Key takeaways

For the first time since its introduction in 2018, the Supreme Court of NSW has considered the scope of section 32B of the SOP Act in Kennedy Civil Contracting Pty Ltd (Administrators Appointed) v Richard Crookes Construction Pty Ltd; In the matter of Kennedy Civil Contracting Pty Ltd [2023] NSWSC 99.

The Court confirmed that section 32B of the SOP Act, which prevents a company in liquidation from issuing or enforcing a payment claim or adjudication determination, is not intended to operate in all cases where a company is insolvent. Section 32B only applies to companies in liquidation, and it is reasonable for an insolvent company to instead enter a Deed of Company Arrangement (DOCA) so that the company can continue to pursue its rights under the SOP Act to best maximise returns to creditors.

Insolvency practitioners should carefully consider whether entering a DOCA to maintain rights under the SOP Act will best maximise the return to creditors.

Head Contractors and Principals should be aware that payment claims or adjudication applications served by insolvent companies who are not in liquidation (but under external administration or DOCA) are not invalid by virtue of that insolvency.

What happened?

In November 2021, Richard Crookes (RC) engaged Kennedy Civil Contracting (KCC) for various construction works at a project at Bankstown Airport. From December 2021 to June 2022, KCC served payment claims on RC for the progress of the works in accordance with the SOP Act. In response to these payment claims, RC either:

1. did not serve a payment schedule, or
2. did not pay the full amount approved in the payment schedule.

On 1 August 2022, joint and several voluntary administrators were appointed to KCC under section 436 of the Corporations Act 2001 (Cth). The administrators recommended the creditors resolve that KCC execute a DOCA. The key purpose of the DOCA was to keep KCC out of immediate liquidation and to enable the administrators to pursue the outstanding payment claims under the SOP Act. If KCC was to enter liquidation, section 32B would have prevented KCC from enforcing those claims. The creditors resolved that the company execute a DOCA to that effect and KCC commenced proceedings against RC to recover $683,928 as a statutory debt under the SOP Act.

RC brought proceedings against KCC arguing that the DOCA ought to be set aside pursuant to section 445D(1)(g) of the Corporations Act 2001 (Cth) as it was entered to deliberately circumvent section 32B of the SOP Act, which RC alleged to be an improper purpose, or an abuse of process.

What was the outcome?

Justice Ball determined that entering a DOCA to avoid the operation of section 32B was not an improper purpose, or an abuse of process. His Honour said that the purpose of a DOCA is to maximise the return to creditors and doing so to permit the company to exercise rights under the SOP Act was not improper. Instead, the company was within its rights to “organise its affairs so that it falls outside the scope of s32B”.

In so finding, his Honour confirmed that the restriction in section 32B only applies to companies in liquidation, not insolvent companies more broadly.

Further information / assistance regarding the issues raised in this article is available from the author, Sarah Hammond, Special Counsel, Emily Barnett, Paralegal, or your usual contact at Moray & Agnew.