FEDERAL COURT OF AUSTRALIA

Khouzame v All Seasons Air Pty Ltd [2015] FCAFC 28

THE COURT ORDERS THAT:

1.    The appeal be allowed.

2.    The orders of the Court made on 3 December 2014 be set aside and in their place the following orders be made:

(i)    Bankruptcy notice (BN 172625) issued on 13 June 2014 be set aside;

(ii)    there be no order as to the costs of the proceedings before the primary judge.

3.    The respondent pay the appellant’s costs of the appeal, as agreed or assessed.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

THE COURT

Introduction

1    This appeal is from the judgment and orders of a judge of this Court (the primary judge) made on 3 December 2014 dismissing, with costs, the application filed on 10 September 2014. The application was to set aside a bankruptcy notice claiming the sum of $85,236.81.

The judgment under appeal

2    The primary judge said that the dispute between the present appellant and the present respondent emerged in 2013, the respondent then being a subcontractor retained by the appellant to install mechanical ventilation and air-conditioning for a building being constructed at Five Dock, a Sydney suburb. The respondent maintained that the appellant owed it money. The dispute resulted in an adjudication carried out pursuant to the Building and Construction Industry Security of Payment Act 1999 (NSW) (the New South Wales Act). An adjudication was made in April 2014. That adjudication concluded that the respondent was entitled to a payment claim in the sum of $78,120.62. The appellant failed to pay the adjudicated amount. An adjudication certificate was then issued pursuant to s 24 of the New South Wales Act.

3    On 14 May 2014, the sole director of the respondent, Mr Bachir, attended upon the Bankstown Local Court for the purpose of entering judgment against the appellant. In doing so he gave no notice to the appellant. That Court entered judgment in favour of the respondent in the sum of $84,646.62. That sum was for the amount of $78,120.62 together with $6,358 in respect of the adjudicator’s fees and $168 for Local Court filing fees.

4    In June 2014, a bankruptcy notice (BN 172625) issued on the application of the respondent. The amount there claimed was $85,236.81, being the total of the judgment amount plus interest.

5    The primary judge held that there was no evidence of any abuse of process on the part of the respondent, and that the application to set aside the bankruptcy notice should be dismissed.

6    The primary judge set out [28] of the adjudication determination as follows:

On a final note it is apparent from the invoices at 27.1] and 27.2] that the claimant has not made any allowances for any money that may have been paid to date. The respondent says that it has previously paid the claimant $27,500.00 (Incl GST) and if this is so then this amount should also be accounted for in any payment by the respondent to the claimant in relation to the adjudicated amount.

7    The primary judge said the payment of a sum of $27,500 assumed some prominence. There was no dispute that the respondent had received an amount of $27,500 on 4 November 2013. That amount was paid to the respondent by the owner of the development site, Omega House Pty Limited (Omega). The respondent maintained that the amount was paid in respect of work performed by it at the request of Omega. Mr Bachir gave oral evidence before the primary judge.

8    The appellant maintained that the $27,500 represented payment of part of the monies owed by him to the respondent. The argument on behalf of the appellant before the primary judge seized upon the failure on the part of Mr Bachir when he attended upon the Bankstown Local Court on 14 May 2014 to disclose either that there was a real and serious dispute as to whether the sum of $27,500 had been received in respect of work previously undertaken at the request of the appellant, and/or the fact that there was a failure to disclose the contents of [28] of the adjudication determination. The appellant also relied on the failure of the respondent to comply with s 25(2) of the New South Wales Act, which required an affidavit to be filed with the adjudication certificate at the time of seeking judgment disclosing whether the whole or any part of the adjudicated amount remains unpaid.

9    The primary judge, at [28], accepted the account of the conversation and the agreement reached on 4 November 2013 between Mr Bachir and the principal of Omega. That account was as follows:

[23]     … Mr Bachir maintained in his oral evidence this morning that he had a conversation with a principal of Omega (Mr Brian Metledge) on 4 November 2013. Mr Bachir maintained that he expressed concern at the fact that he had not been paid for work performed on site and that other sub-contractors were expressing a like concern. He told Mr Metledge that he was not doing any more work. Mr Metledge expressed his understanding as to Mr Bachir’s position. Mr Bachir further maintained that the agreement reached with Mr Metledge was that All Seasons Air would complete work on site and would perform the work “directly” for Omega. There was agreement that Omega would pay the sum of $27,500 on account of work to be undertaken. [Emphasis in primary judgment.]

10    The primary judge said that, taken at its highest, all that the evidence established was the simple fact that there was a dispute as to the proper characterisation of the payment. All that the respondent had done in proceeding to enter judgment against the appellant was to act upon its own account and its own understanding of the events. It had not been shown that the view upon which the respondent had proceeded was anything other than a genuine belief that it received the payment from Omega in respect of work that it performed at the direct request of Omega and not in respect of a part payment for the amounts owed by the appellant. The evidence fell far short of establishing any breach of any duty of candour on the part of the respondent in not disclosing to the Bankstown Local Court the payment it received from Omega or the existence of any dispute as to the proper characterisation of that payment or the terms of [28] of the adjudication determination. There was no obligation on the part of the respondent to disclose to the Bankstown Local Court the claim of the appellant that the amount adjudicated was in dispute. The respondent had the benefit of an adjudication certificate and was entitled to rely upon the quantum of the amount specified in that certificate. There were no circumstances which required the respondent to further disclose matters which had previously been the subject of dispute and which continued to be disputed by the appellant.

11    As to s 25(2) of the New South Wales Act, the primary judge held that non-compliance with the section did not, of itself, establish an abuse of process in the present case. The failure to file an affidavit at the time of seeking the entry of judgment did not rise as high as an abuse of process for bankruptcy law purposes. The primary judge accepted the account of Mr Bachir which was that he attended upon the Bankstown Local Court and signed such forms as he was then asked to sign. Mr Bachir was asked whether he had received any payment with respect to the adjudicated amount and he responded in the negative. Any failure to file an affidavit to that effect, assuming there to have been such a failure, did not provide any independent reason to conclude that there was an abuse of process or breach of any duty of disclosure.

12    On 10 September 2014, the appellant filed a summons in the Supreme Court of New South Wales seeking, inter alia, an order that the Local Court judgment be set aside. An amended summons was filed on 25 September 2014 which abandoned that prayer for relief. What remained were requests for an order seeking to quash the adjudication determination, a declaration that no construction contract existed and an order for costs. The Local Court judgment had not been stayed or set aside. On 2 October 2014, a judge of the Supreme Court ordered that the proceeding brought by the appellant in that Court be itself stayed pending his payment into court of the sum of $84,478.62. No such payment had been made.

The grounds of appeal

13    The grounds of appeal are as follows:

1.    His Honour erred in failing to find that bankruptcy notice 172625 (BN) was issued as an abuse of process in circumstances where:

a.    the respondent entered judgment against the appellant in the Local Court, which judgment was based on an adjudication determination (the Adjudication Determination) carried out pursuant to the Building and Construction Industry Security of Payment Act 1999 (NSW) (the New South Wales Act);

b.    the process by which judgment was entered was an ex parte process;

c.    the respondent had a duty of candour to the Local Court when making the ex parte application to the Court for the entry of judgment against the appellant;

d.    the respondent breached the duty of candour in failing to disclose to the Local Court that:

i.    The adjudicator who made the Adjudication Determination had determined that if the amount of $27,500 had been paid to the respondent, this amount should be accounted for in any payment by the appellant to the respondent in relation to the adjudicated amount;

ii.    The amount of $27,500 had in fact been paid to the respondent;

iii.    The respondent, contrary to the determination by the adjudicator, did not intend to account to the appellant in any way for the payment of $27,500.

2.    Further or alternatively to 1 above, his Honour erred in failing to find that the BN was issued as an abuse of process in circumstances where section 25(2) of the New South Wales Act required an affidavit to be filed with the Local Court at the time of seeking judgment against the appellant and the respondent failed to file the affidavit required by section 25(2).

3.    His Honour erred in failing to consider himself bound by the decision of the Full Court in Croker v FCT [2003] FCAFC 23 which required the BN to be set aside because it was not authorised by, and entered in breach of the provisions of, the New South Wales Act.

Section 25 of the New South Wales Act

14    Section 25 of the New South Wales Act was in the following terms:

25    Filing of adjudication certificate as judgment debt

(1)    An adjudication certificate may be filed as a judgment for a debt in any court of competent jurisdiction and is enforceable accordingly.

(2)    An adjudication certificate cannot be filed under this section unless it is accompanied by an affidavit by the claimant stating that the whole or any part of the adjudicated amount has not been paid at the time the certificate is filed.

(3)    If the affidavit indicates that part of the adjudicated amount has been paid, the judgment is for the unpaid part of that amount only.

(4)    If the respondent commences proceedings to have the judgment set aside, the respondent:

(a)    is not, in those proceedings, entitled:

(i)    to bring any cross-claim against the claimant, or

(ii)    to raise any defence in relation to matters arising under the construction contract, or

(iii)    to challenge the adjudicator’s determination, and

(b)    is required to pay into the court as security the unpaid portion of the adjudicated amount pending the final determination of those proceedings.

Application for leave

15    In the course of argument in the appeal, counsel for the appellant accepted that before the primary judge he raised the subject matter of ground 3 of the notice of appeal and the decision of the Full Court in Croker v Federal Commissioner of Taxation [2003] FCAFC 23; (2003) 52 ATR 226 (Croker) only in the context of the submission as to the respondent’s duty of candour but not as an independent ground. Counsel for the respondent took the point that leave to rely on ground 3 was required. He accepted that his client was not prejudiced. It was common ground that the required affidavit had not accompanied the adjudication certificate when it was filed in the Local Court. Counsel for the respondent did, however, rely on what he referred to as discretionary matters, that is the dispute was over only $87,500, and he also pointed to the question of whether the appellant was impermissibly seeking in the Federal Court to side-step the stay of the proceedings in the Supreme Court pending the payment into that Court of the amount in question. In the circumstances, we grant the appellant leave to rely on ground 3 because it relies on an accepted fact and because of the potential significance to the status of the appellant of a bankruptcy notice. We consider, however, that since ground 3 is the ground on which the appellant succeeds, not taking the point below should have the effect that there be no order for costs in relation to the proceedings before the primary judge.

The parties’ submissions

16    The appellant did not challenge the findings of fact of the primary judge in so far as they were relevant to the appeal.

17    The appellant submitted that in breach of its duty of candour to the Local Court the respondent failed to disclose material matters to that Court. Those matters were that the adjudicator had determined that if the amount of $27,500 had been paid to the respondent, this amount should be accounted for in any payment by the appellant to the respondent in relation to the adjudicated amount; the amount of $27,500 had in fact been paid to the respondent; and the respondent did not intend to account to the appellant in any way for the payment of $27,500. The affidavit required by s 25(2) of the New South Wales Act provided a convenient mechanism by which the respondent could have disclosed these matters to the Court. It did not matter whether the respondent concealed such matters from the Local Court deliberately or unintentionally. The primary judge erred in failing to set aside the bankruptcy notice as an abuse of process.

18    The appellant also submitted that since the respondent did not make the affidavit required by s 25(2) when its director attended upon the Bankstown Local Court for the purpose of entering judgment against the appellant on the basis of the adjudication certificate, “entry” of the Local Court judgment was “invalid and of no effect” and “the registration was a nullity”: Croker at [10]. As the bankruptcy notice was based upon a non-existent judgment of the Local Court, it should have been set aside: Croker at [11]. The primary judge erred in failing to consider himself bound by the decision of Croker which required the bankruptcy notice to be set aside because it was procured in circumstances which were specifically prohibited by the New South Wales Act.

19    The respondent submitted that the primary judge accepted the respondent’s director’s explanation that the $27,500 was not in respect of work the subject of the adjudication: the respondent referred to [23] and [28] of the judgment of the primary judge. The respondent submitted that the notice of appeal did not challenge the factual findings of the primary judge relevant to the assertion as to the proper characterisation of the $27,500, including at [28], [30] and [33]. The respondent submitted that because the appellant did not challenge the factual findings of the primary judge it was unclear on what basis the appellant could submit that in seeking to have judgment entered against the appellant, the absence of an affidavit as required by s 25(2) of the New South Wales Act ought to have been taken into account as founding a breach of the duty of candour.

20    At its highest, there was a dispute as to the proper characterisation of the payment and it had not been shown that the respondent had not acted on a genuine belief that the payment did not have to be deducted from the adjudicated amount; there was no obligation for the respondent to disclose that the appellant had challenged the amount of $27,500.

21    The respondent submitted that the failure to file an affidavit had no material consequence given that there was no obligation to disclose the $27,500.

22    As to Croker, the respondent submitted that the judgment in issue in that case was a nullity because the Local Court had no jurisdiction to register a certificate of taxation of the High Court of Australia. As such, it was not a question of going behind the judgment. The present issue did not involve the question of whether the Local Court had jurisdiction to issue a judgment based on the adjudication certificate. It clearly did. Ground 3 of the notice of appeal did not allege that the issue of the Local Court judgment was a nullity. On that basis alone, Croker was irrelevant to the appeal.

23    The respondent submitted that the failure to follow s 25(2) of the New South Wales Act was not a ground for setting aside the bankruptcy notice. A series of judgments established that a failure to comply with a statutory provision or rules of court did not result in a conclusion that a judgment could not found a bankruptcy notice if there was a genuine debt owing. The respondent referred principally to Re Ferguson; Ex parte E N Thorne & Co Pty Ltd (in liq) (1969) 14 FLR 311 (Ferguson); Re King; Ex parte Gallagher Ryan & Maloney v King (1994) 54 FCR 493 (Re King); and Amos v Brisbane TV Ltd [2000] FCA 825; (2000) 100 FCR 82 (Amos). The respondent submitted that given the findings of the primary judge and the fact that the Supreme Court proceedings seeking to challenge the adjudication were stayed, there was no basis for the appellant to challenge that the amount claimed in the bankruptcy notice was presently in dispute. Therefore, it was open to the primary judge to find that non-compliance with s 25(2) of the New South Wales Act did not, of itself, establish an abuse of process in the present case.

24    In reply, the appellant submitted that at [29] of the judgment of the primary judge, his Honour said it was unnecessary to reach any firm conclusion on whether the $27,500 was not paid in respect of the work the subject of the adjudication.

25    The appellant also submitted that as an inferior court of record created by statute, the Local Court had no jurisdiction beyond that authorised by statute, and s 25 of the New South Wales Act authorised the issuing of the judgment by the Local Court only if the adjudication certificate was filed with the requisite affidavit. The jurisdiction of the Local Court could not be enlarged simply by ignoring an express statutory limitation on its jurisdiction. It followed that the authorities relied on by the respondent had no application to the present issue.

Consideration

26    In our view, there is nothing of substance in grounds 1 and 2 of the notice of appeal.

27    In our opinion, the obligations on an applicant who is proceeding ex parte do not apply to a person who files an adjudication certificate as a judgment for a debt in a court of competent jurisdiction under s 25 of the New South Wales Act.

28    As noted by Keane CJ in Birdon Pty Ltd v Houben Marine Pty Ltd [2011] FCAFC 126; (2011) 197 FCR 25 at [33], the New South Wales Act is not concerned to give effect to the rights of the parties under a construction agreement and it expressly leaves the determination of those rights to the courts. The process for which the Act provides does not involve a determination, even of a provisional kind, of the actual rights of the parties under their construction contract. At [155], Buchanan J cited with approval the judgment of the New South Wales Court of Appeal in Falgat Constructions Pty Ltd v Equity Australia Corporation Pty Ltd [2005] NSWCA 49; (2005) 62 NSWLR 385 (Falgat) at [22] to the effect that the New South Wales Act confers statutory rights on a builder to receive an interim or progress payment and enables that right to be determined informally, summarily and quickly, and then summarily enforced without prejudice to the common law rights of both parties which can be determined in the normal manner. In our view, the obligation on a person filing an adjudication certificate is the obligation stated in s 25(2).

29    Further, on the facts found by the primary judge the respondent did not breach any duty of candour to disclose to the Local Court that the amount of $27,500 had in fact been paid to the respondent because, on those facts, the respondent had a genuine belief that the amount of $27,500 had not in fact been paid to it by the appellant. Also, on those facts, it was not contrary to the determination by the adjudicator that the respondent did not intend to account to the appellant for the payment of $27,500.

30    We reject grounds 1 and 2 of the grounds of appeal.

31    Ground 3 invokes Croker and the appellant’s written submissions at [3.9] make it clear that he contends that the Local Court judgment was a nullity.

32    In Croker, the dispositive reasoning of the Full Court was that the respondent’s submissions rested on the false premise that the certificate of taxation issued by the High Court’s taxing officer was registered in the Local Court. The respondent’s lodgement of a certified copy of the certificate was not authorised by s 105(1) of the Service and Execution of Process Act 1992 (Cth). The High Court was not a court of rendition for the purposes of s 105. The purported “registration” of the certificate of taxation as a judgment by the registrar of the Local Court was a mere clerical entry in the records of that court and was not an order pronounced or a judgment given by a superior court of record. Such an entry was invalid and of no effect. The registration was a nullity. The clerical entry was completely ineffective in law. The consequence was that the bankruptcy notice relied upon a non-existent judgment of the Local Court with the result that the bankruptcy notice failed because a fact essential to its validity, which it alleged to have existed, did not in fact exist: (Croker at [10]-[11].)

33    The central question on the present appeal is, therefore, whether non-compliance with s 25(2) of the New South Wales Act had the consequence that the “judgment” referred to in s 25(1) was not in law a judgment and was of no legal effect so as to found the bankruptcy notice.

34    In our view, the proper construction of s 25 is that an adjudication certificate only becomes enforceable as a judgment for a debt when it “may be filed” and it “cannot be filed” unless it is accompanied by the affidavit specified in s 25(2). The affidavit is, in our view, a part of the administrative process permitted by the New South Wales Act, a pre-requisite to the filing and essential to the legal effectiveness of the filing. The intention of the provision is that, absent the affidavit, the adjudication certificate may not be filed as a judgment for a debt and therefore does not become enforceable as such a judgment. In our opinion, this construction of the provision is consistent with the approach in Falgat at [22], the effect of which we have set out at [28] above. In our view, the summary nature of the process is entirely consistent with requiring compliance with the express words of s 25(2) that an adjudication certificate cannot be filed unless accompanied by an affidavit stating that the whole or any part of the adjudicated amount has not been paid at the time the certificate is filed. The statutory enforcement mechanism “as a judgment for a debt … and … enforceable accordingly” is dependent for its legal efficacy on compliance with the statutory pre-requisite. Filing of an adjudication certificate which is not accompanied by the required affidavit does not attract the statutory regime of the New South Wales Act and, therefore, the adjudication certificate is not filed as a judgment for a debt and is not enforceable accordingly.

35    Chase Oyster Bar Pty Ltd v Hamo Industries Pty Ltd [2010] NSWCA 190; (2010) 78 NSWLR 393 concerned the language in s 17 of the New South Wales Act which provided that an adjudication application “cannot be made unless” the claimant had notified the respondent within the period of 20 business days immediately following the due date for payment of the claimant’s intention to apply for adjudication of the payment claim and the respondent had been given an opportunity to provide a payment schedule to the claimant within five business days after receiving the claimant’s notice. The relevance of the case is the similarity between the language “[a]n adjudication application … cannot be made” in s 17 and the language “cannot be filed under this section” in s 25(2). The New South Wales Court of Appeal held that compliance with the time limit specified in s 17(2)(a) was an essential condition for a valid adjudication application. As Basten JA said at [96], in agreeing with the Chief Justice’s reasons at [31]–[53] of the judgment and with McDougall J, the language of the provision (“cannot be made unless”) was intractable and neither the structure nor the purpose of the Act suggested a different conclusion. See also Kitchen Xchange v Formacon Building Services [2014] NSWSC 1602, and the dicta of Allsop P (as his Honour then was) in Dualcorp Pty Ltd v Remo Constructions Pty Ltd [2009] NSWCA 69; (2009) 74 NSWLR 190 at [14] in relation to s 13 of the New South Wales Act, as follows:

The terms of s 13(5) are a prohibition. The words “cannot serve more than one payment claim” are a sufficiently clear statutory indication that a document purporting to be a payment claim that is in respect of the same reference date as a previous claim is not a payment claim under the [Building and Construction Industry Security of Payment] Act and does not attract the statutory regime of the Act.

In The Trustees of the Roman Catholic Church for the Diocese of Lismore v T F Woollam and Son [2012] NSWSC 1559 at [49] McDougall J relied on this reasoning to say:

As I have indicated already, any other approach would set at naught the statutory prohibition. And if the statutory prohibition is not to be given effect, then the subsection serves no useful purpose. It would be as though s 13(5) reads to the effect that a claimant cannot serve more than one payment claim in respect of each reference date but, if it does so, the payment claim nonetheless initiates the statutory enforcement or recovery mechanisms.

36    The respondent referred to Matthews v SPI Electricity Pty Ltd; SPI Electricity Pty Ltd v Utility Services Corp Ltd (Ruling No 1) [2011] VSC 167; (2011) 34 VR 560 (Matthews) but that was a case which concerned whether or not a group proceeding asserting a common law cause of action commenced in the Supreme Court of Victoria by a firm of solicitors in a person’s name but without his authority or knowledge was void or a nullity.

37    More generally relevant, in our view, is the decision of the High Court in Berowra Holdings Pty Ltd v Gordon [2006] HCA 32; (2006) 225 CLR 364, relied on in Matthews. The provision then under consideration was s 151C of the Workers Compensation Act 1987 (NSW). That section provided that a person to whom compensation was payable under that Act was not entitled to commence court proceedings for damages in respect of the injury concerned against the employer liable to pay that compensation until six months had elapsed since notice of the injury was given to the employer. On the day prior to the trial of Mr Gordon’s common law damages claim, the employer gave notice that it proposed to rely upon the non-compliance with s 151C and to argue that the proceeding was invalid or a nullity. The employer failed. There are a number of important distinctions between the statutory provision in that case and the present provision. Most importantly, s 151C was construed as postponing the remedy for the common law right to initiate proceedings, whereas in the present appeal the right to obtain a judgment is entirely statutory. Further, s 25 does not postpone any remedy: it is not a question of a person’s entitlement to commence judicial proceedings in a superior court. In our view, the present provision is not concerned with mere timing. Nor can it be characterised as a procedural law giving rise to a mere irregularity.

38    For the reasons we have given in [34] above, we do not accept the respondent’s submission that there were two acts involved in s 25(1): first, the filing of an adjudication certificate as a judgment debt and, secondly, the issue of the judgment, that submission being to the effect that the second act was unaffected by the legal efficacy of the first. For similar reasons we do not accept the relevance of the distinction the respondent sought to draw between the position of the Local Court in Croker and the present case. In Croker, the Court held there was no power to issue a judgment under the Service and Execution of Process Act 1992 (Cth). In our opinion, on the proper construction of s 25 of the New South Wales Act, in the absence of an affidavit complying with s 25(2), the adjudication certificate is not one which may be filed as a judgment in the Local Court and be enforceable accordingly.

39    The respondent placed particular reliance on the decision of Northrop J in Re King but in our view the statutory provision there under consideration was quite different. Section 61(1) of the Supreme Court Act 1986 (Vic) provided that a solicitor must not commence proceedings to recover costs until after the solicitor had complied with that section, except where there was a solicitor-client agreement. Having found that s 61 had not been complied with, Northrop J proceeded on the basis that non-compliance with the section merely made a claim for costs unenforceable and such non-compliance did not go to the validity of the claim: a provision such as s 61 did not prevent a petition being granted, provided the debt was in fact in existence. The fundamental difference between that statutory provision and the provision under consideration in the present case is that under the New South Wales Act there is no underlying existing debt apart from that conferred by the legislation. We repeat our reasoning in [34] above. The effect of s 25 of the New South Wales Act is that there is no judgment to go behind.

40    Similarly, in each of Ferguson and Amos, the factual context was not analogous because in each of those cases there was a relevant judgment. In Ferguson, there was a default judgment of the Supreme Court of New South Wales for moneys lent. In Amos, there was a costs order made by the District Court of Queensland.

Conclusion and orders

41    The appeal should be allowed with costs and the bankruptcy notice set aside. Orders 1 and 2 made by the primary judge on 3 December 2014 should be set aside but there should be no order for costs in relation to the proceedings before the primary judge given that the point on which the appellant has now succeeded was not then argued.

Associate:

Dated:    12 March 2015