Security of payment regime available to claimants in liquidation

This article was written by Scott Budd, Sophie Sweeney and Aisling Scott.

The recent decision of the New South Wales Court of Appeal in Seymour Whyte Constructions Pty Ltd v Ostwald Bros Pty Ltd (in liquidation) [2019] NSWCA 11  has rejected the Victorian Court of Appeal position that an insolvent contractor cannot claim under Security of Payment legislation.  In doing so, an extended bench of 5 judges found that the decision of the Victorian Court of Appeal in Façade Treatment Engineering Pty Ltd (in liq) v Brookfield Multiplex Constructions Pty Ltd [2016] VSCA 247 was "plainly wrong" and should not be followed.  The decision also confirms that a claimant who commences an adjudication application to enforce an unpaid payment schedule is not precluded from enforcing that payment schedule by proceeding to court if the determination if it is found that the adjudication application is made out of time.

The appeal arose in the context of a claim for a progress payment under a subcontract between Seymour Whyte and Ostwald for earthworks on the Pacific Highway upgrade project (Subcontract).  

In August 2017, Ostwald served a payment claim on Seymour Whyte under the Building and Construction Security of Payment Act 1999 (NSW) (SOPA) for the amount of $6,351,066.08 (July Payment Claim).  Seymour Whyte responded with a payment schedule, proposing payment for $2,505,237.58 (Scheduled Amount).

On 24 August 2017, Seymour Whyte terminated the Subcontract for convenience.  On 25 August 2017, Ostwald entered administration.

In September 2017, Ostwald made an adjudication application in respect of the July Payment Claim, in respect of which the adjudicator determined that Ostwald was entitled to $5,074,218.27.

Seymour Whyte commenced proceedings to have the adjudication determination declared void on the ground that Ostwald had made the application for adjudication outside the time limits contained in SOPA.   Further, Seymour Whyte argued that because Ostwald had elected to proceed to adjudication instead of seeking to enforce the scheduled amount as a statutory debt pursuant to SOPA s 16(2)(a)(i) in court, it had made a binding election and was therefore prohibited from making that alternative claim once the adjudication determination was declared void. .

After the proceedings commenced, Ostwald entered liquidation.  As a result, Seymour Whyte argued that the Victorian Court of Appeal decision in Façade Treatment Engineering Pty Ltd (in liq) v Brookfield Multiplex Constructions Pty Ltd applied, which case held that a company in liquidation was not a "claimant" under the Victorian SOPA and therefore was not entitled to enforce the adjudication determination.

The primary judge rejected Seymour Whyte's arguments and held that Façade was "plainly wrong" and that a claimant under SOPA did not cease to have that status simply because it had entered liquidation.  The judge also found that the Adjudication Application had been made in time, but that if this was incorrect, and the adjudication was invalid, Ostwald was still entitled to recover the Scheduled Amount in summary court proceedings under SOPA.  Put simply, an invalid adjudication application was never actually an adjudication application for the purposes of SOPA and there was no binding and irrevocable election made that prevented Ostwald from taking the alternative path to recovery.

However, because of Ostwald being in liquidation, the Court stayed any judgment obtained by Ostwald following the Adjudication Determination by reason of s 553C of the Corporations Act 2001 to allow Seymour Whyte to lodge a proof of debt for any set offs it might have that would reduce the amount payable to Ostwald.  Seymour Whyte lodged a proof of debt for alleged defects in Ostwald's works and other set off claims, and appealed the decision of the primary judge.

The questions on appeal included:

• whether the judge made an error in ordering that the Subcontract be rectified to alter the due date for payment, the order which resulted in Ostwald's adjudication application being made in time (Ground 1 – Rectification);
• whether, by electing to make an adjudication application (even if that adjudication application was out of time), Ostwald was precluded from suing to recover the unpaid amount as a statutory debt (Ground 2 – Election); and
• whether SOPA is incapable of applying if the claimant has entered liquidation (as held in Façade) (Ground 3 – Liquidation of Ostwald).

Seymour Whyte also contended that that SOPA was inapplicable by reason of s 109 of the Constitution (ie that SOPA was inconsistent with the set-off procedure in section 553C of the Corporations Act).  During oral submissions, Seymour Whyte abandoned this ground of appeal.

Given the significance of the subject matter of the appeal, the NSW Court of Appeal sat an extended bench of 5 judges for the hearing of the appeal.  The court of appeal gave a unanimous judgement with Sackville AJA giving the primary judgment (Leeming, Payne, White JJA and Emmett AJA agreeing).

Ground 1 – Rectification

The parties maintained their positions in respect of the rectification claim as in the Court below.  Ultimately the Court found that the Subcontract should not have been rectified, as the threshold for determining the common intention of the parties required to make out a rectification claim is high, and was not established on the evidence before the Court.  As a consequence, Ostwald's adjudication application was held to be made out of time, and was invalid.

Ground 2 – Election

Seymour Whyte contended that Ostwald had made an adjudication application "in fact" by electing to make an adjudication application under SOPA s 17(a)(ii), even if that application and the subsequent determination were legal nullities.  Seymour Whyte's argument was that once that election was made, the alternative statutory pathway was no longer available to Ostwald, and it could not seek recovery of the Scheduled Amount pursuant to SOPA s 16(2)(a)(i). 

Ostwald contended that once it was determined that the adjudication application had no legal effect (having been made out of time), no election had been made.  Ostwald further argued that to allow a respondent to refuse to pay a claimant in accordance with a payment schedule, should that claimant unsuccessfully attempt to make an adjudication application, would undermine the overarching objectives of SOPA in respect of the cash flow of subcontractors.

The NSWCA agreed that the remedies under SOPA are alternative and not cumulative.  The Court noted the strict and "brutal" time periods are stipulated in SOPA and that compliance with such time limits are preconditions to a valid application. 

The Court found that Ostwald's noncompliance with such time periods rendered its adjudication application (and the subsequent determination) invalid, and liable to be set aside.  However, Ostwald remained entitled to seek recovery of the unpaid Scheduled Amount as a statutory debt and the court gave judgement against Seymour Whyte for the Scheduled Amount.

Ground 3 – Liquidation of Ostwald

The NSWCA was obliged to follow the decision in Façade unless it concluded that the decision was "plainly wrong". 

In Façade, the VCA considered that companies in liquidation were unable to be classified as "claimants" under the Victorian equivalent of SOPA.  The Court reasoned that the legislation creates an entitlement to progress payments only for persons who have undertaken to, and continue to, carry out construction work or supply related goods and services.  The VCA also considered that the cash flow problems sought to be addressed by security of payment regimes cease to be a concern once a company is in liquidation.

The NSWCA did not agree with the VCA's reasoning.  It observed that a company in liquidation does not necessarily cease to trade immediately upon being wound up and that a liquidator may continue to trade the business, so as to sell (or attempt to sell) the company's business as a going concern.  The NSWCA also found that there is nothing in the text of SOPA that supports an implication that the entitlement to a progress payment only arises where a subcontractor "continues to carry out" construction work.  SOPA refers to a person who "has undertaken to carry out construction work under the contract". This is a reference to a contractual undertaking, not to the physical performance of work.

The NSWCA concluded that the central premise in respect of companies in liquidation in Façade was "plainly wrong".  SOPA continued to apply to Ostwald's claim even when it was placed into liquidation.  As such, Ostwald was entitled to pursue its claim for the Scheduled Amount.

Implications

The decision of the NSWCA has confirmed that a company in liquidation remains a "claimant" under, and can access the regime in SOPA.  In New South Wales, however, after the primary judgment was handed down, the NSW Government amended SOPA to expressly exclude companies in liquidation from having the benefit of the Act.  That Act received assent on 28 November 2018 and will commence on a date to be fixed by proclamation.  However the decision has application to other jurisdictions which have similar regimes and, given the strength of the NSW bench on the appeal, it is very unlikely that a different position will be taken by courts in those states.