Australia: Victorian Court of Appeal limits application of Security of Payment Act in circumstances of claimant insolvency

In brief - Security of Payment Act not available to claimants in liquidation

In its recent judgment in Façade Treatment Engineering Pty Ltd (In Liq) v Brookfield Multiplex Constructions Pty Ltd [2016] VSCA 247, the Victorian Court of Appeal has confirmed that an insolvent claimant in liquidation is precluded from relying on procedures for recovering progress payments set out in the Building and Construction Industry Security of Payment Act 2002 (Vic) (SoP Act).

The Court of Appeal in Façade has limited access to those parts of the SoP Act (Part 3) to persons not in liquidation by giving the SoP Act a narrow interpretation.

Without deciding the appeal on this basis, the Court of Appeal has also concluded that an inconsistency exists between the "anti-set off" provisions of the SoP Act and the rights of mutual credit and set off involving insolvent companies being wound up under the Corporations Act 2001 (Cth) (Corporations Act).

Inconsistency between Security of Payment Act and Corporations Act in context of claimant insolvency

The purpose of the SoP Act is to assist payees in the contracting chain (claimants) to maintain cash flow throughout the duration of a construction project by providing a statutory entitlement to receive progress payments at regular intervals. Under the SoP Act, payers (respondents) must "pay now and argue later" (see Hickory Investments Pty Ltd v Schiavello (Vic) Pty Ltd [2009] VSC 156, [44]) so that claimants have funds on an interim basis with which to proceed with the contracted works, though the final rights of the parties under the contract remain to be resolved later. Certain provisions in the SoP Act favour the claimant's right to receive an interim progress payment over the respondent's right to resist payment by raising counterclaims or set-offs in certain circumstances.

Under the SoP Act, where a claimant seeks judgment for a claimed amount for which a respondent failed to provide a payment schedule ( section 16(2)(a)(i) of the SoP Act), the respondent is prohibited from raising a cross-claim or set off (section 16(4)(b)(i) of the SoP Act). (Similarly, a respondent is prohibited from raising a cross-claim or set off where it fails to pay in full in accordance with a payment schedule it has issued to the claimant ( section 17(4)(b)).

The problem that arises in the context of claimant insolvency is that a respondent who makes an interim payment under compulsion from the operation of the SoP Act, despite having a substantive counterclaim or set-off against the claimant, may be left to prove its substantive claim in a liquidation, along with the debts sought to be proved by any other unsecured creditors.

However, under section 553C(1) of the Corporations Act, where there are mutual dealings between a company being wound up in insolvency and another person, there is a set-off and only the net balance can be proved as a debt against the insolvent company.

Liquidator seeks payments from Brookfield who in turn seeks to bring counterclaims under section 553C of Corporations Act

Façade Treatment Engineering Pty Ltd was engaged as a subcontractor by Brookfield Multiplex Constructions Pty Ltd to design, supply and install façade and curtain wall works on a project in Lonsdale Street, Melbourne. Façade went into liquidation in February 2013, after two SoP payment claims made by Façade went largely unpaid.

The liquidator of Façade commenced proceedings, seeking payment under section 16(2)(a)(i) of the SoP Act to recover from Brookfield an amount of some $1.2 million, being the amount outstanding under the two SoP Act payment claims. Façade contended that Brookfield had failed to respond to the payment claims with payment schedules. Façade's argument was that Brookfield was not entitled to bring a cross-claim, by reason of section 16(4)(b)(i) of the SoP Act.

Brookfield sought to rely on section 553C of the Corporations Act to bring substantial counterclaims which, if proved, would entirely extinguish any entitlement in Façade and would have left a substantial balance due to Brookfield.

In first instance decision, section 16 of SoP Act found to embody constitutional inconsistency, Brookfield email found to amount to payment schedule

The Supreme Court (Vickery J) had decided that the operation of section 109 of the Commonwealth of Australia Constitution Act 1900 (Cth) meant that the SoP Act (a state Act) must yield to the Corporations Act (a Commonwealth Act) to the extent of the inconsistency. Section 16 of the SoP Act embodied such an inconsistency.

The Court also held that an email sent by Brookfield to Façade in response to one of the payment claims did amount to a payment schedule under the SoP Act.

Court of Appeal bases decision on narrow interpretation of SoP Act, finds that constitutional inconsistency supports such interpretation

In a combined judgment, the three Justices of Appeal relied on the text of various provisions of the SoP Act, including section 9(1) (rights to progress payments) to find that section 16(4)(b) contemplates use only by claimants "still carrying out construction work or supplying related goods and services". An insolvent company in liquidation, such as Façade was, does not meet that test. The Court of Appeal also found that other provisions in Part 3 of the SoP Act are inapplicable to companies in liquidation.

The Court of Appeal determined that if the SoP Act were held to compel payment to a claimant in liquidation, the payment would become final in effect, rather than provisional as intended by the SoP Act. The Court also found, distinguishing the circumstances of a company teetering on the edge of insolvency (pre-liquidation) and a company in liquidation such as Façade, that cash flow problems cease to be a concern when a company enters liquidation (upon the making of a winding up order).

Having based the appeal decision squarely on a narrow textual interpretation of the SoP Act, the Court of Appeal then considered the issue of constitutional inconsistency that had been a basis of the decision of Vickery J. The Court of Appeal upheld the judge's finding that there is an inconsistency between sections 16(2)(a) and 16(4)(b) of the SoP Act and section 553C of the Corporations Act, and that the provisions of the SoP Act are inoperative to the extent of the inconsistency.

The Court of Appeal considered that the finding of inconsistency provided independent additional support for the narrow interpretation of the SoP Act adopted.

Implication of Court of Appeal's decision clear for claimants in liquidation, but possibly limited application for claimants in voluntary administration

The Court of Appeal's decision formally pegs back the reach of the SoP Act (and other East Coast variants) for claimants in liquidation, providing emphatic guidance to insolvency practitioners and construction industry participants alike.

This decision may be limited in its application, however, to claimants being wound up in insolvency.

In an earlier NSW case, a claimant that went into voluntary administration after an adjudication under the NSW SoP Act was held to have had no use for cash flow, and that the Commonwealth laws regarding Deeds of Company Arrangement came into play and the SoP Act fell away at the point where the players ceased to be "going concerns" (see Brodyn Pty Ltd v Dasein Constructions Pty Ltd [2004] NSWSC 1230 (per Young CJ)).

The Court of Appeal in Façade criticised as difficult the identification of the point when a company was no longer a "going concern". The Court of Appeal's reasoning that entry into liquidation marks the point when cash flow problems cease to be a concern, may leave the way open for claimants in voluntary administration to rely safely on Part 3 of the SoP Act.

Catherine Bell
Construction and engineering
Colin Biggers & Paisley

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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