I posted last month about the question of whether an insolvent company may avail itself of the security of payment legislation; see Support for the Bust? It was a topical question because of the increasing number of liquidators who are now seeking to use the legislation, and I concluded that the answer is “no” based on a decision of Young CJ in Eq in and Brodyn Pty Ltd v Dasein Constructions Pty Ltd[3] some 11 years ago. Little did I know that on the very same day as I put that post up, Justice Vickery was busy coming to exactly the same conclusion in Victoria in Facade Treatment Engineering Ltd the Brookfield Multiplex Constructions Pty Ltd [2015] VSC 41.
There were some who doubted my conclusion in a LinkedIn discussion, but this latest decision seems to drive a very firm nail into the coffin of liquidators who seek to use the Security of Payment legislation.
The Façade case did not concern an adjudication, but a default judgement. The plaintiff had served two payment claims. There was an argument about whether the defendant had served a payment schedule in respect of one (the court concluded that it had) but it was common ground that there had been no payment schedule served in respect of the other. The defendant said that it had a cross-claim which more than exceeded the amount being claimed by the plaintiff. The constitutional issue was taken head-on, and the result was a clear “no” to enforcement. Justice Vickery said:
85 The conclusion I have come to on the constitutional issue is this: A company to which s 553C of the Corporations Act 2001 applies, subject to s 553C(2), is precluded from entering any judgment pursuant to s 16(2)(a)(i) of the BCISP Act in respect of the debt due to it under that Act, and is further precluded from relying on s 16(4)(b) as a bar to a respondent under the BCISP Act from bringing any cross-claim against the company or raising any defence by way of set-off in relation to matters arising under the relevant construction contract.
There are a number of points worth noting about this conclusion.
First, although much of the discussion was based on the effect of the respondent’s cross claim, this paragraph is not limited by its terms to cases where the respondent has a set-off. The expression “a company to which section 553C of the Corporations Act 2001 applies” apparently means, on its face “an insolvent company that is being wound up”. And the words “and is further precluded” lends support to the reading that the point about cross claims is additional to the more general point in the first limb of paragraph 85.
However, it seems clear that Justice Vickery was particularly concerned with cases where there is a cross-claim, and indeed said this:
84 The position may change in the event that the Defendant evinces an intention not to proceed with its foreshadowed counterclaims, either expressly, or by letting further and inordinate time pass without taking steps to prosecute these claims. In this event, it would be open to the Plaintiff to seek appropriate declaratory relief before proceeding to enter judgment under s 16 of the BCISP Act.
Justice Vickery was accordingly leaving the door open for the issue to be argued again in a case where there is no cross-claim. It might be said that the expression “a company to which section 553C of the Corporations Act 2001 applies” imports the notion of a company against whom a cross claim is asserted.
Secondly, although the case was determined by reference to the Victorian Act, there appears to be no difference of any importance between the Victorian Act and other East Coast Models in this respect. Justice Vickery has a particularly high reputation in construction matters, and one would expect that the decision will be followed in other East Coast Model jurisdictions.
Thirdly, having decided the matter on these constitutional grounds, Justice Vickery found no need for him to deal with the alternative approach in Brodyn v Dasein:
86 Having dealt with the matter in this way, there is no need for me to consider the second and alternative limb of the reasoning of Young CJ in Equity in Brodyn to the effect that, in construing the security of payments legislation, it manifests an intention to operate only when the head contractor and the subcontractor are going concerns, and should be so construed.[1]
There was thus no discussion of the interesting question of whether Young CJ in Equity was right in Brodyn to conclude that the whole nature of the security of payment legislation, premised as it is on the assumption of some later opportunity for correction. I made this remark in the LinkedIn discussion:
And partly, the whole “pay now, argue later” concept of adjudication is premised on the availability of an “argue later”. The rough and ready justice is justified by its feature as a merely temporary cashflow mechanism. When used by a liquidator, adjudication (particularly East Coast Model) looks more like a smash and grab raid with no practical possibility of the rough justice ever getting smoothed out. Thus, whilst the objection to use of SoP by liquidators is particularly strong where there are set-off issues, there are good policy reasons behind Brodyn v Dasein in any event.
So where does all this leave us? It seems that in East coast model states, at any rate, a liquidator will face real difficulty in obtaining and keeping a judgment based on lack of a payment schedule or in pursuing an adjudication. Those difficulties will be especially great were the respondent has a cross-claim, regardless of whether that cross-claim is set out in a payment schedule or not. It is well arguable – on the basis of Brodyn v Dasein – that a liquidator is prevented from making any use of the Security of Payment legislation, whether the respondent has a cross-claim or not.
The position under the West Coast model is less clear. In the recent case of Hamersley Iron Pty Ltd v James [2015] WASC 10 the court’s approach was simply not to grant leave to enforce the adjudicator’s decision. Perhaps surprisingly, the court was not even referred to the Brodyn v Dasein case, and did not touch on the constitutional issue at all in its judgment. This may reflect, at least in part, that the West Coast model is much less Draconian, and offends much less against the insolvency scheme.
[1] Brodyn [2004] NSWSC 1230 [85]-[87].