The decision is significant because it confirms that a payment of a dividend to a creditor does not necessarily extinguish the company’s claim for the balance in fact owing to it.
This was an appeal by MK Builders Pty Ltd (MKB) of orders made by the Victorian Civil and Administrative Tribunal (Tribunal) in MK Builders Pty Ltd v 36 Warrigal Road Pty Ltd & Ors (Domestic Building).
The critical issue in the appeal concerned the effect and practical operation of the automatic set-off provisions in section 553C of the Corporations Act 2001 (Cth) (Act), which had been incorporated into a Deed of Company Arrangement.
Section 553C of the Act prescribes a mandatory set-off where there have been mutual credits, mutual debts or other mutual dealings. An account is taken and only the balance is admissible to proof against the company, or is payable to the company.
The proceeding before the Tribunal
MKB commenced proceedings in the Tribunal against 36 Warrigal Road Pty Ltd (WAR) alleging, among other things, that it had breached a building contract entered into with MKB for the construction of four townhouses and a joint venture agreement to share the profits upon the sale of the townhouses. It claimed, among other things, the amount of $479,621 plus interest. It also sued Mr Taky Kaplan (Kaplan), who had guaranteed the obligations of WAR under the building contract and allegedly dissipated the profits under the joint venture agreement, and Mondland Pty Ltd (Mondland), which allegedly had received the profits under the joint venture agreement.
WAR, Kaplan and Mondland applied for orders summarily dismissing or striking out MKB’s claim (Application). They relied on the following uncontroversial facts.
- On 5 May 2009, the directors of MKB appointed Mr Joseph Loebenstein as an administrator of MKB (First Administrator).
- On 12 May 2009, WAR gave the First Administrator details of its claim against MKB in the sum of $100,000.
- On 20 May 2009, the First Administrator was replaced by Messrs Lofthouse and Cauchi (Second Administrators).
- On 21 July 2009, a Deed of Company Arrangement (DOCA) was executed and the Second Administrators were appointed as the Deed Administrators.
- On 28 September 2010, WAR lodged a formal proof of debt of $50,000 (being half of the amount of $100,000 originally claimed) with the Deed Administrators.
- On 7 October 2010, a first and final dividend of 0.549 cents in the dollar was declared by the Deed Administrators in favour of the unsecured creditors of MKB and WAR was paid a dividend of $274.29 in respect of an admitted debt of $50,000.
In the Tribunal WAR, Kaplan and Mondland contended that the effect of the DOCA and section 553C of the Act was to cause an automatic set-off of the respective claims of MKB and WAR, with the result that the original choses in action ceased to exist and were replaced by WAR’s claim to a net balance of $274.29.
The Tribunal accepted that contention. It found that the automatic set-off and accounting required by section 553C of the Act had resulted in a payment to WAR such that there was no “balance” owing to MKB and any claim that MKB had against WAR had been extinguished by the DOCA.
As the Supreme Court of Victoria subsequently found, this reasoning assumed that the Deed Administrators had performed the necessary accounting to determine the balance due, which was contrary to the evidence of Mr Lofthouse, one of the Deed Administrators.
On appeal, Almond J found that the Tribunal had erred in law:
- as there was no evidentiary basis for the finding that “the accounting required” by section 553C of the Act had taken place or that “there was no balance owing to MKB”; and
- by finding that any claim MKB might have had against WAR has been extinguished by the DOCA.
It was common ground that the set-off provisions in section 553C of the Act were incorporated into the DOCA, and applied with respect to the mutual credits, mutual debts or other mutual dealings between MKB and WAR. It was also common ground that the set-off applied automatically and did not require any procedural step to be undertaken (such as lodgement of a proof of debt).
The Respondents submitted that WAR’s claim was “plainly an offsetting claim and the Deed Administrators had recognised it as such”.
MKB contended that the Deed Administrators had not ascertained the effect which section 553C of the Act automatically had on the debt claimed by WAR before paying the dividend of $274.29 and that that payment had not extinguished MKB’s claim.
The Supreme Court of Victoria agreed and found that the Tribunal had erred in law.
In reaching his conclusion, Almond J said that:
at the commencement of the administration, there was prima facie a debt due from WAR to MKB of either $255,349 or $549,046, both of which substantially exceed WAR’s claim of $100,000;
there was no evidence to suggest that the Deed Administrators calculated the net balance due in accordance with the principles of insolvency law;
it could not be inferred from the payment of the dividend that the Deed Administrators took an account and calculated the set-off pursuant to section 553C of the Act, particularly in light of the unchallenged evidence of Mr Lofthouse that on the basis of his file it would not appear that the matter of set-off was ever canvassed;
it is premature to make a finding that any claim of MKB has been extinguished until it is demonstrated by admissible evidence that there has been a taking of account in accordance with insolvency law and the outcome of that accounting is determined; and
it is for MKB to demonstrate in the litigation that a retrospective calculation of legitimate claims would result in a balance being due to it, although credit would need to be given for the dividend received if the retrospective calculation produced a balance in favour of WAR.
Although the set-off is automatic an account still needs to be taken to ascertain its effect.
The declaration and payment of a dividend by liquidators or deed administrators will not be the end of the matter if they have failed to ascertain the effect of the automatic set-off mandated by section 553C of the Act.