Photo Source: St Hilliers Construction LinkedIn page

The recent Voluntary Administration of companies in the St. Hilliers Construction Group provides a reminder of the opportunities which exist to preserve value for the benefit of creditors in such circumstances. Administrators contemplating carrying on the business of a construction company are faced with daunting issues of personal liability attached to projects. Separating out pre-administration issues can limit an Administrator's personal liability as to issues of build quality but have the capacity to impact recoveries from individual projects.

From a developer's perspective, continuity of construction has never been as important as it is today. It is a concept I first developed when a partner of Ferrier Hodgson for the Provisional Liquidation of KB Hutchinson Group, a well-regarded mid-tier builder whose failure was associated with the well-known issues attached to the long-delayed World Square Development in George Street, Sydney.

Contracts between Builders, Developers and their Financers generally incorporate Tripartite Agreements, which enable a disaffected party to "step in" in the event of a Builders or Developers' default, but where the Novation of Contracts brings with it an assumption of acceptance of all issues attaching to a Contract. In the case of an insolvent Builder and Developer taking a novation of its sub-contracts, it assumes the responsibility to resolve disputes which may exist in relation to them. In today's environment of rapid escalation in the cost of contract works (with little prospect of mitigating them) they can come in point where there is no equity in individual contracts from an unsecured creditors' perspective. However, there can be reasons why affected parties may have a desire to see individual contracts completed.

Paramount to the completion of most projects are issues of documentation and signing off of various certificates which ultimately allow certification of Practical Completion and the issue of Occupancy Certificates. Clients may be motivated to enter into amended contractual arrangements to expeditiously ensure contract completion. As a general rule, the insolvency of a Builder can see costs of completion escalate by 30-40% and product warranties being jeopardized by non-payment of sub-contractors and suppliers. Bond providers may be motivated to facilitate completion of construction of project works on the basis of safeguarding residual equity in respect of Retention and Performance Guarantees given.

Registration of Strata Bodies in NSW requires the provision of a range of information relative to "the build". The loss or absence of project documentation associated with a Builder failure in the healthcare sector recently resulted in significant issues for the Developer Client securing an Occupation Certificate. From a Developer's perspective, it can often be commercially advantageous to "prop up" the continuation of a builder's activity on the basis additional costs incurred are necessary to achieve a successful project outcome.

In recent years, selected projects have continued to be completed in several major administrations where the downside risk of value loss justifies the use of creative techniques in the interest of providing better outcomes.

Author: Brian Silvia, Principal 

Brian Silvia is an expert restructuring and insolvency practitioner. He is not acting on the St Hilliers matter. 

The recent insolvency administrations of ProBuild and Impact Homes are a timely reminder of the issues confronting insolvency practitioners when dealing with the assets of insolvent construction companies. In most instances should the insolvency practitioner carry on business they will attract personal liability for future construction works. This becomes an immediate impediment to the continuation of business; the results of which generally see all building contracts terminated and the draw down of performance guarantees/bonds etc. Most builders invariably have little in the way of tangible assets such that the administrator may be lucky if there is some cash at bank but little else in the way of relisable assets, except for disputed debtors.

Historically, insolvency practitioners would close down a site pending a quantity surveyor doing a survey to assess the current state of a building contract from a financial perspective. The advent of PPSR complicates that process to the point of it being almost impossible to work out contract status on a timely basis. This process adds to the pressure on an insolvency practitioner to discontinue construction activity.

Cessation of work on a building site will generally speaking add 30 – 40% to the future cost of the balance of construction work on a project plus raises issues of building and product warranties not being honored in the future. Unique issues arise in Queensland with its Sub-Contractors Charges Act and in NSW relative to the registration of Strata Plans and their associated developer Bonds.

There are alternatives which can ensure continuity of construction and the completion of projects with the potential to yield better outcomes from a range of stakeholder perspectives. With the onset of inflation, even mild by historical standards over the last 50 years, we will see increasing pressure on Builders who in the recent past had undertaken projects on a Design and Construct basis with fixed prices. They have little room to move.

Another little appreciated issue are the obligations which attach to contracts novated in favour of Developers who exercise “step in rights” where they can assume the liability of any newly appointed Builder for the payment of future Sub-Contract works undertaken. These obligations are akin to the historical liability assumed by Developers where in the 1970’s and 1980’s Architects working on behalf of Developers would nominate Sub-Contractors on the behalf of the Developer to be utilized by a builder. In the event of the Builder failing, both the Architect and the Developer would become liable for the payment of debts owed by the Builder to Sub-Contractors.

Parts of the construction industry are now entering an interesting phase.

The diversity and usefulness of potential Insolvency Appointment tools are often little appreciated.

The below summation covers the majority of potential corporate and personal appointments. For example, the Conveyancing Act in NSW includes provisions which can more readily assist Insolvency Practitioners in setting aside property transactions that may have conferred a disposition of property in favour of a third party. These types of proceedings can often be a more cost-effective recovery process.