The recent decision of the Full Court of the New South Wales Court of Appeal in Seymour Whyte Constructions Pty Ltd v Ostwald Bros Pty Ltd (In liquidation) [2019] NSWCA 11 considered whether an insolvent contractor can seek the benefit of security of payment legislation.

Last year we provided an update regarding the first instance decision of Stevenson J in the Supreme Court of New South Wales, where his Honour held that a company in liquidation remains a ‘claimant’ under the Building and Construction Industry Security of Payment Act 1999 (NSW) (the NSW SOP Act). A copy of that update is available here.

Seymour Whyte Constructions Pty Ltd sought leave to appeal against Stevenson J’s decision on several grounds. These included (amongst others) that the trial judge erred in failing to hold that the payment provisions of the NSW SOP Act are unavailable to a company in liquidation.

On Appeal, the Court of Appeal held that:

•   there is nothing in the language of section 8(1) of the NSW SOP Act to support the implication that a party is not entitled to a progress payment unless it ‘continues to carry out’ construction work;

•   the circumstances in which an insolvent company may be placed in liquidation will vary greatly, and it is entirely possible for a construction company in liquidation to have the same cash  flow requirements as a company “teetering on the edge of insolvency”; and

•   there are other procedural or legislative mechanisms available to “eliminate or at least minimise the risk of injustice” to a party seeking to enforce rights (such as a cross-claim) against a claimant in liquidation.

Accordingly, the Court of Appeal determined that the NSW SOP Act is capable of operating for the benefit of an insolvent builder or subcontractor.

The Court of Appeal also recognised the divergence in position between New South Wales and Victoria. On this point, the Court agreed with Stevenson J that the Victorian Court of Appeal decision in Faade Treatment Engineering Pty Ltd (in liq) v Brookfield Multiplex Constructions Pty Ltd [2016] VSCA 247 was plainly wrong and should not be followed.

Until we receive further clarification from the courts, parties to construction contracts should be aware that insolvency may not be an effective bar to prevent contractors from seeking the benefits of security of payment legislation.

The effect of this decision (at least in New South Wales) will be impacted by the implementation of amendments to the NSW SOP Act contained in the Building and Construction Industry Security of Payment Amendment Act 2018 (NSW) (Amendment Act), which includes a prohibition on corporations in liquidation taking any steps under the NSW SOP Act. The Amendment Act bill passed both Houses of Parliament in November 2018, but the government is yet to confirm when such amendments will take effect.

The full decision can be found here.