Fitz Jersey Pty Ltd v Atlas Construction Group Pty Ltd (in liq); Yazbek v Gleeson as Liquidator of Atlas Construction Group Pty Ltd (in liq); Fitz Jersey Pty Ltd v Atlas Construction Group Pty Ltd (in liq) [2021] NSWSC 1692 and [2022] NSWSC 394 

Andrew Hales |  Lauren Topper

Key takeout

Directors must be careful to comply with their duties and avoid breaching the Corporations Act and the Australian Accounting Standard AASB 111 (Construction Contracts) to avoid prejudicing the company’s ability to pay its creditors.  This applies when declaring dividends after receipt of an adjudicated amount under the Building and Construction Industry Security of Payment Act 1999 (NSW) which is disputed by a counterparty to a construction contract.

An attempt to take the adjudicated amount out of the reach of creditors by recognising the amount as revenue without recording a corresponding liability, then declaring dividends, will likely result in the entire dividend having to be repaid to the company

Facts

To appreciate the facts of this case it is necessary to understand the facts of a related proceeding which was decided in 2017. We covered the 2017 proceeding in our May 2017 Construction Law Update but have briefly restated the main facts of that case below.

Fitz Jersey Pty Ltd v Atlas Construction Group Pty Ltd [2017] NSWCA 53

• Fitz Jersey Pty Ltd (developer) entered into a building contract with Atlas Construction Group Pty Ltd (builder) in December 2010.
• The builder served a final payment claim for approximately $11 million and the developer issued a payment schedule certifying that no money was due.
• An adjudication determination was made in favour of the builder. The developer failed to make payment and commenced proceedings in the Supreme Court seeking to have the determination set aside for jurisdictional error.
• The developer did not:
  • seek an injunction to restrain the builder from obtaining an adjudication certificate and filing it as a judgment debt for the unpaid adjudicated amount; or
  • request an undertaking from the builder that it would not enforce the determination as a judgment debt.
• The builder filed the adjudication determination as a judgment debt and enforced it by garnishee order.
• The developer’s bank paid the $11 million to the builder during the Supreme Court proceedings.
• The developer appealed arguing:
  • notice was impliedly required to be given to the developer when the builder obtained the judgment debt;
  • the developer was challenging the adjudication determination and those proceedings should have been disclosed to the court; and
  • the primary judge should have set aside the garnishee order and ordered repayment to the developer.
• The developer’s appeal was dismissed. The Court of Appeal held there was no requirement on the builder to notify the developer of steps being taken to enforce the judgment debt.

Fitz Jersey Pty Ltd v Atlas Construction Group Pty Ltd (in liq) [2021] NSWSC 1692; [2022] NSWSC 394

The facts of the 2021/2022 judgments follow on from the facts of the 2017 proceeding.

• 3 days after receiving $11 million via the garnishee order, the builder declared dividends for all but $400,000 of the adjudicated amount. The builder also wrote off all shareholder loans.
• The developer claimed that:
  • the builder was in breach of s 254T of the Corporations Act;
  • the builder had breached its own constitution;
  • the directors of the builder breached s 588FDA of the Corporations Act, s 37A of the Conveyancing Act 1919 (NSW) and their director’s duties.
• In April 2018 (approximately a year after the dividends were declared), the builder was placed into liquidation.
• The builder’s liquidator conducted investigations into the director’s actions and admitted the developer as a creditor of the builder to the amount of $12.8 million, the liquidator assigned causes of action against the directors to the developer. These were the causes of action that the developer sought to prosecute in the 2021 proceedings.
• In separate proceedings the directors appealed against the liquidator’s admission of the developer as creditor, asserting that no money was owing to the developer. In response, the developer made several claims regarding the builder’s entitlement under the building contract. This largely concerned the contents of a verbal agreement between the parties resulting in a $10 million uplift to the contract sum  (2013 agreement). The parties disputed what the uplift was intended to cover.
• The builder claimed the uplift was for additional works required to the basement car park and an adjustment because 15 units and a swimming pool were removed from the contract works.
• The developer claimed the uplift was for the basement works and the 15 units and swimming pool adjustment, but also encompassed a CPI increase, an early completion bonus, a carbon tax and an appliances upgrade (payment claim items).
• The builder claimed the payment claim items were still outstanding. This was the basis for its adjudication claim in the 2017 proceedings.

Decision – 2021/2022 judgments

The 2013 agreement did not encompass payment for the CPI increase, early completion bonus, carbon tax or applicable upgrades. Therefore the builder was entitled to make a payment claim in respect of those items, however, the quantum of the amount claimed was incorrect and was reduced.

The builder had breached s 254T of the Corporations Act in paying the dividend, and in causing the shareholder loans to be written off the directors engaged in an unreasonable director-related transaction for the purposes of s 588FDA of the Corporations Act and their general duty of care to the builder. Further, for the purposes of s 37A of the Conveyancing Act, the builder paid the dividends with the intention of defrauding the developer.

The court referred to Australian Accounting Standard AASB 111 (Construction Contracts) which provides that an amount received under a construction contract is to be recognised as revenue only if:

• payment is made in accordance with the terms of the building contract; or
• it is for a claimed variation which is quantifiable and for which the principal accepts it is ‘probable’ that it is liable to pay.

The accounting expert for the directors had wrongly concluded that payment following determination of the contractor’s rights (ie the adjudication process) had the effect of satisfying the requirements of AASB 111 and classified the adjudicated amount as revenue. 

The court held that the adjudicated amount should have been treated as revenue with a corresponding liability also recorded. This meant that when the dividend was declared the builder did not have assets exceeding its liabilities sufficient to allow for the payment of dividends.

In paying the dividends the directors of the builder had breached their duties:

• to exercise their powers bona fide and in the interests of the builder as a whole;
• to exercise their powers for a proper purpose;
• not to exercise their powers to obtain a private advantage for themselves; and
• not to permit their interests to conflict with those of the builder.

The following points were relevant in reaching the decision that the directors had breached their duties:

• the directors failed to obtain specific advice about their ability to declare a dividend;
• the directors resolved urgently to declare the dividend but there was no urgent need for the shareholders to have the funds; and
• the directors knew the developer’s position was that it was entitled to recover the adjudicated amount and that the developer had the financial means to make a legal challenge.