Introduction

The recent Court of Appeal decision of CT Indah Construction Sdn Bhd v BHL Gemilang Sdn Bhd [2020] 1 CLJ 75 ensures that a subcontractor is guaranteed of their payment for work done by the mechanism of direct payment from the employer/developer to the sub-contractor pursuant to Section 30 of Construction Industry Payment and Adjudication Act 2012 (“CIPAA”).

Brief Facts

CT Construction Indah Sdn Bhd (“CT”) was the subcontractor, BHL Builders Sdn Bhd (“BHL Builders”) was the main contractor and BHL Gemilang Sdn Bhd (“BHL Gemilang”) was the developer of a project. CT commenced CIPAA proceedings and was awarded a sum to be paid within a stipulated time for works carried out as subcontractor. BHL Builders however failed to pay within the time stipulated.

CT then proceeded to issue a statutory demand under Section 218 of the Companies Act 1965 to BHL Builders for payment of the said sum. CT also issued a request under Section 30(1) of CIPAA to BHL Gemilang as BHL Builders’ principal for direct payment of the said sum.

BHL Gemilang did not issue a notice under Section 30(2) of CIPAA to BHL Builders to "show proof of payment" to CT nor "to state that direct payment would be made after the expiry of ten working days of the service of the notice".

BHL Builders, the main contractor, was later wound up by an unrelated company.

The Issue Before the Cour of Appeal

The issue before the Court of Appeal was whether Section 30 of CIPAA is subject to the prohibition of preferential payment under Section 293 of the Companies Act 1965 as BHL Builders was wound up and is in receivership.

Decision of the Court

The liability of making direct payment by BHL Gemilang is statutory vide Section 30(3) of CIPAA. The payment made by BHL Gemilang would not come from the assets of BHL Builders rather it will be a debt due by BHL Builders to BHL Gemilang once payment is made by BHL Gemilang. BHL Gemilang can then recover the debt from BHL Builders vide Section 30(4) of CIPAA.

This legal obligation arises in the absence of proof of payment by BHL Builders. It is mandatory for BHL Gemilang to make payment to CT. It is a requirement of law which BHL Gemilang shall comply with.

Section 30 of CIPAA creates an independent statutory obligation on the part of BHL Gemilang, as the principal to pay CT which is a separate obligation that exist via statute parallel to BHL Builder’s obligation to pay CT as the main contractor. The status of BHL Builder as a bankrupt is irrelevant. BHL Gemilang is bound by statute, Section 30 of CIPAA prevails.

Conclusion

The Court of Appeal decision of CT Indah Construction Sdn Bhd v BHL Gemilang Sdn Bhd [2020] 1 CLJ 75 can only remind us of the wise remarks of Lord Chief Justice Hewart uttered nearly 100 years ago in the case of R v Sussex Justices ex parte Mc Carthy [1924] 1 KB 256, [1923] All ER Rep 233 where he said that “Justice should not only be done but should manifestly and undoubtedly be seen to be done”.

Sub-contractor(s) must be safeguarded of their payments as due, for work rendered and cannot be deprived of what is rightly due and payable because of the winding up of the main contractor and the prohibition of preferential payment.

Hence in the construction industry, a subcontractor that has been awarded a sum to be paid in an adjudication proceeding but the contractor fails to make payment, the subcontractor can then invoke the statutory direct payment mechanism under Section 30 of CIPAA and demand the developer as the principal to make payment.