TGIF 17 March 2023 – ‘Holding’ DOCA used to maintain rights to enforce security of payment claims pre-liquidation

This week’s TGIF concerns Kennedy Civil Contracting Pty Ltd (Admins Appt) v Richard Crookes Construction Pty Ltd [2023] NSWSC 99, in which the New South Wales Supreme Court determined that an insolvent company’s creditors could properly make a DOCA to maintain the right under security of payment legislation to recover amounts that would have been lost on entry into liquidation.

Key takeaways

• The power in Corporations Act 2001 (Cth) (Corporations Act) section 445D(1)(g) to terminate a deed of company arrangement (DOCA), including if it is entered for an improper purpose, may be available where the effect of a DOCA is to require a company to breach a legislative provision, including that of a state or territory.
  
  
• Creditors of an insolvent company may be able to execute a valid DOCA to preserve the company’s right to recover amounts under relevant security of payment legislation, at least where the DOCA sets up a trust for distribution only after any underlying claims by the debtor principal are finally determined.
  
  
• If such a DOCA instead provides that any amounts recovered are to be distributed to creditors, a court may stay the enforcement of any judgment until any underlying claims are finally resolved.

What happened?

Kennedy Civil Contracting Pty Ltd (admin appt) (KCC), a civil construction contractor, brought proceedings against its principal, Richard Crookes Construction Pty Ltd (Richard Crookes), to recover amounts due under payment claims KCC had made pursuant to the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act).

KCC commenced those proceedings after it had entered administration and its creditors had approved the making of a deed of company arrangement.

The DOCA provided for any funds received from KCC’s payment claims to be paid by KCC to the Deed Administrators and held on trust for KCC and Richard Crookes pending final determination of Richard Crookes’ claims against KCC. The trust was to survive any termination of the DOCA. Any amounts recovered would, following final determination of Richard Crookes’ claims, be paid to KCC’s creditors or Richard Crookes, in accordance with that determination.

KCC accepted that the DOCA had been made to preserve its rights under the SOP Act. If KCC had instead entered liquidation, it would have been prevented by SOP Act section 32B from pursuing its payment claims in the proceedings.

Determining the validity of the ‘holding’ DOCA

In deciding that the DOCA was valid and that KCC was entitled to judgment on its payments claims, Justice Ball considered multiple points:

• Section 445D(1)(g) of the Corporations Act gave the Court power to terminate the DOCA if it was entered for an improper purpose.
  
  
• Section 445D(1)(g) is general and should be interpreted consistently with its broad terms; the power to terminate may be available where the effect of a DOCA is to require a company to breach some other legislative provision, including of a state or territory.
  
  
• The DOCA was not entered to defeat the operation of SOP Act section 32B in allowing KCC to temporarily avoid liquidation and pursue its payment claims. The purpose of SOP Act section 32B is only to deny the benefits of pursuing payment claims to companies in liquidation, not more generally.
  
  
• The DOCA’s purpose, consistently with the Corporations Act, was to maximise the return to creditors by permitting KCC to exercise its rights under the SOP Act. Where creditors accepted the advice of the Administrators (appointed to KCC before it entered the DOCA) that entering the DOCA gave them the best chance of maximising returns, they reached what appeared to be a reasonable conclusion on a matter they were properly entitled to consider, which was sufficient to make the purpose of the DOCA a proper one.
  
  
• The DOCA provided for any recovered amounts to be held on trust and therefore specifically preserved Richard Crookes’ right to recover amounts paid, consistently with the purpose of SOP Act section 32B. The interim payments under the SOP Act would not become permanent on KCC entering liquidation.
  
  
• While not deciding the point, that even if the DOCA had not provided for the trust structure included in it, it may still have been valid so that KCC could have brought proceedings to enforce its payment claims. However, in those circumstances, Richard Crookes may have been entitled to a stay of enforcement of any judgment obtained by KCC until Richard Crookes’ underlying claims had been finally resolved.

Implications for administrators and creditors

Administrators and creditors of companies with security of payment claims should be aware of the limits in certain state security of payment legislation on companies pursuing payment claims once they have entered liquidation.

Justice Ball’s decision has confirmed that, in those circumstances, administrators may well wish to seek advice on whether creditors may approve a holding DOCA to preserve the company’s right to enforce any such payment claims.

Administrators will also benefit from taking advice as to whether a trust or other structure similar to that set up for KCC should be implemented to hold any amounts recovered. Such an approach may be more in keeping with the policy of the local security of payment legislation and support the validity of the DOCA.

If such an approach is not taken, it may be that while the DOCA could be valid and judgment on the payment claims secured, a debtor may successfully seek a stay on enforcement of that judgment. Such an occurrence would leave administrators in a position of having incurred the costs of proceedings while being unable to receive the benefit of having done so, at least until any underlying claims are finally resolved.