Security of Payment Law Update: Court Confirms – Companies in Administration can Utilise the SOP Act


Key Takeaways

The recent Supreme Court of NSW decision of Kennedy Civil Contracting Pty Ltd (Administrators Appointed) v Richard Crookes Construction Pty Ltd; in the matter of Kennedy Civil Contracting Pty Ltd [2023] NSWSC 99 has determined that a company in administration was entitled to utilise the Building and Construction Industry Security of Payment Act 1999 (NSW) (the SOP Act).

The decision is discussed in detail below, however, the decision is relevant for both Developers and Contractors alike.

In light of the recent high-profile insolvencies including most recently the appointment of administrators to Lloyd Group, it is important to ensure that all payment claims are being responded to on time and with properly detailed Payment Schedules to avoid any such issues.

If you dispute a Payment Claim made under the SOP Act you have 10 business days (unless the Contract expressly provides for an earlier time) to provide a Payment Schedule which must:

    1. Identify the Payment Claim to which it relates;
    2. Indicate the amount of the payment proposed to be made; and
    3. If the proposed amount is less than the claimed amount, indicate the reasons for withholding payment. It is important that adequate reasons are given as in any subsequent adjudication proceedings you will be prevented from relying on additional reasons not raised in the Payment Schedule.

If you have been caught out and a company in external administration is pursuing you, all is not lost. We have previously successfully sought a stay against an adverse adjudication determination (refer to the decision of Greenwood Futures v DSD Builders (No 2) [2018] NSWSC 1471) based on the risk that by allowing enforcement the contractor would not be able to repay the Developer should it succeed on its counterclaim.

Facts in Kennedy Civil v Richard Crookes Construction

The relevant facts were:

    1. Richard Crookes was the head contractor for a project at Bankstown Airport. On around 1 November 2021, Richard Crookes engaged KCC under two subcontracts to carry out civil, stormwater and associated works for the project at Bankstown Airport.
    2. While the works were being carried out KCC served several Payment Claims under the SOP Act. Richard Crookes responded to some of the served payment claims, however in most cases failed to serve a payment schedule within the 10 business days specified in the SOP Act.
    3. On 1 August 2022, joint and several voluntary administrators were appointed to KCC pursuant to Section 436A of the Corporations Act 2001 (Cth) (Corporations Act). At the time of the administration, it was believed that KCC was insolvent.
    4. Administrators report to creditors on 2 November 2022 recommended that KCC execute a “Holding DOCA” to keep KCC out of liquidation and enabling the Joint and Several administrators more time to continue pursuing KCC’s outstanding debts.
    5. On 29 September 2022, KCC filed a Notice of Motion seeking Summary Judgment pursuant to sections 15 and 16 of the SOP Act due to RCC failing to make payment in accordance with previously issued payment schedules or failing to issue payment schedules at all.
    6. On 9 November 2022, Richard Crooks filed a Notice of Motion, seeking that the proceedings commenced by KCC be dismissed as an abuse of process. The creditors approved entering into a “holding DOCA” to pursue RCC under the SOP Act. A “Holding DOCA” was proposed to allow proceedings under the SOP Act to continue noting section 32B of the SOP Act provides that an entity in liquidation cannot use the SOP Act.

Court’s finding

In rejecting RCC’s application to dismiss the application for summary Judgment as to an abuse of process, the Court held: “it is not correct to characterise KCC’s claim as an attempt to avoid the operation of s 32B. Rather, it has organised its affairs so that it falls outside the scope of s 32B. That does not involve an abuse of process. Moreover, again for the reasons already given, it could not be said that the DOCA undermines any policy of the SOP Act.”