Security of Payment Fraud Claim Rejected: Defendant Ordered to Pay $450,000

The court ordered the defendant to pay $450,000 into court within 7 days, rejecting the defendant's claim of impecuniosity and the argument that the full amount should not be paid pending the final resolution of the claim.

Supreme Court New South Wales

Medium Neutral Citation: [COMPANY] v [COMPANY] (No 2) [2019] NSWSC 1330 Hearing dates: 23 July 2019 Date of orders: 26 July 2019 Decision date: 26 July 2019 Jurisdiction: Equity - Technology and Construction List Before: Rein J Decision:

1. The Defendant to pay the sum of $450,000 into Court within 7 days.

2. The Defendant to pay the Plaintiff's costs of the Motion on the ordinary basis, as agreed or assessed. Catchwords: JUDGMENTS AND ORDERS – Where the [ADDRESS] of Appeal, accepting the defendant's submissions, had ordered the defendant to pay into Court a sum of $399,000 (plus GST and interest) subject to any further or different order made by a judge of the Supreme Court – Where the defendant sought, by notice of motion, to vary the Court of Appeal's order to require only $60,000 to be paid into Court on grounds of impecuniosity – Where the defendant's impecuniosity was not revealed to the Court of Appeal and the reasons for the defendant's impecuniosity have not been explained, particularly with respect to what the defendant did with substantial adjudication monies received the previous year. Legislation Cited: Building and Construction Industry Security of Payment Act 1999 (NSW) Corporations Act 2001 (Cth) Uniform Civil Procedure Rules 2005 (NSW) Cases Cited: [COMPANY] v [COMPANY] (No 3) (1998) 86 FCR 374; 155 ALR 94 ICI Australia Operations Pty Ltd v Trade Practices Commission (1992) 48 FCR 248 YTO Construction Pty Ltd v Innovative Civil Pty Ltd [2018] NSWSC 1354 YTO Construction Pty Ltd v Innovative Civil Pty Ltd [2019] NSWCA 110 Texts Cited: Nil Category: Procedural and other rulings Parties: [COMPANY] (Plaintiff/Respondent) [COMPANY] (Defendant/Applicant) Representation: Counsel: [redacted] [NAME] (Defendant/Applicant) File Number(s): 2018/97840 Publication restriction: Nil

Judgment 1. I gave judgment in this matter on 10 August 2018 (see YTO Construction Pty Ltd v Innovative Civil Pty Ltd [2018] NSWSC 1354). I shall use the same terminology in this judgment as I did in that judgment. [NAME] appealed the decision (the "Appeal") asserting that I should not have dismissed the three claims made by it against [NAME]. At the hearing of the Appeal, [NAME] abandoned the appeal in respect of the claim described in 21(c) of its Further Amended Technology and Construction List Statement (the "List Statement"), was unsuccessful in relation to its appeal in respect of the claim in 21(b) of the List Statement, but was successful in relation to its appeal in respect of the claim in 21(a) of the List Statement: see YTO Construction Pty Ltd v Innovative Civil Pty Ltd [2019] NSWCA 110. [ADDRESS] of Appeal's orders included (at [93](3)): "(3) Remit the proceeding to the Equity Division for further hearing or redetermination by the primary judge, as the primary judge may determine, or rehearing by another judge of that Division, as the Chief Judge of the Equity Division may determine." And at [93](5): "(5) Order that the respondent pay into Court $399,000 plus GST and interest that had accrued on that sum that formed part of the moneys paid into Court by the appellant pursuant to the adjudicator's determination and the judgement entered thereon on 6 March 2018 and paid out to the respondent pursuant to orders made on 16 August 2018, to await the final determination of the appellant's claim to set aside the adjudication determination for fraud."

1. The facts of the matter are recounted at [10]-[42] of [NAME]'s judgment but, for present purposes, I shall summarise the key aspects of the case: 1. [NAME] contracted [NAME] to undertake excavation work pursuant to a formal construction contract. 2. [NAME] claimed that it had removed material from the site that was not within the contracted description and for which it was entitled to additional amounts of money. It also claimed amounts for other work done under the construction contract. 3. [NAME] disputed that the amounts claimed were payable to [NAME] and the matter was dealt with under the Building and Construction Industry Security of Payment Act 1999 (NSW) (the "[NAME]"). The Adjudicator determined that [NAME] was liable to pay [NAME] $1.5 million. 4. [NAME] brought proceedings in this Court seeking to set aside the Adjudicator's determination alleging that [NAME] obtained the determination by fraud. The fraud alleged related solely to the nature and cost of removing material from the site (an amount of $453,000 determined by the Adjudicator). [NAME] also contended that the alleged fraud tainted the whole adjudication and that all of the amount determined should be set aside, rather than only the amount attributable to debris removal.

5. In support of its Summons, [NAME] paid into Court the entire amount of the determination, i.e. approximately $1.5 million.

6. Having ruled against [NAME] on its fraud claim, I directed that the monies paid into Court by [NAME] be paid out to [NAME]. This was done in August 2018. 7. [NAME] brought the Appeal in the Court of Appeal and, as I have mentioned, was successful in relation to its claim under 21(a) of its List Statement. 8. [ADDRESS] of Appeal addressed the question of how much should be returned to Court pending the outcome of the balance of the proceedings. [ADDRESS] expressed the view that [NAME] would not be likely to be able to set aside all of the adjudicated amount and, even in respect of the haulage amounts, the Court of Appeal concluded that not all of that would be recovered on the basis of fraud and, accordingly, ordered the payment into Court of $399,000 plus GST and interest. [NAME], with whom [NAME] and [NAME] agreed, said at [92]: "However, the parties should be restored to their position as it otherwise was before the primary judge's decision and orders. [NAME] must repay $399,000 plus GST to await the final determination of [NAME]'s claim, together with any interest on that amount that may have accrued and been paid to [NAME] by [NAME]." 1. [NAME] has not paid the amount ordered by the Court of Appeal into Court or any part of it.

2. There is evidence that [NAME] currently has nothing more than $64 in its bank account, and has not tendered for or engaged in any work since December 2017. It had debts of approximately $995,000 as at 30 June 2018, and there was no evidence of what are its current debts.

3. There is evidence of a very limited nature in the affidavits put forward by [NAME] that there is a third party who is said to be willing to put up $60,000, but no evidence of the identity of that party or any affidavit or even a letter from that unidentified person. 1. [NAME] of Counsel appears for [NAME]. [NAME] SC and [NAME] appear for [NAME]. Counsel provided me with their written submissions and I heard oral submissions at the hearing on Tuesday 23 July 2019. 2. [NAME]'s Appeal was heard on 12 April 2019 and the Court of Appeal's judgment was handed down on 15 May 2019. On 17 June 2019, [NAME] filed a Notice of Motion in the Court of Appeal seeking a variation of the Court of Appeal's order in relation to the sum of $399,000 plus GST and interest, namely to require [NAME] to instead lodge with the Court a bank guarantee for $60,000. On 2 July 2019 the Court of Appeal varied the order it had previously made as follows: "Vary Order 5 made by the Court of Appeal on 15 May 2019 to insert the words: 'Subject to any further or different order made by a judge of the Supreme Court.'" 1. [NAME], who appeared for [NAME] before the Registrar of the Court of Appeal, indicated that [NAME] did not oppose that variation and the Motion was fixed to be heard on 23 July 2019.

2. At the hearing of the Motion on 23 July 2019, I asked the parties what the current amount required to be paid was, in accordance with the Court of Appeal's order on 15 May 2019 that [NAME] pay into Court $399,000 plus GST and interest. [NAME], on instructions from his solicitor, advised that the amount required to be paid is $450,000, and [NAME] did not dispute that. I will treat $450,000 as the amount required to be paid by the Court of Appeal (given that GST of 10% would bring the $399,000 to $438,900 and an allowance of $11,100 for interest that accrued on the monies paid into Court by [NAME]) and I shall use that figure in the balance of these reasons (although I will return to the issue of the amount of interest at [19] of these reasons).

3. There are some additional matters of fact to which I need to refer:

1. After it had obtained the adjudication in 2018, [NAME] registered the adjudication amount as a judgment in this Court.

2. In the Court of Appeal there were lodged on behalf of [NAME] submissions which, although primarily contending that my decision should be upheld, included submissions on [NAME]'s claim that if the Appeal was successful the fund of $1.5 million should be paid back into Court, pending the further hearing. [NAME]'s submissions were in the following terms: "Prayer 3 45. The third order sought by [NAME] is an order that [NAME] "pay $1,557,809.08 back in to Court by a date to be fixed by the Court".

46. If a retrial is ordered, [NAME] should not be obliged to repay the whole of the Determination amount back into Court, 47. There are two bases in principle for this.

48. First, even if it be assumed that the determination was affected by fraud, it would be voidable not void; Brodyn Pty Ltd v Davenport (2004) 61 NSWLR421 at [60]. That was common ground below. The determination, being voidable, would not become void unless and until certiorari issues. Certiorari is discretionary: Australian Education Union V General Manager of Fair Work Australia (2012) 246 CLR 117 at [71] (Gummow, Hayne and Bell JJ). A proper exercise of that discretion below could make the payment of unimpeached amounts by [NAME] a condition of the relief sought.

49. Secondly, consistently with the decision of Buss P and Murphy JA in Duro Felguera Australia Pty Ltd v Samsung C&T Corporation (2018) 52 WAR 323 at [140]-[152] and Blue J in [NAME] v [NAME] (No 2) (2017) 127 SASR 193 at [222] (and compare Fulton Hogan Construction Pty Ltd v Cockram Construction Ltd [2018] NSWSC 264 at [40]-[48] (Ball 3))"*, any invalid parts of the determination can be severed from those which are valid and wholly unimpeached by the alleged fraud.

50. How do these principles apply here? 51. Grounds 21(a) and (b) of the TCLS both related to "variation 5", in respect of which the adjudicator awarded $466,800 of a total determined amount of $1,535,377,51. [NAME]'s challenge leaves $1,068,677.51 of the determined amount unimpeached.

52. Ground 21(a) impugned only 22 loads of a total of 66 loads which were the subject of variation 5, That left $312,900 of the determined amount for variation 5 unimpeached. If a retrial is ordered, [NAME] should not be required to repay into Court those parts of the determined amount which are unimpeached by the relevant ground of the TCLS. That is either $1,381,577.51 (in respect of Ground 1) or $1,068,677.51 (in respect of Ground 2)." [Footnotes omitted]

1. In support of its Notice of Motion, [NAME] filed two affidavits of [NAME], one dated 12 June 2019 and the other dated 18 July 2019. 2. [NAME]'s case can be summarised in this way: 1. [NAME] obtained an adjudication in its favour for $1.5 million. It registered that award as a judgment in the Supreme Court.

2. It is entitled to be paid on its judgment subject only to [NAME]'s claim that the judgment was obtained by fraud. [NAME] provides a mechanism for contractors to obtain speedy payment of their claims. The Adjudicator's determination has not, as yet, been found to have been invalid, and [NAME]'s case is that it will not be so held.

3. The fact that the Court of Appeal varied the order it made previously meant that [NAME] was no longer required by Court order to pay the $450,000 and the Court of Appeal has opened up for full reconsideration the question of whether any amount should be paid by [NAME] – it is not, he submits, now a final order. 4. [NAME] is impecunious and cannot pay the $450,000.

5. The bank guarantee referred to in the Notice of Motion is not forthcoming but [NAME] has deposed to [NAME] informing him that "a third party will be able to pay $60,000" into Court (see para 11 of [NAME]'s affidavit of 18 July 2019).

6. To order [NAME] to repay the $450,000 will very likely stultify the litigation. A liquidator will very likely take a conservative approach to any litigation such as this and the proceedings may not be defended. 7. [ADDRESS] should not order a party to do something which it cannot do and the, in effect, mandatory order of the Court of Appeal should be discharged. Reference was made to [COMPANY] v [COMPANY] (No 3) (1998) 86 FCR 374; 155 ALR 94 and, in particular, what was said by Beaumont J at 381: "An order for specific performance is clearly final rather than interlocutory. It is not robbed of its final character by the undoubted circumstance that it "may be dissolved or varied by the court when it is just to do so" (Spry, at 319) for instance, when supervening impossibility of performance either renders the order entirely inappropriate, or requires its modification (see [NAME] and [NAME] [1980] AC 367 per Lord Wilberforce at 399." And what was said by the Full-Court of the Federal Court in ICI Australia Operations Pty Ltd v Trade Practices Commission (1992) 48 FCR 248, 266: "Thirdly, s 80(3) authorises the court to rescind or vary not only an interim injunction but a final injunction. Such an order becomes spent by reason of the temporal or other criteria specified in for its operation (e.g. the duration of a patent). A subsequent change in the law in aid of which the injunction was granted or supervening impossibility of performance required by a mandatory order, may provide special cases." 1. [NAME]'s arguments against the relief sought in the Notice of Motion are as follows:

1. The fund which the Court of Appeal required to be paid into Court was by way of an order in the nature of restitution pending the determination of the issue which the Court of Appeal had determined had to be dealt with by the Court (and which may include a further issue to be the subject of a proposed amendment by [NAME]).

2. At no time was the Court of Appeal informed of [NAME]'s financial circumstances. [ADDRESS] of Appeal received submissions from the respondent (to which I have previously referred) arguing, in the event of a successful appeal, for the payment back into Court of an amount which [NAME] must have known it could not repay. [ADDRESS] of Appeal considered and, in substance, accepted [NAME]'s submissions: see [83]-[92] per [NAME].

3. The financial position [NAME] now asserts was its position as at the time of the hearing before the Court of Appeal. There is nothing new that has happened since the hearing before the Court of Appeal.

4. There is no relevant financial statement evidencing [NAME]'s circumstances after 30 June 2018 and there is no explanation as to what [NAME] did with the $1.5 million that it received in August 2018 or the further $75,000 that it received by way of return by [NAME] of retention monies. [NAME] has chosen not to reveal what has happened to that fund that it received from the Court. Exhibit 1, obtained by [NAME] following service of a notice to produce, demonstrates that large amounts were paid out following receipt of the fund but the identity of the payees is not available and has not been the subject of any evidence from [NAME]. There is no explanation as to why [NAME] has not produced current accounts in the same form as those it presented through [NAME], the sole director of [NAME], in his affidavit of 5 April 2018 filed earlier in these proceedings. The affidavits of [NAME]'s solicitor do not reveal debts of [NAME] such as the $46,000 owing to his firm or the costs order obtained against [NAME] in the Court of Appeal.

5. Prima facie, on the evidence now disclosed by [NAME] it is unable to pay all of its debts as and when they fall due and, therefore, is insolvent (see s 95A of the Corporations Act 2001 (Cth)) and was so as at the time of argument before the Court of Appeal.

6. The order the Court of Appeal made for restoration of the fund identified by the Court was an appropriate order and it has not been shown that it was in any way irregular or illegal or against good faith: see r 36.15(1) of the Uniform Civil Procedure Rules 2005 (NSW).

7. Given the position of [NAME] in the Court of Appeal hearing, it should not be able now to change forensic course.

8. Cases on impossibility of performance are dealing with unforeseen events after an order has been made, not matters known to the injuncted party at the time of the order.

9. Neither the identity nor the capacity of the provider of the proposed "cash security" is identified and the amount proposed is wholly inadequate. In the draft accounts as at 30 June 2018 there is reference to a debt by way of loan from [COMPANY], which [NAME] contended is very likely a reference to [COMPANY], which could well be able to assist [NAME] to comply with the Court of Appeal's order, but about which no evidence has been led by [NAME].

10. There is a complete lack of evidence from those standing behind [NAME] as to their capacity to put [NAME] in funds to meet the Court's order.

11. If it were accepted that there is evidence of potential stultification of [NAME]'s defence of the proceedings, that only raises the question of how [NAME] has funded its defence to date, particularly in the Court of Appeal.

12. It appears that [NAME] has ceased trading and there is little likelihood of it ever being in a position to resume trading. 13. [NAME] submitted that, had [NAME] made its financial position clear before or at the hearing in the Court of Appeal, [NAME] may not have proceeded (on the basis that [NAME] was impecunious) and not have wasted its money in pursuing the Appeal.

14. On the material presented to the Court by [NAME] not only cannot repay the Court the $450,000 but it cannot pay its solicitor's bill of $46,000 or meet the costs order that [NAME] obtained in the Court of Appeal. It has no funds to meet the costs of further litigation which will ensue as a result of the Court of Appeal's determination and which [NAME] wishes to pursue.

1. It should be noted that the payment of the $1.5 million to [NAME] in August 2018 has not led to [NAME] commencing to trade again. On the contrary, it has not undertaken any work since December 2017 even with the payment of funds in August 2018 which, on its case, were due to it (and as found so by the Adjudicator). 2. [NAME] accepted that [NAME] was not able to pay any money back at the time of the Appeal and that the Court of Appeal should have been informed of [NAME]'s financial position had the issue been appreciated (T6.21-22), but resisted the proposition that a forensic decision had been made not to reveal that fact: T5.30 – T6.1. [NAME] contended that even if [NAME] and [NAME] SC did not know that [NAME] was unable to pay any money back into Court, [NAME] must have known, and that it was incumbent on [NAME] (through [NAME] or its solicitors) to explain why the Court of Appeal was not informed, that being a matter wholly within their knowledge.

3. I agree with [NAME]'s criticism of the nature of the evidence presented by [NAME]. In particular, it is to my mind of considerable significance that [NAME] has not revealed what it has done with the $1.5 million that it received in August 2018. I do not accept [NAME]'s assertion that what it did with the money is its business, not only because it is out of that fund which the $450,000 is derived but also because if the payments have been made to persons other than trade creditors, there is a real prospect that [NAME] has become 'impecunious' by its own design. These are matters within the knowledge of [NAME] and he has chosen not to explain how it is that, notwithstanding the receipt of a significant amount of money and not trading since December 2017, [NAME] has no funds available to repay the money it received in August 2018. [NAME] has chosen not to present a clear picture of its present financial position and how it has arrived at that position.

4. The previous point links to a further point made by [NAME], namely the absence of any evidence from those who stand behind [NAME] as to their personal ability to put [NAME] in funds to repay the $450,000. Although the present case is not one involving an application for security for costs, it has some similarity in that [NAME] asserts that if it is required to repay the $450,000 that may stultify the litigation. The litigation will not be stultified if those behind [NAME] assist [NAME] to comply with the order made by the Court of Appeal, and in the absence of evidence from those persons I am not satisfied that they are not able to put [NAME] in funds, should they so wish.

5. On this issue of stultification of proceedings, I accept that I need to have regard to [NAME]'s position, but I think it is not only [NAME]'s position which must be taken into account. The $450,000 fund is the subject matter of the dispute. [ADDRESS] of Appeal has determined that [NAME] should be permitted to pursue its rights to the fund and that the fund should be reinstated. If the Court of Appeal's order is varied so as not to require the repayment, [NAME] will be left with a claim against a defendant without reasonable prospect of recovery of the money to which it would be entitled if it is successful. That would in a practical sense stultify [NAME]'s claim. I am not persuaded that it would be unjust in the circumstances to require [NAME] to return the $450,000 and that if it is not able to do so that that may lead to [NAME] being wound up or otherwise not being permitted to maintain its defence.

6. In addition, there is the further point made on behalf of [NAME] that [NAME] sought to persuade the Court that it should only be required to pay back the $450,000 if [NAME]'s appeal was successful, and yet at the time of the hearing in the Court of Appeal [NAME] was impecunious and had no prospect of paying back into Court any part of the $450,000. Not only does this highlight that the claimed impecuniosity is not something which has only arisen since the orders of the Court of Appeal, but also amounts to a course of conduct by [NAME] in relation to the matter which would render it decidedly unfair to permit it to now advance its lack of funds as a reason to vary the order.

7. I think the material concerning [NAME]'s financial position and the absence of any evidence from [NAME] that [NAME] has the wherewithal to pay all of its debts (both existing and prospective) such that it could maintain its defence even it is not required to pay back the $450,000, very much puts in doubt the contention that it is the requirement to pay $450,000 that would likely stultify the litigation, even putting aside the possibility (limited, I agree) that a liquidator might choose to defend [NAME]'s claim. There is a real question as to whether [NAME] is, and has been for some time, insolvent.

8. I accept, as did [NAME] in his oral submissions, that I do have power to vary the order made by the Court of Appeal by reason of the remittal of this matter to this Division by the Court of Appeal. In my view, however, the Court of Appeal's clear requirement that the fund over which the fraud case should now be fought should be restored (in line with the submission of [NAME] at the hearing before the Court of Appeal) is the appropriate order and should not be varied, since that is, in effect, the maintenance of the status quo, and not requiring it would stultify [NAME]'s bona fide claim to the fund. 9. [NAME] submitted that if I reject the contentions of [NAME], I should simply dismiss the Motion. However, given the fact that the order for payment was made in May and then varied in July to the present form, I think it is appropriate to vary the order to provide that [NAME] is to pay into Court within 7 days of today's date the amount of $438,900 plus an amount for interest which I will fix at $11,100 (making a total of $450,000) unless there is any dispute as to that figure for interest, which fund is to be held in the Court's account pending the outcome of [NAME]'s claim against [NAME]. I will also direct that if the amount of $450,000 (or the adjusted amount, as per my remarks above about the amount of interest) is paid into Court, by or on behalf of [NAME], on or before 4 pm on 2 August 2019, the solicitor for the Defendant is to notify the Plaintiff's solicitor of that payment. 10. [NAME] is to pay [NAME]'s costs of the Motion on the ordinary basis, as agreed or assessed.

11. The matter to stand over to 15 August 2019 before me at 10 am for directions.

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