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Contractors beware: Court concludes that deed preserves payment claims

Rebecca Watters ||
Overview

The Supreme Court has determined in a recent matter that the restriction on companies in liquidation from enforcing payment claims under section 32B of the Building and Construction Industry Security of Payment Act (SOP Act) does not extend to insolvent companies generally.

What is Section 32B?

Section 32B of the SOP Act operates to prevent companies in liquidation from issuing and enforcing payment claims, as well as applying for an adjudication determination.

Individuals who receive payment claims from companies in liquidation are therefore not required to comply with the usual obligations under the SOP Act including to review, respond and raise any disputes in respect to a claim within the specified time frames.

Supreme Court Case

Kennedy Civil Contracting Pty Ltd (Administrators Appointed) v Richard Crooked Construction Pty Ltd; In the matter of Kennedy Civil Contracting Pty Ltd [2023] NSWSC 99

In November 2021, Richard Crookes Construction Pty Ltd (RCC) engaged Kennedy Civil Contracting Pty Ltd (KCC) to complete constructions works for a project at Bankstown Airport.

Payment claims were served by KCC on RCC for the various stages of works and for each of the claims, RCC either failed to pay or failed to submit a payment schedule in reply.

In August 2022, administrators were appointed on behalf of KCC and a recommendation was made by the administrators to KCC to enter into a deed of company arrangement (DOCA). This recommendation was made with a view to preventing KCC from going into liquidation and attracting the payment claim restrictions that might otherwise be enforced under section 32B of the SOP Act.

After entering into a DOCA, proceedings were brought by KCC against RCC for recovery of the costs initially claimed by KCC, to the tune of $683,928.

In responses, RCC made an application under s 445D Corporations Act 2001 (Corporations Act) to set aside the DOCA entered into by KCC, on the basis that it was constructed to deliberately and improperly avoid the operation of section 32B.

Impact of Supreme Court Decision

Up until the Supreme Court hearing of this matter, the SOP Act was silent as to whether or not section 32B applied exclusively to companies in liquidation or if it extended to insolvent companies more broadly.

In the course of the hearing, the scope of the provision was explored and the outcome of the case was in favour of limiting the application of section 32B to companies in liquidation.

In coming to that decision, the Court made it clear that section 32B does not prevent returns to creditors by companies that are insolvent and which have not yet gone into liquidation.

The Court further confirmed in its judgment that it is not unreasonable, nor an abuse of process under section 445D of the Corporations Act for an insolvent company to enter into a DOCA to avoid the effects of section 32B, and to pursue its rights under the SOP Act (including to issue and enforce payment claims) to satisfy its creditors.

Conversely, in his assessment of the DOCA entered into by KCC, Justice Ball stated that “it would be more accurate to say that it was designed to take advantage of the limited operation of s 32B” and not to abuse it.

Following various large-scale construction disputes caused by variations and delays in the aftermath of the COVID-19 pandemic, this Supreme Court case has confirmed an avenue through which insolvent companies can legally pursue payment claims from debtors – despite section 32B of the SOP Act.

Key takeaways
  • Contractors should not assume that a payment claim issued by an insolvent company discharges them of their obligations under the SOP Act.
  • Insolvent companies are not immediately barred from issuing and enforcing payment claims and can take steps to maximise returns to creditors by entering into a DOCA.
  • It is not an improper use or abuse of process under section 445(1)(g) of the Corporations Act for companies to enter into a DOCA to address their internal financial affairs and avoid the operations of section 32B.

If you are in a building and construction dispute and you are unsure of your rights, or you think that this matter may apply to you, we recommend that you seek swift and specialised legal advice from Coleman Greig’s Building and Construction team.

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