NSW Court of Appeal decision on security of payment regime confirms conflict between Victoria and NSW on the applicability of the regime to insolvent companies
A five-judge bench of the NSW Court of Appeal handed down its decision in Seymour Whyte Constructions Pty Ltd v Ostwald Bros Pty Ltd (in liq)  NSWCA 11 (Seymour Whyte) on 12 February 2019. Unanimously, the Court found that the Victorian Court of Appeal was “plainly wrong” in Façade Treatment Engineering Pty Ltd (in liq) v Brookfield Multiplex Constructions Pty Ltd  VSCA 247; (2016) 337 ALR 452 (Façade Treatment) when it found that the Building and Construction Industry Security of Payments Act 2002 (Vic) (Victorian SOPA) does not apply to companies in insolvency.
The NSW decision concerns a payment claim made by Ostwald (the Subcontractor) against Seymour (the Contractor) for performance of road works on the Pacific Highway under the Building and Construction Industry Security of Payment Act 1999 (NSW) (NSW SOPA). Seymour issued a payment schedule proposing to pay $2.5m of the $6.3m claimed. Ostwald submitted the claim to adjudication and the adjudicator determined that Ostwald should be paid $5.07m.
Seymour challenged the determination on the basis that the application was made out of time. Whether or not that was so depended on the construction to be given to two conflicting provisions in the contract. The trial judge found in favour of Ostwald’s interpretation, which meant the application was made in time. The Court of Appeal upheld Seymour’s appeal on this point, meaning that the application was made out of time and invalid.
The second issue on appeal was whether, given the finding that the application was invalid, it was then open to Ostwald to take the second of two “exclusive alternatives” in s 16(2)(a) of the NSW SOPA (1) available where there had been a failure to pay a scheduled amount. The judge at first instance found that Ostwald could pursue a judgment debt for the scheduled amount even though the adjudication application was a nullity. This was affirmed on appeal.
The third, and most interesting, issue was the Court’s consideration of whether the trial judge was correct in finding that the Victorian Court of Appeal in Façade Treatment had been “plainly wrong” in holding that the security of payments regime does not apply to insolvent companies. If not, then the Court of Appeal was obliged to follow the Victorian decision.
In the Façade Treatment case, Façade sought judgment pursuant to s 16(2)(a) of the Victorian SOPA on the basis of two payment claims that had been part-paid and for which no payment schedule had been issued. In February 2013, Façade was wound up by court order.
Multiplex argued that s 16 of the Victorian SOPA had no application to an insolvent company and that s 16 was invalid to the extent that it was inconsistent with s 553C of the Corporations Act 2001 (Cth). That section provides for a set-off of mutual debts, credits and dealings between an insolvent company and a creditor; an exercise which is precluded by operation of s 16(4).
The Victorian Court of Appeal found that Part 3 of the Victorian SOPA does not apply to companies in liquidation. The Court found that s 9(1) applies only to persons who continue to carry out construction work or supply related goods and services. This interpretation was consistent with the Act’s focus on a person who “carries out” construction work, and also s 16(2)(b), which allows a contractor to suspend works, as the right only applies where work is still being carried on. The word “claimant” as it appears in the Victorian SOPA was also limited by this interpretation (2).
Their Honours also considered that if Part 3 of the Victorian SOPA were to apply to persons in liquidation, the interim payment regime intended by the Victorian SOPA would become final, as the payment made under the Victorian SOPA would become available for distribution to creditors and could not be clawed back. The significance bestowed upon cashflow in the regime did not apply to companies in liquidation, as cashflow problems ceased to be a concern once a company entered liquidation (3).
In Seymour Whyte, Sackville AJA gave the leading judgment. Unanimously, the Court found that the Victorian Court of Appeal had been plainly wrong on this point. The Court disagreed with the Victorian Court of Appeal’s interpretation of the word “claimant” as it appears in the legislation. A “claimant” is a person who has served a payment claim and is, or claims to be, entitled to a progress payment for construction work. There was nothing in the language of s 8 (Victorian SOPA, s 9) or s 13 (Victorian SOPA, s 14) to support an implication that the entitlement to a progress payment cannot arise unless the builder continues to carry out construction work. The reference to “undertaken” in s 9 is to a contractual undertaking, not the physical performance of work:  (Leeming JA), , ,  (Sackville AJA),  (Emmett AJA). Leeming, Payne and White JJA and Emmett AJA agreed with Sackville AJA.
Acting Justice Sackville noted that a builder who has completed all work is entitled by s 8 to a final payment even though they are not continuing to undertake construction work. The references in the Acts to the power of a contractor to suspend works in certain circumstances did not mean that entitlement to a progress payment depends on the claimant actually performing work on the reference date: , , .
Justice Leeming and Acting Justice Sackville also focused upon the power of a liquidator to continue to trade or sell as a going concern, meaning that a central premise of Façade Treatment – that a company in liquidation has ceased to trade – is incorrect:  (Leeming JA),  (Sackville AJA).
Acting Justice Sackville considered the argument that it is unfair to a respondent to permit a claimant to recover its interim statutory entitlement in circumstances where it could not then claw that back against an insolvent claimant. His Honour noted that Seymour was only in a position to advance this argument because it had refused to pay the Scheduled Amount it had stated it would pay, which did not promote the objectives of the Acts. If, however, enforcement of a judgment for a progress payment would unfairly prevent a respondent from asserting its contractual rights, that would be alleviated by the mechanism in s 553C. A respondent with a reasonably arguable claim arising out of the contract may also seek a stay of execution of a judgment obtained under Part 3. Therefore, the legislation, as a matter of construction, was capable of operating for the benefit of a respondent: -.
In Façade Treatment, the Court found that ss 16(2)(a)(i), 16(4)(b)(i) and 16(4)(b)(ii) of the Victorian SOPA were inconsistent with s 553C of the Corporations Act and invalid to the extent of that inconsistency (that is, insofar as they applied to a company in liquidation). The “roll back” provisions in ss 5E, 5F and 5G of the Corporations Act, which are generally to the effect that where state legislation co-existed with the Corporations Law prior to July 2001, it should continue to operate after commencement of the Corporations Act, had no application given that the Victorian SOPA came into force after the Corporations Act (4).
In Seymour Whyte, while the Constitutional point was initially raised but then abandoned, Leeming JA considered it appropriate to note that the constitutional analysis from Façade Treatment did not apply to the NSW SOPA. Leeming JA found that a different analysis applies in NSW as the NSW SOPA, unlike the Victorian SOPA, commenced prior to the coming into force of the Corporations Act. His Honour noted that where the point arose in the future, it would be necessary to examine the operation of the roll-back provisions in NSW: -.
The decision in Seymour Whyte now places NSW squarely at odds with Victoria in relation to the applicability of the regime to insolvent companies. Resolution will likely have to await a suitable vehicle for determination of the issue in the High Court.
1. Victorian SOPA, s 17(2).
2. Façade Treatment, .
3. Façade Treatment, -.
4. Façade Treatment, -.