Creditors and construction companies facing cashflow challenges are set to be the ‘big winners’, following a recent ground-breaking Supreme Court decision that makes the NSW Security of Payment (SOP) Act available to entities in Administration – regardless of their solvency.
The action was brought by Chamberlains Law Firm on behalf of insolvency specialist Jirsch Sutherland, to recover debts owed to a subcontractor, Kennedy Civil Contracting (KCC), which had entered Voluntary Administration. The ruling is the first reported decision testing the ambit and scope of Section 32B of the SOP Act.
The matter involved executing a ‘Holding DOCA’ for the purpose of pursuing the debtors, including Richard Crookes Construction Pty Ltd, under the SOP Act. Creditors voted to execute the DOCA rather than placing KCC into liquidation.
While it was acknowledged by KCC’s creditors that the company would inevitably be placed into liquidation in the future, the action was being done to ‘get around’ Section 32B of the Act.
The Court, which handed down its judgement on February 10, 2023, held that the Holding DOCA was entered into to maximise returns to creditors and, as such, was entered into for a proper purpose and that KCC organising its affairs carefully to avoid operation of Section 32B was not an abuse of process.
Jirsch Sutherland Partner Trent Devine calls the judgement “a game-changer”.
“It will allow Administrators to take advantage of the SOP Act when companies are insolvent (not in liquidation) via a DOCA,” he says.
“This will allow collection of debts for the benefit of creditors and it will help protect subcontractors. It’s a significant development for insolvency in the construction industry, particularly in NSW, but might also have ramifications in other states, as other security of payment regimes are based on the NSW SOP Act.”
Michael Terry-Whitall, Chamberlain’s Legal Director, Litigation – Building and Construction, adds, “This judgement conclusively answers the question of whether the SOP Act can be used on behalf of an entity that’s insolvent. Construction companies facing cashflow difficulties and which enter into administration now have a far greater chance of pursuing and being paid by their debtors. Recoveries can also assist a construction company that enters into administration to fund a DOCA, while being able to continue to trade or return a far better result for creditors.
“The decision has far-reaching implications for construction companies as a whole, particularly during the current economic climate, which is placing further cashflow pressures on an already strained industry.”
Background
On November 1, 2021, Richard Crookes Construction Pty Ltd (Richard Crookes) engaged Kennedy Civil Contracting to carry out civil, stormwater and associated construction works under two separate subcontracts. During the performance of the works KCC served several payments claims under Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act). Richard Crookes responded to some of the payment claims with payment schedules and failed to respond to others.
On 1 August 2022, joint and several voluntary administrators were appointed to Kennedy Civil Contracting.
During the administration, the administrators formed the view that KCC was “hopelessly insolvent”. Kennedy Civil Contracting commenced proceedings seeking to recover monies owed by Richard Crookes under the SOP Act.
Particularly, at a meeting of its creditors, a vote was carried to, rather than enter into liquidation immediately, execute a “Holding Deed of Company Arrangement” (Holding DOCA) for the dominant purpose of pursuing Richard Crookes under the SOP Act. It was acknowledged by Kennedy Civil Contracting’s creditors that the company would inevitably be placed into liquidation in the future, and this was being done simply to “get around” section 32B of the SOP Act.
Richard Crookes argued that the Holding DOCA was entered into for an “improper purpose” and thus the Court should override Kennedy Civil Contracting’s creditors and terminate the DOCA, placing Kennedy Civil Contracting into liquidation. They also argued that entering into the Holding DOCA for the sole purpose of avoiding section 32B of the SOP Act was an abuse of process.
The Court did not agree. The Court held that the Holding DOCA was entered into to maximise returns to creditors and as such was entered into for a proper purpose and the Kennedy Civil Contracting organising its affairs carefully to avoid the operation of section 32B of the SOP Act was not an abuse of process.
Construction companies facing cashflow difficulties which enter into administration now have a far greater chance of pursuing and being paid by their debtors. Recoveries can both assist a construction company that enters into administration to fund a DOCA and be able to continue to trade or return a far better result for creditors.