Update; see Even Less Support fo the Bust

The construction industry in Australia seems to be going through rather a hard time at the moment, and there is a fair bit of insolvency about. There is topicality in the question,

“Can a company in liquidation avail itself of the Security of Payment Legislation by validly commencing an adjudication?”

It is not hard to find examples of liquidators who take the view that the Security of Payment Legislation is available for them[1], or of adjudicators who share that view, but what is the true legal position?[2]

There appear to be no decided cases on the validity of an adjudication process where the claimant was in liquidation before commencing the adjudication. However, it is not a question that is entirely devoid of authority, and indeed the answer “no” to the question posed above emerges from paragraph 87 of the decision of Young CJ in Eq in and Brodyn Pty Ltd v Dasein Constructions Pty Ltd[3]:

[The Security of Payment legislation] only intends to operate when the head contractor and the subcontractor are going concerns. Once the subcontractor ceased to be a going concern, it no longer needs cash flow and the mischief to be covered by the Act is not present in that situation. No-one forced the subcontractor to go into voluntary administration. It elected to do so and in my view the protection of the BCISP Act ceased at that point and the Commonwealth law as to adjustments of rights under administration and later under a DOCA came into play. [4]

This is not, of course, the only time where the courts have identified that the Security of Payment Legislation is subject to some limits which are not set out in the express words of the legislation itself. For example, in Cant v Casella[5] the Court of Appeal in Queensland considered the question of whether the Security of Payment Legislation was available to a contractor who did not hold the requisite building licence[6]. The court said “no”, and Jerrard JA included this among the reasons:

It is unlikely the Act was intended to benefit builders who cannot enforce the payment provisions of their contracts, especially when the making of such a contract involved an offence by the builder. Ultimately, it far from appears that the Payments Act was intended to override the disentitlement according to s 42; the contrary appears. In my view, the Payments Act operates only when there is a construction contract of which the terms as to payment are enforceable by the builder.

 There are no express words in the Security of Payment Legislation saying that it does not apply where the builder lacks a necessary building licence, but the court found that the Act was not intended to operate in those circumstances, and that was sufficient to disapply it.

At first blush, it might seem that the decision in Brodyn v Dasein is not quite on point, because in that case the adjudication took place before the insolvency, and in any event, the form of insolvency in question was a deed of company arrangement (DOCA) and not a liquidation. The relevant timeframe is as follows: –

• The adjudication application was made in October 2003
• The adjudicator made his determination on 16 October 2003
• Dasein went into voluntary administration on 31 October 2003
• Dasein became the subject of a DOCA on 4 December 2003.

So could it be said that the passage quoted above – paragraph 87 – was merely obiter dictum? Or that being concerned with a DOCA, the case is not relevant to a liquidation? The answer to both of these questions appears to be “no”: Brodyn v Dasein should be treated as binding on adjudicators, who have no jurisdiction where a claim is brought by a company in liquidation.

 Obiter dictum?

There is no need to guess as to whether the relevant line of reasoning was part of the ratio decidendi in the case, because Young CJ in Eq expressly identified it as “the vital question” in paragraph 79 of his judgment[7].

This vital question arose, of course, because there is an inherent inconsistency of approach between the Security of Payment Legislation on the one hand and the insolvency scheme which applies to a company in liquidation under the Corporations Act on the other. These inconsistencies include not only what is to be taken into account in relation to the alleged debt itself (the Security of Payment Legislation operating a default scheme of payment claim and payment schedule, whereas no such scheme applies in the case of insolvencies) but also how set offs are to be taken into account (the Security of Payment Legislation severely restricting set offs, whereas the Corporations Act Section 553C provides for an account to be taken whether have been mutual dealings).

 The Two Ratios

Young CJ in Eq came to the same result by two lines of alternative reasoning. The first was expressed at paragraph 87 itself: the Security of Payment Legislation simply does not apply to an insolvent company that has ceased to trade, because its very purpose is to achieve proper cash flow for going concerns[8]. Once a company ceases to be a going concern, that purpose falls away and the legislation ceases to apply.

The alternative line of reasoning arises from the Constitution. Having found that there was a conflict between the Security of Payment Legislation and the insolvency scheme set out in the Corporations Act[9], Young CJ in Eq simply applied section 109 of the Australian Constitution to the effect that State laws, to the extent of inconsistency with Commonwealth law, is invalid[10].

Again, this is by no means the only time that the court has taken a similar approach to the constitutionality of the Security of Payment Legislation. Thus in Chase Oyster Bar[11] it was remarked by McDougall J at [159] – [160] that the Security of Payment Legislation in New South Wales might well have been struck down as unconstitutional but for the change of mind by the courts as to the availability of judicial review.

Extrapolating from DOCA to liquidation

It is true that Brodyn v Dasein was concerned with a DOCA, and not with a liquidation. Paragraph 87 of the decision offers two formulae as to when the Security of Payment Legislation ceases to operate: –

•  When the claimant ceases to be a going concern
•  When the claimant went into voluntary administration.

There is later authority which suggests that the Brodyn v Dasein principle does not apply where a company is subject to a DOCA and is seeking to trade out of its financial difficulties[12]. But once a company is not merely subject to administration, but is in liquidation, then it is certainly a “dead duck” and must a fortiori be regarded as within the scope of the Brodyn v Dasein principle.

 Voting for Christmas

Of course, adjudicators do not much like finding that they have no jurisdiction. Such a finding is akin to a turkey voting for Christmas. There is a special practical difficulty: that to apply the Brodyn v Dasein principle means that the Security of Payment Legislation is of no applicability, that the adjudication is thus a nullity, that there is thus no conceivable power to make a cost finding against the respondent, and that there may be very real difficulty about the adjudicator getting paid, and resisting any claim by the liquidator for repayment as a voidable preference under section 588FA. The most satisfactory course of action is probably for an ANA simply to take the view that an adjudication application by a company in liquidation is simply not a valid application under section 17(6) of the Building and Construction Industry Security of Payment Act 2009 (SA) and to refuse to make an appointment, and if the ANA does appoint an adjudicator, that adjudicator may well be wise not to accept the appointment under section 19(1).

 Why do liquidators bother?

The question might be asked, why do liquidators bother to make an adjudication application, when it is virtually certain that the respondent would be able to successfully obtain a stay of any enforcement? The answer seems to be partly good old-fashioned nuisance value, and partly the expectation that the respondent might be ordered to pay the amount of any determination into court as a condition of the stay. Once the money has been ordered into court, it is likely to be some very considerable time before it is ever released, and in the meantime the liquidator is, at least to some extent, in the box seat. In any event, the evidence is clear that liquidators sometimes do take the view that pursuing an adjudication is a worthwhile course.

Summary

Perhaps it will not be long before a substantial adjudication determination is made in favour of a claimant in liquidation, triggering an application for judicial review[13]. In the paradigm case discussed above, where the claimant is in liquidation before commencing the adjudication process, then the Brodyn v Dasein principle should be followed, leading to a quashing of the determination, unless it can be shown that the principle is clearly wrong. Far from being clearly wrong, there is good reason to believe that it is clearly right.

Quite what the limits of the principle are is much less clear. What is the position where the claimant falls into liquidation at some stage during the adjudication process? It may be some time before all of these murky waters are fully charted.

[1] There is one liquidator in South Australia who has recently been firing off adjudication claims in all directions.

[2] The essential question would seem to be similar in each State and Territory. For convenience, the following discussion proceeds from the point of view of South Australia.

[3] [2004] NSWSC 1230

[4] Emphasis added.

[5] [2006] QCA 538

[6] A decision on the applicability of that case in South Australia is currently pending from the Supreme Court.

[7] “78       The vital question is whether, in the light of s 25 of the BCISP Act, one can apply s 553C…”

[8] “11       The evident purpose of the BCISP Act is to address what Parliament perceived to be a mischief in subcontractors not being able to achieve proper cash flow because payments apparently due to them were withheld by the head contractor or proprietor.”

[9] “82               There is a conflict of legislative provisions in the instant case and the scheme set out in the BCISP Act and the scheme set out in the Corporations Act where a company is under a DOCA do conflict”

[10] “83     The first reason is s 109 of the Australian Constitution. It provides that:

“When a law of a State is inconsistent with a law of the Commonwealth, the latter shall prevail, and the former shall, to the extent of the inconsistency, be invalid.”

The Corporations Act is a Commonwealth Act, the BCISP Act is a State Act, so if there is any inconsistency, the former prevails.”

[11] Chase Oyster Bar v Hamo Industries [2010] NSWSC 1167

[12] Veolia Water Solutions v Kruger Engineering [No 3] [2007] NSWSC 459

[13] In at least two recent adjudications commenced by a liquidator in South Australia, the adjudicators have declined to determine that any sum is due.