Australian court dismisses head contractor's ‘Grosvenor stay’ application for no prejudice

A common fear of head contractors, particularly in the current difficult contracting market, is being on the wrong side of an adjudicator’s decision obtained by a financially precarious subcontractor. The fear is that the adjudicated amount will be handed over to the impecunious subcontractor claimant, and that money will find its way into the general pool for distribution among creditors. In that scenario, the head contractor loses its right to contest the subcontractor’s entitlement to payment under the contract on a final basis, whether in court or arbitration – or rather, if it did so successfully it would at best receive cents in the dollar as an unsecured creditor.

The courts have, however, come the aid of head contractors in this scenario.  If the claimant is impecunious and the head contractor has an arguable claim that it is not required to pay the claim adjudicated under the contract, then the courts will often order what’s become known as a ‘Grosvenor stay’, after the relevant case. That is, even though the adjudicator’s decision has been validly obtained, the impecunious claimant will not be permitted to enforce it because, if it did, the payment would be in truth a final payment - not an interim one as envisaged by the security of payment legislation - given the operation of the insolvency process.

In the case of Piety Constructions, an administrator for an insolvent subcontractor ran an effective defence to a claim for a ’Grosvenor stay’. The subcontractor proffered an undertaking to retain the adjudicated amount and interest earned on that amount in trust outside the insolvency process to ensure that, if the respondent was in fact not required under the contract to pay the adjudicated amount, it could have that money returned. Importantly, the administrator undertook to be personally liable for any adverse costs order. Therefore, as there was no prejudice to the head contractor respondent, the court refused its application and instead ordered the adjudicated amount to be paid into the subcontractor’s solicitors’ trust account.

The case

In 2020 Piety, the head contractor, and a subcontractor, Megacrane, signed a subcontract on a project. Two years later, Megacrane appointed an administrator, who later sent a letter to Piety stating he was assessing the viability of engaging a third party to provide the labour services required for Megacrane to perform its obligations under the contract and, if there was no such arrangement his only option was to stop supplying labour services under the contract. Piety issued a notice to Megacrane on the second day and took the remaining work from Megacrane.

Two months later, Megacrane’s administrator sent Piety a payment claim. Then the administrator sent the creditors a report stating that Megacrane was insolvent. The administrator applied for and was granted an extension of time to hold the second meeting of creditors of the company.

One month later Megacrane obtained an adjudicator’s decision in its favour and an adjudication certificate. On the same day, Megacrane registered a judgment debt in the District Court. Piety later started proceedings in the court in New South Wales, paid the judgment debt into court and obtained an interim stay that Megacrane was restrained from enforcing the judgment debt and taking any further action to enforce the adjudication determination.

In March, Megacrane made another application to the Federal Court seeking to extend the deadline to hold the second creditors’ meeting and was granted up to no later than 30 June 2023.

In May, Megacrane's lawyer gave notice that the administrators would undertake on behalf of Megacrane to the court that Megacrane would declare the payments made by the court to be held in trust in full satisfaction of the judgment. If Piety is not liable to make the payments to Megacrane, they would be held on trust by Piety. That trust would continue even if Megacrane appoints a liquidator and is subsequently liquidated.

Justice Richmond considered that, as Megacrane was insolvent and about to be liquidated, the only benefit to Piety of bringing a cross claim would be gaining the ability to recover some or all of the judgment debt through the operation of the statutory set-off under s 553C of the Corporations Act if a stay was granted.

However, Justice Richmond held that the administrator's proposal allowed Piety to bring its cross claim by filing a proof of debt and to retain those funds through the administrator's declared trust of the funds released by the court until the final determination of the proof of debt. The undertaking by the administrator both as administrator and liquidator to bear personal liability for Piety’s costs in relation to the adjudication of the proof of debt overcame the potential prejudice to Piety concerning costs. The court therefore dismissed Piety's application for a stay.