Payments for insolvent claimants – approach to Security of Payment rejected as "plainly wrong" by NSW Supreme Court

In Seymour Whyte Constructions Pty Ltd v Ostwald Bros Pty Ltd (in liq) [2018] NSWSC 412, the NSW Supreme Court considered the extent to which Security of Payment (SOP) legislation can be relied upon by an insolvent contractor.

The relevant facts of this case are straightforward, though the sequence is important. Seymour Whyte Constructions Pty Ltd (SWC) and Ostwald Bros Pty Ltd (Ostwald) entered into a subcontract to perform works on the Pacific Highway. Ostwald served a payment claim on SWC pursuant to the NSW SOP Act and SWC responded with a payment schedule for a lesser amount. Subsequently, SWC terminated the contract and the following day the directors of Ostwald resolved to appoint administrators. Soon afterwards, Ostwald made an application for adjudication based upon the difference between the claimed amount and the scheduled amount. The adjudicator determined that the amount due by SWC to Ostwald was significantly more than the scheduled amount. Within weeks of the determination, Ostwald's administrators reported to creditors that it was insolvent and the creditors resolved that it should be wound up.

The central dispute concerned whether an insolvent claimant could take the benefit of the NSW SOP Act. SWC argued that the NSW SOP Act was not available for use by insolvent contractors, relying upon Victorian Court of Appeal precedent in Façade Treatment Engineering Pty Ltd (in liq) v Brookfield Multiplex Constructions Pty Ltd [2016] VSCA 247. In Façade Treatment, it was held that, under the Building and Construction Industry Security of Payment Act 2002 (Vic) (Vic SOP Act), the proper interpretation of the term "claimant" did not extend to insolvent contractors. Insolvent parties were therefore unable to take the benefit of the Vic SOP Act regime.

The NSW Supreme Court declined to follow the authority of the Victorian Court of Appeal. It instead held that Ostwald remained a claimant, notwithstanding it was in liquidation, and was free to exercise the rights available to claimants, including convert an entitlement into a final payment.

However, Justice Stevenson decided that any judgment obtained by Ostwald arising from the filing of an adjudication certificate should be stayed given that section 553 of the Corporations Act 2001 (Cth) applied. That section provides a mechanism by which mutual credits and debts are automatically set off against each other when a company is placed to liquidation. SWC and Ostwald had mutual dealings with one another. It was therefore not appropriate to give effect to the cash flow ramifications of the adjudication outcome until the material debits and credits has been ascertained and set off against each other.

Divergence between NSW and Victoria

In Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89, the High Court laid down the guidance – consistent with there being “a common law of Australia" rather than of each Australian jurisdiction – that trial judges (here, Justice Stevenson in the NSW Supreme Court) must follow the decisions of intermediate appellate courts in other Australian jurisdictions (here, Façade Treatment from the Victorian Court of Appeal) “unless they are convinced that the interpretation is plainly wrong”.

Subsequent cases have set a high bar for a decision to be found to be “plainly wrong”: for example, in Informax International Pty Ltd v Clarius Group Ltd (2011) 192 FCR 210, Justice Perram noted that the emphasis is on whether there has been a miscarriage of the adjudicative process and that mere disagreement with other courts will not suffice.

Justice Stevenson formed the view that the Victorian Court of Appeal was "plainly wrong" in respect of this matter. Given the high bar established in Informax and other like cases, he set out his reasoning at some length. Justice noted that the meaning of "claimant" preferred in Façade Treatment turned upon whether a person has "undertaken" construction work in its present tense (connoting ongoing performance). However, in the current case, he saw nothing in the provisions of the NSW or Vic SOP Acts that would "compel the conclusion that a person … somehow loses that status [of claimant] by reason of (if a company) being wound up or (if a person) becoming bankrupt".

Justice Stevenson took care to identify the similarities between the NSW and Vic SOP Acts, noting in particular the near identical definitions of the word "claimant". However, the Victorian Court of Appeal in Façade Treatment did not refer to the definition. Instead, its attention was drawn to section 1 of the Vic SOP Act, which states that its purpose is to provide for entitlements to persons “who carry out construction work” (present tense). An identical section does not appear in the NSW SOP Act (though a similar "object" is set out in section 3 of the NSW SOP Act). However, Justice Stevenson did not distinguish Façade Treatment on these grounds, but instead expressly rejected the Victorian Court of Appeal's decision as "plainly wrong". This enabled him to reject Façade Treatment as binding precedent in NSW.

As a result, the authorities in NSW and Victoria are in conflict on the question of SOP legislation and insolvent claimants until the Courts of Appeal of NSW and Victoria are given the chance to re-consider this issue.

Commercial and public policy implications

The issues raised in this case go to the heart of SOP policy, and there are valid arguments for and against each position:

• Arguments against allowing SOP claims by insolvent claimants: Where a claimant is insolvent, a party higher up the contracting chain is at risk in circumstances where SOP Act adjudications require claims to be promptly paid "on account". This can only be reversed by a full "on the merits" case via the judicial process. However, by the time the judicial process is conducted, it may be too late if the insolvent claimant is in liquidation and has lost all of its assets.
• Arguments in favour of allowing SOP claims by insolvent claimants: SOP Acts are designed to promote cashflow through the industry and prevent parties further down the contracting chain, such as subcontractors, experiencing financial hardship because of payments being withheld. In such cases, the would-be claimant's insolvency may be caused or contributed to by a failure to pay funds claimed, raising the question of fairness if its resulting insolvency is used as a reason to bar it from benefiting from the SOP legislation.

Both of these policy considerations have merit, and either may be more or less persuasive, depending on the facts of the case. However, the SOP legislation should have a fixed and predictable application in the case of an insolvency claimant. The divergence in the authorities in NSW and Victoria reduces this predictability.

What does this mean for you?

This decision has significant implications for the building and construction industry, as it reopens the question of whether an insolvent contractor can take advantage of SOP legislation. Notwithstanding the judgment in Façade Treatment, Justice Stevenson's decision has established that an insolvent company remains a "claimant" under, and can take the benefit of, the NSW SOP Act.

This raises the prospect that an insolvent contract may also remain a claimant under similar legislation in force in other jurisdictions, though it remains to be seen whether Justice Stevenson's reasoning will be followed in Victoria in respect of the Vic SOP Act.