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Insolvency trumps Security of Payments legislation

Building & Construction

Take home lessons

  • Insolvency trumps Security of Payments legislation.
  • Where a subcontractor or contractor who has issued a payment claim from and subsequently becomes insolvent, the principal or head contractor should consider whether there are any sums that can be set off against the payment claim. If so, the set-off provisions for insolvent companies in the Corporations Act will prevail over security of payments legislation.
  • Liquidators should be mindful that once a company is placed into liquidation, whether or not it has performed construction work for which it has not yet been paid, the liquidated company will not be able to make a claim under security of payment legislation.

On 14 October 2016, the Victorian Court of Appeal delivered its decision in Façade Treatment Engineering Pty Ltd (in liq) v Brookfield Multiplex Constructions Pty Ltd [2016] VSCA 247, being an appeal of the Supreme Court decision in Facade Treatment Engineering Pty Ltd (in liquidation) v Brookfield Multiplex Constructions Pty Ltd [2015] VSC 41, where Justice Vickery has held that provisions of the Building and Construction Industry Security of Payment Act 2002 (Vic) (the BCISP Act) are inconsistent with set off and mutual credits and debits provisions of the Corporations Act 2001 (Cth) in the context of insolvency.

The facts in Façade Treatment involved the following:

  • In September 2011, Façade Treatment entered into a contract with Brookfield Multiplex to supply and install facades for an Upper West Side development at the Docklands in Melbourne;
  • Façade issued two payment claims under the BCISP 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 also did not issue any payment schedule in respect of the second claim;
  • On 6 February 2013, Facade was place into liquidation. The liquidators of Facade then commenced proceedings in the Supreme Court on Façade’s behalf seeking payment of the unpaid balance of the claims. They argued the amounts were automatically owing by reason of Multiplex’s failure to issue a payment schedule in accordance with the BCISP Act;
  • 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”. Multiplex also argued that it had claims against Façade in excess of the quantum of those claims and sought to set-off against the payment claims brought by Façade.

In upholding the Justice Vickery’s decision, the Court of Appeal noted that determinations under the BCISP Act 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 concluded that the set off provisions in BCISP were unavailable to parties in liquidation though it may no express finding that the provisions were only available to solvent parties.

The Court also commented that the offset provisions of the Corporations Act 2001 (specifically sections 553C) were inconsistent with the summary judgment provisions of the BCISP Act once a company had entered into liquidation (and therefore void pursuant to the Constitution). This, reasoned the Court, supported the view that contractors in liquidation could not avail themselves of the payment regime under the BCISP Act.

The decision by the Victorian Supreme Court has wide reaching implications throughout Australia in the insolvency space and building & construction industries. Analogous provisions in security of payments legislation in other Australian states and territories (such as sections 12 to 20A of the Building and Construction Industry Payments Act 2004 (Qld) and sections 13 to 26 of the Building And Construction Industry Security Of Payment Act 1999 (NSW)) will be treated similarly in accordance with the decision in Facade Treatment.

Where a building company enters into liquidation it will no longer be able to rely on the benefit of the progress payment regime under the security of payments legislation to recover money to be administered in its liquidation.