13 April, 2019
There is now a divergence between New South Wales and Victorian authority on whether a company in liquidation may make a claim under Security of Payment legislation. The common law position in NSW is now that a company in liquidation can bring a Security of Payment claim. This decision will be rendered somewhat academic in NSW following enactment of legislation to come into force on a (currently unspecified) date in 2019 which has the effect of overriding this decision. The implications of this decision are therefore most likely to be felt in states other than NSW, with courts in those states now having to choose between conflicting NSW and Victorian authority.
This article takes five minutes to read.
1. What you need to know
In Seymour Whyte Constructions Pty Ltd v Ostwald Bros Pty Ltd (in liq)1 the New South Wales Court of Appeal was asked to determine if the Building and Construction Security of Payment Act 1999 (NSW) applied allowing claims to be made under that Act by companies in liquidation and whether the decision in Façade Treatment Engineering Pty Ltd (in liq) v Brookfield Multiplex Constructions Pty Ltd2 (Façade) ought be followed.
In Façade the Victorian Court of Appeal found that:
a. A company in liquidation cannot carry out construction work or supply goods and services under a contract – therefore any concern to ensure ongoing cash flow to the claimant company does not apply;
b. The very thing that the Security of Payments legislation is designed to ensure is ongoing and timely payments to ensure that subcontractors do not have cash flow issues creating a risk of insolvency – a company in liquidation is already insolvent;
c. Security of Payments legislation creates an entitlement in favour of the claimant contractor that is decided on an 'pay now/ argue later' interim basis, which is enforced without prejudice to any rights that the paying party may seek to have determined on a final basis at a later date. It is unfair to the paying party to compel it to pay the claimant in liquidation an "interim" statutory entitlement when the de facto effect of the liquidation would be to relegate the paying party to the status of an unsecured creditor unable to recoup the notional 'interim' payment;
d. The provisions for payment in the Security of Payments legislation envisage that the paying party will be able to claw back any payments made to the claimant in the event that the paying party is able to establish a right to do so; and
e. The interim nature of the claimant's entitlement supports the view that a claimant should not be entitled to lodge a claim under the Security of Payments legislation when a liquidator has been appointed to it.
In Seymour Whyte Constructions Pty Ltd v Ostwald Bros Pty Ltd (in liq,) the NSW Court of Appeal responded to each of the above points raised by the Victoria Court of Appeal as follows:
f. The idea that cash flow problems cease to be a concern for a company in liquidation fails to take into account the express power of a liquidator to trade on a business if it required for the beneficial disposal of the business. The claimant in liquidation may need a progress payment from the paying party to ensure that it can continue to trade the business and perform its rights under the contract. In addition, payment of a progress payment may enable a company in liquidation to discharge its few remaining obligations under the contract potentially entitling it to payment and possibly any security held;
g. A company wound up because it is alleged that it is insolvent may ultimately be found to have a surplus of assets over liabilities. It is not correct to suggest that creditors of a company in liquidation can never expect a full return of the amounts owed to them;
h. In the present case, Seymour Whyte refused to pay the Scheduled Amount prior to the liquidation despite stating that it proposed to do so. Had the Scheduled Amount been paid in accordance with the Security of Payment legislation, then Seymour Whyte's only remedy would have been to lodge a proof of debt and the notionally "interim" payment could well have been effectively final. The Court noted that Seymour Whyte was only able to make this argument because it had not paid the Scheduled Amount as agreed. In those circumstances the court refused to reward Seymour Whyte for delaying a progress payment; and
i. Section 553C of the Corporations Act 2001 (Cth) provides a mechanism to alleviate the unfairness by ensuring a right of set-off.
In those circumstances the New South Wales Court of Appeal reached the conclusion that the decision of the Victorian Court of Appeal in Façade was plainly wrong and should not be followed.
It should be noted that the NSW government has approved changes to Security of Payment legislation which come into force on a date in 2019 which will prevent a company in liquidation from serving a payment claim or taking actions to enforce it, including by making an application for adjudication or attempting to enforce an adjudication determination.3
2. Where does this leave other jurisdictions?
Victorian courts are now placed in the difficult position of being obliged to follow a binding Victorian Court of Appeal decision in circumstances which the New South Wales Court of Appeal has pronounced to be plainly wrong.
The NSW decision will be of more long term relevance in other jurisdictions where there is no plan to introduce amendments to prevent reliance on the Security of Payment legislation during liquidation. In those States and Territories the consequences of the case may be less clear.
In Queensland the competing views of NSW and Victorian judges to date have received limited judicial consideration. However, the recently commenced Building Industry Fairness (Security of Payment) Act 2017 (QLD) has already replaced the language upon which the Victorian courts relied heavily in reaching the outcome in the Façade decision. This suggests it is more likely that the NSW position will be followed in Queensland at least.
In December 2017 Jon Murray AM presented his review of Security of Payments legislation throughout Australia to the Minister for Small and Family Business (Murray Review). Whilst the Murray Review recommended harmonisation of Security of Payment legislation generally, it made a specific recommendation that such legislation should not apply in a liquidation scenario.4 This recommendation informed the NSW amendment referred to above.
As a consequence of the above there is a degree of uncertainty as to how this case will be viewed in other jurisdictions. If you are the respondent the uncertainty is good news and may give you the leverage to negotiate a better outcome with the liquidator.
For further information, please contact:
Alex Hartmann, Partner, Baker & McKenzie
alex.hartmann@bakermckenzie.com
1 [2019] NSWCA 11
2 [2016] VSCA 247
3 Building and Construction Industry Security of Payment Amendment Bill 2018 (NSW) s 32B(1).
4 Jon Murray, 'Review of Security of Payment Laws' (Report, Department of Jobs and Small Business, 2017) 119, Recommendation 10.
