A recent Supreme Court of New South Wales decision has illuminated the potential for issues to arise when the statutory demand procedure under the Corporations Act 2001 (Cth) is used by a creditor to enforce an adjudication certificate obtained under the Building and Construction Industry Security of Payment Act 1999 (NSW) (Security of Payment Act) against a corporate debtor.

Introduction

After obtaining an adjudication certificate against a company and registering that certificate as a judgment in a court of competent jurisdiction, it may seem like a simple matter to serve a statutory demand on the debtor company and either obtain payment of the amount or proceed to wind up the company if payment is not forthcoming. However, the recent decision of Robb J in In the matter of J Group Constructions Pty Ltd[2015] NSWSC 1607 has sounded a warning on the use of the statutory demand procedure in these circumstances.

A link to the decision is available here (https://www.caselaw.nsw.gov.au/decision/5631b5aee4b003c5681fa285).

Implications

The major implications of this decision are:

  • caution needs to be exercised in using the statutory demand procedure to enforce an adjudication certificate against a company which otherwise appears to be solvent and advice needs to be obtained to ensure that the creditor does not suffer the costs consequences of an incorrect use of the statutory demand procedure;
  • in certain circumstances, the adjudication certificate will not prevent the company from asserting an offsetting claim under section 459H of the Corporations Act and the creditor might have to accept a reduced amount if the Court makes a determination of the offsetting claim in favour of the debtor company;
  • given Robb J’s comments in this case, the Court may in future reduce the utility of the statutory demand procedure in the construction industry by more closely scrutinising the use of statutory demands in these situations where it appears that the statutory demand procedure is being used as no more than a debt collection mechanism against a solvent company;
  • even if an offsetting claim is dismissed by an adjudicator in making a determination, this finding does not bind the Court on an application to set aside a statutory demand; and
  • a further level of complexity has been added to enforcement in the construction industry. The voluntary administration process was amended in 1992 (and subsequently) to provide a far more simplified process and to specifically avoid the previous, often arising, need for litigation. The construction industry has been the recipient of a number of specific legislative amendments in the area of how debts accrue, are quantified and are enforced. Those specific, industry tailored remedies, have been increasingly “clashing” with the Corporations Act and this process appears to be continuing.

Background

The proceeding involved an application by J Group Constructions Pty Ltd (J Group), to set aside a statutory demand served on it by PGA Rendering Group Pty Ltd (PGA).

The statutory demand claimed payment of a judgment debt entered in the District Court of New South Wales. The judgment debt was based upon an adjudication certificate obtained by PGA under the Security of Payment Act as a progress payment for building work it had performed for J Group.

Notwithstanding that PGA had obtained the adjudication certificate, there was an extant dispute between the parties about whether PGA had performed the relevant building work to the requisite standard. The adjudicator had dismissed this dispute and not made an allowance for it when issuing the certificate.

J Group had filed a claim in the District Court alleging that PGA had breached the relevant contract by, inter alia, not performing the building work to the requisite standing and sought to have the statutory demand set aside or varied on this basis.

Decision

The issue for determination was to what extent J Group was able to raise the dispute being ventilated in the District Court to establish that either:

  • the demand should be set aside on the basis of a genuine dispute as to the underlying debt; or
  • the amount payable under the demand should be varied to take into account J Group’s offsetting claim.

J Group initially tried to claim the demand should be set aside on the basis of a genuine dispute. However, J Group ultimately accepted that the decision of Brereton J in In the matter of Douglas Aerospace Pty Ltd[2015] NSWSC 167 should be followed. The relevant principle in that case is that a company which is judgment debtor on a judgment issued upon the filing of an adjudication certificate cannot claim that there is a genuine dispute about the existence of the underlying debt where the company’s only right to do so has not arisen under the relevant contract. However, where the claim made by the debtor company accepts the validity of the debt, but asserts that there is a countervailing liability, there may still be an offsetting claim.

While following the Douglas Aerospace decision, Robb J noted that he did not consider that the principle in that case was apt to cover all circumstances where an application is made to set aside a statutory demand based upon a debt created under the Security of Payment Act. Robb J noted that there was the potential to undermine fundamental principles concerning the proper use of statutory demands and that the Court may have to guard against the use of statutory demands as a debt collecting mechanism against solvent companies.

Robb J noted that the present case was not one in which the adjudicator based his adjudication decision upon the existence of a contractual debt in the absence of the availability to J Group of any offsetting claim. Had that been the case, the only course available to J Group would have been to challenge the existence of the debt that underlies the statutory debt, and J Group would be faced with the prohibition discussed above. Robb J expressed some dissatisfaction with this potential outcome.

The Court did not face this theoretical difficulty in the present case, as the adjudicator did not make an allowance for the rectification costs of PGA’s defective work. Accordingly, the amount in the adjudication certificate was not already a net amount of a claim and an offsetting claim. Robb J therefore did not have to deal with the problem which would have been faced if the adjudicator had already made an allowance for some or all of an offsetting claim made by J Group.

The apparent determination by the adjudicator that J Group was not entitled to succeed on its offsetting claims, by dismissing those, did not bind the Court on a subsequent application to set aside the statutory demand. Accordingly, Robb J made an order varying the amount of the statutory demand to take into account J Group’s offsetting claim.