A litigation lawyer has revealed the construction industry is like a house of cards where the insolvency of one company could send others into liquidation.
Ben Twomey of Twomey Dispute Lawyers says those within the construction industry need to understand a few basics about insolvency for their own protection or they will put themselves at risk of learning the hard way.
“Contractors, developers and anyone involved in a building contract need to take protective measures in the event that a builder they are working with or providing goods or services to goes under,” says Mr Twomey.
“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.”
Mr Twomey says those within the building industry who have previously worked with an insolvent company need to consider what sorts of action, if any, a liquidator may bring against them.
“If there are subcontractors or contractors who have received payments from an insolvent company within a six-month timeframe, these payments might be clawed back by a liquidator,” Mr Twomey says.
“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.
“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.”
Mr Twomey says despite this being a serious and prevalent issue within the construction industry, there are defences available and now is the time to take precautionary action.
“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 says.
“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 owing, 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.”
The other major hardship an insolvency event can trigger for other businesses centres around the 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, once the liquidator locks the gate and is in possession of that site, they may be unable to retrieve those items,” says Mr Twomey.
“When a company goes into liquidation, there are a number of things that could then belong to that company, meaning there is a risk that it becomes the liquidators’ unless protections are put in place.”
Mr Twomey says varying levels of protection are available to all parties, including developers, principals, and contractors entering into a construction contract.
“There are ways stakeholders can secure themselves against the tribulations of insolvency such as ensuring they’ve taken appropriate measures, one being effecting the appropriate registrations on the Personal Property Securities Register (PPSR),” says Mr Twomey.
“This assists parties within a construction contract by providing security over materials or equipment used on 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.
“If you suspect a company you’re working with or have previously worked with is insolvent, seek legal advice because we are going to continue seeing the negative impacts insolvency has on other businesses.”
