Probuild Constructions (Aust) Pty Ltd (subject to a deed of company arrangement) ACN 095250945 & Ors v Allianz Australia Insurance Limited ACN 000122850

[2023] HCATrans 163

[2023] HCATrans 163

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S40 of 2023

B e t w e e n -

PROBUILD CONSTRUCTIONS (AUST) PTY LTD (SUBJECT TO A DEED OF COMPANY ARRANGEMENT) ACN 095250945

First Applicant

SALVATORE ALGERI (AS JOINT AND SEVERAL DEED ADMINISTRATOR PROBUILD CONSTRUCTIONS (AUST) PTY LTD (SUBJECT TO A DEED OF COMPANY ARRANGEMENT))

Second Applicant

JASON MARK TRACY (AS JOINT AND SEVERAL DEED ADMINISTRATOR PROBUILD CONSTRUCTIONS (AUST) PTY LTD (SUBJECT TO A DEED OF COMPANY ARRANGEMENT))

Third Applicant

MATTHEW JAMES DONNELLY (AS JOINT AND SEVERAL DEED ADMINISTRATOR PROBUILD CONSTRUCTIONS (AUST) PTY LTD (SUBJECT TO A DEED OF COMPANY ARRANGEMENT))

Fourth Applicant

DAVID MICHAEL ORR (AS JOINT AND SEVERAL DEED ADMINISTRATOR PROBUILD CONSTRUCTIONS (AUST) PTY LTD (SUBJECT TO A DEED OF COMPANY ARRANGEMENT))

Fifth Applicant

and

ALLIANZ AUSTRALIA INSURANCE LIMITED (ACN 000122850)

Respondent

Application for special leave to appeal

GAGELER CJ
GORDON J
BEECH‑JONES J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON FRIDAY, 17 NOVEMBER 2023, AT 9.33 AM

Copyright in the High Court of Australia

____________________

MR J.T. GLEESON, SC:   Your Honours, in this application, I appear with MR D. KROCHMALIK and MS K.I.H. LINDEMAN for the applicants.  (instructed by King & Wood Mallesons)

MR J.C. GILES, SC:   May it please your Honours, I appear with my learned friend MS A.E. CAMPBELL for the respondent.  (instructed by DLA Piper)

GAGELER CJ:   Thank you, Mr Giles.  Mr Gleeson.

MR GLEESON:   Your Honours, we seek leave to read the affidavit, which commences at page 190, for the purpose of establishing two matters which support the general importance of the questions.  The two important matters are firstly the letter of the Australian Government, which is found at pages 303 to 305.  The importance of that letter is that the Department of Employment and Workplace Relations, which handles the FEG scheme paying the employees even if there is not enough money in the insolvent estate, asserts that they have a vital interest in both these questions being considered by the Court.

That is probably fairly obvious from question 2, the scope of a “security interest” under section 12 of the PPSA. This application is critically important to understand whether the Court of Appeal has failed to adopt the true substance over form approach required by section 12. But also, your Honours will see on the foot of page 304, the Department supports the application in relation to the first question for this reason, as explained on the page above, that typically, in construction insolvencies – which form a disproportionate and increasing number of insolvency appointments – the only hard assets are the receivables owed to the building company in construction. And the receivables often, as in this case, take a particular form of a right under the Building and Construction Industry Security of Payment Act 2002 to claim moneys from the principal without set‑off.

We have sought to give your Honours a particular section of the Victorian Security of Payments Act, around section 10 to explain why it is that where there is a claim and, in this case, an adjudication determination, the principal cannot set off its claim for unliquidated damages against that claim.  And so, what is of general importance about issue 1 is that it will be common that there will be claims under the SOPA, and if there are settlement deeds, they will take the form of the present deed - - -

GORDON J:   Will they always take the form of the present deed?

MR GLEESON:   Not always.

GORDON J:   Is that not the problem?

MR GLEESON:   They may regularly take the form of the present deed because what they purport to do is to settle all claims under the building contract, as this one does with mutual releases.  Whenever one has an underlying SOPA claim, then the critical question arises, do you simply identify that as a deed settling all claims, as Justice Adamson did, and said, that is enough to establish an excess for the purpose of a surplus bonds clause, or do you take the approach the trial judge did, which was to say you need to be able to establish that there is an excess and that cannot be done in the face of a SOPA claim.

Anyway, I point your Honour to that piece of evidence to support general application, and the other piece of evidence is in the affidavit itself.  Between pages 194 to 197, there is evidence that the bonds that we see in this case and the deed of indemnity are now a typical feature of the industry.  In particular, at paragraph 19, there is evidence of how, in the case of a parallel bond with the present, the registration is in fact done under the Act. 

Your Honours will see that registration at page 297 of the book, particularly under the heading “Collateral Details”. That is the way under the PPSA you record an interest like the present. This addresses her Honour Justice Adamson’s concern that there would be no purpose in registering this instrument. We submit to the contrary, the very purpose is that anyone dealing with the building company reads that and knows there is this prior claim over the assets of the company. Your Honour, from that point, that was my submission on general importance. I propose to deal first with question 2 and then come back to question 1, if that is a convenient order, your Honour.

GAGELER CJ:   Yes, thank you.

MR GLEESON:   In respect to question 2, we have sought to give your Honours this Court’s decision, Associated Alloys, for this purpose of demonstrating that that is where the law stood prior to the PPSA and to then understand the change effected by the PPSA. In Associated Alloys (2000) 202 CLR 588 at paragraph 3 on page 594, there are the terms of the former Corporations Law, consistent with the earlier companies’ codes and Acts, that what was registerable under section 9 was a charge which included:

a mortgage and an agreement to give . . . a charge or mortgage –

The only creatures that were required to be registered were those which fell within that description, and as the Court observed at paragraph 5, trusts per se were not required to be registered and therefore it was essential to observe the distinctions between trusts and charges, even though, as the Court noted, some have described those distinctions as “sterile” and “overly conceptualist”.

In that particular case, the relevant trust, which is found on page 597 in subparagraph [5], was – and this is part of a Romalpa clause – a trust over the proceeds of manufactured product from the original supplied goods, limited to the amount of the underlying sale debt.  The case stands for the proposition under the old law that this does not constitute a charge.  That can be seen at paragraphs 28 and 32.  Critical to that finding was, in 32, that when the trust was performed, the trust relationship was brought to an end and the further obligations of accounting did not constitute a charge.

Your Honours, I go to that because the Court at paragraph 49 adverted to the potential mischief of the old law, which was that this was the very sort of instrument that perhaps ought to be on the register to allow creditors to assess the credit‑worthiness of the buyer, but if that were to be so, that was a matter for the legislature. That is the problem which the legislature then dealt with in the Act. If I could take your Honours to section 12, which is on page 125 of the book, your Honours will observe immediately that what is required for a security interest has these steps: firstly, there must be an interest in personal property; secondly, provided for by a transaction; thirdly, that taking a substance approach provides security for the payment or performance of an obligation; fourthly, without regard to form, and so on.

When your Honours look at the examples in subsection (2), one can see immediately that paragraphs (a), (b), and (c) would have been registerable under the old regime.  However, many of the ones that follow would not have been registerable under the old regime.  Paragraph (d) includes “retention of title” or Romalpa clauses.  We would submit that the very arrangement in Associated Alloys is now registerable under the general provisions of subsection (1) but confirmed by (2)(d).  You then have – I will just direct attention to two others:  “hire purchase agreement”, (e); and “a flawed asset arrangement”, (l).  What is important about those examples I have just given is that there will not necessarily be an equity of redemption.

If there is an equity of redemption, that is solid evidence that one has a security. But under the approach taken in the PPSA, it is not essential that there be an equity of redemption, rather, one simply applies the test in subsection (1).

GAGELER CJ:   Is the supposed need for an equity of redemption part of the reasoning of the Court of Appeal here?

MR GLEESON:   We think it is not expressed, but it is perhaps ‑ ‑ ‑

GAGELER CJ:   We did not see it.

MR GLEESON:   ‑ ‑ ‑ what Justice Leeming was indicating.

GORDON J:   Was it?  I thought what he was saying was, in a sense, that the trust was extinguished immediately, and there was none of this – the arrangement necessary did not give rise to anything like it.

MR GLEESON:   When his Honour said that, with respect to his Honour, he was really employing the Associated Alloys‑type analysis, where the trust was extinguished, so there could not be a charge. Where we submit this error in his Honour’s reasons is – if we go, perhaps, to the critical paragraphs, which are 60, 61, 62, and the end of 63 – what his Honour has not done is take the step required by section 12 and analyse how the performance of the trust interrelates with the satisfaction of the primary obligation of indemnity under clause 1.1. His Honour had stopped short of that. That, we submit, is the critical exercise under section 12(1) ‑ ‑ ‑

GORDON J:   Is that not what the primary judge did in 59 which he adopts in 60?  Or have I missed something?

MR GLEESON:   Well, your Honour, in 59, you will see in the middle of that paragraph:

Once such moneys were received, they were to be subject to the obligation to return them “forthwith” Allianz, on account of Probuild’s obligation of indemnity under cl 1.1(a) –

That is the type of reasoning that is necessary under section 12, and it essentially works this way, if I can explain it. Perhaps, if your Honours go to the deed of indemnity to ground this submission. Under clause 1.1, which is on page 206 – that is the promise of indemnity against all “Loss”. The “Loss” is defined on page 223 as the payments made by Allianz under the bond.

So, from no later than Allianz paying the $34.5 million to May21, Probuild had an obligation of indemnity under clause 1.1. That was an actual obligation of indemnity, and it was accountable as such on its balance sheet. That is the relevant obligation secured under section 12. One then sees how that obligation fits with clause 2.6. Assuming there are surplus bond moneys, in the typical case and the present case, they can only arise after the obligation has arisen under clause 1.1, by definition.

Clause 2.6 is creating a trust.  It is either a trust over the chose in action, which Probuild holds against May21 to recover an excess.  Probably that is the better way of looking at it – if not, it is a trust over the money that comes in from May21.  Whichever way one views it, clause 2.6A is giving Allianz an interest in personal property of Probuild, being the chose in action or the money.  The reason it operates as security is that, to the extent the trust descends and is performed, dollar‑for‑dollar, the obligation of indemnity under clause 1.1 is satisfied.  Secondly, in the event that there is ultimately a residual surplus – that is, that there is money which Allianz has its hands on under the trust but is not necessary for any obligations of indemnity – that money must be accounted back to Probuild. 

Now, your Honours, the parties are largely agreed on the last two propositions that I put.  You will see that in the respondent’s submissions at page 149, paragraphs 28 to 30, over the page.  Paragraph 30 is the acknowledgment that performance of the trust reduces the indemnity under clause 1.1, and 28 and 29 are the acknowledgement that if a residual surplus arises, Allianz is obliged to account to it for Probuild. 

GORDON J:   So, what about the end of paragraph 30?  Is that the crux of the dispute between you?

MR GLEESON: That is the dispute, yes. So, we agree that this is not a case where when the trust descends, Allianz can just say, that is my money no matter what. Allianz has to account for that money against the obligation of indemnity under 1.1, and it has to account for a residual surplus. We may have a disagreement whether that ultimate accounting obligation is personal or proprietary. We say it is both, but that should not matter to the section 12 analysis.

What this had shown us is that Allianz has received an interest in personal property, securing the obligation of indemnity under clause 1.1.  Now, with respect to Justice Leeming, that link between the two is not something he has fully addressed.  In relation to Justice Adamson ‑ ‑ ‑

GORDON J:   Sorry, is that not addressed in paragraph 60?  The way he put it was, it was a separate trust and a separate obligation, both temporally and legally.  Have I missed something?

MR GLEESON: Your Honour, that is not addressed in the question under section 12. Section 12 is not asking you to engage in these types of Associated Alloys analyses.  What it is trying to say is:  do we have personal property?  Yes.  Do we have an interest in personal property?  Yes.  Do we have an obligation?  Yes.  Can we see that the transaction is providing security in respect to that obligation?  And the answer is, yes, as illustrated by the present facts.  Allianz gets its hands on the excess bonds, excess moneys ahead of the other creditors, the company. 

So, your Honours, if special leave is granted, what we would be seeking to submit in respect to Justice Leeming is that the reasoning – for example, in 60 – simply does not address the PPSA question. In respect to ‑ ‑ ‑

BEECH-JONES J:   Mr Gleeson, what about 61?  Does that advance it?

GAGELER CJ:   And 62?

MR GLEESON: No, for this reason: because, again – firstly, we would say his Honour’s reasoning is wrong, because there will be an ultimate beneficial interest in Probuild if a surplus arises. That is one response. But the second is: to look at only at this question of beneficial interest, and not look at the accounting relationship within which it sits, is to not carry out the section 12 analysis. In 61 and 62, what you do not see is any analysis of how the performance of the trust interrelates with the satisfaction of the clause 1.1 obligation. That is the critical step that has not been taken.

With Justice Adamson, your Honours – it is 153 to 157.  As to 153, whether a breach of the clause is a “prerequisite for the creation of the trust” is not the question because one is looking for security for the obligation, one is not asking about breach.  In 154, the parentheses record the critical qualification that there is an:

obligation to make restitution for those funds –

We would submit, restitution supported by a proprietary interest in the funds. Paragraph 155, your Honours, is particularly troubling because that seems to deny that it is a security because it is wholly contingent upon future events, and yet section 18 of the PPSA expressly says, you can have security over future acquired property.

At 156 it is difficult to see what her Honour gets out of the explanatory memorandum, because the first example, the flawed asset arrangement, is a security, and yet you will see in the nature of a flawed asset arrangement there is no proprietary interest involved at all.  So, it is a good example of how the in substance approach does not focus on necessarily proprietary interests.  The second example, which is not a security, is one where there is no property at all.  In our case we have at least identified property.  At 157, the purposive approach would point exactly in our direction for the reasons I have explained.

Your Honours, on question 1, we would be commending its general importance for the reasons I have indicated and we would be seeking to support the reasons of the primary judge, particularly – I will draw up the paragraph.

GAGELER CJ:   You are not saying clause 2.6 is some kind of standard form provision, are you?

MR GLEESON:   I am saying the evidence indicates that is now a standard form provision, that what we now have in the construction industry is a large number of people providing these surety bonds, that is what principals demand, the bonds are payable on call, and what the sureties are taking is clause 2.6 trust interest over surplus bond moneys as they arrive as security for the obligation of indemnity, and that is what our affidavit suggests is now relatively common across the industry and therefore of importance.  The reasons of the primary judge we support at application book 18 to 19 on the first question.

May it please the Court.

GAGELER CJ:   Thank you.  Mr Giles.

MR GILES:   May it please. Could I address in the same order adopted by our learned friend and direct attention first of all to the applicants’ second ground. Taking up section 12 of the PPSA at application book 125 – and we agree with our learned friend’s, in effect, division of the section into different parts – the important part is that the relevant transaction, that is, here clause 2.6, in substance secures payment or performance of an obligation.

The examples in subsection (2) are ultimately not expansionary but are simply by way of example.  One sees that from the opening words, of course, but also that the phrase:

the following transactions, if the transaction, in substance –

So, one is left back with the question not whether, for example, a conditional sale agreement is necessarily intended to be a security interest, but whether the transaction in substance secures payment or performance.

In substance, it directs attention, in our submission, as – in particular Justice Leeming, but the Court of Appeal identified to the object, we accepted that is not a matter of form. It also follows from that proposition, in our submission, that, as the Court of Appeal held, a trust may or may not, depending on the transaction as a whole – that is, construed as a matter of substance – be a security interest. That ultimately means that the question identified as to the construction of section 12 is dependent on this particular instrument, and what clause 2.6 does.

GAGELER CJ: You are really saying it is a question of the application of section 12 to the particular contractual arrangements.

MR GILES:   Quite.  Ultimately, that does descend to the point of analysis, particularly that of Justice Leeming at paragraph 59 and following.  That is an analysis that on clause 2.6 – which is set out, relevantly, in full in Justice Adamson’s judgment at page 68, paragraph 84 – creates a trust over that which meets the description of surplus bond moneys.  That obligation does not so much descend – to use the language that one used to use in relation to floating charges – but it exists on the existence of the predicate fact, that is, moneys that meet the description.

Those moneys will always, as Justice Leeming identified, be subject of the trust until the commensurate payment obligation – you must pay immediately – is performed.

BEECH‑JONES J:   Do you accept that in all cases where that is engaged, that would be circumstance where there would be an obligation to indemnify, in clause 1.1?

MR GILES:   Not always.  There may be occasions where the indemnifier has already paid part of the money the subject of the indemnity, and the trust attaches irrespective of that.

GORDON J:   Is that the point Justice Leeming was making?

MR GILES:   We think it is.  We only add to what Justice Leeming was saying, and in answer to our learned friend’s submissions – if one goes to page 205 of the book, one sees that the indemnifier is not only Probuild, it is a series of other companies – no doubt part of the same broader corporate group – so the circumstance your Honour Justice Beech‑Jones asks about, it may be that one of the other indemnifiers has met the indemnity under clause 1.1, paid Allianz pursuant to that obligation, surplus bond moneys are then paid, they are the subject of the trust.

What we accept is that on the trust being performed – that is, the immediate payment obligation being performed – Allianz will at that stage have recovered the amount of surplus bound moneys.  There will have been an amount paid on the indemnity and that is where we accept there may be an accounting, but it certainly not proprietary in the sense that our learned friend used, because it may not even be to the same person.

In short, our submission is that, for those reasons – that is, those identified by Justice Leeming up until paragraph 62 as a matter purely of construction – the Court of Appeal was right.  But Justice Leeming identifies, also in paragraph 62, in effect, the clear enough reason for this arrangement – 62 into 63 – namely, that Allianz having provided the bonds – the bonds having been called on by May21 and the predicate to having reached this point of the analysis is there being a surplus, Allianz, of course, has no claim against May21 because of the nature of the bond.

As his Honour identified, that is, in effect, a mutually known background fact.  It is known that Probuild has a claim for the amount of the surplus bond moneys, with the consequence that this arrangement is to be fairly seen as being an arrangement in which that the amount paid by Allianz in excess of the amount to which May21 was entitled to retain is never intended to become part of the beneficial assets of Probuild.

That is, the object, the substance to which the arrangement is directed, is to achieve an end that, because of the tripartite arrangement or nature of the arrangements, Probuild never receives the beneficial interest, with the consequence that the surplus bond moneys never become part of the assets – at least beneficially, the pool of assets of the company.

That, in effect, meets the Commonwealth’s interest that our learned friend identified by reference to the letter, which assumes its own conclusion – that is that the moneys were ever intended to be part of the pool of assets. For those reasons in brief, in our submission, the Court of Appeal was right, and this is just simply a question of application of section 12.

Returning to the first point, again it is a question of application.  The construction identified by Justice Leeming of clause 2.6 – ultimately summarised in paragraph 24 at 50 of the book – is that one is required in applying the clause to ask whether there has been an amount paid on the bonds which can be seen – and more accurately, seen at the time of receipt, which is what caused 2.6 direct attention to – receipt by Probuild as having been in excess of the amount required by the beneficiary.

At that point in time, for the reasons identified by the Court of Appeal, the settlement deed has had the effect of mutual releases and May21, having agreed to an obligation to pay $7.7 million dollars back to Probuild.  That, of course, is against the background that, as Justice Adamson held, there was no other relationship between May21 and Probuild and there is no other occasion in which payment may have been made by Probuild to May21.

So, the in effect contractual accounting that has occurred by agreement between May21 and Probuild leads to the conclusion – that is, the conclusion of proof for which we contended, namely that there was an excess in the call.  That is, for those reasons which ultimately turn on the proper construction of clause 21 and also the settlement agreement, the Court of Appeal was right, and no point of principle arises.

May it please.

GAGELER CJ:   Thank you, Mr Giles.  Mr Gleeson.

MR GLEESON:   Your Honours, this is far more than a case about a particular arrangement.  I am forced to take your Honours back, if I may, to the affidavit at page 195, paragraph 16, where the unchallenged evidence – and your Honours might observe that, of course, one of the players in this industry is Allianz.  It was perfectly open to Allianz to contradict this evidence, but in paragraph 16, these clauses:

are now commonly contained in the Australian and international surety bond facilities –

Paragraph 13 had identified the six players in the market.  And then, over at paragraph 20, there is evidence that international surety bond facilities in the Australian market use this kind of term.  So, that is the general importance.

Secondly, Mr Giles says this was never intended to become part of the beneficial assets of Probuild. That is the whole type of approach that the PPSA was designed to cut through. The whole purpose of these sorts of provisions is to try and find a way in which you say, although that is a pot of money or an asset that I can resort to as a security ahead of the other creditors to get my debt paid, I will try to draft it in a way where it never becomes part of the beneficial assets of the company.

The PPSA in section 12 was designed to cut through that very type of argument, and if I could take your Honours back to section 12(1) at the end, I drew attention to the first part of the parentheses:

(without regard to the form of the transaction –

but the second part is important:

or the identity of the person who has title to the property).

So, what Justice Leeming is considering at paragraph 60, 61 and 62, where is the title, that is not the inquiry that section 12 is about and so, if one looks at those paragraphs again – this is my final reply submission – if one looks at 60, 61 and 62, if that is the reasoning which is now to be followed in New South Wales and elsewhere in Australia, that reasoning does not address the questions required by section 12. And even to look at paragraph 60:

Clause 1.1 of the Deed of Indemnity required Probuild to indemnify Allianz for all loss.

True.  Next sentence:

It is separate from, and pre‑dates, any trust created by cl. 2.6.

True, but that is true of all after acquired property, which is what section 18 says can be a security. If and when the trust created by 2.6 comes into existence it was on terms that it was to be extinguished forthwith, and at that point what his Honour has not done is to say what is the legal consequence of the trust so being extinguished. The legal consequence is that the indemnity obligation under 1.1 is reduced, and if there is an ultimate surplus, it goes back to Probuild. That is the analysis section 12 requires.

May it please the Court.

GAGELER CJ:   The proposed appeal would turn ultimately on the construction of the deed of indemnity.  We see insufficient reason to doubt the correctness of the construction adopted by Justice Leeming in the Court of Appeal to warrant the grant of special leave.  Special leave to appeal is refused with costs.

The Court will now adjourn to reconstitute.

AT 10.09 AM THE MATTER WAS CONCLUDED