This case concerns the issue of whether an insolvent company’s creditors are able to enter into a DOCA to recover payments that would have been lost upon entry into liquidation and, furthermore, whether this comes into a direct conflict with the Building and Construction Industry Security of Payment Act 1999 (SOP Act).
On 1 November 2021 Kennedy Civil Contracting began the process of carrying out construction work on behalf of its principal Richard Crookes Construction. Following this, under the SOP Act, KCC served several payments claims to RCC. However, only some of these payment claims were responded to by RCC.
On 1 August 2022, administrators at KCC determined that they were “hopelessly insolvent”. Yet the decision was made on 29 September 2022 to pursue sections 15 and 16 of the SOP Act (which address the consequence of a failure of correct payments) in direct response to the RCC’s failure to make the correct payments, or payments at all. KCC then entered into a Deed of Company Arrangement (DOCA) as per Part 5.3 A of the Corporations Act in order to avoid liquidation.
In response to this action, on 9 November 2022 RCC claimed that this action by KCC was an abuse of process and sought that their DOCA be terminated. Despite this, on 10 November 2022, KCC entered into a ‘Holding DOCA’ in order to allow for the proceedings under SOP Act to continue, while simultaneously acknowledging that liquidation would occur at a later date.
The main issue before the Supreme Court was whether there was an abuse of process. The Supreme Court considered whether KCC’s decision to enter into the DOCA was being done in order to avoid operations of section 32B of the SOP Act which notes that the SOP Act does not apply to a construction company in liquidation (“A corporation in liquidation cannot serve a payment claim”).
The RCC argued that the entering into a DOCA for the purpose of avoiding section 32B of the SOP Act was, in fact, an improper purpose.
The Court found that the RCC’s argument was not valid as it did not draw on the correct authorities that noted DOCA’s use to circumvent the SOP Act, but rather the Corporations Act. Furthermore, Ball J considered that entering into a DOCA was to serve the purpose of giving the corporation the best chance of maximising returns. Hence, the Court found that the ‘Holding DOCA’ used by KCC remained within the scope of the SOP Act, therefore it did not need to be terminated.
Secondly, and relating to the first point here, it was held that no abuse of process had occurred in this matter due to the fact that KCC had appropriately used a ‘Holding DOCA’. This was critical in considering the scope of section 32B of the SOP Act in addition to preserving a company’s right to enforce payment claims.
This case is highly significant as it considers the scope an application of section 32B of the SOP Act. Here, construction companies who are potentially facing hardship in terms of their cashflow now have a significant chance of being paid by their debtors if they enter into administration and should continue to submit valid payment claims under the SOP Act, notwithstanding that they may be entering into administration.