Insolvent companies can still serve a payment claim 4 min read
The recently introduced section 32B of the Building and Construction Industry Security of Payment Act 1999 (NSW) (the Act) prevents companies in liquidation from either serving or taking action to enforce a payment claim made under the Act.
Despite this provision, a recent NSW Supreme Court decision1 has confirmed that even 'hopelessly insolvent' companies can still serve a payment claim or enforce an adjudication determination under the Act in certain circumstances:
- Do not assume in the event of a contractor insolvency that obligations under the Act no longer apply.
- A Deed of Company Arrangement (DOCA) to avoid liquidation (and therefore s32B), gain access to the mechanisms under the Act and maximise returns to creditors is not an improper purpose or basis to terminate the DOCA under s445D(1)(g) of the Corporations Act 2001 (Cth). However, in this case the DOCA expressly preserved the Principal's right to recover amounts paid under the contract, avoiding a supposedly interim payment under the Act being made permanent by default.
- Be mindful that the s32B bar to serving or enforcing a payment claim applies only to entities in liquidation, and not following other insolvency events.
The decision clarifies an avenue that exists (despite recent amendments) for distressed construction companies to pursue debtors, consistent with the purpose of the Act. It comes in the wake of a string of high-profile construction groups entering administration, as supply chain delays, the ballooning cost of materials and labour continue to impact the industry.
NSW Supreme Court decision
In Kennedy Civil Contracting Pty Ltd (Administrators Appointed) v Richard Crookes Construction Pty Ltd; In the matter of Kennedy Civil Contracting Pty Ltd [2023] NSWSC 99, the NSW Supreme Court has, for the first time, examined the operation of the new s32B provision in the Act.
The court considered whether a construction company which had entered into a DOCA could enforce its statutory rights. The court looked to the purpose of the security of payment legislation, being to alleviate cash flow issues faced by construction entities by introducing a 'pay now, argue later' regime.
The facts
In November 2021, Richard Crookes Construction Pty Ltd (RCC) engaged Kennedy Civil Contracting Pty Ltd (KCC) to undertake various construction works for a project at Bankstown Airport. KCC served a number of payment claims under the SOP Act, to which RCC failed to respond within the timeframe mandated by the legislation.
Administrators were appointed to KCC on 1 August 2022. On the advice of the administrators, KCC's creditors resolved for the company to execute a DOCA, which provided:
Any funds (SOPA Funds) received by the Company after entry into this deed as a result of a claim, adjudication or judgment (other than a cost order) obtained against a debtor (the SOPA Debtor) under the [SOP Act] will be paid by the Company … to the Deed Administrators and held by the Deed Administrators as trustee (the Trustee) on a trust for the Company and each SOPA Debtor on the terms in this clause 4.
KCC later sought to recover the unpaid amounts under the SOP Act and RCC resisted, arguing that the DOCA should be set aside under s445D(1) of the Corporations Act, as it was entered into for an improper purpose (ie for KCC to circumvent s32B of the Act).
Key findings
- Was the DOCA entered into for an improper purpose?
RCC argued that the public policy of the Act was to promote cashflow, and thereby the function of s32B was to make clear that the regime could not operate where the claiming corporation was in liquidation. KCC argued that 'improper purpose' should only be determined by reference to the Corporations Act, and that the DOCA maximised returns to creditors while the company was in administration.
The court found in favour of KCC, determining that it was not an improper purpose to enter into the DOCA to take the benefit of the limited operation of s32B of the Act. At [35], Justice Ball held:
…it is difficult to see how it could be said that the DOCA was designed to avoid the operation of the SOP Act. It would be more accurate to say that it was designed to take advantage of the limited operation of s32B (with our emphasis).
- Were the proceedings an abuse of process?
RCC argued in the alternative that KCC's use of a DOCA to avoid the operation of s32B, and thereby temporarily stave off inevitable liquidation, was an abuse of process.
Again, the court found against RCC, holding that merely structuring its financial affairs such that they were not captured by s32B of the Act does not constitute an abuse of process.
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