Construction Law – Court rejects proof of debt based on alleged entitlement under SOP Act

In the matter of Nicolas Criniti Pty Ltd (In Liquidation) [2022] NSWSC 1149 the NSW Supreme Court examined the intersection between the winding up provisions in the Corporations Act 2001 (Cth) and the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act).

What happened?

On 16 May 2017, a builder was engaged by Nicolas Criniti Pty Ltd to construct a residential apartment block in Sydney. Two years later, the builder made a claim for a progress payment under the SOP Act. When the Company responded with a nil payment schedule, the builder made an adjudication application under the SOP Act.

Before the adjudication application could be determined, the Company appointed voluntary administrators and was then wound up at the second creditors’ meeting. While under administration, the adjudicator issued a determination in favour of the builder in the amount of $927,727.80.

The builder subsequently lodged a proof of debt in the liquidation for the amount stated in the determination. However, this was rejected by the liquidator who indicated that there was no ‘statutory debt’ under the SOP Act admissible to proof against the Company at the relevant point in time (being the date the administrators were appointed).

The builder appealed this decision by commencing proceedings in the NSW Supreme Court.

The legal arguments

The question for determination by the Court was whether the circumstances giving rise to the debt had arisen before the appointment of voluntary administrators.

The builder relied on section 8 of the SOP Act which provides that a person who, under a construction contract, has undertaken to carry out construction work or to supply related goods and services is entitled to receive a progress payment. It was submitted that entry into the construction contract itself gave rise to the debt and the SOP Act simply quantified the amount payable.

Moreover, it was contended by the builder that the circumstances giving rise to the debt included the steps which preceded the adjudication determination (that is, the payment claim and the application for adjudication). Each of these steps occurred before the appointment of the administrators.

The liquidator’s position was that the circumstances giving rise to the debt under the SOP Act was the adjudication determination alone and, given that was delivered after the administrators were appointed, there was no legally enforceable debt provable in the winding up pursuant to section 553(1) of the Corporations Act 2001.

The Decision

The Court rejected the builder’s submissions and dismissed the appeal. In reaching this conclusion, his Honour observed the case raised a significant question concerning the intersection of the winding up provisions in the Corporations Act and the SOP Act.

Relevantly, his Honour noted that:

• where there is a payment schedule under the SOP Act, the amount in dispute must be the subject of an adjudication determination to give rise to an enforceable debt;
• the service of a payment claim and the making of an adjudication application are pre-conditions to the making of an adjudication determination, not circumstances which give rise to the debt; and
• the determination itself is the source of the debt.

Notwithstanding the findings above, his Honour made it clear that the builder’s rights under the construction contract itself were preserved and any claim in respect of those rights was provable under section 553(1) of the Corporations Act. The decision in this case dealt solely with the enforcement of the statutory right created by the SOP Act.

Comment

Given the current challenges facing the construction industry in Australia, it is likely that we will continue to see an increase in insolvencies in the sector. In light of this, the Court’s decision in this case provides timely guidance to insolvency practitioners and their advisers as to when a payment claim under the SOP Act will crystallise as an enforceable debt and thus be provable in a winding up. What is clear is that timing is everything when the Corporations Act and SOP Collide.

While not binding outside of New South Wales, the similarity of security-for-payment regimes around Australia will likely have other Courts follow the same reasoning applied, given most Courts’ reticence to otherwise extend the powers granted under each SOP regime without express amendment to the statutory framework. As such, it is important that where a debt can be pursued under your local SOP Act (especially where concerns exist about that debtor’s ability to pay) that it is done as swiftly as possible and as fully in compliance with both legislation and the specific contract, so as to avoid a potential debtor going into liquidation before you receive a determination and landing you at the back of the line.

For more information and expert advice, ask to speak to Ash Ibrahim at Ezra Legal on (08) 8231 6100 or email aibrahim@ezralegal.com.au

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Ash Ibrahim

Solicitor

Ezra Legal