The use of Security of Payment by insolvent companies – allowed but a toothless tiger?
As the construction industry continues to face numerous challenges, there is a steady flow of builders and developers going into administration or liquidation. In this current climate, it is no surprise that the Court has recently considered whether insolvent builders can utilise the fast-track payment regime under the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOPA).
SOPA is legislation that provides a mechanism for quick dispute resolution over payments claimed to be due for ‘construction work.’ It allows builders to serve a simple payment claim and, if challenged, initiate an adjudication process usually comprising one round of written submissions to an independent adjudicator and a determination enforceable by a Court within 3 to 4 weeks. You can read more about SOPA in our earlier article - Security of payment 101.
Under s 32B of SOPA, a corporation in liquidation cannot serve a payment claim or take action to enforce a payment claim (including making an adjudication application) or an adjudication determination.
This is because the public policy behind SOPA is to promote cashflow for a builder’s ongoing business (not relevant in liquidation), and as an unsecured creditor, a principal will unlikely be able to recover a payment made to a company in liquidation under SOPA if the creditor is subsequently successful in establishing a contractual right to repayment.
But what about an insolvent contractor that isn’t formally in liquidation?
Kennedy Civil Contracting
The recent Supreme Court case of Kennedy Civil Contracting Pty Ltd (Administrators Appointed) v Richard Crookes Construction Pty Ltd; In the matter of Kennedy Civil Contracting Pty Ltd (KCC) considered whether the regime under SOPA could be used by a subcontractor in voluntary administration.
Kennedy Civil (KCC) was subcontracted to Richard Crookes to provide civil, stormwater and associated works at a project at Bankstown Airport.
Between December 2021 and June 2022, KCC served six payment claims on Richard Crookes. Richard Crookes either failed to pay the amount conceded in their payment schedules or failed to serve payment schedules at all. KCC was therefore entitled to enforce payment and so commenced the proceedings.
The sole purpose of the DOCA was to enforce payment under SOPA, as KCC was “hopelessly insolvent” and would not ultimately be revived.
Richard Crookes resisted KCC’s claim on two bases:
It argued that the DOCA was liable to be terminated under s 445D(I) of the Corporations Act 2001 (Cth), because it was entered into for a wrongful purpose, being to circumvent s 32B of SOPA; and
The Court ought to stay the proceedings on the basis that the proceedings were an abuse of process in circumstances where KCC was ‘hopelessly insolvent.’
KCC argued that:
The DOCA was a means of seeking to maximise the amount that would be available for distribution to creditors, which is consistent with the Corporations Act and is not an improper use of a DOCA; and
s 32B plainly seeks to deny the benefit of SOPA only to a company in liquidation, not to any company that is insolvent.
The Court did not accept Richard Crookes’ arguments and held:
The DOCA was not entered into for a wrongful purpose (being to avoid the operation of s 32B). Rather, it would be more accurate to say that it was designed to take advantage of the limited operation of s 32B; and
- KCC had organised its affairs so that it fell outside the scope of s 32B and could maximise the return to creditors (a rationale for the voluntary administration regime), which does not involve an abuse of process.
Kennedy demonstrates that despite s 32B, a company in voluntary administration or subject to a DOCA can use SOPA to recover unpaid progress payments.
Following Kennedy, the case of Piety Constructions Pty Ltd v Megacrane Holdings Pty Ltd identified that there are nonetheless some obstacles to the use of SOPA by a company in administration.
Megacrane Holdings Pty Ltd (Megacrane) was subcontracted to Piety Constructions Pty Ltd (Piety) for the supply of tower cranes and labour. On 9 March 2022, an administrator was appointed to Megacrane.
The administrator served payment claims on Piety under SOPA. Megacrane subsequently made an application for adjudication, obtained an adjudication certificate and then registered a judgment debt in the District Court.
Piety commenced proceedings in the Supreme Court to restrain Megacrane from enforcing the judgment debt and argued that the adjudication determination was void. It also sought a permanent injunction on the enforcement of the judgment debt arguing that given the insolvency of Megacrane, it would be an abuse of process.
Megacrane contended that unless and until a claimant goes into liquidation, the Act is capable of operating in favour of a claimant which is insolvent.
Piety failed in its challenge to the adjudication determination.
Regarding the permanent injunction sought by Piety, the Court said that it is possible for a party to seek a stay of a judgment under SOPA. In determining this, the Court must balance the competing policies of SOPA - that contractors should be paid promptly for the work that they have done but that any payment under SOPA is not intended to affect the rights of the parties under the relevant construction contract - and consider factors such as the strength of the principal’s claim, the basis of the claim and the insolvency of the contractor.
Subsequently, in Piety Constructions Pty Ltd v Megacrane Holdings Pty Ltd (Administrator Appointed) (No 2), the Court held that it would have ordered a stay of execution of the judgment but for undertakings to the Court offered by the Administrator on behalf of Megacrane.
The undertakings were that Megacrane would declare a trust of the money paid in satisfaction of the judgment, to be held on trust for Piety to the extent that Piety was not liable to pay these monies to Megacrane because of a set-off of any successful contractual claim Piety ultimately made against Megacrane.
This case reminds us that even if a claimant can rely on the SOPA regime whilst insolvent, the Court could potentially order a stay of payment, if the judgment amount is not otherwise quarantined from the general pool of creditors. Either way the money would not be available to the insolvent company.
Lastly, the NSW Court of Appeal case of A-Civil Aust Pty Ltd v Ceerose Pty Ltd confirmed both that:
s 32B only applies to companies in liquidation (rather than administration); and
that there is a heavy burden on a party who seeks injunctive relief or a stay pending the outcome of proceedings contemplated by s 32 on the basis that a payment may become unrecoverable due to the possible or even likely insolvency of the payee at a later date.
With respect to the latter, the principal must demonstrate the likelihood of irreparable prejudice.
In summary, these recent cases demonstrate that contractors which are insolvent (including companies that have entered into voluntary administration and/or entered into a DOCA), but are not in liquidation, can still rely on the regime under SOPA to recover unpaid progress claims.
However, the Court has the power to stay payment of a claim if there are sufficient reasons to do so, including the likelihood of irreparable prejudice to the principal because the contractor is insolvent.
If you require any advice regarding SOPA or other building and construction issues, please contact our team at Bartier Perry.
Authors: David Creais & Rebecca (Renshaw) Khoury