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A single insolvency could trigger a wave of bankruptcies and builders need to know how to protect themselves, says Queensland lawyer.
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Construction industry could collapse ‘like a house of cards’
28 October 2022
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The construction industry is like a house of cards where the collapse of one company could send many others crashing into liquidation, says one Gold Coast litigation lawyer.
Ben Twomey of Twomey Dispute Lawyers urged builders arm themselves by learning the basics of insolvency or they would be at risk when other operators go under.
“Contractors, developers and anyone involved in a building contract need to take protective measures,” Mr Twomey said. “It’s quite common for the insolvency of one building company to engulf other businesses, particularly unsecured creditors, and potentially create significant financial difficulty for them.
“There are two main ways these difficulties arise: one is the retention of funds paid to contractors, the other is a contractor’s on-site property and materials being seized.”
Any builders who had worked with an insolvent company in the past six months needed to consider whether a liquidator might try to claw money back.
“I’ve heard it many times where a contractor completes the works, is owed money, receives what they’re owed and then the liquidator has contacted them and they have been required to pay it back,” Mr Twomey said.
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“It is a mind-boggling concept when all a contractor did was provide services to a company that has since collapsed, but it is very real and entirely possible for others to suffer from the fallout of another company’s liquidation.”
ASIC figures show construction companies are crashing at a rate of about 200 a month, with more than 600 entering administration already this financial year.
Mr Twomey said it was time for builders to take precautionary measures.
“Those within the building industry need to take proactive action as this might limit their exposure to the effects of liquation, or they might be able to succeed in becoming a secured creditor,” he said.
“A common position of defence is whether you had reason to suspect that the company you were providing goods or services to was insolvent at the time of the payment or as a result of making the payment.
“Insolvency is when you can’t pay your debts when they are owning, so if you’ve been chasing a payment from a business for months, this can be seen as an indication.
“If you were aware that a company was unable to pay their debts when they were owing because they couldn’t pay your bill for months, it’s reasonable to assume you had some indication of insolvency.”
Another potential problem triggered by insolvency involved retention of title, where a contractor’s on-site materials could become the property of the liquidator.
“An electrical contractor or scaffolder for example might have supplies or temporary equipment on site to do the job,” he said. “Once the liquidator locks the gate and is in possession of that site, they may be unable to retrieve those items.”
Mr Twomey said varying levels of protection were available to all parties – including developers, principals and contractors – entering into a construction contract.
One way was to make appropriate registrations on the Personal Property Securities Register (PPSR), which offered security over materials or equipment used by contractors on a construction site.
“However, it is important to remember the PPSR generally operates in a priority fashion, so it’s essential that you ensure your security is filed not only correctly, but also as early as possible.”
And he urged any constructors who had worked with a company that was now insolvent to seek legal advice “because we are going to continue seeing the negative impacts insolvency has on other businesses”.
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