Security of payment: navigating state-level differences in insolvent contractors' rights

Comparing approaches to contractor insolvency and payment claims across jurisdictions 6 min read

In this Insight, we consider the differing entitlements of insolvent companies to make security of payment claims and enforce adjudication applications under each Australian jurisdiction's Security of Payment (SOP) legislation. These divergences are significant in light of a number of recent, high-profile contractor collapses in the construction industry and contracting parties should not assume that the extraordinary rights and remedies available under the relevant SOP regime are unavailable to an insolvent contractor.

Key takeaways

• The entitlement of an insolvent entity to make or enforce a payment claim varies between SOP regimes around Australia.
• In NSW and WA, companies in liquidation are barred by statute from making or enforcing payment claims. However, other kinds of insolvency events do not prevent a claimant from exercising its rights under SOP legislation in these states.
• The remaining states and territories do not expressly codify the restriction on claimants in liquidation making or enforcing payment claims under SOP legislation, and avenues exist in the respective legislative frameworks for distressed claimants, potentially even those in liquidation, to pursue debtors.

Security of payment regimes

Purpose of security of payment

In Australia, each state and territory has SOP legislation intended to promote cash flow in the contracting chain by enforcing timely payment of contractors, subcontractors, consultants and suppliers.

The various SOP regimes operate on a 'pay now, argue later' basis, enabling claimants to obtain payment on an interim basis while preserving a respondent's final rights. Despite sharing an overarching purpose, the various SOP Acts are not uniform and the rights and entitlements of contracting parties can vary under each regime.

A notable point of departure between the differing legislation is the treatment of insolvent claimants.

Claimants in liquidation

In a recent Insight, we discussed how s32B of the Building and Construction Industry Security of Payment Act 1999 (NSW) prevents companies in liquidation from either serving or taking action to enforce a payment claim made under the Act. However, in light of a recent decision of the NSW Supreme Court, even 'hopelessly insolvent' companies may still serve a payment claim or enforce an adjudication determination as s32B only acts as a bar to entities in liquidation.

Introduced in 2018, s32B is intended to give effect to the purpose of the Act by ensuring that any payment by a respondent remains 'interim'. This is because if a claimant in liquidation were able to avail itself of the SOP regime and receive payment, the monies would enter the general pool for distribution to the claimant's creditors. The respondent would not later be able to sue for recovery of all, or part, of the payment, as it is entitled to do under the 'pay now, argue later' regime.

Despite this, Western Australia is the only other jurisdiction which incorporates an express provision barring claimants in liquidation from serving or enforcing a payment claim.

The table below summarises the current position in respect of insolvent claimants' entitlement to make or progress a SOPA payment claim or adjudication application.

Next steps

Despite the variation across jurisdictions, avenues exist for distressed construction companies to pursue debtors, consistent with the purpose of SOP legislation.

While the position is relatively straightforward in NSW, Victoria and Western Australia, the lack of clear statutory or judicial authority in the remaining SOP jurisdictions means that parties operating in those jurisdictions ought to remain cognisant of the risks of a payment claim being made, and enforced, by an insolvent claimant or potentially even a claimant in liquidation.

If you would like to discuss the issues raised in this Insight, please contact us below.