Insolvency Set-Off ousts Contractors’ Right to Summary Judgment in the Construction Industry

It has been held that automatic set off under s 553C of the Corporations Act 2001 (Cth) precludes companies in liquidation from taking advantage of the summary progress payment regime under the Building and Construction Industry Security of Payment Act 2002 (Vic).

Façade Treatment Engineering Pty Ltd v Brookfield Multiplex Constructions Pty Ltd [2016] VSCA 247 

Part 3 of the Building and Construction Industry Security of Payment Act 2002 (Vic) (BCISP Act) provides a mechanism for sub-contractors in the construction industry to receive progress payments for work conducted.  Upon service of a valid ‘payment claim’[1] a recipient must provide a ‘payment schedule’.[2]  If the recipient fails to provide a valid payment schedule within time, they become liable to pay the amount claimed.  The claimant can, among other remedies, recover that sum as a debt, without defence or set off.

The appellant (Façade) was a sub-contractor on the respondent’s (Multiplex) construction project.  Façade issued two relevant payment claims.  Multiplex part-paid the first payment claim and did not pay the second.  A dispute ensued and Multiplex exercised its rights under the parties’ agreement to take the outstanding work out of Façade’s hands.  Liquidators were subsequently appointed to Façade, who caused Façade to commence proceedings against Multiplex seeking summary judgment of $1.19m outstanding under the payment claims.

Multiplex alleged Façade was liable for $10.3m for breach of contract.

Central to Façade’s entitlement to judgment on the payment claim was the extent to which s 553C of the Corporations Act 2001 (Cth) (Corporations Act) overrode the preclusion of cross-claims and defences under Part 3 of the BCISP Act if the claimant was in liquidation.

Section 553C is the insolvency set-off provision. In summary it provides that where there have been mutual credits, mutual debts or other mutual dealings between a company in liquidation and a creditor, then an account is taken of what is owed by one to the other and the two amounts are set-off against each other, so that only the balance is admissible to proof against the company or is payable to the company.

The Court of Appeal determined that the summary procedure for payment under the BCISP Act was not available for claimants in liquidation.

Statutory Interpretation

The trial judge had reached the same conclusion, basing his reasoning on the inconsistency for the purposes of s 109 of the Constitution between Part 3 of the BCISP Act and s 553C.  However, the Court of Appeal commenced its reasoning on statutory interpretation with a textual analysis.  The Court of Appeal held that the plain words of the BCISP Act, without regard to policy or extrinsic materials, support a narrow interpretation of Part 3 to apply only to trading claimants, which are not in liquidation.  The Court relied upon:

• the purpose of the BCISP Act which refers to claimants “who carry out construction work or who supply related goods and services …”;[3]
• the alternative remedy available to unpaid claimants to suspend construction work pending payment – suggesting the BCISP Act presumes claimants are still carrying out construction work; and
• a characterisation of Part 3 of the BCISP Act as an “interim payment regime”[4] and the availability of restitution of amounts paid under that Part in subsequent proceedings between the claimant and the respondent.[5]

Further, the extrinsic materials supported this interpretation:

• the second reading speeches for the BCISP Act and its NSW equivalent indicate their driving concern was cashflow problems experienced by smaller players within the construction industry. That concern was addressed by shifting the risk of insolvency from the sub-contractor to the head-contractor and was no longer present for a company in liquidation; and
• the s 553C set-off procedure has a long legislative history and the State legislature was aware of that when it enacted the BCISP Act.

Finally, NSW authority[6] in which a claimant subject to a Deed of Company Arrangement obtained judgment under the NSW equivalent of the BCISP Act did not assist Façade, as:

• one of the driving purposes of Part 5.3A of the Corporations Act is to maximise the prospect of a company’s financial recovery by improving cashflow – a concern that does not arise in the liquidation context; and
• there was no s 553C equivalent in Part 5.3A of the Corporations Act.

Section 109 Constitutional Inconsistency

By s 109 of the Constitution, when a State law is inconsistent with a law of the Commonwealth, the latter prevails and the State law is invalid to the extent of the inconsistency.

The trial judge determined that a company in liquidation is precluded from entering judgment pursuant to s 16 of the BCISP Act and from relying on s 16(4)(b) as a bar to any cross-claim or defence due to the conflict between Part 3 of the BCISP Act and s 553C of the Corporations Act.

While strictly unnecessary, given their interpretation of Part 3 of the BCISP Act, the Court of Appeal concluded, for completeness, that summary judgment in favour of an insolvent claimant under Part 3 of the BCISP Act would “alter, impair or detract from” the operation of s 553C of the Corporations Act.  The Court of Appeal emphasised the practical effect of the BCISP Act on the rights and duties conferred under the Corporations Act.

Their Honours restated the law of set off under s 553C with reference to Guy v McIntyre[7]:

• section 553C operates automatically where one party is in liquidation; and
• the set-off results in the original claim ceasing to exist at the date of the administration, such that only the balance is admissible to proof against the company or payable to the company; and
• as at the date of the winding up order, there is only a single claim that represents the net balance between the parties; the claims and cross-claims having been merged and thereby extinguished.

Upon operation of s 553C of the Corporations Act, on the date of Façade’s winding up order Façade’s claim to the unpaid portion of the payment claims ceased to exist, as did Multiplex’s counterclaim.  What replaced them was a single claim representing the balance between them.  Without the protection of s 553C of the Corporations Act, summary judgment in Façade’s favour meant Façade would receive the full amount of the sum owed under the relevant payment claims and Multiplex would be left to prove in Façade’s liquidation for its counterclaim.[8]

This outcome would have given rise to the very injustice which s 553C was enacted to avoid, rendering the interim payment under Part 3 of the BCISP a final payment.

Notice of Insolvency under the Corporations Act

Finally, Façade maintained that the relevant time to determine whether Multiplex had notice of Façade’s insolvency for the purposes of s 553C(2) of the Corporations Act was upon Façade’s breach of contract because, unlike in Grapecorp Management Pty Ltd (in liq) v Grape Exchange Management Euston Pty Ltd[9] and JLF Bakeries Pty Ltd (in liq) v Baker’s Delight Holdings Ltd[10] Multiplex’s claim for damages was not a contractual fee which fell regularly in the course of the relevant agreement.

The Court of Appeal determined that the date of entry into the sub-contract was the date on which Multiplex received the credit from Façade to perform the construction work.  On the same date, the consequences of Façade’s failure to perform its obligations under the sub-contract (ie the default provisions under that contract) were known to the parties.  Thus, the parties’ execution of the sub-contract gave rise to the mutual giving and receiving of credits between the parties; but those credits were simply contingent on future events contemplated by the contract, for example, the issue of payment claims or the failure to complete works.  In the circumstances, the relevant date for the purposes of s 553C(2) of the Corporations Act was the date of the parties’ entry into the sub-contract.  There being no suggestion that Façade exhibited any sign of insolvency as at the date of entering into the sub-contract, s 553C(2) had no operation.

Validity of Payment Schedule 

The Court of Appeal overturned Vickery J’s finding that Multiplex had issued a valid payment schedule.

In doing so, the Court held that an email relied upon by Multiplex as a payment schedule under s 15 of the BCISP Act was not responsive to particular items claimed in the payment claim. The complaints raised were procedural hurdles.  They were not reasons for denying the substance of the claims made, but reasons why Multiplex did not intend to pay at that moment.  Such reasons did not satisfy the requirement of s 15(3) of the BCISP Act.

However, in light of the Court’s finding in relation to the scope of the BCISP Act, this did not affect the ultimate outcome.

[1] BCISP Act, s 14.

[2] BCISP Act, s 15.

[3] BCISP Act, s 1.

[4] See Brodyn Pty Ltd v Dasein Constructions Pty Ltd (2005) 21 BCL 443, 445; Grocon Constructors Pty Ltd v Planit Cocciardi Joint Venture [No 2] (2009) 26 VR 172, 202; Cardinal Project Services Pty Ltd v Hanave Pty Ltd [2011] NSWCA 339.

[5] BCISP Act, s 47(3).

[6] Veolia Water Solutions & Technologies (Australia) Pty Ltd v Kruger Engineering Australia Pty Ltd [No 3] [2007] NSWSC 459.

[7] (1991) 171 CLR 609.

[8] [176] – [177].

[9] (2012) 265 FLR 33.

[10] (2007) 64 ACSR 633.