Federal Court of Australia

Smith v Achieve Homes Pty Ltd [2024] FCA 327

ORDERS

THE COURT ORDERS THAT:

1.    The orders made by the Registrar on 23 February 2024 are set aside.

2.    The Bankruptcy Notice Number 262757 issued on 12 December 2023 is set aside.

3.    Unless either party applies by 4:00pm on 11 April 2024 for a different order for costs:

(a)    The respondent pay the applicant’s costs as agreed or fixed by the Registrar.

(b)    The applicant pay the respondent’s costs thrown away in relation to the hearing on 23 February 2024 as agreed or fixed by the Registrar.

(c)    If no agreement as to costs is reached by 4:00pm on 11 April 2024:

(i)    each party file and serve by 4:00pm on 12 April 2024 a submission of no more than 2 pages on costs;

(ii)    the question of costs be referred to a Registrar to fix costs in a lump sum.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

THAWLEY J:

1    On 23 February 2024, a Registrar of the Court dismissed the applicant’s application to set aside a bankruptcy notice. In doing so, the Registrar exercised the power derived from s 35A(1)(h) of the Federal Court of Australia Act 1976 (Cth) (FCA Act).

2    The applicant applies under s 35A(5) of the FCA Act for review of the Registrar’s exercise of power. Sections 35A(5) and (6) provide:

(5)    A party to proceedings in which a Registrar has exercised any of the powers of the Court under subsection (1) may, within the time prescribed by the Rules of Court, or within any further time allowed in accordance with the Rules of Court, apply to the Court to review that exercise of power.

(6)    The Court may, on application under (5) or of its own motion, review an exercise of power by a Registrar pursuant to this section and may make such order or orders as it thinks fit with respect to the matter with respect to which the power was exercised.

3    A review under s 35A(6) is a de novo review of the exercise of power by the Registrar. The review is not an appeal from the Registrar’s orders or decision.

4    Before turning to the relevant facts, it is necessary to understand the operation of the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act), because it was under that Act that the respondent obtained the judgment debt upon which the relevant bankruptcy notice was founded.

THE SECURITY OF PAYMENT ACT

5    The SOP Act was enacted in New South Wales in 1999. Similar statutes were later enacted in Victoria, Queensland, the Australian Capital Territory, South Australia and Tasmania. The SOP Act was considered by the High Court in Probuild Constructions (Aust) Pty Ltd v Shade Systems Pty Ltd [2018] HCA 4; 261 CLR 1 at [3] to [18].

6    The main aspects of the scheme of particular relevance to the present case are as follows. The express object of the SOP Act is set out in s 3(1):

to ensure that any person who undertakes to carry out construction work (or who undertakes to supply related goods and services) under a construction contract is entitled to receive, and is able to recover, progress payments in relation to the carrying out of that work and the supplying of those goods and services.

7    The SOP Act achieves its object by “granting a statutory entitlement to such a payment regardless of whether the relevant construction contract makes provision for progress payments”: s 3(2). A “progress payment” includes a final payment for construction work: s 4(1). The entitlement to progress payments is provided for in s 8.

8    Section 3(3) explains that the procedure for recovering a payment requires:

(a)    the making of a payment claim by the person claiming payment, and

(b)    the provision of a payment schedule by the person by whom the payment is payable, and

(c)    the referral of any disputed claim to an adjudicator for determination, and

(d)    the payment of the progress payment so determined.

9    That procedure is set out in Pt 3. Section 13(1) provides that a person who is or who claims to be entitled to a progress payment (the “claimant”) may serve a payment claim on the person who is or may be liable to make a payment. Section 14(1) provides that a person on whom a payment claim is served (the “respondent”) may reply to the claim by providing a payment schedule to the claimant. The payment schedule must indicate the amount of the payment (if any) that the respondent proposes to make (the “scheduled amount”): s 14(2)(b).

10    If the scheduled amount is less than the claimed amount, the payment schedule must indicate why that is so and, if the respondent is withholding payment, the respondent’s reasons for withholding payment: s 14(3).

11    If the respondent does not provide a payment schedule within 10 business days, s 14(4) makes the respondent liable to pay the claimed amount on the “due date” (s 4(1) and 11) for the progress payment.

12    Division 2 of Pt 3 deals with the adjudication of disputes. Section 17(1) provides that a claimant may apply for adjudication of a payment claim (an “adjudication application”) where, amongst other things, the scheduled amount is less that the claimed amount.

13    An adjudication application is made to an authorised nominating authority, which must refer the application to an adjudicator as soon as practicable: s 17(3)(b) and (6).

14    An adjudicator might have a law degree, but that is not a mandatory eligibility criterion. A natural person is eligible to be an adjudicator if the person “has such qualifications, expertise and experience as may be prescribed by the regulations for the purposes of” s 18(1)(b).

15    Section 19 of the Building and Construction Industry Security of Payment Regulation 2020 (NSW) provides:

(1)     For the purposes of section 18(1)(b) of the Act, a person is eligible to be an adjudicator in relation to a construction contract if the person has--

(a)     a degree or diploma in architecture, building surveying, quantity surveying, building and construction, construction management, project management, engineering or law conferred by an Australian or foreign university or tertiary institution and at least 5 years of relevant experience, or

(b)     at least 10 years of relevant experience.

16    The respondent may lodge with the adjudicator a response to the claimant’s adjudication application only if the respondent provided a payment schedule within the time specified in s 14(4): s 20(1). The response must be lodged within five business days after receiving a copy of the application or two business days after receiving notice of the adjudicator’s acceptance of the application, whichever is the later date: s 20(1). The response may contain submissions but it cannot include reasons for withholding payment that were not included in the payment schedule provided to the claimant: s 20(2)(c) and 20(2B).

17    Section 21(3) requires the adjudicator to determine an application “as expeditiously as possible” and, in any case, within 10 business days after the date on which the adjudicator notified the claimant and the respondent of acceptance of the application or within such further time as agreed by the parties.     Any “proceedings conducted to determine an adjudication application” are conducted informally and the parties are not entitled to legal representation: s 21(4A). The adjudicator may, for the purposes of any proceedings conducted, request further written submissions, call a conference of the parties and carry out an inspection: s 21(4).

18    Section 22 includes:

(1)     An adjudicator is to determine:

(a)     the amount of the progress payment (if any) to be paid by the respondent to the claimant (the adjudicated amount), and

(b)    the date on which any such amount became or becomes payable, and

(c)    the rate of interest payable on any such amount.

(2)    In determining an adjudication application, the adjudicator is to consider the following matters only:

(a)    the provisions of this Act,

(b)    the provisions of the construction contract from which the application arose,

(c)    the payment claim to which the application relates, together with all submissions (including relevant documentation) that have been duly made by the claimant in support of the claim,

(d)    the payment schedule (if any) to which the application relates, together with all submissions (including relevant documentation) that have been duly made by the respondent in support of the schedule,

(e)    the results of any inspection carried out by the adjudicator of any matter to which the claim relates.

19    The five matters which the adjudicator must consider under s 22(2) are mandatory considerations and are the “only” considerations which the adjudicator may consider. A failure to consider the matters might amount to jurisdictional error and a consideration of extraneous matters might amount to jurisdictional error.

20    If the adjudicator determines that the respondent is required to pay an adjudicated amount, the respondent must pay that amount to the claimant on or before the “relevant date” as defined in s 23(1): s 23(2). The “relevant date” is the date occurring five business days after the adjudicator’s determination is served on the respondent, unless the adjudicator determines a later date: s 22(1)(b).

21    If the respondent fails to pay the whole or any part of the adjudicated amount to the claimant, the claimant may request the authorised nominating authority to whom the adjudication application was made to provide an adjudication certificate: s 24.

22    The adjudication certificate may be filed as a judgment for a debt in any court of competent jurisdiction and is enforceable accordingly: s 25(1). However, s 25(4) provides that, if the respondent commences proceedings to have the judgment set aside, the respondent:

(a)    is not, in those proceedings, entitled:

(i)    to bring any cross-claim against the claimant, or

(ii)    to raise any defence in relation to matters arising under the construction contract, or

(iii)    to challenge the adjudicator’s determination, and

(b)    is required to pay into the court as security the unpaid portion of the adjudicated amount pending the final determination of those proceedings.

23    The rights, duties and remedies arising under a construction contract are preserved: ss 3(4) and 32. Section 32 provides, in summary, that nothing in Pt 3 affects any right that a party to a construction contract may have under that contract and that nothing done under Pt 3 affects any civil proceedings arising under a construction contract except as provided in s 32(3).

24    Section 32 provides:

(1)     Subject to section 34, nothing in this Part affects any right that a party to a construction contract--

(a)     may have under the contract, or

(b)     may have under Part 2 in respect of the contract, or

(c)     may have apart from this Act in respect of anything done or omitted to be done under the contract.

(2)     Nothing done under or for the purposes of this Part affects any civil proceedings arising under a construction contract, whether under this Part or otherwise, except as provided by subsection (3).

(3)     In any proceedings before a court or tribunal in relation to any matter arising under a construction contract, the court or tribunal--

(a)    must allow for any amount paid to a party to the contract under or for the purposes of this Part in any order or award it makes in those proceedings, and

(b)    may make such orders as it considers appropriate for the restitution of any amount so paid, and such other orders as it considers appropriate, having regard to its decision in those proceedings.

25    The scheme set up by the SOP Act is sometimes referred to as a “pay now and argue later” scheme. The SOP Act establishes a system for early payment of disputed progress claims, by informal non-curial adjudication, largely on the basis of written information. The scheme is geared towards maintaining the cashflows of builders whilst preserving (and often deferring) the curial determination of disputes about the legal correctness of the progress claim or whether a progress claim should be paid having regard to any claim against the builder which might be available to the person for whom the construction work was carried out.

26    The SOP Act involves a form of adjudication which has been described as one which will necessarily “give rise to many adjudication determinations which will simply be incorrect”: Brodyn Pty Ltd t/as Time Cost and Quality v Phillip Davenport [2003] NSWSC 1019 at [14].

27    The adjudication process has been described as “possibly rough”. In Demir Pty Ltd v Graf Plumbing Pty Ltd [2004] NSWSC 553 at [19], Campbell J accepted that the purpose of Parliament in introducing the legislation was to ensure “that, once a quick, and possibly rough, adjudication by a neutral person had taken place, a progress payment in the amount found by the adjudicator should be made to a builder”. The “ultimate correctness of the progress payment being made should be argued afterwards”. The SOP Act is “concerned with maintaining a builder’s cashflow, not determining its ultimate rights”.

28    The SOP Act was intended to provide a speedy mechanism for a builder to obtain a legally enforceable judgment or order in respect of a progress claim, even where the claim is disputed, but otherwise does not interfere with the legal rights of the parties. Section 32 specifically empowers a court or tribunal, in a proceeding where the legal rights of the parties under the construction contract are determined, to order restitution of an amount paid by reason of a previous adjudication under the SOP Act. That power is necessary in part because the scheme is likely in many situations to produce results which would and could not have arisen if all of the issues between the parties had been determined by a court or tribunal according to law.

29    Whilst s 22(2)(d) requires the adjudicator to consider an owner’s payment schedule and any submissions made as one of the five mandatory considerations relevant to determining the builder’s claim, the SOP Act does not expressly or implicitly permit the bringing of a cross-claim against the builder who claims the progress payment. Indeed, that would be directly antithetical to the objects sought to be achieved by the SOP Act.

THE FACTS

30    On 19 September 2021, Ms Smith signed a building contract with the respondent (Achieve Homes) to build a home in Googong, New South Wales.

31    On 16 March 2023, Achieve Homes claimed to have reached practical completion of the build and issued what has been referred to as the “practical completion invoice” in an amount of $35,136.58. On 12 April 2023, a pre-handover inspection was conducted. Ms Smith alleged that there were significant defects in the build and that the defects were not rectified.

32    On 19 September 2023, Ms Smith issued a termination notice for breach of contract. Achieve Homes contended it terminated the contract on 25 September 2023.

33    On 10 October 2023, Achieve Homes issued a payment claim under the SOP Act for $35,136.58, being the amount in the practical completion invoice.

34    The applicant served a payment schedule in response, providing a scheduled amount of $0.00.

35    On 31 October 2023, Achieve Homes made an adjudication application under the SOP Act claiming the sum of $35,136.58.

36    On 8 November 2023, Ms Smith served on Achieve Homes her adjudication response. Ms Smith’s adjudication response included detailed submissions and annexures setting out alleged breaches of contract by Achieve Homes, including defects in the build.

37    On 22 November 2023, the adjudication determination was issued. It determined in favour of Achieve Homes that the amount of $35,136.58, plus interest and the adjudicator’s fees, was due and owing by Ms Smith.

38    On 28 November 2023, Ms Smith lodged a “Home building application” in the consumer and commercial division of the NSW Civil and Administrative Tribunal (NCAT).

39    On 30 November 2023, an adjudication certificate under the SOP Act was issued. On 5 December 2023, Achieve Homes filed a registration of certificate of judgment/order with the New South Wales Local Court in the sum of $41,197.19.

40    On 6 December 2023, the Local Court issued a judgment in favour of Achieve Homes against Ms Smith in the amount of $41,197.19.

41    On 12 December 2023, Achieve Homes obtained Bankruptcy Notice Number 262757 from the Australian Financial Security Authority. The bankruptcy notice was served on 4 January 2024. There was no dispute that it was validly served.

42    On 8 January 2024, the parties attended a directions hearing before NCAT and orders were made for Ms Smith to file an amended claim and points of claim. These were lodged on about 22 January 2024. The points of claim may be summarised as follows. Ms Smith alleged that:

    practical completion of building works under the contract have not occurred, by reason of defects, such that the 16 March 2023 invoice is invalid: [4] to [18];

    there were several outstanding defects which have not been rectified: [19] and [20]; and

    the hot water system and oven which Ms Smith had paid for in earlier invoices were “stolen” from the property by Achieve Homes: [21] to [25].

43    Ms Smith sought the following orders:

The applicant requests NCAT to make an order that the respondent:

a.    has not reached practical completion.

b.    that the respondent be liable for the full balance of the adjudication application of $5,000.00.

c.     that the practical completion invoice #2875 dated 16 March 2023 for the sum of $35,136.58 is not due and payable to the respondent.

d.    that the respondent refund the sum of $35,136.58 to the applicant for the invoice for milestone 7 that was paid to the respondent.

e.    that the respondent refund the sum of $6,500.00 the applicant for the hot water system and oven that were paid for by the applicant.

f.    that the respondent pay the applicant the sum of $63,400.00 to bring the property up to a reasonable standard as per the build contract and rectify the defects contained herein.

i.    Those expenses are outlined in annexure A attached to the Applicant’s Points of Claim. [These include $6,500 for the hot water system and oven.]

g.    that the respondent pay the applicant’s legal costs on an indemnity basis.

44    On 25 January 2024, Ms Smith filed an application to set aside the bankruptcy notice. Ms Smith’s application was filed within the 21-day time limit: 41(6A) and (7) Bankruptcy Act 1966 (Cth) (Bankruptcy Act). The grounds to set aside the bankruptcy notice were as follows:

a.    The Applicant initiated proceedings in the NSW Administrative and Civil Tribunal [(NCAT)] seeking Orders that the Adjudication Decision, which is the subject of the Respondent’s judgment debt, is invalid and the monies claimed by the Respondent against the Applicant are not payable.

b.    The Applicant initiated proceedings in [NCAT] on 18 December 2023 seeking Orders that the Respondent pay to the Applicant the sum of $105,036.58 in a cross-claim raised by the Applicant.

i.    The Applicant has an arguable claim to the amount of $105,036.58, which exceeds the Respondent’s judgment debt amount.

ii.    The claim is mutual between the Applicant and Respondent and arises out of a breach of contract by the Respondent.

iii.    The claim could not have been litigated in the same proceeding in which the Respondent’s judgment was obtained, because the Respondent used an Adjudication Certificate to obtain default judgment against the Applicant.

c.    The Applicant does not owe the debt alleged in the bankruptcy notice.

45    On the same day, the Registry accepted the application for filing. On the front page of the stamped application, the Registry included the following notation:

Time and date for hearing    23/02/2024, 11:00 AM

46    On 23 February 2024, the application was listed before the Registrar. Ms Smith, who was legally represented, did not appear at the hearing. The Registrar dismissed the application with costs. The Registrar did so on the basis of Ms Smith’s non-appearance and on the basis that her application to set aside the bankruptcy notice could not succeed.

47    On 2 March 2024, Ms Smith filed an application for review of the Registrar’s decision to dismiss the application.

NON-APPEARANCE ON 23 FEBRUARY 2024

48    Ms Smith’s solicitor filed and served an affidavit on 19 March 2024, setting out the reasons for Ms Smith’s solicitor’s failure to attend the hearing on 23 February 2024. In short, the fault lay with Ms Smith’s solicitor, not being the solicitor who appeared on the present application, but being a solicitor in the same firm.

49    The consequence of Ms Smith now being present before the Court (by her solicitor) is that the power to dismiss the proceedings for non-attendance is absent – see: Dekkan v Macquarie Leasing Pty Ltd [2008] FCA 1235 at [8].

50    Accordingly, this issue is only relevant to costs.

APPLICATION TO SET ASIDE THE BANKRUPTCY NOTICE

51    Ms Smith seeks to set aside the bankruptcy notice on the following grounds:

    Ground 1: there are proceedings to set aside the underlying judgment – see: s 41(6A)(a) and 41(6C) of the Bankruptcy Act and r 3.02(4) of the Federal Court (Bankruptcy) Rules 2016 (Cth) (Bankruptcy Rules);

    Ground 2: there is a counter-claim, set-off or cross demand which could not have been set up in the proceeding giving rise to the underlying judgment – see: s 40(1)(g) and 41(7) of the Bankruptcy Act and r 3.02(3) of the Bankruptcy Rules; and

    Ground 3: the debtor does not owe the debt alleged in the bankruptcy notice – see: s 41(6A)(b) of the Bankruptcy Act.

Ground 1

52    By Ground 1, Ms Smith seeks to set aside the bankruptcy notice on the basis that, in NCAT, she seeks to set aside the adjudication determination and the judgment of the Local Court.

53    NCAT does not have jurisdiction to set aside the adjudication determination. Nor does NCAT have power to set aside a judgment of the Local Court.

54    Further, in any event, Ms Smith does not allege jurisdictional error on the part of the adjudicator. There is, therefore, no possibility of the adjudication determination or Local Court judgment being set aside even by a Court of competent jurisdiction: Probuild.

55    Ground 1 must be dismissed.

Ground 2

56    Section 40(1)(g) provides:

(1)    A debtor commits an act of bankruptcy in each of the following cases:

(g)    if a creditor who has obtained against the debtor a final judgment or final order, being a judgment or order the execution of which has not been stayed, has served on the debtor in Australia or, by leave of the Court, elsewhere, a bankruptcy notice under this Act and the debtor does not:

(i)    where the notice was served in Australia – within the time fixed for compliance with the notice; or

(ii)     where the notice was served elsewhere – within the time specified by the order giving leave to effect the service;

comply with the requirements of the notice or satisfy the Court that he or she has a counter - claim, set - off or cross demand equal to or exceeding the amount of the judgment debt or sum payable under the final order, as the case may be, being a counter - claim, set - off or cross demand that he or she could not have set up in the action or proceeding in which the judgment or order was obtained.

57    Ms Smith relied upon her proceeding in NCAT. Ms Smith submitted that her “cross-claim, set-off or cross demand” could not have been “set up” in the same proceeding in which Achieve Homes’ judgment was obtained, because Achieve Homes used an adjudication certificate “to obtain default judgment [in the Local Court] against” Ms Smith. Ms Smith observed that her NCAT claim against Achieve Homes exceeded the Local Court judgment debt.

58    This submission raises at least two issues. The first is the proper identification of the “proceeding” and the second is whether Ms Smith has a “cross-claim, set-off or cross demand” which she could not have “set up” in the adjudication proceeding.

59    As to the first issue, s 40(3)(b) of the Bankruptcy Act provides:

For the purposes of paragraph (1)(g):

(b)    a judgment or order that is enforceable as, or in the same manner as, a final judgment obtained in an action shall be deemed to be a final judgment so obtained and the proceedings in which, or in consequence of which, the judgment or order was obtained shall be deemed to be the action in which it was obtained;

60    Section 25(1) of the SOP Act provides that “[a]n adjudication certificate may be filed as a judgment for a debt in any court of competent jurisdiction and is enforceable accordingly”.

61    The adjudication certificate was filed in the Local Court as a judgment for a debt – see: s 133 of the Civil Procedure Act 2005 (NSW). The judgment was entered – see: r 36.11 of the Uniform Civil Procedure Rules 2005 (NSW).

62    The proceeding “in which the judgment or order was obtained” within the meaning of s 40(1)(g) of the Bankruptcy Act included the adjudication determination conducted under the SOP Act – see, by analogy: Chen v Bannerman [2001] FCA 160 at [4]. The adjudication process falls within the ordinary meaning of the term “proceeding”. Although it is not determinative, it is relevant to note that the SOP Act itself refers to the non-curial statutory adjudication process under which the adjudication determination is made as “proceedings” – see, for example: s 21(4) of the SOP Act.

63    The entering of the judgment in the Local Court constituted the finalisation of the “proceeding”, subject to any legal right to apply in the Local Court to have the judgment set aside. The lodgement and entering of the judgment did not require prior notice to Ms Smith.

64    The second issue raised by Ms Smith’s submission is whether Ms Smith has identified a “counter-claim, set-off or cross demand”, being one which she could not have “set up” in the proceeding. As noted, Ms Smith relies on the issues raised in the NCAT proceeding.

65    Ms Smith provided the adjudicator with a detailed adjudication response and submissions in support of her position. Ms Smith’s submissions included that:

    practical completion had not occurred under the contract and further works were required to reach practical completion;

    there were several outstanding defects; and

    the hot water system and oven were removed from the property without her consent.

66    The adjudicator, after considering both parties’ submissions, found that the adjudicated amount of $35,136.58, being the whole progress payment claimed, was payable by Ms Smith. In his reasons, the adjudicator:

(a)    found that the building works had reached practical completion and that there were, accordingly, no additional costs required to bring the building works to a state of practical completion: reasons at [30] and [31];

(b)    rejected the entitlement on the part of Ms Smith to deduct amounts for outstanding claimed defects: reasons at [53];

(c)    recorded that Ms Smith did not appear to have made a claim for a set-off or deduction in relation to the hot water system and oven. The adjudicator considered that this issue had been raised “for information only”: reasons at [56].

67    The issues raised by Ms Smith in the NCAT proceeding are each matters the substance of which Ms Smith raised before the adjudicator in the adjudication proceeding. The matters were raised as reasons why the adjudicator should determine that the progress payment should not be made. The adjudicator was bound to consider the matters raised by Ms Smith in adjudicating the builder’s claim against Ms Smith: s 22(2)(d) of the SOP Act.

68    The question of present relevance, though, is whether Ms Smith “has a counter - claim, set - off or cross demand equal to or exceeding the amount of the judgment debt … being a counter - claim, set - off or cross demand that … she could not have set up in the [adjudication] proceeding”.

69    In determining that question, it would be wrong to construe the Commonwealth Bankruptcy Act by reference to the policy behind NSW’s SOP Act.

70    First, the policy objectives of State legislation cannot limit the operation of Commonwealth legislation unless it can be said that the State legislation was a part of the relevant context for the Commonwealth legislation – see: Demir at [20].

71    Secondly, the two pieces of legislation are concerned with different topics and have different objectives. The SOP Act is designed with a view to maintaining a builder’s cashflow by providing for early recovery of progress claims, including by creating legally enforceable judgment debts, with preservation of the legal rights and liabilities of the parties for later determination if necessary. The Bankruptcy Act is not concerned with debt recovery as such. The Bankruptcy Act is directed to persons in financial crisis with unmanageable debts and, amongst other things, provides for the discharge of certain debts (with a view to economic rehabilitation) whilst providing for realisation of assets for distribution to affected creditors. An evident policy behind s 40(1)(g) is that a judgment debtor who has a genuine claim against a creditor should not be made bankrupt if, although the creditor has obtained a judgment and is owed the judgment debt, the judgment debtor has not had the opportunity to “set up” a genuine counter-claim, set-off or cross demand if there is one. Such a person is not properly regarded as having unmanageable debt and should not be visited with the consequences of bankruptcy.

72    Thirdly, in any event, there are many mechanisms for recovery of legally enforceable debts outside of attempting recovery by serving a bankruptcy notice. A creditor with a judgment debt under the SOP Act has the full range of remedies available to any judgment creditor.

73    Ms Smith could not “set up” a “counter-claim, set-off or cross demand” in the adjudication proceeding. Ms Smith had no legal right to bring a “counter-claim, set-off or cross demand” in the adjudication process. The words “that he could not have set up in the action or proceeding in which the judgment or order was obtained” mean “which he could not by law set up in the action” – see: Re Jocumsen (1929) 1 ABC 82 at 85; Re A Debtor (1914) 3 KB 726 at 730; Re Brink [1980] FCA 78; 44 FLR 135 at 139 (Lockhart J); Re Vicini; Ex parte EA Sealey & Co [1982] FCA 156; 64 FLR 323 at 326 (Fisher J). Not only could Ms Smith not bring a counter-claim, set-off or cross demand against the builder, the adjudicator had no jurisdiction to award a “counter-claim, set-off or cross demand”. The SOP Act only permits claims for progress payments by builders. It does not permit a counter-claim against the builder bringing the claim for a progress payment. The adjudicator could not have made an award in Ms Smith’s favour whether or not the adjudicator had considered that Ms Smith had good claims and whether or not those claims exceeded the amount of the progress payment claimed by Achieve Homes. In this context, it should be observed that a “set-off” is more than a defence; a “set-off” only arises by establishing a countervailing claim which can be set off from the relevant debt: Re Dalco [1986] FCA 357; 67 ALR 605 at [611].

74    The adjudicator was required to make his determination by considering “only” the five matters set out in s 22(2) of the SOP Act, as mandatory considerations. One of those considerations was the “provisions of the Act” which includes the express object of the Act and the objects of the Act as evident from its language and structure. The object of the SOP Act is to permit those carrying out construction work to be able to recover progress payments quickly via a non-curial statutory adjudication, largely on written material. The legal liability of the parties to the adjudication is otherwise preserved for later determination by a court or tribunal where necessary – see: ss 3 and 32. The SOP Act preserves claims against the builder, such as counter-claims. The SOP Act permits facts and argument – which might support a counter-claim, set-off or cross demand – to be raised as a reason not to make a determination in the builder’s favour and requires matters so raised to be considered: s 22(2)(d). It does so in a statutory scheme the object of which is to permit early recovery of progress payments by the builder with the legal rights of the parties being preserved for determination, where necessary, later.

75    Ms Smith could (and did) raise the issues she wanted to raise as a form of defensive argument against the adjudicator determining that the progress payment should be made. The adjudicator was bound to take her arguments into account in determining the builder’s claim: s 22(2)(d). That is not the same as setting up a counter-claim within the contemplation of s 40(1)(g) of the Bankruptcy Act.

76    Achieve Homes, in its submissions filed after the hearing, submitted:

The focus of [s 40(1)(g)] is [on] whether there is a legal preclusion stopping the Owner from raising the issues. The answer on the simple wording of s 40(1)(g) is that the Owner did set up her counter-claim and set-off. There is no question that the adjudicator acted within his jurisdiction to dismiss those issues and order payment in favour of the Builder.

77    This submission should be rejected. First, I do not accept that the focus of s 40(1)(g) is on the ability to “raise issues”. The focus of s 40(1)(g) is on whether Ms Smith could have “set up” a “counter-claim, set-off or cross demand”. Ms Smith could not bring a counter-claim in the adjudication proceeding and her legal right to bring a counter-claim was expressly preserved.

78    Secondly, with respect to the submission that “the adjudicator acted within his jurisdiction to dismiss [the] issues raised by Ms Smith”, it may be accepted that the adjudicator had jurisdiction (and was obliged to) consider what Ms Smith raised in her response and submissions. The adjudicator had to consider those issues together with each of the five matters in s 22(2) of the SOP Act. The adjudicator had jurisdiction to conclude that the matters raised by Ms Smith were not a sufficient reason not to make a determination in favour of the builder. This does not amount to a determination of a counter-claim brought by Ms Smith.

79    At the hearing, Achieve Homes relied on two decisions of the Federal Magistrates’ Court of Australia in which it was assumed or conceded that matters which could have been raised in response to an adjudication claim made under the SOP Act were matters which fell within the concept of “counter-claim, set-off or cross demand” in s 40(1)(g) which could have been “set up” in the adjudication process: Cavanah v Advance Earthmoving & Haulage Pty Ltd [2008] FMCA 427 at [100] and Bailey v MCH Building Pty Ltd [2011] FMCA 124 at [16] to [19].

80    Those decisions did not provide any clear reasoning for the implicit conclusion that – because the facts relevant to a counter-claim could be raised for consideration as a form of defensive submission against a determination under the SOP Act in the builder’s favour – a “counter-claim, set-off or cross demand” could be “set up” for the purposes of s 40(1)(g) of the Bankruptcy Act.

81    This concern was raised at the hearing and, it not having clearly been advanced in any submission made on behalf of Ms Smith, Achieve Homes was provided an opportunity to make further submissions and provide references to cases in which the issue had been directly addressed.

82    In submissions filed after the hearing, Achieve Homes referred to the decision in Grave v Blazevich Holdings Pty Ltd [2010] FMCA 386. That decision also did not expressly address the issue. Dr Grave’s argument was described in the following way (at [7]):

The applicant’s argument that he falls within s 40(1)(g) is that his claim that the respondent has brought proceedings against the wrong party is a defence which by the operation of s 32 of the [SOP] Act is converted into a right to a restitutionary claim to recover the money to be paid under the judgment. He argues that by virtue of the provisions of [the SOP] Act … [he] had no right to bring this claim in the original proceedings and so is not a cross demand that could have been set up in the proceeding in which the judgment or order was obtained …

83    The respondent’s response was described in the following way (at [7]):

The respondent argues the situation that is before the applicant is one of his own making. He could have and should have filed a payment schedule stating that he owed no money to the builder because he was not a party to the contract and that this type of proceeding does not fall within s 40(1)(g).

84    The Court concluded at [22] that “the applicant could have raised his defence that he was not the proper party in the process whereby the amount due was determined” and that his failure to do so was entirely his fault. The Court concluded that “the restitutionary right which only came into existence because of the applicant’s own failure to have the issue determined under the [SOP] Act does not constitute a cross demand that could not have been set up in the proceedings in which the judgment was obtained”: at [22].

85    Dr Grave’s argument is difficult to understand. It is a nonsense to speak of “a defence which by the operation of s 32 of the [SOP] Act is converted into a right to a restitutionary claim to recover the money to be paid under the judgment”. A claim for restitution can only arise in respect of a payment which has in fact been made. Dr Grave did not have a “counter-claim, set-off or cross demand” and s 40(1)(g) could not have applied. The case does not address the issue which presently arises.

86    Achieve Homes also referred, in its submissions filed after the hearing, to the decision in Bobos v Deputy Commissioner of Taxation [2019] FCA 1910. The case does not concern s 40(1)(g) of the Bankruptcy Act or the question presently raised.

87    Section 40(1)(g) identifies a situation comprising an act of bankruptcy (in summary, non-compliance with a bankruptcy notice based on a final judgment). It contains a qualification or exception. The exception is that an act of bankruptcy does not occur if the debtor, against whom a final judgment has been obtained, satisfies the Court that the debtor has a legal right to make a “counter-claim, set-off or cross demand” which the person “could not have set up” in the action giving rise to the judgment debt. The fact that leave of the Court might be required in order to bring a counter-claim would be insufficient to engage the exception in s 40(1)(g): Re Willats [1991] FCA 541 at [14] to [21]; 31 FCR 206 at 210 to 212. The exception might perhaps also not be engaged simply because the debtor might need to seek to transfer the proceedings to a different court – see the discussion in Axarlis v Pets Paradise Franchising (SA) Pty Ltd [2010] FCA 319; 183 FCR 521. However, the exception does apply where there is no legal right – with leave or otherwise – to make a counter-claim, set-off or cross demand in the proceeding giving rise to the final judgment: Re Stokvis (1934) 7 ABC 53 at 57. As Lukin J there stated, in a passage approved by O’Loughlin J in Re Willats at [14] and [21], situations in which it could be said that a counter-claim could not be “set up” would include the situation in which a counter-claim could not be brought at all because of “an absence of empowering provisions”. This reflects the present situation. The right afforded by the SOP Act to respond in writing in a non-curial setting to a progress payment claim made by a builder is not a right to “set up” a “counter-claim, set-off or cross demand” against the builder making the progress claim.

88    The argument that this conclusion deprives the SOP Act of force or – to adopt the language of Achieve Homes, that the conclusion “runs the risk of perverting the object of the SOP Act” – can be put to one side. That argument is deployed in support of an erroneous process of statutory construction and is, in any event, overstated for the reasons given earlier. Whilst it can be imputed to the NSW State legislature, in enacting the SOP Act, that it was intended that a judgment debt in respect of a progress claim could be legally enforced notwithstanding that the full competing legal claims of the parties to the dispute had yet to be finally determined according to law, it cannot be imputed to the Commonwealth legislature, in enacting s 40(1)(g) of the Bankruptcy Act, that a judgment debtor whose legal right to make a counter-claim had been unaffected and preserved, could be bankrupted on the basis of a judgment debt arising from a statutory non-curial informal adjudication procedure in which the counter-claim could not have been brought.

89    Nor could Ms Smith have “set up” her claims in the Local Court: s 25(4) of the SOP Act.

90    I accept that Ms Smith’s counter-claim is genuine. The evidence establishes a prima facie case in the sense that there is sufficient evidence admissible on an application such as this which, if put forward in a form admissible in NCAT, and accepted, would establish both that the progress claim is not owed under the contract and that Achieve Homes is liable for defects and losses.

91    I should not be understood as expressing a view on the merits of the underlying dispute except to conclude that the claim is genuine and that the outcome just mentioned is a possibility sufficient for a bankruptcy court to be satisfied for the purposes of s 40(1)(g) that Ms Smith has a “cross-claim, set-off or cross demand” which is at least as much as the judgment debt. In other words, Ms Smith “has a claim deserving to be finally determined” – see: Glew v Harrowell [2003] FCA 373; 198 ALR 331 at [11]-[12].

92    Ground 2 should be allowed on this basis.

Ground 3

93    By Ground 3, Ms Smith submits that the bankruptcy notice should be set aside on the basis that she does not owe the debt alleged in the bankruptcy notice.

94    The SOP Act creates a legally enforceable debt. It may be that NCAT determines the final legal rights and liabilities of the parties in a way which is inconsistent with the conclusions of the adjudicator or otherwise that Ms Smith has a claim against Achieve Homes sounding in loss or damage. A court or tribunal determining a legal proceeding about the construction contract is empowered by the SOP Act to order restitution of a payment made under Pt 3 of the SOP Act: s 32(3). Of course, Ms Smith has not paid the amount of the relevant progress claim, that being the subject of the bankruptcy notice, so no claim in restitution has yet arisen. None of that provides a basis for concluding that there is no debt.

95    For the Court to find that Ms Smith does not owe the debt alleged in the bankruptcy notice, the Court would be required to look behind the adjudicator’s determination and the judgment of the Local Court. There is nothing to suggest that a bankruptcy court should go behind the Local Court judgment.

96    In particular, there is no reason for thinking that the SOP Act has not been followed to obtain a valid adjudication determination, or that the jurisdiction was exercised in a way bespeaking jurisdictional or other error or abuse sufficient to enliven the Court’s discretion as explained in Wren v Mahony [1972] HCA 47; 126 CLR 212. Ms Smith does not allege jurisdictional error.

97    There is no substantial reason to doubt the judgment debt. Ground 3 is not made out.

CONCLUSION

98    The application for review of the Registrar’s decision should be allowed.

99    During the course of the hearing, Ms Smith’s solicitor quite properly acknowledged that it would not be appropriate to visit any costs consequences in relation to the hearing before the Registrar on 23 February 2024 on Ms Smith given that the non-attendance on that day was due to oversight on the part of the solicitors.

Associate:

Dated: 4 April 2024