Companies in liquidation – No right to payment under the security of payment legislation

Oct 28 2016

Publications

Introduction

In the recent decision of Façade Treatment Engineering Pty Ltd (in liq) v Brookfield Multiplex Constructions Pty Ltd [2016] VSCA 247, the Victorian Court of Appeal has confirmed that companies in liquidation cannot use the Victorian security of payment legislation to recover progress payments. The Court also provided valuable guidance on the form and content of payment schedules required under that legislation.

This decision should be noted by insolvency practitioners and could have important ramifications for contractors and subcontractors in Victoria, Queensland and New South Wales.

Facts

Façade was engaged to design, supply and install façade and curtain works for Multiplex.  Façade submitted payment claims 18 and 19 under the Building and Construction Industry Security of Payment Act 2002 (Vic) (SOP Act).  Multiplex made a partial payment in response to payment claim 18 and responded to payment claim 19 by email, but did not serve any payment schedules.  Façade subsequently entered liquidation by way of an involuntary winding up order by the Supreme Court.

Under s 16 of the SOP Act, a party is able to (amongst other things) apply to court for summary judgment where a respondent fails to pay a payment claim or provide a responding payment schedule.  Further, the respondent is unable to bring any cross-claim or raise a defence of set off.

The liquidators for Façade therefore applied for summary judgment for $1,193,469.20 from Multiplex (being the unpaid amounts from payment claims 18 and 19).  Multiplex alleged that Façade was liable to it under a proposed counterclaim for completion costs and liquidated damages.  That application was dismissed by Justice Vickery on the basis that, first, an insolvent company was not entitled to enter judgment under s 16 of the SOP Act as the section was invalid to the extent it was inconsistent with the set off provisions at s 553C in the Corporations Act 2001 (Cth) (Corporations Act) and, secondly, the email from Multiplex responding to payment claim 19 was a payment schedule.

Decision

Façade appealed the trial judge’s decision to the Court of Appeal. The Court of Appeal ultimately affirmed the decision of the trial judge, deciding that:

  • following the making of the winding up order, Façade only continued to exist for the purposes of the winding up and, therefore, Façade was no longer a “claimant” for the purposes of the SOP Act or able to use the legislation to recover progress payments;
  • in any event, the Court of Appeal agreed with Justice Vickery’s decision that the relevant provisions of the SOP Act were invalid as they were inconsistent with the Corporations Act;
  • however, contrary to the decision at first instance, the email response to payment claim 19 was not a payment schedule as it did not sufficiently indicate Multiplex’s reasons for withholding payment.

Insolvency and the SOP Act

The SOP Act was introduced as a response to the high levels of insolvency in the construction industry, particularly amongst contractors and subcontractors that are low on the “contractual chain”. It addresses the issue by ensuring that contractors are entitled to regular progress payments and by providing an expedited method for determination and recovery of disputed payments. The purpose of s 16 is to allow contractors to recover undisputed progress payments quickly through an application for summary judgment.

Multiplex argued that, because the aim of the SOP Act is to ensure prompt payment to assist those in the construction industry who depend on cash flow for their continued existence, it should not be used to benefit a company in liquidation which no longer depends upon that cash flow.

The Court of Appeal agreed, finding that the SOP Act is for the benefit of contractors that “have undertaken to, and continue to, carry out construction work or supply related goods and services” and is therefore not available to companies in liquidation (as they can no longer do so).  Once a winding up order is made in respect of a company, that company only continues in existence to facilitate that winding up.  Further, the regime is intended to be interim and, if an insolvent company was allowed to utilise it to recover monies by way of summary judgment, it would make that recovery final (as the respondent would not then be able to sue for recovery of monies paid).

Inconsistency between the Corporations Act and the SOP Act

While that essentially disposed of Façade’s appeal, the Court of Appeal nevertheless went on to consider the issue of inconsistency with the Corporations Act, agreeing with Justice Vickery that the SOP Act was inconsistent with the Corporations Act and therefore invalid (to the extent of that inconsistency).

This is because section 16(4)(b) of the SOP Act provides that a respondent may not bring any cross-claims or defences against the claimant in an application under that section whereas section 553C of the Corporations Act provides a statutory right to set off any amounts owed by a company in liquidation against amounts owed to the company.  Where a law of a State is inconsistent with a law of the Commonwealth, the Commonwealth law prevails.  Therefore, where a claimant brings an application under s 16 of the SOP Act, and the respondent has set offs against the claimant, the set offs should be applied.

Interestingly, s 553C(2) of the Corporations Act provides that the statutory right of set off is not available to a party which had notice of the company’s insolvency at the time of receiving the credit. The Court held that the relevant time for determining when that notice was required was at the time of entry into the contract.  At that time, Multiplex did not have notice of Façade’s insolvency, meaning the provision did not apply.

Conclusion

As noted above, the SOP Act is similar to the security of payment regimes in Queensland and New South Wales.  We therefore consider it likely that courts in Queensland and New South Wales will adopt similar reasoning to Victoria and find that insolvent companies cannot use security of payment legislation to recover unpaid progress payments.

Naturally, once a company is being wound up or is in liquidation, control of the company passes to external liquidators.  With liquidators unable to use security of payment regimes to expeditiously recover unpaid amounts, it is foreseeable that funds available for release to creditors, including contractors and subcontractors, may not be released as quickly, or available at all.

For further information please contact:
Andrew Kelly | Partner | +61 7 3338 7550 | akelly@tglaw.com.au