Construction in liquidation: the overlap between the…

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The Construction and Insolvency team discusses a recent decision which upheld that a statutory debt for a disputed claim does not crystallize under SOPA’s separate “pay now, argue later” process until until an arbitration decision is rendered.

In a recent decision, the Supreme Court of New South Wales (NSWSC) considered an important question concerning the intersection of the Companies Act 2001 (Cth) (Law) and the Security of Payments in the Building and Construction Industry Act 1999 (New South Wales) (SOPs) for debt securities in a liquidation.[1] The decision confirms that a statutory debt for a contested claim does not crystallize under the distinct status of SOPA”pay now, argue later” process until an arbitration decision is rendered.

Key points to remember

  • Liquidators may reject evidence of debt filed under claims for payment under SOPA if the claims are disputed and have not been determined by an arbitrator.
  • A statutory liability with respect to an escalating claim under SOPA accrues only when determined in accordance with the mechanisms of SOPA. For example, a debt relating to an agreed down payment request arises when the claimant accepts the amount in a payment schedule, while a debt relating to a disputed claim only arises after a court decision.
  • Liquidators should, however, be aware of alternative claims in the contract or restitution that may be admissible as evidence. Compensation issues frequently arise and may also need to be determined as part of the proof of debt process.

Background

In the matter of Nicolas Critini Pty Ltd (in liquidation) [2022] NSWSC 1149 (Critini) concerned an appeal against the dismissal of a debt obligation.

Nicolas Critini Pty Ltd (Company) selected Zadro Constructions Pty Ltd (Zadro) to build a residential block in Westmead, Sydney.

On October 17, 2019, Zadro issued a demand for payment under SOPA to the Company for an amount of $1,125,988.43. The company responded by serving a zero payment schedule on Zadro. Zadro filed for arbitration under SOPA. On December 6, 2019, the arbitrator found that the company owed Zadro $927,727.80 under the demand for payment (Debt).

On November 22, 2019, before the request for adjudication was decided, the Company entered into voluntary administration. It then went into liquidation and Zadro filed formal proof of debt for the debt. The liquidator of the Company (Liquidator) rejected the debt evidence, which was the subject of Zadro’s appeal.

Decision

Both parties agreed that the source of the debt was Section 8 of SOPA, which entitles a person who has undertaken work or provided goods and services under a construction contract to an installment payment. .[2]Therefore, the Court’s decision depended on when a legal debt under section 8 of SOPA accrues.

Zadro argued that the debt accrued when the parties entered into the construction contract on May 16, 2017, and that the SOPA regime only quantifies the debt. Conversely, the liquidator argued that the debt only accrued when the request for adjudication was decided. He argued that since there was no determination before the company went into administration, the debt was incurred after the “relevant date” within the meaning of Article 553(1) of the Act and was not admissible as evidence.

Chief Justice Hammerschlag agreed with the liquidator and dismissed Zadro’s appeal. He held that the legal right arising from SOPA Section 8 cannot be enforced other than in accordance with the processes described in SOPA. For example, when a down payment request is disputed and the payment schedule is not accepted by the applicant, the amount in dispute must be the subject of an adjudication decision to give rise to a claim. enforceable.

Alternative claims

The NSWSC ruling specifically notes that Zadro’s rights, if any, under the construction contract have been preserved. Claimants will typically have at least one other payment request, typically either:

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

Zadro did not assert an alternative claim in Critini. SOPA creates a provisional debt which is due »on accountand subject to subsequent determination of the rights of the parties under the construction contract. However, the statutory debt created by SOPA may have been attractive because quantum meruit claims are generally limited to the contract price and may require the claimant to prove the value of the work undertaken. Contract claims can also be difficult because construction contracts usually provide that a building owner is only liable to pay the contracted amount to a contractor.

Other Intersections of the Act and SOPA

Critini confirms in passing that an application for adjudication is not suspended pursuant to a voluntary administration, describing a letter from the administrators’ lawyers advancing this argument as untenable. However, there are generally few practical advantages for claimants against an externally administered company in continuing with the adjudication process.

In Victoria and New South Wales, SOPA installment payments cannot be enforced by liquidators. In Frontage Treatment Engineering Pty Ltd (in liq) v Brookfield Multiplex Constructions Pty Ltd [2016] VSCA 247, Victoria Court of Appeal (VCA) ruled that an entity in liquidation is not entitled to SOPA payments. Subsequently, in Seymour Whyte Constructions Pty Ltd v Ostwald Bros Pty Ltd (in liquidation) [2019] NSWCA 11, the NSW Court of Appeal characterized the VCA’s position as “totally wrongand ruled that liquidators can initiate progress payments under SOPA. However, subsequent amendments to the NSW SOPA now prohibit its use by companies in liquidation to enforce a claim for payment (including through arbitration). No cases have been reported regarding the application of SOPA legislation to other insolvency processes, such as voluntary administration, so the situation is less clear outside of liquidation.

The most common issue that arises when settling claims is compensation, either under the construction contract, equitable compensation or section 553C of the Act. Complicated legal and factual issues can arise when judging evidence where there are compensatory claims.

Conclusion

Judging on evidence of debt in these circumstances (particularly where there are offsetting claims) can be complicated. Critini provides liquidators with certainty when evaluating evidence of debts based on escalating claims under SOPA. However, plaintiffs can also make quantum meruit and breach of contract claims, so the fact of not being able to rely on SOPA is not necessarily determinative.

[1] In Victoria, section 9 of the Security of Payments in the Building and Construction Industry Act 2002 (Vic) provides the legal basis for a down payment request.

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

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