Australian court: NSW security of payment adjudication determination ‘precondition’ to legally enforceable debt

The case, in the matter of Nicolas Criniti Pty Ltd (in Liquidation), serves as a stark reminder for contractors and subcontractors of the difficulties associated with recovering amounts due under a construction contract where the contractual counterparty has entered administration.

It also highlights the usefulness to contractors of performing the relevant searches in relation to a counterparty’s solvency and ability to meet any adjudication determination. Where there is doubt as to the counterparty’s ability to avoid administration, a contractor could be better placed lodging a proof of debt based on its rights under the construction contract.  Whilst enforcing a proof of debt based on an adjudication determination may be preferable, pursuing adjudication under the SOP Act may just be throwing good money after bad if the respondent enters administration before the adjudicator releases their determination.

The case also clarifies:

• Debts owing by a company in administration must have accrued before the date on which administrators were appointed to be valid for the purpose of the Corporations Act’s proof of debt regime.
• Under the SOP Act, an enforceable statutory debt does not arise until the adjudicator makes a determination. The serving of a payment claim and payment schedule and the filing of an adjudication application are not in themselves sufficient to create a statutory debt.
• A party’s rights under a construction contract are separate and distinct from those afforded to a claimant under the SOP Act. Where an adjudication determination has not been made in respect of a payment claim, the party may be better placed to lodge a proof debt based on its entitlement under the relevant construction contract.

The case

In May 2017, Nicolas Criniti Pty Ltd (NC) engaged Zadro Constructions Pty Ltd (Zadro) to construct a 27-unit residential block in Sydney. Zadro issued NC a payment claim for over AU$1 million under the SOP Act nearly two and half years later. NC issued a nil payment schedule in response and Zadro subsequently filed an adjudication application.

NC went into voluntary administration before issuing its adjudication response. The adjudicator then issued a determination in favour of Zadro and a resolution to wind up NC was passed by its creditors shortly after.

Zadro then submitted a proof of debt for the adjudicated amount as part of the winding-up process. The liquidator disallowed the proof of debt on the basis that Zadro had not provided sufficient documentation to establish that as at the date of liquidation, there was a valid “statutory debt” against NC.

Zadro then commenced proceedings in the NSW Supreme Court seeking to overturn the liquidator’s decision.

The ultimate question before the court was: had the circumstances causing the debt or proof of claim arisen before NC entered administration?

Zadro relied on section 8 of the SOP Act which provides that “a person who, under a construction contract, has undertaken to carry out construction work or to supply related goods and services is entitled to receive a progress payment”. Zadro also argued that its payment claim, its adjudication application, and the appointment of the adjudicator, all of which occurred before NC entered administration, were additional circumstances that gave rise to the statutory debt.

The liquidator argued that Zadro had no statutory debt as at the appointment of the administrators and that a debt could only accrue under the SOP Act following an adjudication determination.

The Court rejected Zadro’s position and dismissed the appeal. Mr. Justice Hammerschlag noted the service of a payment claim and a payment schedule and the making of an adjudication application are pre-conditions to the making of an adjudication determination but are not circumstances which give rise to a statutory debt. Rather, it is the adjudication determination itself that is the source of the statutory debt.

Mr. Justice Hammerschlag also noted that Zadro’s rights under the construction contract were separate and distinct from its statutory entitlements under the SOP Act, and that those claims were covered by section 553(1) of the Corporations Act and there was nothing preventing Zadro from proving those claims in the liquidation process.

Co-written by Jake Lengui of Pinsent Masons.