Supreme Court New South Wales

• Medium Neutral Citation: Napier Constructions Pty Ltd (Subject to DOCA)(Receivers & Managers Appointed) -v- Christopher Honey (in his capacity as Joint and Several Receiver and Manager of Napier Constructions Pty Ltd) [2012] NSWSC 762
• Hearing dates: 27 June 2012
• Decision date: 06 July 2012
• Jurisdiction: Equity Division - Technology and Construction List
• Before: Hammerschlag J

Decision

See paragraphs 53, 54 and 55

• Catchwords: CONTRACT - Construction of deed recording agreement as to the basis upon which a party would assist companies and their receivers in prosecuting proceedings against certain third parties - where another party (the bank) makes available funds to facilitate prosecution of proceedings and is owed money under secured facilities - construction of formula for the sharing of settlement proceeds (between the companies and the bank) where provision is capable of two meanings - construction of clauses providing for the taking into account of interest
• Cases Cited: Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165; International Air Transport Association v Ansett Australia Holdings Ltd and others (2008) 234 CLR 151; McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579; Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337; Western Export Services Inc v Jireh International Pty Ltd [2010] NSWSC 622; Jireh International Pty Ltd t/as Gloria Jean's Coffee v Western Exports Services Inc [2011] NSWCA 137; Western Export Services Inc v Jireh International Pty Ltd (2011) 86 ALJR 1; Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522; Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99; Westpac Banking Corporation v Tanzone Pty Limited (2000) 9 BPR 17,521
• Category: Principal judgment
• Parties: Napier Constructions Pty Ltd (Subject to DOCA) (Receivers and Managers Appointed) ACN 121 046 679 - Plaintiff; Christopher Honey (in his capacity as joint and several receiver and manager of Napier Constructions Pty Ltd) - First Defendant; James Thackray (in his capacity as joint and several receiver and manager of Napier Constructions Pty Ltd)
• Representation: A.P.P. Lo Surdo SC with E.M. Peden - Plaintiff; P. J. Dowdy - Defendants; Clamenz Evans Ellis Lawyers - Plaintiff; Henry Davis York - Defendants
• File Number(s): 2011/373741

Introduction

1 HIS HONOUR: The plaintiff (or Napier Constructions) is a company associated with Mr Eric and Mrs Tiffany Krecichwost.

2 In about August 2006, under a written Share Sale Agreement, the plaintiff bought shares in a company known as M&K Napier Constructions Pty Limited ("M&K Napier") from Mr Michael and Mrs Karen Napier. I shall refer to the plaintiff and M&K Napier collectively as "the Companies".

3 Under the Share Sale Agreement the Napiers gave certain warranties which the Companies asserted were breached. On 27 March 2008 they commenced proceedings in this Court against the Napiers for damages.

4 The Commonwealth Bank of Australia ("the Bank") lent the Companies money under certain Facilities. As security for their obligations the Companies gave the Bank registered fixed and floating charges ("the Charges") over their assets to the Bank. The Bank also held guarantees from Mr and Mrs Krecichwost for the Companies' obligations ("the Guarantees").

5 On 3 July 2008 voluntary administrators were appointed to the Companies. The next day the Bank appointed the first and second defendants as receivers of the Companies ("the Receivers") under the Charges.

6 On 28 January 2009 the Companies, the Receivers, the Bank and Mr and Mrs Krecichwost made a Deed recording their agreement as to the basis upon which Mr Krecichwost would assist the Receivers and the Companies in prosecuting the proceedings against the Napiers.

7 As at the date of the Deed the amount owing to the Bank pursuant to the Facilities and secured by the Charges and guarantees was $11,708,036.61.

8 The proceedings against the Napiers were settled on 28 September 2011 and the Companies received pursuant to a negotiated settlement the sum of $7,500,000 ("Settlement Amount").

9 The Deed makes provision for the Receivers and the Companies to enter into a funding arrangement under which the Bank would provide funding to the Receivers as agents of the Companies for the costs of prosecuting the proceedings. It provides an order of priority for the application as between them of any amount received by the Companies pursuant to any judgment in or negotiated settlement of the proceedings.

10 The Companies and the Bank are in dispute as to the proper construction of provisions in the Deed which provide for the disposition of the Settlement Amount.

Provisions of the Deed

11 The following are the relevant provisions of the Deed:

1. DEFINITIONS AND INTERPRETATIONS

In this Deed (including the Recitals) unless the content otherwise requires:

"Charges" means:

(a) Registered fixed and floating charge 22891148 entered into between Napier Constructions and CBA on 31 August 2006; and

(b) Registered fixed and floating charge 22891149 entered into between CBA and M & K Napier Construction on 31 August 2006.

...

"Costs" means:

(i) the Legal Costs

(ii) any costs incurred by the Receivers in obtaining separate legal advice from lawyers other than the Solicitors in relation to the preparation of this Deed and the conduct of the Proceedings; and

(iii) all incidental expenses relating to the conduct of the Proceedings,

(iv) all plus GST and all calculated on a full indemnity basis.

...

"Funding Charge" means the sum of $200,000.00 (plus any GST payable).

...

"Secured Amount" means the amount owing to CBA pursuant to the Facilities as secured by the Charges and the Guarantees which as at 15 December 2008 was $11,708,036.61.

"Settlement Amount" means any amount received by the Companies (or either of them) pursuant to any judgment in the Proceedings or any negotiated settlement of the Proceedings and shall include any payment received pursuant to Clause 5.2.

...

"Surplus Amount" means the sum that remains from the Settlement Amount after Settlement Amount is applied in accordance with Clause 5 of this Deed.

5. RECOVERY FROM PROCEEDINGS

5.1 The Settlement Amount shall be applied in the following order of priority:

(a) Firstly, reimbursement to CBA of the Costs.

(b) Secondly, payment of the Funding Charge to CBA.

(c) Thirdly, payment of the following amounts up to a maximum of the Secured Amount to CBA, depending upon the quantum of the Settlement Amount, calculated as follows:

(iii) for a Settlement Amount between $0.00 to $10,000,000.00: 75% of the Settlement Amount less the payments at clauses 5.1(a) and 5.1(b) above, plus

(iii) for a Settlement Amount between $10,000,000.00 to $14,000,000.00: 90% of the Settlement Amount above $10,000,000.00, plus;

(iii) for a Settlement Amount above $14,000,000.00: 100% of the Settlement Amount above $14,000,000.00.

6. INTEREST

6.1 The parties acknowledge that CBA will continue to accrue interest on the Secured Amount in accordance with the terms of the Charges, the Facilities and the Loan Agreement.

6.2 The parties acknowledge that CBA will recover interest at non-default rates if the Proceedings are concluded, either by way of judgment or settlement by 9 March 2010.

6.3 The parties acknowledge that CBA will recover interest at default rates on the Secured Amount in the circumstances that the Proceedings do not conclude either by way of judgment or settlement by 9 March 2010.

6.4 The Surplus Amount shall be returned to the Companies.

7. CBA TO RELEASE SECURITY AND GUARANTEES

7.1 Subject to Clause 10, upon resolution of the Proceedings and the Settlement Amount being dealt with in accordance with Clauses 5 and 6 above CBA shall:

(a) release the Charges once the Receivership is concluded;

(b) release the Guarantors from their obligations under the Guarantees;

(c) discharge the Mortgage;

(d) make available for withdrawal the funds held in the Interest Bearing Deposit referred to in clause 10.1 of this Deed; and

(e) release M&K Napier, Napier Constructions and National Construction Services Pty Ltd ACN 121 046 062 from any obligation to repay CBA any moneys owing to the CBA by any of the above companies at the date of this agreement whether as borrower or guarantor.

The issues

12 There are three issues in respect of which the parties are in dispute.

The Costs Issue

13 The first area of dispute concerns subclause (iii) of the definition of "Costs" in cl 1.1 of the Deed.

14 The Bank puts that Receivers' fees in respect of attendances in connection with conducting the proceedings (calculated on the usual time-costed basis) are covered. The plaintiff puts that such attendances are analogous to time spent by a party in furthering its own interests in litigation and are not covered. Resolution of this issue involves firstly determining the reach of the definition and then determining whether particular charges are within that reach.

15 For reasons which will shortly become apparent, the parties requested, and the Court agreed, that it was appropriate for this issue to be deferred until after determination of the other issues.

16 Reflecting the difference in their respective approaches, the plaintiff contends that the Costs are $2,625,400.07, whilst the Bank claims that they are $3,421,939.28.

The Priority Issue

17 The second issue concerns the words "75% of the Settlement Amount less the payments at clauses 5.1(a) and 5.1(b) above" in cl 5.1(c)(i).

18 The plaintiff puts that 75 per cent is to be applied to the Settlement Amount and thereafter the payments at cll 5.1(a) and 5.1(b) are to be deducted.

19 The Bank puts that 75 per cent is to be applied to the Settlement Amount after deduction of the payments at cll 5.1(a) and 5.1(b).

20 As a matter of language the words of the clause are capable of being read either way.

21 On the plaintiff's construction (if the Costs are $2,625,400 and the Funding Charge is $200,000) the clause operates as follows:

75% of Settlement Amount	$5,625,000
Less Costs (cl 5.1(a))	$2,625,400
Less Funding Charge (5.1(b))	$ 200,000
Sub-total (Bank's share of Settlement Amount under cl 5.1(c)(i))	$2,799,600
Add back Costs and Funding Charge	$2,825,400
Total payable to the Bank	$5,625,000

22 The Surplus Amount would be $1,875,000 (i.e. $7,500,000 - $5,625,000).

23 By somewhat remarkable coincidence (or perhaps not) on the plaintiff's construction but if the Costs are at the precise figure of $3,421,939 as contended by the Bank, the result is exactly the same:

75% of Settlement Amount	$5,625,000
Less Costs (cl 5.1(a))	$3,421,939
Less Funding Charge (5.1(b))	$ 200,000
Sub-total (Bank's share of Settlement Amount under cl 5.1(c)(i))	$2,003,061
Add back Costs and Funding Charge	$3,621,939
Total payable to the Bank	$5,625,000

24 On the Bank's construction (if the Costs are $2,625,400 and the Funding Charge is $200,000) the clause operates as follows:

Settlement Amount	$7,500,000
Less reimbursement of Costs (cl 5.1(a))	$2,625,400
Less payment of Funding Charge (Cl 5.1(b))	$ 200,000
Sub-total	$4,674,600
75%	$3,505,950

25 On this approach the Bank would receive reimbursement of the Costs and payment of the Funding Charge totalling $2,825,000 and would receive a further $3,505,950 out of the balance of the Settlement Amount making a total of $6,330,950. The Surplus Amount would be $1,169,050 (i.e. $7,500,000 - $6,330,950).

26 On Bank's construction if the Costs are $3,421,939 and the Funding Charge is $200,000 the provision operates as follows:

Settlement Amount	$7,500,000
Less reimbursement of Costs (cl 5.1(a))	$3,421,939
Less payment of Funding Charge (Cl 5.1(b))	$ 200,000
Sub-total	$3,878,061
75%	$2,908,545

27 On this approach the Bank would receive reimbursement of the Costs and payment of the Funding Charge totalling $3,621,939 and would receive a further $2,908,545 out of the balance of the Settlement Amount making a total of $6,530,484. The Surplus Amount would be $969,516 (i.e. $7,500,000 - $6,530,484).

28 As in all cases of construction of commercial agreements, the meaning of the words used in the Deed is to be determined by what a reasonable person would have understood them to mean. This requires consideration of the language used, the surrounding circumstances known to the parties, the purpose of the transaction and the objects which it was intended to secure: Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at 179; International Air Transport Association v Ansett Australia Holdings Ltd and others (2008) 234 CLR 151 at 160.

29 A commercial contract should be given a business-like interpretation. The nature and extent of the commercial aims and purposes of the agreement or parts of it are part of the essential background circumstances: McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579 at 589; Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337 at 350; Western Export Services Inc v Jireh International Pty Ltd [2010] NSWSC 622; see also Jireh International Pty Ltd t/as Gloria Jean's Coffee v Western Exports Services Inc [2011] NSWCA 137 and Western Export Services Inc v Jireh International Pty Ltd (2011) 86 ALJR 1.

30 The whole of the instrument has to be considered. Preference is given to a construction supplying a congruent operation to the various components of the whole of an instrument: Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522 at 529. If the words used are unambiguous, the court must give effect to them. If the language is open to two constructions, that will be preferred which avoids consequences which appear to be capricious, unreasonable, inconvenient or unjust: Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109.

31 Applying these principles makes it plain, in my view, that of the two constructions the Bank's one is correct.

32 Clause 5.1 legislates for priority in the application of funds received. The correctness of the Bank's construction is demonstrated by simply applying the provisions of the clause in the order in which they appear.

33 First priority is reimbursement to the Bank of the Costs it has incurred. Second priority is payment to it of the Funding Charge. After those payments have been made, what is left of the funds received is to be divided between the parties and cl 5.1(c) directs how the division is to take place.

34 The words "less the payments at clauses 5.1(a) and 5.1(b)" recognise that the Settlement Amount has been depleted by earlier priority payments to the Bank. Seen this way, subclause 5.1(c)(i) operates as a congruent whole with the remainder of cl 5.

35 By contrast, the plaintiff's construction commences with the application of a percentage to the full Settlement Amount, despite the fact that the provision envisages the earlier priorities of reimbursement of the Costs and payment of the Funding Charge. The approach then requires the retroactive step of deducting from the percentage yielded, the payments for which provision has already been made. Of the two constructions, this is the less business-like one. Further, it does not accord with the structure of the clause as a whole and does not give subclause (iii) congruent operation with the other component parts of the clause.

36 Additionally, the Costs and Funding Charge are of the nature of disbursements. One clear commercial aim of cl 5 is to return to the Bank as a priority out of the spoils what it has disbursed to enable the proceedings to be prosecuted.

37 Additionally, if the Costs and Funding exceed the Settlement Amount, on the plaintiff's construction, it will receive part of the Settlement Amount notwithstanding that the Bank will receive less than what it had laid out.

38 A construction that ensures that there is first returned to the Bank its outlay before any spoils are split up is the more sensible and commercially rational one.

The Interest Issue

39 The third and final issue is whether the Bank is entitled to be paid, out of the Surplus Amount, interest accrued in accordance with cl 6 of the Deed before any payment to the plaintiff. The Bank puts that cl 6 entitles it to recover, that is to be paid, interest and that it has the right to recoup that interest out of the Surplus Amount.

40 As at 28 September 2011 interest accrued on the Secured Amount was $6,119,332 and by now undoubtedly exceeds the Settlement Amount if the Bank's construction is correct. If the Bank's contention that it is entitled to be paid interest out of the Settlement Amount before the plaintiff gets anything is correct, plainly the plaintiff will receive nothing.

41 In support of this submission, the Bank puts that where cl 6 of the Deed refers to the Bank being entitled to "recover" interest this means that it is entitled actually to be paid it. It puts further that cl 7.1(e) provides for the release of the Companies only from obligations to repay any monies owing "at the date of this agreement" and that interest accrued after that date is accordingly not the subject of a release and as such must be paid.

42 The plaintiff, on the other hand, puts that it is entitled to receive the Surplus Amount in full. As a starting point, it submits that cl 6.4 provides that the Surplus Amount is to be returned to the Companies. It points to the fact that Surplus Amount is defined to mean the sum that remains from the Settlement Amount after the Settlement Amount is "applied in accordance with Clause 5" [emphasis added] and that cl 5 makes no provision for any deductions from the Surplus Amount once determined. It points out that interest is dealt with in cl 6.

43 In response the Bank puts that the definition of Surplus Amount, in referring only to cl 5, is absurd and manifestly erroneous because the parties would never have contemplated that the Settlement Amount would only be dealt with via cl 5 and then be returned to the plaintiff as the Surplus Amount without having first deducted the interest accruing and payable under cl 6. Although it makes no claim that the Deed is to be rectified, it puts that the definition should be read by the Court as "after Settlement Amount is applied in accordance with Clause 5 and Clause 6 of this Deed". See for example Westpac Banking Corporation v Tanzone Pty Limited (2000) 9 BPR 17,521.

44 It puts that cl 7 makes reference to "the Settlement Amount being dealt with in accordance with Clauses 5 and 6 above" [emphasis added], which it says shows that interest is to be paid out of the Settlement Amount and it points out that cl 6.4, which provides for the return of the Settlement Amount to the Companies, is amongst the provisions dealing with interest.

45 In my view, the Bank's submission is unsustainable. Far from there being any warrant to conclude that the definition of Surplus Amount is absurd, manifestly erroneous or otherwise in error, as it stands it contributes to what I consider to be the congruent and rational operation of the Deed as a whole.

46 In my view, the Bank recovers interest, but only out of its share of the Settlement Amount.

47 Clause 5.1(c) provides that the Bank is to receive its share of the Settlement Amount (after reimbursement of the Costs and payment of the Funding Charge) "up to a maximum of the Secured Amount".

48 Read with cl 6, this formula ensures (as one would expect) that the Bank never recovers more than the Costs, the Funding Charge and the Secured Amount plus interest (including, if applicable, default interest for the entire period). On the other hand it ensures that if the Settlement Amount is large enough it does not receive less than the total of these amounts.

49 Clause 5.1(c) and cl 6.4 operate congruently, reasonably and rationally if so read. By contrast, on the Bank's construction the Bank is entitled to interest off the top of the Secured Amount before the plaintiff receives anything, yet cl 5.1, which provides for priority, does not include a payment of interest in the list of priorities. Additionally, the Bank's construction entails irresolvable tension between the definition of Surplus Amount and the requirement that it be returned to the plaintiff on the one hand, and the notion that the Surplus Amount is determined only after interest is deducted on the other.

50 Moreover, it is no coincidence, in my view, that cl 5, which makes provision for priority of payments, makes no provision for the payment of interest other than by including it in the calculation of the maximum amount payable to the Bank.

51 Finally, the plaintiff's construction also operates congruently with cl 7.1 where it refers to the Settlement Amount "being dealt with in accordance with Clauses 5 and 6 above". Interest is dealt with by calculating the amount in accordance with cll 6.1, 6.2 and 6.3, taking the amount up for determining the maximum amount of the Secured Amount referred to in cl 5.1(c) and returning the Surplus Amount, if any, to the Companies after the Settlement Amount has been so dealt with.

52 In my view, cl 7.1(e) does not entail the Companies remaining liable for interest after the Settlement Amount has been dealt with. Rather, the release is to have retrospective effect. It would also run counter to a commercial and business-like operation of the provisions for all the securities described in cl 7.1 to be released, yet leaving the Companies liable for interest on an unsecured basis.

Conclusion

53 I conclude that on the proper construction of cl 5.1(c)(i) of the Deed the percentage is to be applied to the Settlement Amount after deduction of the payments at cll 5.1(a) and 5.1(b) and that the plaintiff is entitled to return of the Surplus Amount without further deduction of any interest calculated on the Secured Amount.

54 It follows that the quantum of the Surplus Amount to which the plaintiff is entitled depends on resolution of the first issue described above.

55 I will accordingly give directions for the further conduct of the proceedings to enable that amount to be determined.

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Decision last updated: 10 July 2012