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.

100 years of Supporting West Australians

"My family law experience with Mary Roubos has restored my faith in solicitors in general. She not only demonstrated her legal expertise and flair, but also showed a compassionate and understanding nature during the lengthy process. I felt that Mary went above and beyond her obligations as my solicitor, and really listened to me. I would highly recommend Mary and her assistant Debra Wilson, who also demonstrated professionalism and excellence on all levels."

Renee Frangiosa

"Always fast and thorough service. Thank you"

Sitka Pil

"I found Ben most helpful and always prompt to let me know where things were at. Will definately use Ben again and will recommend to others."

Gerrit and Mary Van Bralal

"We wish to express our thanks for your help in attending to our mother/ wife's will - Mrs Grace Margaret Vessey. Aimee was extremely helpful and easy to deal with. We are greatful for your help with our affairs."

Ms Rosalyn Norman, Mr Stephen Vessey

"Thank you ever so much for all your hard work on my case Nicole, I really appreciate everything you did for me."

Workers Compensation Client

"Thank you for such great assistance with the transaction of Flying Domestics on behalf of Lorna Good. It has been such such a pleasure to work with the HHG Legal Group and I look forward to working with you in the future."

Jim Goodwin

"Simon Creek and his team were at all times empathic, professional and confident.  My matter needed to be addressed within a pressing time frame, and their availability at short notice and contact after hours was much appreciated.  It caused me considerable stress, but having such a thoroughly reliable and competent team to call on helped me to feel in control. Although I hope not to need their services again in future, I would be confident in doing so!"

Dr Lana Bell

"A good outcome is what we can expect.  A great outcome is a sign of a company which does the very best for their clients. A very big thank you to Daniel Morris for showing empathy towards my small and much needed legal action.

To HHG Legal Group, thank you for a great outcome.  I would recommend your company to anyone seeking legal services."

Jan Atkinson

"Your support this morning was amazingly kind, not to mention your totally reassuring competence, knowledge and wisdom that you used on my behalf.  It was extremely reassuring to have your knowledgeable support, and I particularly appreciated your real and obvious kindness to me. It means so much at a very difficult time. I'm so grateful to you."

Family Law Client

"I highly recommend the services of HHG Legal Group for both personal and business needs. HHG is very up to date with legal advice and are in tune with the evolution of business."

Robert Forgione

"Sue and myself would like to thank HHG for the way in which our dispute was resolved. It is good to know that people who do not have an understanding of the legal system can rely on people like yourself and the company you represent. Without the assistance of HHG we could not have resolved the problems we were facing, not only have we resolved the issue but the outcome was more favourable then we would have thought possible. Thank-you and please pass on our thanks to all those who worked behind the scenes to achieve this outcome."

Rick and Sue Ashton

"Janene was very professional and we established a good rapport quickly. The subject of death and wills can be quite confronting to deal with, however Janene's approach was soft and accommodating."

Lynette Livesey

"A big thank you to HHG for their professional service, continued support, and wide range of legal knowledge. Our clients have given us nothing but kind words regarding HHG Legal Group and so we have no hesitation in referring and recommending Simon Creek and HHG Legal Group for their outstanding services and legal expertise."

Nigel Plowman, Director at McKinley Plowman & Associates

"Simon is a friendly and practical legal advisor. I have received great feedback from the clients I have referred to him and his team at HHG Legal Group."

Richard Beal, Director at BDO

"Over the last few years, I have been impressed by Simon’s legal ability, management skills, entrepreneurial spirit, personal integrity and people skills. He appears to be that rare breed of lawyer – both knowledgeable and commercial."

Michael Malone, Founder of iiNet

"Our family has been a client of HHG Legal Group over many years and most recently in 2013 and February 2014.  Business has included drawing up of wills for three generations and preparing of probate for my father in law.

I would have no hesitation in recommending HHG Legal Group to anyone requiring such services."

Bernice Climie

"You should be congratulated for the manner in which your staff address clients and we found our dealings with your company, once again a very pleasant experience and we would like to truly thank you for your efforts."

Steve Harvey and Jane Powell

"HHG Legal were absolutely fantastic. Extremely responsive and brought calm to our chaotic family situation through their knowledge and caring attitude. Extremely professional from our very first contact with them and they expertly guided our family though the required legal process over almost a 12 month period."

Amanda Williamson

"Fantastic team! They really care about their client. Tim Colcutt is a 'go that extra mile' guy who gives his client his all. I can't recommend HHG and Tim enough."

Kerry Samson

"Anne Hurley has been such a valuable resource of information and advice, her wealth of knowledge is truly impressive and her ability to explain things in a way that makes them easily understood is very much appreciated. Anne and the wider HHG Legal Group are always a pleasure to work with."

Giorgia Parham

"I had a fantastic lawyer in Anne Hurley. She helped me out a great deal with good, sound advice in a friendly , professional manner. First class, thanks Anne"

Graeme Hammond

"Marine Plant Systems has been working with HHG Legal Group for a few years now and they continually provide first class service. Their professional advice has been invaluable to our company."

Carolin Grimm

"We were kept up to date at all times. Pricing was always updated over the time period so we remained "in budget". Personal access to someone whenever I had questions. All in all a great experience without too much fuss."

Rosslyn Tasker - COO AltusQ Pty Ltd

"Good service you can count on."

Miles Lee

"HHG Legal Group have provided outstanding support as I have taken the journey of buying a business, their professionalism is beyound reproach. Their assistance throughout the Due Diligernce process have been invaluable, I would fully recommend them."

Mark Armitage

"I have experienced how good the HHG Legal Group team are over the last 6 years and highly recommend them."

Lyn Hawkins

"Very friendly and efficient service - what a pleasure working with Anne."

Jacques Taylor

"I highly recommend Daniel from HHG Legal Mandurah. When dealing with a complicated legal property matter recently I was extremely impressed by Daniel's honesty and integrity and the legal advice I received. I am very happy with the service from HHG Legal."

Tony Walker