Can an insolvent contractor still serve or rely on a payment claim?

5 minute read 21.03.2023 Andrew Hales, Anthony Sommer

A recent decision of the NSW Supreme Court examines whether a 'hopelessly insolvent' subcontractor that executes a holding DOCA can enforce payment claims served on a head contractor under the NSW security of payment legislation.

Key takeouts

s 32B of the SOP Act only applies to provide protection to respondents in the event of liquidation, and not where claimants are under administration or a DOCA.

the subcontractor had by executing a DOCA organised its affairs so that it fell outside the scope of s 32B, but nothing in the DOCA undermined any policy of the SOP Act.

the subcontractor's creditors resolved to execute a DOCA in accordance with the administrators' opinion, and they reached what was a reasonable conclusion on a matter that they were properly entitled to consider, which was sufficient to make the purpose of the DOCA a proper one.

A deed of company arrangement (DOCA) may be adopted by companies in administration for various arrangements. This includes to effect an extension of the administration statutory moratorium applying on creditor claims against the company while a proposal is developed which avoids insolvent liquidation. This is known as a holding DOCA. But is it an abuse of process for a hopelessly insolvent company to execute a holding DOCA with its creditors for the purpose of enabling the payment claim mechanism contained within the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act) to be utilised? The NSW Supreme Court considered this issue in Kennedy Civil Contracting Pty Ltd (Administrators Appointed) v Richard Crookes Construction Pty Ltd [2023] NSWSC 99.

The NSW Supreme Court found that the holding DOCA was not liable to be terminated because it was not proposed for an wrongful purpose to circumvent the operation of s 32B of the SOP Act (which provides that a corporation in liquidation cannot serve or enforce payment claims). The Court also found that the subcontractor's claims under the SOP Act were not an abuse of the processes under the SOP Act, even though it was hopelessly insolvent and was only in a position to take advantage of the provisions of the SOP Act by executing a holding DOCA that sought to avoid the operation of s 32B.

What happened in Kennedy Civil Contracting Pty Ltd (Administrators Appointed) v Richard Crookes Construction Pty Ltd

The head contractor engaged the subcontractor under two subcontracts for civil construction works at Bankstown Airport in Sydney. The subcontractor served valid payment claims on the head contractor under the subcontracts in accordance with the SOP Act. The head contractor did not serve payment schedules for many of these claims and for others it served schedules identifying scheduled amounts it was willing to pay. The head contractor did not pay any of these amounts.

Voluntary administrators of the subcontractor were subsequently appointed, by which time the subcontractor was hopelessly insolvent. The administrators recommended to the subcontractor's creditors that they should execute a holding DOCA proposed by the administrators so as 'to enable for the mechanism contained within the [SOP Act] to be utilised … [and] keep [the subcontractor] out of Liquidation'. The holding DOCA was approved by the subcontractor's creditors and executed.

The DOCA preserved the subcontractor's right to recover as debts due to it the amounts claimed under the SOP Act notwithstanding its insolvency, as recovered funds under SOP Act claims were to be held in trust until the final resolution of any claim through the proof of debt and adjudication regime under the DOCA.

The subcontractor's voluntary administrators sued the head contractor seeking to recover amounts owed in respect of the subcontractor's payment claims. The head contactor defended the claims on two bases:

1. the DOCA executed by the subcontractor's creditors was liable to be terminated under s 445D(1)(g) of the Corporations Act 2001 (Cth), because it was entered into for a wrongful purpose – to circumvent the operation of s 32B of the SOP Act. On termination of the DOCA and consequent liquidation, the subcontractor would lose its rights under the SOP Act; and

2. for similar reasons, the Court should stay the payment claim proceeding on the basis it was an abuse of process.

Important takeaways

Justice Ball of the NSW Supreme Court found that:

s 32B of the SOP Act only applies to provide protection to respondents in the event of liquidation, and not where claimants are under administration or a DOCA. That s 32B may have a limited operation because of the ability of a company under administration to execute a DOCA is not a reason for giving the Court's power to terminate a DOCA a broader operation;
the subcontractor's payment claims proceeding was not an abuse of process because there was no repetitious use of the processes of the SOP Act or the Court to obtain judgment and the subcontractor had, by executing a DOCA, organised its affairs so that it fell outside the scope of s 32B but nothing in the DOCA undermined any policy of the SOP Act; and
the purpose of the DOCA was to maximise the return to creditors by permitting the subcontractor to exercise the rights conferred by the SOP Act. As the creditors resolved to execute a DOCA in accordance with the administrators' opinion, they reached what was a reasonable conclusion on a matter that they were properly entitled to consider, which was sufficient to make the purpose of the DOCA a proper one.

Practical significance

The decision confirms that the payment claim restrictions in 32B of the SOP Act only apply to companies in liquidation. The decision also highlights the practical difficulties for respondents to successfully defend payment claims brought by insolvent claimant companies who are not in liquidation.

For insolvency practitioners the decision will be welcome news that hopelessly insolvent companies under administration or a DOCA can proceed with payment claims under the SOP Act and seek recovery for the benefit of creditors.

In this case, the subcontractor was entitled to enforce its payment claims as debts due without having to deal with any defence or cross-claim, as the head contractor had not issued payment schedules in relation to some payment claims and had agreed scheduled amounts payable in respect of other payment claims. The decision will have wider application as a holding DOCA could also be executed to enable a hopelessly insolvent company to issue a payment claim and make an adjudication application in respect of any amount withheld in a payment schedule.

On 21 March 2023 the Court delivered a judgment on costs and in doing so granted a stay on the orders in favour of the insolvent subcontractor on the condition that the head contractor has 14 days to file an appeal against the first instance decision. The issue appears destined for the NSW Court of Appeal.

View the costs judgment.

We hope you find our analysis of this decision useful. Please contact our team if you have any questions or would like any further advice.

View a full copy of the judgment.