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6 Mar 2019

Can insolvent contractors enforce adjudication awards?

Yes in NSW, no in VIC, probably in WA

Written by Daniel Morris, Special Counsel, Commercial Litigation

It remains uncertain whether liquidators of insolvent construction contractors can enforce adjudication awards. This question is of particular interest to the subcontractors who typically suffer most when the flow of funds down the contractual chain dries up due to contractor insolvency. This problem, which is becoming all too common, has been of such concern to the construction industry in Australia that seven parliamentary inquiries have been commissioned to investigate and report on contractor insolvency over the past fifteen years.

Albeit not good news for subcontractors and others adversely affected by head contractor insolvency, the Victorian Court of Appeal’s and the WA Supreme Court’s separate findings that section 553C of the Corporations Act 2001 prevented recovery of adjudication awards in insolvency at least seemed to settle the question. The specific cases and the reasoning applied in each, are discussed in an earlier article.

However, last year, to the surprise of contractors and their lawyers, NSW Supreme Court Justice Stevenson declared in Seymour Whyte Constructions Pty Ltd v Ostwald Bros Pty Ltd (in liq) [2018] NSWSC 412 that the reasoning in Victoria was “plainly wrong”.  Last month, the NSW Court of Appeal agreed with Justice Stevenson in Seymour Whyte Constructions Pty Ltd v Ostwald Bros Pty Ltd (In liquidation) [2019] NSWCA 11.

Speaking for the NSW Court of Appeal, what Justice Leeming considered to be the Victorian Court of Appeal’s error is the notion that liquidation automatically meant cessation of trade. The Court regarded this as “plainly wrong” because a liquidator is empowered, and may wish, to continue to trade as a going concern. The Court derived support for this finding from the High Court’s recent judgment in Southern Han Breakfast Point Pty Ltd (in liq) v Lewence Construction Pty Ltd [2016] HCA 52.

The fact that liquidators may (and sometimes do) trade their way out of insolvency is significant, because the Victorian Courts had presumed that a liquidator would invariably seize and sell the assets of the insolvent construction company and distribute its proceeds to its creditors.  Having made that presumption, the Victorian Courts considered that the enforcement of adjudication awards by construction companies in liquidation would always interfere with the set-off regime in section 553C of the Corporations Act 2001. This is because security of payment legislation does not allow a principal to set off claims for liquidated damages or defective works against a contractor’s adjudicated payment award (unless the contract provides for a set-off), whereas s553C of the Corporations Act 2001 mandates that set-off exercise. This issue is discussed at length in the article linked above.

However, no such problem arises if the insolvent contractor’s liquidators decide to trade out of the contractor’s debts rather than to sell off its assets and wind it up. In such a case, s.553C would not apply and there would be no legal reason why the insolvent contractor should not enforce its adjudication award.

Unlike the Victorian cases, WA Supreme Court Justice Beech’s decision in Hammersley Iron Pty Ltd v James [2015] WASC 10 can be applied in a way that makes room for contractors in liquidation that continue to trade. In that case, his Honour stayed (that is, put on hold) an application for permission to enforce an adjudication award (which was required in WA at the time of that decision, under the Construction Contracts Act 2004). This is discussed in depth in the article linked above. According to Beech J, the stay on such applications did not need to be permanent. It just needed to be long enough to give the principal an opportunity to make any delay or defect claims against the insolvent contractor seeking to enforce its adjudication award – so that the claims could then be set off against each other if required under s.553C of the Corporations Act 2001.

Whilst applications for permission to enforce adjudication awards are no longer required in WA, a temporary stay may  still be applied, following Beech J’s reasoning, to any step taken by an insolvent contractor to enforce an adjudication award. Also, whilst Beech J did not expressly take account of the possibility of the insolvent contractor continuing to trade, this possibility may in future also be taken into account in WA, consistently with Beech J’s reasoning, when a court considers  whether or not, and for how long, to stay an insolvent contractor’s action to enforce an adjudication award.

As it now stands, insolvent contractors can definitely enforce adjudication awards in NSW, definitely cannot do so in Victoria, and probably still can in WA, after waiting a while. Theoretically, this means that a subcontractor will have greater security of payment in NSW relative to the other Australian States (assuming the risk of contractor insolvency is the same around Australia). This is set to change, though, with amendments proposed to the NSW Construction Industry Security of Payment Act 1999 that would take away the right of companies in liquidation to make a payment claim, apply for adjudication or enforce an adjudication determination. Such an amendment would bring the law of NSW in line with Victoria, ultimately to the detriment of those subcontracted to an insolvent contractor.

*This is general information only, and does not constitute specific legal advice. Please consult one of our experienced Legal Team for specific advice relevant to your situation.

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