A recent NSW Court of Appeal decision has re-enlivened the possibility of insolvent construction companies successfully recovering debts via the Security of Payment legislation. Insolvency practitioners appointed to construction companies should seek advice promptly following their appointment.
On 12 February 2019, the New South Wales Court of Appeal handed down its decision in Seymour Whyte Constructions Pty Ltd v Ostwald Bros Pty Ltd (in liquidation)  NSWCA 11.
The Court held the Building and Construction Industry Security of Payment Act 1999 (NSW) does in fact apply to companies in liquidation. This decision highlights a clear divergence between NSW and Victoria in the application of the two states’ analogous Security of Payment Acts, with NSW finding that the Victorian Court of Appeal in Façade Treatment Engineering Pty Ltd (in liq) v Brookfield Multiplex Constructions Pty Ltd was “plainly wrong” in deciding the Act was inapplicable to companies in liquidation.
While the NSW Act is to be amended by the Building and Construction Industry Security of Payment Amendment Bill 2018 (Bill), in which section 32B will nullify this decision on this point, the NSW Court’s interpretation of the Act will likely be persuasive in South Australia, leaving controversial the question of the applicability of the SA Act to contractors in liquidation.
Seymour Whyte Constructions (“Seymour”) was the contractor for a works contract with Ostwald Bros (“Ostwald”). Ostwald served a progress payment claim on Seymour for $6,351,066.06. Seymour responded with a payment schedule, and Ostwald made an adjudication application under the Building and Construction Industry Security of Payment Act 1999 (NSW) (“the Act”). The adjudicator determined Seymour was liable to pay Ostwald some $5,074,218.27; this amount was not paid.
Seymour commenced proceedings, claiming the adjudicator’s decision was invalid because the application was made out of time. Ostwald sought rectification of the contract to alter the relevant timing provisions set out in it. However, soon after the proceedings commenced, the creditors of Ostwald determined that it should be wound up.
At first instance, Stevenson J was required to consider numerous issues including rectification, but most importantly, the court dealt with the consequence of Ostwald’s winding up, namely whether the Act still applied to Ostwald and whether Ostwald remained a “claimant”.
The New South Wales Supreme Court held that the Act does apply to companies in liquidation. The court explicitly disagreed with the decision in Façade Treatment Engineering Pty Ltd (in liq) v Brookfield Multiplex Constructions Pty Ltd (“Façade”), finding it “plainly wrong”. In Façade, the Victorian Court of Appeal held that the Act does not apply to those companies in liquidation, stating at  that s9(1):
“…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 term ‘the claimant’ used throughout Pt 3 is commensurately limited. Consequently, the payment regime in Pt 3 of the [Victorian] Act is not available to companies in liquidation, since such companies cannot carry out construction work or supply goods and services, and thus do not satisfy the requirements for ‘a claimant’”.
Stevenson J found the Victorian Court to be “plainly wrong” in this construction of the Act, and could not find anything in the text of the Act to compel that conclusion. Further, His Honour held the court in Façade had overlooked the definition of “claimant”, which is “a person who serves a payment claim under s14”. His Honour held that this error led the Victorian Court to wrongly find that a claimant had to be someone who is or claims to be entitled to a progress payment by reason of having undertaken to carry out construction work.
Stevenson J concluded that a person’s status as a claimant only depends on whether or not the person has served a payment claim and is or claims to be entitled to a progress payment claim for construction work undertaken, and not some requirement that they continue to perform such work.
Despite determining that the Act applied to companies in liquidation, the court at first instance stayed any judgment obtained by Ostwald until the party’s rights were determined in the liquidation as required by s 553C of the Corporations Act 2001 (Cth).
On appeal, Seymour argued that the primary judge erred in finding that Part 3 of the Act is available to a company in liquidation. (Seymour also made submissions against the other findings which are outside the scope of this alert.)
The Court of Appeal considered the Act’s construction in light of the High Court’s decision in Southern Han Breakfast Point Pty Ltd (in liq) v Lewence Construction Pty Ltd (2016) 260 CLR 340 (“Southern Han”). Their Honours noted that a “reference date” is an essential element to the making of a payment claim (and thus, the existence of a claimant). They noted this reference date can arise “regardless of whether the claimant is actually continuing to carry out construction work on that particular contract”, meaning that a person gains an entitlement to a progress payment by virtue of two factors: (1) that they have undertaken to carry out construction work, and (2) a reference date has arisen.
With striking similarity to the decision at first instance, the Court of Appeal continued to disagree with the Victorian Court of Appeal’s construction and reasoning in Façade. For example, at  they found that “there is nothing in the language of s8(1) (the equivalent NSW section) to support an implication that the entitlement to a progress payment cannot arise unless the builder or subcontractor continues to carry out construction work under the contract”. Rather, this section refers only to a person “who has undertaken to carry out construction work under the contract”. The Court of Appeal interpreted this to be a reference to a contractual undertaking, and not to the physical performance of work. The court noted the same absence of implication in s 13 of the Act. Further, with reference to Southern Han, their Honours noted that a claim may be made even after a contract has expired.
Lastly, their Honours made reference to the specific text of the Act. Section 8 refers to “work carried out or undertaken to be carried out”, while ss 15 and 16 make reference to “carrying out construction work” This distinct specificity indicates that if parliament had sought to limit s 8(1) to claimants continuing to carry out construction work, they could have done so.
In Façade, the Victorian Court of Appeal stated that the provisions of the Victorian Act favoured their construction because they “contemplate a claimant who is still carrying out construction work”. While ss 15 and 16 contemplate that some claimants will be carrying out construction work, the NSW Court of Appeal stated this is not a requirement that all claimants must be doing so.
Seymour contended that because the Act seeks to ensure financial survival of builders, upon liquidation this opportunity has passed and so the act sought not to apply to those in liquidation. In disposing with this argument, the NSW Court of Appeal made reference to matters raised in Façade that might support this argument. First, with regard to a purpose of facilitating cash flow, the Court found that it is possible for a company in liquidation to need a progress payment, in the same way a company on the edge of insolvency needs it, highlighting that cash flow problems do not simply cease when entering liquidation. In Façade it was further noted that a purpose of the Act was to protect against risk of insolvency. There, the Victorian Court of Appeal considered that insolvency is “certain” upon liquidation, and thus the Act’s purpose has no operation. The NSW Court of Appeal disagreed, stating that it is not always true that a company wound up in insolvency can never recover the full amounts due to them.
Court of Appeal Decision
The NSW Court of Appeal agreed with the decision at first instance on this point, determining that the Act does in fact apply to companies in liquidation. It reiterated that the reasoning and construction of the Victorian cognate Act in Façade was “plainly wrong”, leading to an erroneous finding that the Act only created a right to progress payment if a person is continuing to carry out construction work.
However, their Honours did not feel the need to stay judgment because any unfairness to Seymour in pursuing a claim against Ostwald (as an unsecured creditor) would be alleviated by the “mutual credits, debts and dealings” provisions in s 553C of the Corporations Act 2001 (Cth), and the fact that Ostwald had given an undertaking not to enforce judgment without providing Seymour with 14 days’ notice.
Effect of this decision
Seymour Whyte establishes that the Building and Construction Industry Security of Payment Act 1999 (NSW) as in force in 26 March 2000 to 28 November 2018 applies to companies in liquidation.
It is apparent the NSW Parliament agrees with the Court of Appeal’s finding that the NSW Act in its current form does not prohibit use by a company in liquidation. The enactment of the Building and Construction Industry Security of Payment Amendment Bill 2018 (in particular s 32B) will directly nullify the Court of Appeal’s decision on this point. This amending Bill was passed and assented to on 28 November 2018, but (as at the time of writing) is not yet in force.
However, in South Australia the Building and Construction Industry Security of Payment Act 2009 (SA) (“SA Act”) relevantly remains in the same form as the cognate interstate Acts considered in Façade and Seymour White.
Absent any similar amendment to the SA Act as is currently being brought into operation in NSW, there will remain uncertainty as to whether the SA Act is applicable to companies in liquidation, by reason of the competition between two persuasive but mutually-inconsistent interstate Court of Appeal decisions.
Insolvency practitioners will need to bear this uncertainty in mind, and should seek advice if appointed over a construction company which would otherwise be entitled to seek adjudication under the SA Act.
Similarly, head contractors likely fielding claims should be mindful that insolvent companies might argue that they are entitled to use the SA Act, bearing in mind there may still be sound arguments to be put against the use of the SA Act by insolvent companies.