Australia: Commonwealth and State legislation go head-to-head in the building and construction industry

In a recent decision of the Supreme Court of Victoria the Court held that a company in liquidation will not be successful in recovering interim entitlements owed to it under the Victorian Building and Construction Industry Security of Payment Act 2002 (SOP Act) in circumstances where the statutory set-off scheme in s553C of the Corporations Act 2001 (Cth) (Corporations Act) could operate to determine amounts owing between the parties.

The facts

In Facade Treatment Engineering Pty Ltd v Brookfield Multiplex Constructions Pty Ltd [2015] VSC 41, the plaintiff subcontractor sought judgment to recover from the defendant contractor unpaid amounts claimed in two payment claims submitted in accordance with the SOP Act.

The plaintiff relied on s16(2)(a) of the SOP Act which provides that where a payment claim has been validly submitted under the SOP Act and no payment schedule is subsequently received in reply, the plaintiff is entitled to judgment in the amount outstanding to it (under the claims) as a debt. S 16(4)(b) of the SOP Act further provides that a defendant in proceedings for recovery of that debt is not entitled to raise a defence or bring a cross-claim.

The plaintiff was placed into liquidation following submission of the two relevant payment claims, but before the commencement of proceedings for their recovery.

The defendant contractor argued that despite any interim entitlements owed to the plaintiff subcontractor under the SOP Act, it was in fact owed substantially more entitlements relating to increased costs for completion of the subcontracted works and associated damages, which would form the basis of a significant counter claim against the plaintiff subcontractor for liquidated damages.

The defendant argued that, as the plaintiff was in liquidation, the statutory set-off scheme outlined in s553C(1) of the Corporations Act was automatically enlivened to enable the defendant to pursue its counterclaim against the plaintiff with a view to set it off against any moneys owing to the plaintiff under the SOP Act.

S553C of the Corporations Act applies where there have been 'mutual credits, mutual debts or other mutual dealings between an insolvent company that is being wound up and a person who wants to have a debt or claim admitted against that company'.

The decision

In reaching its decision, the Court considered the interplay between the SOP Act and Corporations Act, having regard to s109 of the Constitution which provides that when a law of a State is inconsistent with a law of the Commonwealth, the latter shall prevail and the former shall, to the extent of the inconsistency, be invalid.

The Court determined that to the extent of any inconsistency between the operation of s553C of the Corporations Act and the SOP Act, the Commonwealth legislation prevailed.

The Court said that to simply award a monetary judgment under the SOP Act without consideration of a defence of cross-claim by way of set-off would "fly directly in the face of" s553C of the Corporations Act."

The Court concluded that where there is a set-off claim available against a company in liquidation under the Corporations Act, that company is barred from entering judgment under 16(2)(a) of the SOP Act and is further unable to rely on s16(4)(b) of the SOP Act to prevent a set off claim being made against it.

Key takeaways

The decision is consistent with the reasoning of the New South Wales Supreme Court in Brodyn Pty Ltd v Dasien Constructions Pty Ltd [2004] NSWSC 1230 but goes a step further than Justice Beech in Hammersley Iron Pty Ltd v James [2015] WASC 10. Justice Beech, in consideration of s553C of the Corporations Act and the relevant security of payment legislation in Western Australia, addressed the legislative interaction by simply staying a head contractor's claim to enforce a judgment under the relevant Western Australian act pending determination of the asserted counter claim for set-off.

Nevertheless, the outcome for an insolvent subcontractor appears to be the same: despite a claim under state security of payment legislation, there is a mechanism by which a court will allow a contractor to counter claim and set off its debts against that claim.

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