Bank guarantees are commonly used in construction contracts as an alternative to cash retentions. A recent decision of the Supreme Court of New South Wales illustrates why possession of the original guarantee matters, particularly where the contractor later enters external administration.

In In the matter of Novati Constructions Pty Ltd (subject to a deed of company arrangement) [2026] NSWSC 1031, Black J considered competing claims to two original bank guarantees totalling $625,000.

Novati Constructions Pty Ltd (Novati) had agreed to provide the guarantees to Hulak Coonanbarra Pty Ltd (Hulak) in substitution for retention money held under their construction contract. The guarantees required the original documents to be presented to the bank before payment could be made.

The builder intended to deliver the originals but mistakenly delivered colour copies. Both parties believed they were the originals. In reliance on their apparent delivery, Hulak released the retention money and ceased making further deductions from invoices under its contract. After Novati entered voluntary administration, the voluntary administrators discovered that the originals remained with Novati’s director and obtained possession of them.

During the voluntary administration, Novati’s creditors approved a deed of company arrangement (DOCA) governing how its affairs and creditors’ claims would be dealt with. The DOCA was executed on 6 May 2026, at which point the voluntary administrators became the deed administrators.

The deed administrators subsequently received competing claims to the original guarantees and sought directions under section 90-15 of the Insolvency Practice Schedule (Corporations) as to whether the originals should be delivered to Hulak, returned to Novati’s director or sent to ANZ for cancellation.

Hulak argued that it was entitled to the originals on two principal grounds. First, it claimed in detinue, which provides a remedy where a person with an immediate right to possession demands the return of property and it is wrongfully withheld. Secondly, it argued that the originals were held on constructive trust because, in the circumstances, it would be unconscionable for the builder to retain the beneficial interest in them.

Novati Pty Ltd, a separate entity and proponent of the DOCA, argued that the originals remained Novati’s property and should be returned to its director. It contended that Hulak was instead limited to lodging a proof of debt against the Deed Fund alongside Novati’s other creditors.

That argument required the Court to determine whether Hulak’s asserted rights fell within the broad category of claims capable of compromise under a DOCA. Sections 444D and 444H of the Corporations Act 2001 (Cth) provide for a DOCA to bind creditors and release the company from debts covered by the deed. Read consistently with section 553, those provisions extend to present, future, contingent and unquantified monetary claims. The question was therefore one of characterisation, namely was Hulak asserting a claim against the builder capable of compromise under the DOCA, or an existing proprietary right to the original guarantees?

The Court first considered the commercial character of the guarantees. Relying on Re Hastie Group Ltd (in liq) (2022) 410 ALR 531; [2022] FCA 1280 at [270]–[273], Black J observed that an unconditional bank guarantee imposes a primary obligation on the issuing bank, independent of any disputes arising under the underlying construction contract, and is commonly regarded as being “as good as cash”. Here, however, ANZ was only required to pay upon presentation of the original undertakings. Possession of the originals was therefore essential to Hulak calling on the guarantees.

The Court then considered whether the obligation to deliver those originals survived the DOCA. Airtourer Co-Operative Ltd v Millicer Aircraft Industries Pty Ltd (subject to a Deed of Company Arrangement) [2004] FCA 393 and Thiess Infraco (Swanston) Pty Ltd v Smith (2004) 209 ALR 694; [2004] FCA 1155 indicate that some contractual obligations for which specific performance is the appropriate remedy may fall outside the claims compromised by a DOCA. However, the more recent decision in SCL AUS Ltd v Kirkalocka Gold SPV Pty Ltd [2026] FCAFC 60 at [75]–[80] confirms that a DOCA may compromise monetary claims as well as other rights forming part of those claims, where they are capable of valuation and proof in an insolvency.

Interestingly, Black J regarded the interaction between those authorities as complex and did not determine whether the contractual obligation to deliver the guarantees remained specifically enforceable. Instead, his Honour resolved the dispute on proprietary grounds.

The builder had intended to deliver the originals, represented that it had done so and obtained the benefit of the released retention money. That conduct gave Hulak an immediate right to possession sufficient to establish detinue. Once the builder became aware of its mistake, it was also unconscionable for it to retain the originals while preserving the benefit of the released retentions. A constructive trust therefore arose.

The proprietary nature of those rights was critical. Hulak was not seeking payment from the builder or a distribution from the deed fund. It was asserting rights to the originals so that it could pursue payment from ANZ. Those rights were not compromised by the DOCA, and the Court directed that the originals be delivered to Hulak.

The decision highlights how the characterisation of rights to construction security can affect a creditor’s position following insolvency. It also underscores the practical importance of receiving originals when bank guarantees replace retention money.

To discuss the implications of this decision, creditor rights in an insolvency, or the treatment of bank guarantees and other security arrangements under a deed of company arrangement, contact our Restructuring & Insolvency team.