Belmadar Constructions v Environmental Solutions International [2005] VSC 24

What the court decided

Environmental Solutions International Ltd ("ESI") had contracted with Lower Murray Regional Water Authority to design, construct, maintain and operate a water treatment plant at Mildura West [1]. In July 2003 Belmadar Constructions Pty Ltd ("Belmadar") subcontracted with ESI to carry out works on the project for about $4.5M [2]. The legislation was the Building and Construction Industry Security of Payment Act 2002 [3]. On 12 November 2004 Belmadar obtained an adjudication under the Act in the sum of $1,349,648 [4]. Section 25 obliged ESI either to pay that amount or to commence proceedings disputing it and give security for it, and ESI did neither [4]. Belmadar was therefore entitled under section 27(2) to seek judgment for the amount plus interest [4].

In November 2004 ESI came under receivers and managers and appointed administrators under Part 5.3A of the Corporations Act 2001, which stayed the proceeding [6]. Master Wheeler dismissed Belmadar's application for leave to proceed under section 440D, and Belmadar appealed [6]. ESI then executed a deed of company arrangement on 6 January 2005 [7]. Clause 6 of the deed established a moratorium prohibiting creditors, including Belmadar, from prosecuting any proceeding in respect of their claims against ESI [7]. The application now fell to be decided under section 444E(3) [7].

Counsel for Belmadar said it wished only to sue ESI to judgment as a foundation for a claim under Division 4 of the Act against the Authority, and not to enforce the judgment against ESI [7]. He contended that the claim to judgment had a high prospect of success [7]. Byrne J commented in passing that this might be a little optimistic if ESI could set off cross claims, but expressed no view on that [7]. Belmadar also contended that proceeding to judgment would not disadvantage the creditors [8]. Judgment would let Belmadar serve a debt certificate on the Authority, obliging it to pay the judgment amount from money payable to ESI [8]. It appeared that ESI had an unpaid progress claim of $348,000 against the Authority, an asset available to its creditors [9].

ESI argued that allowing an unsecured creditor to recover from a debtor of the company would subvert the orderly and equitable administration of an insolvent company [10]. The fundamental principle of that administration is pro rata distribution among unsecured creditors [10]. It was further contended that other subcontractors might then rush to obtain the benefit of the Act's priority provisions, contrary to the policy of Part 5.3A [13]. Byrne J thought the prospect of anyone recovering the $348,000 very remote, but said it may not be for him to assess those commercial considerations [12].

In Re Summit Design and Construction Pty Ltd, a subcontractor sought leave to proceed against a company in provisional liquidation to take advantage of the Contractors Debts Act 1997 (NSW) [14]. Austin J refused the application as a matter of discretion [15]. Byrne J approached the present case in the same way as Austin J [17]. He distinguished Re Stockport (NQ) Pty Ltd, a Federal Court decision relied on by Belmadar, where a Queensland statutory charge arose from the statute itself and so was unaffected by a later Part 5.3A administration [16]. Under the Act, by contrast, no trust or property claim arises until the subcontractor takes certain steps [16]. Taking those steps after the administration began would "create a security which did not previously exist", advantaging Belmadar at the expense of the body of creditors [16]. His Honour said it was important that the statutory rights of all concerned, including unsecured creditors, be respected once the administration was set in train [17]. As a further consideration bearing on this question of principle, adjudication and recovery against the principal are interim procedures [18]. It would be very undesirable for such interim relief to intrude upon the administration [18]. The application therefore failed and the appeal was dismissed [19].

Responding to an observation of Austin J, his Honour said that, subject to Part 1.1A, the Corporations Act would likely prevail over an inconsistent State Act under section 109 of the Constitution [15]. He said nothing further about this because it was not argued, so the point was not decided [15].

Why it matters

A subcontractor holding an unpaid adjudication against a head contractor bound by a deed of company arrangement should not ordinarily expect leave to proceed merely to obtain judgment and pursue the principal under the Act, absent facts dictating a different approach [17]. Central to the reasoning were respect for the statutory scheme of external administration and the approach in Summit Design, supported by the timing of the recovery steps and their interim character [16], [17], [18]. The decision was made under section 444E(3) during a deed of company arrangement, so its application during an administration alone is an inference, and readers should check the current text of both Acts.

Numbers in square brackets are paragraph numbers of the judgment. This note summarises a decided case for education and is not legal advice. See how the notes are written.