Security of Payment Act claims by companies in liquidation – “plainly wrong” but, if so, not for long

Introduction

The New South Wales Court of Appeal in Seymour Whyte Constructions Pty Ltd v Ostwald Bros Pty Ltd (in liquidation)¹ has decided that the Building and Construction Industry Security of Payment Act 1999 (NSW) is capable of operating for the benefit of a builder or subcontractor which has gone into liquidation in insolvency.  In making this decision, the New South Wales Court decided that the Victorian Court of Appeal’s decision in Façade Treatment Engineering Limited (in liquidation) v Brookfield Multiplex Constructions Pty Ltd² on this point was “plainly wrong” and should not be followed.

In this legal update we consider the New South Wales Court’s decision in Seymour Whyte in the context of the Victorian Court’s decision in Façade, and provide our insights on where this leaves respondents to Security of Payment claims by claimants in liquidation in New South Wales and Victoria.  As we will explain, we believe that respondents are in a stronger position than a quick reading of Seymour Whyte might suggest, especially in Victoria.  In New South Wales, pending amending legislation will soon override the effect of the Seymour Whyte decision entirely.

The underlying fact situations in the Seymour Whyte and Façade decisions were similar. In Seymour Whyte, the subcontractor claimant in liquidation (Ostwald) served payment claims on the contractor respondent (Seymour Whyte). Seymour White provided a payment schedule stating that it proposed to pay a lesser amount (scheduled amount) than the amount of the payment claim. The New South Wales Court considered whether Ostwald was entitled to seek recovery of the scheduled amount pursuant to s16(2)(a)(i) of the Building and Construction Industry Security of Payment Act 1999 (NSW) (NSW Security of Payment Act).

In Façade, the subcontractor claimant in liquidation (Façade) served payment claims on the contractor respondent (Brookfield Multiplex). The Victorian Court considered whether, since it found that no valid payment schedule had been served, Façade could recover the amount of the payment claims as a debt due pursuant to s16(2)(a)(i) of the Building and Construction Industry Security of Payment Act 2002 (Vic) (Victorian Security of Payment Act).

The New South Wales Court accepted that the Façade decision was directly on point, and therefore that it was bound to follow Façade unless convinced that the decision was “plainly wrong”. 

In our analysis below, we consider how the Seymour Whyte and Façade decisions affect the three usual arguments raised by respondents in response to Security of Payment claimants in liquidation.

Argument one - Interpretation of the Security of Payment legislation

This line of argument is that the Security of Payment legislation should be interpreted so that it does not apply to claimants in liquidation.  

The Victorian Court in Façade interpreted s9(1) of the Victorian Security of Payment Act (the equivalent provision in the NSW Security of Payment Act is s8(1)) as creating an entitlement to progress payments only for claimants who have undertaken to and continue to carry out construction work or supply related goods and services (our emphasis). This interpretation was based on a narrow construction of the phrase “a person who has undertaken to carry out construction work” in s9(1). The Court decided that, in its ordinary meaning, the word “undertake” connotes an expectation of performance.  Therefore, the Victorian Security of Payment Act was not available to claimants in liquidation.

The NSW Court of Appeal disagreed with this interpretation and found it to be “plainly wrong”.³ A major reason for the difference is that, in between the Façade decision and the Seymour Whyte decision, the High Court handed down its landmark decision in Southern Han v Lewence.⁴ In his leading judgment, Sackville AJA interpreted the equivalent provisions in the NSW Security of Payment Act in light of the High Court’s analysis of these provisions in the Southern Han decision. His Honour found that the language of s8(1) of the NSW Act, read in light of the analysis in Southern Han, indicates that a person acquires the entitlement to a progress payment on the satisfaction of two conditions:

• The person has undertaken to carry out construction work under a construction contract; and

• A reference date under the construction contract has arisen.⁵ 

His Honour found there was nothing in the language of s8(1) to support an implication that the entitlement to a progress payment cannot arise unless the claimant continues to carry out construction work.⁶

The NSW Court also had regard to the fact that a liquidator is empowered to continue to trade, so as to sell the company’s business as a going concern.⁷ 

Where does this leave respondents with this first line of argument? 

In New South Wales, the Seymour decision will be binding in future cases and, for the short term (until amending legislation comes into force as outlined below), this argument is unavailable to respondents.  In Victoria, this line of argument is still available, but the Seymour decision has cast doubt on whether a Victorian Court in future would follow Façade, or instead would accept that the High Court’s reasoning in Southern Han requires it to depart from Façade.  

In both jurisdictions, respondents need not despair, because there are other lines of argument potentially available, as we explain below.

Argument two - Constitutional inconsistency so that s553C Corporations Act applies

This line of argument is that s553C of the Corporations Act 2001 (Cth) (Corporations Act) is inconsistent with the entitlements of claimants under the Security of Payment legislation to recover as a debt due:

(a) the amount of their payment claim (when the respondent did not provide a payment schedule); 

(b) the scheduled amount (when the respondent did provide a payment schedule); or

(c) the unpaid amount due under an adjudication certificate; 

free of defences or cross-claims by the respondent.  Therefore, pursuant to s109 of the Commonwealth Constitution, s553C prevails over the Security of Payment legislation to the extent of the inconsistency.

Section 553C of the Corporations Act provides for a setting off of mutual credits and debts between a company in liquidation and a person with a debt or claim against the company. Only the balance after the set off is admissible to proof against the company, or payable to the company. The provision recognises that, where a company is in liquidation, it would be unjust to allow the company to recover 100 cents in the dollar on its claim, while the other party is likely to receive a lesser percentage of its cross-claim as one of a pool of unsecured creditors.

By contrast, the Security of Payment legislation entitles a claimant to recover the amount of its claim in Court proceedings (where the respondent did not provide a payment schedule) or the scheduled amount (where the respondent provided a payment schedule but did not pay the scheduled amount), or the unpaid amount of an adjudication certificate, and prohibits a respondent from bringing cross claims or raising defences in these proceedings.

This inconsistency gives rise to the constitutional question.

In Façade, the Victorian Court of Appeal considered this constitutional question and decided that the Security of Payment Act provisions were inconsistent with s553C of the Corporations Act and were invalid to the extent of the inconsistency. Therefore, once a company has gone into liquidation, and where there are mutual dealings so that s553C is engaged, the company cannot enforce a payment claim as a debt due under Security of Payment legislation and such an application should be dismissed.⁸ This was an independent ground for the Court of Appeal’s decision in Façade. The first instance decision in Façade⁹ was made entirely on the basis of this ground.

In Seymour Whyte, the NSW Court of Appeal did not make a finding on the constitutional question because it had been abandoned as a ground of appeal. The background to the abandonment was that Seymour Whyte accepted that a floating charge granted by Ostwald had crystallised before the commencement of its winding up, and that Ostwald had insufficient assets to satisfy its secured creditors and priority creditors. The reason behind the abandonment is not entirely clear from the decision, because s553C is capable of operating whether or not there are any assets in the liquidation available for distribution.

Because the ground had been abandoned, the NSW Court of Appeal did not express a view on the correctness of the constitutional aspect of the reasoning in Façade. However, Leeming JA did state that the constitutional analysis in Façade is inapplicable in New South Wales, because the “roll back” provisions (s5G) of the Corporations Act apply to the NSW Security of Payment Act.  Therefore, His Honour said that, in a New South Wales case when the point arises, it will be necessary to examine the operation of the rollback provisions on the impugned provisions of the Security of Payment Act.¹⁰

The roll back provisions in the Corporations Act broadly provide that State legislation which coexisted with the Corporations Law before July 2001 should continue to operate after the commencement of the Corporations Act. The NSW Security of Payment legislation commenced in March 2000 and preceded commencement of the Corporations Act in 2001, whereas the Victorian Security of Payment legislation commenced in 2003.  

Although Sackville AJA did not address the constitutional question specifically, His Honour did state that, if enforcement of a judgment for a progress payment would unfairly prevent a respondent from effectively asserting its contractual rights against the claimant, s533C of the Corporations Act provides a mechanism that, within its field of operation, alleviates the unfairness.¹¹ This suggests that His Honour was of the view that s553C would override the Security of Payment legislation in this situation.

Where does this leave respondents with this second line of argument?

For respondents in Victoria, it appears that the constitutional analysis in Façade remains good law and provides a ground for respondents to resist recovery applications by claimants in liquidation, where they have a bona fide cross-claim against the claimant.

For respondents in New South Wales, the position in unclear and remains to be determined (bearing in mind the roll back provisions of the Corporations Act) in a future case.  If the amending legislation (discussed below) comes into force soon, the question may never arise for determination in New South Wales.

Argument three - Availability of a stay or similar relief

A third line of argument operates independently of the previous two arguments. This is that a respondent who can establish a seriously arguable claim arising out of the construction contract can seek a stay of execution of a judgment in favour of a claimant in liquidation, pending a decision on a proof of its cross-claim.  

In Seymour Whyte, Sackville AJA considered that such relief may be granted, if the failure to do so would have the practical effect of making permanent that which Security of Payment legislation intended to be only interim. His Honour concluded that this type of relief was a mechanism available to eliminate or at least minimise the injustice to a respondent when a claimant in liquidation has the benefit of a judgment under the Security of Payment legislation.¹²

Where does this leave respondents with this third line of argument?

This third line of argument is available in both Victoria and New South Wales, depending on the circumstances of the case. However, it is questionable whether for a respondent this argument will be as desirable as argument 1 or 2 above, as orders for a stay can also include a requirement that a respondent provide security for the Security of Payment debt and/or diligently prosecute its cross-claim. Compliance with these requirements can result in costs being incurred which are unlikely to be recovered against an insolvent claimant.

Legislative reform pending in New South Wales

The implications of the Seymour Whyte decision in New South Wales may be short lived, because of a new provision in the Building and Construction Industry Security of Payment Amendment Act 2018 (NSW).  This amending Act was assented to on 28 November 2018 but its commencement date has not yet been proclaimed.  New s32B provides that:

• A corporation in liquidation cannot serve a payment claim or take action to enforce a payment claim (including by making an application for adjudication of the claim) or an adjudication determination; and

• If a corporation in liquidation has made an adjudication application that is not finally determined immediately before the day on which it commenced to be in liquidation, the application is taken to have been withdrawn on that day.

When this new provision comes into force, it will preclude claimants in liquidation from bringing an application for judgment or taking other steps under the NSW Security of Payment Act.  

Ironically, the new provision in New South Wales will restore the position in New South Wales to be consistent with the Victorian Court of Appeal’s decision in Façade. Further, respondents in New South Wales will be in a stronger position than respondents in Victoria.  The new provision makes the situation of claimants in liquidation very clear, and does not depend on the respondent having a cross-claim against the claimant. By contrast, respondents in Victoria remain subject to uncertainties in light of the Seymour Whyte and Southern Han decisions.

What about where the claimant is in voluntary administration, not liquidation?

The position where the claimant is in voluntary administration rather than liquidation is uncertain. Neither Seymour Whyte nor Façade specifically address this question. In Tantallon Constructions Pty Ltd v Santos GLNG & Anor¹³, the Queensland District Court followed the reasoning in Façade and commented, in obiter, that very probably a claimant loses its ability to make or progress payment claims upon being placed into administration.

In our view, the Southern Han and Seymour White decisions make it very doubtful that a Court in future would agree with these comments, and it will be more difficult for a respondent to successfully defend an application by a claimant in administration for judgment under the Security of Payment legislation. However, depending on the circumstances of the case, the third line of argument outlined above may still succeed. 

In the case of a claimant under a deed of company arrangement, the deed may incorporate s553C of the Corporations Act, in which case an argument similar to the second line of argument outlined above may also be available to a respondent.¹⁴ The new provision in New South Wales does not preclude companies in administration from progressing security of payment claims.

View the Seymour Whyte Constructions Pty Ltd v Ostwald Bros Pty Ltd (in liquidation) decision.