By Georgina King a Senior Associate of Matthews Folbigg, in our Insolvency, Restructuring and Debt Recovery Group
Three recent Supreme Court cases, in 2 different States and the Australian Capital Territory, have dealt with insolvent companies seeking to rely upon Building and Construction Industry Security of Payment legislation to recover amounts from parties that have significant set off claims and grounds to dispute the amounts sought to be recovered.
The judgments and comments made by the Courts in each case make it clear that notwithstanding the ordinary operation of the security of payment provisions, which are designed to provide for quick interim payment of progress claims by construction companies, the provisions are not to be interpreted as providing for amounts to be recovered by currently or soon to be insolvent companies without any right of set off or challenge to the debt by the opposing party being taken into account.
Two of the cases, concerning the same construction company now in liquidation, involved applications to stay action by the company to enforce a judgment or adjudication determination obtained pursuant to Building and Construction Industry Security of Payment legislation. The stays were sought so that any right of set off or challenge to the debt was able to be taken into account before payment was made. This was critical in terms of the net result for these parties given the impact the insolvency of the company would have had on their ability to recover any amount they paid.
Case 1 – Hakea Holdings
In the first case, a decision of the New South Wales Supreme Court, Hakea Holdings Pty Ltd and BaptistCare NSW & ACT were successful in obtaining an ongoing stay of adjudication determinations obtained against them by Denham Constructions Pty Ltd pursuant to the Building and Construction Industry Security of Payment Act 1999 (NSW). At that time Denham Constructions was not in liquidation however there was a substantial risk that it was going to be wound up. If Hakea Holdings and BaptistCare paid the adjudication sums and Denham Constructions was then wound up, as looked likely, Hakea Holdings and BaptistCare would be placed in the same position as any other unsecured creditor of Denham Constructions in seeking to recover any amount from the company notwithstanding that each company established before the Court that they had strong offsetting claims in respect of the debt and additionally in one case a strong claim in respect of liability for the debt itself. Without the stays granted by the Court, the companies would have been left considerably out of pocket. In the circumstances the Court was prepared to allow the previous stay of enforcement of the adjudication determinations and judgments obtained in respect of them to continue. This was an important outcome given that, as discussed below, Denham Constructions was in due course placed into liquidation.
Case 2 – Islamic Republic of Pakistan
The second case, a decision of the ACT Supreme Court, concerned a judgment in the sum of $1,062,886.89 obtained by Denham Constructions against the Islamic Republic of Pakistan pursuant to the Building and Construction Industry (Security of Payment) Act 2009 (ACT). The debt was disputed by the Islamic Republic of Pakistan however a response sent when a progress payment claim was made by Denham Constructions was deemed to be inadequate to prevent Denham Constructions from obtaining judgment under the Building and Construction Security of Payment legislation. The Islamic Republic of Pakistan also wished to make an offsetting claim in respect of the debt however the security of payment legislation prevents any cross-claim from being raised in proceedings brought under that Act in respect of unpaid payment claims. When judgment was given against the Islamic Republic of Pakistan, Denham Constructions was not yet in liquidation and the Court granted a stay for a limited period. Within weeks of the judgment being given in favour of Denham Constructions and by the date of hearing of an application by the Islamic Republic of Pakistan for a further stay, Denham Constructions had been wound up. If the Islamic Republic of Pakistan paid the judgment sum to Denham Constructions, the amount stood to be absorbed by receivers who had been appointed over all present and after acquired property of Denham Constructions, thwarting the foreshadowed dispute and set off claim in the liquidation. Having considered those matters, the Court ordered that the judgment be stayed until the liquidator had determined a proof of debt which the Islamic Republic had undertaken by its counsel to lodge as part of the orders sought. This provided the Islamic Republic of Pakistan with an opportunity to have its claim in respect of the debt and claim of set off dealt with as part of the liquidation process and any payment it is ultimately required to make to the company.
Case 3 – Façade Treatment
The third case, a decision of the Supreme Court of Victoria Court of Appeal, involved an attempt by a liquidator to obtain judgment pursuant to the Building and Construction Industry Security of Payment Act 2002 (Vic) by relying on payment claims issued by the company to which he was appointed prior to the liquidation commencing. As a result the Court was required to determine whether the payment claim regime under the security of payment legislation should be available to companies in liquidation. The Court ultimately held that the payment regime does not apply to companies in liquidation having regard to the wording and intention of the legislation. The Court found that this wording and intention together focus on improving cash flow for construction companies carrying out continuing work – rather than a company that has entered liquidation. The Court also noted that the legislation creates an interim payment regime, pursuant to which payments may potentially be clawed back by the party making the payment in the future following determination of any relevant issues. A payment pursuant to the regime would have a final rather than interim effect in circumstances where the sum paid would immediately form part of the pool of moneys available for distribution to a company’s creditors. The Court also noted that when enacting the security of payment legislation Parliament would have been aware of the long-standing right of set off pursuant to section 553C of the Corporations Act 2001 (Cth) in respect of claims involving a company in liquidation. On an additional point raised, the Court found that aspects of the payment regime are inconsistent with section 553C of the Corporations Act and from a constitutional law perspective are therefore invalid to the extent of that inconsistency. Having reached these conclusions the Court dismissed the appeal against an earlier decision in which the claim made by the company by its liquidator for entry of judgment pursuant to the security of payment legislation was dismissed.
Cases in the future
Given the high level of insolvency in the construction industry and the extent to which disputes in respect of construction related payments arise, situations involving issues of potential set off and challenge to debts arising under the security of payment legislation are likely to continue at a high rate and further judgments from Courts considering these issues can be expected.
Read the judgments here:
- Hakea Holdings Pty Limited v Denham Constructions Pty Ltd; Baptistcare NSW & ACT v Denham Constructions Pty Ltd  NSWSC 1120(link is external)
- Denham Constructions Pty Ltd v Islamic Republic of Pakistan (No 4)  ACTSC 288(link is external)
If you would like more information or advice in relation to insolvency, restructuring or debt recovery law, contact Georgina King on (02) 9806 7485 or email@example.com or a Principal of the Matthews Folbigg Insolvency, Restructuring & Debt Recovery Group:
Jeffrey Brown on (02) 9806 7446 or firstname.lastname@example.org
Stephen Mullette on (02) 9806 7459 or email@example.com