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23 NOVEMBER 2023 BY JASON GEISKER & NICOLE BURNS
Middleton J’s judgment in Hastie Group Limited (in liq) v Multiplex Constructions Pty Ltd (Formerly Brookfield Multiplex Constructions Pty Ltd) (No 3) [2022] FCA 1280, delivered on 2 November 2022, contains important guidance for liquidators and other stakeholders in the administration of insolvent subcontractors. The Federal Court’s rejection of the liquidators’ proprietary claims in the proceeds of performance bonds and upholding the head contractors’ ‘automatic’ and ‘autonomous’ right of statutory set-off was the culmination of 5 years of complex and hard-fought litigation brought by the liquidators to recover approximately $120m in receivables and proceeds of drawn bank guarantees. The subsequent decision ordering the liquidators to pay costs of certain of the respondents reflect the Judge’s findings they were “wholly unsuccessful and in parts misguided in relation to various issues”.[1]
Background
The Hastie group of companies provided mechanical, electrical and plumbing services in countries including Australia. Prior to liquidation, the entities entered into major long-term building subcontracts with various head contractors. Pursuant to those subcontracts, the Hastie entities performed work and rendered progress payment invoices to the respective head contractors, which invoices remained unpaid as at the date of liquidation (Appointment Date).[2]
Under each subcontract, the Hastie entities were required to secure their performance by way of bank guarantees issued to the relevant head contractor. As is common commercial practice, each Hastie entity held a “bank guarantee facility” with the issuing bank for the purpose of issuing bank guarantees to beneficiaries.[3] The Hastie group also had in place a Deed of Cross-Guarantee, under which each Hastie entity would guarantee to a ‘Creditor’ (as defined) the payment in full of any debt payable by another Hastie entity.[4]
After the Appointment Date, each head contractor failed (or refused) to pay the amounts allegedly owing as at the Appointment Date for work performed by the relevant Hastie entity. Instead, in general terms they:[5]
(a) elected to terminate or suspend performance of their respective subcontracts;
(b) stated that they had or would incur costs and expenses to have other providers perform the services the Hastie entities now could not perform, and asserted an entitlement to set off against the amount sought by the relevant Hastie entity; and/or
(c) called on the bank guarantee provided by the relevant Hastie entity, resulting in the issuing bank drawing down on the guarantee and providing the proceeds to the head contractor.
The Hastie entities and liquidators alleged:[6]
- the head contractors failed to pay to the Hastie entities the cumulative sum of $60m in “receivables” owing as at the Appointment Date (the ‘Receivables Case’);
- after the Appointment Date, the head contractors impermissibly drew the cumulative sum of $63.5 million on bank guarantees (the ‘Bank Guarantee Case’); and
- the monies owed in receivables and the monies drawn down by the head contractors on the bank guarantees were property of the relevant Hastie entity.
The liquidators sought to recover those monies and apply them in satisfaction of the liabilities of each of the Hastie entities in accordance with Chapter 5 of the Corporations Act 2001 (Cth) (Act).[7] The trial, and the ensuing judgment, was limited to the issue of liability. It should be noted that only a debt claim, as distinct from a claim in damages or quantum meruit, was pleaded and pressed at the liability trial by the liquidators.[8]
The head contractors (whose respective positions were broadly aligned) made the following counter-arguments:[9]
- no actual receivable arose on the terms of the subcontract;
- if a receivable was owing, they were entitled to set off that amount, pursuant to section 553C of the Act,[10] against monies owed by the Hastie entity to the respective head contractors, under the relevant subcontract by reason of the loss and damage it has suffered by the Hastie entity’s being unable to complete the works under the subcontract; and
- the value of their claims against the relevant Hastie entity was greater than the amount of the unpaid receivables alleged, and the amount of the guarantee proceeds held by them.
The decision
The ‘Receivables Case’
His Honour made certain general findings as matters of principle (and without expressing a final view as to what occurred in each project) as follows:
1. As to the general construction of the subcontracts:
(a) If the relevant Hastie entity did not comply with the contractual preconditions for the making of a payment claim, then a claim for payment cannot arise under the subcontract. That is, where the contractual preconditions are not satisfied and there is no valid progress payment claim, the Hastie entity will have no valid claim for the receivables in the main proceeding because no debt will have arisen under the subcontract.[11]
(b) If the agreed contractual mechanism for the determination of the debt due and payable by the head contractor is not satisfied then no debt arises under the subcontract.[12] For instance, where the head contractor is required to assess each progress claim and issue a payment schedule for a certified amount, and that has not occurred, the contractual provisions as to the conditions of payment have not been fulfilled entitling the Hastie entity to payment.
(c) If the relevant subcontract contained default or termination clauses that dealt with the treatment of pending or future progress payment claims at or after termination of the subcontract, such clauses make it very difficult for the Hastie entity to claim that it is entitled to a receivable or progress payment claim following termination of the subcontract.[13] That is, where the subcontract, properly construed, does not oblige the head contractor to make payment of any outstanding payment claims where it has validly exercised its right to terminate, no debt arises.
2. As to the application of the statutory right to set-off under s 553C:
(a) The head contractors were entitled to set off the amount of any receivables against monies owed to them by the Hastie entities, which was a “claim” within the meaning of s 553C on account of an accrued right under the subcontract which existed before the Appointment Date. Importantly, the application of that right is automatic. The head contractor can apply section 553C themselves and without recourse to the liquidators, that is, without having to lodge a proof of debt in the winding up and await the determination of the liquidators. Where the liquidators consider the head contractor has not sufficiently evidenced their set-off claims, the onus is on the liquidators to bring proceedings (for instance a debt claim).[14]
(b) On the issue of mutuality, the head contractors were entitled to set off their contractual claims against Hastie Group Limited (the First Applicant) against a different Hastie entity’s receivables claim by virtue of it being a guarantor of all Hastie entities under the Deed of Cross-Guarantee. Therefore, a damages claim for loss arising from termination of the subcontract may be set off against any Hastie entities’ claim to a progress payment or receivable from that head contractor, as no distinction is drawn between damages suffered before and after liquidation and mutuality does not require a connection between the claims in terms of subject matter.[15]
The ‘Bank Guarantee Case’
In respect of the Bank Guarantee Case, His Honour found:
1. The contractual instruments in relation to the bank guarantees conferred on each relevant head contractor a proprietary interest not only in the physical bank guarantees but more importantly, in the proceeds of the guarantees drawn down (once those proceeds were received).[16] By contrast, the Hastie entities did not possess proprietary interests in relation to the guarantees that affected, impaired or defeated the proprietary interests of the head contractors in the proceeds of the drawn down guarantees.[17]
2. Accordingly, for those head contractors who retained their bank guarantees, the Hastie entities had no personal or proprietary right to enforce their return (whether back to the Hastie entities or the issuing bank).[18]
3. Finally, the drawing on the bank guarantees were not “dispositions of the property” of the company and the head contractors were not otherwise restrained from retaining the bank guarantee proceeds by reason of Chapter 5 of the Act. The head contractors were entitled to retain the bank guarantee proceeds subject to the final accounting of the respective claims of the Hastie entities and the head contractors, following which it can be determined whether there are any surplus proceeds which the head contractors must account for and repay to the Hastie entities.[19]
Conclusions
The liquidators filed an application for leave to appeal in January 2023. Subject to any further consideration of these issued by the Full Court, His Honour’s findings regarding the application of the statutory right of set-off, and proprietary rights to bank guarantees, provide key lessons for liquidators hoping to assert the same or similar rights to the Hastie entities. In other respects, the Hastie litigation is far from over, with certain of the head contractors now required to provide evidence of the losses they claim by way of set-off and attend mediation.
Notes
[1] Hastie Group Limited (in liq) v Multiplex Constructions Pty Ltd (Formerly Brookfield Multiplex Constructions Pty Ltd) (No 4) [2022] FCA 1575 at [75].
[2] Hastie Group Limited (in liq) v Multiplex Constructions Pty Ltd (Formerly Brookfield Multiplex Constructions Pty Ltd) (No 3) [2022] FCA 1280, [10].
[3] Ibid, [12].
[4] Ibid, [13].
[5] Ibid, [15].
[6] Ibid, [4].
[7] Ibid, [4].
[8] Ibid, [225].
[9] Ibid, [6]-[7].
[10] Section 553C of the Corporations Act sets out that where there have been mutual credits, mutual debts or other mutual dealings between a company that is being wound up and a creditor seeking to have their claim admitted in the winding up, an account is to be taken of what each party owes the other. Those sums are to be set-off against each other, and only the balance is admissible to proof or payable to the company, as the case may be.
[11] Ibid, [225].
[12] Ibid, [226].
[13] Ibid, [235].
[14] Ibid, [253].
[15] Ibid, [260]- [264].
[16] Ibid, [375].
[17] Rather, the Hastie entities’ proprietary interests are confined to a chose in action enforceable against the issuing bank for the issue of the bank guarantee to the head contractor as beneficiary upon the Hastie entity’s request. The Hastie entities do not have any interest in the chose in action in the hands of the head contractor enforceable against the issuing bank to pay upon demand: ibid, [384]-[393].
[18] Ibid, [392].
[19] Ibid, [422]-[424].
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