Commonwealth corporations act trumps state security of payment

The various States’ and Territories’ construction industry “security-of-payment” legislation has been in place for many years now, and it has always had to interact with the Commonwealth’s Corporations Act 2001.

For example, many a creditor’s statutory demand has been issued under section 459E of the Corporations Act for payment of an adjudication-decision amount, just as many an application has been made under section 459G to set aside such demand on the basis of there being a genuine dispute about the claimed debt or there being a greater offsetting claim under section 459H.

More recently, the courts have been considering the effect of section 553C of the Corporations Act — dealing with mutual set-offs — as it applies in situations of companies in liquidation attempting to enforce adjudication decisions. A couple of these cases are summarised below.

Recent cases

Hamersley Iron Pty Limited v James [2015] WASC 10; Hamersley HMS Pty Limited v Davis [2015] WASC 14

Hamersley Iron contracted with Forge Group Construction Pty Limited to construct fuel hubs in the Pilbara. In February 2014, mid-contract, Forge went into voluntary administration and then into liquidation. Typical of many insolvencies in the construction industry, a dispute broke out between Hamersley and Forge about amounts owing between them under the construction contract for work already done and work to complete.

In March 2014 Forge’s liquidators served on Hamersley an adjudication application under Western Australia’s Construction Contracts Act 2004, and it was decided by the adjudicator that Hamersley owed Forge around $641K for work done. Hamersley did not pay on the basis it had an offsetting claim against Forge under section 553C of the Corporations Act in the order of $7.4M.

Forge sought an order from the Supreme Court of Western Australia that it could enforce the adjudication decision against Hamersley, and Hamersley sought an order that the decision be set aside given the quantum of its counterclaim against Forge. The practical question before the Court was whether the Commonwealth’s Corporations Act trumped the State’s Construction Contracts Act.

In finding for Hamersley, Beech J said that the object and purpose of section 553C would be defeated if Forge was entitled to recover 100 cents in the dollar from Hamersley under the adjudication decision but Hamersley was left to prove its debt in Forge’s liquidation and potentially receive less than its claim. His Honour was satisfied that there was a serious case to be tried about Hamersley’s counterclaim, and noted that the purpose of section 553C is ‘to do substantial justice between the parties where a debt is really due from the bankrupt to the debtor’.

The Court did not, however, set aside Forge’s adjudication decision — the application to enforce was suspended pending resolution of Hamersley’s claim in the liquidation.

Façade Treatment Engineering Limited v Brookfield Multiplex Constructions Pty Limited [2015] VSC 41

In September 2011 Brookfield Multiplex contracted with Façade Treatment Engineering to assist construct the Upper West Side Redevelopment in Melbourne. Disputes about the contract ensued during 2012 and in February 2013, Façade was ordered into liquidation by the Supreme Court of Victoria.

Façade’s liquidator sought judgment against Brookfield for unpaid claims under Victoria’s Building and Construction Industry Security of Payment Act 2002, namely on the basis that Brookfield had not provided any payment schedule in response to Façade’s claim. Among other things, Brookfield claimed it had a significantly greater offsetting claim against Façade as a result of Façade’s delay and failure to complete the subcontracted works.

In finding for Brookfield, Vickery J had a similar view to Beech J in the Hammersley cases. For example, his Honour said ‘for a company in liquidation to enter a judgment for monetary entitlement claimed [under the Victorian Act] without taking into account any cross-claim or defence by way of set off…would fly directly in the face of the scheme established by section 553C of the Corporations Act’.

Unlike the Hammersley cases, Vickery J also dealt with the prohibition in section 553C(2). That section provides that a person may not claim the benefit of a set-off if the person had notice of the debtor’s insolvency at the time of giving credit to the debtor. Here, Façade argued that Brookfield had notice of Façade’s insolvency at the time of the payments at issue. Vickery J disagreed and said that the time of the notice was the time the contract was entered in September 2011 — not the time of the payments during 2012 – and Brookfield did not have any notice of any insolvency of Façade in 2011.

Conclusion

It has been held that the purpose of security-of-payment legislation is ‘to ensure that, once a quick, and possibly rough, adjudication by a neutral person’ has taken place, ‘a progress payment in the amount found by the adjudicator should be made to a builder’ and ‘the ultimate correctness of the progress payment being made should be argued afterwards’. Furthermore, the legislation is ‘concerned with maintaining a builder’s cashflow, not determining its ultimate rights’.

On the other hand, with regard to section 553C, it has been said that ‘it would be unjust if the trustee in bankruptcy could insist upon having one hundred cents in the dollar upon the whole of the debt owed to the bankrupt but at the same time insist that the bankrupt’s debtor must be satisfied with a dividend of some few cents in the dollar on the whole of the debt owed by the bankrupt to him. It was to prevent such injustice that the ‘mutual credits’ and ‘mutual debts’, and later ‘mutual dealings’, provisions were introduced into bankruptcy legislation’.

Beech J somewhat reconciled the competing positions by saying that ‘in circumstances where Forge as contractor is insolvent, and in liquidation, the object of the Construction Contracts Act — keeping the money flowing in the contracting chain by enforcing timely payment and sidelining protracted and complex disputes — does not demand the grant of leave to enforce the adjudication determination’. That is, the purpose of security-of-payment legislation is wasted on a company in liquidation.

Vickery J explained the apparent conflict between the State and Commonwealth laws by reference to section 109 of the Constitution, which provides that where a State law is inconsistent with a Commonwealth law, the Commonwealth law will prevail to the extent of the inconsistency.

The practical effect of the decisions is that it will fall to liquidators to determine the quantum of section 553C claims against the company in liquidation. This may sound simple enough, but how is a liquidator in any better position to adjudicate than the previously appointed adjudicator? Perhaps we will see liquidators simply adopting adjudication decisions, including findings about offsetting claims, for the purposes of admitting a creditor’s proof of debt rather than the liquidator repeating the exercise using the pool of funds otherwise available for all creditors.

In summary, section 553C trumps any security-of-payment legislation.

For more information contact:

Alisa Taylor — Partner — Dispute Resolution Team
(02) 6279 4388
alisa.taylor@meyervandenberg.com.au

Bernice Ellis — Senior Associate — Dispute Resolution Team
(02) 6279 4385
bernice.ellis@meyervandenberg.com.au