that a proof of debt could be lodged even though there had been no breach of the terms of settlement at the time of the winding up order.

40 Section 553 does not state when the proof of debt has to be lodged. Further, s.553D allows for both the formal and informal proof of debts. Formal proof is only required when the liquidator requires it to be formally proved and there is no evidence that Epitome’s liquidator required formal proof of the debt in issue in these proceedings.

41   …

42 Although [the plaintiff] has submitted that the judgment entered on 12 December 2017 is invalid as it was entered contrary to the terms of settlement, there is no evidence of any steps being taken to have it set aside under UCPR 39.15 and it remains a judgment of this Court.

43   [The plaintiff] argued that there could not be a debt without a proof of debt being lodged and that no proof of debt could be lodged as there is no debt.

44   As I indicated above, I do not accept that there was no debt.

45   Although [the defendant] did not explicitly submit that the notice to the liquidator was an informal proof of debt, in my view, the notice and annexed judgment could be taken to be an informal proof of debt. It set out the amount that Epitome was liable to pay to [the defendant]. The notice was consistent with Brereton J’s orders concerning leave to proceed against Epitome [and] enclosed a copy of the judgment that had been entered against the company. It did not purport to foreshadow the taking of enforcement action against the company. Instead, it stated that action would be taken to recover the money pursuant to the guarantee.

46   [The plaintiff] guaranteed all moneys payable by or recoverable from Epitome arising out of the Sutherland local court proceedings and judgment entered therein. The judgment that was entered on 12 December 2017 clearly arose from the Sutherland proceedings. Epitome has failed to pay the amount that it was ordered to pay. Accordingly, I find on the balance of probabilities that [the plaintiff] is bound by the terms of his guarantee to pay the money owed by Epitome.

47   Accordingly, I am satisfied on the balance of probabilities that [the defendant] has proven its claim and I give judgment accordingly …”

The appeal from the Local Court

The relevant statutory provisions

  1. The Local Court Act 2007 (NSW) provides, relevantly:

“39   Appeals as of right

(1)   A party to proceedings before the Court sitting in its General Division who is dissatisfied with a judgment or order of the Court may appeal to the Supreme Court, but only on a question of law.

(2)   …

40   Appeals requiring leave

(1)   A party to proceedings before the Court sitting in its General Division who is dissatisfied with a judgment or order of the Court on a ground that involves a question of mixed law and fact may appeal to the Supreme Court but only by leave of the Supreme Court.

(2)   …

41   Determination of appeals

(1) The Supreme Court may determine an appeal made under section 39(1) or 40:

(a)   by varying the terms of the judgment or order, or

(b)   by setting aside the judgment or order, or

(c)   by setting aside the judgment or order and remitting the matter to the Local Court for determination in accordance with the Supreme Court’s directions, or

(d)   by dismissing the appeal.

(2)   …”

The grounds of appeal

  1. In his summons, the plaintiff advanced six grounds. Grounds 1 to 4 concerned the magistrate’s interpretation and application of s 553 of the Corporations Act and are considered together. Ground 5 was not developed in submissions and appears to be an acknowledgement by the plaintiff of a finding by the magistrate that the plaintiff submits is of assistance to its case, rather than a ground of appeal. Accordingly, I disregard it as a ground of appeal.

  1. The grounds of appeal are as follows:

“(1) Her Honour erred in law by finding that S. 553 Corporations Law 2001 (C’th) applied to the subject settlement agreement dated 26 August 2013.

(2) Alternatively to 1., Her Honour erred in law by finding that S. 553 Corporations Law 2001 (C’th) converted the principal liability under the settlement agreement into a provable debt, by failing to find that the ‘provable debt’ had been proved when such was required in order to have effect.

(3) Alternatively and additionally to 1. and 2., Her Honour erred in law by finding that S. 553 Corporations Law 2001 (C’th) converted the principal liability under the settlement agreement into a provable debt, by failing to find the time at which the provable debt was required to be proved.

(4)   It was an error in law to fail to find that a ‘provable debt’ is converted into a ‘debt’ capable of being the subject of a judgement without it being accepted or rejected by a liquidator prior.

(5)   Her Honour found that, in the absence of the liquidation of the principal debtor, Epitome Holdings Pty Ltd, on 25 March 2015, the plaintiff (as guarantor) would not have had to pay the amount due under the settlement deed until at least 12 December 2018, and perhaps 18 December 2019.

(6)   It was an error in law to allow reliance on the judgement entered in the Local Court at Sutherland when that judgement was entered;

(a)   in accordance with the Consent Orders of August 2013, when;

(i) those Consent Orders had not been breached as at the time, as they were an independent agreement to the operation of S. 553;

(ii)   they were not granted by consent in the terms used;

(b) In accordance with leave of the Supreme Court, the right to the judgment had not been determined or validated. Merely leave to file in accordance with s 471B of the Corporations Act 2001 (“C’th”);

(c)   Any leave to file such orders did not validate them;

(d)   The judgement must be for the basis of an unpaid debt by Epitome Holdings Pty Ltd, a debt which was not payable by it until at least 17 December 2018.”

  1. I am satisfied that each of the remaining grounds raises issues of law and therefore leave is not required.

  2. Tendered on the hearing was an affidavit of the defendant’s solicitor, which annexed the written submissions of the parties that had been handed up in the Local Court hearing. The defendant is content to rely on its submissions that were handed up below, with little by way of additional submissions.

The parties’ submissions

  1. In his written submissions, the plaintiff accepted that “the central matter in contention … is whether a payable debt existed at the time of commencement of these proceedings”. Clause 5(c) of the terms of settlement allowed a two-year period for Epitome to pay the debt from the time of “issue” of the certificate of completion. The certificate of completion of works was “created” December 2016 and not served on Epitome until 22 December 2017. If “issue” meant “creation”, the two-year period expired in December 2018. [2] If it meant service, that period expired on 23 December 2019. The plaintiff submitted that “issue” must denote awareness of the existence of the certificate and therefore receipt of it by Epitome, but either way, the claim in the Local Court, which commenced with the filing of the statement of claim on 29 March 2018, was premature.

    2. The dates in the plaintiff’s submissions were inconsistent with the evidence. Whereas the earlier notice was dated 12 December 2016, the plaintiff referred to it as being dated 16 December 2016. The plaintiff said that two years from that date expired on 23 December 2018, presumably meaning 11 December 2018.

  2. The plaintiff submitted that, as it was a future or contingent debt, s 553 applies. However, the magistrate erred by accepting that s 553 “changed the nature of the claim”, as s 553 does not “convert” debts which have not arisen. Its application is limited, as the heading of Pt 5.6 of the Corporations Act and the sub-heading suggests, to “Debts or claims that are provable in winding up”, such as when a claim is admissible to proof, but a liquidator rejects a proof of debt: see Re National Express Group Australia (Swanston Trams) Pty Ltd v Smith (2004) 209 ALR 694; [2004] FCA 1155; and Wallace-Smith v Thiess Infraco (Swanston) Pty Ltd (2005) 218 ALR 1; [2005] FCAFC 49.

  3. The plaintiff submitted that it appears to be common ground that this debt was not proved, informally or otherwise, and s 553 could not remedy that. Accordingly, the Local Court judgment of 22 December 2017 was invalid, since no cause of action had yet arisen under the terms of settlement. The magistrate had not ruled on the 22 December 2017 judgment, only the right to file it. The guarantee did not operate, because the “provable claim” was not proved and had not been discounted.

  4. In oral submissions, the plaintiff contended that s 553 rendered the debt provable, but not proved. The debt was not proved thereafter, but could have been, by lodging a formal proof of debt with the liquidator.

  5. As noted, the defendant relied upon the written submissions that it had handed up at the Local Court hearing. On the issue of s 553, the defendant’s submissions were:

“14.   As at the date of commencement of the winding up, on 25 March 2014 the liability under the Terms of Settlement entered into between the Plaintiff and the Company:

(a)   was clearly an identifiable amount payable in the future according to the timing of the completion: of works as reflected.

(b) was converted by operation of s. 553 of the Corporations Act 2001 into a provable debt claimable against the Company in the winding up: Ex parte Llynvi Coal and Iron Co; Re Hyde (1871) 7 LR Ch App 28 at 31-2 and Re National Express Group Australia (Swanston Trams) Pty Ltd (2004) 50 ACSR 434; [2004] FCA 1155, approved on appeal Wallis-Smith v Thiess lnfraco (Swanston) Pty Ltd (2005) 218 ALR 1; [2005] FCAFC 49.

(d) [3]    The Company was then and thereafter not in a position to satisfy any obligation towards the Plaintiff.

(e)   Liability to satisfy the obligations of the Company under the terms of the Deed of Guarantee arose as against the Defendant.

15.   The ability to lodge a proof of debt and participate in the winding up in respect of that liability existed even though a formal breach of the Terms of Settlement had not occurred at the time of the winding up order: Re Asphaltic Wood Pavement Co (Lee & Chapman's case) (1885) LR 30 Ch D 216 and Wallis-Smith v Thiess lnfraco (Swanston) Pty Ltd (2005) 218 ALR 1; [2005] FCAFC 49 at [47] per French J;

16. Because of the operation of s 533 of the Corporations Act 2001 as to the date for proof [of] debt and the impossibility on the part of the Company to perform the [remaining] obligations under the Terms of Settlement it is submitted that there is no impediment to the Plaintiff seeking recovery from the Defendant under the Deed of Guarantee for the amount claimed and the subject of the present judgment.

17. Consequently, in proceedings in the Local Court at Sutherland, leave having been obtained under the provisions of s. 471B of the Corporations Act 2001 to do so in terms of the bar otherwise existing against the Council to recover a judgement for the debt, a judgement was obtained in the Local Court of New South Wales against the Company and remains unsatisfied.”

3. There was no “14(c)” in the defendant’s submissions.

  1. In this application, the plaintiff relied upon different provisions of the Corporations Act to advance an argument for the first time. The relevant provisions are as follows:

“Subdivision B—Computation of debts and claims

554   General rule—compute amount as at relevant date

(1)   The amount of a debt or claim of a company (including a debt or claim that is for or includes interest) is to be computed for the purposes of the winding up as at the relevant date.

(2)   Subsection (1) does not apply to an amount admissible to proof under subsection 553(2).

…

554B   Discounting of debts payable after relevant date

The amount of a debt that is admissible to proof but that, as at the relevant date, was not payable by the company until an ascertained or ascertainable date (the future date) after the relevant date is the amount payable on the future date reduced by the amount of the discount worked out in accordance with the regulations.”

  1. The plaintiff submitted that s 554B applies to provable debts of the subject kind and, pursuant to its terms, the value of the debt should have been discounted at the rate of 8 per cent per annum, which had not occurred. Regulation 5.6.44 of the Corporations Regulations 2001 (Cth) provides that the rate, for the purposes of s 554B, is 8 per cent per year, “calculated from the declaration of the dividend to the time when the debt would have become payable according to the terms on which it was contracted”. It was submitted that since it appears that there was no declaration of the dividend, apparently because no creditor had lodged a proof of debt, the defendant would have difficulty complying with s 554. Alternatively, s 554 requires that the debt is to be calculated as at the “relevant date”, which the plaintiff submitted would have been March 2014.

Consideration

  1. I accept that cl 5(c) of the terms of settlement is to be interpreted as meaning that the time runs from the “issue” of the certificate of completion of the upgrade works, but that there is an implication that within a reasonable time, Epitome is to be made aware of the fact of its issue. Accordingly, the two-year period did not commence to run until 22 December 2017 when, following the re-registration of Epitome, notice was served upon the liquidator.

  2. The only contingency associated with the debt owed to the defendant was the passage of two years from the date of the issue of the certificate of completion; the quantum of debt had been agreed between the parties in the terms of settlement. In Re National Express Group Australia (Swanston Trams) Pty Ltd v Smith, Finkelstein J reviewed the applicable principles to the entitlement to “contingent” debts or claims in the insolvency provisions of the Corporations Act. His Honour reviewed s 553 and noted its genesis in bankruptcy law. In the course of that review, his Honour stated:

“[9]   Since 1869 it has never been doubted that if at the date of bankruptcy the bankrupt was bound by an executory contract the creditor could prove as a contingent creditor for any losses that he might suffer from a past or future breach of that contract. This accords with the evident purpose of bankruptcy which is to permit all creditors to share in the distribution of the assets of the bankrupt and to leave the debtor thereafter free from the liability of previous obligations. As Lord Halsbury observed in Hardy v Fothergill (1888) LR 13 AC 351 at 355: ‘[T]he legislature has been engaged in the effort to exhaust every conceivable possibility of liability under which a bankrupt might be, to make it provable in bankruptcy against his estate and relieve the bankrupt for the future from any liability in respect thereof’. It would be most unfortunate if persons entitled to the performance of executory agreements on the part of bankrupts were excluded from participation from bankrupt estates and the bankrupts themselves as a necessary corollary were left still subject to action for non-performance in the future although without the property or credit often necessary to enable them to perform those obligations. The categories of claims which are admissible should be as wide as possible so that the financial affairs of the bankrupt are dealt with comprehensively.

[10]   The view that a future breach of contract could be proved as a contingent claim not only accords with principle, it conforms to the opinions of textbook writers and is supported by the cases. Hardy v Fothergill was a case which arose under the Bankruptcy Act 1869. There the bankrupt, an assignee of a leasehold estate, covenanted to indemnify the lessees against damages for breach of their covenants to repair with the lessors. At the time of the bankruptcy, the covenant to indemnify still had 8 years to run. The lessees did not tender any proof as to the bankrupt’s possible liability at the end of their covenant. When the lessor sued the lessee on the covenants for repair, the bankrupt resisted being joined as a third party on a claim for indemnity on the basis that he had been discharged from bankruptcy. The House of Lords agreed as the liability could have been proven in the bankruptcy. According to the Law Lords the only cases which fell outside the proof provisions were:

(1)   those where the court considered that it was impossible to estimate in any way the amount of the claimant’s damage; and

(2)   possibly, contracts which had an object different from the payment of money and any others for which the proper remedy was an injunction or specific performance.”

  1. Neither of those two qualifications arise in the circumstances of this case. Finkelstein J noted, at [13]:

“The English provisions allowing proofs by contingent creditors were adopted in Australia with little change from their English counterparts …”

  1. On appeal, in Wallace-Smith v Thiess Infraco (Swanston) Pty Ltd, French J, as his Honour then was, referred to the review of relevant law that had been conducted by Finkelstein J, and observed, at [47]:

“His Honour reviewed case law and textbook writings on the topic of contingent debts in bankruptcy and corporate insolvency. He concluded that a claimable debt would arise when, by reason of a company’s insolvency, it became impossible for it to perform a contract. This was so notwithstanding that a formal breach of the contract had not occurred at the time of the winding up order – Re Asphaltic Wood Pavement Co (1885) LR 30 Ch D 216 at 224 (Lee & Chapman’s case).”

  1. The nature of the debt agreed in the terms of settlement was, in my opinion, one that comes within the ambit of a contingent debt that was considered by Finkelstein J and found to be within the contemplation of the terms of s 553.

  2. I concur with the magistrate’s reasoning and conclusion that the effect of s 553 was to convert the debt owed by Epitome to the defendant into a right of proof of it against Epitome, even though the two-year period had not elapsed. The defendant obtained the 2017 Sutherland Local Court judgment, which was not challenged by Epitome or the plaintiff, and was accepted by the liquidator as a sufficient proof of debt, without requiring it to be formally proved.

  3. Having regard to the terms of the deed of guarantee between the parties, the relevant parts of which were summarised by Brereton J in In the matter of Epitome Holdings Pty Ltd at [4] of his Honour’s judgment, the plaintiff became liable for the debt, as determined by the magistrate.

  4. In relation to ground 6, I agree with the defendant’s submission that, in the absence of an application that the 2017 Sutherland Local Court judgment be set aside, the magistrate was correct to accept it on its face.

  5. Accordingly, having regard to the plaintiff’s five grounds of appeal, I find that the magistrate did not err in law in respect of her findings.

Orders

  1. I make the following orders:

  1. The summons filed 20 June 2019 is dismissed;

  2. The plaintiff to pay the defendant’s costs.

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Endnotes

Decision last updated: 13 November 2020

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