NSW Court of Appeal upholds rejection of proof of debt claim
The recent decision of Alora Property Group Pty Ltd as trustee for Alora Property Group Trust v Henry McKenna (as Liquidator of Alora Davies Development 104 Pty Ltd) [2022] NSWCA 197 has upheld a primary judge’s finding that a proof of debt claim should be rejected. This decision dealt with some interesting considerations for insolvency practitioners and creditors when seeking to challenge a liquidator’s proof of debt.
Background
The company, Alora Davies Development 104 Pty Ltd, was wound up in insolvency on 6 May 2020. It had been a joint venture between its two shareholders “Alora” and “Davies” to develop real property. The arrangements were contained in a shareholder’s agreement, which relevantly provided by clause 16:
The parties agree that Alora (or its nominee) shall be entitled to be paid fees for project managing the Company’s property development(s) including but not limited to managing the development application process. The fees payable shall be calculated at $8,000 plus GST per lot, to be paid as an expense by the Company to Alora (or its nominee), prior to the disbursement of funds via dividends or profit share between the Shareholders.
After the company was wound up in insolvency, APG (Alora’s nominee and related entity) on 5 June 2020 lodged a formal proof of debt with the liquidator, in the sum of $1,084,983.82. On 22 February 2021, the Liquidator admitted APG’s proof to the extent of $166,599.62. The liquidator rejected any claims for project management fees essentially on the basis that as the development had not been completed and there were no proceeds available for distribution, no entitlement to any fees had accrued. The primary judge found in the liquidator’s favour and APG appealed this decision.
In arriving at its decision at first instance, the Court noted that a person appealing against the liquidator’s decision to reject the proof of debt has the onus of showing that decision was wrong, and that question is determined by reference to the evidence before the Court when it considers whether or not to affirm the liquidator’s decision. Further, the decision in Tanning Research Laboratories Inc v O’Brien (1990) 169 CLR 332 remains good law in respect of an appeal against a liquidator’s decision in relation to a proof of debt under s90-15 of the Insolvency Practice Schedule in Schedule 2 to the Corporations Act 2001. These principles were not disturbed on appeal.
On appeal, APG submitted that the terms of clause 16 were clear and unambiguous, to the effect that APG (as Alora’s nominee) was entitled to fees for its project management services and that it did not stipulate that those fees were contingent on any event such as completion of all of the services.
However, the Court of Appeal (Ward P, Macfarlan JA & Brereton JA) disagreed with APG’s interpretation. They held that the proper construction of clause 16 was that the project management fees became payable only upon completion of the project by realisation of the development.
It was concluded that project management was expressly not limited to the managing of the development application process, and so contrary to the appellant’s contention, that alone could not be enough to earn the fee. All of the project management work required to bring the project to completion needed to be performed. The purpose of the provision that the fees would be paid “prior to the disbursement of funds via dividends or profit share” was to ensure the fees would be paid in priority to distribution of any surplus, once funds were available – a situation which would only arise upon completion of the project by realisation.
