Construction Alert: No relief for insolvent contractors: Court grants permanent stay on judgment obtained by contractor under the security of payment regime

Mar 6 2017

Publications

Thomson Geer have successfully acted for developer FAL Management Group (FAL) in securing a permanent stay on a judgment obtained by a (subsequently insolvent) contractor (Denham) under the security of payment regime. In its decision handed down last Friday in FAL Management Group Pty Limited as Trustee for TF Investment Trust v Denham Constructions Pty Ltd [2017] NSWSC 150, the Supreme Court of New South Wales has confirmed that insolvent companies will not be entitled to enforce judgments obtained under the security of payment legislation where principals have a strongly arguable claim to recover the judgment amount (and more) under the construction contract but are deprived of that opportunity due to the contractor’s insolvency.

Background

FAL engaged Denham for the design and construction of a residential development in Hornsby, New South Wales for the sum of $35,398,000.00 incl GST (construction contract). Denham submitted Payment Claim No. 8 for the sum of $1,643,110.67 (incl.GST) under the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act). Denham subsequently obtained an adjudication certificate consequent upon an adjudication determination in respect of Payment Claim No. 8 and registered it as a judgment debt in the District Court of New South Wales for $511,229.94 (District Court judgment).

Shortly thereafter, FAL was served with a Notice of Claim under the Contractors Debts Act 1997 (NSW) by a subcontractor (Moits) claiming part of the monies payable to Denham in respect of the District Court judgment. An issue had arisen as to the identity of the Denham entity with which Moits was contracting (and therefore the validity of the notice of claim). FAL paid part of the judgment debt to Denham and paid the balance into Court pursuant to orders that the District Court judgment be stayed on a condition that FAL make an application as to the validity of the notice of claim. FAL commenced these proceedings in accordance with those orders. His Honour Justice Hammerschlag subsequently made orders transferring the monies to the Supreme Court of New South Wales, dismissing these proceedings and continuing the stay on that part of the District Court judgment pending the outcome of separate proceedings that had been commenced by the subcontractor against Denham.

Denham had also commenced separate proceedings against FAL in the Supreme Court of New South Wales claiming, among other things, the return of the security provided under the construction contract (Denham proceedings). FAL filed a cross-claim seeking to recover, among other things, overpayments to Denham under the construction contract. FAL’s claims exceeded $10 million. FAL served a substantial amount of evidence in support of its claims. The Denham proceedings were set down for a two week hearing commencing in October last year.

Denham went into liquidation in September last year. The Denham proceedings were stayed and the hearing vacated. Denham and FAL each filed applications seeking payment of the monies held by the Court.

Decision

Justice Ball rejected Denham’s application and made orders that the money be paid to FAL and that the District Court judgment be permanently stayed. His Honour also made a number of ancillary orders in relation to costs in favour of FAL.

His Honour determined that there are two features of judgments obtained under the SOP Act: firstly, like any judgment, they are immediately recoverable. Secondly, they do not affect a party’s rights under a construction contract; that is, a right to sue to recover amounts the subject of a judgment claimed to not be properly payable under the relevant construction contract. Applying his reasoning in Hakea Holdings Pty Limited v Denham Constructions Pty Ltd [2016] NSWSC 1120 (a case decided by His Honour last year just prior to Denham’s liquidation), the Court will take into account matters including the strength of the contractual claim, the likelihood that the contractor will be unable to pay the amount the subject of the determination and the risk that the contractor will become insolvent if the stay is granted.

His Honour also rejected Denham’s submission that the money was paid by FAL into Court on an interpleader and at the time, FAL made no claim to entitlement to the money. On the contrary, His Honour determined that the Court was not confined to asking whether the original circumstances resulting in the granting of the stay still exist, however should have regard to the present facts in determining the question of whether the stay on the judgment should be continued.

Ultimately, His Honour held that:

  • Having gone into liquidation, the lifting of the stay would have the effect of making any payment to Denham permanent;
  • FAL had demonstrated on its evidence that, at the time it made payment of the monies in respect of the District Court judgment into Court, it had a strongly arguable claim to recover amounts well in excess of that payment under the construction contract and that consequently Denham was never entitled to the payment under the construction contract;
  • Payment of the monies by FAL into Court was not intended to affect FAL’s rights to recover under the construction contract and any claim to entitlement to the monies by Moits did not alter this;
  • There was nothing preventing the liquidator from suing FAL to recover the monies if paid out to FAL, however it was plain that if the monies were paid out to Denham it would not be recoverable.

Conclusion

Irrespective of the circumstances that existed at the time the stay was originally granted and FAL made payment into Court, the goal-posts substantially changed when Denham went into liquidation.

A liquidator will not be able to ‘side-step’ proving the merits of a claimed entitlement to monies awarded under the SOP Act such that what was always intended to be an interim entitlement is converted into a permanent payment. Liquidators should be aware that in circumstances where insolvent companies have a large deficit and there is no reason to think that circumstance would change, claimants with a strongly arguable case that judgments obtained by the company under the SOP Act are not payable under construction contracts may be entitled to permanent stays on those judgments.

For further information please contact:

Luke Aiken | Partner | +61 2 9020 5706| laiken@tglaw.com.au
Kimberley Garth| Lawyer | +61 2 8248 3462 | kgarth@tglaw.com.au