Much more is at stake in enabling the effective operation of security of payment laws in the building and construction industry than just preventing contractors becoming insolvent. Employees, taxation authorities, suppliers and lenders – all rely on receiving their due payments from contractors, so the flow-on effect of building industry insolvencies is far reaching.
“More generally, the economy is adversely affected by [building subcontractor] insolvency,” say Professor Helen Anderson and Dr Matthew Bell in their article, “Timing is Everything: Security of Payment, Set-off and (In)solvency”, in the Building and Construction Law Journal (BCL), Vol 35 No 6.
In these COVID-19 times the prevention of insolvencies and their consequences is more urgent than ever, especially given anticipation of a possible upsurge in insolvencies in coming months should temporary legal measures effectively postponing business bankruptcies and insolvencies be wound back.
Anderson and Bell consider the interplay of competing imperatives in the law: ensuring prompt payment for those who have done building work via claims made under security of payment legislation, versus maintaining the right to set-off for respondents in such cases when they owe debts to an insolvent claimant company. The issue is examined through the lens of security of payment claimants who are in or near liquidation being denied timely payment of what they are owed, by courts “vigorously” defending “set-offs in order to avoid causing injustice”.
Citing “deeply embedded and highly complex commercial dynamics at play within the industry”, Anderson and Bell suggest the challenge for legislators is “to strike a proper balance between freedom to contract and protection of those who are vulnerable to abuse within … contractual chains”.
The article explores the issue of the competing imperatives through examining: the diverging approach of superior courts in Australia’s two biggest States on whether insolvent claimants can use security of payment processes (eg the Victorian Court of Appeal answered no in Façade Treatment Engineering Pty Ltd (in liq) v Brookfield Multiplex Constructions Pty Ltd (2016) 313 FLR 163; (2017) 33 BCL 127;  VSCA 247); the constitutional issues arising from the entitlement to set-off contained in s 553C of the Corporations Act 2001 (Cth), as against State and Territory security of payment legislation; possible legislative reform in the area, including harmonised national laws; and, the relevant competing policy reasons.
It is “a fraught issue”, say Anderson and Bell.
Questions about the fundamental role of the legal system in a free market economy are also begged by the security of payment–set-off dichotomy and the divergent policy considerations.
The authors argue that allowing the right to set-off to trump the security of payment objective, exacerbates the risk of insolvencies by providing “a significant perverse incentive on respondents to delay payment on the possibility of the claimant’s collapse”. The rationale favouring prioritising set-offs, namely that companies making security of payment claims may enter liquidation, becomes self-fulfilling – and cumulative in effect. And it imposes burdens on others, including the state. For example, the Federal Government under the Fair Entitlements Guarantee Act 2012 (Cth) is exposed to the loss suffered by employees in unmet entitlements when a company becomes insolvent, while unpaid superannuation can result in additional reliance on the aged pension.
Insolvencies in the building and construction industry are a huge problem, ranking high in statistics for external administration lodgements, deficiency of assets to pay creditors, and in the amount owing in unpaid taxes and charges exceeding $1 million, note Anderson and Bell.
The authors come down on the side of allowing claimants who are in liquidation to enforce their claims under security of payment laws. They stress that policy will not address all the ills of non-payment in the construction industry –– but say it is an important piece of the puzzle.
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