Creditors to be vigilant when using the statutory demand procedure to enforce an Adjudication Certificate

Introduction

During the process of obtaining payment under the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act), a Contractor (or Subcontractor) may, after obtaining an adjudication certificate and filing the certificate in the court of competent jurisdiction, serve a statutory demand on the Principal (or Contractor) demanding payment.

In the matter of J Group Constructions Pty Ltd [2015] NSWSC 1607, and more recently In the matter of Datlas-Rahme Construction Pty Ltd [2016] NSW 1833, the Court confirmed the established legal principles between section 459H(1) of the Corporations Act 2001 (Cth) (Corporations Act) and the SOP Act after a statutory demand based on an adjudicator’s determination is served.

Legislation

Under section 459H(1) of the Corporations Act, a recipient company of a statutory demand may apply to set aside the statutory demand on two basis:

  • Section 459H(1)(a) – Existence of a genuine dispute between the creditor and recipient regarding the existence or amount of a debt to which the demand relates; and

  • Section 459H(1)(b) – Existence of an offsetting claim which the recipient has against the creditor.

Established Principles

Section 459H(1)(a) of the Corporations Act

The Court confirmed that it is not open for a Principal (or Contractor) to establish a genuine dispute in respect of the existence of the debt or the existence of an offsetting claim relating directly to the debt claimed by a Contractor (or Subcontractor) under section 459H(1)(a) of the Corporations Act as long as the judgment reflecting the adjudication under the SOP Act remained in force.

Section 459H(1)(b) of the Corporations Act

However, it is open for a Principal (or Contractor) to establish an offsetting claim under section 459H(1)(b) if it has a counterclaim, set off or cross demand that does not deny the debt, but asserts a countervailing liability against the Contractor (or Subcontractor).

If the court is satisfied that a Principal (or Contractor) has an offsetting claim, the Court is then required to calculate the “substantiated amount” of the demand by deducting any offsetting claim from the admitted amount of the debt.

Therefore, it is necessary for a Principal (or Contractor) to establish a seriously arguable case not only as to liability, but also as to quantum, in respect of its offsetting claim to enable the Court to make a reasonable assessment as to the amount thereof.

Implications

Contractors (or Subcontractors) should note that an adjudication certificate will not prevent a Principal (or Contractor) from asserting an offsetting claim under the section 459H of the Corporations Act, and they may have to accept a reduced amount if the Court determines that there is an offsetting claim under section 459H(1)(b) of the Corporations Act.

Accordingly, a Contractor needs to be vigilant when using the statutory demand procedure in enforcing an adjudication certificate against a company which may be insolvent and advice should be sought to prevent unnecessary costs for an incorrect use of the statutory demand.

For further information on anything in the above article, please contact Vick Tan or Brett Vincent on (02) 9261 5900.