NSW Supreme Court prevents insolvent contractor from enforcing adjudication determinations

31.08.2016 Michelle Knight, Richard Crawford

A court may prevent enforcement of an adjudication determination where it established that the beneficiary of that determination is insolvent or at risk of going insolvent.

Hakea Holdings Pty Limited v Denham Constructions Pty Ltd; BaptistCare NSW & ACT v Denham Constructions Pty Ltd [2016] NSWSC 1120

A court may grant a stay or injunction preventing the enforcement of an adjudication determination where it can be established that the beneficiary of that determination is insolvent or at risk of going insolvent and depending on the strength of the applicant's claim against that party.

If a respondent has serious concerns about the solvency (rather than an actual insolvency) of a claimant it can now challenge adjudication determinations.

The court examined two applications made in separate proceedings. The first application was brought by Hakea Holdings Pty Limited (Hakea) in respect of an adjudication determination in favour of the contractor, Denham Constructions Pty Ltd (Denham) valued at $1,138,045.33, and the second by BaptistCare NSW & ACT (BaptistCare) in respect of a judgment obtained in the District Court of NSW for $475,322.32 relying on an adjudication certificate for that amount. Both applications sought orders of a stay or injunction preventing Denham from obtaining the benefit of those adjudication determinations on the basis that Denham is insolvent or at a substantial risk of becoming insolvent.

The court held it would continue the orders previously made in both the BaptistCare and Hakea proceedings restraining Denham from enforcing the adjudication determinations.

In determining whether to grant a stay and/or injunction, the court balanced two competing policies of the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act):

  • that contractors should be paid promptly for the work done; and
  • that payment under the SOP Act is not intended to affect the rights of parties under the construction contract (and section 32 of the SOP Act provides that a court hearing a dispute may make orders as it considers appropriate for the restitution of any amount paid as a result of a determination).

The factors that the court will consider in balancing those polices are the strength and basis of the applicant's claim (including whether the applicant has challenged the debt), the likelihood that the contractor will be unable to repay the amount and the risk that the contractor will become insolvent.

Strength of applicant's claim

In the BaptistCare proceedings, the court considered the parties' respective arguments as to whether BaptistCare was entitled to terminate the contract between it and Denham. BaptistCare had initially served a notice purporting to terminate the contract for convenience but later sought to exercise its right to terminate due to an insolvency event and withdraw its original notice. The court's view was that it was difficulty to see why BaptistCare was not entitled to enforce its termination rights as it did.

In the Hakea proceedings, Hakea served a show-cause notice on Denham arguing several substantial breaches of contract including failure to bring works to practical completion by the date for practical completion. On 10 December 2015, Hakea terminated the contract. Denham argued that it had not been in substantial breach of the contract. The court found that Hakea had a strong case that it was entitled to terminate its contract with Denham.

Denham's financial position

The court confirmed that 'the relevant question is not whether Denham is solvent or insolvent, but rather the likelihood that Hakea and BaptistCare will be able to recover the amounts paid by them if ultimately they succeed in their claims against Denham' but recognised there was a close relationship between the two issues.

On review of Denham's financial position, the court concluded:

  • there was a substantial risk that Denham would become insolvent in the near future which would have a significant effect on the recoverability of any amounts paid by BaptistCare and Hakea;
  • Denham was likely to have 'a substantial deficiency in current assets to meet its current liabilities indefinitely' and its business prospects were unlikely to improve; and
  • taken together, these considerations strongly favoured a stay and the continuation of any injunction preventing Denham from enforcing the adjudication determination and judgment in its favour.

The court also stated that if it had been required to decide Hakea's alternative argument regarding the right to withhold payment due to Denham's failure to provide a subcontractor's statement, it would have decided that this right could not displace a judgment debt or provide a ground for granting a stay or an injunction.

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https://www.minterellison.com/articles/nsw-supreme-court-prevents-insolvent-contractor-from-enforcing-adjudication-determinations

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