“The collapse of a big contractor has a ripple effect, often ruining scores of subcontractors and suppliers. They are last in the queue as administrators, banks and employees have first call on the assets.” (AFR, 15 November 2012, p.44)

Since the New South Wales Government commissioned an independent inquiry into construction industry insolvency last year, in an attempt to assess the causes and the extent of insolvency in the building and construction industry, Supreme Court of New South Wales decisions remind subcontractors that they must act early to enforce payment claims to protect against the trend of principal contractors entering external administration.

The industry position

On 28 January 2013 a final report was published on the New South Wales Government Independent Inquiry into Construction Industry Insolvency (“the Report”).

The Inquiry came as a result of continuing high number of insolvencies in the sector and the effects that stemmed, which include, but are not limited to, dead weight loss associated with uncompleted projects and the detrimental effect on unsecured subcontractors, triggered in part by the recent demise of Reed Constructions Australia Pty. Limited, St Hilliers Constructions Pty. Limited and Southern Cross Constructions (NSW) Pty. Limited. The Inquiry, citing a report prepared by BIS Shrapnel, stated: –

“The industry recorded the highest number of insolvencies of any defined industry for the financial year 2011/12, a total of 1,113 or 24.7% of external administrations reported to ASIC…”

Current ASIC figures do not indicate this trend will subside, with 179 construction companies in August 2013 (77 of which are NSW based) entering external administration.

The Report noted certain contributors to the trend and made a list of recommendations for change, including further power being given to adjudicators under the Building and Construction Industry Security of Payment Act 1999 (NSW) (“SOPA”). However, the Report did not make any recommendations (despite certain trade organisation submissions) to reform the current position facing subcontractors under Part 5.3 of the Corporations Act 2001 (Cth.)(“the Act”); subcontractors remain unable to enforce SOPA rights and become a secured creditor in the event the principal contractor enters external administration as section 440D of the Act operates to stay all proceedings.

A practical example

Modcol Pty Ltd v National Buildplan Group Pty Ltd [2013] NSWSC 380 (“Modcol”) is a stern reminder to subcontractors of the consequence of failing to enforce their rights under SOPA early should the principal contractor enter external administration.

 Facts

1. National Buildplan Group Pty. Limited (“Buildplan”) was contracted by Health Infrastructure (“Health”) to carry out construction works for a redevelopment works at Dubbo Base Hospital;
2. Buildplan subcontracted part of the works to Modcol Pty. Limited (“Modcol”);
3. On 6 March 2013, Modcol served a payment claim under SOPA on NBP for approx. $1.37 million;
4. NBP did not serve a payment schedule on Modcol until 22 March 2013 (well outside the 10 business day requirement under SOPA) and was therefore liable for the full amount of the payment claim pursuant to section 14(4) SOPA;
5. Modcol was faced with two alternatives of recovery:-
   1. To recover the unpaid amount as a debt in court under section 15(2)(a)(1) SOPA;
   2. To make an adjudication application under section 15(2)(a)(ii).
6. Modcol took the first route and filed a summons in the Supreme Court of New South Wales seeking summary judgment for the amount of the payment claim together with interest; and
7. Two days before the summons was filed, Buildplan entered external administration.

Ruling

The court was asked to consider the following two issues: –

1. Whether leave should be granted to Modcol pursuant to section 440D of the Act to commence proceedings against Buildplan; and, if leave was granted
2. Whether the Court should issue, pursuant to section 7 of the Contractors Debts Act 1997 (NSW) (“the Debt Act”), a certificate to enable Modcol to “springboard” ahead of other creditors and enable it to access money owed by Health to Buildplan.

Mc Dougall J summarised the objectives of Part 5.3 of the Act which formed the basis of his conclusion, and accepted the view expressed by Byrne J in Belmadar Constructions Pty Ltd v Enviromental Solutions International Ltd (2005) 23 ACLC 337 at [17]:-

“It is important that once the processes for an ordinary management and winding up of the affairs of a company in financial distress are set in train that the statutory rights of and limitations upon the rights of all concerned, including unsecured creditors under the Corporations Act 2001, be respected and given effect to.”

With this is mind, and after contrasting the conflicting purposes of Part 5.3 of the Act against the Debt Act (in the case of insolvent contractors), Mc Dougall J drew on his discretion under section 440D of the Act to revoke the grant of leave to Modcol.

Implications for Subcontractors

It is imperative that subcontractors adopt a strict protocol to reduce the real risks faced by them in today’s climate. Such a protocol ought to include:-

1. Ensuring service of payment claims made under SOPA are effected and documented accurately;
2. Serving a notice of intention to suspend work where the contractor fails to pay a scheduled amount or fails to provide a schedule in accordance with SOPA;
3. Enforce rights early; seek a determination of an adjudicator (or commence proceedings) as soon as possible; and
4. Seek professional legal advice on the operation and rights arising under SOPA early.

Reform in the pipeline

On 24 October 2013, the New South Wales Government introduced the Building and Construction Industry Security of Payment Act Amendment Bill 2013. The bill is forecast to be one of a number of proposed reforms to the current legislative framework with a view of consolidating the Report’s recommendations.

However, subcontractors should remain cognisant of the fact that the proposed reforms do not afford protection to them from the operation of Part 5.3 of the Act.