In December 2015, the Senate Economics References Committee released its report ‘I just want to be paid’, highlighting the prevalence of corporate insolvency in the Australian construction industry.
The report found a contributing factor to the insolvency and liquidation of subcontracting companies were head contractors withholding funds for unpaid progress claims owed to subcontractors. The Victorian Supreme Court of Appeal considered the question of an insolvent company’s ability to enforce payment of progress claims last month in Façade Treating Engineering Pty Ltd (in liq) v Brookfield Multiplex Constructions Pty Ltd  VSCA 247. The Court handed down a decision narrowing the application of ‘progress payment’ provisions, affecting the ability of companies in liquidation to rely on rights to progress payments.
The applicant (Façade) and the respondent (Multiplex) were parties to a construction contract to which the Building and Construction Industry Security of Payment Act 2002 (Vic) (BCISP Act) applied.
As the subcontractor, Façade was required to execute, and complete work and Multiplex would pay Façade an agreed sum. The terms of payment required Façade to submit payment claims on the 25th day of each month, which included work completed, or to be completed, to the last day of the month. Also, these payment claims would be delivered in a specified form with supporting evidence and all information required under the clauses of the subcontract.
In August and September 2012, Façade issued payment claims to Multiplex in accordance with the agreed terms. Multiplex did not pay one and only partially paid the other, stating that Façade’s claims failed to comply with the contract’s terms and were consequently, invalid. Façade was eventually placed into liquidation.
Façade commenced proceedings to recover the outstanding amounts under section 16 of the BCISP Act, which provides for summary judgment and precludes cross-claims. Multiplex counterclaimed for completion costs (as it had taken the works out of Façade’s hands) and liquidated damages. The trial judge dismissed Façade’s claims, and Façade sought leave to appeal.
The proposed grounds of appeal raised complex questions concerning the interpretation of the BCISP Act and its interaction with the Corporations Act 2001 (Cth). Façade sought to rely on section 9 of the BCISP Act to establish an entitlement to progress payments through the submission of payment claims.
The Court of Appeal considered the construction and operation of the BCISP Act, concluding the Act indicated that the entitlement to progress payments under section 9 are only available to persons who have undertaken to, and are capable of, carrying out construction work or supplying related goods and services.
As Façade had entered liquidation before the completion of the work under the subcontract with Multiplex, the Court determined it was not capable of carrying out the work. Consequently, the Court of Appeal found that the entitlement to progress payments set out in section 9 of the BCISP Act are not available to persons in liquidation. The appeal was dismissed.
What Does This Mean?
In considering Façade’s right to rely on the progress payment provisions in the BCISP Act, the Court of Appeal construed the Act narrowly and concluded that section 9(1) of the Act does not create an entitlement to progress payments for persons who are in liquidation. This will affect companies that:
- Enter into a contract to which the BCISP Act applies;
- Face insolvency, or are placed in liquidation part-way through the completion of construction work or the supply of related goods and services; and
- Have not received payment for part-progress before liquidation.
This judgment will have a significant impact on the ability of affected companies to seek remedy for payment for works completed. Given the inability of insolvent or liquidated companies to enforce contractual progress payment claims under the BCISP Act, it is integral to understand alternative methods to enforce rights to payment. For further details, see our related article explaining the risk of insolvency and outlining methods of preventing insolvency and enforcing contractual rights after becoming insolvent.
The Australian construction industry is facing a crisis of increasing insolvency due to top-down financial failures, and a prevalent inability to pay subcontractors on time and in full. The Façade decision indicates that companies facing insolvency or placed into liquidation will be unable to seek a remedy under the BCISP Act right to progress payments.
Questions? Get in touch with our building and construction lawyers on 1300 544 755.