Security of Payment Act benefits companies in liquidation - but not for long

The decision of the NSW Court of Appeal in Seymour Whyte Constructions v Ostwald Bros Pty Ltd (in liq) [2019] NSWCA 11 will have short-lived material impacts in NSW due to looming amendments to the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOPA). However, it will have lasting implications for other jurisdictions as there is now a real risk that a claimant’s insolvency may not be a bar to it having the benefit of security of payment legislation.

In this case, the NSW Court of Appeal unanimously held that the SOPA is capable of operating for the benefit of contractors and subcontractors who have entered into insolvency or liquidation and, in doing so, upheld the NSW Supreme Court’s original decision in Seymour Whyte Construction Pty Ltd v Ostwald Bros Pty Ltd (in liq) [2018] NSWSC 412 that:

even though the subcontractor (Ostwald) was in liquidation at all material times, including when it obtained an adjudication determination and commenced its claim under section 16 of the SOPA, that did not prevent it from having rights under Part 3 of the SOPA, and
the Victorian Court of Appeal’s finding that the benefit of that state’s security of payment legislation is not available to companies in liquidation (see Façade Treatment Engineering Pty Ltd (in liq) v Brookfield Multiplex Constructions Ltd [2016] VSCA 247 (Façade)) is ‘plainly wrong’.

This decision’s significance in NSW will be short-lived due to looming legislative changes that will expressly prohibit companies in liquidation from recovering payment under the SOPA. However, it does muddy the judicial waters in other jurisdictions where courts will need to decide between the opposing positions articulated by the NSW and Victorian Courts of Appeal.

Decision at first instance

At first instance, Stevenson J held that:

the Contract should be rectified to alter the dates on which Seymour Whyte was required to make progress payments, with the consequence that Ostwald’s adjudication application was made in time and the adjudication determination was valid
in the alternative, even if the adjudication application was out of time (which was held to be the case on appeal), Ostwald was entitled to seek recovery of the sum claimed under section 16(2)(a)(i) of the SOPA (the alternative statutory mechanism for recovery), and
the SOPA continued to apply despite the fact that the winding up of Ostwald had commenced.

Decision on appeal

On appeal, there were three main issues for the Court to consider:

whether Stevenson J erred in rectifying the Contract so as to alter the date for payment
if Stevenson J erred in rectifying that date, whether Ostwald was precluded from suing to recover the unpaid amount pursuant to section 16(2)(a)(i) of the SOPA, and
whether builders and subcontractors in liquidation are ‘claimants’ for the purposes of the SOPA.

The Court held on these points:

Stevenson J erred in finding (as a matter of fact) that the intention of the parties on execution of the Contract was that Seymour Whyte should have 30 days from the end of the relevant month within which to pay Ostwald, rather than the earlier date included in the Contract. Accordingly, the adjudication application was served out of time and the adjudication determination was invalid.
Even though the adjudication determination was invalid, Ostwald was entitled to seek recovery of the scheduled amount pursuant to section 16(2)(a)(i) of the SOPA as the:
- making of an invalid adjudication application did not preclude Ostwald from pursuing the statutory alternative available to it; and
- ‘adjudication application’ referred to in section 16(2)(a)(ii) of the SOPA is an adjudication application that complies with section 17(1)(a)(ii) of the SOPA, not an ‘adjudication application in fact’ as was submitted by Seymour Whyte.

That is, it would only be where a claimant submitted a valid adjudication application that the statutory alternative in 16(2)(a)(i) would no longer be available to it.

An entitlement to submit a progress claim under section 8(1) of the SOPA does not depend on the claimant continuing to perform work under a contract. Instead, it simply requires that:
- a party has undertaken to carry out construction work under a construction contract; that is, there is a contractual undertaking, not a physical undertaking of construction work; and
- a reference date has arisen under the construction contract regardless of whether the claimant is continuing to perform construction work under the contract on that date.
Even though it was being wound up, the SOPA continued to apply to Ostwald’s payment claim and it was entitled to pursue the scheduled amount to judgment.

Impending legislation

On 21 November 2018, the Building and Construction Industry Security of Payment Amendment Act 2018 (NSW) was passed by the NSW Parliament. This Act is awaiting proclamation however, it will introduce a new section 32B(1) to the SOPA which:

prohibits claimants in liquidation from serving payment claims or enforcing adjudication determinations, and
provides that if a claimant makes an adjudication application and is then placed into liquidation before a determination is made, the adjudication application will be deemed to have been withdrawn.