Chamberlains Law Firm brought the action on behalf of Jirsch Sutherland, which sought to recover debts owed to a subcontractor, Kennedy Civil Contracting, which had entered.

The ruling, Chamberlains said, is the first reported decision testing the ambit and scope of section 32B of the SOP Act.

“The Court, which handed down its judgement on 10 February 2023, held that the Holding DOCA was entered into to maximise returns to creditors and, as such, was entered into for a proper purpose and that KCC organising its affairs carefully to avoid operation of section 32B was not an abuse of process,” the firm outlined in a statement.

Chamberlains legal director of litigation (building and construction) Michael Terry-Whitall said that the judgment “conclusively answers” whether or not the SOP Act can be used on behalf of a company that is solvent.

“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,” he detailed.

“The decision has far-reaching implications for construction companies as a whole, particularly during the current economic climate, which is placing further cash flow pressures on an already strained industry.”

Jirsch Sutherland partner Trent Devine added that the judgement is a “game-changer”.

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“It will allow administrators to take advantage of the SOP Act when companies are insolvent (not in liquidation) via a [Deed of Company Arrangement (DOCA)].”

“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 Act,” he said.

Making insolvency processes work

Reflecting on the judgement, Baker McKenzie construction partner Aleisa Crepin said that in the current economic climate, “savvy operators in the construction industry are seeking out opportunities to use insolvency processes”.

This case shows, she told Lawyers Weekly, that there are ways to make that work for them.

“Where legitimate claims are being delayed by principals and contractors, that can lead to the loss of suppliers and subcontractors that might otherwise be needed to complete a project. But worse than that, principals and contractors might find themselves the target of claims, weaponised by an insolvency process,” she advised.

“Smart principals and contractors will take the opportunity to reach commercial resolutions that keep key counterparties in place so projects stay on track, whilst balancing the challenges of our current economic conditions.”

Considering merits of pay claim disputes

Hamilton Locke partner Mark Schneider added that directors of construction companies “cannot simply thumb their noses” at counterparties who go into administration.

“The judgement confirms that administrators and creditors of construction companies with payment claims are entitled to use a holding DOCA to pursue outstanding debts for the benefit of creditors as a whole. This could see well-advised DOCA proponents in carefully planned restructures more readily including recoveries from these types of payment claims in DOCA funds in future,” he mused.

Administrators will need to carefully consider, Mr Schneider pointed out, the merits of any payment claim disputes during the administration period to determine whether a holding DOCA is appropriate for pursuing outstanding debts.

“DOCA proponents and their advisers should consider whether DOCA proposals ought to include recoveries from payment claim disputes. Counterparties of construction companies should engage with administrators to explore compromises early,” he said.

“There remains a lot of hardship in the construction industry with rising costs across the board and we have seen a lot of company failures in the industry in the last 12 months, so debt recovery will remain a priority, but there will almost always be a risk of a ‘domino effect’ when there is a collapse.”

Boosting funds for creditors

Ironbridge principal Trevor Withane noted that organising your affairs in a way that takes advantage of the limited operation of a statute will not usually be considered an “abuse of process”.

“We, in Australia, are governed by laws, not the intent of legislators. Extreme care must be taken when considering extrinsic materials (such as second reading speeches) in interpreting legislation — they should only be used as a last resort and definitely not when the express terms of the statute plainly suggest otherwise,” he submitted.

“Insolvency practitioners and the legal advisers dealing with a construction company which might have SOP Act claims should consider whether it is appropriate to use a DOCA to preserve those claims, and advise creditors accordingly.”

Indeed, in the light of the decision and in any event, Mr Withane went on, it is arguable that a failure to provide the advice that the company would lose the benefit of an SOP Act claim if it went into liquidation would be negligent.

“The decision is great for all contractors in the construction industry who are facing insolvency concerns,” he surmised.

“A company which enters into administration does not need to entirely give up on its SOP Act claim. The case may have paved the way for a company in administration to boost the funds available for creditors.”