Pay Now, Argue Later—Even if the Contractor is Going Bust: The NSW Security of Payment Regime and Distressed Contractors
The Situation: Security of payment ("SOP") legislation across Australia provides a "pay now, argue later" regime for payment claims by contractors in the construction industry. The legislation expressly provides that this regime is not available to a contractor in liquidation.
The Development: The recent case Kennedy Civil Contracting Pty Ltd (Administrators Appointed) v Richard Crookes Construction Pty Ltd  NSWSC 99 suggested this regime might be available for financially distressed contractors who enter into a deed of company arrangement to avoid liquidation.
Looking Ahead: With an appeal on foot and legislative intervention a real possibility, this case is unlikely to be the final word on the issue.
The plaintiff Kennedy Civil Contracting ("Contractor") operated a civil construction business providing services to the construction industry. The defendant Richard Crookes Construction ("Richard Crookes") is a major construction company. The Contractor was engaged by Richard Crookes as a subcontractor. The Contractor served Richard Crookes with several payment claims under the New South Wales security of payments legislation, the Building and Construction Industry Security of Payment Act 1999 ("SOP Act"). Richard Crookes failed to respond at all to some claims, and responded to others with a payment schedule accepting some amounts were payable—but failed to pay those amounts in any event. These failures enlivened the Contractor's rights under the SOP Act to recover amounts owing as a debt through court proceedings, and it commenced proceedings in the Supreme Court of New South Wales for that purpose.
Before those proceedings could be resolved, the Contractor was placed into voluntary administration. The Contractor was "hopelessly insolvent" and facing liquidation. If the Contractor was placed into liquidation, it could no longer rely on sections 14(4), 15(4), or 16(5) of the SOP Act because section 32B of the SOP Act prohibits a corporation in liquidation from enforcing a payment claim. Aware of this issue, the Contractor's creditors entered into a "holding" deed of company arrangement ("DOCA") that the administrators recommended for the express purpose of enabling the Contractor to pursue Richard Crookes for any amounts owed to the Contractor under the SOP Act.
Attempt to set aside DOCA or stay proceedings based on SOP legislation
Richard Crookes sought to avoid liability by:
- Having the DOCA set aside by the court on the basis it was entered into for an "improper purpose" and thus liable to be set aside pursuant to section 445(D)(1)(g) of the Corporations Act, which empowers the Court to terminate a DOCA "for some other reasons"; and
- Having the Contractor's claims stayed as an abuse of process on the basis it was an abuse of process for the "hopelessly insolvent" Contractor to rely on the SOP Act.
The Court rejected both arguments. It was not improper to enter into the DOCA to take advantage of the SOP Act. This was done with the purpose of maximising potential returns, which is the purpose for which the power to enter into a DOCA is conferred. There was also no abuse of process because the Contractor had not attempted to avoid the operation of section 32B of the SOP Act; it had simply organised its affairs so that it fell outside the scope of that provision.
Importantly, the Court emphasised that Richard Crookes's position could not be reconciled with the express wording of section 32B of the SOP Act, which was limited to companies in liquidation, not companies in administration. This was notwithstanding that Richard Crookes had argued that the policy intent of the introduction of s32B was broader and pointed to opinions of those involved in the drafting and passing of the legislation. The Court reiterated that to the extent that policy is relevant to legislative construction, it must be identified from the terms of the legislation properly construed, not from the individual opinions of those involved in its drafting and enactment.
Remaining uncertainty for industry
The outcome in this case is positive for those that find themselves in a similar position to the Contractor looking to work through financial difficulty with the aid of SOP legislation. However, it creates added risk for principals and head contractors, which might be forced to "pay now" under the SOP regime in circumstances where they have rights to recover those amounts later but, in practice, are able to recover nothing or far less because the contractor has since succumbed to the financial difficulties that saw it enter a DOCA.
Richard Crookes has commenced an appeal against the judgment, and the enforcement of the judgment has been stayed pending the outcome of that appeal. If the appeal is unsuccessful, there is a real prospect of legislative reform given the policy background and the arguable view that the same logic that supported the introduction of section 32B for companies in liquidation equally applies to those that avoid it only by reorganising under a DOCA.
Three Key Takeaways
- The failure to respond to a payment claim has serious consequences and can significantly limit any future defence of the claim.
- At least for now, companies in financial difficulty can reorganise under a DOCA in order to avoid liquidation and enable recovery of amounts under SOP legislation.
- Given the implications and ongoing financial challenges for the construction industry, the policy background, and a foreshadowed appeal, the decision in this case is unlikely to be the final word on this issue. Irrespective of the outcome of the appeal, it may attract the attention of legislators, so industry should monitor closely.
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