Industry participants who are close watchers of the different States’ and Territories’ security of payment regimes may have noticed a divergence between NSW and Victorian security of payment law in relation to failing corporate claimants. A recent NSW case regarding a head contractor’s unsuccessful challenge to the continuation of a deed of company arrangement may perpetuate a divergence in security of payment law in the context of insolvency.
Background – NSW law
In NSW, the 2019 Court of Appeal decided in Seymour Whyte Constructions Pty Ltd v Ostwald Bros Pty Ltd (In Liquidation) [2019] NSWCA 11 that the Building and Construction Industry Security of Payment Act 1999 (NSW) (SoPA) can be used by claimants in liquidation. However, within the year, section 32B of the Building and Construction Industry Security of Payment Act 1999 (NSW) came into force, reversing the position. Under section 32B, a NSW claimant that is in liquidation cannot use the mechanisms of SoPA for recovery of payments and any adjudication on foot at the date of commencement of a liquidation is deemed withdrawn.
The NSW statutory position is broadly in line with the law in Victoria arising from the decision of the Court of Appeal in Façade Treatment Engineering v Brookfield Multiplex Constructions [2016] VSCA 247 that precludes use of the Victorian Act’s mechanisms by claimants in liquidation.
NSW legal development
In a recent NSW development, the Supreme Court in the case of Kennedy Civil Contracting v Richard Crookes Construction [2023] NSWSC 99 has found that a Deed of Company Arrangement (DOCA) entered into by KCC with its creditors while KCC was in administration was not entered into for an improper purpose, so defeating the hearesd contractor’s argument that the DOCA ought to be terminated and KCC put into liquidation (which would have ended the application of SoPA and the head contractor’s obligation under SoPA to pay KCC a substantial sum).
The NSW Supreme Court stated that the question of improper purpose was not to be resolved by evaluating whether the company would be in a better position if the DOCA remained on foot than not, and that the creditors’ apparent acceptance of the administrators’ advice that the DOCA gave the best chance of maximising return to creditors was a reasonable view that creditors were entitled to consider, making the purpose of the DOCA a proper one. The administrators’ views also included that KCC was “hopelessly insolvent” and liquidation was an inevitability. The Court found that entry into the DOCA (expressly described as a “holding DOCA”) that made provision for the playing out of SoPA processes and the final determination of claims between payee and payer) could not be characterised as an attempt to avoid the operation of section 32B. The Court said “Rather, [the claimant KCC] has organised its affairs so that it falls outside the scope of s 32B. That does not involve an abuse of process.”
The NSW decision confirms that in NSW collection of debts for an insolvent entity in administration or under a DOCA for the benefit of creditors can proceed even where liquidation is ultimately inevitable. This limits the application of the SoPA in the context of failing claimant companies to claimants already in liquidation, where even a “holding DOCA” allowing SoPA collections to play out can stave off that day a little longer.
Victorian law
The Victorian law in respect of failing corporate claimants and security of payment rests on caselaw based on a close analysis of the Victorian Act. In Façade Treatment Engineering v Brookfield Multiplex Constructions [2016] VSCA 247, the Court of Appeal said the proper interpretation of the Victorian Act was that it creates an entitlement to a progress payment for persons who have undertaken to – and continue to – carry out construction work or supply related goods and services. For that reason, on the facts in that case, it was determined that entry into liquidation marked the point where the Victorian Act no longer applies.
It is possible or even likely that a future decision of a Victorian Court following that reasoning may reach a different view from the NSW position about whether a “hopelessly insolvent” claimant company under a DOCA is properly a claimant for the purposes of the Victorian Act.
If you have any questions in relation to this article, please don’t hesitate to contact Catherine Bell.
