Security of payment: preventing enforcement of adjudicated amounts to contractors in precarious financial positions

Stays granted even if contractors are not insolvent 6 min read

The Queensland Supreme Court has granted a stay preventing enforcement of a judgment debt obtained by a contractor in reliance upon an adjudication decision pursuant to the Building Industry Fairness (Security of Payment) Act 2017 (Qld) (BIF Act).

In this Insight, we consider Taringa Property Group Pty Ltd v Kenik Pty Ltd [2024] QSC 327 and similar cases in NSW and Victoria, with a focus on two key questions:

• can contractors in liquidation benefit from security of payment legislation?
• how do courts approach stay applications made by the principal where the contractor is solvent, but in a precarious financial position?

Key takeaways 

• Taringa Property Group is a welcome development for principals in Queensland as it lays the foundation for seeking a stay, even when a contractor is not in liquidation.
• Insolvency remains a major challenge for contractors, who may now experience more difficulties in enforcing payment of adjudicated amounts which can, in turn, exacerbate cash flow problems.
• Courts maintain a wide discretion and will consider each stay application on its own facts and circumstances—however, a major consideration is how long the stay will likely be.
• We expect to see an increase in security of payment adjudication and related court litigation as a result of the likely reforms in Victoria.

Taringa Property Group Pty Ltd v Kenik Pty Ltd [2024] QSC 327

TPG (Principal) engaged Kenik (Contractor) to design and construct a retail complex at Taringa.

The contract ended in August 2023 and the Contractor made a final payment claim in September 2023 for $9.7 million. Following the Principal issuing a payment schedule (with a scheduled amount of nil), the Contractor made an adjudication application under the BIF Act, where the adjudicator awarded the Contractor $4.2 million. The Contractor obtained judgment in respect of the adjudicated amount.

The Principal commenced two applications in the Queensland Supreme Court:

• First, seeking to have the adjudication decision declared void for jurisdictional error or, in the alternative, a stay of the judgment debt.
• Second, seeking final relief relating to the contract (specifically, that the Contractor is not entitled to retain the adjudicated amount).

The court warned that considerable caution should be given to the granting of the stay as it detracts from the primary purpose of the BIF Act in enabling a contractor to be paid.¹ Any risk of non‑recovery of payments made under the BIF Act as a consequence of the financial failure of the contractor after the receipt of the BIF payment is generally to lie with the principal.²

The court gave three examples of circumstances of when a stay might be granted:³

• where the contractor has taken steps to make the task of recovering any BIF payment more difficult for the principal by way of restructuring its financial affairs;
• where the contractor engages in tactics to delay the resolution of the substantive proceeding;⁴ or
• where the contractor is in liquidation or in some form of external administration due to liquidity issues at the time the BIF payment would otherwise be made.

Essentially, there needs to be a real risk that the Principal will suffer prejudice or damage if a stay is not granted. However, Justice Hindman rejected the proposition that the risk must reach the level of certainty before a stay might be granted—in other words, the threshold is not so high that the contractor must actually be in external administration or must be positively proved to be hopelessly or otherwise insolvent.⁵

Justice Hindman found 'undisputed' evidence of serious financial instability and that, if a stay is granted, the Contractor is most likely to financially fail.⁶ It was further observed that, even if it received the adjudicated amount, the Contractor was still likely to go into external administration as it would be insufficient to satisfy its debts.

The court concluded that if the stay was refused, there would be a very high risk that the Contractor would not be able to repay the adjudicated amount should the Principal succeed in its claim for final relief. The practical effect of refusing the stay would be to transform the Contractor’s interim entitlement under the BIF Act into a final payment, unable to be recovered by the Principal, and at odds with the intended operation of the BIF Act.

In a separate proceeding following this decision, a creditor of the Contractor successfully obtained an order that the Contractor be wound up.⁷

The decision is currently under appeal.

Discussion 

Insolvency has been a major challenge for contractors, who are experiencing obstacles at every turn—high inflation, regulatory reforms, supply-chain issues, delayed effects of the pandemic, labour shortages etc. The main purpose of the BIF Act (and equivalent acts) is to help contractors be paid for the work they do, so stays to delay payment to contractors may have significant consequences and could potentially increase insolvency rates in the industry.

New South Wales

Since 2019, NSW has had a prohibition on companies in liquidation using the security of payment process⁸—the only jurisdiction in Australia to have such an express carveout. Companies in liquidation may not serve or enforce payment claims, or make applications for adjudication of a payment claim.

Where contractors are not in liquidation, courts have been cautious in light of the policy of the statute and have undertaken a close analysis of the extent or certainty of the risk of prejudice or damage if a stay is not granted. Nevertheless, courts have been ready and willing to grant stays if the failure to do so would have the practical effect of making permanent that which, clearly enough, the legislature intended to be only interim.⁹

Recently, the NSW Supreme Court noted that, although it does make it harder to obtain a stay when the contractor is not in liquidation, it by no means follows that a stay cannot be obtained unless it is.¹⁰

The court further observed that:

'up to a point, the more financial difficulty the contractor is in, the less reason there is for granting a stay, as the more likely it will be that the grant of such a stay will result in the contractor being deprived of the cashflow which is needed to sustain its operations. It is only when insolvency becomes inevitable, or at least highly probable, that the dynamics reverse because of the possibility that an interim payment will effectively become final.'¹¹

Indeed, in another recent decision, the court considered that even a 'significant risk' was not sufficiently certain of financial difficulty such that a stay should be granted.¹² We note, however, in that case the contractor continued to trade, unlike the contractor in Taringa Property Group.

The decision in Taringa Property Group, although the first of its kind in Queensland, is consistent with the approach taken in NSW.

Victoria

Victorian principals can still run the argument that contractors in liquidation may not use the payment regime, though this is unlikely to be without serious consideration by the courts due to conflicting decisions on this issue.¹³

There is also a question of whether, in seeking a stay against a contractor who is not in liquidation, a principal is required to show that there is more than a real risk the contractor would not be able to repay the adjudicated amount in order to succeed.¹⁴

At least one decision has granted such a stay, without requiring that higher standard.¹⁵ In that case, the stay was justified—save the fact of the parlous financial circumstances of the contractor—on the basis that it would be limited in time, and therefore minimal in the prejudice it caused the contractor.¹⁶ The likely takeaway is that, where the court is able to grant the stay on conditions or for a limited time period, application of a higher standard in the form of more than a real risk may be less relevant.

On a wider note, principals in Victoria should be prepared to engage in more and broader adjudications in the near future as a result of the likely reforms to the current Victorian act. Consequently, it is expected that there will be an increase in proceedings seeking final determination of rights under contract and corresponding stay applications.

To read more about Victoria's proposed reforms, including the removal of Victoria's unique 'excluded amounts' regime, removal of the concept of 'reference dates', an introduction of a blackout period and the introduction of a new provision allowing notice-based time bars to be declared unfair, see Government support for security of payment reform in Victoria.