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When builders go broke: 25 steps to survival for subcontractors

There have been a number of large building company failures in Queensland recently, resulting in significant losses for subcontractors. Many of these subcontractors now face financial difficulties themselves from not being paid the money they’re owed.

Here are 25 things subcontractors can do to minimise the financial impact of a building company going broke.

Before starting work

1. Have a solicitor review contracts, especially if they involve significant amounts of money.

2. Do a trade credit check. Credit reporting agencies can provide the credit history of a company and its directors that includes details of past related corporate failures and any currently known credit defaults or Judgments entered1.

3. Do a QBCC Licence search. The QBCC’s licence history for a builder can include details of whether the builder has ever:

  • had their licence suspended
  • been directed to rectify work
  • received any demerit points for Judgments obtained and not paid.

4. Update trade credit terms. Subcontractors should get professionally prepared trade credit agreements that include:

  • personal guarantees, which contain a charging clause making the subcontractor a secured creditor of the guarantor with the ability to lodge a caveat over real property if payment isn’t made.
  • retention of title clauses for any materials supplied. A security interest should also be registered on the Personal Property Securities Register (PPSR).

5. Talk to other subcontractors. If a subcontractor has any concerns about a potential client, they should talk to or try to get credit references from other subcontractors who have also done work for that client. The other subcontractors may not have been paid on time, or may be aware of issues that could affect payment.

6. Consider the risks of taking on big projects. The larger the project, the larger the risk to the subcontractor’s cash flow if payment isn’t received.

7. Obtain trade credit insurance for larger clients. While there’s obviously a premium to pay for trade credit insurance, it may be worth the cost if it means a claim can be made to recover some amount from a bad debt. Subcontractors need to weigh up the costs of such policies against the risk of non-payment by their larger debtors.

Once the work is underway

8. Get written confirmation of variations. Building companies in financial difficulty often stop paying poorly documented variation claims to improve their cash flow. Subcontractors should have a formal variation approval system that includes getting appropriate documentation signed off by the client before they start work on any variations.

9. Consider stopping work (or refusing to carry out further work) if payment isn’t made. If payments aren’t being made, stopping work may be an option to ensure payment is made to get the work done. Subcontractors should also think twice about agreeing to take on new work for a client when they have outstanding overdue invoices payable.

Note: Contractual obligations should always be considered before stopping work, as it may constitute a breach of contract.

When the work is complete

10. Invoice for work as soon as it has been completed. This includes invoicing promptly for any progress claims that may be payable under a contract.

11. Ensure claims and payments are BCIPA payment claims2. Issuing a claim or invoice as a BCIPA payment claim allows subcontractors to access the BCIPA process if any disputes arise.

If payment isn’t made

12. Follow up payment on the due date.

13. Enter into a payment arrangement.

14. Seek adjudication under the BCIPA process. An adjudicator confirming a debt is owed is similar to obtaining a Judgement against the debtor.

Note: It may be prudent to obtain legal advice before seeking adjudication, as certain timeframes and statutory steps need to be observed to comply with the BCIPA process.

15. Notify the QBCC of unpaid debts. If the QBCC receives a complaint from a subcontractor that they haven’t been paid, the QBCC will request a builder to show cause. This may well result in the subcontractor being paid. It could also lead to the builder’s licence being suspended, forcing them to cease all work and possibly enter liquidation.

16. Issue a subcontractors’ charge. A subcontractors’ charge secures a subcontractor’s debt over any money owed by the principal/developer to the builder. This gives subcontractors a means of getting paid directly without having to rely on (or wait for) payment from the builder.

The subcontractor should engage a specialist building and construction solicitor to prepare a subcontractors’ charge and take any necessary recovery action. These charges have various requirements and timeframes, including:

  • charges needing to be issued within three months of completing the work
  • court proceedings needing to be filed within one month of serving the charge.

17. Issue a Statutory Demand. If there’s no genuine dispute about a debt, a subcontractor can instruct solicitors to issue a Statutory Demand rather than filing court proceedings to seek a judgement. This gives the debtor building company 21 days to pay the debt, after which the subcontractor can make an application to Court to place the debtor building company in liquidation.

18. Start legal proceedings to obtain a judgement. If a debt is disputed (or if solicitors suggest it) a subcontractor can start legal proceedings to obtain a judgment, which may result in the debt owed being recovered.

19. Don’t do further work on the promise of being paid for earlier work. Subcontractors need to be careful if they’re asked to perform more work when their invoices for earlier work still haven’t been paid. If the builder wants a subcontractor back on site to carry out further work, they should pay for the work that has already been completed.

If the builder enters administration or liquidation

20. Exercise all rights under credit terms. This may involve:

  • collecting materials supplied under retention of title terms
  • pursuing personal guarantees
  • lodging caveats over the guarantors’ properties.

21. Issue a subcontractors’ charge. Subcontractors’ charges can still be claimed if the builder has entered administration or liquidation.

22. Be careful about lodging a Proof of Debt if claiming a subcontractors’ charge. Claiming a subcontractors charge makes the subcontractor a “secured creditor”. However, if a subcontractor submits a Proof of Debt in a liquidation and/or votes at a creditors’ meeting they could surrender their security to the Liquidator and become an “unsecured creditor”.

Subcontractors claiming a subcontractors’ charge should obtain legal advice on the effect that lodging a Proof of Debt or voting in a liquidation could have on this claim.

23. Seek payment from the principal/developer. It may be possible for the subcontractor to have their outstanding debts paid by the principal/developer. For example, they may pay some of the contractor’s historical costs to:

  • come back on site to complete work that has already been started
  • provide or release certificates or certifications of work performed.

As it may be more costly for the principal/developer to have these matters dealt with by another contractor, they may be open to paying the current contractor a premium to obtain them.

24. Pursue claims for insolvent trading. If the Liquidator doesn’t pursue a claim for insolvent trading against the director, the subcontractor (or perhaps a number of them) can pursue the claim themselves. The subcontractor(s) need to obtain the consent of the Liquidator in writing or leave of the Court before starting recovery action.

25. Be aware of unfair preference claims from a Liquidator. If a company makes a payment to a creditor in the six months before the relation back day for a liquidation, this payment may be an unfair preference and recoverable by a Liquidator.

A possible defence to an unfair preference claim is that the recipient of the payment did not have reasonable grounds to suspect the payer was insolvent when the payment was made. However, the following actions taken by a subcontractor may result in the subcontractor being unable to rely on this defence:

  • corresponding with the debtor about their failure (or inability) to pay
  • entering into a payment arrangement, especially if multiple payment arrangements are entered into or payment arrangements have been breached
  • stopping work and walking off the site
  • issuing a statutory demand or commencing legal proceedings.

At Pearce & Heers we specialise in helping people in the building industry who:

  • are in financial difficulty
  • would like advice on handling the risks of working in the industry.

If you’d like to talk about this article, or your circumstances in general, don’t hesitate to get in touch with us.

 

[1] Depending on the search obtained.

[2] This applies to subcontractors in Queensland.

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