By Stuart Robertson
Partner, Kensington Swan Lawyers
A recent decision delivered in the Court of Appeal, Laywood & Rees v Holmes Construction Wellington Limited, is arguably the most important decision under the Construction Contracts Act 2002 (CCA) to date. It deals with various aspects of a contractor’s right to enforce an adjudication determination. More importantly, it deals with the ability to seek recovery against individuals and companies in the current recession. This article deals with one aspect of that decision, the use of statutory demands.
Volcanic Investments Limited v Dempsey & Wood Civil Contractors Limited was decided in 2005. The High Court held that a statutory demand under the Companies Act 1993 was a “proceeding for recovery of a debt” under the CCA. As such, the debtor company could not raise a counterclaim, cross-demand or set-off unless it already had judgment for that sum, or the contractor agreed that one existed. The decision in Volcanic was a refreshing reality check in regards to the use of statutory demands.
While statutory demands, and bankruptcy notices for individuals, are the first step in assessing the solvency of a company (or individual), the reality is statutory demands are used overwhelming as a means of debt recovery. It is a simple one-page document that any creditor can produce, so long as the debt is actually due and there is not a substantial dispute that the debt is owed. The document is then served on the debtor company.
In 2007 Associate Judge Doogue, in Silverpoint International Limited & Ors v Wedding Earthmovers Limited, squarely challenged the decision in Volcanic, holding that a statutory demand was of itself not a ‘proceeding’ for the recovery of a debt. While in some respects technically correct (the statutory demand is not a court proceeding), the effect of Silverpoint was to cast into doubt the use of statutory demands. With the well known awards of costs against creditors for wrongly issuing statutory demands, there was a noticeable drop off in the use of statutory demand on CCA debts.
The Court of Appeal in Laywood & Rees has come out squarely in favour of the use of statutory demands (and bankruptcy notices) as an enforcement mechanism for the recovery of CCA debts. To take any other view would undermine the enforcement procedures in the CCA and parties to construction contracts could simply refuse to pay any amount ordered by an adjudicator. This, the Court of Appeal rightly noted, would take us back to the dark days prior to the CCA.
The Court of Appeal also noted this may create hardship for debtors in that they will have to ‘pay now and argue later’. They noted that protection still exists for debtors because the statutory demand proceeding merely founds the basis for the bringing of liquidation proceedings. Either at that point or subsequently on the appointment of the liquidator, any counterclaims, set-offs or cross-demands could be dealt with (a similar second stage and ability to defend applies in bankruptcy proceedings).
This does raise two further matters. The first, if you are a principal or a head contractor (dealing with subcontractors) you need to be vigilant in respect of issuing payment schedules and being able to substantiate the reasons for any reduction in the claimed amount. Second, while the Court of Appeal’s decision has provided a significant improvement in the ability of contractors to enforce the CCA debts, the debtor can still defend the liquidation proceedings and bankruptcy adjudication proceedings.
Contractor Vol.33 No.3 April 2009
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