What to do when your builder goes bust?

KEY TAKE-OUTS:

• Many building companies and Builders are facing insolvency and being wound up or made bankrupt up in Australia at an alarming rate due to a combination of economic factors.
• If your builder goes bust, this is a breach of your building contract. You should seek advice as to your next steps which may include ceasing to make payments to them and ensuring any action or interaction with the builder is noted for possible insurance or liquidation purposes.
• Home Building Compensation Fund Insurance was established to cover Homeowners when such circumstances arise.
• Once a liquidator/Trustee has been appointed to oversee your builder or its company, you should make contact with them to ensure they are aware of your status as a creditor and to ensure they forward any relevant correspondence to you.
• Overall, make sure that you take care of yourself during this process, as it can be quite stressful, and you will need to know what your options are for having our build completed

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Why did my builder go bust and what does this mean?

Many Building companies and Builders are facing insolvency in Australia as a result of economic factors including supply chain issues, COVID-19, inflation and rises in material costs. According to the Australian Securities and Investment Commission in the financial year ended 30 June 2023, 2,213 construction companies entered external administration, compared to 1,284 companies in the previous year, which is a drastic increase.

A building company enters external administration after they are declared insolvent (or have ‘gone bust’). Section 95A of the Corporations Act 2001 (Cth) defines a company as insolvent when they are not able to pay their debts when they become due. Similarly, Builders that operate as sole traders that cannot pay their debts when they become due are also insolvent and face bankruptcy.

Once a building company is in external administration or wound up; or once a builder is insolvent and bankrupt, they are no longer able to carry out the balance of the building contracts they still have on foot. This gives rise to a breach of the contract by the Builder/Building Company and makes them liable to a Homeowner for their repudiatory conduct. In the event a Builder/Building Company cannot rectify the defaults then it is likely that the building contract will be terminated.

What happens when the building contract is terminated due to insolvency?

The first thing you should do when your builder has been declared insolvent is to notify the Home Building Compensation Fund Insurer and begin the process of making a claim. We recommend that you seek legal advice prior to making a claim or terminating your contract with your builder to ensure you are legally protected and do not breach the building contract yourself.

In NSW, any building works commenced with a value greater than $20,000 require a builder to have and provide valid Home Building Compensation Fund Insurance. If your build is over $20,000, When you first entered into an agreement with your builder, you should have received a certificate of cover for home building compensation fund insurance alongside your contract, which will allow you to claim some of the losses faced due to your insolvent builder. The Home Building Compensation Fund Insurance will step in, in the event that an insurance event is triggered including that your builder has died, disappeared or become insolvent.

Insolvency is a ground for making a claim under Home Building Compensation cover (as per section 99 of the Home Building Act 1989 (NSW)). It is important that you notify the insurer as soon as you are aware of the insolvent status of your builder. This is because a delay in notifying the insurer may affect your insurance claim as there are strict timeframes when it comes to building claims for defective and incomplete works. Additionally, you should document any actions that you take, including interactions with your builder regarding the contract, the repudiation and the termination to ensure your records are up to date for the purposes of making your claim.

If you are unsure whether you are covered, you can check using the NSW Government State Insurance Regulatory Authority HBC Check at the following link (HBC Check – SIRA (nsw.gov.au)). If your builder has not issued you with valid Home Building Compensation Fund Insurance for a job that is over $20,000, this is a breach of the Builder’s obligations pursuant the Home Building Act. Accordingly, any such breach should be reported, however, this will limit your avenues of claim as you will only be able to rely upon the asset position of the Builder or the Building Company to pursue your claim.

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The Insolvency Process

If you are unable to make a claim against the Home Building Compensation Fund Insurance then another available avenue will be to pursue the building company or builder in the insolvency process.

When a company is declared insolvent, an administrator or liquidator will be placed in charge of winding up of the business. This means that work will most likely cease on your build unless a new builder is quickly appointed or the company manages to come out of administration. Similarly, if a builder is a sole trader and becomes bankrupt.

Once your builder is declared insolvent, it is important that you seek advice before making any more payments to the builder, as you may not be able to recover all these payments in the event that the builder does not come out of insolvency. As soon as a builder or a Building Company have a liquidator or trustee appointed, you should contact that liquidator or trustee to confirm your status as an unsecured creditor, and to ensure you receive necessary correspondence from them. You will most likely be an unsecured creditor in the process and ranked behind other creditors involved including anyone the company owes debts to (e.g. secured creditors, the Australian Taxation Office, Machinery and Equipment Companies, Employees and other tradespeople).

During the insolvency process, the main role of the liquidator or trustee is to ensure the assets of the company or builder are protected and eventually sold to raise funds to distribute to the creditors. The liquidator will also report to the creditors about the affairs of the company or builder.

The amount of money you will receive depends on the remaining assets of the company or builder. However, there is no guarantee that you will recover any money following payment of the costs of liquidation/bankruptcy, and any other debts that receive priority (such as outstanding employee entitlements. Only then will the remaining assets be divided amongst the unsecured creditors. Accordingly, this is the downfall of having to pursue this avenue over a claim under the Home Building Compensation Fund Insurer which has automatic caps for building claims in such circumstances.

How can we help?

If your builder goes bust it can be quite stressful, so it is important to look after yourself during this difficult time and also ensure that you make the right decisions regarding your contract and claims available to you. If you require any assistance with managing the impact of your builder becoming insolvent, including making an insurance claim or managing the insolvency process, our Building and Construction expert, Melissa Care and her team at Coutts Lawyers and Conveyancers can assist you every step of the way. We are happy to assist with enquiries and can provide further guidance to ensure you take the best steps to protect yourself and get your build back on track to completion.

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