Contractor's rights under SOP Act are inconsistent with the objectives of Part 5.3A of the Corporations Act

Key Points:

Contractors and subcontractors should always act quickly to exercise their rights under the Security of Payments Act

The recent decision of Modcol Pty Ltd v National Buildplan Group Pty Ltd¹ addressed whether leave should be granted to a subcontractor to allow it to commence proceedings against a contractor in administration in respect of the subcontractor's rights under the Building and Construction Industry Security of Payment Act 1999 (NSW) (the SOP Act).

In determining that leave should not be granted, the court held that the rights of a subcontractor under the SOP Act were inconsistent with the objectives of the relevant provisions of Pt 5.3A of the Corporations Act 2001 (Cth).

Facts

National Buildplan Group Pty Ltd (Buildplan) was contracted to carry out work by Health Infrastructure (NSW Health) in respect of the Dubbo Base Hospital. Buildplan subcontracted part of the works to Modcol Pty Limited.

On 6 March 2013, Modcol served a payment claim on Buildplan. On 22 March 2013, Buildplan provided a payment schedule. The payment schedule was out of time.

In these circumstances, Modcol was entitled to either:

1. obtain a judgment against the contractor (s 15(2)(a)(i) of the SOP Act); or
2. obtain an adjudication determination against the contractor and have this registered as a judgment of the court (section 15(2)(a)(ii) of the SOP Act).

Once judgment was obtained, Modcol would be entitled to then obtain a "debt certificate" from the court and recover the outstanding amount directly from NSW Health (Pt 2 of the Contractors Debts Act 1997 (NSW) (the CD Act)).

Modcol chose the first option and commenced proceedings against Buildplan on 10 April 2013 for summary judgment of the amount claimed in the payment claim together with interest.

Two days before the summons was filed, administrators were appointed to Buildplan.

Decision

As Buildplan was in administration, Modcol was required to seek the leave of the court to commence proceedings against Buildcorp pursuant to s 440D of the Corporations Act. Consequently, the court was asked to consider the following:

• Whether leave pursuant to s 440D of the Corporations Act should be granted to allow Modcol to commence proceedings against Buildplan in respect of the amount claimed under the SOP Act.
• If granted, whether a certificate should be issued pursuant to section 7 of the Contractors Debts Act to enable Modcol to access money said to be owing by NSW Health to Buildplan.

The objectives of the Corporations Act

In respect of the first question, McDougall J noted that granting leave was discretionary. His honour went on to consider the circumstances in which leave should be granted. His Honour stated that whether leave should be granted must be weighed against the objectives of the Corporations Act as a whole and the importance of protecting the company's property during administration.

His Honour noted that the object of Pt 5.3A is to:

• maximise the chance of the company continuing in business; or
• get a better return for creditors than would result from immediate winding up (section 435A of the Corporations Act).

Further, these objectives are reflected in section 439C of the Corporations Act, which provides that the creditors shall meet to decide the company's future. At this meeting, the creditors have three choices:

• the company execute a deed of company arrangement;
• the administration should end; or
• the company be wound up.

When to grant leave under section 440D?

Justice McDougall noted that the courts had previously taken two approaches to this question:

• Leave will be granted rarely in situations other than where the company was insured against the liability that is the subject of the proceedings (Foxcroft v Ink Group Pty Ltd).²
• The court should not start from the position that leave will be granted rarely but should grant leave where the circumstances of the particular case warrant the granting of leave (Larkden Pty Ltd v Lloyd Energy Systems Pty Ltd).³

Although concluding that he did not have to express a definitive view as to which of the above positions he preferred (because the result in this case would be the same either way), his Honour's judgment appears to suggest that Justice Hammerschlag's approach was to be preferred.

Should leave be granted in respect of claims under the SOP Act?

Modcol argued that the policy of the SOP Act justified the grant of leave which would enable it to pursue its rights in full (ie. the recovery of judgment and the obtaining of a s 7 certificate). This was consistent with White J's reasoning in Sam the Paving Man Pty Ltd v Berem Constructions Pty Ltd (in liq)⁴ that an unpaid person within the meaning of section 5 of the CD Act may obtain priority over other creditors.

However, McDougall J did not agree. Instead, McDougall J preferred the view expressed by Byrne J in Belmadar Constructions Pty Ltd v Environmental Solutions International Ltd⁵ that:

"It is important that once the processes for an orderly management and winding up of the affairs of a company in financial distress are set in train that the statutory rights of and limitations upon the rights of all concerned, including unsecured creditors under the Corporations Act 2001, be respected and given effect to."

His Honour went on to say that the main objectives of Pt 5.3A noted above would be subverted by the exercise of discretion in favour of Modcol. In particular:

"[41] On the first basis, the effect of intercepting what might be a substantial amount owed by Health Infrastructure to Buildplan would in my view be subversive of the primary object of Part 5.3A. I say that because it seems to me that if the chances of the company's continuing in business are to be maximised, it will need as much cash as it can get its hands on for the purpose of funding both the administration, any deed of company arrangement and the subsequent continuation of business.

[42] If, however, there is no arrangement and the company does not continue in business, the likely result is winding-up. Clearly, a payment which would have the effect of giving a significant advantage to one unsecured creditor over others would not be consistent with the scheme of the Act for winding-up on insolvency."

In circumstances where state law is inconsistent with Commonwealth law, Commonwealth law prevails (section 9 of the Constitution). Consequently, the objectives of the Corporations Act prevailed.

His Honour also noted that the first meeting of creditors had not taken place. In these circumstances, it was premature to take any action that may adversely affect Buildplan's chances of continuing its business.

Accordingly, leave was not granted and there was therefore no need to consider the second question relating to whether a debt certificate should be issued pursuant to the Contractors Debts Act.

Timely reminder

This case confirms that where there is an inconsistency between the SOP Act and the Corporations Act, the latter will prevail.

Consequently, this case is a timely reminder to contractors and subcontractors that they should always act quickly to exercise their rights under the SOP Act. This is particularly the particularly relevant in the current economic climate where there have been a number of recent high-profile insolvencies in the construction industry.

This article was first published in Insolvency Law Bulletin, Vol 13 No 9, June 2013

Footnotes

¹Modcol Pty Ltd v National Buildplan Group Pty Ltd [2013] NSWSC 380.

²Foxcroft v Ink Group Pty Ltd ; 12 ACLC 1063 per Young J.

³Larkden Pty Ltd v Lloyd Energy Systems Pty Ltd; [2011] NSWSC 1305; per Hammerschlag J.

⁴Sam the Paving Man Pty Ltd v Berem Constructions Pty Ltd (in liq) [2010] NSWSC 868.

⁵Belmadar Constructions Pty Ltd v Environmental Solutions International Ltd (2005) 23 ACLC 337; [2005] VSC 24.

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.