Subbies defeat preference claim for payments from head contractor

The Supreme Court of New South Wales has recently dismissed unfair preference claims brought by liquidators against six subcontractors in In the matter of Evolvebuilt Pty Limited [2017] NSWSC 901.

The decision clarifies the circumstances in which a liquidator can pursue payments by third parties as unfair preference payments, often relying upon the decisions of Emanuel (No 14) Pty Ltd, Re; Macks v Blacklaw & Shadforth Pty Ltd (1997) 147 ALR 281; 24 ACSR 292 and Commissioner of Taxation v Kassem and Secatore (2012) 205 FCR 156; [2012] FCAFC 124.

Relevantly, the Court has considered that the words "from the company" in section 588FA Corporations Act 2001 (Cth) require that the insolvent company must have directed that the payments occur, and the company must have had some form of entitlement to the payments.

It is common for construction contracts to contain clauses to the effect that if the contractor has not paid its subcontractors that the principal can deduct monies due to the contractor and pay the subcontractor direct.  Such clauses are often invoked when the contractor is insolvent, and in circumstances where the principal disputes liability to pay the subcontractor.

Relevantly, in that case:

1. Evolvebuilt Pty Ltd (Company) had entered into a construction contract with Built NSW Pty Ltd (Built), and the contract provided such clauses (see paragraph [4]).
2. The Company's subcontractors had ceased work by reason of non payment of their invoices on 12 March 2013.
3. The Company requested that Built make payment directly to its subcontractors on 12 March 2013.
4. The Company was insolvent on and from 14 March 2013.
5. Built terminated its contract with the Company on 14 March 2013.
6. From about 15 March 2013 to early April 2013 Built attended to making payments to the Company's subcontractors direct.
7. On 19 September 2013 the Company entered voluntary administration, and subsequently liquidation.
8. The liquidator sought to void the payments made by Built from the subcontractors as unfair preferences, reliant upon authorities like Emanuel (No 14) and Kassem.

At paragraphs [18] to [54] Justice Brereton considered the phrase "from the company" in section 588FA Corporations Act 2001, and various authorities involving the payment of debts by third parties.

At paragraph [35] His Honour commented that the consideration between the debtor company and the third party for making the payment is important to determining whether the payment can be said to have been made by the company.

At paragraph [50] His Honour held that:

1. there was no evidence that there were any monies owing by Built to the Company out of which the payments could have been directed, and that a payment claim by the Company had been assessed by Built at nil; and
2. the fact that the payments made had the effect of diminishing the Company's claim against Built did not make the payments preferential as the Company's rights under the contract with Built depended on the assessment of progress of the works, and not on the claims made on the Company by its subcontractors.

Subcontractors suspecting that their debtor is insolvent should carefully consider their position.  If possible, obtaining payment directly from the principal may defeat potential preference claims later.