Proving Up A Proof Of Debt: Invoices And Bare Assertions Won’t Cut It

In the case of Alora Davies Developments 104 Pty Ltd [2021] NSWSC 1583, the NSW Supreme Court considered an appeal by a creditor against a liquidator’s decision to reject part of its proof of debt. 

The NSW Supreme Court was required to consider the strength of the evidence relied on by the creditor to establish its debt and outlined the principles for contesting a liquidators’ determination of a proof of debt. 

Background

Alora Davies Developments 104 Pty Ltd (the Company) was a special purpose vehicle incorporated in April 2017 for the purpose of a joint venture between Alora Developments Pty Ltd (Alora) and Davies Property Developments Pty Ltd (Davies) to undertake a residential property development in Tahmoor, New South Wales.

The Company obtained an option to purchase the underlying land in May 2017, and then entered into a shareholders agreement with Alora and Davies in July 2017 (Shareholders Agreement).  The Shareholders Agreement relevantly provided that the Company would pay Alora or its nominee a fee for project managing the Company’s property developments calculated at $8,000 plus GST per lot, to be paid as an expense prior to the disbursement of funds via dividend of profit share.

The Shareholders Agreement also stated that the Company would sign a development agreement on terms reasonably required by Alora, but there was no evidence that the Company and Alora entered into any such development agreement.

The Company obtained development consent on 2 August 2018 for the subdivision of the land into 63 lots.

On 5 February 2019, the plaintiff, being a company associated with Alora named Alora Property Group Pty Ltd (the Plaintiff) issued two invoices to the Company for:

• development management fees of $8,000 plus GST for the 63 lots, totalling $554,400 (Development Fees); and
• amounts described as “DM Fees for CC, Marketing” of $5,000 for the 63 lots, totalling $346,500 (Marketing Fees).

The Company then exercised its option to purchase the land at some time between February and April 2019, but was ultimately unable to raise sufficient funds to complete the purchase and the option contract was terminated.

The Company ceased to trade and Court made orders on 6 May 2020 to wind up the Company in insolvency and to appoint Henry McKenna as liquidator (Liquidator).

On 5 June 2020, the Plaintiff lodged a proof of debt in the winding up for $1,084,983.82, which included (amongst others things) the $554,400 in  Development Fees and the $346,500 in Marketing Fees.  The proof did not provide any particulars of these fees and merely attached the invoices issued by the Plaintiff, certain ledgers, and an affidavit in support which was not read or relied upon in the proceedings.

The Liquidator admitted the Plaintiff’s proof of debt in the amount of $166,599.62 (for a loan by the Plaintiff to the Company as well as expenses paid by the Plaintiff on behalf of the Company), but rejected the amounts claimed for the Development and Marketing Fees.

The Plaintiff appealed the Liquidator’s decision to the NSW Supreme Court.

Relevant principles

Williams J noted with approval the settled principles outlined in Re St Gregory’s Armenian School Inc¹ regarding an appeal against a liquidator’s decision as to a proof of debt:

The principles that determine the enforceability of a liability to which a proof of debt relates are the same as the principles which would be applied in an action brought directly against the company to enforce that liability.

The issue in the proceeding is whether the liability referred to in the proof of debt is a true liability of the company enforceable against it.

The party 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.

Williams J went on to confirm that in order to demonstrate that a liquidator’s decision was wrong, a plaintiff must adduce evidence establishing that the debts in question were true liabilities of the company as at the date of winding up, and the Court must be satisfied of this on the balance of probabilities before the liquidator’s decision rejecting the proof will be set aside.

Decision

Williams J then considered the claims for the Development Fees and the Marketing Fees.

As to the Development Fees:

• the Plaintiff argued that the overall intention behind the project was never to carry out the development, but simply to obtain the land and the development consent, and to then sell the project to a third party.  The Plaintiff argued that on a proper construction of the Shareholders Agreement, Alora became entitled to payment of the Development Fees as soon as the development consent for the subdivision was obtained and regardless of whether the project went ahead.
• Williams J rejected this argument on the basis that the purchase of the land had clearly been an integral part of the development plan (even if it was as described by the Plaintiff), and that it would have been understood by a reasonable businessperson in the position of the parties at the time of entry into the Shareholders Agreement that the $8,000/lot development fees would not be payable unless the land was acquired, the services to project manage the development had been provided, and there were profits to be distributed by way of dividend or profit share; and
• Williams J held that the Plaintiff had therefore failed to establish that the Development Fees were a liability of the Company at the time it went into external administration.

As to the Marketing Fees:

• the Plaintiff relied on a meeting in February 2019 at which it was said that an agreement had been reached between the Company and Alora that a further $5,000/lot would be paid to the Plaintiff for additional work done by Alora to obtain a construction certificate;
• there was no evidence to prove that such an agreement was reached, and the Plaintiff did not adduce any evidence of the work undertaken by Alora in relation to obtaining the construction certificate; and
• Williams J held that the Plaintiff’s bare assertion as to the agreement was not sufficient to persuade the Court on the balance of probabilities that the Marketing Fees were a liability of the Company at the time it went into external administration.

One feature of the Plaintiff’s case was that the Plaintiff sought to rely on its own invoices as evidence of a debt owing.  William J held on this point that:²

Invoices issued by the plaintiff to the Company are evidence that the plaintiff charged the amount in the invoice to the Company for work or services described in the invoice that the plaintiff claimed to have performed.  That fact is relevant to, but not necessarily conclusive of, the question whether the amount in the invoice was a true liability of the Company to the plaintiff.  By themselves, invoices do not establish that the amount charged corresponds with an amount included in the plaintiff’s proof of debt and rejected by the Liquidator.

Williams J ultimately held that the Plaintiff had failed to establish that the Liquidator was wrong in any aspect of his decision and dismissed the proceeding. 

Lavan comment

This case is a useful reminder to liquidators and creditors about where the onus lies for proving that a liquidator’s decision on a proof of debt is wrong, the standard to which this must be proved, and the need for there to be clear evidence in support of any such claim.  It is worth noting Williams J’s reminder that invoices do not establish that an amount charged is truly a debt.

If you have any questions about a proof of debt or an appeal against a decision on a proof of debt, the Lavan team is ready to help.