Seymour Whyte Constructions Pty Ltd v Ostwald Bros Pty Ltd

1. [1]

   HER HONOUR: This is an application by the second defendant, Australia and New Zealand Banking Group Ltd (ANZ), to be removed as a party from these proceedings pursuant to rule 6.29 of the Uniform Civil Procedure Rules 2005 (NSW) (Removal of parties by order) or, alternatively, that the proceedings against it be dismissed pursuant to rule 13.4 (Frivolous and vexatious proceedings).

2. [2]

   These orders were opposed by the plaintiff, Seymour Whyte Constructions Pty Ltd. The remaining defendants – first defendant, Ostwald Bros Pty Ltd (in liquidation), and third defendant, RSA Equity Pty Ltd – did not actively participate on the hearing of the motion.

FACTS

1. [3]

   In 2006, ANZ and Ostwald executed a Mortgage Debenture. The terms of the Mortgage Debenture were unremarkable. Ostwald granted a fixed and floating charge over “the Company’s undertaking and all its assets, both present and future, including, without limitation … all assets acquired after the date or dates on which the floating charge created under this charge crystalises”: clause 1.1.

2. [4]

   The fixed charge was over all the Company’s right, title and interest (legal or beneficial), both present and future in, to, under or derived from inter alia “any book debts and other debts but not the proceeds of those debts”: clause 2.2(l). The floating charge was over all of the Company’s property which was not subject to the fixed charge: clause 2.3.

3. [5]

   As to crystallisation of the floating charge, the Mortgage Debenture provided that the floating charge would become a fixed charge “automatically and immediately … if this charge becomes enforceable”: clause 2.6(a)(i). The charge immediately became enforceable inter alia if “a garnishee notice is given in respect of tax”: clause 10.2(b).

4. [6]

   Details of the charge were notified to the Australian Securities and Investments Commission in 2006. Following the enactment of the Personal Property Securities Act 2009 (Cth), the charge was registered on the Personal Property Securities Register (PPSR) on 30 January 2012. ANZ was entitled to transfer the charge, any of ANZ’s rights in connection with the charge, and any of Ostwald’s obligations under it without telling the Company and without getting its consent: clause 14.11.

SOPA claim

1. [7]

   In 2016, Seymour (as contractor) and Ostwald (as subcontractor) entered into a Works Subcontract, by which Ostwald agreed to perform roadworks on the Pacific Highway near Grafton. In July 2017, Ostwald served a payment claim on Seymour for some $6 million under the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOPA). On 11 August 2017, Seymour served a payment schedule, proposing to pay $2,505,237.58 by way of progress payments.

2. [8]

   More relevantly to ANZ, on 15 August 2017, Ostwald received a garnishee notice from the Australian Taxation Office. This had the effect of crystalising the floating charge over the assets of the company, including its chose in action against Seymour under the Works Subcontract. As Seymour put it, relying on the explanation by Tottle J in Hamersley Iron Pty Ltd v Forge Group Power Pty Ltd (in liq) (mgrs and recs apptd) [2017] WASC 152; (2017) 52 WAR 90 (Hamersley (2017)), “Crystallisation marks the moment when the equitable assignment of the security to the chargee occurs or is completed”: at [302]. Or as the Court of Appeal of Western Australia described it in Hamersley Iron Pty Ltd v Forge Power Group Pty Ltd (in liq) (mgrs and recs apptd) [2018] WASCA 163; (2017) 53 WAR 325 (Hamersley (2018)), on crystallisation, the asset the subject of the floating charge is “appropriated”: at [53], citing Re Spectrum Plus Ltd (in liq) [2005] 2 AC 680 at [111].

3. [9]

   On 19 August 2017, Ostwald became entitled to “recover the unpaid portion of the scheduled amount from the respondent, as a debt due to the claimant, in any court of competent jurisdiction” or make an adjudication application: section 16(2)(a), SOPA. That is, Ostwald became entitled to $2,505,237.58 from Seymour.

4. [10]

   On 24 August 2017, Seymour terminated the Works Subcontract. On 25 August 2017, Ostwald went into administration. On 27 September 2017, Ostwald served an adjudication application on Seymour under the SOPA Act, which Seymour contended (ultimately successfully) was served ‘out of time’. On 6 November 2017, an adjudication determination was issued, determining that the amount due to Ostwald was some $5 million.

SOPA proceedings

1. [11]

   On 17 November 2017, Seymour commenced proceedings in this Court, challenging the validity of the adjudication determination (SOPA proceedings).

2. [12]

   On 30 November 2017, Ostwald went into liquidation. By reason of section 513B(b) and 513C(b) of the Corporations Act 2001 (Cth), the winding up of Ostwald was taken to have commenced on 25 August 2017. As Seymour put it, ordinarily, section 553C of the Corporations Act would operate on that date in its “self-executing” way, such that there would be a statutory set-off between Seymour’s claims against Ostwald and Ostwald’s rights against Seymour under Part 3 of SOPA: Hamersley (2018) at [91]-[93]. Section 553C of the Corporations Act provides:

3. [13]

   On 5 April 2018, Stevenson J held that Ostwald was entitled to judgment in the adjudicated amount, or, if he was wrong about that, to $2,505,237.58 which Seymour proposed to pay in its payment schedule: Seymour Whyte Constructions Pty Ltd v Ostwald Bros Pty Ltd (in liq) [2018] NSWSC 412. However, any judgment should be stayed until the parties’ rights were finally determined in the liquidation by an account of their mutual dealings as required by section 553C of the Corporations Act: at [31]. Stevenson J refused a late application by Seymour to amend its pleadings to contend that SOPA was inconsistent with section 553C of the Corporations Act and therefore invalid to the extent of the inconsistency by virtue of section 109 of the Commonwealth Constitution: at [175]-[187]. On 20 April 2018, Stevenson J made final orders, including that any judgment obtained by Ostwald from filing an adjudication certificate in respect of the adjudication determination be stayed until an account was taken as contemplated by section 553C of the Corporations Act: Seymour Whyte Constructions Pty Ltd v Ostwald Bros Pty Ltd (in liq) (No 2) (Supreme Court (NSW), Stevenson J, 20 April 2018, unrep). Seymour undertook to lodge a proof of debt in the winding up of Ostwald within 28 days, failing which the stay would be lifted.

4. [14]

   In May 2018, Seymour lodged a proof of debt. The liquidator has yet to admit proofs of debt. It is not expected that there will be a dividend to ordinary, unsecured creditors of Ostwald.

SOPA appeal

1. [15]

   Seymour lodged an appeal (SOPA appeal). In its written submissions for the hearing of the appeal, Ostwald submitted on 17 September 2018, in respect of “mutuality”, that “Seymour … would almost certainly have failed” having regard to Hamersley (2017), where Tottle J held that there was no mutuality of interest between the progress payment entitlements of a builder under a construction contract against its principal and that principal’s counterclaims against the builder because the former claims were subject to a security interest in favour of a financier.

2. [16]

   On 21 September 2018, Tottle J’s conclusions on mutuality were overturned on appeal. The Court of Appeal observed in Hamersley (2018) at [84]-[87]:

3. [17]

   The SOPA appeal was heard in October 2018. Ultimately, Seymour did not press its argument concerning the intersection between SOPA and section 553C of the Corporations Act. As Sackville AJA recorded in Seymour Whyte Constructions Pty Ltd v Ostwald Bros Pty Ltd (in liq) [2019] NSWCA 11 at [66]-[67]:

4. [18]

   In January 2019, the Court of Appeal gave judgment on the SOPA appeal. Sackville AJA, with whom the other Justices agreed, concluded that the adjudication application was not within time but Ostwald was nonetheless entitled to institute proceedings against Seymour pursuant to section 16(2)(a)(i) of SOPA to recover the unpaid portion of the progress claim proposed in Seymour’s payment schedule: at [257]. As Seymour had not paid any of the $2,505,237.58, Ostwald was entitled to the full amount.

5. [19]

   On 12 April 2019, the Court of Appeal made final orders: Seymour Whyte Constructions Pty Ltd v Ostwald Bros Pty Ltd (in liq) (No 2) [2019] NSWCA 64. In particular, the Court of Appeal made Order 3(b):

6. [20]

   As I understood, the parties were ad idem that ANZ’s charge attached to the judgment debt.

Deed of Assignment

1. [21]

   On 29 November 2019, ANZ entered into a Deed of Assignment with RSA, which appears to have assigned 36 securities in respect of various entities in the Ostwald group of companies. The terms of the deed were, again, unremarkable. Relevantly, clause 3 provided:

2. [22]

   The Mortgage Debenture was one such Security. Clause 3.2 obliged ANZ to deliver to RSA the originals of “each title document to the property the subject of a Security” together with the ‘token’ for each financing statement registered by ANZ in respect of each Security, to enable RSA to register the assignment of each Security.

3. [23]

   RSA indemnified ANZ against any claim, loss, liability, damages, cost or expense arising or incurred by ANZ as a result of any Claim: clause 5.4. ‘Claim’ was defined as a demand, suit, claim, litigation or other action in any forum in any way related to inter alia any document delivered by ANZ under clause 3.2.

4. [24]

   According to ANZ’s solicitor, Michael Vickery, RSA’s obligations set out in the deed were satisfied on or before 29 November 2019 and the assignment was completed on that date. As ANZ put it, by the deed, whatever rights ANZ had over the judgment debt were absolutely assigned to RSA, which now holds whatever rights ANZ previously held in respect of the charge and the judgment debt.

These proceedings

1. [25]

   On 18 October 2021, Seymour commenced these proceedings against Ostwald and ANZ. As against ANZ, Seymour seeks the following relief:

2. [26]

   According to the Amended Technology and Construction List Statement, Seymour claims that Ostwald’s work was incomplete and defective and claims to be entitled to inter alia liquidated damages. The extensive pleading is largely concerned with this matter. As Seymour put it, it contends in these proceedings that, on a final basis, the amounts the subject of the Court of Appeal’s orders are not owing from it to Ostwald. That is, the interim right recognised under Part 3 of SOPA does not reflect the final position as between the parties.

3. [27]

   So far as the pleading against ANZ is concerned, Seymour contends that the Mortgage Debenture – to the extent that it assigned or appropriated to ANZ any right of Ostwald under Part 3 of SOPA – was void by reason of section 34 of SOPA. Section 34 of the SOPA Act provides:

4. [28]

   As to why section 34 of SOPA voids the Mortgage Debenture, Seymour contends that the rights given by SOPA are interim only and may be reversed in proceedings under section 32, which provides:

5. [29]

   Thus it is said that, where a claimant is in liquidation and unsecured creditors are unlikely to receive a dividend, a provision in an agreement which purports to assign or appropriate to a third party an interim right under SOPA destroys any mutuality between the claim of the unsecured creditor (here, Seymour) and the claim of the secured creditor (ANZ) to the interim right. The provision of the agreement excludes, modifies or restricts the operation of SOPA as it destroys the unsecured creditor’s ability to reverse the interim right in section 32 proceedings and transforms the interim right into a final right. In addition, Seymour contends that the Mortgage Debenture is void as the rights conferred by SOPA are personal and inherently incapable of being assigned.

6. [30]

   For the same reasons, Seymour contends that the Deed of Assignment is void so far as the deed purported to assign ANZ’s interest in Ostwald’s rights under SOPA, or had the effect of assigning any right of Ostwald or ANZ under Part 3 of SOPA. Seymour claims to be entitled, in equity, to set off its claims against Ostwald against any rights of ANZ. As a consequence, Seymour claims to be entitled to set-off Ostwald’s right to the progress payment under section 553C.

7. [31]

   Finally, Seymour contends that ANZ should be restrained from enforcing any rights it has in respect of the judgment debt (although ANZ does not assert that it has any rights). For completeness, it is said that ANZ should be restrained as SOPA does not permit a third party to insist on payment in respect of a Part 3 interim right in circumstances where, on a final basis, there is no right and, because the intervening solvency of the claimant, the interim right, if paid out, cannot be reversed under section 32 of SOPA.

8. [32]

   Apparently, these proceedings were commenced without warning to ANZ. On learning of these proceedings, a financing change statement was lodged on the PPSR in relation to the charge earlier registered in 2012, to record the change of the secured party from ANZ to RSA. ANZ’s solicitor provided the PPSR verification statement to Seymour’s solicitor, stating that ANZ was not a proper defendant. Correspondence ensued. ANZ provided a copy of the Deed of Assignment and, on 1 December 2021, served a Calderbank letter advising that, if ANZ was not removed as a party forthwith, ANZ would file an application to be removed and seek its costs on an indemnity basis.

9. [33]

   Seymour offered to agree to remove ANZ from the proceedings on ANZ giving various undertakings, being:

10. [34]

    Unsurprisingly, this was not acceptable to ANZ. On 15 December 2021, ANZ filed the application presently before the Court. On 17 December 2021, Seymour amended its pleadings, joining RSA to the proceedings. The same injunctive and declaratory relief sought against ANZ is now sought against RSA.

SUBMISSIONS

1. [35]

   ANZ submitted that it was the predecessor in title to the rights conferred by the charge. It has no interest in the subject matter of the dispute and is not a "necessary party" where it is RSA that is entitled to exercise whatever rights are conferred by the charge, including with respect to the judgment debt. ANZ agreed that, if it continued to hold a charge over Ostwald's assets, then there may be merit in being joined to the proceedings as its rights may be affected by Seymour's claim. But given its absolute assignment of the debt previously owed to ANZ by Ostwald, and the security that ANZ held over Ostwald's property to secure its rights to repayment of that debt, ANZ had no interest in the subject matter of the dispute or the outcome of the proceeding. ANZ no longer holds any security or charge over the property of Ostwald, including Ostwald's judgment debt. ANZ is not the entity against which injunctive or declaratory relief need be sought as ANZ no longer has any rights over the judgment debt. ANZ's rights, interests or liabilities are no longer affected by the resolution of the issues in dispute in the proceeding or the orders that may be made at its conclusion. Besides Ostwald, it is only the interests of RSA, as the assignee of ANZ's rights, that could possibly be affected and RSA has now been joined to the proceeding.

2. [36]

   ANZ accepted that the position may be different if ANZ had received any funds from Ostwald in respect of the chose in action or the judgment debt, as there may be a restitutionary claim against the bank. But ANZ never enforced the security nor obtained any money in respect of the chose in action or judgment debt and, because of the assignment to RSA, ANZ can never recover any money in the future. Those rights belong to RSA. If ANZ has no rights over the judgment debt that were capable of assignment, that was a problem for RSA but not for ANZ. The assignee stands in the shoes of ANZ. If the charge over the judgment debt does not operate by reason of section 34 of SOPA or set-off or some other right then, on any view, it does not affect ANZ. If Seymour is successful in its contentions in these proceedings, that will have the effect that whatever rights were assigned by ANZ to RSA may not have included an appropriation of the particular asset, being the judgment debt; the rights of the chargee with respect to the judgment debt will be whatever the Court finds them to be. But whatever those rights are, they have been assigned.

3. [37]

   ANZ submitted that it was no answer to suggest that ANZ should grant a release to Seymour, following which Seymour would consent to ANZ's removal as a party. A party that has been improperly or unnecessarily joined as a defendant should not be compelled to give a release of the claimant as the price for its removal as a party, particularly where the release sought extended broadly to "any rights [that] ANZ has against Seymour in relation to the matters the subject of the Proceedings". I agree. The undertakings sought gave Seymour wider rights than it would have had, even if the relief sought in these proceedings against ANZ were ultimately granted.

4. [38]

   Seymour accepted that, if the Mortgage Debenture and Deed of Assignment were effective, then its real opponent was RSA. The beneficial owner of Ostwald's rights against Seymour under Part 3 of SOPA would be RSA, although it remained open to Seymour to contend that there was an equitable set-off: Hamersley (2018) at [48], [139]-[177]. However, Seymour put the validity of both documents in issue by reason of section 34(2) of SOPA. ANZ's contention that it was not a necessary party as it has assigned the security interest was said to assume in its favour the issues in dispute in the proceedings, that is, whether ANZ ever had a security interest (by reason of the purported assignment from Ostwald to ANZ, which Seymour contends was ineffective) and whether ANZ assigned that interest to RSA. Seymour put in issue whether ANZ was a secured creditor when section 553C operated, that is, before RSA took the assignment.

5. [39]

   Seymour submitted that ANZ was a necessary and proper party as Seymour seeks relief which directly affects ANZ's rights: Seymour contended that the purported assignment from Ostwald to ANZ was ineffective, the purported assignment from ANZ to RSA was ineffective, and ANZ had no equitable rights against Seymour. The prayers for relief directly affected ANZ's rights, which effect appeared on the face of the order. Otherwise, Seymour would be asserting that the assignment from Ostwald to ANZ was ineffective and the assignment from ANZ to RSA was ineffective even though ANZ was not here to defend the validity of the assignments. If Seymour established that Ostwald’s claims against Seymour was subject to section 553C because, at the date section 553C operated, there was no valid assignment to ANZ, then ANZ may say that the determination was not binding or effective against it.

6. [40]

   Seymour submitted that it was possible that the equitable assignment on crystallisation of the floating charge may be valid but the subsequent Deed of Assignment was invalid. ANZ replied that it was difficult to see how this might happen where the second assignment was a contractual assignment. If ANZ had rights, it assigned them. If it did not have such rights, there was nothing to assign. Likewise, if the asset was not appropriated to ANZ’s security, then ANZ did not assign anything to RSA. There was no reason to think that rights would re-vest in ANZ, such that it should be injuncted.

JOINDER AND REMOVAL OF PARTIES

1. [41]

   Rule 6.29 of the UCPR provides:

2. [42]

   ANZ raised this issue promptly on commencement of these proceedings and thus no question of delay or election to participate arises cf Carpenter’s Investment Trading Co Ltd v Commonwealth (1952) 69 WN (NSW) 175; Sproule v John Fairfax & Sons Ltd [1968] 3 NSWR 655.

3. [43]

   Whether a party should be joined to, or removed from, proceedings turns on similar considerations. "A person or entity should be joined as a party to litigation where orders might be made directly affecting that person or entity's rights and liabilities": Seller v Jones [2014] NSWCA 19 at [49] (per Leeming JA, Meagher JA and Tobias AJA agreeing); Ross v Lane Cove Council (2014) 86 NSWLR 34; [2014] NSWCA 50 at [51]-[53], [86] (per McColl JA, Ward JA agreeing); John Alexander's Clubs Pty Ltd v White City Tennis Club Ltd (2010) 241 CLR 1; [2010] HCA 19 at [131]; News Ltd v Australian Rugby Football League Ltd (1996) 64 FCR 410 at 524-526. When a person is a necessary party, joinder is not a matter of discretion but a necessity: Ashton v Pratt [2013] NSWCA 400 at [28].

4. [44]

   In News v ARL (at 524), the Full Court of the Federal Court of Australia followed Lord Diplock in Pegang Mining Co Ltd v Choong Sam [1969] 2 MLJ 52 at 55-56, when considering the precursor to the equivalent Federal Court rule to UCPR rule 6.29: (emphasis added)

5. [45]

   The Court noted in News v ARL that, in some classes of case, it was not difficult to ascertain the necessary parties. “Where the orders sought establish or recognise a proprietary or security interest in land, chattels or a monetary fund, all persons who have or claim an interest in the subject matter are necessary parties… [as] an order in favour of the claimant will, to a corresponding extent, be detrimental to all other who have or claim an interest”: at 525. (Emphasis added). Further, at 525: (emphasis added)

6. [46]

   Likewise, in determining whether to remove a party under rule 6.29, “consideration is given to whether the rights, interests or liabilities of the relevant party would be affected by any order that may be made, or that party’s joinder was necessary effectually and completely to determine all matters in dispute”: K v St Vincent's Hospital Sydney Limited [2020] NSWSC 742 per Ward CJ in Eq at [15]. As the Court explained in News v ARL at 525:

7. [47]

   As the learned authors of Ritchie’s Uniform Civil Procedure NSW note in respect of rule 6.29, “if the question of joinder is related to substantive issues of law that are fairly arguable, then the proceedings should not be dismissed or stayed on the ground of misjoinder or non-joinder of parties”, at [6.29.5], citing Uniting Church in Australia Property Trust (NSW) v Monsen [1978] 1 NSWLR 575 at 585.

8. [48]

   An example of the application of rule 6.29 in like circumstances is Hayes v Lend Lease Darling Park One Pty Limited [2017] NSWSC 1376, where the plaintiff tripped and fell on stairs in Darling Harbour and sued the defendant for damages. The defendant was said to be the ‘owner, occupier or manager’ of the area where the plaintiff had fallen but the defendant had, in fact, transferred its lease of the area 14 years earlier. Bellew J considered that rule 6.29 and rule 13.4 should be approached in the same way. At [18]:

9. [49]

   While the plaintiff contended that the defendant was still the ‘manager’ of the area, Bellew J reviewed the lease and considered that, even at a prima facie level, it could not be said that the defendant had any ongoing managerial responsibility; this was an untenable proposition on undisputed evidence: at [19], [22]. The claim was dismissed under rule 13.4(1)(b) (no reasonable cause of action is disclosed).

CONCLUSION

1. [50]

   In light of the authorities, it is not sufficient that ANZ is mentioned in the pleadings but rather that the relief sought, if made, will directly affect ANZ as opposed to the effect being indirect or consequential only. That this is so must be obvious and not the subject of a fairly arguable substantive issue in the proceedings.

2. [51]

   Essentially for the reasons advanced by ANZ, it is not a necessary party to these proceedings. Whatever rights ANZ had, as a secured creditor, to the assets of Ostwald – including the judgment debt – have been absolutely assigned to RSA. If, by reason of the contentions advanced by Seymour in these proceedings, ANZ had no entitlement to the judgment debt, then ANZ has assigned nothing to RSA. If SOPA ‘trumps’ section 553C of the Corporations Act, then the consequences will be felt by RSA, but not by ANZ, who has assigned any rights it had absolutely.

3. [52]

   To use the words in News v ARL when considering claims concerning security interests, ANZ does not “have or claim an interest in the subject matter”. The party who is affected by the relief presently sought against ANZ is RSA, who may well wish to argue that the declaration that “no amounts are owing in equity” from Seymour to ANZ should not be made, as such a declaration will affect whether anything was assigned by ANZ to RSA. But ANZ has no interest in the subject, having already assigned whatever rights it had for valuable consideration. If those rights prove less valuable than previously thought, the Deed of Assignment makes tolerably plain that that risk falls on RSA. Indeed, if ANZ were to remain a party, RSA would be obliged to indemnify ANZ for its costs of doing so. Nor does RSA suggest that ANZ’s presence is necessary in order to agitate the appropriateness of the relief sought by Seymour in respect of the rights of Ostwald’s secured creditor. This case is indistinguishable from Hayes v Lend Lease.

ORDERS

1. [53]

   For these reasons I make the following orders:

   1. (1)

      Pursuant to rule 6.29 of the Uniform Procedure Rules 2005 (NSW), remove the second defendant from these proceedings.

   2. (2)

      Order the plaintiff to pay the second defendant’s costs of the Notice of Motion dated 15 December 2021.

   3. (3)

      Direct the plaintiff to file and serve a Further Amended Summons and Further Amended Technology and Construction List Statement by 4.00 pm on 18 March 2022, removing the second defendant and making consequential amendments only.

   4. (4)

      If either party seeks a variation of Order 2: