McLeod v Lane Cove Municipal Council

1. [1]

   HIS HONOUR: By a summons filed on 20 June 2019, the plaintiff, David McLeod, seeks orders that a judgment made in favour of the defendant, Lane Cove Municipal Council, that was entered in the Local Court on 23 May 2019 by Atkinson LCM, be set aside and instead be entered in favour of him, as well as an order for costs.

The background

1. [2]

   The dispute between the parties concerns a licence granted to a café proprietor over a section of council-owned footpath. At all material times, the plaintiff was the sole director and shareholder of Epitome Holdings Pty Limited (“Epitome”), which operated the café in question, in a plaza known as the Lane Cove Plaza (“the Plaza”). Epitome licensed an adjoining part of the footpath from the defendant, for the outdoor seating of its customers.

2. [3]

   Between 21 March 2011 and 15 June 2011, the defendant upgraded the Plaza and footpath. During that period, the plaintiff failed to pay licence fees that were due. In 2013, the defendant commenced proceedings in the Local Court at Sutherland to recover the unpaid licence fees, together with interest and costs (“the 2013 proceedings”). The plaintiff filed a defence and cross-claim.

3. [4]

   The parties resolved the proceedings by terms of settlement which, together with ensuing events, were summarised by Brereton J (as his Honour then was) in a judgment of this Court, In the matter of Epitome Holdings Pty Ltd [2017] NSWSC 1533, as follows:

4. [5]

   The application by the defendant before Brereton J was for an order that ASIC reinstate Epitome to enable the defendant to obtain a judgment against Epitome following on from the 2013 proceedings, and then enforce that judgment against the plaintiff as a guarantor. The defendant also sought leave pursuant to s 471B of the Corporations Act 2001 (Cth) to continue the Sutherland proceedings against Epitome.

5. [6]

   Brereton J concluded:

6. [7]

   By correspondence dated 22 December 2017, the defendant gave notice, which was expressed to be pursuant to “Supreme Court Order made 13 November 2017”, to the re-appointed liquidator of Epitome, of a certificate of completion. On the same date, on the application of the defendant, judgment was entered against Epitome by the Local Court in the Sutherland Registry, in the sum of $70,387.98 (“the 2017 Sutherland Local Court judgment”).

7. [8]

   On 22 January 2018, the defendant gave notice to the plaintiff of the Supreme Court orders, the completion of the footpath works, the issue of the certificate of completion and its service upon the liquidator, and requested that he pay the debt of $70,387.98, pursuant to the deed of guarantee. Attached to the letter giving notice was a copy of the 2017 Local Court judgment.

8. [9]

   On 29 March 2018, the defendant filed a statement of claim in the Local Court against the plaintiff, seeking judgment in the sum of $72,756.47, which comprised the settlement sum of $70,387.98, together with interest in the amount of $1,145.49 and fees in the amount of $1,223.00. The matter was heard on 13 March 2019 and judgment was delivered on 23 May 2019.

9. [10]

   The Local Court hearing involved consideration of further provisions of the Corporations Act, which were as follows:

10. [11]

    The “relevant date” as stated in s 553(1) is defined in s 9 as follows:

11. [12]

    In her judgment, the magistrate referred to the parties’ submissions. The defendant submitted that once Epitome went into liquidation, the debt was converted into a provable debt pursuant to s 553 of the Corporations Act, which had the effect that the debt could be proved even though there had not been a formal breach of the terms of settlement at the time of the liquidation.

12. [13]

    The plaintiff submitted that the terms of settlement only created an agreement to pay and that the debt would only arise after the two-year period following the issuing or serving of the certificate of completion of the works, so that the defendant did not have the right to enter consent judgment until the two-year period had elapsed. He submitted that s 553 did not convert debts that had not arisen, and therefore it had no application. Accordingly, the judgment entered in the Sutherland proceedings was invalid and, since the moneys referred to in the deed of guarantee must arise from those proceedings, there was no judgment or debt payable to found liability.

13. [14]

    The defendant, in reply, submitted that the necessary preconditions were satisfied by the terms of settlement, which included an agreed fixed amount, coupled with the “ability and necessity to prove in the winding up and inability to recover otherwise”.

The Local Court judgment

1. [15]

   The magistrate found that the key issue in the case was when the plaintiff was entitled to take action to enforce the guarantee. The magistrate was satisfied that a reasonable person would have understood the terms of settlement to require the certificate of completion of works to be issued, rather than served, for the two-year period to start running. The magistrate found that the certificate of completion of works was issued on 12 December 2016 which, had Epitome not gone into liquidation, would have allowed it until 11 December 2018 to pay what was due pursuant to the terms of settlement. The magistrate was also satisfied that the terms of settlement made it clear that Epitome owed the defendant the amount in dispute, although it deferred payment pending the completion of works, the issue of a notice and the passage of two years from that date.

2. [16]

   The magistrate concluded:

The appeal from the Local Court

1. [17]

   The Local Court Act 2007 (NSW) provides, relevantly:

The grounds of appeal

1. [18]

   In his summons, the plaintiff advanced six grounds. Grounds 1 to 4 concerned the magistrate’s interpretation and application of s 553 of the Corporations Act and are considered together. Ground 5 was not developed in submissions and appears to be an acknowledgement by the plaintiff of a finding by the magistrate that the plaintiff submits is of assistance to its case, rather than a ground of appeal. Accordingly, I disregard it as a ground of appeal.

2. [19]

   The grounds of appeal are as follows:

3. [20]

   I am satisfied that each of the remaining grounds raises issues of law and therefore leave is not required.

4. [21]

   Tendered on the hearing was an affidavit of the defendant’s solicitor, which annexed the written submissions of the parties that had been handed up in the Local Court hearing. The defendant is content to rely on its submissions that were handed up below, with little by way of additional submissions.

The parties’ submissions

1. [22]

   In his written submissions, the plaintiff accepted that “the central matter in contention … is whether a payable debt existed at the time of commencement of these proceedings”. Clause 5(c) of the terms of settlement allowed a two-year period for Epitome to pay the debt from the time of “issue” of the certificate of completion. The certificate of completion of works was “created” December 2016 and not served on Epitome until 22 December 2017. If “issue” meant “creation”, the two-year period expired in December 2018. [2] If it meant service, that period expired on 23 December 2019. The plaintiff submitted that “issue” must denote awareness of the existence of the certificate and therefore receipt of it by Epitome, but either way, the claim in the Local Court, which commenced with the filing of the statement of claim on 29 March 2018, was premature.

2. [23]

   The plaintiff submitted that, as it was a future or contingent debt, s 553 applies. However, the magistrate erred by accepting that s 553 “changed the nature of the claim”, as s 553 does not “convert” debts which have not arisen. Its application is limited, as the heading of Pt 5.6 of the Corporations Act and the sub-heading suggests, to “Debts or claims that are provable in winding up”, such as when a claim is admissible to proof, but a liquidator rejects a proof of debt: see Re National Express Group Australia (Swanston Trams) Pty Ltd v Smith (2004) 209 ALR 694; [2004] FCA 1155; and Wallace-Smith v Thiess Infraco (Swanston) Pty Ltd (2005) 218 ALR 1; [2005] FCAFC 49.

3. [24]

   The plaintiff submitted that it appears to be common ground that this debt was not proved, informally or otherwise, and s 553 could not remedy that. Accordingly, the Local Court judgment of 22 December 2017 was invalid, since no cause of action had yet arisen under the terms of settlement. The magistrate had not ruled on the 22 December 2017 judgment, only the right to file it. The guarantee did not operate, because the “provable claim” was not proved and had not been discounted.

4. [25]

   In oral submissions, the plaintiff contended that s 553 rendered the debt provable, but not proved. The debt was not proved thereafter, but could have been, by lodging a formal proof of debt with the liquidator.

5. [26]

   As noted, the defendant relied upon the written submissions that it had handed up at the Local Court hearing. On the issue of s 553, the defendant’s submissions were:

6. [27]

   In this application, the plaintiff relied upon different provisions of the Corporations Act to advance an argument for the first time. The relevant provisions are as follows:

7. [28]

   The plaintiff submitted that s 554B applies to provable debts of the subject kind and, pursuant to its terms, the value of the debt should have been discounted at the rate of 8 per cent per annum, which had not occurred. Regulation 5.6.44 of the Corporations Regulations 2001 (Cth) provides that the rate, for the purposes of s 554B, is 8 per cent per year, “calculated from the declaration of the dividend to the time when the debt would have become payable according to the terms on which it was contracted”. It was submitted that since it appears that there was no declaration of the dividend, apparently because no creditor had lodged a proof of debt, the defendant would have difficulty complying with s 554. Alternatively, s 554 requires that the debt is to be calculated as at the “relevant date”, which the plaintiff submitted would have been March 2014.

Consideration

1. [29]

   I accept that cl 5(c) of the terms of settlement is to be interpreted as meaning that the time runs from the “issue” of the certificate of completion of the upgrade works, but that there is an implication that within a reasonable time, Epitome is to be made aware of the fact of its issue. Accordingly, the two-year period did not commence to run until 22 December 2017 when, following the re-registration of Epitome, notice was served upon the liquidator.

2. [30]

   The only contingency associated with the debt owed to the defendant was the passage of two years from the date of the issue of the certificate of completion; the quantum of debt had been agreed between the parties in the terms of settlement. In Re National Express Group Australia (Swanston Trams) Pty Ltd v Smith, Finkelstein J reviewed the applicable principles to the entitlement to “contingent” debts or claims in the insolvency provisions of the Corporations Act. His Honour reviewed s 553 and noted its genesis in bankruptcy law. In the course of that review, his Honour stated:

3. [31]

   Neither of those two qualifications arise in the circumstances of this case. Finkelstein J noted, at [13]:

4. [32]

   On appeal, in Wallace-Smith v Thiess Infraco (Swanston) Pty Ltd, French J, as his Honour then was, referred to the review of relevant law that had been conducted by Finkelstein J, and observed, at [47]:

5. [33]

   The nature of the debt agreed in the terms of settlement was, in my opinion, one that comes within the ambit of a contingent debt that was considered by Finkelstein J and found to be within the contemplation of the terms of s 553.

6. [34]

   I concur with the magistrate’s reasoning and conclusion that the effect of s 553 was to convert the debt owed by Epitome to the defendant into a right of proof of it against Epitome, even though the two-year period had not elapsed. The defendant obtained the 2017 Sutherland Local Court judgment, which was not challenged by Epitome or the plaintiff, and was accepted by the liquidator as a sufficient proof of debt, without requiring it to be formally proved.

7. [35]

   Having regard to the terms of the deed of guarantee between the parties, the relevant parts of which were summarised by Brereton J in In the matter of Epitome Holdings Pty Ltd at [4] of his Honour’s judgment, the plaintiff became liable for the debt, as determined by the magistrate.

8. [36]

   In relation to ground 6, I agree with the defendant’s submission that, in the absence of an application that the 2017 Sutherland Local Court judgment be set aside, the magistrate was correct to accept it on its face.

9. [37]

   Accordingly, having regard to the plaintiff’s five grounds of appeal, I find that the magistrate did not err in law in respect of her findings.

Orders

1. [38]

   I make the following orders:

   1. (1)

      The summons filed 20 June 2019 is dismissed;

   2. (2)

      The plaintiff to pay the defendant’s costs.