In brief - Subcontractor with payment claim against insolvent builder cannot jump the queue
Creditor subcontractors should not be able to use the Contractors Debts Act to leapfrog other creditors when the builder who owes them money is insolvent.
Subcontractor seeks leave to proceed with claim against builder in administration
On 12 April 2013, Justice McDougall in the NSW Supreme Court gave judgment in Modcol v National Buildplan Group  NSWSC 380. The judgment has significance for both insolvency practitioners and sub-contractors who may be owed money by contractors who enter into an insolvency administration.
The Court considered an application for leave to proceed against a company, National Buildplan Group Pty Limited, brought by a sub-contractor Modcol Pty Limited (Modcol). According to section 440D of the Corporations Act, once a company is in administration, court proceedings cannot be commenced without the administrator's consent or leave of the Court.
Subcontractors should not be able to obtain priority payments from insolvent builders
The effect of the judgment is that creditor subcontractors with payment claims against an insolvent builder under the Building and Construction Industry Security of Payment Act 1999 should not be able to obtain what is effectively a priority payment in the builder's administration by using section 7 of the Contractors Debts Act 1997 (NSW).
Subcontractor attempts to use Security of Payment Act and Contractors Debts Act
The facts of this case may be more readily understood through a diagram of the relevant parties:
Modcol's strategy for obtaining access to these funds was to bring proceedings against Buildplan under the Security of Payment Act and then use the judgment arising out of those proceedings to be paid any money owing by Health Infrastructure to Buildplan in accordance with the Contractors Debts Act.
However, as Buildplan was in voluntary administration, Modcol was subject to the moratorium on bringing proceedings against Buildplan and thus required leave from the Court in order to do so, pursuant to section 440D of the Corporations Act. This was the basis of the application in Modcol v National Buildplan Group.
Subcontractor strategy ignores purpose of Part 5.3A of Corporations Act
His Honour made clear that when exercising the discretion under section 440D, proper weight should be given to the objects of Part 5.3A of the Corporations Act governing voluntary administration, which are primarily to maximise the chances of the company continuing in business, or alternatively, to seek to obtain a better return for creditors than would result from an immediate winding-up.
His Honour observed that if he granted leave and Modcol was successful in its strategy, Modcol would effectively have been given a priority over amounts owing by Health Infrastructure to Buildplan, as those amounts would have otherwise become part of the funds of Buildplan's administration.
His Honour explained that by allowing this course, he would be subverting the purposes on which Part 5.3 operates (as set out above) because:
- in order to maximise the chances of the company continuing in business, Buildplan would need as much cash as it could get to fund the administration, any deed of company arrangement and the subsequent continuation of the business; and
- if there was a winding-up, a payment that advantages one unsecured creditor over the others would not conform with the insolvency provisions of the Corporations Act.
His Honour's view was that these considerations were significant enough to outweigh the object of the Security of Payment Act: namely, to allow persons in Modcol's position to obtain prompt payment of progress claims for construction work and to provide a mechanism for the enforcement of that right.
Principal may have already paid all sums due to builder
It should be noted that his Honour also took into account in his decision evidence from a director at the administrators' firm that suggested that Health Infrastructure may have already paid all sums owing to Buildplan.
If this was the case, there would of course have been no point in Modcol obtaining a judgment against Buildplan. This may be a distinguishing point that will allow sub-contractors in the future to seek to distinguish this judgment.
Legislation protecting subcontractors does not govern companies in administration
While the Security of Payment Act and Contractors Debts Act (and the applicable legislation in other states) are clearly designed to protect subcontractors such as Modcol from situations where their contractor does not pay them their debts, Justice McDougall's judgment suggests that this legislation should not govern a company in administration. Instead Part 5.3A of the Corporations Act should prevail.
Indeed, from a broader perspective, it would appear that any discretion the Court has in relation to administration should be exercised in furtherance of the objects of Part 5.3A - that is, firstly to keep the business alive, and secondly to provide a better return to creditors than they would obtain in a liquidation.
Greater difficulty for contractors to sidestep normal priorities in administration
Ultimately the question of whether a court grants leave under section 440D remains discretionary. An affected party needs to consider its own circumstances carefully.
The effect of this judgment, though, is to make it more difficult for subcontractors to use the security of payment legislative scheme to step outside the normal priorities in an administration.
Subcontractors should enforce progress claims as judgments promptly
Finally, as a practical matter, subcontractors should be looking to enforce their progress claims as judgments and availing themselves of remedies such as that in the Contractors Debts Act as soon as possible, as it is clear their rights will diminish if the debtor enters administration.
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