Wealth Psychology Pty Ltd at Trustee for the PRIVATE TRUST t/as Taxation Strategies & Accounting Services v Morhall
[2019] WADC 149
•31 OCTOBER 2019
JURISDICTION : DISTRICT COURT OF WESTERN AUSTRALIA
IN CIVIL
LOCATION: PERTH
CITATION: WEALTH PSYCHOLOGY PTY LTD at Trustee for the PRIVATE TRUST t/as TAXATION STRATEGIES & ACCOUNTING SERVICES -v- MORHALL [2019] WADC 149
CORAM: VERNON DCJ
HEARD: 8 MARCH 2019
DELIVERED : 31 OCTOBER 2019
FILE NO/S: CIV 4140 of 2016
BETWEEN: WEALTH PSYCHOLOGY PTY LTD at Trustee for the PRIVATE TRUST t/as TAXATION STRATEGIES & ACCOUNTING SERVICES
Plaintiff
AND
JOHN IVOR MORHALL
Defendant
Catchwords:
Preliminary issue - Effect of agreement with liquidator - Rule in Walker v Bowry - Release - Forbearance to sue
Legislation:
Corporations Act 2001 (Cth)
Result:
Judgment for the plaintiff on the preliminary issue
Representation:
Counsel:
| Plaintiff | : | Mr J R Ludlow |
| Defendant | : | Mr K C B Staffa |
Solicitors:
| Plaintiff | : | HWL Ebsworth |
| Defendant | : | Legal Success |
Case(s) referred to in decision(s):
Bower v Marris (1841) Cr & Ph 351; (1841) 41 ER 525
Carr v Thomas [2009] NSWCA 208
Deanplan Ltd v Mahmoud [1993] Ch 151
Dorgal Holdings Pty Ltd v Buckley (1996) 22 ACSR 164
Ex parte Wyldman (1750) 2 Ves Sen 113; (1750) 28 ER 74
Goodwin v Duggan (1996) 41 NSWLR 158
Handberg v Smarter Way (Aust) Pty Ltd [2002] FCA 469
Harplex Pty Ltd v Konstandellos [2018] VSCA 67; (2018) 54 VR 174
James Hardie & Co Pty Ltd v Seltsam Pty Ltd (1998) 196 CLR 53
Kendall v Hamilton (1879) 4 App Cas 504
Lavin v Toppi [2015] HCA 4; (2015) 254 CLR 459
Mahoney v McManus (1981) 180 CLR 370
Midland Montagu Australia Ltd v Harkness (1994) 35 NSWLR 150
Murray-Oates v Jjadd Pty Ltd [1999] SASC 537; (1999) 76 SASR 38
National Australia Bank Ltd v Pollak (2001) 186 ALR 44
Pollak v National Australia Bank Ltd [2002] FCAFC 55; [2002] FCA 237
Re (Warrant Finance Co's Case) (No 2) Humber Ironworks & Ship Building Co (1869) LR5ChApp 88
Tanning Research Laboratories Inc v O'Brien (1990) 169 CLR 332
WalkerBowry [1924] HCA 28; (1924) 35 CLR 48
VERNON DCJ:
This matter comes before me for determination of a preliminary issue, expressed as follows:[1]
Does the defendant have a complete defence to the plaintiff's claim in the statement of claim based on the principles in Walker v Bowry [1924] HCA 28; (1924) 35 CLR 48.
[1] Order 1, Order of Registrar Kubacz made 27 August 2018.
The plaintiff claims for recovery of a debt, totalling $174,800,[2] said to arise under an oral agreement for the provision of taxation and accounting services, entered into with the defendant on 29 October 2012[3] and a subsequent written agreement entered into on 18 July 2014,[4] in relation to which the plaintiff rendered three invoices.
[2] Statement of claim filed 8 November 2016 at par 7 – par 9.
[3] Described in par 3 of the Statement of claim as a 'Verbal Engagement'.
[4] Statement of claim par 4.
In his defence, the defendant denies liability to pay the invoices,[5] however says that, if the defendant is liable for any amount, he was jointly and severally liable with Pipewest Pty Ltd (Pipewest).[6] The defendant says that, as a result of the plaintiff entering into a settlement agreement with Pipewest's provisional liquidator, the plaintiff is estopped from claiming from the defendant any amount that remains owing under the invoices.[7]
[5] Defence filed 29 November 2016, par 4(b).
[6] Defence par 8(b).
[7] Defence par 8(c).
In its reply, the plaintiff denies that the defendant was jointly and severally liable with Pipewest for the claimed debt.
Given the debt is said, in part, to arise under an oral agreement between the plaintiff and defendant, oral evidence is required to determine the issue of whether the defendant's liability, if any, was joint and several with Pipewest. The parties did not, however, propose to lead such evidence at the hearing of the preliminary issue, and the determination of the preliminary issue would have had little benefit, over proceeding to a final hearing, had the matter proceeded in that way. Accordingly, the parties agreed that I am to assume, solely for the purposes of the determination of the preliminary issue, that the defendant is jointly and severally liable with Pipewest for the amounts claimed by the plaintiff against the defendant.
For the reasons set out below I find that the principles in Walker v Bowry[8] do not provide the defendant with a complete defence, or any defence, to the plaintiff's claim.
[8] Walker Bowry [1924] HCA 28; (1924) 35 CLR 48.
Facts
The facts on which the preliminary issue is to be decided were not reduced to a statement of agreed facts, as would usually be the case. However, a bundle of documents the parties agreed were relevant to the preliminary issue was tendered at the hearing,[9] and the facts on which I am to determine the preliminary issue are not controversial, save for that referred to in [5] above (which I am to assume).
[9] Exhibit 1.
Accordingly, I find the facts to be as stated in [9] – [35] below.
The agreement under which the plaintiff's services were engaged was initially an oral agreement, and subsequently under a written agreement. Relevantly the written agreement provided that:[10]
1.Clause 8: Services under the agreement were provided on a time basis, calculated using staff rates which were available on request, with accounts being rendered intermittently calculated on the basis of
time elapsed in interviews, meetings, during telephone calls, attending to mail and email correspondence, account and taxation return preparation, maintaining electronic files, maintaining electronic records, etc.
2.Clause 11: Accounts not paid within 30 days would accrue interest at a rate of 0.05% per day.
3.Clause 13: Accounts were to be paid in full or under an acceptable payment arrangement within 120 days of the due date in order to avoid further action being taken.
4.Clause 14: Disputes about invoiced fees were to be made in writing before the due date.
[10] Exhibit 1 pages 33 ‑ 35.
There is no evidence as to the terms of the oral agreement, however, it is not in dispute that accounts under that agreement would also be rendered intermittently, for work done calculated on a time basis multiplied by a billing rate, as in the written agreement.[11]
[11] The defendant submitted that the scope and terms of the parties' liability (to pay the fees) is evidenced by the written agreement: par 24(b) of the defendant's submissions dated 25 February 2019.
The plaintiff issued three invoices addressed to:
John Morhall/Kevin Richards
PIPEWEST PTY LTD
Each invoice comprised an itemised invoice and a discounted invoice issued on the same date. Not all the discounted invoices were in evidence. However, they were recorded in an account statement[12] and were not in dispute.
[12] Exhibit 1 pages 40 - 41.
The invoices, their dates and discounted amounts were as follows:
Invoice Number
Date
Original amount
Discounted amount
007367[13]
28 November 2013
$55,993.70
$39,800
007755[14]
19 September 2014
$89,315.31
$85,000
008113[15]
15 April 2015
$67,308.48
$50,000
Total
$212,617.49
$174,800
[13] Exhibit 1 pages 20 - 30.
[14] Exhibit 1 pages 50 - 57.
[15] Exhibit 1 pages 43 - 49.
Each invoice listed individual items of work and the date each item of work was performed but did not identify the amount of time spent on each individual item, or a charge for that item.
The plaintiff has filed particulars which attach 'work in progress' ledgers relating to each invoice.[16] These identify the time spent on each recorded item of work (expressed as units) and the charge for that item.
[16] Particulars filed 14 March 2018 contained at pages 7 - 78 of the Papers for the Judge filed 28 February 2019.
On 31 March 2015 Master Sanderson ordered the appointment of a provisional liquidator (liquidator) to Pipewest, in Supreme Court proceedings COR 48 of 2015 (Supreme Court proceedings).[17] The defendant was named as second plaintiff in the Supreme Court proceedings, with Pipewest as first plaintiff.[18]
[17] Exhibit 1 pages 36, 37, and 38.
[18] Exhibit 1, page 36.
The orders appointing the liquidator provided that he have certain additional powers, in particular powers under s 420(2),[19] s 477(1)(b),[20] s 477(1)(c),[21] s 477(2)(a),[22] s 477(2)(b)[23] and s 477(2)(d)[24] of the Corporations Act (Cth), and the power to call for and adjudicate on proofs of debt.[25]
[19] Section 420(2) identifies the powers of a receiver.
[20] Section 477(1)(b) provides a liquidator has the power to pay any class of creditors in full, subject to s 556.
[21] Section 477(1)(c) provides a liquidator has the power to make any compromise or arrangement with creditors or persons claiming to be creditors or having or alleging they have any claim (present or future, certain or contingent, ascertained or sounding only in damages) against the company or whereby the company may be rendered liable.
[22] Section 477(2)(a) provides a liquidator has the power to bring or defend legal proceedings in the name of the company.
[23] Section 477(2)(b) provides a liquidator has the power to appoint solicitors.
[24] Section 477(2)(d) provides a liquidator has the power to do all acts and execute in the name of and on behalf of the company all deeds, receipts and other documents and for that purpose use when necessary a seal of the company.
[25] Exhibit 1, page 37.
On 15 April 2015 the plaintiff submitted a 'Form 535' 'Formal Proof of Debt or Claim' (proof of debt) to the liquidator, in the amount of $178,213.81. The plaintiff particularised the debt by identifying the three invoices referred to in [13] above in the particulars of the debt,[26] and stated that the claimed debt included interest.[27]
[26] Exhibit 1, page 39.
[27] Exhibit 1, page 39.
By letter dated 26 November 2015 the liquidator informed the plaintiff that he had formally adjudicated the plaintiff's claim and issued a 'Form 537' 'Notice of Partial Rejection of Formal Proof of Debt or Claim' (Form 537).[28]
[28] Exhibit 1, pages 83 - 85.
The Form 537 stated as follows:[29]
[29] Exhibit 1, pages 84 - 85.
1.Your claim against the Company set out in the formal proof of debt or claim made on 15 April 2015 and further explained in subsequent correspondence from you has been:
(a)Disallowed to the extent of $137,713.81; and
(b)Partially allowed to the extent of your claim for $40,500.00.
2.My grounds for disallowance of $137,713.81 are as follows;
(a)You charged the Company the amount of $5,800 for work in relation to the taxation affairs of John Morhall where either the Company did not have a retainer with you to do such work or alternatively, if, which is denied, the Company did engage you to undertake this work, this engagement was a breach of the director of the Company's duties of which you had knowledge, or alternatively, the engagement constituted an uncommercial transaction as provided by s.588FB of the Corporations Act or alternatively, an unreasonable director related transaction as provided by s.588FDA of the Corporations Act.
(b)The work undertaken by you at the request of the Company relating to issues pertaining to the superannuation audit by the Australian Taxation Office amount to a sum of approximately $59,700 of which an amount of $44,700 was unreasonable or unnecessary to be performed in breach of your retainer with the Company including, at least, an implied term which, in effect, required you to act reasonably and with all due diligence in undertaking the work on behalf of the Company.
(c)The claim includes amounts totalling $87,200 approximately for work relating to 'partnership' profits/calculations and 'partnership' process/meetings/ emails to facilitate the same which are matters pertinent to a dispute between the shareholders and/or directors of the Company but not the affairs of the Company per se for which you do not have a retainer from the Company or alternatively if, which is denied, the Company did engage you to undertake this work, this engagement was done in breach of the director's duty of which you had knowledge or alternatively, the engagement constituted an uncommercial transaction as provided by s.588FB of the Corporations Act or alternatively, the engagement constituted an unreasonable director-related transaction as proved by s.588FDA of the Corporations Act.
(d)You have no agreement for the payment of interest.
3.If you are dissatisfied with my determination as set out above, you may appeal against it, no later than twenty eight (28) days after the service of this notice or, if the Court allows, within any further period, to the Federal Court of Australia or the Supreme Court of Western Australia. If you do not do so, your claim will be assessed in accordance with this determination.
I infer from the content of the Form 537, in particular the reference to the invoices being further explained and to specific amounts calculated in relation to various categories of work, that the plaintiff had provided the liquidator with information that enabled the liquidator to quantify of the work referred to in par (a) – par (c) of the Form 537, which was not possible from the content of the invoices themselves.
On 12 January 2016, the plaintiff's director, Phillip Loveland, filed an interlocutory application in the Supreme Court proceedings, seeking review of the liquidator's decision to partially reject the plaintiff's proof of debt (Application).[30]
[30] Exhibit 1, pages 86 - 88.
By a letter dated 22 January 2016, the liquidator's legal representatives told Mr Loveland that they considered that the Application was unlikely to succeed for a number of reasons including that the Application was not in the correct form.[31]
[31] Exhibit 1, page 116.
By a letter dated 16 February 2016 to the liquidator's lawyer and copied to the defendant's lawyer, the plaintiff's lawyer said, in part:[32]
[32] Exhibit 1, pages 101 - 102. This communication was subject to 'without prejudice' privilege. To the extent that the privilege applies to the defendant, that privilege was waived by the defendant's agreement to the inclusion of the document in exhibit 1. To the extent the privilege applies to the liquidator, it is irrelevant as these proceedings do not concern the liquidator.
Our clients are willing to accept the points made in par 2(a), (c) and (d) of the Form 537, and therefore intend to commence separate proceedings against Mr Morhall in a court of competent jurisdiction claiming payment of the amounts dealt with in par 2(a), (c) and (d) as debts due under an agreement with Mr Morhall.
However, our clients continue to dispute your client's disallowance of $44,700 of their claim for '… work undertaken by [them] at the request of the Company relating to issues pertaining to the superannuation audit by the Australian Taxation Office.
As the Form 537 indicates, our clients' total claim in respect of that work was approximately $59,700, of which your client allowed only $15,000. In our client's view, $15,000 is a wholly inadequate allowance for the work in question.
…
It is our clients' contention that the work they did in connection with the superannuation audit was necessary and appropriate, and that they charged an appropriate amount for that work ...
However with a view to resolving the appeal, our clients are willing to compromise on the amount they are seeking to be paid for that work.
Our clients [sic] therefore now offer to your client and to Morhall to settle the appeal[33] on the following basis;
1.Your client will immediately increase the amount allowed in respect of the portion of the proof of debt or claim of approximately $59,700 relating to issues pertaining to the superannuation audit from $15,000 to $45,000, with the consequence that the total amount allowed in respect of the proof of debt or claim will become $70,000.
2.Our clients will forgo their claim against your client or the Company for the balance of their proof of debt or claim insofar as the proof of debt is over and above the amount allowed by your client (which would be $70,500 instead of the present amount of $40,500).
3.Our clients will forgo any claim they may have against Mr Morhall in respect of work they undertook relating to issues pertaining to the superannuation audit by the ATO and quantified by them at approximately $59,700, but will otherwise be free to pursue Mr Morhall in respect of payment for work they have done.
4.The three parties will enter into a deed of settlement of the appeal containing the usual clauses for such deeds.
5.The appeal will be dismissed by the consent of our clients, your client and Mr Morhall, with no order as to costs and any existing costs order vacated.
6.The parties to the settlement will bear their own costs.
[33] There is no dispute that by 'the appeal' the plaintiff's representatives were referring to the Supreme Court proceedings.
In an email dated 18 February 2016, sent to the liquidator's lawyer and copied to the defendant's lawyer, the plaintiff's lawyer said, in part:[34]
For the record, I also confirm as follows:
1.The dollar element of my client's present offer is that the portion of the proof of debt or claim relating to issues pertaining to the superannuation audit will be increased to $35,000 and the total amount allowed will therefore be increased to $60,500.
2.…
3.Otherwise the terms of the present offer are as set out in our letter dated 16 February …
[34] Exhibit 1, page 105.
In a letter dated 23 February 2016, the defendant's lawyer responded to the letter referred to in [15] above saying, in part:[35]
I refer to your letter of 16 February 2016, which was cc'd to me.
Mr Morhall does not accept the justification of your clients' fees referred to in your abovementioned letter but he is prepared to agree to the adjudication of your clients' proof of debt being increased to $60,500 (inc GST) on the following terms.
1.Your clients and Mr Morhall enter into a simple Deed of Settlement and Release (refer to the attached draft) under which your clients irrevocably release and discharge Mr Morhall from all liability for all other amounts claimed in the proof of debt and in your clients' recent application.
2.Your clients undertake not to commence any claim against Kevin Richards for any amounts outstanding under the proof of debt or claimed in the recent application.
Mr Morhall requires this term (notwithstanding that Mr Richards would not be a party to the Deed) to ensure that Mr Morhall is not faced with a contribution claim from Mr Richards if your clients subsequently decide to make a claim against him.
3.In exchange for the above Mr Morhall would forego his claims for costs arising from the recent application and would irrevocably release and discharge your clients from any claims he may have against them …
[35] Exhibit 1, pages 106 and 107. The privilege in this 'without prejudice' communication has been waived by the parties, by their agreement to include the document in Exhibit 1.
The plaintiff did not accept this offer.
In a letter dated 24 February 2016 the defendant's lawyer said to the plaintiff's lawyer, in part:[36]
[36] Exhibit 1, pages 108 and 109. Privilege in this communication has been waived by the parties, by their agreement to include this document in exhibit 1.
1.…
2.If your clients have settled with the provisional liquidator, or do so, no further claim can be pursued against Pipewest.
3.It is open to [the plaintiff] to institute a claim against Mr Morhall and/or Mr Richards but it will face a number of problems, including:
(a)…
…
(c)WP will need to be able to justify making claims against my client and/or Mr Richards in circumstances where the whole of the invoices were the subject of a proof of debt lodged in the provisional liquidation. My client takes this as an acknowledgement by WP was [sic] undertaken for Pipewest rather than for Mr Morhall or Mr Richards.
(d)in any event, WP cannot, in my view, seek payment from Mr Morhall or Mr Richards for work that was undertaken for Pipewest.
…
In an email dated 5 April 2016, sent by the plaintiff's lawyer to the defendant's lawyer, the plaintiff's lawyer said, in part, 'the liquidator has indicated that he is willing to settle my clients' appeal on the basis that the appeal will be upheld to the extent of the said proof of debt be [sic] admitted in the sum of $60,500 inclusive of GST', and made an offer to settle 'the debt claimed against your client/Pipewest (after the proposed $60,500 agreement with the Liquidator)'.[37]
[37] Exhibit 1, pages 110. Privilege in this communication has been waived by the parties, by their agreement to include this document in exhibit 1.
By letter dated 6 April 2016 the defendant's lawyer informed the plaintiff's lawyer that the offer referred to in [29] was rejected.[38]
[38] Exhibit 1, page 112.
By an emailed letter dated 13 April 2016 to the plaintiff's lawyer, the liquidator's lawyer said:[39]
Given the problems which have arisen because of your client's inappropriate application, the difficulty in attending to a court order to cover all bases creates some problems.
Accordingly, I propose that to implement the prior agreement:
1.We will attend Court tomorrow for the purpose of moving for consent orders in which your client's chamber summons is dismissed with each of our clients bearing their own costs.
2.In consideration of that my client will, pursuant to regulation 5.6.55 of the Corporations Regulations, agree to revoke his decision in respect of the proof of debt lodged by your client and amend the decision so as to admit the proof of debt in the amount of $60,500. In consideration of this, your client agrees not to appeal the amendment made to his proof of debt pursuant to regulation 5.6.55 of the Corporations Regulations.
[39] Exhibit 1, page 174.
By an email dated 14 April 2016, in reply to the email referred to in [31] above, the plaintiff's representatives said:[40]
I will seek instructions from Mr Loveland when I see him in court, but I don't anticipate a problem with your proposal.
As indicated in the Calderbank letter sent some time ago, my clients are willing to accept the points made in pars 2(a), (c) and (d) of the Form 537. They will therefore be withdrawing their challenge to those pars before orders are made.
[40] Exhibit 1, page 134.
Subsequently, on 14 April 2016, the plaintiff's lawyer and the defendant's lawyer, amongst others, attended before the Master on a hearing of the Application. The transcript records that the plaintiff's lawyer said to the Master, in the presence of the defendant's lawyer:
Just before any orders are made, Master, I wish to indicate that my clients formally withdraw the part of the appeal that challenges par 2(a), par 2(c) and par 2(d) of the form 537.
The Master subsequently made orders dismissing the Application as between the plaintiff's director, Mr Loveland, and the liquidator.[41]
[41] Exhibit 1, page 176 - 180 (at page 2 of the transcript). The extracted orders appear at exhibit 1 pages 181 ‑ 182.
On 18 April 2016 the liquidator issued a further Form 537, entitled 'Notice of Amendment to Partial Rejection of Formal Proof of Debt or Claim' (amended Form 537), which was in the same terms as the Form 537, other than that the amount allowed in par 1(b) was amended to $60,500 from $40,500, and in par 2(b) the figure of $44,700 was amended to $24,700.[42]
[42] Exhibit 1, pages 119 - 121.
Parties' submissions
The defendant submits that:
1.By the agreement between the liquidator and the plaintiff, the plaintiff released Pipewest from payment of all the amounts in the three invoices other than an agreed settlement sum of $60,500;[43]
2.The defendant was not a party to the release and did not agree to the terms of settlement;[44]
3.In the agreement under which the plaintiff claims to be entitled to be paid its fees there is no provision that allows the plaintiff to release one of two co-debtors without the other being released; and[45]
4.The principles of Walker v Bowry operate to discharge the defendant's liability to the plaintiff as a result of Pipewest having been released (assuming that the defendant was ever liable for payment of the tax invoices).[46]
[43] Defendant's submissions, par 25.
[44] Defendant's submissions, par 26.
[45] Defendant's submissions, par 24(b).
[46] Defendant's submissions, par 27.
The plaintiff submits that:
1.The operation of the rule in Walker v Bowry is excluded by the operation of the provisions of the Corporations Act concerning the winding up of corporations, under which a creditor is entitled to prove the whole of its debt against a company in external administration, and at the same time seek payment from a joint debtor and receive satisfaction from either or both of their estates, although the creditor cannot retain any surplus;[47]
2.The settlement did not involve a release of Pipewest, but rather a covenant not to sue, which did not extinguish the plaintiff's rights to recover the debt;[48]
3.To the extent the settlement operated as a release, it did so only in relation to amounts that are not included in the plaintiff's claim against the defendant; and[49]
4.The defendant's reliance on Walker v Bowry is an abuse of process, as the defendant was aware of the plaintiff's position, was represented at the hearing where the plaintiff formally withdrew its appeal against the liquidator's rejection of the claim referred to in sub-pars 2(a), 2(c) and 2(d) of the Form 537, did not object to that withdrawal, and cannot now be permitted to contend the settlement included settlement of the claim for the amounts referred to in those paragraphs.[50]
[47] Plaintiff's submissions at par 26 – par 41, relying on Ex parte Wyldman (1750) 2 Ves Sen 113; (1750) 28 ER 74; Bower v Marris (1841) Cr & Ph 351; (1841) 41 ER 567; In Re (Warrant Finance Co's Case) (No 2) Humber Ironworks & Ship Building Co (1869) LR5ChApp 88; Midland Montagu Australia Ltd v Harkness (1994) 35 NSWLR 150; Goodwin v Duggan (1996) 41 NSWLR 158 (CA).
[48] Plaintiff's submissions dated 28 February 2019 at par 46 – par 53, relying on Lavin v Toppi [2015] HCA 4; (2015) 254 CLR 459; Murray-Oates v Jjadd Pty Ltd [1999] SASC 537; (1999) 76 SASR 38 (FC); National Australia Bank Ltd v Pollak (2001) 186 ALR 44; Pollak v National Australia Bank Ltd [2002] FCAFC 55; [2002] FCA 237 and Harplex Pty Ltd v Konstandellos [2018] VSCA 67; (2018) 54 VR 174.
[49] Plaintiff's submissions at par 42 - par 42.
[50] Plaintiff's submissions at par 44 - par 45, relying on James Hardie & Co Pty Ltd v Seltsam Pty Ltd (1998) 196 CLR 53, 62.
Issues
Given that I am to assume for the purpose of the determination of the preliminary issue that any debt owed to the plaintiff was owed jointly and severally by the defendant and Pipewest, the issues to be determined are:
1.Is the so called rule in Walker v Bowry excluded in the circumstances of this case?
2.If the rule in Walker v Bowry applies, did the plaintiff agree to release Pipewest from payment of any part of the debt owed jointly and severally by the defendant and Pipewest?
3.If the plaintiff did agree to release Pipewest from payment of any part of the debt, did that release include the amounts now claimed against the defendant?
4.If the plaintiff did release Pipewest from that part of the debt now claimed against the defendant, is the defendant prohibited from relying on the release in defence of the plaintiff's claim as an abuse of process?
Rule in Walker v Bowry
The common law rule described in Walker v Bowry, which continues to be the law in Australia, unless abolished by statute,[51] is that where a creditor releases one or some of a number of debtors who are jointly, or jointly and severally, liable for the same debt then all the debtors are released.[52]
[51]As is the case in Victoria, see Harplex Pty Ltd v Konstandellos [64] (McLeish, Hargrave & McDonald JJA).
[52] See for example Mahoney v McManus (1981) 180 CLR 370, 380 (Gibbs CJ); Carr v Thomas [2009] NSWCA 208 [14] (Beazley, Ipp & McColl JJA).
The facts in that case were that, in 1910, Walker v Bowry jointly and severally agreed to become sureties for a company to a bank, under a deed of guarantee, limited to £3,850. In 1915 the bank sued Walker and obtained judgement against him for approximately £2,800. Walker was declared insolvent on the bank's petition, a trustee was appointed, and the bank was the sole creditor to prove in the insolvent estate. In June 1919, the bank executed a document that recited that Walker had offered, and the bank had agreed to accept, £800 in 'full satisfaction and discharge' of its debt and to execute a release. The release in the document provided that the bank 'doth hereby for its successors and assigns release and forever discharge [Walker] his heirs, executors and administrators from the said sum … and all claims and demands in respect thereof.' Walker's insolvency was annulled in 1919 and he paid the agreed £800. Walker subsequently sued Bowry for contribution of £400. Bowry defended the claim on the basis that the release did not affect Bowry's liability to the bank, and as Walker had not paid more than his share of the principal debt, he could not recover the claimed contribution.
Issacs ACJ[53] held that, under the applicable legislation, the effect of the annulment of the insolvency was that Walker had been restored to his former status as to all his property.[54] The judgement against Walker put an end to the original contractual liability of Bowry, because his right, if sued, to be sued in company with his co-contractor could not be satisfied. His Honour cited Hatherley LC in Kendall v Hamilton,[55] who said, 'Each of the co-contractors has a right to be sued and to have the matter settled at once, instead of its being settled piecemeal.'
[53] Pages 53 - 54, Rich J agreeing at (56).
[54] Subject to any effectual dispositions that had been made under the authority of the insolvency law. The release was not an act under that law and its effect had to be considered.
[55] Kendall v Hamilton (1879) 4 App Cas 504, 515, 516.
Isaacs ACJ concluded that:[56]
True, Bowry had contracted to pay 'jointly and severally' and not 'jointly'. He had thereby consented to the bank suing and recovering judgement against Walker severally or jointly, and, even if severally, he undertook to be liable to pay the creditor severally himself. Even if several judgements are obtained, all would be liable. But he did not undertake that Walker should be released and still be liable himself to pay as if he had contracted 'severally' only. So far as the bank released Walker from his liability to pay the secured debt, the condition of 'joint and several' liability, on the faith of which Bowry had entered into his obligation, would have been rendered impossible of observance … But it applies only pro tanto. There was no release as to £800. The effect of the release was to relieve Bowry from the liability to pay the balance of about £2000.
[56] Page 55. Starke J came to the same conclusion at (58).
Is the rule in Walker v Bowry excluded?
As the defendant submits, there is nothing in the plaintiff's written costs agreement that suggests a reservation of rights against other co-debtors upon release of one of them, which would exclude the operation of the rule in Walker v Bowry.
The plaintiff says that the Corporations Act sets up a regime for the making and resolution of claims against companies in external administration, which excludes the operation of the rule in Walker v Bowry. The plaintiff relies in particular on s 553(1) which provides:
Subject to this Division and Division 8, in every winding up, all debts payable by, and all claims against the company (present of future, certain or contingent, ascertained or sounding only in damages), being debts or claims the circumstances giving rise to which occurred before the relevant date, are admissible to proof against the company.
The plaintiff refers to a line of authorities in which it has been held that a creditor may prove against the insolvent estates of co-debtors, and receive satisfaction from either or both, until the whole of the debt is paid.[57]
[57] Commencing with Ex parte Wyldman (75) and (76).
In Handberg v Smarter Way (Aust) Pty Ltd[58] the respondent sought to prove a debt in the voluntary administration of another company, Waiviata International Ltd, being the taxed costs of legal proceedings. The applicants and Waiviata were jointly and severally liable for the costs. Kenny J said:[59]
[I]t seems that a creditor may in an appropriate case, seek to prove in a debtor's bankruptcy for the full amount of joint and several debt and, at the same time, seek to recover the full amount of the debt from a co‑debtor or co-debtors, until the creditor receives the full amount of the debt … Once the creditor receives the full amount of the debt, the creditor cannot retain any surplus as, if the creditor were to do so, this would amount to double satisfaction.
(references deleted)
[58] Handberg v Smarter Way (Aust) Pty Ltd [2002] FCA 469.
[59] Handberg v Smarter Way (Aust) Pty Ltd [35]. In that case, however, there had been satisfaction of the debt, by way of a set off by operation of the Corporations Act, of an amount the applicants owed to Waiviata. Accordingly, the bankruptcy notices issued by the respondent against the applicants were set aside.
In Bower v Marris,[60] it was held that although the amount on which dividends were paid did not include interest after the date of bankruptcy, the dividends were to be treated as ordinary payment on account of the debt, and applied first to the payment of interest due at the date of the dividend and any surplus in reduction of the principal. Lord Cottenham LC said that:
The interest stops at the date of the commission, and though subsequent interest become due, it is not provable under the commission. The bankrupt's estate is taken from him by the commission; and the law in order to make an equal division amongst the creditors, pays to each a dividend upon the debt proved. But this is merely an arrangement for the convenience of the debtor's creditors. The bankrupt continues to be indebted for the principal and interest accrued since the commission, although his certificate if he obtains one, protects him from liability to the debt; and being so indebted, payments are made out of his estate to the obligee. Why should such payments have a different effect than they would have if made by a solvent obligor? Why should they lessen and destroy the remedy which the obligee would have had against a co‑obligor? Suppose the bankrupt does not obtain his certificate, but afterwards acquires property, and is sued by the obligee, ought not the obligee be entitled to compel payment of all he could have demanded if there had not been any bankruptcy? Suppose the assignees realise a surplus of the estate, ought the obligee, in the case supposed, to suffer and the bankrupt's estate to benefit, by the bankruptcy?
[60] Bower v Marris (355) - (357); (527).
In Re (Warrant Finance Co's Case) (No 2) Humber Ironworks & Ship Building Co Sir Giffard LJ held to the same effect in relation to a secured creditor of a company that was being wound up.[61]
[61] In Re (Warrant Finance Company's Case) (No 2) Humber Ironworks & Ship Building Co (88), (92).
In Midland Montagu Australia Ltd v Harkness McClelland CJ followed Bower v Marris and Re (Warrant Finance Co's Case) (No 2) Humber Ironworks & Ship Building Co.[62] After discussing these authorities, McClelland CJ said:[63]
One of the premises upon which this rule is based is the proposition that neither bankruptcy nor winding up, as such, effects a discharge of a debtor's liability for future interest, although each limits the means by which, and the assets against which, such a liability may be enforced. That proposition, as a matter of general law, is overwhelmingly supported by the authorities … This proposition is not affected by section 82 (3B) of the Bankruptcy Act 1966 (Cth), which provides: 'a debt is not provable in a bankruptcy insofar as the debt consists of interest accruing, in respect of a period commencing on or after the date of the bankruptcy, on a debt that is provable in the bankruptcy.' That section does no more than enact in statutory form a principle as to the proof of liabilities carrying interest which has been part of the general law of bankruptcy since 1729.
(references deleted)
[62] Midland Montagu Australia Ltd v Harkness.
[63] Midland Montagu Australia Ltd v Harkness (164).
The defendant submits[64] that there was no question that Pipewest had sufficient assets to pay its debts, and that the liquidation was not for that purpose. I have no evidence of this, although the plaintiff does not appear to dispute it. However, assuming it is the case, I do not consider that Pipewest's solvency is relevant. The authorities on which the plaintiff relies concern the proving of debts against companies being wound up. Insolvency is not the only basis upon which a company may be wound up.[65]
[64] Additional submissions filed with leave after the hearing, on 15 March 2019.
[65] See s 461(1)(k) of the Corporations Act with provides that a court may order the winding up of a company if the court is of opinion that it is just and equitable that the company be wound up.
The fact that Pipewest may have been wound up for reasons other than its insolvency may have had the practical effect that the dividend paid would be 100% of the proved debts, but does not otherwise change the character of what the liquidator was doing by accepting and adjudicating on proofs of debt.
However, the cases referred to are authority for the proposition that merely lodging a proof of debt in the winding up of a company does not affect the rights of the creditor to recover against a co-debtor, and that debts may continue to accrue under the agreement between the creditor and the company, for which the company remains liable, even though the creditor cannot prove those amounts in the winding up. They do not concern a situation where the creditor has granted a release to a company in liquidation and subsequently sought to recover the debt against a co-debtor. There is nothing in them to suggest it is not theoretically possible for a creditor to grant such a release and be barred from recovering against a co-debtor.
Has the plaintiff released Pipewest?
Distinction between covenant to sue and a release
In Lavin v Toppi[66] the High Court held that a covenant not to sue did not extinguish the co-debtors liability for the guaranteed debt in that case, and that the co-debtors shared co-ordinate liabilities to the creditor under the guarantee both before and after the covenant not to sue. The court said, 'That the Bank was barred from enforcing the appellant's liability by action did not extinguish the appellant's liability to the Bank and did not alter the appellant's obligations vis-à-vis the respondents'.[67]
[66] Lavin v Toppi [31] (French CJ, Keifel, Bell, Gageler & Keane JJ).
[67] Lavin v Toppi [39].
In Pollak v National Australia Bank Ltd[68] the Full Court of the Federal Court cited with approval the decision of Judge Paul Baker QC in Deanplan Ltd v Mahmoud[69] that:
A covenant not to sue is not a release, it is merely a contract between the creditor and the joint debtor which does not affect the liabilities of the other joint contractors or their rights of contribution or indemnity against their co-contractor. It is a question of construction of the contract between the creditor and the joint debtor in light of the surrounding circumstances whether the contract amounts to a release or merely a contract not to sue.
[68] Pollak v National Australia Bank Ltd [15] and [16] (Branson, Weinberg & Dowsett JJ); see also Carr v Thomas [36] (Beazley, Ipp & McColl JJA); Murray‑Oates v Jjadd Pty Ltd [84] (Wicks J, Doyle CJ & Mullighan J agreeing).
[69] Deanplan Ltd v Mahmoud [1993] Ch 151, 170 (Branson, Weinberg & Dowsett JJ).
The Full Court went on to say:[70]
Moreover, even where an instrument purports to release one of two or more debtors, if it discloses an intention to reserve rights against the other joint debtor, it will be construed merely as a covenant to not to sue.
(reference deleted)
[70] See also Dorgal Holdings Pty Ltd v Buckley (1996) 22 ACSR 164, 167 (McClelland CJ); Carr v Thomas [15] - [17] and [23] (Beazley, Ipp & McColl JJA).
Whether the agreement between the liquidator and the plaintiff amounts to a release of Pipewest is one of construction having regard to the words used, including whether there is an express or implied reservation of rights. However the fact that the plaintiff might not have intended to release the defendant, or did not realise the legal consequence of a release to one joint debtor, is not significant.[71]
Nature of the proceedings between the liquidator and the plaintiff
[71] Pollak v National Australia Bank Ltd [15] – [18] (Branson, Weinberg & Dowsett JJ); Murray-Oates v Jjadd Pty Ltd (Wicks J at [88] Doyle CJ and Mullighan J agreeing).
The nature of a liquidator's determination of a proof of debt and the subsequent appeal were considered in Tanning Research Laboratories Inc v O'Brien[72] where it was held:
In determining whether to admit or reject a proof of debt, a liquidator has been said to act in a quasi-judicial capacity according to standards no less than the standards of a court or judge. This description of the liquidator's functions reflects his duty to distribute the assets in his hands or under his control among the persons truly entitled. That duty was stated by Vicount Simonds in Government of India v Taylor:
I conceive that it is the duty of the liquidator to discharge out of the assets in his hands those claims which are legally enforceable and to hand over the surplus to the contributories. I find no words which vest in him a discretion to meet claims which are not legally enforceable. It will be remembered that, so far as is relevant for this purpose the law is the same whether the winding up is voluntary or by the court, whether the company is solvent or insolvent, and that an additional purpose of a winding up is to ensure that creditors who have enforceable claims shall be treated equal, subject only to the priorities for which the statute provides.
The principles which determine enforceability of the liability to which a proof of debt relates are, in the main, the same as the principles which would be applied in an action brought against the company to enforce that liability … But this general rule is qualified. As the parties whose interests are affected by admission of a proof of debt are the general body of creditors and the contributories rather than the company in liquidation, there are some liabilities which would be enforceable against the company but which a liquidator is not bound to admit to proof of debt lest the interests of creditors may be unjustly affected.
…
It is not necessary in this case to determine the scope of this qualification. It sufficies to note that it qualifies the principles governing the admission or rejection of a proof of debt by arming the liquidator with grounds for rejecting a proof of debt additional to any grounds available under the general law. For present purposes, the relevant consideration is that no liability which is unenforceable against the company by general law can found a debt admissible to proof in a winding up.
Determination of the issue of whether there has been a release
[72] Tanning Research Laboratories Inc v O'Brien (1990) 169 CLR 332, 338 - 339 (Brennan & Dawson JJ).
The proof of debt amounts to a demand that the liquidator adjudicate whether the debts evidenced by the three invoices were owed by Pipewest and provable in the winding up: that is was the liquidator, in the exercise of his duties, obliged to pay the plaintiff a dividend in relation to those debts. The liquidator's decision to reject the claim determined the limit of the plaintiff's participation in the winding up, subject to the right of appeal that the plaintiff purported to exercise by the Application.
Again, in my view whether Pipewest was insolvent or solvent is not relevant to my consideration of this issue.[73] The liquidator was exercising powers to receive and adjudicate on the proof of debt for the purpose of determining who was entitled to be included in the distribution of the company's assets,[74] and determining a dividend, whether or not it was expected that the dividend be 100%.
[73] See [51] above.
[74] Tanning Research Laboratories Inc v O'Brien (339) (Brennan & Dawson JJ).
The liquidator's position in relation to the amounts referred to in sub‑pars 2(a), 2(c) and 2(d) of the Form 537 appears to have been based on defences he claimed to be available to Pipewest under the general law and, in addition, on defences available in the winding up, namely that the contract under which the debt was claimed was an uncommercial transaction, or an unreasonable director-related transaction as provided in s 588FB and s 588FDA of the Corporations Act respectively. That is the liquidator relied on defences that would not have been available to Pipewest had the plaintiff been in a position to sue Pipewest, given the operation of s 471B of the Corporations Act, which stays any such proceedings unless leave is obtained.
In my view, the liquidator's determination to reject, in part, the plaintiff's claim in the proof of debt did not determine the question of Pipewest's liability to the plaintiff, as a matter of general law, although there is clearly an overlap in the considerations applicable. Neither would the Application, had that matter proceeded to a conclusion.
Assuming, as I must for the purposes of these proceedings, that Pipewest did have a joint and several liability to pay the amounts claimed in the invoices, in my view there is nothing in the facts that requires the conclusion that the agreement between the plaintiff and the liquidator leading to the dismissal of the Application included a release by the plaintiff of Pipewest's legal liability for the full amount claimed to be owed under the plaintiff's invoices.
The agreement recorded in the correspondence referred to in [31] above was that the liquidator would amend the adjudication of the claim, in consideration of the plaintiff agreeing to the order dismissing the Application with no order as to costs, and not to appeal the amended adjudication. It settled the Application, and the extent to which the plaintiff could participate in the winding up, rather than Pipewest's liability for the debt.
Even if, however, that agreement settled the debt, it did not incorporate an express release of Pipewest and in my view, such a release cannot be inferred. On the basis of the authorities referred to in [53] – [56] above, the agreement should be construed as being limited to an agreement to forebear to sue, given the plaintiff's expressed intention to reserve its rights in relation to recovery against the defendant of a significant portion of the debt claimed, in the letter referred to in [24] above, the plaintiff's effective rejection of the proposal to release the defendant in the letter referred to in [26] above, the plaintiff's pursuit of the debt in the email referred to in [29] above, the limit of the negotiations between the liquidator and the plaintiff to the amount in par 1(b) of the Form 537, and the express withdrawal of the challenge to the points made in par 1(a), par 1(c) and par 1(d) before the agreement between the liquidator and the plaintiff was executed, by the dismissal of the Application and the issue of the amended Form 537.
The defendant submits that fact that the Corporations Regulations 2001 provide that a creditor is not entitled to disturb the distribution of a dividend declared before the creditor's debt was admitted, is 'tantamount to a statutory release of the company from liability' if the proof of debt is adjudicated on and the adjudication is not challenged.[75] No authority for this proposition was provided. The regulation relied also provides that such a creditor was entitled to be paid dividends that the creditor has failed to receive out of any available money for the time being in the hands of the liquidator before that money is applied to the payment of a further dividend. The creditor's right to payment in the winding up of the admitted debt is not extinguished, rather the funds from which the creditor is entitled to receive payment are limited.
[75] Defendant's additional submissions filed 15 March 2019 par 4 and footnote 3 referring to reg 5.6.68.
The defendant also submits that the inability to sue the company without leave of the court, which would not be granted in circumstances where the creditor had reached agreement with the liquidator, also amounts to a release by operation of law. Again no authority was provided for this proposition. However, it must be incorrect. The inability to enforce a claim against Pipewest in legal proceedings, even if that is assumed, does not amount to a release from legal liability from the claim, on the basis of the authorities referred to in [47] – [49] above.
What was the extent of any release?
If I am wrong in determining that the agreement between the plaintiff and the liquidator did not release Pipewest from the debt, the question arises of the extent of that release.
The plaintiff's claimed debt in the three invoices arises from the performance by the plaintiff of its obligations under the agreements: that is the plaintiff earned the right to recover the debt by performing the work the plaintiff was instructed to perform, although it is implicit in the written agreement that the obligation to pay does not arise until the plaintiff issues an invoice.
The defendant relies on the fact that all the amounts claimed against him were included in the proof of debt[76] in support of his submission that the agreement between the plaintiff and the liquidator released Pipewest from the entirety of the debts claimed in the proof, which includes the amounts the plaintiff now claims in these proceedings. The defendant says that the plaintiff is suing the defendant for the unpaid balance of the proof of debt.[77] In my view, however, that is not an accurate description of the plaintiff's claim. Rather the plaintiff is suing the defendant for the balance of the debt the plaintiff claims to be owing to it, for payment of the work performed, which is identified in the invoices.
[76] Statement of claim at par 16.
[77] Defendant's further submissions at par 1(b).
It is evident that the three invoices covered a number of different categories of work. It would have been open to the plaintiff to render separate invoices in relation to each category of work, although it did not do so. However, I do not consider the fact that the amounts claimed to be owed in relation to different tasks are not separately identified results in the debt claimed being single and indivisible. The fact that the plaintiff included the claim for all the work it performed in an intermingled way in the three invoices, does not, in my view, alter the position that the invoices, in fact, evidence, claims for payment for time spent on instructions to perform different categories of work.
In my view it was always open to the plaintiff, after issuing the invoices, to identify the work applicable to individual tasks, the time spent on that work and the calculation of a fee for that work based on the agreed charge out rates, after each account was issued, by correspondence. As I have inferred from the contents of the invoices and the Form 537, this had been done.
By the Form 537 the liquidator clearly distinguished between various tasks of work said to have been performed by the plaintiff under the agreements, and the amounts charged for items of work, accepting that the plaintiff was entitled to some payment for its work including for work done 'at the request of the company relating to issues pertaining to the superannuation audit by the Australian Taxation Office'.
As I have said, the preliminary issue is to be determined on the assumption that Pipewest and the defendant were jointly and severally liable for the debt evidenced by the invoices: in other words I must put to one side the liquidator's determination that Pipewest had no liability to pay the amounts referred to in par 2(a), par 2(c) and par 2(d) of the Form 537 either jointly or severally, or the plaintiff's apparent acceptance of that position.
However, the plaintiff's express intention, by its acceptance of the liquidator's rejection of the claims referred to in par 2(a), par 2(c) and par 2(d) of the Form 537,[78] was to withdraw those parts of its invoices that concerned charges for work the liquidator had rejected from consideration by the liquidator, leaving only the claim for work done in relation to the audit as the subject of the negotiations between the plaintiff and the liquidator.
[78] As evidenced in the letter referred to in [24] above, the email in [32] and what was said in the hearing before the Master referred to in [33] above.
In my view the plaintiff's offer to settle the Application for an additional $30,000, was limited to an offer to settle the claim for $59,700 for work done in relation to that audit, and did not encompass the amounts which are now the subject of the claim against the defendant in these proceedings. Similarly the settlement that was agreed to was limited to the plaintiff's claim for payment for items in the accounts relating to this category of work.
The plaintiff's clear intention, as the liquidator must have understood in the circumstances, was to withdraw the disputed amounts from the liquidator's consideration before the settlement as to the amount in par 2(b) of the Form 537 was concluded; in order to preserve the plaintiff's rights to bring proceedings against the defendant. If the agreement did amount to a release of Pipewest from liability, rather than merely a promise not to sue, I consider that release is limited to the amounts referred to in par 2(b) of the Form 537, and does not affect the plaintiff's ability to sue the defendant in these proceedings.
Has there been an abuse of process?
In light of the above it is not necessary for me to determine the abuse of process argument. However, in my view there is no basis for the submission that the defendant is prohibited from raising this matter as a defence because he did not do so at the hearing before the Master.
The sole authority relied, being the decision of Gaudron and Gummow JJ in James Hardie & Co Pty Ltd v Seltsam Pty Ltd,[79] does not support the plaintiff's submission. In that case a plaintiff sued three defendants for damages arising from asbestos related disease. The first defendant cross‑claimed against the third defendant. The plaintiff reached a settlement with the first and second defendants and judgment was entered against them by consent. The plaintiff and the third defendant settled on terms adverse to the plaintiff and judgment was entered, by consent, in favour of the third defendant, at a hearing at which the first defendant was represented by counsel. The third defendant then successfully applied to strike out the first defendant's contribution claim. The High Court upheld the decision of the Court of Appeal to the effect that the entry of judgment put an end to the statutory right of contribution, on an interpretation of the applicable legislation. The first defendant could have, but did not, take steps to protect its position, by applying to delay the entry of judgment in favour of the third defendant or appealing the judgment when entered. The first defendant was not, however, precluded from claiming a contribution by reason of its failure to object to the judgment in favour of the third defendant, but because, its failure to do so meant the judgment stood, which judgment precluded the contribution claim.
[79] James Hardie & Co Pty Ltd v Seltsam Pty Ltd [17] - [21].
Conclusion
The principles in Walker v Bowry do not provide the defendant with a complete defence, or any defence, to the plaintiff's claim for the reasons given.
I certify that the preceding paragraph(s) comprise the reasons for decision of the District Court of Western Australia.
JG
Associate to Judge Vernon30 OCTOBER 2019
1
14
1