A clever application of the DOCA process to avail of the security for payments ‘pay now, argue later’ regime
- Published 31.03.2023
The Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act) provides a ‘pay now, argue later’ regime that allows contractors to recover undisputed progress payments under construction contracts through a summary judgment process. The process is not available to companies that are in liquidation: s32B of the SOP Act.
The limits of s32B of the SOP Act were recently tested in Kennedy Civil Contracting Pty Ltd (Administrators Appointed) v Richard Crookes Construction Pty Ltd ; In the matter of Kennedy Civil Contracting Pty Ltd (NSWSC 2023). Justice Ball was asked to determine whether:
- a ‘holding DOCA’ entered into by a hopelessly insolvent company for the purpose of engaging the ‘pay now, argue later’ regime to recover from a head contractor undisputed progress claims was a proper use of Part 5.3A of the Corporations Act 2001 (Cth) (Act); and
- the debt recovery proceedings commenced by the company against the head contractor were an abuse of process.
His Honour determined that there was nothing improper about the strategy adopted by the company and its administrators in this case. The head contractor’s application to terminate the ‘holding DOCA’ and to stay the debt recovery proceedings were dismissed.
Richard Crookes Constructions Pty Ltd (Richard Crookes) engaged Kennedy Civil Contracting Pty Ltd (Administrators Appointed) (KCC) under two subcontracts to carry out civil and associated works at a project for which Richard Crookes was the head contractor.
KCC was entitled to recover from Richard Crookes $683,928.49 under the SOP Act.
On 1 August 2022, joint and several voluntary administrators were appointed to KCC pursuant to s436A of the Act. KCC was hopelessly insolvent.
On 17 December 2022, a ‘holding ‘DOCA’ was entered into to keep KCC out of liquidation so that its administrators could take action to enforce the payment claims against Richard Crookes under the SOP Act.
KCC commenced proceedings against Richard Crookes to recover the $683,928.49.
Richard Crookes commenced proceedings seeking orders to terminate the ‘holding DOCA’. It argued that it should be terminated because it was entered into for a wrongful purpose; namely, to defeat the operation of s32B of the SOP Act which is to preserve the ‘pay now, argue later’ regime to assist the cash flow of solvent companies.
Richard Crookes argued in the debt recovery proceedings that those proceeding should be stayed as an abuse of process because KCC was hopelessly insolvent and the ‘holding DOCA’ was liable to be terminated.
Ball J found in favour of KCC and determined that KCC was entitled to judgment against Richard Crookes on its debt claim.
His Honour was not persuaded that the purpose of the ‘holding DOCA’ was to circumvent the operation of the SOP Act and should be terminated or that the debt recovery proceedings were an abuse of process.
Firstly, he observed that it was plain from the terms of s32B of the SOP Act that the purpose of the section is to deny the benefits of the legislation to companies in liquidation, not more generally. Whilst it was accepted that KCC was insolvent, it was not ‘in liquidation’.
Secondly, he found it difficult to accept that the ‘holding DOCA’ was designed to avoid the operation of the SOP Act. Richard Crookes argued that the ‘pay now, argue later’ regime was undermined by the ‘holding DOCA’ because any interim payment made under the SOP Act would become permanent because there would be reduced prospects of recovering that payment from the insolvent company once any dispute was determined.
His Honour observed that it was a term of KCC’s ‘holding DOCA’ that any funds received from a debtor under the SOP Act would be paid by the company to the deed administrators to be held on trust for the company and the debtor and distributed once any dispute had been determined. The DOCA therefore effectively preserved the debtor’s rights under s32 of the SOP Act to bring separate proceedings against KCC with respect to the disputed claim. His Honour concluded that the ‘holding DOCA’ was merely designed to take advantage of the limited operation of s32B of the SOP Act, not to circumvent it.
KCC argued that even if the ‘holding DOCA’ did not include the trust mechanism, the 'holding DOCA' was still for a proper purpose because it merely sought to take advantage of the limited operation of s32B of the SOP Act. To the extent that Richard Crookes sought to rely on its rights under the SOP Act, KCC submitted that the proper course was not for it to seek to set aside the 'holding DOCA', but to seek a stay on the enforcement of the judgment until the underlying claim under the construction contract had been resolved1. His Honour considered that this submission had considerable force but did not need to decide it as it did not arise on the facts.
The strategy adopted by the administrators in this case provides a very useful precedent that insolvency practitioners can apply to avail of the streamlined debt recovery processes provided for by the SOP Act to unlock cash tied up in undisputed progress claims. It is critical to identify and apply the strategy early and before a company goes into liquidation.