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Security of payment rights of set-off / insolvency

A recent decision of the Victorian Supreme Court has reaffirmed the ability of a contractor to use s 553C of the Corporations Act to defeat claims made under the security of payment legislation

In Facade Treatment Engineering Pty Ltd (in liquidation) (“FTE”) v Brookfield Multiplex Constructions Pty Ltd (“BMC”) [2015] VSC 41, the Court held that BMC could raise a defence to a claim brought by the liquidator of FTE, who sought to obtain a judgment against BMC, on the basis that BMC had failed to provide a payment schedule in response to a payment claim under the Building and Construction Industry Security of Payment Act 2002 (Vic) (“the Act”).

Under the Act, a claimant can serve a respondent with a “payment claim”. The Act then provides very strict timeframes for a response in the form of a “payment schedule”.

If a respondent fails to provide a payment schedule:

  • the claimant can recover the amount of the payment claim from the respondent as a debt in a court; and
  • the respondent is prevented from bringing a cross-claim or raising a defence.

The Plaintiff, FTE, provided facade and curtain wall works under a subcontract with the Defendant, BMC.

In August and September 2012, FTE submitted two payment claims to BMC totalling approximately $1.6m.

BMC did not provide a payment schedule under the Act with respect to the first claim, but made a part payment of approximately $600,000.00, and denied that the second payment claim was a valid payment claim under the Act. BMC then took the works out of FTE’s hands on 10 October 2012.

On 6 February 2013, FTE was wound up.

The liquidator of FTE issued proceedings on 26 September 2014 seeking to recover approximately $1m from BMC and attempted to argue that s 16(4)(b) of the Act prevented BMC from raising a set off.

Justice Vickery held that FTE was prevented from obtaining summary judgment pursuant to the Act in circumstances where BMC had a set off pursuant to s 553C of the Corporations Act 2001 (Cth).

Section 553C applies automatically “where there have been mutual credits, mutual debts or other mutual dealings between an insolvent company that is being wound up and a person who wants to have a debt or claim admitted against the company”.

BMC argued, and the Court agreed, that the provisions of the Act which prevented reliance on a defence or set off were inconsistent with the express right to set off under s 553C and therefore, pursuant to s 109 of the Constitution, s 16(4)(b) of the Act was invalid to the extent of the inconsistency.

The effect of this case is to confirm that a recipient of a payment claim is not prevented by the Act from bringing a claim for set off under s 553C where it has failed to respond to the payment claim with a payment schedule and the claimant is in liquidation.

The Act is similar to the equivalent South Australian legislation, the Building and Construction Industry Security of Payment Act 2009 (SA).

The decision is likely to be viewed as highly persuasive by a South Australian court.

Liquidators appointed over building companies should therefore be mindful that, despite the provisions of the security of payment legislation, the liquidator may be prevented from obtaining swift recovery of outstanding payment claims and adjudication determinations where a head contractor may have a set off.

Contractors should note that they may be able to defend the enforcement of payment claims and adjudication determinations obtained by a company in liquidation where the contractor has a right of set off.

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