Australia: Administrators vs Adjudicators: How does an administration impact on debts due under security of payment legislation?

Focus: Modcol v National Building Group [2013] NSWSC 380
Services: Financial Services, Property & Projects
Industry Focus: Financial Services, Property


Part 5A of the Corporations Act 2001 (Cth) provides that the purpose of an administration is to enable the business, property and affairs of a company to be managed in a manner which maximises the chances of that company continuing to trade or otherwise achieve a better return to creditors and members than immediately winding up that company.

The decision in Modcol v National Building Group [2013] NSWSC 380 is a reminder of the Court's overwhelming preference to recognise that philosophy, regardless of the rights afforded to contractors under the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act).

Legal context

Sections 440D and 440F of the Corporations Act provide for a moratorium to be imposed which protects the company and its assets from attack from creditors while the administrator formulates a proposal to be put to creditors concerning the future of the company. The Court nevertheless retains a discretion to permit the continuation or commencement of an enforcement process against a company in administration.

The overarching purpose of the SOP Act was to reform payment behaviour in the construction industry. This is achieved through a fast-track adjudication system for interim determinations of progress payment entitlements which are enforceable as a statutory debt enforceable in Court.

Once judgment is obtained, the Contractors Debts Act 1997 (NSW) (CDA) further provides a process whereby a subcontractor can recover a debt owed to it by a head contractor from a principal (assuming the principal owes money to the head contractor).

The decision

Modcol, as subcontractor, sought the Court's leave to enforce an adjudication award against a head contractor, Buildplan, a company in administration.

The only basis put forward upon which the Court could exercise its discretion was the overarching purpose of the CDA. In deciding to dismiss the application for leave to proceed, Justice McDougall determined that:1

...whichever way one approaches the s 440D discretion, the answer seems to me to be the same: to exercise the discretion in favour of Modcol, on the facts as they are known, would be subversive of the objects of Part 5.3A. Whatever may be said about the limits or otherwise on the discretion, an exercise which had the effect of subverting that Part of the Corporations Act in which the section conferring the discretion appears does not appear to me to involve an appropriate and principled approach to the power that is given.

What about the subcontractor?

Since reforms of the security of payment legislation in 2010, parties have been less inclined to adopt the processes under the CDA, instead relying upon the more expedient 'with-holding regime' under Part 2A of the SOP Act. That regime provides that debts under the SOP Act may be paid directly from a principal to a subcontractor at an earlier point in time (assuming the principal owes money to the head contractor).

However any attempt to recover payments under Part 2A of the SOP Act, whilst a company was subject to administration under the Corporations Act, would also be thwarted by the moratorium imposed by section 440 Corporations Act.

With the financial pressures the building industry is currently facing, this decision will only serve to increase that pressure and introduce further uncertainty for the smaller subcontractors who rely heavily upon the speed and directness of the SOP Act and CDA.

Given that it is unlikely that the financial pressure on the building and construction industry will lessen for the foreseeable future, subcontractors need to be aware of the limitations of the SOP Act and CDA. Conversely, insolvency practitioners may continue to default to the moratorium under the Corporations Act in the context of building dispute claims absent some overriding court order – which, as this case suggests, appears unlikely.

Need for further reforms?

This decision may not be surprising to those in the insolvency industry. However, it provides a further example as to the need for safeguards for subcontractors as recently detailed in the Collins Review. The difficulty is that prescribing more administrative obligations on an industry suffering from a hard market is unpopular (at best).

The state legislature's efforts should focus on preventing insolvency in the industry – once a company is insolvent, the Corporations Act moratorium is likely to prevail.


1Modcol v National Building Group [2013] NSWSC 380 [43].

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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