March 2, 2014

Construction Alert: Corporations Act v Security of Payment Legislation

Following on from an article in our previous newsletter relating to changes to the NSW security of payment legislation, there has been further court action as part of the Modcol administration process.


The decision by the Supreme Court of New South Wales in regard to the suspension of proceedings against a contractor in administration (Modcol Pty Ltd v National Buildplan Group Pty Ltd) under the Construction Industry Security of Payment Act 1999 (NSW), identifies that time is of the essence and creditors should move to ensure that their actions are completed prior to the administration of the debtor.

Court Decision

The Court refused the application on the basis that granting leave may place Modcol in the position of a secured creditor.

The role of the administrator or liquidator is to ensure that secured and priority creditors, such as banks and employees, are paid first.  To allow a subcontractor such as Modcol to be paid before secured or preferred creditors would be considered an unfair outcome as part of the  administration process.

This decision highlights that once a company becomes insolvent, a party who has submitted a payment claim will be considered as an unsecured creditor, and cannot improve its position by relying on the SOPA legislation.

The Court also noted that the first meeting of creditors had not taken place, and it was premature to take any action that may adversely affect Buildplan’s chances of continuing its business.

Case Facts

National Buildplan Group Pty Ltd (Buildplan) was engaged by Health Infrastructure (Head Contractor) in respect of works at the Dubbo Base Hospital.  In turn, Buildplan engaged subcontractor Modcol Pty Limited (Modcol) to carry out the works.

On 6 March 2013, Modcol served a payment claim on Buildplan under the Building and Construction Industry Security of Payment Act 1999 (NSW).

On 22 March 2013, Buildplan served a payment schedule. The payment schedule was deemed out of time (being more than 10 business days allowed under the Act).  The late response combined with the subsequent failure to pay the amount claimed on the due date for payment entitled Modcol to either:

  • Obtain a judgment against the Buildplan for the full amount of the payment claim (s15(2)(a)(i) of the SOP Act); or
  • Obtain an adjudication determination against Buildplan and have this registered as a judgment of the court (section 15(2)(a)(ii) of the SOP Act).

Modcol elected to commence proceedings against Buildplan however, two days before proceedings commenced, administrators were appointed to Buildplan.

Modcol then sought leave of the Court in order to commence proceedings pursuant to Section 440D of the Corporations Act 2001 in respect of the amount claimed under the SOP Act.

Advice for contractors

This case confirms that where there is an inconsistency between the SOP Act and the Corporations Act, the latter will prevail.

Should a principal or head contractor fail to make payment by the due date, a contractor should immediately suspend all works to limit further losses.

In order to protect your business from possible administration or insolvency of a head contractor or principal contractor, there are some steps that contractors undertaking construction work should undertake:

  • Submit regular invoices in relation to work completed to minimise the amount owing by the contractor
  • Obtain protection by way of a director’s guarantee, bank guarantee or charge where practical
  • Obtain debt insurance
  • Seek advice in relation to signs of insolvency of the principal contractor.

If you would like further information or advice on how the Corporations Act or Security of Payment Legislation will affect your business, please contact one of our insolvency experts on 1800 246 801.

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