Trying to deal with a building company liquidation is never easy.
The fallout hits other people and businesses, with effects ranging from mere inconvenience, to business interruption and potentially even further shutdowns. Particularly effected are subcontractors, suppliers and the directors of the company involved.
If you are anyway involved in the building industry, the more you know about the process, the better you can navigate it. To assist, here is a closer look at the problems caused by building company liquidations in Queensland.
What actually happens during a building company liquidation?
When a building company is placed into liquidation or voluntary administration, the following typically occurs:
- The Liquidator or Administrator takes control of the company.
- The company’s QBCC licence is cancelled immediately. The exception is, in very rare circumstances, if an Administrator is appointed, the QBCC may allow the company in administration to carry out minor works to complete existing projects.
- When the company’s building licence is cancelled, the company must cease carrying out building works immediately. That means it can’t complete projects it has already started or start new projects.
- Most if not all employees will be terminated immediately.
- The insolvency appointment is often an event of default under contracts. This means principals and developers can terminate contracts with the company.
- Secured creditors will often repossess assets which they have financed.
- A secured creditor with security over all, or most, of the company’s assets may appoint a Receiver and Manager. The Receiver and Manager will take control of and recover assets subject to the secured creditor’s security and after payment of their costs, pay funds recovered to the secured creditor up to the balance of its debt.
What are the typical problems that a Liquidator or Voluntary Administrator deals with?
It is often difficult for a Liquidator or Administrator to realise the assets of the company for the benefit of ordinary unsecured creditors, including subcontractors. Here is a look at some of the reasons for these difficulties:
- Often most assets are financed and/or a lender will hold security over the whole company. Secured creditors are entitled to be paid amounts realised from assets subject to their securities in priority to such funds being available to the company.
- In most cases, the company will not be able to complete projects which it is carrying out. The two main reasons for this are: 1) its QBCC licence will be terminated and/or, 2) it is in breach of contract due to the insolvency appointment. The result is that principals or developers will terminate contracts with the company and hire third parties to finish incomplete projects. This generally costs more than what it would have cost if the company completed the projects.
- Principals or developers are entitled to set-off claims for completing outstanding work, over and above remaining amounts payable under contracts with the company, against debts which they owe. They are also entitled to set-off claims for rectifying defects. This often results in the amounts of debts owed to the company being significantly reduced, or not being recoverable at all.
- Principals or developers will also more than likely be able to claim liquidated damages if projects are not finished on time. They can also set-off any such claim against debts which are owed to the company, thus reducing any amount recoverable by a Liquidator.
- Subcontractors often claim subcontractors’ charges, which give them a “security” over debts owed by principals or developers to the company. If these subcontractors’ charge claims are valid, then subcontractors get paid directly by principals or developers from any debts owed to the company in voluntary administration or liquidation. This means that the company does not receive these funds.
- If there are funds recovered by a Liquidator, then the Liquidator’s costs are payable in priority to any amounts owed to unsecured creditors. A Liquidator’s costs can be significant in a building company liquidation, given the issues which are commonly encountered.
- If there are any funds available after paying a Liquidator’s costs, then unpaid employee entitlements are paid from these funds in priority to amounts owed to ordinary unsecured creditors, such as subcontractors. There can often be significant amounts owed to employees especially if they are owed pay in lieu of notice, redundancy pay and long service leave.
Unfortunately for unsecured creditors, this means that if a building company goes into liquidation, they can often expect a limited return at best.
What are the risks for directors?
When a building company collapses, the directors usually become insolvent and are often made bankrupt.
There are five main reasons for this:
- The directors have often personally guaranteed the company’s bank debts and any finance agreements. It is very common for banks and financiers to suffer shortfalls on debts owed by the company and then to try to recover shortfalls from the directors.
- The directors have often signed personal guarantees for a number of trade creditors, meaning the directors are personally liable for these debts.
- Guarantees signed for creditors often contain charging clauses. This means the creditor can lodge a form of security over any real property directors own. As a result, the creditor will be paid in priority from any such property’s sale, after prior ranking secured debts are paid.
- The Liquidator may pursue certain claims against the directors. For example, they might pursue claims against the directors for insolvent trading or as a result of a QBCC Deed of Covenant, as detailed below.
- The QBCC might pursue specific claims against the directors, as detailed below.
What is the QBCC’s role in building company liquidations and what are the problems?
QBCC licensing and other regulations have a major effect on a building company and its directors during a liquidation. These include:
- The company will almost always lose its QBCC licence when a Liquidator or Administrator is appointed. Additionally, the company’s directors and any influential persons in respect of the company will become excluded individuals. This means they will lose their building licences for three years (for a first event of insolvency) and they won’t be able to act as a director, shareholder or take a role at senior management level in a private building company during this period.
- The QBCC defines an influential person to be an individual, other than a director or secretary of the company, who is in a position to control or substantially influence the conduct of the company’s affairs, including, for example, a shareholder with a significant shareholding, a financier or a senior employee.
- This definition includes senior employees and shareholders of companies as being influential persons. The QBCC may also assert that directors of corporate shareholders are influential persons.
- If a builder is a principal contractor, and carrying out residential building work then the builder will also likely be covered by the QBCC homeowners warranty scheme. Residential building work includes construction of new dwellings to three stories, and certain renovations. If the builder is covered by the homeowners warranty scheme then subject to various conditions, the QBCC provides insurance for homeowners for six and a half years after building work has been completed.
- Under the scheme the QBCC will pay the costs of completing any incomplete work, or fixing any defects and it can recover these costs from both the company in liquidation, and the company’s directors. This can be a significant cost for directors involved in building company liquidations where the business was doing residential building work covered by the QBCC’s homeowners warranty scheme.
- If the company’s director or another related party executed a Deed of Covenant and Assurance to meet the QBCC’s net tangible assets requirements, the Liquidator can recover the defined amount pursuant to the Deed. The amount recoverable is calculated by the QBCC each time a company renews its building licence. The Deed also grants security over the company’s directors’ assets for the amount payable meaning the Liquidator can lodge a caveat over any property which directors own. This will obviously be another problem for directors because the amount involved can often be substantial.
If you need advice or assistance
The unfortunate reality is that building company liquidations can cause major problems which have a significant impact on those involved.
That’s why numerous Queensland building companies and other stakeholders in building company liquidations rely on our expertise and experience to help them navigate these problems.
If you’d like to know more, you can get in touch with us here. We can help you through these complex legal and financial issues.