Application of Security of Payment Act to insolvent claimants – Victorian approach ‘plainly wrong’

Commercial Directions

In Seymour Whyte Construction Pty Ltd v Ostwald Bros Pty Ltd (in liq) [2018]
NSWSC 412, the New South Wales Supreme Court considered the extent to which an insolvent claimant can rely on the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOPA) and determined that:

  • the Victorian Court of Appeal’s view that the benefit of security of payment legislation is not available to companies in liquidation is ‘plainly wrong’;
  • a ‘claimant’ under the SOPA can include a company in liquidation; and
  • where a company is in liquidation, the enforcement of an adjudication determination under the SOPA should be stayed until the parties’ rights are finally determined in accordance with section 533C of the Corporations Act 2001 (Cth).

Key facts

  • Seymour Whyte entered into a subcontract with Ostwald under which Ostwald agreed to perform certain roadworks
  • On 28 July 2017, Ostwald served Seymour Whyte with a payment claim for more than $6.3 million pursuant to the SOPA
  • On 11 August 2017, Seymour Whyte served Ostwald with a payment schedule pursuant to the SOPA which identified a scheduled amount of just over
    $2.5 million
  • On 24 August 2017, Seymour Whyte terminated the subcontract for its convenience, and the following day, the directors of Ostwald resolved to appoint administrators
  • On 27 September 2017, Ostwald commenced adjudication proceedings under the SOPA on account of Seymour Whyte’s failure to pay Ostwald any of the scheduled amount
  • On 6 November 2017, the Adjudicator determined that just over $5 million was due to Ostwald from Seymour Whyte
  • On 17 November 2017, Seymour Whyte commenced proceedings in the Supreme Court challenging the Adjudicator’s determination on the bases that:
    • consistent with the decision of the Victorian Court of Appeal in Façade Treatment Engineering Pty Ltd (in liq) v Brookfield Multiplex Constructions Pty Ltd [2016] VSCA 247, Part 3 of the SOPA is not available to insolvent claimants; and
    • it was entitled to a stay of any judgment arising from the filing of Ostwald’s adjudication certification until the parties’ rights were finally determined in accordance with section 533C of the Corporations Act.

On 30 November 2017, Ostwald’s creditors resolved that it should be wound up.

By reason of sections 513B and 513C of the Corporations Act, Ostwald’s winding up was taken to have commenced on 25 August 2017 when its administrators were appointed.

Decision

In Façade Treatment, the Victorian Court of Appeal held that a ‘claimant’ for security of payment purposes is a person who has ‘undertaken to, and continued to, carry out construction work’. Accordingly, a company in liquidation cannot be a claimant once a winding-up order is made in respect of it as it then only exists for the purpose of being wound up.

In determining that Ostwald was at all relevant times a claimant for the purposes of the SOPA, Justice Stevenson found the approach taken in Façade Treatment to be ‘plainly wrong’ on the bases that a person’s status as a ‘claimant’ under the SOPA does not depend upon whether it ‘undertook’ to carry out construction work, but instead depends only on whether it served a payment claim in accordance with the SOPA.

Having said this, it did not follow that Ostwald was free to exercise all rights available to it under the SOPA as:

  • the role of the Corporations Act had to be considered; and
  • when this was done, and as a result of Ostwald entering into liquidation before it moved for judgment on the adjudicated amount, section 533C of the Corporations Act applied such that:
    • in the case of Ostwald, it was entitled to recover from Seymour Whyte any amount found following the taking of such accounts to be due by Seymour Whyte to it, and
    • in the case of Seymour Whyte, to be able to prove in the winding up of Ostwald for any amount found to be due by Ostwald to it.

What this means for you

This decision has significant implication for participants in the building and construction industries and represents a divergence in the New South Wales and Victorian positions, despite their respective security of payment legislation being in substantially the same terms. In particular:

  • for those responding to payment claims there is now a real risk that insolvency may not be a bar to claimants seeking the benefit of security of payment legislation; while
  • for claimants who are concerned about their financial status, their ability to enforce SOPA determinations may be stayed until the set-off procedure included in section 533C of the Corporations Act is finalised where they are placed into liquidation prior to moving for judgment.

Further information regarding the issues raised in this article is available from the authors, Joel Sturgeon, Partner and Shanna Beeton, Lawyer or your usual contact at Moray & Agnew.


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