Preserving security for payment claims when facing insolvency

Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act) claims, administrator appointments and Holding DOCAs.

Introduction / Summary

While the SOP regime has been a tool available to the construction industry for some time to provide for the timely collection of debts and ongoing cash flow during construction projects, there was a major difficulty in utilising this regime when dealing with a company near to or experiencing insolvency or requiring restructuring. When a liquidator is appointed, it removes the company’s ability to access the regime and renders claims under the SOP Act that had not been commenced or determined as “withdrawn”, despite the company’s best efforts in taking action for the enforcement and payment for completed work.

Now, due to a recent decision in Kennedy Civil Contracting (Administrators Appointed) v Richard Crookes Construction Pty Limited; in the matter of Kennedy Civil Contracting Pty Limited [2023] NSWSC 99 there is an option to preserve those claims, which we explore and explain in greater detail below. Effectively, it involves careful consideration before appointing a voluntary administrator by using a “Holding Deed of Company Arrangement (Holding DOCA)” in order for a company to avoid liquidation, at least until the company realises any SOP Act claims.

Background to SOP Act

Section 3 of the Act states:

“The object of the Act is 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 supplying of those goods and services.”

There had been some contention in the Courts as to whether the SOP regime should apply to construction companies that were insolvent or in liquidation. In 2016 the Victorian Supreme Court of Appeal said it would not, but in 2019 the New South Wales Supreme Court of Appeal said it would.

After industry consultation and various reviews at both a Federal and State level into the SOP regime, New South Wales enacted an amendment to the SOP Act by inserting a new section 32B that expressly provides that the SOP Act would not apply to a construction company in liquidation.

Section 32B States:

Application of Part to a claimant in liquidation

(1)  A corporation in liquidation cannot serve a payment claim on a person under this Part or take action under this Part to enforce a payment claim (including by making an application for adjudication of the claim) or an adjudication determination.

(2)  If a corporation in liquidation has made an adjudication application that is not finally determined immediately before the day on which it commenced to be in liquidation, the application is taken to have been withdrawn on that day.

The Kennedy Civil Contracting decision is the first reported decision testing the scope of section 32B. The circumstances, in summary, were:

• Richard Crookes Construction Pty Ltd (RCC) engaged Kennedy Civil Contracting Pty Ltd (KCC).

• During the performance of works KCC made several claims under the SOP Act.

• RCC responded to some claims but failed to respond to others.

• Joint and several administrators were appointed to the company (KCC).

• KCC commenced proceedings under SOP Act.

• At a meeting of creditors, KCC creditors resolved to approve a proposal for a Holding DOCA for the dominant purpose of pursuing RCC under the SOP Act. It was acknowledged that KCC would inevitably be placed into liquidation in the future.

There were two key issues before the Court for determination in this case:

1. Was a DOCA entered into (for the dominant purpose of avoiding the operation of section 32B of the SOP Act a DOCA) an “improper” purpose pursuant to section 445(D)(1) of the Corporations Act 2001?

2. If the answer to question one above is “No”, then did KCC’s actions in entering into the DOCA for the dominant purpose of avoiding the operation of section 32B of the SOP Act amount to an abuse of process?

The Court held that the Holding DOCA preserved the “pay now argue later” spirit of the SOP Act and that deliberately using the Corporations Act provisions to avoid triggering section 32B of the SOP Act did not amount to an improper purpose. Accordingly, the Court refused to terminate the DOCA pursuant to section 445(D)(1) of the Corporations Act.

The Court held that no abuse of process had occurred simply because KCC had organised its affairs so that it fell outside of the scope of section 32B of the SOP Act.

Holding DOCA

So, what is a holding DOCA? Effectively it is a Deed of Company Arrangement that is proposed to provide a voluntary administrator/stakeholder further time to develop proposals to recapitalise the company without the need to seek court orders to extend the administration’s convening period.

In the context of maintaining the integrity of claims under SOP regime, the holding DOCA keeps the company from being wound up (and falling foul of section 32B of the SOP Act) in a cost-effective manner until such time as the deed administrator can enforce the claims available to the company under SOP Act.

While in some cases the company will still ultimately end up in liquidation, there is the opportunity to provide for enhanced returns to creditors by realisation of what is usually a substantial asset that may otherwise be lost or prove difficult to collect.

Go to our factsheet to get more information on Deeds of Company Arrangement click here.