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 
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
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).
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
...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
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
 NSWSC 380 .
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