A&K Madhoji Pty Ltd v The Trustee Of Neale Walter Novek [2011] FMCA 819 (1 September 2011)

Last Updated: 25 October 2011

FEDERAL MAGISTRATES COURT OF AUSTRALIA

A &K MADHOJI PTY LTD AS TRUSTEE v THE TRUSTEE OF THE PROPERTY OF NEALE WALTER NOVEK

[2011] FMCA 819

BANKRUPTCY – Trustee – review of decision – proof of debt - consideration of relevant standard for assessing proof of debt – whether setoff allowed to quantify provable debt – consideration of whether special circumstances present to warrant costs order against trustee personally – decision set aside – no special circumstances to warrant personal costs order.

Bankruptcy Act 1966 (Cth), s.82, s.84(3), s.86, s.102, s.104, s.105(2) Queensland Building Services Authority Act 1991 (Qld), s.72

Coventry and Ors v Charter Pacific Corporation Limited [2005] HCA 67; (2005) 227 CLR 234

Applicant:

A&K MADHOJI PTY LTD AS TRUSTEE FOR THE MADHOJI FAMILY TRUST

Respondent:

THE TRUSTEE OF THE PROPERTY OF NEALE WALTER NOVEK, A DEBTOR

File Number:

BRG 450 of 2011

Judgment of:

Burnett FM

Hearing date:

14 July 2011

Date of Last Submission:

14 July 2011

Delivered at:

Brisbane

Delivered on:

1 September 2011

.

REPRESENTATION

Counsel for the Applicant:

Mr J. Dearn

Solicitors for the Applicant:

Romans & Romans Lawyers

There was no appearance by or on behalf of the Respondent

ORDERS

(1) That pursuant to s.104 of the Bankruptcy Act 1966 (Cth) the Court extend the time to appeal against the decision of the Respondent made on 16 May 2011 to the date of this application.
(2) That the Respondent’s decision of 16 May 2011 which was made pursuant to s.102(1) of the Bankruptcy Act 1966 (Cth) be set aside pursuant to s.104 of the Bankruptcy Act 1966 (Cth).
(3) That the Applicant’s Proof of Debt be admitted in the sum of $559,995.95.
(4) That the Applicants costs of and incidental to the application be costs in the bankruptcy.

FEDERAL MAGISTRATES COURT OF AUSTRALIA AT BRISBANE

BRG 450 of 2011

A&K MADHOJI PTY LTD AS TRUSTEE FOR THE MADHOJI FAMILY TRUST

Applicant

And

THE TRUSTEE OF THE PROPERTY OF NEALE WALTER NOVEK, A DEBTOR

Respondent

REASONS FOR JUDGMENT

(Revised from Transcript)

1. On 10 December 2010, Neale Walter Novek filed a debtor’s petition. Andrew Hugh Jenner Wily was appointed his trustee. At the time of filing his petition, the bankrupt filed a statement of affairs detailing, inter alia, his list of creditors. The creditors disclosed in the statement of affairs included the listing “A & K Madhoji Family Trust - $0.” There was no reference to “A & K Madhoji Pty Ltd (ACN 069 060 653) as Trustee for the Madhoji Family Trust (ABN 57 933 807 253)”, but I assume, given the similarity in title, that the reference to that creditor is also a reference to the applicant. On about 8 March 2011, the applicant lodged a proof of debt in the estate, claiming $1,033,316.45. However, in correspondence dated 13 May 2011, the trustee wrote to the applicant noting:
   • “The bankrupt’s records indicate you are a debtor in the amount of $450,000.”
2. A demand for payment of that sum followed. A dispute appears to have arisen between the applicant and the trustee from this point.
   In email correspondence between them dated 16 May 2011, the trustee noted the applicant had lodged a proof of debt. However, as no dividend was to be declared, the trustee stated he would not be dealing with proofs. He noted the applicant was, however, recorded as a debtor in the sum of $450,000.00. He requested the applicant advise of its availability to attend his office to discuss that matter further with him.
3. As I have earlier noted, the applicant had delivered a proof of debt in respect of the sum of $1,033,316.45. That same day, that is, 16 May 2011, notwithstanding that proof of debt, the trustee wrote advising that he rejected the applicant’s claim. In his letter of that date he stated:
   • “Take note that I, Andrew Hugh Jenner Wily, Armstrong Wily, Chartered Accountants, on level 5, 75 Castlereagh Street Sydney, NSW 2000, as trustee of the estate of the above named bankrupt, have this day rejected your unsigned and undated proof of debt, which was received in this office on 8 March 2011, made against the estate to the extent of $1,033,316, and have rejected such claim in full on the following ground:
     • 1. You claim to be a creditor of the estate in respect to defective works carried out by the bankrupt pursuant to works completed under a commercial building contract between the contractor, Neale Novek, and the proprietor, A & K Madhoji AFT Madhoji Family Trust. This claim was reviewed by the Building Services Authority, who determined that an amount of $450,000 remains unpaid under the contract.”
4. The applicant now seeks to review that decision. The trustee has not appeared, but has informed the court that he will abide the court’s ruling. The hearing itself is to proceed as a hearing de novo.
   To understand the applicant’s claim and the trustee’s response, it is necessary to review the circumstances surrounding a certain construction contract which was concluded between the applicant and the bankrupt in the period leading up to the bankrupt’s bankruptcy.
5. On about 5 May 2008, the applicant entered into an agreement with the bankrupt whereby the bankrupt was to undertake certain building works which can broadly be described as a townhouse development. Difficulties arose in the course of the project, which I will expand upon shortly. However, in summary, a classic building dispute evolved. The applicant complains that the bankrupt didn’t complete the works in accordance with the contract. He complains the work was performed defectively, that the project ran behind schedule, and that the project did not achieve completion by the due date. The bankrupt appears to have suffered cash flow difficulties, requiring the applicant to pay some of the suppliers and subcontractors directly during the course of the works. Ultimately, the applicant says, it incurred completion costs because the bankrupt abandoned the works; that is, the bankrupt did not complete the works, leaving it to the applicant to undertake completion.
6. There was material concerning these matters made available to the trustee prior to the hearing. It appears that at least in part, so far as the trustee was informed at the time of his decision, the bankrupt complained that the applicant didn’t pay the moneys due under the contract. Furthermore, there are complaints now by the bankrupt that there were variations which were not paid for by the applicant. Further, that extensions of time which ought to have been allowed to meet the applicant’s delay claim were not permitted. And finally, that the applicant’s engagement of independent subcontractors gave rise to a compensable disruption claim on the part of the bankrupt.
7. Before examining the competing claims, it is first necessary to comment upon the Building Service Authority’s (BSA’s) involvement, as it appears it is the BSA’s involvement which has plainly influenced the trustee’s decision in this case. It appears that once difficulties arose between the bankrupt and the applicant in the course of the works, the applicant engaged a building surveyor to provide an assessment of the bankrupt’s work. Although not expressed in material, it is apparent that the applicant was plainly unhappy about the workmanship of the bankrupt among other things. Accordingly, it engaged Building Services Proprietary Limited to undertake various inspections.
8. Building Services Proprietary Limited issued a number of inspection reports, which were variously dated October to November 2009. Arguably, the applicant was seeking to set up a complaint against the bankrupt under the Queensland Building Services Authority Act 1991 (Qld) (QBSA Act); that would have involved, in part, seeking directions for rectification of building work via an appropriate authorised inspector of the Queensland Building Services Authority. In response to the applicant’s preparation and delivery of those reports, and in response to the complaint made to the BSA, the BSA arranged for its own inspection of the works. While its own inspector assessed the need for some rectification, he also observed the bankrupt’s complaint, contended in response to the applicant’s complaints, that the applicant owed it – that is, the bankrupt – a sum of $450,000.00. Accordingly, each of the BSA’s reports contained the following concluding paragraph:
   • “At this time, based upon the premise that a Supreme Court hearing is pending and that the licensee claims he is owed approximately $450,000, it would be unreasonable for the BSA to direct rectification until such time that these matters are dealt with in the appropriate forum.”
9. This matter is significant because, had a direction to rectify issued and not been complied with by the bankrupt, as the licensee, he and the building company would have contravened the QBSA Act and have been exposed to risk of disciplinary action, including a loss of licence to undertake building works. Without a current licence, it would have been unlawful for the bankrupt to continue building work. In any event, the statutory scheme provided for under the QBSA Act also provides via Part 6 for consideration of such matters as the underlying warranties in the relevant contract, and provides for an engagement of dispute resolution. In this instance, the applicant had already commenced proceedings in the Supreme Court. Accordingly, in my view, the trustee was incorrect in simply stating in his decision that:
   • “... this claim was reviewed by the Building Services Authority, who determined that an amount of $450,000 remains unpaid under the contract.”
10. The BSA’s observation simply noted the competing claims of the applicant and the bankrupt, and determined not to exercise its available powers under s.72 of the QBSA Act in light of that dispute. It is in this context that the applicant now seeks relief.
11. Before examining the relief sought and if it is to be granted, it is necessary to examine the basis upon which the court’s jurisdiction is enlivened and how it is to be exercised. Section 104 of the Bankruptcy Act 1966 (Cth) relevantly provides:
    • “Application to Court
    • (1) A creditor ... may apply to the court for review of a decision of the trustee under section 102(1), (3) or (4) in respect of a proof of debt.
    • (2) The court may comment upon the application, confirm, reverse or vary the decision of the trustee.”
12. Section 102 of the Act relevantly provides:
    • “Admission or rejection of proofs
    • (1) The trustee shall examine each proof of debt and the grounds of the debt sought to be proved and, subject to the power of the Court to extend the time, shall, not later than 14 days after the expiration of the period specified in the notice of intention to declare a dividend as the period within which creditors may lodge their proofs of debt, either:
      • (a) admit the proof of debt in whole;
      • (b) admit it in part and reject it in part;
      • (c) reject it in whole; or
      • (d) require further evidence in support of it.
    • (2) Where the trustee rejects a proof of debt in whole or in part, he or she shall inform the creditor by whom it was lodged, in writing, of the grounds of the rejection.”
13. Section 82 deals with debts provable in bankruptcy. It relevantly provides:
    • “Debts provable in bankruptcy
    • (1) Subject to this Division, all debts and liabilities, present or future, certain or contingent, to which a bankrupt was subject at the date of the bankruptcy, or to which he or she may become subject before his or her discharge by reason of an obligation incurred before the date of the bankruptcy, are provable in his or her bankruptcy.
    • ...
    • (2) Demands in the nature of unliquidated damages arising otherwise than by reason of a contract, promise or breach of trust are not provable in bankruptcy.”
14. Finally in the context of this application, regard might also be had to s.86, which deals with mutual credits and setoffs. It provides:
    • “(1) Subject to this section, where there have been mutual credits, mutual debts or other mutual dealings between a person who has become a bankrupt and a person claiming to prove a debt in the bankruptcy:
      • (a) an account shall be taken of what is due from the one party to the other in respect of those mutual dealings;
      • (b) the sum due from the one party shall be set off against any sum due from the other party; and
      • (c) only the balance of the account may be claimed in the bankruptcy, or is payable to the trustee in the bankruptcy, as the case may be.”
15. In this context, the first question to be considered is whether the applicant has any provable debt, and if so, whether those debts are capable of fair valuation.
16. I note at the time when assessing the original proof of debt, the trustee appears to have accepted its form, despite its apparent defects. Secondly, despite the form not being signed or dated, the trustee made no demand under s.84(3) for the proof of debt to be supported or supplemented by a statutory declaration.
17. The relevant standard to be addressed for assessing a proof of debt appears not to be proof in the balance of probabilities, but rather reasonable satisfaction in respect of the existence of a debt. There is no assistance to be gained from the case law as I have found no authority on that point. However, in the context of claims or demands for unliquidated damages, the observations of the court in Coventry and Ors v Charter Pacific Corporation Limited [2005] HCA 67; (2005) 227 CLR 234 at paragraph [144], are helpful. There, Kirby J observed:
    • “In our system of law, “demands” are formulated by those who demand. Commonly, they make such demands by oral claims, letters before action and eventually by pleading a claim in a court of law. Such a pleading could not be conclusive. In every case it would remain for the court to characterise the “demand”. This is made clear by the use of the expression “in the nature of” in s 82(2). The court deciding the character of the demand looks at the nature of the demand. It is not confined to the language of its formulation. But as a practical rule of thumb, where proceedings have been brought, the formulation of the demand in those proceedings will ordinarily be the best evidence of the true character of the plaintiff’s “demand”. At least this approach is more certain. It is supported by precedent. Until a more comprehensive and reformed law is adopted by the parliament, that would be the solution I would favour.”
18. Dealing then with the facts; At the outset it should be noted that the applicant has judgments against the bankrupt in the form of two separate costs orders.
19. They have each been subject to assessment. There is some dispute attended upon the assessment, but in the absence of any material to contradict the assessments, they should be accepted at face value. They are for sums of $40,327.95 and $7,085.50. They should be allowed as liquidated claims.
20. The more troublesome proofs relate to the applicant’s unliquidated claim alleged in respect of its breach of contract claim. In respect of this claim, it having an uncertain value, it is necessary to see whether an estimate can be made. The applicant’s statement of claim in the Supreme Court proceedings provides some guidance.
21. The heads pleaded included a claim for liquidated damages of $209,600.00, a claim for overpayments made by the applicant to the bankrupt in the sum of $291,935.00, completion costs incurred by the applicant to bring the construction to completion of $114,368.00, and rectification costs of $370,000.00. It should be observed that the delivery of the statement of claim does not of itself prove up the contingent debt. However, its expression does provide some guidance as to the appropriate heads of claim in respect of this part of the applicant’s claim when considered in conjunction with the affidavit of Mr Madhoji.
22. Dealing with the matters raised in the statement of claim. First, rectification costs: the only material in support of that part of the applicant’s claim is the draft affidavit of Mr Arun Madhoji, director of the applicant. While it is not strictly necessary to prove the claim to the standard expected of a court, the claim must be supported by some reliable albeit not necessarily admissible evidence. The only evidence on this issue is the applicant’s statement. By his own admission, he is not a builder, and the source of his opinion on this matter is not evident. Whilst recognising that the matter could be the subject of an appropriate claim for unliquidated damages, I am not prepared to ascribe any value to the present claim on the state of the material presently before me. However, other claims included in the statement of claim fall into a separate class.
23. Liquidated damages were provided for by clause 26 of the contract. The contract provided for a staged construction with the commencement date for the works being 1 May 2008. The date for practical completion was set at 19 December 2008. The contract provided for a liquidated damages allowance of $400.00 per day, a day being defined as a calendar day within the terms of the contract. The applicant’s evidence was that there were no extensions of time negotiated in accordance with clause 22 of the contract. Furthermore, the evidence was that, whilst the works commenced in mid-June 2008, they were not brought to completion by the contractual due date for practical completion, or indeed at all.
24. The works continued until about mid-August 2009, when works were abandoned by the bankrupt and taken up and concluded by the applicant. In due course, as a matter of form, a notice of practical completion was issued on 28 October 2009. Based upon those bare facts, the applicant appears to be entitled to liquidated damages in the sum of $209,600.00, as alleged by the statement of claim. In terms of the other heads, it must be restated that it is alleged that the bankrupt abandoned the works in mid-August, leaving the works incomplete and defectively performed.
25. Arguably, the circumstances gave rise to a repudiatory intent on the part of the bankrupt, which repudiation was accepted and thus the contract was terminated. Such facts would enliven a claim on the part of the applicant for damages for completion costs, together with the costs for rectification. As I have earlier noted, rectification costs cannot be adequately assessed. However, the applicant has paid completion costs of $114,368.00 to bring the works to completion.
    In addition, the applicant says that he incurred costs on behalf of the bankrupt in the course of the works in the sum of $196,300.00.
26. It follows that, in completing the works following the bankrupt’s alleged unlawful termination, the bankrupt appears to be indebted to the applicant in a sum of $310,668.00. That is made up as follows:

Contract Price 2,700,000.00

Less payments made

Amounts paid by the applicant 196,300.00

Completion costs 114,368.00

Total expenditure by the applicant: 3,010,668.00

Less contract price: 2,700,000.00

Balance: $310,668.00

27. The applicant is entitled to a credit for those sums it paid which ought to have been covered by the contract. The contract also provided for retention moneys. However as a retention ought to be paid across to the respondent in the ordinary course, that should not be included in any allowance which is presently made.
28. It follows, on my finding, that the proof ought to have been allowed in the sum of at least $559,995.95, which is made up as follows: costs in the first application, $40,327.95; costs in the second application, $7,085.50; liquidated damages, $209,000.00; and then, unliquidated damages for breach of contract, $310,668.00, which totals $559,995.95. In reaching that sum, I note that there is no allowance included for rectification costs, which I acknowledge appear to be required, but which to date have not been adequately quantified.
29. Even after allowing for a setoff of the sum of $450,000.00 pursuant to s.86 if the facts permitted it (but presently they don’t), there is plainly indebtedness due by the bankrupt to the creditor. However, I’m not required to determine the question of the setoff; I make that observation simply in passing, and in doing so, I am particularly mindful that the $450,000.00 is based upon the BSA’s assessment.
    I note that the BSA assessment has not been tested and remains a live issue for resolution between the bankrupt and the creditor.
30. On the applicant’s case, the bankrupt has failed to bring the construction to a state of practical completion as defined, and has otherwise breached the building contract by abandoning the works and by his egregious delay. All that conduct was arguably repudiatory. The applicant accepted the repudiatory conduct and terminated the contract. On that basis, the bankrupt estate would only be entitled to be paid a sum representing the difference between the unpaid balance due under the contract less the value of the contract as completed after allowance for the extra costs incurred by the creditor in bringing the works to a contractual state of completion, together with liquidated damages.
31. Here a question remains as to whether the $450,000.00 represents the unpaid balance due under the contract as I’ve outlined and thus whether any setoff might be allowed pursuant to s.86 in quantifying the provable debt due. This is a matter clearly in dispute on the pleadings but not subject to evidence and so cannot be assessed. This is so irrespective of the fact that on the applicant’s case the bankrupt has no entitlement against it. I order that the applicant’s proof of debt be allowed in the sum of $543,348.45.
32. So far as costs are concerned, the applicant seeks for an order that costs be costs ordered personally against the trustee. Relevantly, the applicant refers to s.105(2), which is in these terms:
    • “105(2) A registered trustee is not personally liable for such costs unless the court is of the opinion that there are special circumstances that justify that the trustee be personally liable.”
33. The circumstances of this case are unusually complex. At the time the trustee proceeded to consider the proof of debt, the trustee only had before him an unsigned copy of a proof of debt and affidavit of the respondent, that affidavit being the affidavit of Arun Madhoji, which is a relatively lengthy affidavit which deposes to the circumstances surrounding the construction contract. It can be seen by reference to the extensive annexures that the matters that I have outlined in my reasons are extremely complicated, if not by any other matter, but by the sheer volume of material itself.
34. The matters which require resolution were matters which required a consideration of a building contract in the standard master builders form, which could be seen by many to be somewhat arcane and esoteric, particularly to someone who is not familiar with matters of construction law. Likewise, the volume of material dealing with the dispute between the parties, including matters detailed in the statement of claim and defence which have been placed before the court, highlight the complexity of the facts underlying the proof which was submitted to the trustee. Section 105(2) of the Act provides an exception to the general rule that the costs of an application ought ordinarily be costs in the bankruptcy, and it would seem on a reading of s.105(2) that in order to be satisfied that an exception is established, there must be “special circumstances that justify an order that the trustee be personally liable.”
35. The adjective “special” which informs the noun “circumstances” is defined in the Macquarie Dictionary, to include:
    • “6. distinguished or different from what is ordinary or usual; a special occasion; 7. extraordinary; exceptional; exceptional in amount or degree; especial; special importance.”
36. Those special circumstances are directed to the trustee, such as would invoke his personal liability. In other words, the provision requires something undertaken by the trustee in his capacity as trustee that is peculiar or unusual that justifies a departure from the customary order. Plainly, in a circumstance where the trustee has failed to act in accordance with the duty that would ordinarily be expected of a reasonable trustee, where he has overlooked something which he ought not properly have overlooked, or where some other failing on the part of the trustee can be demonstrated, it would seem that it would be possible to make out special circumstances.
37. However, in a case where the trustee is presented with lengthy and complex material, it would be unfair, in my view, to visit an order for personal liability for costs upon the trustee, as the trustee could not have been in any position to inform himself in the same manner that the court has been able to inform itself of the issues alive between the parties. It follows, in my view, that special circumstances justifying an order that the trustee be personally liable have not been made out, and the appropriate order in this case would be that the costs be costs in the bankruptcy.

I certify that the preceding thirty-seven (37) paragraphs are a true copy of the reasons for judgment of Burnett FM

Date: 20 October 2011