In a recent decision, the Supreme Court of New South Wales (NSWSC) considered an important question regarding the intersection of the Corporations Act 2001 (Cth) (Act) and the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOPA) for proofs of debt in a liquidation.[1] The decision confirms that a statutory debt for a disputed claim does not crystalise under SOPA’s distinct “pay now, argue later” process until an adjudication determination is delivered.

Key takeaways

• Liquidators may reject proofs of debt lodged in respect of payment claims under the SOPA if the claims are disputed and have not been determined by an adjudicator.
• A statutory debt in respect of a progress claim under the SOPA only accrues when it is determined in accordance with the machinery of the SOPA. For example, a debt in respect of an agreed progress claim accrues when the claimant accepts the amount in a payment schedule, whereas a debt in respect of a disputed claim does not accrue until an adjudication determination.
• Liquidators should, however, be aware of alternative claims in contract or restitution that may be admissible to proof. Issues of set-off frequently arise and may also need to be determined in the proof of debt process.
  

Background

In the matter of Nicolas Critini Pty Ltd (in Liquidation) [2022] NSWSC 1149 (Critini) concerned an appeal against a rejection of a proof of debt.

Nicolas Critini Pty Ltd (Company) retained Zadro Constructions Pty Ltd (Zadro) to construct a residential unit block in Westmead, Sydney.

On 17 October 2019, Zadro issued a payment claim pursuant to the SOPA to the Company in the amount of $1,125,988.43. The Company responded by serving a nil payment schedule on Zadro. Zadro made an adjudication application under the SOPA. On 6 December 2019, the adjudicator found that the Company owed Zadro $927,727.80 in respect of the payment claim (Debt).

On 22 November 2019, before the adjudication application was determined, the Company entered voluntary administration. It subsequently entered liquidation and Zadro lodged a formal proof of debt for the Debt. The Company’s liquidator (Liquidator) disallowed the proof of debt, which was the subject of Zadro’s appeal.

Decision

Both parties agreed that the source of the Debt was section 8 of the SOPA, which entitles a person who has undertaken work or supplied goods and services under a construction contract to a progress payment.[2] Accordingly, the Court’s decision hinged on when a statutory debt under section 8 of the SOPA accrues.

Zadro submitted that the Debt accrued when the parties entered into the construction contract on 16 May 2017 and the SOPA regime merely quantifies the Debt. Conversely, the Liquidator contended that the Debt only accrued when the adjudication application was determined. He argued that since there was no determination before the Company entered administration, the Debt was incurred after the “relevant date” within the meaning of section 553(1) of the Act and was not admissible to proof.

Hammerschlag CJ agreed with the Liquidator and dismissed Zadro’s appeal. He reasoned that the statutory entitlement arising out of section 8 of the SOPA cannot be enforced other than in accordance with the processes outlined in the SOPA. For example, where a progress claim is disputed and the payment schedule is not accepted by the claimant, the amount in dispute must be the subject of an adjudication determination to give rise to an enforceable debt.

Alternative claims

The NSWSC’s decision specifically notes that Zadro’s rights, if any, under the construction contract were preserved. Claimants will generally have at least one alternative claim to payment, commonly either:

• Quantum meruit, if the claimant has undertaken work, the contract has been repudiated or terminated and the contractual right to payment has not yet accrued; or
• A claim in contract, if the claimant’s contractual right to payment has accrued.

Zadro did not assert an alternate claim in Critini. SOPA creates an interim debt that is payable “on account” and subject to a later determination of the parties’ rights under the construction contract. However, the statutory debt created by SOPA may have been attractive as claims in quantum meruit are generally limited to the contract price and may require the claimant to prove the value of the work undertaken. Contractual claims may also be difficult as construction contracts generally provide that a principal is only liable to pay the scheduled amount to a contractor.

Other intersections of the Act and SOPA

Critini confirms in passing that an adjudication application is not stayed by virtue of voluntary administration, describing a letter from the administrators’ solicitors advancing that argument as unsustainable. However, there is generally little practical benefit for claimants against an externally administered company in continuing the adjudication process.

In Victoria and NSW progress payments under the SOPA cannot be enforced by liquidators. In Façade Treatment Engineering Pty Ltd (in liq) v Brookfield Multiplex Constructions Pty Ltd [2016] VSCA 247, the Victorian Court of Appeal (VCA) held that an entity in liquidation has no entitlement to payments under the SOPA. Subsequently, in Seymour Whyte Constructions Pty Ltd v Ostwald Bros Pty Ltd (in Liquidation) [2019] NSWCA 11, the NSW Court of Appeal labelled the VCA’s position as “plainly wrong” and held that liquidators can initiate progress payments under the SOPA. However, subsequent changes to the NSW SOPA now prohibit its use by companies in liquidation to enforce a payment claim (including by adjudication). There are no reported cases considering the application of SOPA legislation to other insolvency processes, such as voluntary administration, so the position is less clear outside of liquidation.

The most common issue that arises in adjudicating on claims is set-off, either under the construction contract, equitable set-off or section 553C of the Act. Complicated legal and factual issues may arise when adjudicating on proofs where there are countervailing claims.

Conclusion

Adjudicating on proofs of debt in these circumstances (particularly where there are set-off claims) can be complicated. Critini provides liquidators with some certainty when assessing proofs of debts based on progress claims under the SOPA. However, claimants may also make quantum meruit and breach of contract claims, so being unable to rely on SOPA is not necessarily determinative.

[1] In Victoria, section 9 of the Building and Construction Industry Security of Payment Act 2002 (Vic) provides the statutory basis for a progress claim.

[2] In the matter of Nicolas Critini Pty Ltd (in Liquidation) [2022] NSWSC 1149.