Landmark legal win a ‘game-changer’ for construction sector

OPINION: CREDITORS and construction companies facing cashflow challenges are set to be the ‘big winners’, following a recent ground-breaking Supreme Court decision that makes the NSW Security of Payment (SOP) Act* available to entities in Administration – regardless of their solvency.

The action** was brought by Chamberlains Law Firm on behalf of insolvency specialist Jirsch Sutherland, to recover debts owed to a subcontractor, Kennedy Civil Contracting (KCC), which had entered Voluntary Administration. The ruling is the first reported decision testing the ambit and scope of Section 32B of the SOP Act.

The matter involved executing a ‘Holding DOCA’ for the purpose of pursuing the debtors, including Richard Crookes Construction Pty Ltd, under the SOP Act. Creditors voted to execute the DOCA rather than placing KCC into liquidation. While it was acknowledged by KCC’s creditors that the company would inevitably be placed into liquidation in the future, the action was being done to ‘get around’ Section 32B of the Act.

Backgrounder

KENNEDY CIVIL CONTRACTING PTY LTD (ADMINISTRATORS APPOINTED) v RICHARD CROOKES CONSTRUCTION PTY LTD

Jirsch Sutherland runs landmark case.
Major win for construction companies facing cashflow challenges: SOP Act available to entities in Administration regardless of solvency.
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. Link to case here.
Jirsch Sutherland was appointed joint and several administrators over Kennedy Civil Contracting (KCC). KCC’s financial position was dire, owing creditors $5.5 million while having debtors of only $4.4 million.
Jirsch Sutherland engaged Chamberlains Law Firm to pursue the debts owed to KCC. Proceedings were commenced against Richard Crookes Construction Pty Limited (and others) under the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act).
On February 10, 2023, the Supreme Court handed down judgement conclusively answering the question of whether the SOP Act can be used on behalf of an entity which is insolvent. This decision has far-reaching implications for construction companies, particularly during the current economic climate, which is placing ever further cashflow pressure on an already strained industry.
To read the judgement click here and for a more detailed summary of the case prepared by Chamberlains Law Firm click here.

The issue

There had been some contention under the Security of Payment Regime as to whether it should apply to construction companies that were insolvent or in liquidation. In 2016, the Victorian Supreme Court of Appeal said it would not,[1] but in 2019 the New South Wales Supreme Court of Appeal said it would.[2]

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 which expressly provided that the SOP Act would not apply to a construction company in liquidation.

The decision in the Kennedy Civil Contracting Case is the first reported decision testing the ambit and scope of section 32B.

The facts

On November 1, 2021, Richard Crookes Construction Pty Ltd (Richard Crookes) engaged Kennedy Civil Contracting to carry out civil, stormwater and associated construction works under two separate subcontracts. During the performance of the works KCC served several payments claims under Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act). Richard Crookes responded to some of the payment claims with payment schedules and failed to respond to others.

On August 1, 2022, joint and several voluntary administrators were appointed to Kennedy Civil Contracting. During the administration, the administrators formed the view that KCC was “hopelessly insolvent”. Kennedy Civil Contracting commenced proceedings seeking to recover monies owed by Richard Crookes under the SOP Act. Particularly, at a meeting of its creditors, a vote was carried to, rather than enter into liquidation immediately, execute a “Holding Deed of Company Arrangement” (Holding DOCA) for the dominant purpose of pursuing Richard Crookes under the SOP Act. It was acknowledged by Kennedy Civil Contracting’s creditors that the company would inevitably be placed into liquidation in the future, and this was being done simply to “get around” section 32B of the SOP Act.

The Court decision

Richard Crookes argued that the Holding DOCA was entered into for an “improper purpose” and thus the Court should override Kennedy Civil Contracting’s creditors and terminate the DOCA, placing Kennedy Civil Contracting into liquidation. They also argued that entering into the Holding DOCA for the sole purpose of avoiding section 32B of the SOP Act was an abuse of process.

The Court did not agree. The Court held that the Holding DOCA was entered into to maximise returns to creditors and as such was entered into for a proper purpose and the Kennedy Civil Contracting organising its affairs carefully to avoid the operation of section 32B of the SOP Act was not an abuse of process.

What it means

Construction companies facing cashflow difficulties which enter into administration now have a far greater chance of pursuing and being paid by their debtors. Recoveries can both assist a construction company that enters into administration to fund a DOCA and be able to continue to trade or return a far better result for creditors.

The Court, which handed down its judgement on February 10, 2023, held that the Holding DOCA was entered into to maximise returns to creditors and, as such, was entered into for a proper purpose and that KCC organising its affairs carefully to avoid operation of Section 32B was not an abuse of process.

The judgement is “a game-changer”, said Devine.

“It will allow Administrators to take advantage of the SOP Act when companies are insolvent (not in liquidation) via a DOCA.

“This will allow collection of debts for the benefit of creditors and it will help protect subcontractors. It’s a significant development for insolvency in the construction industry, particularly in NSW, but might also have ramifications in other States, as other security of payment regimes are based on the NSW SOP Act.”

“This judgement conclusively answers the question of whether the SOP Act can be used on behalf of an entity that’s insolvent. Construction companies facing cashflow difficulties and which enter into administration now have a far greater chance of pursuing and being paid by their debtors. Recoveries can also assist a construction company that enters into administration to fund a DOCA, while being able to continue to trade or return a far better result for creditors,” Terry-Whitall said. “The decision has far-reaching implications for construction companies as a whole, particularly during the current economic climate, which is placing further cashflow pressures on an already strained industry.”

*The Building and Construction Security of Payment Act 1999.

**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

By Trent Devine, Partner, Jirsch Sutherland and Michael Terry-Whitall, Legal Director, Litigation – Building and Construction, Chamberlain.*