SOPA disputes are now one of the biggest drivers of construction insolvencies, and holding DOCAs are increasingly being used to manage them.
Why this matters now
Construction insolvencies in NSW continue to rise, and disputes under the Security of Payment Act (SOPA) are now one of the most common triggers for cash‑flow collapse. Developers, contractors and lenders are increasingly facing stalled projects, unpaid claims, and defect exposures that can rapidly erode value.
Used correctly, SOPA and holding DOCAs can stabilise distressed projects, surface working capital, and preserve value for creditors. Used incorrectly, they can destroy it. Recent court decisions show a tightening judicial stance on DOCAs that overreach, discriminate, or attempt to suppress defect claims.
This article explains how SOPA interacts with voluntary administration, how holding DOCAs are being deployed in NSW, and the statutory guardrails that practitioners and stakeholders must respect.
The NSW Security of Payment Act – how it works
SOPA is a fast‑track, “cash‑flow first” mechanism that operates alongside contractual rights. A claimant serves a payment claim; a respondent must issue a payment schedule with all “reasons for withholding payment”; disputed claims go to adjudication; and successful claimants may enforce either as a debt (if no schedule) or via adjudication certificate.
If a respondent fails to serve a valid payment schedule, SOPA bars any defence, set‑off or cross‑claim in subsequent recovery proceedings under s 15(2)(a)(i) and s 15(4)(b). You cannot “net” damages or back‑charges at that stage unless they were included in the payment schedule.
SOPA preserves final rights - “pay now, argue later” - with restitution adjustments available under s 32(3).
Where does set‑off actually bite?
During adjudication, respondents may raise back‑charges, LDs and defect issues only if they were included in the payment schedule. New reasons are locked out (now codified in s 20(2B)).
If the respondent misses the schedule deadline, s 15(4)(b) prohibits any cross‑claim or contractual defence. Cash must flow; disputes are deferred to later curial determination.
After adjudication, parties may run full damages claims and equitable/contractual set‑offs, and courts must account for SOPA payments when striking the final balance (s 32).
Section 553C – Mutual Dealings in winding up
Section 553C applies only in winding up. It does not automatically apply in voluntary administration or under a DOCA unless expressly provided for. The High Court has also confirmed that s 553C cannot be used to set off unfair preference claims.
A company in liquidation is barred from serving or enforcing SOPA claims (s 32B). A company in administration, however, may use SOPA to crystallise and collect outstanding progress sums. This has led to the rise of holding DOCAs - structures designed to preserve the ability to pursue SOPA claims rather than forcing an immediate liquidation.
Holding DOCAs – purpose and limits
DOCAs bind creditors for claims arising on or before the “relevant date” (s 444D). They can provide controlled compromises, trading‑on, and orderly realisations. But they cannot bind non‑party claims or impose unauthorised third‑party releases.
Recent cases show courts are increasingly intolerant of DOCAs that discriminate against building‑defect claimants or attempt to suppress statutory rights.
Academy Construction (NSWSC 808, 1 July 2024)
Project Sea Dragon (FCAFC 141, 1 Nov 2024)
The Full Court upheld termination of a DOCA that structurally disadvantaged certain creditors. Discriminatory treatment and structural unfairness will not stand.
DOCAs that suppress or discriminate against defect and consumer‑protection claims - including Home Building Act s 18B warranties and Design and Building Practitioners Act s 37 duty of care - are at serious risk.
