News & Insights

Construction Insolvency- Practical Hints

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.