Clifford Chance

Without haste – the decade-long attempt to claw back bond monies for creditors: Hastie Group Limited (in liq) v Multiplex Constructions Pty Ltd (Formerly Brookfield Multiplex Constructions Pty Ltd) (No 3) [2022] FCA 1280

The construction industry in Australia is in a state of extreme turbulence. Supply chain disruption and spiralling costs on lump sum contracts are destroying contractors' bottom lines, increasingly making it impossible for contractors to break even, let alone achieve their planned profit margins, meaning the risk of insolvency is no longer an outlying risk, but is now an increasing reality. From an owner's perspective, tendering a project on a lump-sum basis is not risk-free. If the contractor is liquidated, this will significantly increase the costs of completing the project if another contractor is required to complete the works. Calling the original contractor's performance bonds simply might not be enough to recover the owner's losses.

That said, the judgment in Hastie confirms that performance bonds are not property of the procuring contractor, or their administrators pursuant to Chapter 5 of the Corporations Act 2001 (Cth). Further, the advent of the contractor's insolvency does not affect the status quo of on-demand performance bonds – namely that they are enforceable by the beneficiary against the issuing bank, meaning funds cannot simply be clawed back by the administrators to pay creditors.

Over a decade has passed since voluntary administrators were appointed for Hastie entities on 28 May 2012. Proceedings were commenced by the Hastie entities and liquidator in November 2017 against several contractors (including Multiplex) pursuant to subcontracts relating to various construction projects. Hastie entities were subcontractors to Multiplex and others.

The Hastie entities claimed that:

a) The contractors failed to pay the Hastie entities $60 million in receivables as of 28 May 2012 (Receivables Claim), and

b) The contractors impermissibly drew $63.5 million on performance bonds after 28 May 2012 (Bonds Claim).

The Hastie entities and liquidator claimed that these sums belonged to the Hastie entities and should be recoverable and applied against liabilities to priority creditors, former employees, and unsecured creditors.

Receivables Claim

One of the contractors' arguments in defence to the Receivables Claim was that they were entitled to set-off these amounts against greater sums owed to them by the Hastie entities for the loss and damage suffered from the Hastie entities being unable to complete their subcontract works. It was this debt that led the contractors to call on the performance bonds.

The Hastie entities and liquidator argued that the contractors were 'creditors' pursuant to Chapter 5 of the Corporations Act 2001 (Cth) (the Act) as they were persons asserting debts against the entities after the date in which administrators were appointed. The effect of this was that the contractors should be denied the right to sue the entities to receive the relevant debts and had to otherwise participate in the distribution of funds.

While the focus of this note is on the Bonds Claim, it is worthy to note that Middleton J concluded that a defence of set-off is not a 'claim' for the purposes of Chapter 5 of the Act, meaning that the contractors' rights to set-off were not a basis to participate in the division of assets.

Bonds Claim

The performance bonds in this case were 'on-demand'. The Hastie entities argued that the bonds were property of the entities as they possessed a chose in action in relation to the 'financial accommodation' they purchased from the issuing banks, meaning that only the administrator could deal with them pursuant to ss 437D and 468 of the Act.

Middleton J rejected this argument and explained that an on-demand bond is 'paid for' by one party, but 'the property' of another. There was no authority supporting the Hastie entities' position that the bonds, the funds realised by their call, or any relevant chose in action relating to that call might constitute a 'property' right. Therefore, the contractors' calls on the bonds were not voidable.

Middleton J further explained that the contractors' rights to call on the performance bonds fell outside the Chapter 5 insolvency regime as the contractors had a right to payment from the third-party banks, not the Hastie entities:

[…] as a matter of both form and substance, the Respondents' rights enforced under the bank guarantees are as against the issuing banks. In that sense, the Respondents have no need to access the statutory regime of insolvency in relation to the Hastie Entities. They do not seek to be recognised as 'secured creditors' or 'unsecured creditors' of the Hastie Entities, to enforce any security interests or contractual rights against the Hastie Entities, or to make any 'claims' against the Hastie Entities in their liquidations. […] Like with any third party guarantee, part of the point of the mechanism of entering into [such] arrangements with the banks is to avoid entirely the situation of being a creditor of an insolvent company. Instead, the beneficiary is a contingent creditor of the bank, which in turn enters into separate but correlative arrangements with the Hastie Entity, and so the bank is a contingent creditor of the Hastie Entity.

The execution of the performance bonds conferred proprietary interests on the contractors in not only the physical bonds themselves, but more importantly, the proceeds of the bonds (once those proceeds were received by the contractors).

Conclusion

This judgment serves as a useful reminder of the very limited circumstances in which a call on an on-demand bond can be challenged (namely: fraud, unconscionability, or pursuant to a term of the contract) and that this position is not affected by the advent of insolvency. It further highlights the significant protection performance bonds offer beneficiaries and that the party procuring the bond (in this case, Hastie) has scant rights to intervene.