Australia: Corrs High Vis: Episode 33 – Can a builder in liquidation take advantage of the Security of Payment regime?

Can a builder that is in liquidation take advantage of the security of payment regime? Not according to a 2016 decision of the Court of Appeal in Victoria, but last month the NSW Court of Appeal reached a different conclusion.

In our latest Corrs High Vis podcast, Samuel Woff and Ryan Shlah sit down with presenter Wayne Jocic to discuss the two cases, and the approach taken by each Court.

The podcast series, brought to you by Corrs, offers analysis and insights to help you make smarter decisions.


Wayne: Today we're dealing with a question that can be asked fairly simply and it's this: can a builder in liquidation use security payment legislation? A simple question. So in 2016, the Court of Appeal in Victoria said no, partly because of the construction under the Act and partly because of the policy behind the Act. That's 2016 but the NSW Court of Appeal has rejected that analysis. They held that that analysis was plainly wrong and they did that with a five judge panel in the Court of Appeal. So today we're going to be discussing those two cases and asking which one of those views is right and thankfully I'm not doing this alone. So I'm Wayne Jocic and I'm here with two senior associates. I'm here with Sam Woff and Ryan Shlah and we're going to explore these issues today.

Okay, so Sam let's work out what those two positions in the two courts were to see whether we can clarify this just a little bit. So the basic question as I see it is whether a claimant it might be a contractor, it might be a subcontractor who's in liquidation. So their affairs are being wound up can that claimant take advantage of the security payment legislation so that they can claim amounts owed to them, go through the adjudication process and so on. A simple question, Sam, so tell us about it.

Sam: Yes thanks mate it is a simple question it belies obviously a more complex answer. The Victorian Court of Appeal as you mentioned first grappled with this issue back in 2016 and when they looked closely at the legislation their conclusion was that the text of the legislation itself doesn't really answer that question one way or the other it's a little bit ambiguous and it could be read in a number of different ways. Fortunately, that wasn't the end of their analysis and they turned to the broader policy considerations which might assist them in answering that question and they really picked upon three things to help them reach the conclusion that a company in liquidation couldn't use the Act. The first of those was that the Act itself in things like allowing contractors to suspend works anticipates that the people that are going to be using the Act are people that are continuing work on the project and obviously in their view they said a company in liquidation is not going to be continuing any works so that points against the company being able to use the Act. The second thing they drew attention to was the fact that yes while the Act is supposed to protect builders and businesses from falling into insolvency to ensure that they are maintaining their cash flow those considerations actually have far less weight once the company is actually in insolvency. By that point the rubicon has been crossed and it's too late to try and save the company it's already heading for an orderly demise and cash flow considerations are far less important. I mean for me Wayne the most compelling reason that they found that a company in liquidation couldn't use the Act was the whole purpose the Court of Appeal said of the Act was to ensure that any payments that were made pursuant to the Security of Payment Act were on an interim basis only. They weren't supposed to be permanent they could always be undone through the normal litigious court process. Now that ruse of being able to claw back payments made pursuant to the Security of Payment Act is obviously not possible if the company is in liquidation. So what that means is in essence a company that receives a payment under the Security of Payment Act instead of that payment being interim that payment is final and that is really not in keeping with the purpose and policy of the Act. So for those three policy reasons the Court of Appeal found that a company in liquidation wasn't able to access the fast and cheap [03.58] resolution process under the Security of Payment Act.

Wayne: Thanks so much, Sam. Look I might point out the judgment that you're talking about is [04.04] Brookfields and it's a judgment that stretches to about 265 paragraphs so thank you very much for the summary. Now that's the Victorian position a three panel judge for the Court of Appeal but earlier this week as I've hinted the NSW Court of Appeal had an opportunity in a case called Seymour White to consider exactly the same issue. So can you tell us about the New South Wales position as it now stands.

Sam: Yeah sure thing Wayne. I mean the first point to make there is that it's not normal in Australia for the respective courts of appeal in the different States to disagree about what is in essence the same piece of legislation. The High Court has specifically said that they're not to do so unless they're convinced the other court was plainly wrong and that's in the interests of just maintaining consistency and a harmonious approach across Australia but in fact that's what this case is all about. The NSW Court of Appeal did decide that Victoria was plainly wrong in its position and it did so for a couple of reasons. Firstly, it said that the text of the legislation actually makes it clear in that a person in liquidation is able to access the acts because it doesn't anywhere in the legislation say that they can't. So they found that to be a fairly compelling first reason. Secondly, they said that some of the policy considerations of the Victorian Court of Appeal relied upon are actually either wrong or not as compelling as they first appear. So they said that notwithstanding there are certain sections of the Act which anticipate that a claimant must be undertaking and continuing to undertake construction work there are also other sections of the Act which anticipate that a person can make a claim even though work is finished on the project and they point to the fact that there is provision in the Act for making final payment claims at the end of a project when obviously work has been complete. So they didn't find that to be a particularly persuasive point by the Victorian Court of Appeal.

Wayne: Well thanks very much, Sam. So just to recap all of that we're in a situation where we have legislation which in these respects is essentially the same in all material respects it's the same in New South Wales and Victoria and what we see are the two Courts of Appeal reaching directly opposed views. So the NSW Court of Appeal says the Victorian Court of Appeal was plainly wrong in making this assessment. So what do we do? What do we do in the face of this conflict between these appellate courts and so for a response to that, Ryan, I'm going to turn to you and ask what you think has been the practical impact of these decisions, how to resolve them that affects New South Wales of course but also other jurisdictions. So, Ryan, what do you think?

Ryan: Thank you Wayne, thank you Sam. The decision causes more confusion between the various States and their security for payment legislation. The Murray report, however, recommends that the States ought to have consistent legislation and this is for a few reasons. First, construction is a national industry and requires a national approach. Second, the equality of rights and protections across the various States. Third, a national approach will reduce complexity and administrative burdens. Fourth, there is significant practical and legal experience to support a national approach and finally there is widespread industry support for a consistent national approach. Now one of the more compelling reasons for a national approach in the Murray report has a direct impact on the current topic. As a result of the competing decisions in Victoria and New South Wales, a party that becomes insolvent anywhere in Australia may or may not be able to make claims or seek payment of claims under a Security for Payment Act simply because of the State in which that work was performed. This means that there isn't inequality of rights and protections across the various States for insolvent parties. It also remains to be seen how the other States will decide the issue. It is a live question and the other States will have two competing decisions from New South Wales and Victoria which they can consider. How they decide the question may also increase the level of inconsistency and complexity of the legislation from a national perspective. How relevant is the decision given that on 28 November 2018 the NSW Government issued an act amending the legislation such that a company in liquidation cannot serve a payment claim or enforce a payment claim under the Act. The short answer is that it depends on how long it takes for the amendment to come into force. The amendment to the Act complies with the ninth recommendation to the Murray report and the ninth recommendation of the Murray report is that security for payment legislation should not apply to a claim in liquidation. Now everybody in the construction industry should know that those payments are made on an interim basis but the party's final rights are reserved. Now if a claimant in liquidation were to rely on the provisions of the NSW Act any payment a respondent would be required to make to the claimant would not be interim as intended by the legislation but it would in effect make that payment final.

Wayne: Thank you very much Sam and Ryan. This has been a fascinating discussion about central issues in construction about money, about payment and about insolvency and here we have a stark conflict between these courts of appeal and it's been very, very helpful to have this discussion with you. circumstances.

This podcast is for reference purposes only. It does not constitute legal advice and should not be relied upon as such. You should always obtain legal advice about your specific circumstances.

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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