Insolvent contractors beware: principals can rely upon set-off rights when resisting claims

In brief

The Victorian Supreme Court has provided guidance on set-off rights in the context of insolvency, particularly in relation to inconsistency between provisions of the Corporations Act and security of payment legislation. Partner Nick Rudge and Lawyer James Waters report.

Executive summary

In Facade Treatment Engineering Pty Ltd (in liquidation) v Brookfield Multiplex Constructions Pty Ltd [2015] VSC 41, Justice Vickery has held that provisions of the Building and Construction Industry Security of Payment Act 2002 (Vic) (the BCISP Act) are inconsistent with provisions of the Corporations Act 2001 (Cth) relating to set-off and mutual credits and debts in the context of insolvency.

Specifically, Justice Vickery held that an insolvent company could neither enter judgment for a debt due to it nor avoid any cross claims or set-off defences under the BCISP Act where those cross claims/defences arose out of the same construction contract. The court also gave helpful guidance in relation to how parties responding to payment claims may respond within the meaning of the BCISP Act.

The decision is currently the subject of an appeal, in which Façade alleges that Justice Vickery erred in finding that there was inconsistency between the two acts, that they should have been given 'side by side' operation and that the payment schedule in this case was invalid. It remains to be seen whether Façade's appeal will be successful.

In a recent decision in Western Australia that considered this inconsistency, Hamersley Iron Pty Ltd v James [2015] WASC 10, section 553C of the Corporations Act was held to apply in place of the equivalent Western Australian security of payment legislation. Although the result is practically the same, the reasoning in Hamersley contrasts that of the trial decision of Justice Vickery in Façade. In Hamersley, Justice Beech held that the policy of security of payments acts was to ensure cashflow while construction companies remained solvent, but that if they became insolvent, the policy behind provisions for insolvent companies of the Corporations Act should apply. This approach mirrors the reasoning of Chief Justice Young in Equity in Brodyn Pty Ltd & Dasein Constructions Pty Ltd [2004] NSWSC 1230, discussed below.

Facts

On 7 September 2011, Façade entered into a contract with Multiplex for the design, supply and installation of facade and curtain wall works on the Upper West Side development in Melbourne. Façade made two payment claims in August and September 2012. In response to the second payment claim, Multiplex responded alleging that Façade had supplied insufficient information to Multiplex and that the payment claim was therefore invalid.

In February 2013, Façade went into liquidation. After Façade commenced proceedings under s16(2)(a)(i) of the BCISP Act for recovery of unpaid amounts, Multiplex revealed that it had claims against Façade in excess of the quantum of those claims and in which it sought to set-off against the payment claims brought by Façade.

The dispute

The key issue raised in the proceedings was whether parts of the BCISP Act are invalid to the extent that they are inconsistent with the operation of set-off provisions which apply in the event of insolvency under the Corporations Act. Specifically, Justice Vickery was asked to consider whether the provisions in the BCISP Act that prevent respondents from bringing a defence or counter claim are inconsistent with s553C of the Corporations Act, which allows set-off of claims against an insolvent company. In resolving the matter, Justice Vickery relied on s109 of the Australian Constitution, which gives primacy to Commonwealth legislation in the event of an inconsistency.

Justice Vickery also considered whether Multiplex's response to Façade's second payment claim satisfied the requirements of a Payment Schedule under s15 of the BCISP Act and confirmed the relevant time at which knowledge of insolvency is assessed under s553C(2) of the Corporations Act.

The decision

Is s16(4)(b) of the BCISP Act inconsistent with the Corporations Act in the context of an insolvent claimant?

Multiplex argued that Part 3 of the BCISP Act (including s16) does not apply to companies that are in liquidation because the provisions of s553C of the Corporations Act are inconsistent with those in the BCISP Act and, further, that s553C provides an exhaustive regime that covers the field in circumstances when the allegedly inconsistent provisions apply. As a result, Multiplex argued that s16 of the BCISP Act is therefore invalid to the extent of any such inconsistency under s109 of the Constitution.

Section 16(4) of the BCISP Act provides:

Consequences of not paying claimant where no payment schedule
…
(4) If the claimant commences proceedings under subsection (2)(a)(i) to recover the unpaid portion
of the claimed amount from the respondent as a debt—

(a) judgment in favour of the claimant is not to be given unless the court is satisfied—

(i) of the existence of the circumstances referred to in subsection (1) [that the respondent has become liable to pay the claimed amount due to a failure provide a payment schedule and fails to pay any part of the payment claim]; and
(ii) that the claimed amount does not include any excluded amount; and

(b) the respondent is not, in those proceedings, entitled—

(i) to bring any cross-claim against the claimant; or
(ii) to raise any defence in relation to matters arising under the construction contract.

Section 553C of the Corporations Act provides:

Insolvent companies--mutual credit and set-off

(1) Subject to subsection (2), where there have been mutual credits, mutual debts or other mutual dealings between an insolvent company that is being wound up and a person who wants to have a debt or claim admitted against the company:

(a) an account is to be taken of what is due from the one party to the other in respect of those mutual dealings; and
(b) the sum due from the one party is to be set off against any sum due from the other party; and
(c) only the balance of the account is admissible to proof against the company, or is payable to the company, as the case may be.

(2) A person is not entitled under this section to claim the benefit of a setoff if, at the time of giving credit to the company, or at the time of receiving credit from the company, the person had notice of the fact that the company was insolvent.

Justice Vickery observed that High Court authority interpreting s86 of the Bankruptcy Act 1996 (Cth), in terms very similar to s553C, required that provisions such as s553C of the Corporations Act should be given the widest possible scope.¹

The alleged inconsistency

Justice Vickery observed that the prohibition against raising a cross-claim in s16(4) of the BCISP Act potentially conflicts with the express right of set-off enshrined in s553C of the Corporations Act.

His Honour accepted that Multiplex's counter-claim for amounts to be set-off was likely to substantially exceed Façade's claim under the BCISP Act and held that:

• s16(4)(b) of the BCISP Act was directly inconsistent with s553C of the Corporations Act; and
• s553C of the Corporations Act was an exhaustive regime that covered the field in this area.

It followed that the BCISP Act, as applied to the facts in this case, would alter, impair or detract from the operation of the Corporations Act and must therefore yield.

The potential conflict between the provisions of the Corporations Act and security of payments legislation was also considered in Brodyn Pty Ltd & Dasein Constructions Pty Ltd [2004] NSWSC 1230. However in that case, Chief Justice Young resolved the inconsistency by reading the State Act down, so that the only operative legislation in the circumstances was the Corporations Act.

It remains to be seen whether this kind of defence will be applied in relation to security of payments disputes in other states and territories. Before Facade, disputes involving inconsistency between the prohibition on respondents bringing cross-claims in security of payments legislation and the Corporations Act were typically dealt with in the same way as Brodyn.²

Relevant time for assessing knowledge of insolvency under s553C

Façade argued that Multiplex had knowledge of its insolvency in February 2012 and, under s553C(2) of the Corporations Act, Multiplex should not have the benefit of the operation of s553C(1). Justice Vickery rejected Façade's contention that the relevant time for assessing knowledge of insolvency was at the time when Façade's payment claims under the BCISP Act fell due. Rather, His Honour held that previous authority dictated that the relevant time was when Multiplex executed the subcontract with Façade in September 2011, under which it owed Façade obligations for progress payments.

Was Multiplex's email a valid Payment Schedule?

Justice Vickery considered whether Multiplex's email constituted a valid payment schedule. In this regard, his Honour set out the requirements for payment schedules provided for by s15 of the BCISP Act, which provides, among other things, that a payment schedule must:

• indicate the amount of the payment (if any) that the respondent proposes to make; and
• be in the relevant prescribed form (if any).

In the absence of a prescribed form, and in reliance upon a number of earlier Victorian decisions, Justice Vickery provided further guidance on compliance, including that:

• the question of whether a document constitutes a payment schedule should not be approached in an overly technical manner; and
• given the emphasis on the speed and informality in the BCISP Act, courts have recognised that payment claims may be prepared quickly and in an abbreviated form, but must nevertheless contain sufficient precision and particularity to allow the parties to identify the real issues in dispute.

Multiplex's response argued that the payment claim was invalid due to apparent inaccuracies and uncertainties, and that once these were remedied, Multiplex would issue Façade with a payment schedule. Justice Vickery construed this as evidencing a Multiplex intent to pay nothing and held that this met the requirements of the BCISP Act.

Section 15(3) of the BCISP Act requires that the respondent must provide reasons for why the proposed amount is less than that claimed. Addressing this, Justice Vickery held that Multiplex's assertion that Façade's payment claim was invalid was sufficient to meet this requirement. This approach reinforces the principle that payment schedules should not be approached in an overly technical manner. Ultimately, His Honour held that Multiplex's Aconex communication constituted a valid payment schedule under the BCISP Act.

It follows that a bare rejection of a payment claim, so long as it is supported by a reason, will suffice as a payment schedule in Victoria.

Practical implications

• Where a principal or head contractor receives a payment claim from a contractor or sub-contractor that subsequently becomes insolvent, the principal or head contractor should consider whether there are any sums that can be set off against the payment claim. If so, the set-off provisions for insolvent companies in the Corporations Act will prevail over security of payments legislation.
• When considering raising a set-off claim in similar circumstances to this case, it is necessary to marshal the relevant evidence in support of the amount to be set-off. Here, evidence of Multiplex's set-off claim was accepted on the basis of detailed affidavit evidence.
• When responding to a payment claim, while it is advisable to have consideration to the requirements set out in the BCISP Act, this decision suggests that Victorian courts will not strictly enforce the requirements for payment schedules and will typically find these to be valid.