Seymour Whyte Constructions Pty Ltd v Ostwald Bros Pty Ltd (In liquidation) [2019] NSWCA 11

The NSW Court of Appeal has decided that SOPA enforcement is available to claimants in liquidation in NSW, contrary to its equivalent Court in Victoria.   The same statutory words now have consequences that differ north and south of the border.

Why does this matter? 

  • Upstream project participants in NSW now face greater counterparty insolvency risk. For insolvent downstream parties, liquidators have a new short form recovery path in NSW.
  • Fixing this disparity in judicial opinion now falls to the High Court but only if an appeal is launched.
  • Perhaps this disparity ought not be left in the hands of the parties. While the 2018 SOPA amendments will establish a new section 32B which will curtail the rights of claimants in liquidation, those amendments have not commenced operation as law.   Has the time come for the Building Ministers Forum to accelerate uniform security of payment at Commonwealth level in coordination with the 2018 ipso facto reforms, with a view to a uniform national solution to insolvency in the construction industry?

The facts follow a well-trodden path …

A subcontractor made a payment claim under NSW’s security of payment legislation (SOPA). The contractor served a payment schedule which scheduled a lesser amount for payment. The following day, the subcontractor appointed administrators. Relying on the contractor’s non-payment of the scheduled amount, the subcontractor made an adjudication application, (this kind of application sometimes known as a “second chance” adjudication), which resulted in a determination in favour of the subcontractor.

The contractor commenced Court proceedings asserting the determination to be invalid because the application had been made out of time. After the proceedings commenced the subcontractor’s creditors resolved that it should be placed in liquidation.

How did the divergence between the Victorian and NSW laws arise? 

A glitch in the subcontract led to controversy as to when the time limit for notice of an intention to make a “second chance” application expired.  At first instance, the Court rectified the subcontract, meaning that the application was within time and that the determination was valid. On appeal rectification was overturned, meaning it was out of time.

The question therefore arose, whether, faced with an invalid determination the subcontractor could still sue for the statutory debt on the payment schedule. According to the Court, depriving the subcontractor of such a right would have left it without any means of enforcing its statutory entitlement to a progress payment, contrary to the first object of the legislation, which is to be “able to recover” progress payments.

The Subcontractor in liquidation seeks judgment on the unpaid payment schedule   

The question was whether SOPA should be construed (narrowly) so as not to apply to a builder or subcontractor which had been placed in liquidation in insolvency. On this question, judicial opinion diverged along state lines, with the NSW Court deciding that SOPA “as a matter of construction, is capable of operating for the benefit of a builder or sub-contractor which has gone into liquidation in insolvency”  contrary to the Victorian Court of Appeal’s decision in Façade.

The NSW Court approached the legislation quite differently to its treatment in Façade:

  • Façade proceeded on the basis that a company in liquidation cannot carry out construction work or supply goods and services under a contract such that “cash flow problems cease to be a concern when a company enters liquidation”.This however was said to have overlooked the liquidator’s express power to “carry on the business of the company so far as is, in the opinion of the liquidator, required for the beneficial disposal or winding up of that business.” 
  • Façade proceeded on the basis that that once a winding up order is made “it is no longer a question of the risk of insolvency; insolvency is a certainty.”  According to the NSW Court however, “[e]ven a company wound up on the ground of insolvency may ultimately be found to have a surplus of assets over liabilities. It is therefore not necessarily inevitable that creditors of a company wound up on the ground of insolvency will suffer a shortfall in recovering the moneys due to them.”
  • Finally, Façade focussed on the interim character of the statutory entitlement, with a respondent being able to claim back any amounts paid to the claimant. According to the NSW Court, that focus did not recognise that there are “mechanisms available to eliminate or at least minimize the risk of injustice to a respondent seeking to enforce contractual rights against a claimant in liquidation which has the benefit of a judgment obtained under” SOPA.  In the view of the NSW Court, it was unnecessary for the Victorian Court to address the matter as a constitutional issue having determined that the legislation did not operate for the benefit of companies in liquidation, with that analysis having no application in NSW. 

The decision shifts the battle front in security of payment law, particularly in NSW. The Supreme Court’s inherent power to stay execution of judgments looks set to become the bulwark against insolvency impacted SOPA judgments that could now become interim in name only.  While the discretion to grant such a stay is to be exercised judicially, clarity at the outset for the commercial community must surely be the preferable approach.