Australia: DOCA as a mechanism to preserve SOPA claims

Introduction

The recent decision of Kennedy Civil Contracting Pty Ltd (Administrators Appointed) v Richard Crookes Constructions Pty Ltd [2023] NSWSC 99 considered whether Kennedy Civil Contracting (KCC), a "hopelessly insolvent"¹ company, entered into a deed of company arrangement (DOCA) for a proper purpose, where they executed a DOCA to preserve its rights under Building and Construction Industry Security of Payment Act 1999 (NSW) (SOPA). Ultimately, the Court was satisfied that executing the DOCA was a legitimate tool to preserve KCC's rights to recover debts due to it under SOPA.

Background

Richard Crookes Pty Ltd (Richard Crookes) was the head contractor of works conducted for a project at Bankstown Airport. In November 2021, Richard Crookes engaged KCC under two subcontracts to carry out various civil, stormwater and associated works.² Between December 2021 and June 2022, KCC validly served various payment claims on Richard Crookes under the SOPA. Richard Crookes failed to serve various payment schedules in response to payment claims within period prescribed by SOPA. In some instances, Richard Crookes served payment schedules identifying the amounts it was willing to pay but failed to pay those amounts to KCC.

On 1 August 2022, administrators were appointed to KCC when KCC was "hopelessly insolvent".³ Upon their appointment, the administrators recommended that the creditors resolve that KCC execute a holding DOCA.⁴ They reasoned that this would enable the administrators to continue pursuing KCC's outstanding debts using mechanisms contained within SOPA notwithstanding KCC's insolvency.

The DOCA was approved by creditors and subsequently executed on 17 November 2022. The DOCA preserved the "pay now, argue later" principles of the SOPA by a mechanism which required any amounts paid by Richard Crookes to be held in trust until the final resolution of any claim. Relevantly, the DOCA provided inter alia⁵:

• that any funds received arising after entry into the DOCA as a result of a claim, adjudication or judgment obtained against a debtor under SOPA will be paid by KCC to the Deed Administrators and held on trust for KCC and each debtor (SOPA Funds) with this trust surviving the termination of the DOCA; and
• that the SOPA Funds would be held in trust pending final adjudication of the debtors claims against KCC and I the absence of the submission of a proof of debt, the SOPA Funds would become property of KCC.

Arguments

Notwithstanding the plain reading of the DOCA, Richard Crookes submitted that the DOCA was entered into for a wrongful purpose because it was entered into to defeat the operation of section 32B of SOPA. That is, that a corporation in liquidation cannot serve a payment claim on a person or take any action to enforce a payment claim under Part 3 of SOPA to enforce a payment claim or an adjudication determination. Relevantly, Part 3 of SOPA provides that if a corporation in liquidation has made an adjudication application, that has not been determined prior to the date of liquidation, that application is taken to have been withdrawn on that day.

Richard Crookes argued that the DOCA was executed for an improper purpose. Firstly, that public policy purpose objectives of SOPA would be defeated if KCC were permitted to avoid liquidation temporarily by executing a DOCA simply to enable it to exercise its rights under SOPA.⁶ Richard Crookes contended that the rights created by SOPA should only be available where the exercise of those rights assists in the cashflow of a solvent company. Secondly, that the DOCA should be characterized as an attempt to subvert SOPA since KCC's liquidation was inevitable.

KCC submitted that the question of whether the DOCA had a proper purpose should be considered exclusively in the context of Part 5.3A of the Corporations Act 2001 (Cth) (Act). Namely, that the creditors of KCC chose to enter the DOCA rather than place KCC into immediate liquidation, as a means of seeking to maximise returns to KCC's creditors, which is not an improper use of the DOCA process.

Decision

The Court rejected both arguments advanced by Richard Crookes and found that the choice of liquidation as the point in time at which the benefits of the SOPA ceased to be available makes "perfect sense".⁷ A liquidation date is certain whereas a date of insolvency is uncertain. The Court upheld the validity of the DOCA and emphasised the key objectives of the DOCA was to maximise the returns to creditors rather than for some other purpose.⁸ Somewhat ironically, the Court rejected Richard Crookes submissions that KCC had enacted the holding DOCA to circumvent the provisions of SOPA and observed that if any party had sought to avoid its obligations under SOPA, it was in fact Richard Crookes by refusing to make interim payments due to KCC under the SOPA.⁹

The Court considered the legislative intention of section 32B of SOPA and observed that the purpose of the section is "to deny the benefits of the legislation to companies in liquidation, but not more generally."¹⁰ The Court considered the argument advanced by Richard Crookes which referred to explanatory materials relating to section 32B of SOPA and had alluded to cash flow considerations that the section had been enacted to address. The Court highlighted that the policy must be identified from the express terms of the statute rather than the individual opinions of those involved in drafting or passing the legislation.¹¹ The Court observed that the holding DOCA was designed to take advantage of the "limited operation" of section 32B of SOPA.

The Court ordered judgment in favour of KCC for the total sum that it claimed under sections 15(2)(a)(i) and 16(2)(a)(i) of SOPA totalling $683,928.49 plus interest.

Takeaways

The purpose of section 32B of SOPA is to prevent a situation arising where an interim payment made under SOPA becomes permanent because, on liquidation, the payment is no longer available to be returned to the payer if the payer is successful in its claim under a construction contract. Given the express wording of section 32B of the SOPA, administrators ought to be aware of the distinction between a company that has entered liquidation and a company that is insolvent but not in liquidation (i.e. a company in administration) in respect of the company's ability to take enforcement action under Part 3 of SOPA.

Parties seeking to argue that the utilisation of a DOCA subverts the operation of SOPA or is otherwise for an improper purpose are likely to be met with resistance by the Court in circumstances where the objectives of Part 5.3A of the Act are met and noting that a company subject to DOCA is not in liquidation (which would bring section 32B of SOPA into play).

If a company is placed into administration, appointed administrators ought to consider and investigate, amongst other things, if:

1. any payment claims pursuant to SOPA have been issued by the Company;
2. any payment schedule has been issued to the company by a head contractor within the requisite time provided in accordance with SOPA;
3. a payment schedule was provided by a head contractor and whether payment has in fact been made to the Company;
4. there are any adjudication applications on foot in respect of the Company;
5. enforcement of a payment claim or adjudication will result in a better returns for creditors than if the company was placed into immediate liquidation;
6. if the directors or any alternate DOCA proponents would be willing to agree to terms for payment by a head contractor to be made to a trust account pending the adjudication of any proof of debt lodged by the head contractor in the administration of the company.

Administrators, and any party effected by external administration, ought to be cognisant of the overriding objectives of Part 5.3A of the Act in the formulation of any DOCA. Relevantly for the purposes of companies with SOPA claims and adjudications on foot, it will be essential for administrators (and participating creditors) to understand the key mechanisms within the DOCA will deal with and distribute funds that are subject to payment claims or adjudications pursuant to SOPA.

Specialist insolvency advice should be sought by administrators, deed proponents and creditors on the drafting of DOCAs involving matters relevant to SOPA. This is to ensure that value is preserved for creditors, that any debtor claims are dealt with via adjudication and mechanisms are available to deal with the dispersal of funds subject to trust whilst adjudications on proofs of debt remain subject to assessment by the administrators.

Footnotes

¹ Kennedy Civil Contracting Pty Ltd (Administrators Appointed) v Richard Crookes Constructions Pty Ltd [2023] NSWSC 99 at [9]

² Ibid at [7]

³ Ibid at [9]

⁴ Ibid at [10]

⁵ Ibid at [12] to [15]

⁶ Ibid at ]21]

⁷ Ibid at [23]

⁸ Ibid at [29]

⁹ Ibid at [35]

¹⁰ Ibid at [34]

¹¹ Ibid at [33]

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.