Two recent decisions have determined the applicability of security for payment legislation to insolvent contractors. One decided that the legislation does not apply to contractors in liquidation. The other decided that the legislation can be used by bankrupt contractors. At first glance, the decisions seem to be at odds, but on closer analysis the two decisions are not inconsistent.

Security of payment legislation has been enacted in all jurisdictions in Australia for the primary purpose of combating contractor insolvency. It is therefore interesting that Courts have recently had to determine the availability of the features of the legislation to insolvent contractors. In the past month, two separate Australian Courts have determined that:

  1. A contractor (company) in liquidation cannot use security of payment legislation to recover payment; and
  2. A bankrupt contractor (individual) can use security of payment legislation to recover payment.

The above conclusions may appear to be inconsistent, but there is a simple explanation for why they are not. The liquidation of a company is the process through which a company is wound up and is no longer permitted to trade. A bankrupt is allowed to continue trading, but has a ceiling placed on the amount the bankrupt can earn, with anything earned above that ceiling going to the bankrupt’s creditors. Below is a summary of each case and its practical effect for claimants and respondents.

Façade Treatment Engineering Pty Ltd (in liq) v Brookfield Multiplex Constructions Pty Ltd [2016] VSCA 247 (14 October 2016)

In 2011, Façade Treatment Engineering Pty Ltd (in liq) (Façade) entered into a contract with Brookfield Multiplex Constructions Pty Ltd (Multiplex) to supply and install facades for the Upper West Side development at Docklands in Melbourne for the sum of $13,475,000. Façade issued two payment claims under the Victorian Security of Payment Act on 23 August 2012 and 11 September 2012 respectively. Multiplex part paid the first claim and paid nothing in respect of the second claim, leaving a sum of $1,193,469.20 unpaid. Multiplex did not issue payment schedules in relation to either claim within the time allowed under the legislation.

Façade was placed into liquidation on 6 February 2013, and the liquidators commenced proceedings on Façade’s behalf on 26 September 2014 seeking payment of $1,193,469.20, which it argued was automatically owing by reason of Multiplex’s failure to issue a payment schedule. Multiplex argued that Façade had no right to recover under the legislation as the legislation is only intended to apply to parties who are a “going concern”; that is, parties who are solvent and continue to trade.

The Court reasoned that the legislation can be construed in one of two ways. Either, that it is available to any person who has undertaken to carry out construction work (or to supply related goods and services), or that it is available only to a person who has undertaken to carry out such work, and continues to carry out such work (or continues to be able to carry out such work). The Court took the latter approach.

The Court noted that determinations under security of payment legislation are interim in nature. If the legislation were available to parties in liquidation, a determination becomes a final determination of each party’s rights as the solvent party will have no ability to recover anything paid to the insolvent party in later Court proceedings. The Court stopped short of finding that the legislation is only available to solvent parties, concluding instead that it is unavailable to parties in liquidation. This is because parties can be insolvent for some time prior to going into liquidation, and it is exceedingly more difficult to pinpoint the time when a party becomes insolvent than to pinpoint the time when a party is placed into liquidation.

The Court also stated (in obiter) that the provisions of the Act which permit a claimant to seek summary judgment in the absence of a payment schedule are inconsistent with provisions of the Corporations Act 2001 once a claimant is placed into liquidation. Those provisions are therefore void pursuant to the Constitution in the event of liquidation of the claimant. The Court decided that this supported the view that contractors in liquidation are unable to claim under the legislation, as that view preserves the validity of the security of payment legislation under the Constitution.

The practical effect of this case is that once a company is placed into liquidation, whether or not it has performed construction work for which it has not yet been paid, that company will not be able to make a claim under security of payment legislation.

Maxcon Constructions Pty Ltd v Vadasz & Ors (No 2) [2016] SASC 156 (29 September 2016)

Two weeks prior to the Victorian Court of Appeal decision above, the South Australian Supreme Court determined that a subcontractor who was an undischarged bankrupt, and who had not notified the head contractor that he was bankrupt at the time of entering into the contract (in breach of the Bankruptcy Act 1966), was entitled to make a claim under the security of payment legislation.

In this case, the claimant (Vadasz) was a subcontractor to Maxcon Constructions Pty Ltd (Maxcon) engaged to provide piling for the Bohem Apartments in Adelaide’s CBD. Vadasz issued a payment claim under the security of payment legislation seeking payment of $204,864.55. Maxcon issued a payment schedule identifying that it intended to pay $141,163.55. An adjudicator determined that Vadasz was entitled to be paid the full amount claimed.

At the time of entering into the subcontract, and at all relevant times thereafter, Vadasz was an undischarged bankrupt under the Bankruptcy Act 1966 (Bankruptcy Act). Pursuant to the Bankruptcy Act, Vadasz was required to notify Maxcon of his status as an undischarged bankrupt at the time of entering into the subcontract. The Court found that he did not do so. Maxcon argued that the subcontract was therefore void and that Vadasz could not have recourse to the provisions of the security of payment legislation.

The Court decided that the subcontract was not void. The Court reasoned that, while the Bankruptcy Act requires Vadasz to notify Maxcon of his bankruptcy status before entering into the subcontract, it does not provide that the subcontract will be void if Vadasz fails to do so. In fact, the Bankruptcy Act imposes a penalty upon Vadasz for his failure to notify, but it does not prevent Vadasz from entering into that subcontract. The Court noted that if the subcontract were to be declared void for Vadasz’s failure to notify of his status as an undischarged bankrupt, this would be disproportionate to the seriousness of the unlawful conduct, because it would arguably permit Maxcon to obtain the benefit of the work performed by Vadasz but to pay him nothing.

The Court held that the contract between the head contractor and the bankrupt subcontractor was not void and that the adjudicator was well within his power to award a sum of money to the bankrupt subcontractor.

Summary

Whilst the conclusions reached in the above cases are not necessarily inconsistent with one another, there is a curious dichotomy which arises from these decisions. The Victorian Court of Appeal noted that a company ceases to be able to undertake to carry out work once it is placed into liquidation, which is not true for a bankrupt individual. However, the Victorian Court of Appeal relied heavily upon the notion that security of payment legislation is intended to be interim in nature, finding that Courts should therefore avoid encouraging situations where the parties final rights are decided by default due to the insolvency of one party who will be unable to repay any amount it receives pursuant to the legislation. Applying that logic to the second case, should the South Australian Supreme Court have given greater consideration to the fact that they may have determined the final rights of the parties by default, as Maxcon will not be able to recover any amount paid to the bankrupt Vadasz?

As things presently stand, companies in liquidation will be unable to use security of payment legislation to pursue unpaid payments for construction work, whereas bankrupt individuals may continue to use the legislation.