Case Summary – 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

Facts

On 1 November 2021, Richard Crookes Construction Pty Ltd (Richard Crookes) engaged Kennedy Civil Contracting Pty Ltd (KCC) to carry out civil, stormwater and associated construction works under two separate subcontracts. During the performance of the works KCC served several payment claims under Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act).  Richard Crookes responded to some of the payment claims with payment schedules and failed to respond to others.

On 1 August 2022, Jirsch was appointed as joint and several voluntary administrator to KCC pursuant to Section 436A of the Corporations Act 2001 (Cth) (Corporations Act).  During the administration, the administrators formed the view that KCC was insolvent.

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.

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.  Separately, Richard Crookes filed proceedings in the Federal Court seeking the DOCA be terminated pursuant to section 445D of the Corporations Act.

On 10 November 2022, at a meeting of KCC’s creditors, the creditors voted in favour of entering into a “holding DOCA” for the dominant purpose of pursuing RCC (among other debtors) under the SOP Act.  The meeting minutes reflected that in the administrators view KCC was “hopelessly insolvent” and that it would inevitably need to be placed into liquidation, however a “Holding DOCA” was proposed to allow proceedings under the SOP Act to continue (as section 32B of the SOP Act provides that an entity in liquidation cannot make use of the SOP Act) while acknowledging KCC would be placed into liquidation at a later date.

The parties respective Motions and Richard Crookes Federal Court proceedings were then heard together by Ball J in the Supreme Court of NSW on 2 February 2023.

Issues for determination by the Court

By the time the matter was heard, Richard Crookes had conceded that if they were unsuccessful on their case, KCC would be entitled to judgment in the sum of $683,928.49 plus interest.  Richard Crookes also abandoned a motion seeking security for their costs.

Accordingly, there were two issues left for determination by the Court, namely:

1. Was a DOCA entered into for the dominant purpose of avoiding the operation of section 32B of the SOP Act a DOCA that was entered into for an “improper” purpose pursuant to section 445(D)(1) of the Corporations Act? (Question 1)
2. In the event that the answer to question [1] above is “No”, nevertheless did KCC’s actions in entering into the DOCA for the dominant purpose of avoiding the operation of section 32B of the SOP Act amount to an abuse of process? (Question 2)

The parties arguments – Question 1

KCC argued that, when considering whether a DOCA had been entered into for an “improper” purpose, the Court should only look to the Corporations Act.  KCC referred to section 435A of the Corporation Act which provides the purpose of administration is to maximise a return to creditors and submitted that the “Holding DOCA” achieved that purpose (by allowing proceedings under the SOP Act to remain on foot).

Richard Crookes submitted that the public policy or purpose behind section 32B of the SOP Act was to ensure the SOP regime was only made available to entities which were solvent and required cashflow and that permitting KCC to avoid liquidation “temporarily” by executing the DOCA would be contrary to that public policy.  Richard Crookes, in reliance on several authorities dealing with section 445D of the Corporations Act, argued the DOCA should be terminated having been entered into for an improper purpose.

The Court’s findings – Question 1

The Court rejected as being “too broad” KCC’s argument that, when considering whether a DOCA was entered into for an improper purpose, the Court should only have regard to the Corporations Act.

The Court then proceeded to find that Richard Crookes reliance upon the authorities it cited was misplaced, finding those authorities dealt with DOCA’s seeking to circumvent the Corporations Act not the SOP Act.

Ultimately the Court held, in finding for KCC, that the Holding DOCA preserved the “pay now argue later” spirit of the SOP Act and that deliberately utilising the provisions of the Corporations Act to avoid triggering section 32B of the SOP Act did not amount to an improper purpose.

Accordingly, the Court refused to terminate the DOCA pursuant to section 445(D)(1) of the Corporations Act.

The parties arguments – Question 2

KCC submitted that the fact they had thoughtfully structured their affairs by utilising the Corporations Act to avoid section 32B of the SOP Act should not be construed as being an abuse of process.

Richard Crookes submitted that as KCC was hopeless insolvent and were only in a position to take advantage of the SOP Act because they entered into a DOCA expressly to avoid the operation of section 32B of the SOP Act, their pursuit of claims under the SOP Act were an abuse of process.

The Court’s findings – Question 2

The Court held, in finding no Abuse of Process had occurred, that KCC had not engaged in an abuse of process simply because it had organised its affairs so that it fell outside the scope of section 32B of the SOP Act and in addition that the terms of the DOCA were such that they preserved Richard Crookes’ rights to final relief in much the same way as section 34 of the SOP Act.

At Chamberlains, our expert Building & Construction Team can guide you through your matter.

Butlers Business Lawyers and Chamberlains Law Firm have merged!

Joining forces with the Chamberlains Team has expanded our capabilities beyond what we thought possible. This means introducing a new cast of talented legal practitioners along with a massive expansion in expertise areas such as Building & Construction, Insurance Law, Private Wealth Law and more. This alliance will ensure that new and existing clients will experience a higher calibre of legal support in a variety of areas with the help of some new faces. Learn more about Chamberlains Law Firm here.