Hakea Holdings Pty Limited v Denham Constructions Pty Ltd; BaptistCare NSW & ACT v Denham Constructions Pty Ltd

Before the court are two applications to continue orders the effect of which is to prevent Denham Constructions Pty Ltd (Denham) from obtaining the benefit of adjudication determinations in its favour under the Building and Construction Industry Security of Payment Act 1999 (NSW) (the SOP Act). One application is brought by Hakea Holdings Pty Ltd in respect of an adjudication determination made on 18 March 2016 in the sum of $1,138,045.33. The other is brought by BaptistCare NSW & ACT in respect of a judgment obtained in the District Court of New South Wales on 27 May 2016 for $475,322.32 relying on an adjudication certificate issued on 26 May 2016 for that amount.

The application by Hakea is made in proceedings (the Hakea Proceedings) in which Hakea has brought a claim for damages said to be in excess of $6,000,000 for breach of a contract entered into in October or November 2012 between Denham as contractor and Hakea as principal for the design and construction of an aged care facility at Hamlyn Terrace for $17.7 million (the Hakea Contract). The adjudication determination obtained by Denham for $1,138,045.33 arises from a payment claim made in respect of that contract.

The application by BaptistCare is made in what were originally interpleader proceedings (the BaptistCare Proceedings) arising from the fact that both the Deputy Commissioner of Taxation (DCT) and Denham’s secured creditors, 5G Capital SPV27 Pty Ltd and SPV28 Pty Ltd (together, the 5G Companies), both claim an entitlement to the $475,322.32. The DCT relies on a notice issued on 7 March 2016 to BaptistCare under s 260-5 of Schedule 1 to the Taxation Administration Act 1953 (Cth) (the TAA 1953) requiring BaptistCare to pay to the DCT any amount that BaptistCare owed or would owe to Denham up to the sum of $1,724,260.87. The 5G Companies’ entitlement is said to arise from the fact that they are first and second ranking secured creditors of Denham in respect of all present and after acquired property, including Denham’s judgment against BaptistCare.

It is common ground that the court has power to grant a stay of a judgment, or an injunction restraining the registration of a judgment, based on an adjudication certificate. As Hodgson JA explained in Brodyn Pty Ltd t/as Time Cost & Quality v Davenport [2004] NSWCA 394; (2004) 61 NSWLR 421 at [85]:

In determining whether to grant a stay or an injunction, the court must balance two competing policies of the SOP Act. One is that contractors should be paid promptly for the work that they have done. The other is that any payment under the Act is not intended to affect the rights of the parties under the relevant construction contract. To give effect to the second of these policies, the SOP Act specifically provides in s 32 that the court or tribunal hearing a dispute under the relevant construction contract may make such orders as it considers appropriate for the restitution of any amount paid as a result of an adjudication determination. That right may prove to be worthless if the contractor is or becomes insolvent.

The factors that the court will take into account in balancing the competing policies include the following:

In the Hakea Proceedings, Hakea also relies on Denham’s failure to provide a subcontractor’s statement in accordance with s 127 of the Industrial Relations Act 1996 (NSW), s 175B of the Workers Compensation Act 1987 (NSW) and Schedule 2 Part 5 of the Payroll Tax Act 2007 (NSW). The relevant provisions of each Act are in similar terms. It is sufficient for present purposes to set out the relevant provisions of s 127 of the Industrial Relations Act:

As I have said, in relation to the BaptistCare Proceedings, the DCT also relies on the operation of s 260-5 of Schedule 1 of the TAA 1953 as a reason for refusing a stay.

On 13 March 2015, Denham as contractor and BaptistCare as principal entered into a contract for the design and construction of an aged care facility at Kellyville for $29.65 million (the BaptistCare Contract).

Clause 40A of that contract relevantly provides:

Clause 39.11 of the contract relevantly provides:

“Insolvency Event” is defined in cl 1 to include where “an application is made, a resolution is passed or an order is made (and which is not stayed within 10 Business Days of being made) for the winding-up of the party, including an application relating to dissolution, liquidation, provisional liquidation or bankruptcy”.

Subclause 39.4(a) permits BaptistCare to “take out of [Denham’s] hands the whole or part of the work remaining to be completed and suspend payment until it becomes due and payable pursuant to subclause 39.6”. Under cl 39.6, when work taken out of Denham’s hands has been completed, the Superintendent under the contract is required to assess the costs of completing the works and the costs that would have been payable to Denham if it had completed the works. If the costs of completion are greater than if Denham had completed the works, the difference is payable by Denham. If the costs are less, the difference is payable to Denham.

On 4 December 2015, BaptistCare served a notice under cl 40A giving 5 business days’ notice of termination of the contract. The notice pointed out that the last business day for the purposes of the notice would be 11 December 2015.

On 8 December 2015, Denham wrote to BaptistCare complaining that it had not been given access to the site to remove its construction plant.

On 11 December 2015, BaptistCare wrote a letter to Denham in the following terms:

On the same day, BaptistCare wrote to Denham purporting to withdraw its notice under cl 40A.

On 21 March 2016, Denham issued a notice of dispute in relation to the notice served on 11 December 2015. Clause 42.2 of the contract requires the parties to confer to resolve the dispute or to agree on methods of doing so. So far, the parties have not met or reached an agreement in accordance with that clause.

On 30 May 2016, BaptistCare entered into a contract with Lipman Pty Ltd to complete the work taken out of the hands of Denham. That work has not yet been completed. Mr O’Brien, who is a director of epm Projects Pty Ltd, which has acted as the Superintendent on the project since about 25 July 2015, estimates that the difference between the costs incurred and to be incurred in completing the work taken out of the hands of Denham and the amount that would otherwise have been paid to Denham if the work had been completed by it is approximately $5.4 million. As soon as the work is completed, BaptistCare intends to make a claim against Denham for that amount.

The principal basis on which Denham challenges BaptistCare’s right to take the work out of its hands is that it was precluded from doing so because it had already terminated the contract for convenience. That defence appears to be weak. Clause 40A is expressed to be without prejudice to any other rights BaptistCare has under the contract. The contract was on foot as at the time BaptistCare exercised its right under cl 39.11. It is difficult to see why BaptistCare was not entitled to exercise that right.

Clause 39.2 of the Hakea Contract provides:

Under cl 34.7, Denham is obliged to pay liquidated damages in the event that work under the contract does not reach practical completion by the date specified for practical completion at the rate of $2,500 per day.

On 1 December 2015, Hakea served a show cause notice on Denham dated 27 November 2015. The notice listed a number of what were said to be substantial breaches of the contract. However, the principal one was the failure to bring the works to practical completion by the date for practical completion, which was 22 September 2015, and the failure to progress the works. The notice required a response from Denham by 10 December 2015.

Denham replied on 9 December 2015. It is not easy to understand from the reply precisely what Denham’s response to the principal allegation of delay is. The reply does state that Denham “is entitled to have determined extensions of time of 95.5 days namely an extended date for practical completion of 16 May 2016”. In support of that assertion, it relies on notices of delay.

On 10 December 2015, Hakea responded rejecting Denham’s assertions and terminating the contract.

Mr Katekar, who appeared for Denham, submitted that there had not been a substantial breach because on 17 November 2015 Denham had put forward a program for completion of the work by 7 April 2016 and it was only two weeks later that Hakea served its show cause notice. In Mr Katekar’s submission, approval of the revised program was not a requirement of the contract and any departure from the program in the two week period could not be a substantial departure.

In my opinion, there are at least two difficulties with that submission.

First, there are difficulties with Mr Katekar’s submission that a revised program did not require Hakea’s approval. The logical consequence of that submission is that, upon a request by the Superintendent to provide a revised program, Denham could specify a completion date of its choosing. That would make a nonsense of the contract.

Second, a substantial breach includes a wrongful suspension of the work. According to the evidence of Mr James Barry, a project manager with Caverstock Group Pty Ltd, the Superintendent under the Hakea Contract, Denham ceased performing any substantive work on the site, either itself or through subcontractors, in early November 2015. Denham does not take issue with that evidence. If ultimately it is accepted, it would provide strong evidence of a substantial breach by Denham.

Hakea commenced proceedings on 6 April 2016 claiming damages for breach of contract. It claims the following damages:

Two things are apparent from what I have said and from Mr Barry’s evidence. First, Hakea appears to have a strong case that it was entitled to terminate the Hakea Contract. Second, although there are likely to be disputes concerning the damages claimed by Hakea, its claim is for substantially more than the amount to which Denham is entitled under the adjudication determination it has obtained. It appears that some of the amount claimed by Hakea relates to amounts that are the subject of the adjudication determination.

BaptistCare and Hakea served a combined report and Denham served its own report from expert accountants dealing with Denham’s solvency. The combined report served by BaptistCare and Hakea was prepared by Ms Tamara Lindsay. The report served by Denham was prepared by Mr Bradley Tonks. In considering these reports, it is relevant to bear in mind that the relevant question is not whether Denham is solvent or insolvent, but rather the likelihood that Hakea and BaptistCare will be able to recover the amounts paid by them if ultimately they succeed in their claims against Denham, although obviously there is a close relationship between the two issues.

It is also relevant to observe at the outset that the volume of work undertaken by Denham has decreased sharply over recent years, as shown by the following table setting out Denham’s financial results for the years ending 30 June 2014, 30 June 2015 and 30 June 2016:

Both experts agree that Denham is currently insolvent. However, Mr Tonks expresses the opinion that the problem is temporary and should be overcome in a period of 2 months or so. That conclusion is based on the following table showing Denham’s assets and liabilities as at 30 June 2016:

It is apparent from the table that as at 30 June 2016, Denham had a substantial deficit of net current assets. The table also suggests that as assets are realised Denham’s position should improve and that it has a total surplus of assets over liabilities of $791,562.22. However, as Mr Tonks points out, this analysis depends on a number of assumptions. In my opinion, a number of those assumptions are not made out on the evidence.

First, the evidence is that Denham owes the DCT $1,790,242.83 as at 4 August 2016, not the $606,042.43 included in Denham’s accounts. A large component of the amount claimed relates to PAYG instalments. The DCT has issued two certificates under s 8AAZJ of the TAA 1953 certifying that the DCT is owed amounts that total that amount. Those certificates are prima facie evidence of the facts stated in them. Denham takes issue with the amount claimed by the DCT on the basis that approximately $1.1 million of the amount claimed is owed by a separate company, PC760 Pty Ltd, which was responsible for the employment of Denham’s staff from 1 April 2015 onwards, paid their wages and issued them group certificates. However, no detail is given of the basis of the dispute. In my opinion, the certificates given by the DCT must be accepted for the purposes of assessing Denham’s ability to repay the amounts the subject of the adjudication determinations.

Second, the table states that Denham has current assets of $1,599,383.68 (made up of debtors) and non-current assets of $6,127,559.85 (again made up of debtors). It is apparent from Mr Tonks’ report that those totals and their classification as current or non-current depend on evidence given by Mr Steven McGrath, the sole director of Denham, in an affidavit affirmed on 15 July 2016, concerning Denham’s debtors. The affidavit includes a table setting out Mr McGrath’s comments on each debtor. It is not necessary to set that table out in full. However, the table includes the following items:

It is apparent, however, that these items are not recoverable in accordance with Mr McGrath’s comments.

The table suggests that Denham expected to recover a total of $1 million from the Presbyterian Church “as part of a global settlement” of claim 30 and claim 31, which Mr McGrath expected to be paid by the end of August. However, in an affidavit affirmed on 8 August 2016, Mr McGrath says that the proposed settlement has fallen through, that Denham is currently seeking to enforce a debt owed to it by the Presbyterian Church in the District Court for an amount of $285,813.03 and that it is preparing other payment claims against the Presbyterian Church. It is apparent from this evidence that Denham will not receive $1 million from the Presbyterian Church by the end of August. At most, it will receive $285,813.03.

Mr McGrath gives evidence that Denham is owed $237,937.77 by Bupa Care Services. Denham has sent Bupa Care an invoice for that amount. The invoice describes the amount as “Progress claim for works semi-final”. It is apparent, however, that the amount claimed is retention money. Under cl 5.6 of the contract between Denham and Bupa Care, Bupa Care’s entitlement to retain the retention moneys ceases 10 business days after the issue of a final certificate. However, there is no evidence that the final certificate has been issued. In addition, there is evidence of a conversation between Mr Neal, BaptistCare’s solicitor and Mr Templeman, Bupa Care’s solicitor, in which Mr Templeman stated that practical completion of the project had not been achieved and that he was instructed that no amounts are due and payable by Bupa Care to Denham. Mr Templeman also said that Bupa Care had been served with a garnishee order by the ATO and that consequently any payment by it will be made directly to the ATO. The only conclusion that can be reached on the basis of this evidence is that at some time in the future, Denham may be entitled to $237,937.77, but if and when it is that amount will be paid to the ATO.

Mr McGrath gives evidence that Denham is entitled to be paid amounts totalling $4,304,749.94 by Pepperfield Holdings in respect of the construction of the Pepperfield Lifestyle Resort at Bowral. Mr McGrath says that of that amount $1,348,450 was payable by the end of July 2016 and the balance is due in August 2016. He describes the project as being “on track with no issues identified”. Mr McGrath is a director of Pepperfield Holdings and the company controlled by him has a 50 percent interest in it. There is no evidence that that payment has been made and the only inference available is that it has not. The site manager for the project is Mr Nicholas Cordingley. On 5 August 2016, he swore an affidavit to the effect that the last work he saw completed on the Pepperfield site was completed just before Christmas 2015. He says that at that time the following work had been done:

There is no reason to doubt the evidence of Mr Cordingley. Mr McGrath says that since the start of 2016 there have been 25 days of rain and 35 days of recovery for inclement weather which has delayed progress. But that does not explain why no work has been done since Christmas 2015. Mr McGrath also says that the amounts claimed include work done outside the contract by Denham including accounting work and other project management expenses. However, there is no evidence of what that work was or its value. It is implausible that Denham would have only recently made a claim for work done at the end of 2015, particularly given its financial position. As result, based on the available evidence, it is unlikely that any amount will be received by Denham in respect of this Pepperfield project in the foreseeable future.

Mr McGrath gives evidence that Denham expected to receive $148,433.68 from RSL Life Care by the end of July 2016 in respect of a progress claim for works completed and certified and further amounts from RSL Life Care totalling $529,508.84 by mid-August. There is no evidence that the payment due at the end of July has been made. In fact, in an affidavit affirmed on 4 August 2016, Mr McGrath explains that, due to Denham’s financial position, it has been forced to withdraw from the balance of the RSL Life Care project and that, as a result, it entered into a deed with RSL Life Care by which it agreed to settle its three outstanding invoices for a total of $515,765.83, which will be paid when a final occupation certificate is issued. Mr McGrath says that the final occupation certificate for the project is expected within the next 6 to 8 weeks.

It is, however, difficult to accept Mr McGrath’s evidence. The evidence is that RSL Life Care and Denham entered into a deed dated 26 July 2016. By cl 3.1 the parties agreed to terminate the contract with effect from the date of the deed. Clause 3.2 provides:

Clause 5 of the deed provides:

It is apparent from this clause that Denham must pay RSL Life Care the sum of $515,765.83 by no later than 1 June 2017. Denham is entitled to nothing under the deed.

Mr Katekar submitted that before the deed was executed, RSL Life Care agreed to pay Denham’s subcontractors directly and to that extent Denham’s liabilities were reduced. However, there is no evidence that that happened. That submission is not consistent with the evidence given by Mr McGrath. Moreover, the evidence is that Denham engages subcontractors through project companies. Consequently, any payment directly by RSL Life Care to subcontractors would go to reduce the liability of the relevant project company, not Denham’s liabilities. Consequently, the position appears to be that far from receiving an amount from RSL Life Care, Denham will have to pay RSL Life Care an amount of $515,765.83 by no later than 1 June 2017.

Mr McGrath’s table shows an amount payable by 5G Capital of $102,500 in respect of a progress claim for design and development which was due by the end of July. There is no evidence that that amount has been paid nor any evidence that it will be paid in the near future, despite the fact that Mr Massie, the sole director and secretary of 5G Capital, swore an affidavit in the proceedings. In my opinion, the inference that should be drawn is that Denham will not receive that amount.

Mr McGrath states that he expects to receive an amount of $800,800.00 from BaptistCare “by mid-August” subject to BaptistCare raising a dispute in relation to this claim. The amount is said to be the progress claim due to Denham as a result of the termination for convenience by BaptistCare under cl 40A. However, for the reasons I have already given, in my opinion, it is unlikely that BaptistCare has any liability to Denham. It is more likely that Denham has a substantial liability to BaptistCare.

Third, the statement of assets and liabilities lists the amount of $5,606,361.96 owing to 5G Capital as a debt not immediately due and payable. In his report, Mr Tonks says that he has assumed that the 5G Companies will not call upon their facilities over the period assessed in his report. That period is “6 Months +”. In the present context, the relevant assumption must be that the 5G Companies will not call on their facilities before BaptistCare or Hakea may be entitled to recover the amounts payable by them. It seems clear that without the continued support of the 5G Companies, Denham would not be able to repay those amounts if and when they become due.

In my opinion, it is not clear that the 5G Companies will continue to support Denham. All Mr Massie says in his affidavit is that on 11 July 2016 he wrote to Denham to set out the support that the 5G Companies were willing to give. That letter states:

Fourth, it is reasonable to include the debts owing by Hakea and BaptistCare that are the subject of the adjudication determinations in issue in these proceedings as non-current assets, since the issue is whether those amounts if paid would be recoverable. However, it is not reasonable to include the amount of $878,322.32 said to be owing in respect of the BaptistCare ACT project. It is apparent that Denham has obtained an adjudication certificate in respect of that amount in the ACT. BaptistCare has commenced proceedings in the ACT Supreme Court challenging that amount and Denham has consented to an injunction restraining it from enforcing its rights under that certificate until the proceedings are determined. There is no reason to think that that injunction will be dissolved; and it is unclear whether Denham will be successful in the proceedings or not.

Fifth, the statement of assets and liabilities lists as an asset not immediately available a debt owed by the Pakistan High Commission of $1,027,054.89. It does not disclose a debt of $503,780.65 owing to the Islamic Republic of Pakistan in respect of the same project.

The position is that on 10 April 2013, Denham entered into a contract with the Islamic Republic of Pakistan for the construction of the Chancery Building and associated site works at the High Commission of Pakistan in Canberra for the sum of $7,147,372.

Clause Q9.1 of that contract relevantly provides:

Clause Q10 provides that if the balance calculated by the architect under cl Q9 is a positive figure, the owner must pay the contractor the balance. If the balance is negative, the contractor must pay the owner the balance. Under cl Q10.3 the amount must be paid within 7 calendar days.

On 18 May 2016, the architect issued a certificate stating the amount payable as -$503,780.65. No reason was advanced for why Denham was not obliged to pay the amount in accordance with the certificate.

Denham also claims that it is entitled to recover from the Islamic Republic of Pakistan the sum of $1,027,054.89 as a result of a payment claim it served on 11 September 2015. Although it is clear that the claim is contested, the Islamic Republic of Pakistan did not serve a payment schedule in response to the payment claim within 10 days with the result that, in accordance with the ACT equivalent of s 15 of the SOP Act, Denham became entitled to commence proceedings to recover the claimed amount as a debt. Denham commenced those proceedings. The Islamic Republic of Pakistan raised a number of defences. However, on 12 August 2016, Mossop AsJ delivered judgment in favour of Denham (Denham Constructions Pty Ltd v Islamic Republic of Pakistan [2016] ACTSC 215). The result is that unless that judgment is stayed, Denham is entitled to be paid the sum of $1,027,054.89 which Mr Tonks classified as an asset not immediately available. On the other hand, the Islamic Republic of Pakistan retains a right to recover that amount. The amount claimed by Denham largely relates to extension of time claims that appear to be out of time and already appear to have been resolved. As a result, the Islamic Republic of Pakistan appears to have at least reasonable prospects of recovering any amount it pays.

Sixth, the evidence is that, contrary to an assumption made by Mr Tonks, a number of creditors are pressing for payment. In fact, A Murray & Sons Pty Ltd has brought a winding up application that is before the court on 17 August 2016 based on a debt of approximately $129,000. There must be a substantial risk that Denham will be wound up because it is currently unable to pay its debts as and when they fall due.

It follows from what I have said that the statement of assets and liabilities as at 30 June 2016 is likely to understate Denham’s liabilities by approximately $2.1 million ($1.1 million owed to the DCT, a $500,000 liability to RSL Life Care and a $500,000 liability to the Islamic Republic of Pakistan). On the other hand, the statement of assets and liabilities is likely to overstate Denham’s assets by a large amount. It is difficult to be precise about that amount because I accept that some proportion of the amounts claimed by Denham may ultimately be recoverable. However, if and when those amounts will be recovered is unclear. The total amount of assets that may not be recoverable, or may only be recoverable much later than Denham anticipates, is in the order of $8,525,000 (that is, approximately $700,000 from the Presbyterian Church, $250,000 from Bupa Care, $4,300,000 from Pepperfield Holdings, $500,000 from RSL Life Care, $100,000 from 5G Capital, $800,000 from BaptistCare in respect of the Kellyville project and $875,000 in respect of the BaptistCare ACT project). On the other hand, Denham appears to have a right to receive approximately $1 million from the Islamic Republic of Pakistan immediately, although the Republic appears to have at least reasonable prospects of recovering that amount in subsequent court proceedings. In any event, even assuming that Denham is entitled to be paid the $1 million immediately and to retain it, it will still have a deficiency in current and total net assets.

In my opinion, it is appropriate to continue the orders preventing Denham from enforcing the adjudication determination and judgment it has obtained.

For the reasons I have given, BaptistCare and Hakea both have strong cases that they do not owe the amounts that are the subject of the adjudication determinations under their respective contracts. In the case of BaptistCare, that arises from the fact that it has an offsetting claim under the contract which is for a sum well in excess of the amount that it owes. In the case of Hakea, it arises both from an offsetting claim and from claims that challenge the liability in respect of which the adjudication determination was made.

On the conclusions I have reached, there is little prospect that BaptistCare or Hakea would be able to recover any amount they pay Denham. Denham’s business has declined rapidly over the past three years. Although Mr McGrath says in his affidavit evidence that he intends to re-focus Denham’s business to concentrate on one project at a time, there is no reason to believe that Denham’s business prospects will improve substantially in the near future. Denham is likely to have a substantial deficiency in current assets to meet its current liabilities indefinitely. There is little prospect in those circumstances that it would be able to repay any amount it owed BaptistCare or Hakea. There is a substantial risk that Denham will be wound up in the near future which will obviously have an effect on the recoverability of any amounts paid by BaptistCare and Hakea. The evidence is that Denham would be insolvent whether or not the amounts currently owed by BaptistCare and Hakea were paid or not. Taken together, those considerations strongly favour a stay and the continuation of any injunction preventing Denham from enforcing the adjudication determination in its favour.

In those circumstances, it is not necessary to address Hakea’s alternative case based on Denham’s failure to provide a subcontractor’s statement. However, had it been necessary to decide that issue, I would have concluded that the right to withhold a payment for failure to provide a subcontractor’s statement cannot displace a judgment debt, that, absent an injunction, Denham is entitled under the SOP Act to obtain judgment against Hakea based on the adjudication determination and for those reasons the provisions permitting a principal contractor to withhold any payment due under a contract for failing to provide a subcontractor’s statement would not provide a defence to Denham’s claim or provide a ground for granting a stay or an injunction.

That leaves the position of the DCT. It is not suggested that s 260-5 of Schedule 1 of the TAA 1953 operates to prevent the court from granting a stay or an injunction in respect of a judgment amount or an amount due under an adjudication certificate. Rather, it is submitted that the court should exercise its discretion to refuse a stay or an injunction because of the DCT’s rights under that section. I do not accept that submission. The section is not concerned to adjust the rights between the payer and payee. Rather, it is concerned with putting the DCT in the shoes of the payee so that the DCT has any entitlement to the payment that the payee has. The rights as between payer and payee are to be determined in accordance with the legal principles applicable to their relationship. In this case, those principles indicate that the orders granting a stay and injunctions should continue.

On 29 July 2016, the court made the following orders in the BaptistCare Proceedings:

On the same day, the court made the following order in the Hakea Proceedings:

It is apparent from the terms of the orders that have been made that they continue until further order of the court. I have concluded that no further order should be made. Consequently, it is not necessary to make any substantive orders to give effect to these reasons for judgment.

I will hear the parties in relation to costs if costs cannot be agreed.