Principals and Contractors be wary! In the recent case of 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 (Kennedy) the Court tested the scope of section 32B of the Building and Construction Industry Security of Payment Act 1999 (NSW) (the SOP Act).Here, New South Lawyers' Litigation Lawyers outline the details on the case, and what it means for a Company Under a Deed of Company Arrangement making a Claim Under the Building and Construction Industry Security of Payment Act 1999 (NSW)

Details of the matter

Kennedy Civil Contracting (Pty) Ltd (KCC) sought to recover amounts said to be due to it from Richard Crookes Constructions Pty Ltd (Richard Crookes) under the SOP Act.  Voluntary Administrators were appointed to KCC in circumstances were KCC was hopelessly insolvent (common ground), and a Deed of Company Arrangement (DOCA) was executed by it. The administrators of KCC recommended the creditors resolve that KCC execute what the administrators described as a "Holding DOCA" to preserve KCC's rights to recover as debts due to it under the SOP Act the amounts it claims notwithstanding its insolvency. KCC contended that the amounts owed by Richard Crookes to KCC were considered recoverable debts under the SOP Act. The SOP Act did not allow Richard Crookes to bring any cross claims or defences regarding the construction contracts related to the payment claims. However, Richard Crookes retained the right to initiate separate proceedings concerning the construction contracts.  The provisions of the SOP Act are often described as introducing a “pay now, argue later” regime. The total amount claimed by KCC under the SOP Act was stated as $683,928.49, plus interest.

Opposition Claims  

Richard Crookes opposed KCC’s claim on two grounds:  Firstly, that the DOCA executed by KCC's creditors could be terminated, which would lead to KCC being taken into voluntary liquidation. The termination of the DOCA would prevent KCC from serving a payment claim or taking action to enforce a payment claim under the SOP Act; and  Secondly, the ongoing legal proceeding initiated by KCC is an abuse of process and should be stayed.  Richard Crookes contended the DOCA was entered into for an improper purpose and aims to defeat the operation of s 32B of the SOP Act. Richard Crookes argued that the legislative history supported this interpretation. Under s 32B(1) of the SOP Act, “a corporation in liquidation cannot serve a payment claim 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”. Richard Crookes submitted the DOCA was structured to maximise the amount available for distribution to KCC, rather than relying on the cash flow provided by the SOP Act. Richard Crookes referred to cases where administrations were terminated due to improper purposes, such as protecting company directors, rather than maximising creditor returns.  The purpose of s 32B of the SOP Act is seen as preventing interim payments made under the SOP Act from becoming permanent in the event of liquidation. However, the DOCA in this case explicitly preserved Richard Crookes's rights to recover the amount paid under the construction contract.

Final findings

The Court held that intentionally using the Corporations Act to avoid triggering section 32B of the SOPA did not amount to an improper purpose. The court ultimately refused to terminate the DOCA and Richard Crookes was held liable for the amounts claimed by KCC.  The Court further held that no abuse of process occurred simply because KCC had organised its affairs such that it fell outside the ambit of section 32B of the SOP Act.  The Court reasoned at [37] and [42]: Firstly, Section 32B of the SOP Act provides protection in the event of liquidation and the fact that it may have limited operation because of the ability of a company to enter a DOCA is not a reason for finding that the DOCA was entered for an improper purpose. Secondly, It is not correct to characterise KCC’s claim as an attempt to avoid the operation of section 32B of the SOP Act. Rather, it has organised its affairs so that it falls outside the scope of section 32B. That does not involve an abuse of process.  The effect of the Kennedy judgment is NOT that section 32B of the SOP Act no longer finds application. In simple terms, it means that section 32B of SOP Act is not triggered where a company enters a Deed of Company Arrangement, even if a company is hopelessly insolvent. This is because the Deed of Company arrangement effectively prevents a company from being wound up and it is consequently not a corporation in liquidation as envisaged in section 32B of the SOP Act.  Parties to Building and Construction Contracts must be wary that the purpose of SOP Act is to permit a party to recover the amount of any judgment by a claim under the relevant construction contract and that right is preserved by a Deed of Company Arrangement.  If you are contactor or principal, it is highly recommended that you seek legal advice before when it comes to matters of Building and Construction. To discuss your Building and Construction Law matter and find the best option for you, please contact our Sydney Building and Construction Law team on 02 9891 6388.

New South Lawyers’ communications are intended to provide commentary and general information. To that end, people should not rely on this communication as legal advice. Accordingly, they should seek formal legal advice for matters of interest arising from this communication.

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