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By: Mark Madsen, Esq. & Ryan Solomons, Esq.
Mullins Lawyers
Brisbane, Australia

Can construction principals seek to stay the enforcement of an adverse adjudication determination made under security of payment legislation where they have a set-off claim against a contractor who is in liquidation?

The main objective of security of payment legislation operating in each state of Australia is to ensure continued cash flow to a contractor, even where there is an ongoing dispute about payment or a set-off claim by a principal.

However, the courts have determined that the relevant payment regimes conflict with section 553C of the Corporations Act, which can apply where a company in liquidation is either owed money by, or has a claim against, another party, such as a principal under a construction contract. The section requires a liquidator to determine the amount of each claim and set-off those amounts against each other. The liquidator will then be required to pay, or claim, the balance.

There has been a number of recent cases where liquidators of insolvent contractors have been seeking to make adjudication claims to obtain funds quickly. As a result, the Courts have been looking at whether the security of payment legislation applies to insolvent contractors, because the main purpose of the security of payment legislation arguably does not apply to an insolvent contractor who has ceased to trade and is no longer a going concern.

The earliest relevant decision is the NSW case of Brodyn Pty Ltd v Dasein Constructions1. The Court found that, on a proper interpretation of the Corporations Act, a company in liquidation cannot utilise the security of payment legislation to enforce an adjudication award. More recently, the Supreme Court of Victoria reached the same conclusion in Facade Treatment Engineering2.

In the more recent WA case of Hammersley Iron v James3, the principal argued that if the insolvent contractor was able to enforce its adjudication award as a judgment against the principal, this would give rise to the situation that section 553C was designed to prevent; that is, the contractor being able to recover the entirety of its claim now but the principal only being able to prove for X cents in the dollar, or for nothing, in the liquidation of the contractor.

The Court found the Corporations Act must prevail over the payment legislation. A principal will be able to apply to stay the enforcement of an adjudication determination where the principal has a set-off claim against the contractor (in liquidation), pending determination of the principal’s set-off claim.

Accordingly, principals will not be forced to pay monies to a contractor (in liquidation) and then run a set-off claim in the hope of receiving a smaller, if any, return from the liquidator of the contractor.

The above decisions are particularly encouraging for construction principals whose contractors are in financial difficulty. However, they will be of little comfort for liquidators seeking to quickly and cheaply obtain monies through security of payment adjudications.

1 [2004] NSWSC 1230
2 [2015] VSC 41
3 [2015] WASC 10

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