A recent Supreme Court of NSW judgment of In the matter of Leralais Pty Ltd [2025] NSWSC 893 is a reminder that a winding up application is not a debt recovery tool – especially when it comes to debts arising under the Building and Construction Industry Security of Payment Act 1999 (NSW).
The case involved $800K judgment debt in favour of a builder under the Security of Payment Act and a land rich developer with sufficient assets and cash to pay, but was unwilling to do so. Spoiler alert: the developer was not wound-up based on insolvency, even though it refused (without legal entitlement) to pay the judgment debt.
The builder’s judgment debt
The builder had three District Court judgments against the developer in the sum of $867,107.61, all of which arise from the operation of the Building and Construction Industry Security of Payment Act 1999 (NSW).
Two judgments were a result of filing adjudication certificates as a judgment debt and the other judgment was entered by operation of section 15 of the Security of Payment Act. The developer did not seek any stay on enforcement of those judgments nor to set aside any underlying adjudication determinations.
The builder’s attempts to enforce the judgments
The builder had attempted to enforce the judgment against the developer via a garnishee order and a writ for levy of property. Under a garnishee order, the builder recovered $90,947.35.
The Sheriff reported a failed attempt to execute the writ for levy of property against the goods of the developer (importantly, the Sheriff had not attempted to execute the writ by sale of land).
The developer filed and was maintaining a cross-claim in the District Court proceedings which includes allegations that none of the debts that are subject of the judgments are properly payable.
The application to wind-up the land rich developer
Xela (a builder) applied under section 459P of the Corporations Act 2001 (Cth) to wind-up Leralais Pty Ltd (a property developer).
The builder relied upon section 459C(2)(b) of the Corporations Act as the presumption of insolvency – being:
…during or after the 3 months ending on the day when the application was made:
(b) execution or other process other process issued on a judgment, decree or order of an Australian court in favour of a creditor of the company was returned wholly or partly unsatisfied …
The developer resisted the application on two bases:
- A presumption of insolvency had not been established because the execution of a relevant judgment had not been returned wholly or partly unsatisfied; and
- The developer was not insolvent and was merely unwilling (but not unable) to pay the judgments.
No presumption of insolvency
The Court found a presumption of insolvency does not arise in the circumstances, because:
- the garnishee order had been returned more than 3 months before the builder’s application was filed – there was also an argument that return of a garnishee does not trigger section 459C(2)(b), but the Court did not need to determine that argument; and
- the writ for levy of property was unexecuted and had not been “returned wholly or partly unsatisfied” – the Court noted that there were more steps for the builder to take in order to execute the writ for levy of property (including by the Sherrif selling the developer’s land in order to realise the judgment debts under section 113 of the Civil Procedure Act 2005 (NSW)).
The failure to establish a presumption of insolvency did not dispose of the proceedings. The builder maintained that it had established on the evidence that the developer was insolvent and should be wound-up.
Was the developer insolvent?
The developer was land rich. It owned 7 (newly constructed) townhouses in Bowral with sufficient equity in those properties to pay the builder’s judgment debts in full. The debts owed by the developer were largely related-party debts.
The developer also had an immediate ability to redraw on loan facilities which would be sufficient to pay the builder’s judgment debts in full.
Unwillingness vs Inability
To be insolvent, the debtor must be unable, as distinct from being merely unwilling, to pay its debts as they fall due. The question of inability is an objective one, whereas the concept of unwillingness imports subjective considerations.
In the context of a company, this requires attributing a state of mind to the company. It may be that if a director who controlled a company was unwilling to cause the company to pay particular debts for no rational reason that could be defended as consistent with the exercise of his or her duties as a director, the company should be held to be unable to pay its debts as and when they fall due, and thus to be insolvent.
The developer was unwilling to pay the judgment debts. The developer was concerned that if it paid the judgment debt and the developer succeeded on its cross claim in the District Court, the builder may be unable to satisfy that judgment.
The Court acknowledged that the developer did not have a lawful basis to delay payment to the builder. However, the Court found that the developer had a rational (and not arbitrary) basis to postpone payment to the builder.
Whilst this appears to sit inconsistently with the “pay now, argue later” regime in the Security of Payment Act, the Court noted the Corporations Act cannot be construed or limited by reference to the policy intentions that underlie the Security of Payment Act.
The Court did not make an order winding up the developer in insolvency because the developer was not insolvent (i.e. it was able to pay the judgment debts, but unwilling to do so).
Recovery against land rich entities
There are many different ways to recover debts arising under the Security of Payment Act and winding-up the debtor is often not the best path for recovery. The Court expressly acknowledged that the builder had other options for recovery available that it had not yet exhausted.
Claimant’s in the construction industry who want to recover debts arising under the Security of Payment Act against a land rich entity can recover (among other options) from the sale proceeds of land owned by the debtor, including:
- for unsecured creditors, a writ for levy of property against land; and
- for secured creditors, the appointment of a receiver to sell land which is subject of your security.
If you are in the construction industry and attempting to recover a debt, get in touch with our Construction + Projects team to find out how you can recover your debt.