Stay on adjudicated amount prevents DSD ‘rising from the ashes’

 

TALKING POINTS:

  • Contractor’s risk of insolvency
  • Implications on adjudication determination under the Security of Payment Act NSW (SOP Act)
  • Illegal phoenix activity

Greenwood Futures v DSD Builders (No 2) [2018] NSWSC 1471

In Greenwood Futures v DSD Builders (No 2), the NSW Supreme Court granted a continuation of stay on an adjudicated amount in favour of DSD (under a SOP adjudication) based on ‘the very real risk’ that the contractor would not be able to repay Greenwood should it succeed on its counterclaim. McDougall J made reference to DSD’s unsatisfactory financial evidence and ‘opprobrious’ business activities as informing his decision.

While consistent with previous decisions of the Court,[1] it is an interesting departure from the general risk of insolvency identified in the past as, on the evidence, DSD was not insolvent or near insolvent. It will be interesting to see how the recent reforms to insolvent trading laws – particularly the ‘safe harbour’ and ipso facto reforms – interact with the Court’s approach to insolvent contractors.

Facts

In the related proceedings, Greenwood Futures v DSD Builders (No 1) [2018] NSWSC 1407, McDougall J determined the validity of an adjudication determination in spite of a range of arguments put forward by Greenwood, including a failure to include a supporting statement, multiple payments claims, lack of a reference date and the purported withdrawal of earlier adjudication applications. In the latest proceedings, Greenwood sought a continuation of a stay for the payment of money pursuant to the adjudication it paid into the court on the basis that it had a counterclaim in excess of the adjudicated amount, which if successful, would likely be unpaid.

McDougall J referred to the concept of a ‘general risk of insolvency’ identified by Keane JA in RJ Neller Building Pty Ltd v Ainsworth[2] and referenced by Payne JA in the NSW case of Shade Systems Pty Ltd v Probuild Constructions (Aust) Pty Ltd.[3]

To justify a stay, the risk must be ‘over and above the normal risk of insolvency’. The ordinary risk of insolvency is, of itself, not sufficient, however the Court may take into consideration ‘other circumstances’ to justify a stay.

To justify a stay, the risk must be ‘over and above the normal risk of insolvency

Greenwood argued there were a number of such circumstances, namely:

  1. the unsatisfactory financial evidence produced by DSD. McDougall J referred to various ‘anomalies’, errors in the statements and the lack of updated financial documents as contributing to his doubt of their reliability. DSD’s equity and loan repayments did not reconcile and the lack of a provision for tax despite apparently earning over $300,000 in profit were of particular concern for McDougall J;
  2. the corporate dealings of the principals of DSD. The corporate searches adduced as evidence supported the inference that DSD’s principals:

‘engaged in the well-known but opprobrious practice of utilising phoenix companies: consigning insolvent companies to the fires of liquidation, and creating new companies to arise from the ashes and take their place.’

and;

  1. the fact that DSD subcontracted the whole of the work to a related company, BH Constructions, however there was evidence that the subcontractors were engaged by yet another related company, Blissful Building Procurements, who had already been placed into external administration.

This evidence led McDougall J to believe that the principals of DSD were ‘engaged in structuring their affairs in such a way so as to avoid, wherever possible, paying their liabilities’. The circumstances created a ‘very real risk, well over and above the normal risk of insolvency, that if Greenwood recovers a verdict … it may not be paid.’ Accordingly, the stay granted to Greenwood was extended.

How this affects you?

Notwithstanding the well-established purpose of the SOP Act to improve cash flow to subcontractors on an interim basis, it is possible to withhold payments in certain, high risk circumstances.

While the ‘ordinary risk’ of insolvency and the existence of a counterclaim are insufficient grounds to grant a continuation of stay of a payment pursuant to an adjudication under the SOP Act, various circumstances may make it possible to obtain a stay even where there is no actual insolvency.

[1] See e.g. Hakea Holdings Pty Limited v Denham Constructions Pty Ltd; BaptistCare NSW & ACT v Denham Constructions Pty Ltd [2016] NSWSC 1120.

[2] [2009] 1 Qd R 390.

[3] [2018] NSWCA 33.