The recent decision of the Supreme Court of New South Wales in Modcol Pty Ltd v National Buildplan Group Pty Ltd serves as a reminder to contractors to seek timely payment of claims under construction contracts, as any rights to payment which may have accrued under Security of Payment Legislation will be suspended once an administrator or liquidator is appointed over the principal.
In this eBulletin we identify practical steps contractors can take to protect their business from the possible insolvency of a head contractor or principal.
Background to Modcol
Modcol Pty Ltd (Modcol) was engaged by National Buildplan Group Pty Ltd (Buildplan), who had in turn been engaged by Health Infrastructure, to perform construction works at the Dubbo Base Hospital.
- Modcol Pty Ltd (Modcol) was engaged by National Buildplan Group Pty Ltd (Buildplan), who had in turn been engaged by Health Infrastructure, to perform construction works at the Dubbo Base Hospital.
- Modcol submitted a payment claim to Buildplan on 6 March 2013 for $1.37 million under the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOPA).
On 22 March 2013, being more than the 10 business days allowed under the SOPA, Buildplan responded to the payment claim with a payment schedule, certifying a portion of the amount claimed as being owing. This late response combined with the subsequent failure of Buildplan to pay the amount of the payment claim on the date due for payment entitled Modcol to:
- commence proceedings to obtain judgment against Buildplan for the full amount of the payment claim; or
- seek adjudication of the payment claim against Buildplan under the SOPA.
- Modcol elected to commence proceedings against Buildplan. Two days before proceedings were commenced, administrators were appointed to Buildplan. This meant Modcol was required to seek leave of the Court to commence proceedings pursuant to section 440D of the Corporations Act 2001 (Cth) (Act).
- Justice McDougall ultimately refused the application for leave on the basis that granting leave may ultimately place Modcol in the position of a secured creditor, which it was not.
The Court noted the following.
- Modcol wanted to obtain judgment against Buildplan so that it could then seek to recover (under the Contractors Debt Act 1997 (NSW)) that amount from Health Infrastructure as the principal to the head contract with Buildplan.
- The role of the administrator or liquidator is to ensure that secured creditors (such as banks) and other priority creditors (such as employees) are paid first. Any money left over after the payment of these creditors is distributed to unsecured creditors on a pro-rata basis. To allow a contractor, such as Modcol, to be paid before other creditors, would be an unfair outcome to other creditors.
- The SOPA, and equivalent legislation in other States, provides assistance to parties who carry out construction work to be paid in a timely manner. Many States also have legislation which requires the principal under certain circumstances to make payment direct to sub-contractors where the sub-contractors have not been paid. However, this decision highlights that once a company becomes insolvent, a party who has submitted a payment claim to that company will be merely an unsecured creditor, and cannot improve its position by relying on the SOPA or analogous legislation.
Practical tips for contractors
There are some practical steps contractors undertaking construction work can take to protect their business from the possible insolvency of a head contractor or principal which has engaged it to perform works, including:
- ensuring regular invoices are issued in order to avoid accruing a large debt;
- making sure that all invoices state they are made in accordance with the relevant State Security of Payment legislation, which will assist contractors in enforcing their right to payment should the invoices not be paid by the date due for payment (noting this will not however assist in the event of insolvency). In addition, contractors should either seek adjudication under the legislation or commence proceedings to obtain judgment, in the event payment is not made within the time frame prescribed by the construction contract and the Security of Payment legislation;
- obtaining the protection of a charge, bank guarantee, directors' guarantee or third party guarantee where practical (please note that security may need to be registered for it to be effective and if you have any doubts you should obtain legal advice);
- seeking debt insurance protection; and
- regularly monitoring the solvency of contracting parties.
- If a head contractor or principal does fail to make payment by the date due for payment, a contractor should consider immediately suspending works in order to mitigate further losses. If you are not sure whether you have the right to immediately suspend works, you should seek urgent legal advice.