Re Avonwood Homes Pty Ltd (in liq)

[2002] VSC 147

IN THE SUPREME COURT OF VICTORIA Not Restricted

AT MELBOURNE

COMMERCIAL AND EQUITY DIVISION

No. 5303 of 2000

IN THE MATTER OF AVONWOOD HOMES PTY LTD (IN LIQUIDATION)
PAUL ANTHONY PATTISON IN HIS CAPACITY AS LIQUIDATOR OF AVONWOOD HOMES PTY LTD (IN LIQUIDATION)	Applicant

---

JUDGE:	Hansen J
WHERE HELD:	Melbourne
DATE OF HEARING:	28 February 2002
DATE OF JUDGMENT:	17 May 2002
CASE MAY BE CITED AS:	Re Avonwood Homes Pty Ltd (in liquidation).
MEDIUM NEUTRAL CITATION:	[2002] VSC 147

---

Corporations – Provisional liquidator – Remuneration – Powers of provisional liquidator – Exercise of power – Commercial judgment – Further evidence – Corporations Law s.473(2)

---

APPEARANCES:	Counsel	Solicitors
For the Liquidator	Mr. T. J. North	Madgwicks
For Dexta Corporation Ltd, a creditor	Mr. G. T. Bigmore Q.C. with Mr. P. Fary	Gadens Lawyers

HIS HONOUR:

1. This is an application under s 473(2) of the Corporations Law (“the Law”) to determine the remuneration of the provisional liquidator of Avonwood Homes Pty Ltd (“Avonwood”). The provisional liquidator is Paul Anthony Pattison (“Pattison”). He provided the Court with two volumes of documents itemising the work for which he claims remuneration. He claims $847,807.97 for the period 5 May 2000 to 31 August 2001, and $725,539.20 for the period 1 September 2000 to 27 April 2001. Pattison has sworn that the amount he claims is fair and reasonable. In addition he seeks an order authorising him to pay $725,539.20 out of the proceeds of realisation of the assets of Avonwood. I refer below to an earlier order which authorised him to pay out the amount of $847,807.97.

1. The application is opposed by a creditor, Dexta Corporation Ltd (“Dexta”).  Dexta does not contest that the work claimed was actually performed.  Nor does Dexta challenge the rate or basis of charging, or any calculation.  Dexta concedes that, considered alone, the charges are fair and reasonable.  The case which Dexta seeks to make is of a different kind.  The case is that Pattison’s work, namely:

(a)in negotiating the Devine Deed, and resisting Dexta’s demands that Pattison resile from it, was unauthorised and/or unnecessary;

(b)in negotiating and implementing the HIH Agreement, was unnecessary.

1. Dexta’s submission does not seek to identify, for the purpose of disallowance, any particular item or items of work, or any particular amount in respect of any item, falling within those two areas of work.  The submission is that no recovery at all should be allowed to Pattison for any item of work involved in either area, and that I should simply refuse the application.  In the alternative, on the basis that the work was unnecessary, as distinct from unauthorised, Pattison should be allowed an amount that represented the value of the benefit to the company as a result of doing the work.  It was submitted that the benefit was much less than the remuneration claimed.  Consistently with these submissions, counsel for Dexta said that I should further order that the balance of the claim (that is, relating to work other than in areas (a) and (b) above) was fair and reasonable, and allow the amount claimed for that work.  However, at this point a difficulty becomes apparent.  The difficulty is that, as presented, Pattison’s claim does not isolate the work he performed in the two areas of work attacked by Dexta, and thus enable identification of the appropriate amount to be disallowed or allowed in respect of work properly undertaken.  For this reason, counsel for Dexta suggested that it may be appropriate to afford Pattison an opportunity to put in further materials to clarify this matter before finally ruling on the application.  Indeed at one point counsel for Dexta said that as an interim measure “some amount should be fixed” with liberty to Pattison to renew his application on further materials.  I conclude this outline by noting that, in any event, Dexta opposed an order authorising payment of remuneration.

Background

1. Avonwood conducted business as a builder of residential houses.  It operated in Victoria.  There were two related companies, Avonwood Homes (Qld) Pty Ltd, a relatively small builder which operated in Queensland, and Avonwood Homes (Aust) Pty Ltd, which was the employer of all employees for the group.  They became insolvent.  Avonwood, the only one of the companies with which I am concerned, had many trade creditors, hundreds of houses in various states of completion, and contracts awaiting performance. 

1. On 5 May 2000 Mandie J ordered that Pattison be appointed provisional liquidator to all the assets and undertaking of Avonwood. It was ordered that the provisional liquidator have all the powers a liquidator would have under s 477 of the Law and some further powers specified in the order. The order provided for Pattison to receive remuneration on a time basis within the scale of charges issued by the Insolvency Practitioners Association of Australia, such remuneration to be paid from the assets and undertaking of the company.

1. Pursuant to an undertaking given to his Honour on 8 May 2000, Avonwood filed an Originating Process for an order that it be wound up. 

1. Pattison set about ascertaining the assets and liabilities of Avonwood.  It was a large task.  There were houses in various stages of completion.  There were houses with defects.  There were houses yet to be commenced.  In some cases, a deposit had been paid but no formal building contract had been entered into.  Work had come to a stop.  There were as many distressed home owners as there were houses to be commenced, completed or repaired.  According to an affidavit Pattison swore on 7 June 2000, there were 785 contracts with owners, under 581 of which construction had commenced, with no construction commenced under 204.

1. The affidavit was sworn in support of an application filed on 8 June 2000, which sought an order that Pattison have power to enter into and execute on behalf of Avonwood:

(a)       an agreement with HIH General & Casualty Insurance Ltd (“HIH”) in the form of an agreement exhibited to the affidavit, and

(b)      the first registered mortgages to HIH provided for in the agreement.

A further order was sought approving the entry into and execution of the agreement and mortgages, and such other instruments necessary to carry the agreement into effect.  In addition, an order was sought that Pattison have power to carry on the company’s business and certain other powers.

1. The involvement of HIH arose in this way.  Builders Warranty Insurance cover existed for each building contract.  There were three main insurers, namely HIH, FAI General Insurance Company Limited (“FAI”) (which policies were controlled and administered by HIH) and Dexta.  Dexta acted as agent for Suncorp Metway Insurance Limited (“SMIL”).  It appeared that 230 contracts were insured by HIH and 555 by Dexta.  There might have been dual cover under 150 contracts for a period of time.  The risk covered by the policies was liability to owners for defective works during and after construction for 6 ½ years and cost overruns. 

1. Pattison’s affidavit discloses that he formed the view that the speedy completion of all contracts, as close as possible to the contract period, would minimise claims by owners and produce a greater return to unsecured creditors.  He considered that a number (but not all) of the building contracts should realise a cash surplus on their completion, and given the support of suppliers and sub-contractors, he investigated the possibility of Avonwood completing the construction of as many of the houses as possible.  That would ensure that construction could take place on all houses rather than just the profitable ones and the return of any cash surpluses to Avonwood and its creditors.  Hence, he took up discussions with HIH and Dexta to determine their preparedness to assist in coming to an arrangement to allow Avonwood as builder to complete the contracts under the supervision of HIH, Dexta and himself and, where necessary, appoint builders to assist as project managers or to complete contracts in their own right. 

1. A factor influencing Pattison was that the likelihood of receiving payment of unpaid progress claims, then approximately $3,681,143, was greater if construction was completed.  But Avonwood required working capital to be able to fund a resumption of work.  Once under way, funding would be provided by the payment of progress claims.  He considered the insurers to be a potential source of such funding in respect of their insured contracts.

1. Pattison reached an agreement with HIH (which also covered FAI insured contracts).  The advantages to Avonwood and its creditors, home owners and HIH were referred to in Pattison’s affidavit. They were also referred to in an affidavit sworn by Raymond James Martin, an officer of HIH.  Without listing them all, it enabled all building contracts covered by HIH to be completed over a three to six month period. That would avoid the increased costs of labour and materials that would be occasioned by greater delay.  The consequential effect would be to limit HIH’s exposure to claims by home owners under its policies which would minimise claims against Avonwood.  This would serve to maximise any return to Avonwood’s creditors, not merely those who were creditors in respect of HIH house contracts. 

1. Pattison stated his opinion that the HIH agreement was in the best interests of all parties including house owners, unsecured creditors, Avonwood and HIH.  This was on the basis that, under the agreement, he would be indemnified by HIH for any debts incurred to sub-contractors and trade suppliers, he would recover significant cash surpluses which would increase the dividend of all unsecured creditors, and he would limit owners’ claims which would enhance the final dividend.  The major unsecured creditors supported the HIH agreement.  The only secured creditor was the National Australia Bank which, at that time, had not acted to realise properties held under mortgages.  He estimated that it would take approximately four to six months to complete works under the HIH agreement.  This may return Avonwood to solvency and result in all creditors being paid in full.  On his examination, a significant percentage of the Dexta houses should realise a cash surplus.  Pattison considered that Avonwood should not be placed in liquidation while houses were being completed and until he was in a position to determine the total extent (if any) of a deficiency to unsecured creditors.  As I understand his affidavit, he estimated that completion of all HIH insured homes would produce a cash surplus (including debtors and work in progress) of approximately $2.2M. 

1. Finally, Pattison sent Dexta an identical form of agreement (modified to refer to Dexta) on 7 June 2000 as part of his attempt to conclude an arrangement with Dexta similar to that reached with HIH.  Pattison’s view was that if Dexta agreed, a further cash surplus (including debtors and work in progress) of approximately $7.5M would be recovered by Avonwood upon completion of the Dexta houses.  If that were recovered, the total assets of Avonwood may exceed the total liabilities. 

1. Mandie J heard the application on 8 June 2000.  Subject to an amendment to the agreement his Honour:

(a)       ordered that Pattison have power to enter into and execute on behalf of Avonwood the HIH agreement, and the mortgages provided for in the agreement;

(b) approved, for the purposes of s 477(2B) of the Law, Pattison entering into such agreement and mortgages;

(c)       authorised Pattison to execute such instruments as necessary to carry the agreement into effect;

(d) conferred power on Pattison to carry on Avonwood’s business and the powers that a liquidator would have under s 477(1)(d)(2) (except para (m)) and (as I follow the order) s 477(3);

(e)       ordered that the costs of the application be treated as costs of the provisional liquidator in the administration; and

(f)       adjourned the hearing of the winding up proceeding to 27 October 2000.

1. On 22 June 2000, Pattison filed the Report as to Affairs submitted by a director of Avonwood.  It stated an estimated deficiency of assets of $6,039,351.38.

1. On 23 June 2000 Dexta wrote to Pattison confirming the rejection of his proposal for Avonwood to complete homes insured through Dexta.  In other words, Dexta would not enter into an agreement with Pattison.  Dexta decided that it would deal with claims directly with the house owners.  That meant that in due course Dexta might, and doubtless will, make a claim in the winding up under its right of subrogation. 

1. The HIH agreement was executed on 29 June 2000.  It provided for HIH to pay Avonwood $500,000 as working capital to enable Avonwood to resume trading to complete works under contracts with owners in relation to HIH (and FIA) insured houses.  The working capital was acknowledged to be part payment by HIH towards losses anticipated to be incurred by HIH under policies and represented the exercise by HIH of its right to make good any loss under those policies.  There were provisions concerning: accounting procedures, treatment of the working capital, receipts from owners, and payments; the resumption and conduct of trading; an indemnity by HIH in favour of Avonwood, Pattison and his employees, consultants and agents; and a range of other matters.  There was provision for HIH to contribute a further sum to pay for the completion of the works on an HIH insured house where the funds due from the owner were insufficient to cover the costs of completing the works.  For his part, Pattison had an absolute discretion to stop work on any HIH insured house if, in his opinion, Avonwood had insufficient funds to complete the works and HIH had refused a request for a further contribution.  There was also provision for Avonwood to grant HIH first registered mortgages over certain land for a value equal to the amount of the working capital.

1. Following approval of entry into the HIH agreement, Pattison engaged personnel, HIH advanced working capital, and Avonwood commenced the performance of works to complete HIH insured houses.

1. On 4 August 2000 Mandie J directed that the winding up application be advertised at least 14 days before 27 October 2000.  It was advertised on 9 October 2000.  Neither before or since then has any person sought to appear at any hearing, other than HIH, FIA and Dexta.

1. On 27 October 2000 the hearing of the winding up application was adjourned to 30 March 2001.  The adjournment was sought by Pattison and supported by HIH.  In an affidavit sworn on 26 October 2000 Pattison outlined the stage reached in completing houses under the HIH agreement.  I first note that he revised the total number of houses insured by HIH/FAI and Dexta to 235 and 651 respectively.  Among these were 174 houses in respect to which it appeared that dual insurance cover had existed for a time.  He stated that since the commencement of works under the HIH agreement, 43 houses had been completed as at 18 October 2000, a further eight certificates of occupancy were held pending final inspections and cash settlement with the owners, and a further four requests had been made for certificates of occupancy and he expected those house contracts to settle in seven days.  He referred to progress payments received, the value of unpaid invoices, and other work in progress, and estimated that the construction of all HIH insured houses should be completed by 31 March 2001.  He exhibited a summary of the financial position concerning the construction undertaken under the HIH agreement.  He also exhibited other financial information.  His opinion was that Avonwood could not pay its debts as and when they fell due in the context of claims and debts incurred prior to his appointment.  He was, however, able to pay debts incurred in performing works under the HIH agreement as and when they fell due for payment.  He was concerned that an order to wind up Avonwood would constitute a default under the standard form building contract between Avonwood and house owners and thus provide an additional ground on which an owner may terminate the contract.  Such termination would jeopardise Avonwood being paid progress claims, work in progress, and be detrimental to the interests of unsecured creditors.

1. On 3 January 2001 Pattison filed an application in which he sought orders concerning his remuneration as provisional liquidator in the period 5 May 2000 to 31 August 2000.  The orders sought were that his remuneration in respect of that period be approved in the sum of $847,807.97, that he be authorised to pay that amount to himself out of the proceeds of realisation of the assets of Avonwood, and that his costs of the application be part of his costs in the provisional liquidation.  Four affidavits were filed in support.  Dexta filed an affidavit in opposition sworn by Trevor Leonard Stinton.  Among other things, Pattison’s affidavits described his work to date.  In the first of his affidavits, sworn on 16 November 2000, he said that 58 HIH insured houses had been completed, and he estimated that, subject to the possibility of demolition and rebuilding of some houses, construction of all HIH insured houses would be completed by 30 March 2002.  In the last of his affidavits, sworn on 8 February 2001, he said that, excluding 24 houses identified for demolition, 73 HIH insured houses remained under construction by Avonwood.  He estimated that 64 would be completed in February and March, and the balance of nine by 10 May 2001. 

1. In his affidavit, Stinton stated that Dexta objected to the claim for remuneration on the grounds that:

(a)      the application was premature;

(b)it was too early to assess the commercial value to unsecured creditors of the HIH agreement and no remuneration should be allowed in respect of such work unless Pattison established such value; and

(c)no remuneration should be allowed for work in relation to an agreement with Devine Ltd as it was of no commercial value to creditors, and it placed Avonwood in breach of its obligations to Dexta under the Dexta insurance policy. 

These contentions were developed in the affidavit.  However, without prejudice to maintaining its objections, Dexta did not oppose a reasonable amount being paid as remuneration to Pattison by way of an interim payment.

1. The remuneration application came before Mandie J on 9 February 2001.  Pattison and Dexta were content for the matter to be dealt with on an interim basis.  It was ordered that the application be adjourned until the hearing of the application for approval of the provisional liquidator’s remuneration at the completion of the provisional liquidation.  However, it was also ordered that the interim payment for the sum claimed may be made forthwith to the provisional liquidator out of the proceeds of realisation of the assets of Avonwood.  The costs of the application were to be treated as part of the costs of the provisional liquidator. 

1. By the time of the adjourned hearing of the winding up application, on 30 March 2001, a significant event had occurred.  On 15 March 2001 provisional liquidators had been appointed to HIH.  That immediately threw into question whether Pattison could continue to act under the HIH agreement.  Pattison dealt with the difficulty in an affidavit sworn on 30 March 2001.  He sought an adjournment of the application to wind up until 29 June 2001, when he would seek an order to wind up.  He had continued works to a limited extent, but Avonwood currently had 74 houses under the HIH agreement (30 of which were to be completed in March 2001).  In substance, however, if Avonwood were to continue to complete all HIH houses, a further sum of approximately $800,000 was required from HIH or a reinsurer of HIH, and effective home warranty insurance in respective of existing and further works.  He required the adjournment to clarify these matters and, if possible, to complete all houses (other than 24 weathered jobs) or identify a builder who may complete construction of the remaining houses.  Mandie J adjourned the winding up proceeding to 27 April 2001. 

1. On 27 April 2001 Mandie J heard the application to wind up Avonwood.  Dexta appeared and opposed the appointment of Pattison.  In an affidavit, Dexta raised concerns as to the commercial efficacy of the HIH agreement and the matter of the Devine Deed.  He stated that an investigation of these matters was required, and that as a result of the HIH agreement and the Devine Deed, Pattison had a conflict of interest.  Pattison swore affidavits in which he disputed Dexta’s contentions, and gave information as to the current position.  Notwithstanding his requests, neither HIH nor any reinsurer had advised that they would adopt the HIH agreement, or provide further funding or insurance cover.  Avonwood had 57 houses under the HIH agreement awaiting completion, or the issue of a certificate of occupancy to enable settlement to occur.  Of those, 17 were scheduled for settlement in the next two or three weeks (after 26 April 2001) and 23 weathered jobs required consultation with the owner and the appointment of a new builder.  The balance of the houses were on hold about four to eight weeks from completion.  In the absence of financial support under the HIH agreement, and confirmation from HIH or a reinsurer that home warranty insurance continued, Avonwood could not continue construction works.  In the circumstances, on 2 April 2001 works, other than works necessary to facilitate settlement to enable owners to occupy of their houses, had been suspended.  In the absence of clarification from HIH or a reinsurer, Pattison’s opinion was that Avonwood should suspend work on all contracts, assist owners to appoint a new builder, and be wound up.  After hearing counsel, Mandie J ordered that Avonwood be wound up and that Pattison be appointed liquidator.

1. Later in the year, on 19 December 2001, Pattison’s application for the determination of his remuneration as provisional liquidator was filed.  As stated at [1] this includes the claim for $847,807.97 for the period 5 May 2000 to 31 August 2001.  Although that was the subject of the claim before Mandie J on 9 February 2001, the authorisation granted by his Honour on that day was on an interim basis and did not involve a determination that the amount claimed was fair and reasonable.  That question was stood over until completion of the provisional liquidation and is now before me for determination on the present application.

1. Pattison swore three further affidavits in support of the application.  The first affidavit was sworn on 26 October 2001, and it was served, together with the draft interlocutory process and a notice of intention to apply for remuneration, on the shareholders of Avonwood, Avonwood’s five largest creditors (which included Dexta) and the Australian Securities and Investments Commission (“ASIC”).  The only objection to the application was received from Dexta.  Subject to some comments about the terms of the draft interlocutory process, ASIC advised that it believed there was sufficient material to enable a court to determine whether the remuneration sought was fair and reasonable and, provided the actual application was in the same or a similar form, ASIC would not oppose the application.

1. The application was fixed for hearing on 28 February 2002 to suit the convenience of the parties.  Apart from the applicant, the only person to appear was Dexta, to object.  I referred to the grounds of Dexta’s objection, and generally outlined the issues, at [2] and [3]. 

The Law

1. Counsel accepted that Pattison bore an onus to establish that the remuneration claimed is fair and reasonable.[1]  The claim has been prepared on a time basis by reference to the scale of charges referred to in the order of Mandie J made on 5 May 2000.  As noted at [2], Dexta does not contest that the work claimed was performed, or any calculation of the charges, and concedes that, subject to its contentions, the charges are fair and reasonable.  Having considered the evidence, I conclude that Dexta’s approach and concession was correct and, accordingly, that subject to Dexta’s contentions, the claim is fair and reasonable.  In stating that view I do not preclude consideration of Dexta’s contentions as referred to at [3] and in the submissions of counsel.

   [1]Venetian Nominees Pty Ltd v Conlan (1998) 20 WAR 96, 102.

1. Section 473(2) does not specify criteria by reference to which the court is to determine the amount of remuneration to which a provisional liquidator is entitled. Guidance is provided by the cases, which deal with particular circumstances. Underlying the cases is the nature of the role of the provisional liquidator who stands in a fiduciary relationship with the company, in association with the powers conferred on him or her for the performance of the provisional liquidation. To justify a claim, it is axiomatic that the work in respect of which the relevant fee or expense arises is within the scope of the powers conferred on the provisional liquidator. In Re Reiter BrothersExploratory Drilling Pty Ltd [2]  Zeeman J stated that a provisional liquidator ought not be remunerated or recover expenses for doing work which “plainly” fell outside the ambit of what he was authorised to do. [3] 

   [2](1994) 12 ACLC 430. See too Re Western National Earthmoving Corporation Pty Ltd (in liq); ex parte Conlan (1998) 16 ACLC 885, 894, and the subsequent decision in that case reported at (1998) BC 9801487.

   [3]At 433 – 434.

1. Then there may be cases in which the relevant item of work done, or expense incurred, is challenged as having been unnecessary to the proper performance of the provisional liquidator’s duties.[4]  They may, for instance, be challenged as wasteful or as not being of significant advantage to the provisional liquidation.  This is not a matter of power, but of judgment exercised in the conduct of the provisional liquidation.  This is an issue on which an objecting party might rely on opinion evidence from an appropriately qualified person as to whether the work done was necessary, and the amount charged was reasonable.[5]  Indeed, in McPherson, The Law of Company Liquidation,[6] it is stated that a person who challenges the provisional liquidator’s remuneration “must provide evidence to suggest that the work was not necessary”.[7]  Before me, counsel for Dexta referred to this passage, did not submit that it was incorrect, and stated that the onus probably fell on Dexta to show that Pattison engaged in “unnecessary” work.  Counsel further conceded that Pattison was entitled to “some latitude so that mere errors of judgment in respect of matters within his power will not disentitle him to remuneration”.  This concession was correct.  As Young J observed in Burns Philp Investment Pty Ltd v Dickens (No 2),[8] the corollary of the court expecting liquidators to use their commercial judgment and not to come to the court for directions on every conceivable point:

“….must be that the court must give to liquidators a fair degree of latitude where they have incurred expense as a result of the exercise of their commercial judgment even if there is a loss to the company by so doing”.

[4]See Re Western National Earthmoving Corporation Pty Ltd, supra.

[5]ReWestern National Earthmoving Corporation Pty Ltd (in liq); ex parte Conlan (1998) 16 ACLC 885, 889, 894.

[6]LBC, 4^th ed.

[7]At 214, citing Re Western National Earthmoving Corporation Pty Ltd (in liq); ex parte Conlan (1998) 16 ACLC 885.

[8](1993) 31 NSWLR 280, 285.

Devine Deed

1. I now deal with Dexta’s contention concerning the matter of the Devine Deed. The contention is referred to at [2]. The issue raised by this contention is not whether it was within the scope of the powers conferred on Pattison as provisional liquidator to negotiate and enter into the Devine Deed. It is not disputed that such action was within those powers. The issue is whether Pattison’s entry into the Deed and refusal to release Devine from it was “unauthorised”, in the sense that it was not authorised by Dexta. The further issue is whether it was “unnecessary”, in the sense that the acts complained of were acts which Pattison should not have done in the proper exercise of his judgment as a provisional liquidator. In their submissions counsel for Dexta described the issue “as a relatively small point”. It was also said that it must involve “some” remuneration. Notwithstanding these statements, it is necessary to refer to the evidence and to analyse the issues raised in order to properly deal with Dexta’s submission. It may not be unreasonable to observe that if the point, and the amount in question, is relatively small, it has been pursued with vigour by Dexta, and the Court is required to deal with it.

1. The Devine Deed is a written agreement made between Pattison as provisional liquidator of Avonwood, and Avonwood, on the one hand, and Devine Limited (“Devine”) on the other hand.  The Deed bears the date 15 June 2000, although Devine forwarded it to Pattison, duly executed under seal, on 14 June 2000.  In the Deed, Devine is described as a builder of an address in Queensland.  I do not have evidence of when the Deed was negotiated.  It is apparent, however, that it came into existence as a result of Pattison’s efforts (described in his affidavits) to ascertain the best way to achieve the completion of houses, including searches for a possible builder or builders.  Out of his efforts came the HIH agreement, entry into which was approved by the court on 8 June 2000, and which was executed on 29 June 2000. 

1. By the Devine Deed, Avonwood granted to Devine a licence to the intellectual property rights of Avonwood in the designs (defined to mean the plans, drawings, sketches and all technical and other information and schematics including engineering formulae and data) used in, referred to in, or forming part of, building contracts between Avonwood and home owners (defined to mean the owner of the site upon which a dwelling was to be constructed by Avonwood pursuant to a contract with the home owner) for the construction of the dwelling identified in the building contract.  The Devine Deed was not a building contract.  It was a licence under which an agreed fee was payable by Devine to Avonwood for the use of certain intellectual property of Avonwood.  The fee was payable in the event that Devine completed the construction of a house which Avonwood had contracted to build.  But it was not any such house, it was only those within the limited category referred to in the Devine Deed, namely:

(a)in the case of pre-contract sales for the construction of a single storey dwelling:  $5,000,

(b)in the case of pre-contract sales for the construction of a double storey dwelling:  $7,500,

(c)in the case of pre-construction contracts (whether single or double storey): 7.5% of the contract value (being the contract value of the new contract to be entered into between Devine and the home owner or the sum of $9,000 whichever is the lesser).

1. Under cl 3 of the Deed, Devine agreed that it must enter into a new building contract with a home owner with respect to works under a contract between Avonwood and the home owner.  In other words, Devine was not to become a party to an Avonwood contract.  If Devine agreed to undertake works to complete construction of a house originally contracted to be built by Avonwood, it (Devine) had to do so under a new contract between itself and the home owner.  If the circumstances of that house were within category (a), (b) or (c) above, the applicable fee would be payable to Avonwood.  In any other case no fee was payable.  The Deed further provided that Devine was responsible, before commencing any works, for paying all insurance premiums to enable the works to be carried out for a home owner.

1. The Deed made no reference to HIH, FAI or Dexta. Hence, on its terms the Deed operated in respect of all houses regardless of the identity of the insurer.

1. In the context of the HIH agreement, and assuming the completion of all HIH (and FAI) houses pursuant to its terms, the Devine Deed could only operate in relation to Dexta insured houses.  But, even then, the Deed could only operate in relation to the houses within category (a), (b) or (c).  In such circumstances, the effect of the Deed was to provide Avonwood with a potential return in respect of the use of its intellectual property.  That return would enure for the benefit of creditors in Avonwood’s insolvent estate. 

1. It was somewhat unclear to me what was comprehended by the expressions "pre-contract sale” and “pre-construction contract”.  Clarity is provided by the following.  In a letter to Stinton dated 9 November 2000, Pattison stated that the Deed “is limited to pre-contract sales (where no contracts have been entered in as at the date of my appointment) and also pre-construction contracts (where no works had been conducted on site as of the date of my appointment)”.  In response to a question from me, Pattison’s counsel said that the former category of “pre-contract sale” referred to the case of a person who, for instance, having inspected a display home, had expressed interest in entering into a contract with Avonwood, and paid a fee of some $200 or so, with a formal contract to be entered into subsequently.  Further, in his letter Pattison stated that there was no agreement with Devine “to restrict or to pay a license fee to Avonwood for attending to” works on behalf of owners of homes insured through Dexta where works have commenced on site.  It is my understanding that counsel for Dexta did not challenge these statements as to the true construction or intended operation of the Devine Deed. 

1. It is pertinent to note that no affidavit was filed by an officer of Devine.  It is also pertinent to note that I have no evidence as to whether any, and if so what number of, Devine insured houses were within category (a), (b) or (c) at the date of Pattison’s appointment or entry into the Devine Deed.  It seems on the evidence to be reasonable to assume that the 651 Dexta houses included some that were within these categories.  It is also reasonable to assume, from the evidence, that there were numbers of other houses insured by Dexta in relation to which construction had commenced on site.  However, in the absence of specific evidence I can not make a finding as to the number in any category.

1. This is sufficient reference to the Deed.  In addition to being criticised for entering into the Deed, Pattison is criticised for not agreeing to Dexta’s demand that he resile from it.  The facts on that aspect lie in the events which occurred subsequent to the agreement.

1. On 17 June 2000 Devine, in the name of its subsidiary Pioneer Homes Australia Pty Ltd (“Pioneer”), published a public notice in The Herald Sun.  The notice was addressed “to new home customers of Avonwood” and advised that Pattison had “entered into a formal Deed with Pioneer… to assist the customers of Avonwood Homes in completing their building contracts”.  The notice advised that Pioneer had set up a special Help-line (the number of which was stated) “for those customers of Avonwood Homes who have paid deposits to Avonwood and are still waiting for the construction of their homes to commence”, and that Pioneer would hold meetings “to facilitate the process of completing your building contracts”. 

1. Then, on 22 June 2000, Pioneer sent a letter to Stinton, at Dexta, in which Pioneer formally expressed interest in negotiating an arrangement with Dexta to complete the Avonwood contracts insured by Dexta.  Among other things, the letter stated that:

(a)Devine had tried to negotiate an arrangement with Pattison, but had not been successful in reaching a suitable arrangement;

(b)Devine had entered into a Deed with Pattison on 14 June 2000, which had been “formally revoked today at 5.53pm, due to the ineffective nature of the Deed, in conjunction with, other correspondence from Pattisons to the Customers and Creditors of Avonwood Homes”; and

(c)Pioneer was interested in completing all of the pre-construction contracts, and would also like to discuss completing those contracts currently under construction which have not progressed beyond completion of the slab.  Pioneer was prepared to contract on the same terms and conditions for the balance of the original contract price, which would minimise any claims on Dexta.

1. A few points may be made about this letter.  First, it is consistent with Pattison’s evidence that he spoke to Devine (Pioneer) in relation to it being a potential builder.  Secondly, it is consistent with the fact of the HIH agreement, Dexta’s refusal to commit to such an agreement, preferring instead to deal with home owners itself, and with the fact that negotiations with Pattison did not result in an agreement to complete Dexta insured houses.  Thirdly, there was no evidence of the act of revocation of the Deed.  (At all times Pattison maintained that there was an agreement, that is, that the agreement subsisted).  It may be that Devine preferred to withdraw from the Deed once it became apparent that Pattison could not also grant or bring about a building contract.  In that context the use of the word “ineffective” may be understandable.  But, whatever the reason, from Devine’s point of view, in the circumstances it might have regarded the Devine Deed as a fetter on its freedom to deal with Dexta and earn as much profit as it may.  Fourthly, the letter makes clear that Pioneer’s interests lay in completing the pre-construction contracts and those where work had not advanced beyond the floor slab. While the former were not every Dexta insured house, the Devine Deed did not cover cases where work had commenced.  Hence, it only covered one of the two types of case that Pioneer expressed interest in.

1. As referred to at [17], on 23 June 2000 Dexta wrote to Pattison and confirmed its rejection of his proposal that Avonwood complete Dexta houses under an HIH type agreement.

1. As far as the relevant correspondence is concerned there is then a lull until September.  I note that in his affidavit sworn on 27 December 2000, Pattison stated that he attempted unsuccessfully to reach an agreement with Dexta in August and September 2000 in terms of the HIH agreement.  In any event, it was not until 8 September 2000 that Dexta wrote to Pattison concerning Pioneer.  There was then a series of correspondence between Dexta and Pattison and their solicitors up to 9 November 2000.  It was in this context that, in his affidavit sworn on 8 February 2001, in relation to Pattison’s application for approval of remuneration, Stinton referred to Pioneer’s above letter dated 22 June 2000, and stated that Dexta was desirous of entering into an arrangement with Pioneer in the terms of that letter, “as such an arrangement would have resulted in fewer indemnity payments being made by SMIL to deposit claimants.  The less paid as indemnity by SMIL would consequently reduce the amount that SMIL will ultimately claim against Avonwood Homes in the winding up”.  Stinton stated that in Dexta’s view the Devine Deed (assuming it remained in force) “would place Avonwood Homes in breach of it’s obligations under clause 7 of Part B of the Dexta Policy, and Mr Pattison in breach … of his duties as provisional liquidator”.  Stinton then stated that Devine and Dexta had asked Pattison not to seek payment of any fee under the Devine Deed should Devine enter into a contract with a building owner covered by a Dexta policy pursuant to an arrangement with Dexta in terms of the Pioneer proposal.  He stated that Pattison would not agree, and maintained that he had a binding agreement with Devine and would not release Devine from it.  These things were said partly by way of a summary of the correspondence which was then produced.  I will return to the correspondence and the insurance policy.  In the meantime, Stinton concluded his affidavit with the statement that:

“By reason of Mr Pattison’s alleged enforceable agreement with Devine Limited and his refusal to withdraw that claim, Dexta (on behalf of SMIL) and Pioneer Homes did not enter into an arrangement in relation to deposit claimants.  As a consequence, SMIL has paid out a greater sum to deposit claimants”.

1. I note that in his affidavit sworn on 26 April 2001 in relation to Pattison’s application to be appointed liquidator of Avonwood, Stinton referred to his earlier affidavit and to a letter from Dexta’s solicitor, dated 24 April 2001, in which Dexta’s concerns about the HIH agreement and the Devine Deed were raised.  For the purpose of their submissions counsel for Dexta took it as sufficient to refer merely to Stinton’s affidavit sworn on 8 February 2001 as setting out Dexta’s complaint in respect of the Devine Deed. 

1. The fundamental point in Dexta’s submission is that by reason of cl 7(a) and (c) in Part B of the policy of insurance, Pattison should not have entered into the Devine Deed without first obtaining the authority of Dexta to do so, and should have released Devine from it when Dexta requested it to do so.  It was submitted that the consequence of his actions was that Avonwood breached cl 7 and he breached his duty as provisional liquidator.

1. It is not necessary to refer at length to the terms of the policy. In summary, in Part A, it was provided that the insurer would indemnify the building owner in respect of loss or damage which results from domestic building work which is defective, which expression included (among other things) a breach of any of the warranties implied by s 8 of the Domestic Building Contracts Act1995 (Vic), non-completion of the work due to (among other things) the builder becoming insolvent or having a provisional liquidator appointed, and the loss of deposit or any progress payment as a result of (among other things) the builder becoming insolvent or subject to provisional liquidation.  It provided that the insurer may, at its option, meet its obligations under the policy by arranging for another builder to satisfactorily complete the work in accordance with the contract. 

1. Part B of the policy was headed “The Builder’s Responsibility”.  There were provisions which dealt with the insurer’s rights of subrogation.  Clause 3 provided that upon the insurer accepting liability in respect of a claim under the policy, the insurer is subrogated to any rights of the building owner against any party, including the builder, whether or not the building owner will be or has been fully or partly indemnified or whether or not any payment has been made by the insurer.  That is sufficient reference to the provisions concerning subrogation. 

1. Clause 7 appears in the same section of the policy.  So far as it is relevant, it provides that:

“…the Builder must:

(a)take all reasonable precautions to avoid or minimise additional loss or damage;

(b)…

(c)not undertake or cause to be undertaken any rectification works without the insurer’s prior written approval;”.

I have only set out (a) and (c), as counsel for Dexta expressly stated that they were the only provisions relied on.

1. It is now appropriate to return to the correspondence that took place between September and November 2000.

1. On 8 September 2000 Stinton wrote to Pattison and outlined the basic complaint.  The letter commenced by referring “to the many homebuyers who have signed contracts with Avonwood, hold Dexta certificates and for whom work on site did not start”.  It stated that “it is in the interest of the homebuyer, the insurer, and the creditors that these homes be constructed at minimal cost”.  The approach of Pioneer to construct “most of these homes for the unpaid balance of the Avonwood Contract Price” was referred to.  Then Pattison’s agreement with Devine was referred to, under which a fee would be payable to Avonwood if Pioneer entered into a building contract “with these homebuyers”.  It was stated that Pioneer said it did not reach a binding contractual commitment with Avonwood, but that Pattison disputed that view and insisted on the fee for any such contract.  The letter proceeded:

“Pioneer has now informed Dexta that it will not proceed with its offer to homebuyers whilst you, albeit wrongfully in Pioneer’s view, maintain that Devine has a binding commitment to pay a fee to you.

If Pioneer proceeded with its offer, the Insurer would be subject to substantially fewer claims from homebuyers in this category, because they would not have suffered a loss of deposit.

It is clearly in the interest of homebuyers and the Insurer to minimise the cost of constructing or completing homes.  Dexta is concerned that arrangements with builders such as Devine purportedly made by you have the effect of increasing this cost.

In these circumstances, the Insurer’s losses will be greater, thereby increasing the amount owed to proved creditors and reducing potential distributions to unsecured creditors.

Your conduct also places Avonwood in clear breach of its obligation under the policy to avoid or minimise additional loss and damage.  It is also Avonwood’s responsibility to not admit exclude or limit its rights against any person without the Insurer’s prior written approval.  The Insurer is entitled to Avonwood’s rights in this regard.  These responsibilities are set out in Clause 7 of Part B of the policy.

In our view, where the Insurer indemnifies homebuyers for deposit monies in respect of claims, this is a loss caused by your wrongful conduct, and we hold you and Avonwood responsible.  The Insurer is entitled to claim these monies and related claim handling costs as an expense in the winding up.  This will unfortunately have the effect of reducing the return to other creditors unless you are required to personally foot the bill, which in the circumstances is a distinct possibility.

I request that you formally advise Dexta and Devine by 5pm on Monday 11 September 2000 that you irrevocably withdraw your claim for fees and confirm that Devine has no binding commitment to Avonwood. 

I am willing to assist in discussions between you and Devine to resolve the situation but advise that unless resolution is achieved by then, the Insurer will process the remaining claims and will have no alternative but to have recourse to its rights”.

1. Pattison replied to Stinton with two letters later that day.  In the first letter, he confirmed an agreement with Devine.  He said the agreement was binding and that he was entitled to exercise his rights under it.  In the second letter, he confirmed comments that Avonwood has been prepared to assist in completion of homes with Avonwood designs, and he was prepared to reopen discussions to consider the agreement.  He invited Stinton to contact him.

1. It seems that the next stage was that Pattison’s solicitors, Madgwicks, wrote to Dexta on 13 September 2000.  The letter requested the information provided by Devine as to why it considered it had not reached a binding contractual commitment.  It ascribed to Devine a statement to “our client” that the arrangement “is of minimal commercial benefit to it and therefore will not proceed to complete homes for home owners”.  That, it was said, was a matter for Devine.  The letter then became somewhat tendentious.  There was a statement that Pattison’s main objective had been to ensure completion of all homes as quickly as possible and at minimal cost, and to maximise the return to all unsecured creditors.  Thus it was that the arrangement with Devine was entered into.  It is unnecessary to set out all that was said.  The letter concluded with the statement that Pattison was willing to discuss a commercial arrangement with Dexta to have homes completed as soon as possible.

1. On 15 September 2000 Dexta’s solicitors, MacPherson + Kelley, wrote to Madgwicks.  I do not refer to all that was said.  It matched the tendention in Madgwicks’ letter.  In so far as it is  relevant for present purposes, the letter stated that Pattison’s -:

“…stance has frustrated Pioneer’s offer to the obvious detriment of homebuyers, the Insurer and the other creditors of Avonwood.  The Insurer now has no alternative but to finalise the processing of remaining claims which will involve numerous payments for loss of deposit to homebuyers, which it would not be liable to pay but for Mr Pattison’s stance.  This will dilute the potential return to creditors.  Take notice that these will be processed immediately after 4pm Tuesday 19 September 2000.

Dexta estimates the losses suffered by the Insurer as a consequence of Mr Pattison’s conduct to exceed $1M.

Dexta considers that the Provisional Liquidator’s conduct in making an arrangement with builders that, by its very nature, increases the cost of completion of homes, is also a breach of the duty of good faith owed to the Insurer.  We note that our clients observations on Avonwood’s obligations under the policy in its letter of 8 September have not been commented upon.  The Provisional Liquidator ‘s stance in relation to the alleged agreement with Devine, which has no tenable legal or commercial basis, is also a breach of that duty.

…

We note your comments about the Provisional Liquidator’s main objective in completing homes as quickly as possible with minimal cost to maximise returns to unsecured creditors.  How is his insistence on maintaining a claim to a fee that he acknowledges will not be paid by Devine in circumstances where the Insurer will suffer a loss of at least $1m as a direct consequence of the Provisional Liquidator’s actions consistent with that objective? And how does this circumstance benefit unsecured creditors? 

…

The Provisional Liquidator’s conduct in this matter and his comments made through you also raise the question of the appropriateness of his potential appointment as Liquidator of the company.

Clearly there will be no retraction by Dexta.

This matter has been referred to us for the commencement of legal proceedings against Avonwood and Mr Pattison.”

1. Madgwicks responded by letter on 18 September 2000.  Among other things, there was reference to conducting the administration of Avonwood for the benefit of all creditors, not merely Dexta.  It is unnecessary to refer to all that was said.  By this stage each party was contending that the other had taken an uncommercial approach to the matter.  The letter concluded with an invitation for a meeting to seek to reach a commercial resolution and see homes completed. 

1. On 19 September 2000 Pattison wrote to Dexta, and Madgwicks wrote to MacPherson + Kelley.  Pattison’s letter indicates that he and Stinton had spoken and confirmed that Pattison would be prepared to release Devine in consideration of a one off up-front payment.  That would mitigate possible insurance claims and hence benefit Dexta.  It would also benefit home owners in having their homes completed, on the assumption that Devine would complete the homes at the price in the contract with Avonwood or, alternatively, within the limits of Dexta’s insurance cover.  Pattison offered to meet Stinton and a representative of Devine to consider a commercial solution.  In their letter, Madgwicks advised MacPherson & Kelley that Pattison would accept a one off up-front payment of $500,000 from Dexta in consideration for releasing Devine from its obligations under the Devine Deed.  That was said to be a considerable reduction of the amount payable if Devine chose to complete the construction of all homes subject to insurance with Dexta.  It would also reduce Dexta’s losses.

1. It was not until 28 September 2000 that Dexta’s solicitors sent a reply.  Dexta’s solicitors said that the insurer had lost an estimated $1M as a result of Pattison’s conduct in “preventing” Pioneer from proceeding with its offer to complete the non-start homes for the unpaid balance of the Avonwood contract price.  In addition to Pattison’s entry into the Devine Deed being a breach of the insurance policy, his “extraordinary demand” for $500,000 was made in light of Avonwood’s duty to avoid or minimise additional loss.  There was no doubt Avonwood would be found liable for the Insurer’s losses as an expense in the winding up resulting from Pattison’s conduct, and unless Pattison was personally liable, the creditors at large will suffer.  Their client had spoken to Pattison on 19 September but Pattison “would not listen to reason”, and the insurer is now processing the remaining claims.  The letter concluded with the statement that “this matter will need to become the subject of legal proceedings and require an examination of Mr Pattison’s conduct”. 

1. Then there is a gap until 14 October 2000, when Pioneer wrote to Dexta stating that:

“It is with regret that I formally advise you that following extensive efforts, Pioneer Homes Australia Pty Ltd has no alternative but to withdraw its interests in any further negotiations for any remaining Avonwood Homes contracts.

Unfortunately, while the threat of litigation exists with the Provisional Liquidator Mr Paul Pattison, we are unable to see any viable option but to bring this matter to an end”.

1. On 8 November 2000 Stinton wrote to Pattison with reference to homes insured through Dexta which were brought to slab stage by Avonwood and which require completion.  The letter stated that Devine made an offer to complete “some” of this work and asked whether Pattison had any claim or other objection against Devine undertaking this work for homebuyers insured through Dexta, and, if so, the nature and basis of the claim or objection.  The letter concluded with the statement that:

“It would be desirable if further disputation concerning Devine (such as that being experienced on the non-started homes) could be avoided in the interests of assisting homebuyers to complete homes”.

1. Pattison responded on 9 November 2000 by identifying the cases covered by the Deed.  As these were cases where no contract had been entered into and no work had commenced on site as at the date of his appointment, there was no agreement with Devine where works had commenced on site.  That is, there was no agreement in the case about which Stinton enquired. 

1. That completes the relevant correspondence between the parties.  The issue was next raised in Stinton’s affidavit sworn on 8 February 2001.

1. Dexta’s contention concerning the Devine Deed attacks Pattison’s work on two grounds.  The first is the work involved in negotiating and entering into the Deed.  The second is the work involved in resisting Dexta’s demand that Pattison resile from the Deed.  Counsel for Dexta submitted that when Pattison acted in those respects he caused Avonwood to be in breach of cl 7(a) and (c) of the insurance policy, which meant that Pattison committed a breach of his duty as provisional liquidator, as referred to earlier.  The important point is that Dexta’s submission concerning the Devine Deed is founded on that breach of the insurance policy.  It is not founded on any lack of power otherwise held by Pattison as provisional liquidator to enter into the Devine Deed. 

1. Counsel for Dexta submitted that even if, for some reason, Pattison had not been aware of the terms and requirements of cl 7(a) and (c) when he negotiated the Deed, Stinton’s letter dated 8 September 2000 was sufficient to bring them to his attention.    He was then on notice of Avonwood’s obligations to Dexta, and of a breach of those obligations, but he refused to release Devine from the Deed, and thus enable Devine to deal with Dexta free of any obligation under the Deed. 

1. Counsel for Pattison did not submit that Pattison had not been aware of the provisions of the policy at any relevant time.  That is hardly surprising, as knowledge of the existence of such insurance, and the terms thereof, was fundamental to the carrying on of Avonwood’s business, and a proper performance of the functions of a provisional liquidator.  I assume that Pattison had such knowledge, but I cannot make a finding as to the point in time at which Pattison became aware of the policy and its terms.  It seems reasonable to conclude that, at the least, as counsel for Dexta submitted, Pattison had sufficient awareness of the policy as a result of Stinton’s letter dated 8 September 2000. 

1. Then there are the claims in Pioneer’s letter to Stinton, dated 22 June 2000 (and sent by facsimile that day), that Devine had been unsuccessful in negotiating a suitable arrangement with Pattison, and that Devine had revoked the Deed. Stinton did not refer to these claims in his letter to Pattison dated 23 June 2000. He raised the matter in his letter to Pattison dated 8 September 2000,[9] and it was referred to in subsequent correspondence. Pattison was at all times consistent in denying the claims and in maintaining that the Deed remained on foot. It is to be noted that no affidavit was filed by an officer of Devine or Pioneer regarding the entry into, and status of, the Devine Deed. Nor did the evidence include any communication to Pattison from Devine or Pioneer in which the claims were made. In these circumstances, it is apparent that the “claims” are founded on the letter of Pioneer, a third party, who has not given evidence in substantiation. In addition to amounting to hearsay in the way Pioneer’s letter to Stinton was put in evidence, the claims were denied by Pattison and he has sworn that the parties made the agreement. He was not cross examined. In these circumstances it is not surprising, but should be recorded, that counsel for Dexta did not seek to support the Pioneer claims. It was not submitted that no agreement had been made, or that Devine had revoked the Devine Deed.

   [9]See [52]

1. Then, it must be emphasised, Dexta’s submission is not that the negotiation and entry into the Devine Deed, per se, was outside Pattison’s power as provisional liquidator.  It is clear that it was within his power to negotiate and enter into the Deed.  Any fee received pursuant to it would have enured for the benefit of Avonwood’s creditors.  Dexta’s submission accepts that as the case, but, concentrating on cl 7(a) and (c) in the insurance contract between itself and Avonwood, Dexta submits that Pattison’s work in the two respects mentioned above was work which no reasonable provisional liquidator would have undertaken in the circumstances.  That is because they constituted a breach of the policy and had caused, and will cause, Dexta to suffer loss which it will claim in the liquidation. 

1. What was it that counsel for Dexta submitted constituted a breach of cl 7(a) and (c)?  In Dexta’s written submission it was stated that by “endeavouring to arrange completion or rectification works in disregard of Dexta’s wishes, Mr Pattison caused Avonwood to be in breach of clause B(7)”.  The written submission then stated that Pattison had never been empowered to cause Avonwood to breach cl 7 and concluded that:

“Therefore, the whole of his time and trouble associated with attempting to arrange completion or rectification works in respect of Dexta insured jobs has been both unauthorised and wasted, and Mr Pattison should be denied remuneration for that time and trouble.”

1. Dexta’s oral submissions included similar references to the present issue being about Pattison endeavouring to arrange for the carrying out of works.  For instance, at one stage it was said by counsel that if I took the view that cl 7 prevented Avonwood “from going about rectification work without Dexta’s approval, then Dexta’s approval was a necessary precondition to any dealings with Devine”.  It was then said that Pattison’s “purpose” in negotiating with Devine “was that Dexta houses would be worked on”.  A little later, in explaining why para (c) of cl 7 could be relied on, counsel for Dexta said that it was relevant because Pattison "was causing rectification works to be undertaken by Devine”.  Some time later, counsel referred to Pattison having negotiations with Devine to build houses insured through Dexta, which put him in breach of cl 7.

1. It seemed that these statements were made in an attempt to establish a breach of cl 7(c).  Clause 7(c) provided that Avonwood not undertake or cause to be undertaken any rectification works without the insurer’s prior written approval.  When regard is had to the nature and terms of the Devine Deed it is immediately apparent that by entering into it Pattison (or Avonwood) was not acting in breach of cl 7(c).  The Devine Deed did not provide for, let alone require, Devine (or Avonwood) to carry out “any rectification works”.   Further, no works at all were “caused to be undertaken” by Devine that fell within the defined types of work to which the Devine Deed applied.  Quite simply, the attempt by Dexta to invoke para (c) is misconceived.  That is the case both in respect of the negotiation of the Deed, and in resisting Dexta’s demand to resile from it.

1. Dexta’s argument in relation to cl 7(a) was outlined in Stinton’s affidavit sworn on 8 February 2001.[10]  The argument was developed somewhat in the oral submissions.  It commenced with the proposition that the Deed itself, by its very terms and without more, constituted, without authority from Dexta to enter into it, a breach of cl 7(a).  Then, Pattison’s refusal to release Devine from the Deed constituted a further breach of cl 7(a).  The result of that breach was that Dexta and Pioneer did not enter into an arrangement in relation to “deposit claimants “ (that expression was presumably intended to refer to persons whose contracts fell within a defined category in the Devine Deed) and, as a consequence, SMIL had paid out a greater sum to such claimants.[11]

   [10]See [45]

   [11]See [45]

1. I do not accept that the acts of negotiating and entering into the Devine Deed constituted, ipso facto, as counsel submitted, a breach by Avonwood of cl 7(a).  It is true that, assuming Avonwood completed the HIH/FAI houses under the HIH agreement, any houses Devine (or Pioneer) worked on in the future would be Dexta insured houses.  But it does not follow that the mere entry into the Devine Deed constituted a breach by Avonwood of the requirement to take all reasonable precautions to avoid or minimise additional loss or damage.  One is addressing here an unspecified number of cases of houses where construction had not commenced, and that were then within a category defined in the Devine Deed.  Moreover, the issue is to be considered without any evidence as to what has happened in the case of any particular contract within those categories.  Dexta has not presented any evidence of the latter kind, or provided any claim to Pattison under the policy in relation to any particular house contract.  Nor has it commenced the threatened legal proceedings.  The matter must therefore be considered at the time the Deed was entered into.  At that time Pattison was seeking to have Dexta enter into a similar agreement to the HIH agreement.  That agreement contemplated Avonwood being the builder.  If Dexta had agreed to proceed in that way the Devine Deed would have been irrelevant, as Avonwood would have continued as the builder.  However, Dexta rejected Avonwood’s proposal for Avonwood to complete homes insured through Dexta and it wrote confirming that rejection on 23 June 2000.  I infer that the refusal occurred subsequent to entry into the Devine Deed. 

1. It also seems clear that the negotiation of the Devine Deed was but one aspect of a great deal of work undertaken by Pattison in a short period of time to seek to make the best of the situation for the creditors generally.  In this context, the Deed is seen as an attempt which might come to produce some funds for the benefit of creditors generally.  It was within Pattinson’s power as provisional liquidator to negotiate and enter into the Deed.  In my view, it was reasonable for him to do so.

1. It was observed by counsel for Pattison that a significant omission in Dexta’s case was the lack of any evidence of an opinion nature from an experienced liquidator as to the reasonableness or appropriateness of Pattison’s actions in relation to the Devine Deed.  The answer to this point was that Dexta’s opposition rested on a finding of a breach of cl 7, on which expert evidence was not admissible.  That is correct.  Nevertheless, I observe that Dexta did not, in relation to any aspect of the case whatsoever (including the HIH agreement), rely on the evidence of an expert as to the proper practice of a provisional liquidator in the circumstances.

1. Recognising the difficulty in accepting the contention that mere entry into the Deed amounted, ipso facto, to a breach of cl 7(a), counsel said that “you have to factor into that the fact that it was known generally that Dexta was looking for people to finish homes", and that “that was the environment in which we were working, there were ads going into the paper about it”.  These were somewhat loose assertions both in their terms and the insufficiency of a proper evidentiary base.  They also glossed over the possibility that Dexta might have agreed to Avonwood building or completing Dexta insured houses. Certainly Pattison was inquiring as to builders, among other things.

1. Counsel for Dexta were careful to state that their present opposition was not about a claim for losses which Dexta might come to lodge in the liquidation, or about a claim which Dexta might come to make against  Pattison personally for losses sustained as a result of his actions.  As I have observed, save for generalised statements of losses in the order of $1M, and references to the processing of claims, Dexta refrained, clearly deliberately, from placing before me any particular or specific evidence of loss sustained as a result of Pattison’s impugned actions.  Counsel observed, correctly,  that the present issue is one of determination of the fair and reasonable remuneration of Pattison, and submitted that in respect of the two areas of work under attack, remuneration should be denied as Pattison should not have undertaken the relevant work.  A consequence of the way in which Dexta has conducted its opposition, in particular the omission of evidence substantiating Stinton’s statements in his affidavit sworn on 8 February 2001 as to Dexta and Pioneer not entering into an arrangement in relation to deposit payments, and SMIL paying out “a greater sum to deposit claimants”, is that the evidence of the result of Pattison’s failure to resile from the Deed and of the consequential loss sustained, is incomplete.  The absence of evidence from Dexta, means that, there has not been, and could not be, a proper consideration of the question of why Pioneer did not make an agreement with Dexta, and why SMIL paid deposit claimants “greater sums”.  I could not properly, and do not, make any finding in relation to those matters.  To make it clear, I make no finding as to whether the impugned acts of Pattison have caused Dexta (or SMIL) to suffer any loss that would not have been suffered in any event.  If there ever comes to be an inquiry on that aspect an issue might arise as to whether Dexta might, with reasonable endeavour, have engaged a builder other than Devine (or Pioneer) on terms at least as favourable as those suggested by Pioneer in June 2000.  Similarly, an issue might arise as to whether, in fact, Dexta (or Pioneer) would have completed works within the original contract price as suggested in June 2000.  The evidence before me did not address those matters. 

1. The second aspect of Pattison’s conduct which is called into question is the point at which he refused to resile from the Deed.  This concerns the period commencing with Stinton’s letter dated 8 September 2000.  It is regrettable that the correspondence was infected with what I find (on the materials before me) to be a false issue regarding the fact of an agreement between Avonwood and Devine.  The allegation may have served to sour the situation and make reasonable discussion more difficult.  Nevertheless, Stinton’s point in relation to the effect of the Devine Deed on Pioneer, and the possibility of Dexta’s loss being greater, called for a response sensitive to the obligation on Avonwood under cl 7(a) of the policy.  The issue then (in September) was not whether it had been appropriate to enter into the Devine Deed, but whether, in light of the circumstances then prevailing, cl 7(a) required some appropriate change to, or abandonment of, the Devine Deed. 

1. It was not a sufficient answer to state, as was the fact, that the Devine Deed stood to benefit all creditors.  Clause 7(a) was a continuing obligation on Avonwood, and all creditors stood to benefit by its observance.  It was in the interest of creditors generally, including Dexta, that claims on Dexta by home owners be kept to a minimum. 

1. The evidence indicates that Pattison fought rather too hard, perhaps to the point of obduracy, to maintain Avonwood’s rights under the Deed.  I do not overlook the offer to take a single up front payment of $500,000, but an offer to reduce the fees specified in the Devine Deed may have been considered more appropriate, and stood a greater chance of success.

1. On this aspect, the issue is not whether the refusal to resile from the Deed caused Dexta to suffer loss.  As put by Dexta, the issue is whether Pattison’s actions constituted a failure by Avonwood to comply with the requirement in cl 7(a) to take all reasonable precautions to avoid or minimise additional loss or damage (as defined in the policy), and a failure by Patterson to act as he should have in the circumstances.  I am concerned with the latter aspect.  That is, whether Pattison failed to act as a reasonable provisional liquidator would have acted in the circumstances.

1. Whether Pattison failed to act in that way requires consideration of whether he, or Avonwood, took "all reasonable precautions" within the meaning of cl 7(a).  This must be assessed having regard to all the relevant circumstances.  The overall context was a difficult and complex provisional liquidation.  The Devine Deed was properly entered into.  There was then, in a relatively short period, communication regarding the issue of the Deed.  Views were exchanged and Pattison made an offer, but Dexta insisted that Pattison withdraw from the Deed, which Pattison refused to do. 

1. I am of the view that Pattison’s refusal to meet Dexta’s request, given that he had failed to reach an accommodation with Dexta and Devine (or Pioneer) on the issue, constituted a failure by him to act as a reasonable provisional liquidator should have in the circumstances in light of cl 7(a) of the policy.  Accordingly, there should be an amount deducted from his claim to reflect that conclusion.  It does not follow from this conclusion that every item of work done by Pattison since 8 September 2000, which is the relevant commencement date, relating to the matter of resiling from the Deed is to be disallowed.  The question of which item to disallow, and the amount to be disallowed, can only be determined when there is a better identification of the items of work concerned.  The amount to be disallowed may turn out to be relatively small, and if I could I would now fix the amount to be deducted, but the evidence does not allow me to do so.  It will be necessary for Pattison to consider the issue and file an affidavit identifying the work done in connection with his refusal to resile from the Deed, and the charges incurred as a result, in the period commencing 8 September 2000.

1. I add for the sake of clarity that the conclusion I have reached does not in any `way constitute a finding that any additional loss or damage has been suffered by a home owner or by Dexta. 

HIH Agreement

1. Dexta's opposition to Pattison receiving remuneration for his work in negotiating and implementing the HIH agreement is based on there never having been "any commercial justification" for the agreement.  It was submitted that either Patterson should never have exercised the power to enter into the agreement or, alternatively, assuming it had been a reasonable exercise of judgment to enter into the agreement in the first instance, he should have withdrawn from it as circumstances established that it was no longer of commercial benefit to Avonwood and its creditors.  A reasonable provisional liquidator would not have acted as Pattison did in these respects.  In effect, it was said, he had chosen to act as a builder and not as a provisional liquidator.  As a provisional liquidator he should have acted in a more conservative manner and directed his attention to protecting and preserving such assets and rights as may have existed.  Hence, his work had been unnecessary.

1. As stated earlier, Dexta submitted that Pattison should be denied any remuneration in respect of negotiating and implementing the HIH agreement.  That is, he should be denied entitlement to any remuneration at all for his endeavours in relation to obtaining the agreement and acting under it.  That is because no provisional liquidator, in the exercise of a commercial judgment in the circumstances, would have negotiated and implemented the HIH agreement. 

1. I have mentioned at [3] that, as presented, Pattison's claim does not isolate the relevant items of work.  That is not a criticism of Pattison, in the sense of being a point against him on this application.  However, the consequence is that counsel for Dexta was not able to point to particular items and submit that they should not be allowed.  For that and other reasons it was said at times that it might be appropriate to require Pattison to provide additional explanation. 

1. It was submitted by reference to parts of the evidence[12] that approximately one half of Patterson's present claim would be accounted for by the HIH matter, and that to this extent, his claim should be disallowed.

   [12]Exhibit PAP 13 to Pattison's affidavit sworn 25 February 2002

1. It was submitted, and I accept as correct, the concession of Pattison's counsel that Pattison’s estimate that approximately 10 per cent of his remuneration related to the HIH agreement was an understatement, and that the proportion "must have been more".[13]  But how much more, and whether it equates to one half, is guess work on the evidence.  I could not resolve the matter in the way suggested by counsel for Dexta.  That would be arbitrary. 

   [13]See the estimate in Pattison's affidavit sworn 8 February 2001, para 26.

1. Then, at another point, it was submitted that Pattison's remuneration should be limited by, or linked to, the amount of the benefit realised under the HIH agreement, but allowing for the fact that the collapse of HIH was neither Pattison's fault nor foreseeable by him.  In other words, in respect of the HIH work, Pattison's basis of remuneration should be changed to a sort of performance based method of calculation.  It was said that this would be an appropriate basis on which to remunerate Pattison, given that his work was unnecessary.  The benefit received under the agreement was only $94,043.41, transferred from the HIH account as surpluses in respect of houses completed, and $33,942.65, paid by HIH as an administration fee, a total of $127,986.06.  It was not said what allowance might be made for the unforeseen collapse of HIH, let alone how it might be calculated, or what any such allowance might represent.

1. I referred earlier to Dexta's alternative submission that Pattison should have withdrawn from the HIH agreement.  Counsel did not submit when that time was reached.  He said that Pattison had not made sufficient information available to enable an identification of the time by which he should have ceased acting under the agreement.  The strength, and perhaps merit, of this point is tempered by the fact that counsel elected not to cross-examine Pattison and to proceed with the hearing of the application without any threshold submission for an adjournment with a direction that Pattison file supplementary materials.  Nor was it the case that counsel for Dexta made no submission at all.  Counsel for Dexta addressed a detailed submission, based on the evidence, to establish that the HIH agreement was an uncommercial transaction which should never have been entered into, and from which, with reasonable prudence, Pattison should have withdrawn in a timely way.

1. It is convenient now to refer to the evidence relied on by counsel for Dexta to establish that the HIH agreement was, or became, uncommercial.  It commenced with exhibit PAP5 to Pattison's affidavit sworn 26 October 2000.  This contained Pattison's summary of the going concern and financial position of Avonwood as at 5 May 2000 (the date of Pattison's appointment).  There was a schedule of assets and liabilities with notes on debtors, work in progress, contingent assets and estimated profits on pre-construction jobs which separately identified amounts for HIH and Dexta. 

1. Exhibit PAP4 to Pattison's affidavit sworn on 7 June 2000 contained estimates of surplus or loss in respect of each house, and these estimates appeared to be the source of the estimated cash surplus of $1,912,237 for HIH contracts in exhibit PAP5.  It is unnecessary to set out all the figures.  The burden of counsel’s submission is that they showed the HIH house component to be a zero or negative asset and hence, an insufficient basis for Pattison's judgment to seek to complete all houses, as distinct from only those which might be expected to produce a surplus, or to proceed in a manner other than by way of the HIH agreement. 

1. The submission then noted Pattison's evidence in his various affidavits as to the number of HIH houses completed.  The submission paused to note that at about 15 March 2001, when HIH went into provisional liquidation, 133 houses had been completed, but under the HIH agreement Pattison had only received the sum of $127,986.06 referred to earlier.  (The number 133 may not be correct; regarding the affidavits overall it would seem that some approximation should be allowed – subject to that, the actual number may have been 138 or even a few more.)  Counsel then contrasted this return with the figure of $796,871 referred to in exhibit PAP13 to Pattison's affidavit sworn on 25 February 2002.  This amount was one of five items claimed by Pattison from the provisional liquidators of HIH.  The particular item is described as "Estimated provisional liquidators cost to HIH to 27/04/01".  Counsel sought to equate the figure with the amount now being claimed as remuneration in respect of the HIH agreement.  This (and the earlier exhibit PAP5) showed that the amount of net benefit to be derived was of such relatively minor magnitude, in relation to the time and trouble to be involved in achieving it, that Pattison should not have made the effort.  Overall, counsel submitted, the figures never supported the likelihood that the HIH agreement would produce a dividend for creditors.

1. I make a few observations about this evidence.  The evidence does not enable a finding that the item in the letter equates to Pattison's present claim for remuneration in respect of the HIH agreement.  Nor is it fair to merely point to the amounts received at the date when HIH went into provisional liquidation as that had the effect of freezing matters as they then were.  Pattison may have been close to receiving further benefits.  The evidence does not establish that the net benefit received was the total that could have been received in respect of work done to date, let alone if the HIH agreement had run its course.  Indeed, exhibit PAP13 to Pattison's affidavit sworn on 25 February 2002 states that Pattison has claimed from HIH the sum of $1,142,393 as the value of work in progress lost, and $1,220,634 for suppliers and subcontractors accounts and Avonwood's employment costs and administration fees. 

1. Counsel for Dexta further submitted, having regard to the figures in exhibit PAP4 to Pattison's affidavit sworn on 7 June 2000, which showed estimated surpluses for some houses and losses for others, that a prudent provisional liquidator would only have sought to proceed with construction of those houses which offered a reasonably appreciable surplus (as against, say, an estimated surplus in one case of $105) which counsel suggested might have been a surplus of around $10,000.  Then Pattison would have had to consider whether to engage a builder or whether Avonwood should be the builder.  I should say that on his evidence it is clear that Pattison devoted extensive endeavours into investigating, and giving due consideration to, the possibility of engaging a builder to perform works, ascertaining who any such builder might be, and considering Avonwood's capacity to perform works.

1. Counsel submitted that, having entered into the HIH agreement, if a job which had been expected to yield a profit started to yield a loss "very early in the piece" he should have "taken that as an indicator and pulled the plug, which he was entitled to do under the HIH agreement".  This submission seemed to me to suffer from a lack of business reality.  The submission seemed to contemplate a process of on-going assessments under which work on a job would be stopped if it started to yield a loss "early in the piece".  What if it was considered that the job might eventually produce a profit?  What if the job was well towards completion when a loss seemed likely?  What if the loss was slight?  Where was the line to be drawn?  Were other matters to be considered, such as the likelihood of a claim on HIH, and the amount thereof, and the extent of a consequent claim by HIH against Avonwood?  Counsel's submission did not address such matters, and how Pattison might reasonably have dealt with them in exercising his judgment.

1. In any event, whatever the merit of that particular submission, counsel submitted that, regarding the net benefit derived to the date of the collapse of HIH, "something was radically wrong", and that Pattison "embarked upon the HIH agreement on a false premise".

1. This is, I think, a sufficient reference to the submissions of Dexta's counsel.  Although I have regard to it, I have not set out all that they said.  One matter I have not mentioned is the amount, over $2M, which HIH actually advanced under the HIH agreement.  Counsel referred to that, and figures for costs, to emphasise the relatively small net benefit received by Pattison under the HIH agreement.  As I say, I have regard to all that was advanced by Dexta's counsel.  In the end the issue is whether Pattison  failed to exercise a proper commercial judgment in entering into the HIH agreement and acting under it.

1. In my view, Pattison did not err in entering into the HIH agreement.  I accept his evidence, which is extensive. I find that in negotiating and entering into the HIH agreement he exercised a judgment that was reasonably open to him as a provisional liquidator acting in a commercially responsible way in the circumstances.  The purpose of the agreement was not merely the admirable one of providing comfort for the 235 hapless home owners, lamenting the collapse of Avonwood.  That purpose would be met, but as the evidence of Pattison and Martin made clear, there were advantages to be gained by Avonwood.  I briefly referred to these at [11] – [13].  It is pertinent in this respect to refer also to Stinton's evidence regarding the advantage of the proposed arrangement with Pioneer of reducing SMIL's claim in the winding up.[14]  It was of undoubted benefit to bring jobs to a completion at an early date in order to fix costs and claims, and HIH's claims on Avonwood.  Delay in completion would serve to produce greater costs and higher claims.  I find that Pattison proceeded by way of the HIH agreement because that was the only way, in any realistic commercial sense, in which he could proceed to achieve this purpose, and consequent benefit for Avonwood and its creditors.  He did not do so blindly but, as his evidence establishes, after thorough investigation of the alternatives, consideration of the financial aspects of the agreement, and having regard to the interests of the creditors.  If he had not proceeded under the HIH agreement, he had no other means of achieving the completion of HIH houses.  The position would have been the same as it was with Dexta houses.  The HIH home owners would have been left to their own devices, and would have had to deal with HIH.  Although the collapse of HIH was not foreseeable, when the collapse occurred home owners would have had no insurer to deal with and would have been left to make claims against Avonwood.  In my view, Pattison's judgment to proceed as he did was an appropriate commercial judgment for him to make at the time. 

   [14]See [45], and Stinton's letter dated 8 September 2000 referred to at [52].

1. The collapse of HIH could not be foreseen.  That was conceded.  As it transpired, by 26 April 2001 a total of 144 houses had been completed, with a further 17 scheduled for completion in a few weeks.[15]  Counsel for Dexta concentrated on the net benefit received by Pattison from the HIH exercise.  However, it is apparent that the collapse of HIH prevented the agreement from reaching its fruition, and it is not clear what would have been achieved if the agreement had run its course.  It seemed to me that Dexta's submissions were infected by the unfortunate consequence of HIH's collapse. In any event, assessing the matter as at the time when the HIH agreement was negotiated and entered into, I am of the view that Pattison's commercial judgment on the matter was one that was both open and reasonably exercised.

   [15]See [26]

1. Then there is the submission that Pattison acted in an uncommercial manner in implementing the HIH agreement.  This submission addressed itself to the period of about nine months between entry into the agreement and the collapse of HIH.  That is not a long time in terms of the number of houses, and the amount of work, involved.  In the above discussion I have referred to matters that occurred in the implementation stage.  I note that in his affidavit sworn on 16 November 2000 Pattison produced a summary of the financial position concerning the construction undertaken by Avonwood pursuant to the HIH agreement which estimated that there would be a surplus of $1.6M.  These matters indicate that it was reasonable for Pattison to have persisted with performance under the HIH agreement. Moreover, it could readily be anticipated that a premature cessation of work under the agreement could have disadvantaged Avonwood.  Yet it seems to me, regarding the evidence overall, that to better enable a conclusion on this aspect of implementation of the agreement, additional evidence should be filed regarding the estimated and actual loss/profit situation of the houses worked on under the HIH agreement as work progressed, as at the time of the HIH collapse, and as was anticipated to be the final result.  Additional evidence should also be filed specifying the remuneration claimed in respect of the implementation work. 

Conclusion

1. For the reasons given above further evidence is required regarding work done in connection with Pattison’s refusal to resile from the Devine Deed, and in implementation of the HIH agreement.  I will hear counsel on these aspects, and the further conduct of the proceeding.  For that purpose I will stand the matter over for mention.  I have not considered the application to permit payment of remuneration.  That matter will also stand over for further consideration. 

---