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Insolvency no escape from security of payment legislation

The New South Wales Supreme Court, in Seymour Whyte Constructions Pty Ltd v Ostwald Bros Pty Ltd (in liq) [2018] NSWSC 412, has confirmed that insolvent claimants can rely on the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act) to recover outstanding payments.

The decision

Ostwald Bros Pty Ltd (Ostwald) was wound up several weeks after it obtained an adjudication determination regarding a payment claim for $6,351,066.08 it had served on Seymour Whyte Constructions Pty Ltd (Seymour). Seymour argued that because Ostwald was in liquidation it was precluded from relying on the progress payment provisions in Part 3 of the SOP Act, in accordance with the Victorian Court of Appeal decision in Façade Treatment Engineering Pty ltd (in liq) v Brookfield Multiplex Constructions Pty Ltd [2016] VSCA 247.

In response to Seymour’s contention that the SOP Act did not apply to Ostwald, the Court denied the application of the Façade case, stating it was “plainly wrong” and was not to be followed in this instance.

The Court then turned its attention to the issue of whether the statutory process for enforcing an adjudication determination as a judgment for debt, under ss24 and 25 of the SOP Act, should be stayed due to the mandatory “set off” procedure under s553C of the Corporations Act 2001 (Cth).

Section 553C states that where there have been 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, the sum due from the one party is to be set off against any sum due from the other party and only the balance of what is owing is payable to the company.

In determining whether the SOP Act applied to Ostwald, the Court considered the Victorian Court of Appeal’s approach in Façade which held that a “claimant” under the Victorian Security of Payment legislation was a person who had “undertaken to, and continued to, carry out construction work”.

The Court of Appeal in that instance found that a company in liquidation “cannot carry out construction work” and therefore didn’t fall within the meaning of the term “claimant”.

This decision was held to be “plainly wrong” by the Court in Seymour v Ostwald and was therefore not followed as the Court of Appeal had erred in its interpretation of the definition of “claimant”.

The Court held that even where a company in liquidation had completed work it would not be “still carrying out construction work” and hence could not suspend the work as a “claimant”, however, such a company was entitled to serve a payment claim and therefore a company in liquidation remained a “claimant”.

How will this decision affect the construction industry?

In instances where a potential claimant is insolvent or is being wound up, their rights to recover progress payments under the SOP Act will not be extinguished simply because they are no longer carrying out construction work. If a solvent company would be entitled to make a payment claim under the contract between the parties, then a company in liquidation will also have rights to rely on the SOP Act in the same circumstances.

If you have any questions regarding your rights to serve progress payments or the rights of a company in liquidation, please contact Morrissey Law & Advisory.

This article was prepared by Michael Morrissey and Patrick Ireland.

Disclaimer: This publication by Morrissey Law & Advisory is for general information and commentary only and should not be considered or relied upon as legal advice. Formal legal advice should be sought in relation to any matters or transactions that may arise in relation with communication.