Reported Decision : (1999) 33 ACSR 301 (2000) 18 ACLC 125 New South Wales Supreme Court CITATION : Re Summit Design & Construction [1999] NSWSC 1136 CURRENT JURISDICTION : Equity FILE NUMBER(S) : 4217/99 HEARING DATE(S) : 22 November 1999 JUDGMENT DATE : 22 November 1999 PARTIES : Summit Design & Construction Pty Limited (Applicant) JUDGMENT OF : Austin J COUNSEL : M J Heath (Applicant) J Johnson (Respondent) SOLICITORS : Cutler Hughes & Harris (Applicant) Watson Mangioni (Respondent) CATCHWORDS : CORPORATIONS - provisional liquidation - application for leave to bring proceedings against company - where proceedings will permit applicant to recover payment from company's debtor under Contractors Debts Act 1997 (NSW) - application refused; BUILDING & CONSTRUCTION - Contractors Debts Act 1997 (NSW) - subcontractor sought leave to sue building company in provisional liquidation, in order to obtain payment from principal under the Act - leave refused ACTS CITED : Contractors Debts Act 1997 (NSW), ss 5, 6, 7, 8, 11, 14, 17, 19 Corporations Law, ss 471B, 472, 555, 556, 559 Barclays Bank Ltd v Quitclose Investments Ltd [1970] AC 567 Bell Coal Pty Limited v UB Minerals Inc (in liq) [1999] NSWSC 3O1 (7 April 1999) CASES CITED : Costain Australia Ltd v Superior Pipe Installations Pty Ltd (Receiver Appointed) [1975] 1 NSWLR 491 Ogilvie-Grant v East (1983) 7 ACLR 669 Vagramd Pty Limited (in liq) v Fielding & Ors (1993) 10 ACSR 373 DECISION : Leave to bring proceedings refused, except to the extent of commencing them THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION AUSTIN J MONDAY 22 NOVEMBER 1999 4217/99 - RE SUMMIT DESIGN & CONSTRUCTION PTY LIMITED JUDGMENT (Ex tempore; revised on 23 November 1999) 1 HIS HONOUR: This matter began with the filing of a summons and notice of motion on 6 October 1999. The summons seeks an order for the winding up of Summit Design & Construction Pty Limited, and the appointment of a liquidator of the company, and the notice of motion sought the appointment of a provisional liquidator. A provisional liquidator was duly appointed on that day. 2 By notice of motion filed on 9 November 1999 Wagstaff Piling Pty Limited seeks an order granting leave to it to commence proceedings against the company under s 471B of the Corporations Law. This is the application before the Court today. 3 The provisional liquidator of the company has appeared at today's hearing in order to make submissions to assist the Court to deal with the application. In effect, the provisional liquidator has drawn the Court's attention to matters which imply that the application should be denied. 4 The applicant is a manufacturer and supplier of piles used in construction. It is a subcontractor to the company. The company was appointed by another company called Sydney Park Development Pty Limited (the developer) to carry out building work on a development project in Alexandria, Sydney. The company defaulted in the payment of three invoices for work carried out by the applicant on this project. The first invoice, which the applicant rendered to the company on 31 July 1999, was in the sum of $249,469. The second invoice, rendered on 31 August 1999, was for an additional $110,574. The third invoice, rendered 30 September 1999, was for an additional $192,146. The company made claims on the developer in respect of these amounts, but has not paid the applicant. 5 The developer has paid the company with respect to the matters covered by the first two invoices. The applicant concedes that in respect of its claims against the company for those amounts it is an unsecured creditor not entitled to any particular priority. However, the developer has not yet paid the company with respect to the amount claimed in the third invoice, in the sum of $192,146. The applicant seeks leave under s 471B to bring proceedings against the company for recovery of this amount. 6 There is evidence before me of the financial state of the company. It appears that the assets and undertaking of the company are the subject of a charge in favour of National Australia Bank Ltd. Further, the financial statements of the company for the year ended 30 June 1999 show a deficiency of net assets and shareholders' equity of $6,075,761. 7 In these circumstances, the applicant seeks leave to proceed in order to take advantage of the Contractors Debts Act 1997 (NSW). The effect of the Act is to allow a person who has carried out work (typically, a subcontractor) and is owed money by a defaulting contractor (typically, a builder) to obtain payment from the person who engaged the defaulting contractor (the principal, typically the proprietor), to the extent that money is still payable by the principal to the defaulting contractor: s 5. In the present case the applicant's objective is to obtain payment of the amount claimed in the third invoice directly from the developer. As the applicant frankly conceded, this would give it an advantage over other unsecured creditors tantamount to an absolute priority. 8 The scheme of the Act is as follows. Section 5 gives the unpaid subcontractor the statutory right to obtain payment from the principal in the circumstances which I have described. An important limitation is that payment can be obtained by the subcontractor only out of money 'that is payable or becomes payable to the defaulting contractor'. Hence, the Act is not available to the extent that the developer has paid the company with respect to work done by the applicant in this case. 9 Section 6 establishes the procedure for obtaining payment pursuant to the statutory right. It requires that a debt certificate must have been issued for the money owed, and that the unpaid subcontractor must serve a notice of claim on the principal together with the copy of the debt certificate. Section 7 sets up the procedure for issue of a debt certificate. A debt certificate may be issued after judgment has been given in proceedings relating to the recovery of money by the subcontractor against the defaulting contractor. The certificate is issued by the Court in which the proceedings have been brought, and it appears on the face of s 7 that the Court has a measure of discretion. If, for example, proceedings for recovery of debt were brought by the present applicant against the company those proceedings may well be instituted in the District Court. I note that the District Court is not a Court for the purposes of the Corporations Law and is, therefore, not in a position to exercise relevant discretions under the Corporations Law, including the discretion to grant leave under s 471B. 10 Section 8 states that service of a notice of claim on the principal operates to assign to the subcontractor, the obligation of the principal to pay money owed under the contract to the defaulting contractor (see Costain Australia Ltd v Superior Pipe Installations Pty Ltd (Receiver Appointed) [1975] 1 NSWLR 491 at 499). The assignment is limited to the amount of the subcontractor's certified debt. Under s 11 the subcontractor has a right of recovery if the principal fails to pay pursuant to the notice. 11 If, therefore, leave were granted by this Court under s 471B of the Corporations Law, the applicant would be permitted to take proceedings to recover the amount stated in the third invoice, against the company as defendant. If the applicant obtained judgment in those proceedings it would then apply to the Court in which judgment had been entered for a debt certificate. Upon the applicant serving the debt certificate and a notice of claim upon the developer, the developer would be obliged to pay the applicant the money owed under its contract with the company, up to the amount stated in the third invoice. 12 In the present case the building contract between the developer and the company is in evidence. The developer has given notice to the builder under clauses 12.01 and 12.02 of the building contract. The consequences of those steps are spelled out in clause 12.05 and, in particular, in clause 12.05.04. According to that provision, until completion of the building works, the developer is not bound to make any further payment to the company, but after completion the developer's representative is to ascertain the costs properly incurred by the developer and its loss or damage caused (in effect) by the company's default, and clause 12.05.04 makes provision for an accounting which sets off the amount so calculated against money owing by the developer to the company. If the applicant in the present case obtains a statutory assignment under the Act, what is assigned is a chose in action limited by those provisions, which may reduce the amount stated in the third invoice or even eliminate it. There is no evidence before me as to whether that would be so. 13 In these circumstances the applicant contends that it is proper to exercise the Court's discretion to permit proceedings even though the practical effect of doing so may be (if the other steps which I have set out come to pass) that it will obtain payment from the developer, possibly of the full amount of the third invoice, in priority to other creditors including other subcontractors. 14 It appears to me that I ought not to exercise my discretion to grant substantial leave, notwithstanding the very able and forceful arguments which have been put to me on behalf of the applicant. If one reviews the foundational provisions of Chapter 5 of the Corporations Law dealing with external administration, one identifies an important public policy. The public policy is to ensure that once a step has been taken which causes the company to be in external administration, individual creditors are no longer able to recover their debts from the company separately but must abide by a system of rateable distribution out of the assets of the company in accordance with the principles of the Law. Thus s 555 states that except otherwise provided by the law (not, one notes, by other legislation such as the Act), all debts and claims proved in a winding up rank equally and, if the property of the company is insufficient to meet them in full, they should be paid proportionately. Section 556 ordains the order of priority of payment in a winding up. Section 559 states that the debts of a class referred to in any of the paragraphs in s 556(1) rank equally between themselves and are to be paid in full, unless the property of the company is insufficient to meet them, in which case they are to be paid proportionately. One of the events which commences this regime is the appointment of a provisional liquidator under s 472 of the Law. 15 The applicant referred me to cases dealing with the exercise of the Court's discretion under s 471B. He placed particular reliance on some observations by McPherson J in Ogilvie-Grant v East (1983) 7 ACLR 669, 671-2, where his Honour said: 'The precise purpose and function of provisions similar to s 230(3) [then the equivalent of s 471B] have seldom been explained. From time to time the suggestion had been made that the prohibition exists in order to effectuate the statutory policy of ensuring that corporate assets are distributed rateably among all creditors so that none of them will gain an advantage over others: See eg. Re Sydney Formworks Pty Limited ... But in Australia at least it is not often that the institution of proceedings or even the recovery of judgment operates to confer a priority or advantage on a litigating creditor. A more convincing explanation is that, without the relevant restriction, a company in liquidation would be subjected to a multiplicity of actions which would be both expensive and time consuming well as in some cases as unnecessary. This explanation has been accepted in a number of Canadian cases and appears also to have been adopted by Street J in Re A J Benjamin Limited.' 16 That passage was cited with approval by the full Federal Court in Vagramd Pty Limited (in liq) v Fielding & Ors (1993) 10 ACSR 373 and by Rolfe J in Bell Coal Pty Limited v UB Minerals Inc (in liq) [1999] NSWSC 3O1 (7 April 1999). The passage establishes that it is open to the Court in the exercise of its discretion to grant leave under s 471B even in a case where the effect of doing so is to give the applicant for leave an advantage over other unsecured creditors. McPherson J's observations show that it is relevant to take into account such other matters as the need to avoid multiplicity of actions which would be expensive and time consuming, and possibly unnecessary. But that is not to say that the fundamental principle of rateable distribution in an external administration is to be disregarded by the Court when it deals with an application for leave under s 471B. McPherson J's point was only that the fundamental principle is not necessarily relevant to an application under s 471B because the institution of proceedings is not itself an event which in the normal case confers priority or advantage on the litigating creditor. But in the present case, the granting of leave will set in motion a chain of events which could and probably would give the applicant an advantage over other creditors, though the quantification of that advantage is unclear in view of the terms of the contract which I have mentioned. That being so, it is relevant in this case to take into account the fundamental principle with respect to rateable distribution in deciding whether to grant leave. 17 The applicant says that the principle with respect to rateable distribution is given full rein with respect to the first two invoices, since the Act cannot assist the applicant because the developer has paid the relevant amount to the company in respect of those two invoices. The applicant acknowledges that in respect of those amounts, it is merely an unsecured creditor whose rights are limited to rateable distribution in the normal fashion. But the applicant asserts the principle of rateable distribution should not be applied to the third invoice amount. 18 The applicant's counsel draws an ingenious analogy with the Quistclose trust ( Barclays Bank Ltd v Quitclose Investments Ltd [1970] AC 567). There is more than a whiff of similarity between the position of the claimant in that case and the applicant's position here. But a whiff of similarity is no substitute for precise legal analysis. It is not suggested that any proprietary claim arises in the applicant with respect to any money in the hands of the developer. The Quistclose case applies only where it is proper as a matter of law to determine that a trust has arisen, and that is not so here. There being no trust or other proprietary claim in the application, it is inescapable, in my view, that the applicant must be subjected to the principle of rateable distribution, painful though it undoubtedly is in such a case as this. 19 There are other considerations which lead me to the view that leave ought not to be granted here. I do not wish it to be inferred that in my view an application under s 471B based on the Contractors Debts Act can never succeed. The other considerations in the present case include the presence of a secured creditor and the absence of any evidence that this creditor, and other subcontractors (if there are any) have been given notice of the present application. 20 Reflection about the position of other subcontractors reinforces the conclusion that I ought not to grant leave in the present case. One can imagine that if leave were granted now, there would be further applications for leave in the event that there are other subcontractors in the same position as the applicant with respect to its third invoice. The race, that is the race to have access to funds in the developer's hands which otherwise would be paid to the company, would be won by the swiftest. Under the Act the victor, the subcontractor who is first to serve a notice of claim and debt certificate on the developer, receives payment to the potential exclusion of the subcontractors who are not quite as quick. I cannot see the justice of that result. 21 At today's hearing there was contention as to whether the liquidator would be prejudiced if I were to grant leave. It is likely that orders could be drafted so as to protect the position of the liquidator completely or substantially. Under s 471B the Court may grant leave on terms, and the applicant has suggested, plausibly enough, that those terms could include limiting the leave to the specific amount of the third invoice, preventing the enforcement of the judgment against the company in liquidation, and also preventing the applicant from making any claim for costs against the liquidator. 22 There is a provision in the Act for an attachment order to be made (s 14). I accept the applicant's submission that I could protect the liquidator from the risk of any such order by imposing a term which would prevent the applicant from seeking to employ that remedy. And so I am not persuaded that arguments about risks and expense to the liquidator carry very much weight in a case such as this. 23 As to the risks and prejudice of the applicant, my attention was drawn to s 17 of the Act, under which proceedings in respect of a debt cannot be taken under an Act more than 12 months after the debt becomes payable. In the present case the company is only in provisional liquidation. It may be that some events may occur which will bring the provisional liquidation to an end. It would be unfair to the applicant, if that were to occur, that the time taken for the working out of the provisional liquidation meant that it had become statute-barred under s 17. 24 The best way of dealing with that problem is to grant leave under s 471B to a strictly limited extent, to permit proceedings in respect of the third invoice to be taken on terms that no further steps be embarked upon once the proceedings have been commenced. Nothing further should be permitted to be done by the applicant than what is necessary to avoid the limitation period in s 17. 25 Finally, I want to say something about the relationship between the Corporations Law and the Act. I have taken the view that the availability of remedies under the Act is a matter which the Court may properly take into account in the exercise of its discretion under s 471B. However, the Act should not be construed so as to prevail over any provisions of the Corporations Law - for example, so as to extinguish or qualify those sections of the Law which add up to the fundamental principle about rateable distribution. 26 The Act does not in terms refer to the liquidation of the defaulting contractor. Section 19 states that the Act does not affect certain other remedies, but there is no mention of the Corporations Law. In these circumstances the correct principle of construction is to be found in s 5 of the Corporations (New South Wales) Act 1989 (NSW). That section states that a later enactment of the Parliament of New South Wales is not to be interpreted as to amending or repealing or otherwise altering the effect of the Corporations Law of New South Wales, expect so far as the later enactment provides expressly that it is to have effect despite applicable provisions of the Corporations Law. There is no such express provision in the Act. Therefore, as a matter of construction the Act should not be taken to qualify the provisions and principles of the Corporations Law. In the result the availability of relief under the Act is relevant, but not determinative in an application under s 471B. 27 I therefore hold that the notice of motion succeeds only to the very limited extent that the applicant be granted leave to commence proceedings against the company under s 471B of the Corporations Law, on terms that no steps be taken by the applicant to prosecute those proceedings except by leave of this Court. I grant liberty to apply before me on 48 hours' notice. I order that the applicant pay the respondent liquidator's costs, since the application has substantially failed. I stand the application for winding up over to the Corporations Judge on Monday 7 February 2000. * * * * * * * * * * Last Modified: 11/24/1999 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.