Using DOCAS To Preserve SOPA Claims In Administrations?

Commercial Context

Construction companies are often thinly capitalised and do not hold significant real property or other assets.  Often their most significant (and sometimes their only) assets are unpaid progress claims arising from construction work undertaken prior to entering into external administration.

Progress claims however can be difficult to recover. They can be subject to cross-claims arising in favour of counterparties, the resolution of which may require time consuming and expensive litigation. Often administrators and liquidators do not have available funds to pursue such disputes meaning that these assets are not realised with the creditors left to receive no dividends in a winding up.

In such circumstances, a construction company that may appear to have significant assets on paper, in practice has little to no assets that can be realised for the benefit of creditors.

SOPA Recoveries

The Building and Construction Industry Security of Payment Act 1999 (NSW) (SOPA) can provide a way out of this conundrum.

SOPA adjudications provide a quick and cheap means of recovering progress payments through an out of court adjudication process which is not subject to the rules of evidence that apply in Court. Nor are applicants in adjudications required to provide security for costs like plaintiffs in Court.

At the end of an adjudication, a contractor can end up having an adjudication certificate issued in their favour which can then be taken out as a judgment and enforced in the usual ways.

The ability to use the SOPA regime can enable administrators to recover progress claims that would otherwise be uneconomical for them to pursue through the Courts.

Grosvenor Stays

Principals in the past have successfully applied for the Court to stay the enforcement of SOPA judgments on the basis that the contractor is insolvent or close to becoming insolvent.

Such stays are commonly referred to as Grosvenor stays arising from the first case in which such a stay was granted in Grosvenor Constructions (NSW) Pty Ltd (in administration) v Musico [2004] NSWSC 344.

Grosvenor stays have been granted on the basis that the SOPA is only meant to provide for an interim payment regime with the parties free to litigate their claims on a final basis once the payments have been made. Enforcement of a judgment by an insolvent company was said to offend this principle given a counterparty would in practice have difficulty later recovering any money paid pursuant to a judgment from the insolvent contractor even if they were to succeed on a final basis.

Section 32B SOPA

Section 32B(1) of the SOPA provides that a company cannot use the SOPA regime once it is in liquidation.

Section 32B was introduced into the SOPA through the Building and Construction Industry Security of Payment Amendment Bill 2018 in response to the decision of the New South Wales Court of Appeal in Seymour Whyte Constructions Pty Ltd v Otswald Bros Pty Ltd (in Liq) (2019) 99 NSWLR 317 (which had ruled that a company in liquidation could pursue an adjudication under the SOPA).

Administrations

There have been a recent series of cases which have considered whether:

1. companies in administration can take advantage of the SOPA regime; and
2. counterparties can apply to stay any judgments that are obtained by those companies under the SOPA.

This includes the following cases:

• Kennedy Civil Contracting Pty Ltd (Administrators Appointed) v Richard Crookes Construction Pty Ltd [2023] NSWSC 99;
• Colbran, in the matter of PBS Building Pty Limited (Administrators Appointed) [2023] FCA 276;
• Piety Constructions Pty Ltd v Megacrane Holdings Pty Ltd (Administrator Appointed) (No 2) [2023] NSWSC 682; and
• Kennedy Civil Contracting Pty Ltd (Subject to Deed of Company Arrangement) v Total Construction Pty Ltd [2023] NSWDC 325.

The following principles emerge from these cases:

1. The prohibition in section 32B does not apply to companies in administration.
2. An administrator can apply to extend the convening period for the purpose of keeping the company in administration so it can pursue SOPA claims.
3. A Holding DOCA can be used to keep a company in administration so it can pursue any SOPA claims.
4. to defeat a Grosvenor stay, a DOCA has to be carefully drafted to ensure that any SOPA Recoveries are quarantined pending an adjudication of any offsetting claims arising in favour of the SOPA Debtor;
5. an out of court adjudication of any offsetting claims is still likely to be more efficient than allowing the parties to pursue their rights through the Courts; and
6. an administrator should arrange for the judgment amount to be paid into a Controlled Moneys Account and may consider drafting a provision enabling them to draw from that account to pay for their costs of adjudicating on any offsetting claims.

Consideration

These new cases provide the pathway for preserving and realising progress claims for construction companies in administration. We expect creditors of construction companies will benefit significantly going forward from increased recoveries to be made from progress claims pursued by companies in administration.

It will be interesting when any of these principles are tested in an appellate court. It will also be interesting to see if any new legislation is passed to extend section 32B to companies in administration.

If this article is of interest, please contact David Greenberg, Partner, or Esther Ihn, Senior Associate, on (02) 9261 5900.