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A supreme court decision means insolvent businesses in administration will be able to still recoup costs from debtors.
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Landmark case a game-changer for struggling construction sector
07 March 2023
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10 minute read
Struggling construction firms with cash flow challenges are the winners from a landmark decision by the supreme court that the Building and Construction Industry Security of Payment Act 2002 (SOP Act) is available to firms in administration regardless of their solvency.
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The case was brought by Chamberlains Law Firm on behalf of insolvency firm Jirsch Sutherland, which was trying to recover debts owed to Kennedy Civil Contracting (KCC) – which had entered into voluntary administration – by Richard Crookes Construction Pty Ltd.
Jirsch Sutherland partner Trent Devine said the decision was a win for the entire construction industry.
“It will allow administrators to take advantage of the SOP Act when companies are insolvent (not in liquidation) via a DOCA (deed of company arrangement),” said Mr Devine.
“This will allow collection of debts for the benefit of creditors and it will help protect subcontractors.”
“It’s a significant development for insolvency in the construction industry, particularly in NSW, but might also have ramifications in other states, as other security of payment regimes are based on the NSW SOP Act.”
The key discussion point of the case was that it was the first reported decision that tested the ambit and scope of Section 32B of the SOP Act which states:
“A corporation in liquidation cannot serve a payment claim on a person under this part or take action under this part to enforce a payment claim (including by making an application for adjudication of the claim) or an adjudication determination,” - section 32B(1) of the SOP Act.
“If a corporation in liquidation has made an adjudication application that is not finally determined immediately before the day on which it commenced to be in liquidation, the application is taken to have been withdrawn on that day.”
The matter before the court was determining whether entering into a DOCA to pursue debtors and avoid section 32B of the SOP Act was an improper use of the function under section 445(D)(1) of the Corporations Act, or an abuse of process.
The court found that entering into the DOCA by KCC’s creditors “preserved the pay now argue later spirit of the SOP Act” and that it did not amount to an improper purpose, and also found it was not an abuse of process purely because the actions fell outside the scope of section 32B of the SOP Act.
Chamberlains’ legal director of litigation – building and construction Michael Terry-Whitall said construction firms with cash flow concerns and their creditors were the big winners.
“This judgement conclusively answers the question of whether the SOP Act can be used on behalf of an entity that’s insolvent,” said Mr Terry-Whitall.
“Construction companies facing cash flow difficulties and which enter into administration now have a far greater chance of pursuing and being paid by their debtors. Recoveries can also assist a construction company that enters into administration to fund a DOCA, while being able to continue to trade or return a far better result for creditors.”
“The decision has far-reaching implications for construction companies as a whole, particularly during the current economic climate, which is placing further cashflow pressures on an already strained industry.”
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