Liquidators beware: pitfalls in admitting proofs of debt

The Federal Court’s decision in Tuscan Capital Partners Pty Ltd v Trading Australia Pty Ltd (in liq)[1] concerns an interlocutory application made by a creditor to review the liquidator’s decision to admit a proof of debt.

Background

The proof of debt was lodged by Fishbank Development Corporation Pty Ltd (FDC) in the amount of $56,289.43, plus interest of $9,742.31. FDC’s proof of debt was premised on a claim for contribution against Trading Australia Pty Ltd (in liq) (TA).

The claim arose from the allegation that FDC and TA jointly retained Madison Marcus Law Firm (MM), who subsequently completed work pursuant to the retainer and ultimately issued an invoice for its work in the amount of $112,578.85, which was paid by FDC. FDC claimed that TA was liable for half of the MM invoice.

The retainer of MM took place in circumstances where Mr Galati, a director of TA and Mr Deans, the principal of FDC, attempted to redevelop the Sydney Fish Markets. At some point, the relationship between Mr Galati and Mr Deans broke down and the project was ultimately unsuccessful. The fall out involved court proceedings concerning both Mr Galati and Mr Deans, along with FDC and TA, in the Supreme Court of New South Wales.

In the creditor’s review application, both parties put on extensive affidavit evidence in respect of the Supreme Court proceedings. After considering the evidence, the Court held that the complexity of the Supreme Court proceedings made it difficult to judge the assertions both parties made on the review application as to how the MM retainer related to the bigger picture. As a result, the Court did not consider that any of the material concerning the wider dispute assisted Mr Galati or the liquidator. The remaining material consisted primarily of:

1. documents generated at the time the alleged retainer was formed; and
2. documents created by and submitted to the solicitors subsequent to the alleged retainer.

Ultimately, the Court considered that this material established that TA did not retain MM.

The Alleged Retainer

On 15 December 2014, Mr Tomlinson, a partner of MM, sent the following email to Mr Deans, copying in Mr Galati and others:

Dear Robert,

Please find Costs Disclosure and Costs Agreement for signing and return this evening.

I formally disclose this firm has acted for the Dahua Group in other transactions. There may accordingly be a perceived conflict of interest in that regard. I understand FDC and Trading Australia Pty Ltd wish to instruct Madison Marcus notwithstanding this disclosure. I also confirm, I am advised Dahua have no objection to Madison Marcus acting for FDC and Trading Australia Pty Ltd in this transaction.

I look forward to receiving your further instructions.

Notably, the email refers to TA as being one of the parties wishing to instruct MM. The email attached two documents, one entitled ‘Costs Agreement – General Terms of Engagement’ and one entitled ‘Costs Disclosure – Commercial & Banking and Finance’ (the First Offer). At the top of the Costs Agreement, the client was named as FDC and TA.

Neither TA nor FDC signed the Costs Agreement. Instead, on 18 December 2014, Mr Deans called MM to negotiate changes to the terms of the Costs Agreement. Those changes were:

1. the work would be completed for a fixed fee of $150,000 plus GST (less than the fee initially proposed in the first costs agreement); and
2. the fee would not become payable for six months if the transaction did not proceed. In addition, the payment of the costs was to be personally guaranteed by Mr Deans.

MM amended the Costs Agreement accordingly and emailed the documents to Mr Deans shortly after (the Second Offer). Mr Galati was copied to that email. MM did not make any suggestion at this point that Mr Galati should be a personal guarantor.

The Court held that the sending of this email revoked the First Offer made by MM on 15 December 2014.

Subsequently on 19 December 2014, Mr Deans returned the signed documents to MM by email. Mr Deans had made further handwritten amendments to the Costs Disclosure, including changes to the payment terms, which were accepted by MM (the Third Offer). Mr Deans did not copy TA into his email to MM containing the amendments.

It was not disputed that MM proceeded on the basis that the amended Costs Disclosure governed their retainer. The liquidator accepted that the evidence could not support the conclusion that TA had received the version of the Costs Agreement that FDC and Mr Deans had executed (i.e. – the Third Offer). Nevertheless, the liquidator submitted that TA should be taken to have accepted the Second Offer made by MM on 18 December 2014.

The Court held that the First Offer was revoked by the Second Offer and therefore was not open for acceptance on 18 December 2014. The Second Offer was, in turn, revoked by Mr Deans’ handwritten amendments to the Costs Disclosure, which he signed and returned to MM on 19 December 2014 (i.e. the Third Offer).

Despite evidence suggesting that Mr Galati was present at various conferences with MM, the Court held that this was insufficient to draw the inference that Mr Galati had given instructions to MM.

The Court held that the evidence could not support a finding that Mr Galati or TA had even seen the documents incorporating Mr Deans’ handwritten amendments. As such, the Court found that it was impossible to accept that a contract had ever formed between TA and MM.

When MM eventually rendered an invoice, it was sent to Mr Deans, along with other individuals who were assisting Mr Deans. TA was not copied to the email. In respect of payment of that invoice, FDC was initially resistant and ultimately only made payment when provided with a statutory demand. At no point was there any suggestion that TA should be asked for payment towards the fees incurred by MM. Even after FDC paid the invoice in October 2015, it did not request or demand any payment from TA until 2020, some five years later.

Decision

The Court concluded that TA was never liable for MM’s fees and the proof of debt was rejected.

Whilst the Court rejected the position of the liquidator, the Court accepted that his position was reasonable and that his defence of the application was appropriate.

Key takeaway

1. Liquidators must exercise caution when presented with proofs of debt, particularly in circumstances where there is uncertainty as to whether the company in liquidation was a party to the contract under which it is alleged to owe money.
2. When considering a proof of debt, liquidators must properly consider the contractual documentation and surrounding circumstances to ensure that the company in liquidation legitimately owes the alleged debt.

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Authored by:

Scott Couper, Partner
Isabelle Quinn, Associate

[1] [2021] FCA 1061.