Major Projects & Construction 5 Minute Fix 112: Hopelessly insolvent? There is hope


In Kennedy Civil Contracting Pty Ltd (Administrators Appointed) v Richard Crookes Constructing Pty Ltd v Richard Crookes Construction Pty Ltd; In the matter of Kennedy Civil Contracting Pty Ltd [2023] NSWSC 99, the NSW Supreme Court considered whether a company on the brink of liquidation can take action to enforce a payment claim under the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act).

Kennedy Civil Contracting Pty Ltd (Administrators Appointed) (KCC) commenced proceedings against Richard Crookes Constructions Pty Ltd (Richard Crookes) for amounts it claimed were owed to it pursuant to sections 15(2)(a)(i) and 16(2)(a)(i) of the SOP Act (the T&C Proceeding).

Around the time that the T&C Proceeding was commenced, administrators had been appointed to KCC, who determined that KCC was "hopelessly insolvent" and would inevitably be placed into liquidation. However, on the recommendation of the administrators, KCC entered into a "holding" deed of company arrangement (DOCA). The purpose of the DOCA was to avoid the operation of section 32B of the SOP Act (which precludes a corporation in liquidation from taking action to enforce a payment claim) and preserve the T&C Proceeding. Importantly, the DOCA provided for any moneys recovered under the T&C Proceeding to be held in trust, preserving Richard Crookes' right to recover the amounts upon a final resolution.

Richard Crookes resisted the T&C Proceedings on the basis that the public policy underpinning section 32B was to ensure that the SOP regime was only available to promote cashflow, and was not available where the claimant was in liquidation. On that basis, permitting KCC to "temporarily" avoid liquidation by executing a DOCA would be contrary to that public policy. Richard Crookes also argued that the T&C Proceeding was an abuse of process.

The Court rejected Richard Crookes' submissions, finding that the DOCA did not circumvent the SOP Act but allowed KCC to take advantage of the limited operation of section 32B. The Court also noted that the terms of the DOCA were such that they preserved Richard Crookes’ right to final relief in much the same way as section 34 of the SOP Act.

The Court also found that it would be incorrect to categorise the T&C Proceeding as an abuse of process, because KCC was exercising a right that was conferred by the SOP Act to obtain judgment, not a repetitious use of the processes of the Court.

This case confirms that section 32B of the SOP Act is limited to its express wording, making it possible for construction companies who enter administration to pursue their debtors through the mechanisms available under the SOP Act, giving some hope to the "hopelessly insolvent".

Original Article