Modcol v National Buildplan Group

Judgment (ex tempore - revised 12 april 2013) 1HIS HONOUR: The defendant (Buildplan) was contracted to carry out work by an entity known as Health Infrastructure. The work involved redevelopment of the Dubbo Base Hospital. Buildplan subcontracted part of the works to the plaintiff (Modcol). It seems to be undisputed (and, I would add, indisputable) that the subcontract in question was a construction contract for the purposes of the Building and Construction Industry Security of Payment Act 1999 (NSW) (Security of Payment Act). 2On 6 March 2013, Modcol served a payment claim on Buildplan. The amount claimed was, rounded off, $1.37 million. The payment claim was expressed to be one made, among other things, under the Security of Payment Act. 3Buildplan did not provide a payment schedule until 22 March 2013. It stated a scheduled amount (again rounded off) of $1.038 million. That payment schedule was not provided within ten business days of service of the payment claim. Accordingly, by s 14(4) of the Security of Payment Act, Buildplan became liable to pay Modcol not just the scheduled amount (an inappropriate but sufficient expression in the circumstances) but the full amount of the payment claim. 4In those circumstances, Modcol had two alternatives. The first (s 15(2)(a)(i) of the Security of Payment Act) was to recover the unpaid amount as a debt in a court of competent jurisdiction. The second (s 15(2)(a)(ii)) was to make an adjudication application. Modcol took the former path. It commenced these proceedings by summons filed on 10 April 2013. The relief claimed was, among other things, for summary judgment for the amount of the payment claim together with interest. 5However, two days before the summons was filed, administrators were appointed to Buildplan. Recognising this, Modcol sought leave pursuant to s 440D of the Corporations Act 2001 to commence these proceedings. Buildplan was represented at the hearing of that application. I have been informed, without objection, that Stevenson J dealt with the application effectively on the basis that substantive argument on the question of leave would occur today. Thus, his Honour granted leave to commence the proceedings (because, otherwise, there would have been nothing to adjourn until today). However, his Honour did so recognising that Buildplan, or perhaps more accurately the administrators, might move today to revoke the grant of leave. Buildplan has so moved. 6In the ordinary way, a judge of first instance does not sit to hear appeals from interlocutory decisions made by other judges of first instance. Thus, in the ordinary way, if Stevenson J had made the order in question after considering the material before him and the submissions, I would not have thought it right to revoke the grant of leave unless there were some significant change in circumstances, after the date when his Honour made the order (or, perhaps, before that date but undisclosed to his Honour) which justified my taking that course. However, in circumstances where Stevenson J dealt with the matter on the practical basis that I have outlined, and acknowledged that Buildplan's opposition could be ventilated by seeking to revoke the grant of leave, I do not feel inhibited from proceeding. 7As has been made clear by the evidence and by submissions, Modcol does not want only to get judgment against Buildplan for the claimed amount. It seeks to use that judgment as a springboard to enable it to access money said to be owing by the principal, Health Infrastructure, to Buildplan in respect of the Dubbo Base Hospital project. Thus, in addition, Modcol seeks an order under s 7 of the Contractors Debts Act 1997 (NSW) that, once it has recovered judgment, it have a certificate to that effect. 8The scheme of the Contractors Debts Act is that an unpaid person, such as a subcontractor or worker who is owed money by a defaulting contractor, can seek to obtain payment of the amount owed out of money owing by the principal to the defaulting contractor under a contract in respect of the work to which the subcontract relates. That scheme is effected by the recovery of judgment and then the issue of the s 7 debt certificate. Notice of claim is given to the principal. That has effect of assigning to the unpaid person the money owed by the principal to the defaulting contractor. The principal must pay the amount owed to the unpaid person, to the extent that the funds in hand permit. 9It is worth noting that s 11(4) of the Contractors Debts Act enables the principal to rely, in defence of a claim made by an unpaid subcontractor, on any defences that it would have had (up to service of the notice of assignment) against a claim brought by the defaulting contractor for recovery of the same money. 10In Sam the Paving Man Pty Ltd v Berem Constructions Pty Ltd (in liq) [2010] NSWSC 868, White J, after setting out the scheme of the Contractors Debts Act (and I should acknowledge that I have borrowed liberally but, hitherto, in an unacknowledged way, from his Honour's description), said at [7] that: "In this way, in the case of insolvent contractors, an unpaid person within the meaning of s 5 of the [Contractors Debts] Act may obtain priority over other creditors." 11It is necessary to return to Part 5.3A of the Corporations Act, which deals with administration of a company's affairs. 12As the heading to that Part shows, the primary aim of the Part is to enable the execution of a deed of company arrangement. The objects of the part are set out in s 435A. They emphasise that the primary object is to maximise the chances of the company's continuing in business. The secondary or alternative objective is to seek to get a better return for creditors than would result from immediate winding-up. I set out s 435A: Object of Part 435A The object of this Part is to provide for the business, property and affairs of an insolvent company to be administered in a way that: (a) maximises the chances of the company, or as much as possible of its business, continuing in existence; or (b) if it is not possible for the company or its business to continue in existence - results in a better return for the company's creditors and members than would result from an immediate winding up of the company. 13There is provision for a first meeting of creditors (s 436E) and for a second meeting of creditors (s 439A). At the latter meeting, the creditors have three choices (s 439C). They may resolve that the company execute a deed of company arrangement. They may resolve that the administration should end. Or they may resolve that the company be wound up. 14Having set out those machinery matters, and having emphasised that it is the creditors who decide the future of a company, Part 5.3A continues, in Division 6, to deal with "protection of company's property during administration". There are a number of provisions which seek to do that in various ways. Section 440D is one of them. It requires written consent of the administrator, or leave of the Court (on terms, if thought desirable) for proceedings to be commenced or continued. I set out the section: Stay of proceedings 440D (1) [Proceedings stayed unless exception] During the administration of a company, a proceeding in a court against the company or in relation to any of its property cannot be begun or proceeded with, except: (a) with the administrator's written consent; or (b) with the leave of the Court and in accordance with such terms (if any) as the Court imposes. (2) [Where subs (1) not to apply] Subsection (1) does not apply to: (a) a criminal proceeding; or (b) a prescribed proceeding. 15Clearly enough, the discretion given by s 440D, to grant leave to commence or continue proceedings, is one to be exercised having regard to the objects of Part 5.3A as a whole and the importance, to the achievement of those objects, of protecting the company's property during administration. 16In some ways, the scheme for protection of the company's property during administration bears resemblances to equivalent provisions of the Corporations Act protecting the company's property whilst it is being wound up (either voluntarily or otherwise). However, as Young J observed in Foxcraft v The Ink Group Pty Ltd (1994) 15 ACSR 203 at 204, there is a significant difference between administration and liquidation. The former is directed to assisting the company, if possible, to continue to trade. Thus, the primary aim is to keep the company in business. The latter is directed to enabling the liquidator to realise the company's assets as quickly as possible for as much money as possible so that the net amount can be distributed as the Act requires. 17There has been some debate as to whether the statutory discretion given by s 440D is (as Young J suggested in Foxcroft at 205) something to be exercised with great caution, and whether good reasons are necessary before the Court should grant leave. 18Young J said in Foxcraft at 205 that applications under s 440D "will rarely be granted". His Honour referred to instances of insurance and the like but said that "outside this field it is hard to see situations where it will be proper to grant leave, though doubtless there are such situations". 19The question, of circumscription of the discretion, was considered by Hammerschlag J in Larkden Pty Ltd v Lloyd Energy Systems Pty Ltd [2011] NSWSC 1305. 20After referring to what Young J had said in Foxcroft, and to other authorities, Hammerschlag J said at [36] that one should not approach applications under s 440D "with an assumption that leave will only rarely be granted or that the court must approach this type of application with a degree of caution greater than that with which it would approach the exercise of any other discretion within a particular statutory context..." 21His Honour said that to impose some higher standard than the wording of the statute required was to place on the exercise of the discretion "an unwarranted confinement". 22It does seem to me that there is a lot to be said for the proposition that the language of s 440D speaks for itself, and that the discretion is one to be exercised, as I have said, giving proper weight not only to the particular facts in respect of which exercise is sought or resisted but, more generally, to the object of Part 5.3A and the role that Division 6 plays. 23It may be accepted that the general position is that stated: namely, that proceedings are not to be commenced or continued with, as the case may be, against a company in administration. But that general position is subject to the express statutory exceptions, of administrators' written consent or leave of the Court (on terms if appropriate). 24In the result, it is not necessary for me to express a concluded view as to whether I should prefer the approach taken by Young J (and others) or that taken by Hammerschlag J, because on either view, it seems to me, the outcome in this case is the same. 25As I have noted, White J indicated in Sam the Paving Man at [7] that the operation of the Contractors Debts Act, in the case of insolvent contractors, could (and most likely would, I think) give the unpaid person priority over other creditors. 26That does not seem to me to be consistent with the general scheme of the Corporations Act providing for the administration of companies under Part 5.3A. It is certainly not consistent with the provisions of the Corporations Act relating to the liquidation of companies. Those provisions cannot be put to one side, because one possible outcome of the administration process is, as s 439C recognises, that the company may be put into liquidation. 27Byrne J considered this question in Belmadar Constructions Pty Ltd v Environmental Solutions International Ltd [2005] VSC 24. 28That was a case where the plaintiff subcontractor had an entitlement to a judgment for a progress payment, under the Building and Construction Industry Security of Payment Act 2002 (Vic). To that extent, Belmadar was in a similar position to Modcol in this case. 29Belmadar also wished to recover a judgment so that it could seek to enforce its rights against the head contractor, under legislation which appears to have some resemblance to the Contractors Debts Act of this State. 30Byrne J took the view that the subcontractor, Belmadar, should not be given leave for that purpose. His Honour said at [17] that: "It is important that once the processes for an orderly 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." 31His Honour observed that nothing in the facts of that case required any different approach to be taken. 32In this case, if Modcol is allowed to recover judgment and the s 7 certificate which it seeks, it will be in a position to serve that certificate on Health Infrastructure and to require payment, out of any moneys held by Health Infrastructure for Buildplan under the relevant head contract, of the amount of the progress claim (to the extent that moneys in hand go so far). 33There is some evidence to suggest that there might not in fact be any money to which the obligation could attach. Mr Nicodemou, a director of the firm in which the administrators work, has said that he believes that Health Infrastructure paid the relevant progress claim (made by Buildplan) to Buildplan shortly before the administrators were appointed. There is evidence, in the form of a bank statement and an email, to suggest that such a payment was made. 34Mr Nicodemou believes, further, that the payment made would include the uncontested portion (as I have said, about $1.038 million) of Modcol's claim. 35If that belief should prove to be substantiated then the recovery of judgment and the issue and attempted enforcement of the s 7 certificate would go nowhere, because there will be no money to which the certificate could attach. 36On the other hand, if Health Infrastructure does owe some money to Buildplan in respect of the Dubbo Base Hospital project, the steps that I have outlined would have the effect, as White J said in Sam the Paving Man, of giving Modcol a priority or preference over other creditors of Buildplan. 37On the first alternative, there is simply no point in continuing with the grant of leave. On the second alternative, the effect of continuing the grant of leave would be to subvert the scheme for which Part 5.3A of the Corporations Act provides. 38What is there in the facts of this case that takes the claim by Modcol outside the ordinary situation, of a creditor of an insolvent company? Mr Kalyk of counsel, who appeared for Modcol, pointed to the fact that his client's claim was based on its rights under the Security of Payment Act. He said, correctly, that the object of that Act was to enable persons in his client's position to obtain prompt payment of progress payments for construction work and related goods and services, and to provide a mechanism for the enforcement of that right. Thus, he submitted, the policy of the Security of Payment Act provided a basis for justifying the grant of leave and, indeed, for enabling his client to pursue its rights through in full: that is to say, to recovery of judgment and the obtaining of a s 7 certificate. 39I do not think that this does provide a sufficient justification for the exercise of the s 440D discretion; and that is so even if the test is, as Hammerschlag J suggested, not to be fenced around by requirements of the kind to which Young J had referred in Foxcroft. 40The purpose of administration is to maximise, in this case, the chances that Buildplan will continue to trade. If that cannot happen then the secondary purpose is to enable an orderly winding-up of its affairs, and to maximise the return for creditors and others. 41On the first basis, the effect of intercepting what might be a substantial amount owed by Health Infrastructure to Buildplan would in my view be subversive of the primary object of Part 5.3A. I say that because it seems to me that if the chances of the company's continuing in business are to be maximised, it will need as much cash as it can get its hands on for the purpose of funding both the administration, any deed of company arrangement and the subsequent continuation of business. 42If, however, there is no arrangement and the company does not continue in business, the likely result is winding-up. Clearly, a payment which would have the effect of giving a significant advantage to one unsecured creditor over others would not be consistent with the scheme of the Act for winding-up on insolvency. 43Thus, whichever way one approaches the s 440D discretion, the answer seems to me to be the same: to exercise the discretion in favour of Modcol, on the facts as they are known, would be subversive of the objects of Part 5.3A. Whatever may be said about the limits or otherwise on the discretion, an exercise which had the effect of subverting that Part of the Corporations Act in which the section conferring the discretion appears does not appear to me to involve an appropriate and principled approach to the power that is given. 44The other matter that has troubled me considerably is that it is very early days in the administration. The first meeting has not yet been held; the Court was informed that it is intended to be held on Thursday next, 19 April. 45It may be that facts emerge between now and then which might justify the grant of leave. Equally, it may be, facts may emerge between now and then which would provide an even firmer basis for revoking the grant of leave. 46I was at first attracted to the proposition that I should adjourn the application for a week, both to enable the administrators to try to see if Mr Nicodemou's belief can be substantiated and to enable the first meeting to proceed, so that the wishes of creditors might be known. On reflection, however, that did not seem to me to be an appropriate course to take. 47One of the things that the Court must be careful to do is to exercise the discretion (if it is to be exercised) in a way that does not distract administrators from their statutory duties, and require them to divert the company's funds (such as they are) to payment of legal costs. 48It seems to me, on reflection, that if I were to stand the matter over without deciding it, that particular aspect would be subverted. 49For those reasons, I conclude that the grant of leave under s 440D of the Corporations Act 2001, to commence these proceedings, be revoked. I will hear counsel on what, if any, other orders should be made. [Counsel addressed.] 50The defendant asks for its costs to date. That is not opposed except on the basis that, if the grant of leave is revoked with effect from 10 April, then there is no proceeding in respect of which costs can be granted. It seems to me that there are two answers to that. The first is that the Court, in any event, has power to control its own processes and that making costs in respect of proceedings that (retrospectively) turn out to have been improperly commenced is a sufficient basis. The other is that the grant of leave can be revoked with effect from today's date. 51There is also a question as to what should happen to the proceedings. There is no express statutory stay (that is to say, no "stay" so called), notwithstanding the heading of s 440B ("Stay of proceedings"). The section has the same effect as a stay, by forbidding the commencement or continuation, as the case may be, of proceedings. 52It would be possible to dismiss the proceedings, but that may have the unfortunate consequence of giving rise to estoppels in the event that, in circumstances that I cannot presently foresee, Modcol becomes in a position to prosecute its claim. 53Mr White of counsel, for Buildplan, said that he might be able to get instructions not to raise an estoppel defence in that circumstance. Whilst I appreciate the offer, I would prefer to deal with the matter now. 54It, therefore, seems to me that the appropriate course is to make the following further orders: