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.