Builder in Liquidation : What should I do?

6 October 2024 in Building and Construction Law | 7 min read | skip to FAQs

This article discusses what you should do if your builder is in liquidation. The financial viability of the construction industry fluctuates due to a multitude of internal and external pressures, and construction can be a risky enterprise. When a building company goes into liquidation, or becomes insolvent, a home owner may potentially be left with unfinished works, defective works, delay costs and other loss and damage resulting from the building company’s failure to complete the home building works.

If you have contracted with a home building company that goes into liquidation (or administration), you must swiftly determine your legal position and rights in order to take the appropriate steps to mitigate your loss and salvage your project.

The most efficient way to find accurate information is to contact an experienced building and construction lawyer.  The building and construction lawyers at Sydney BSM Law are acknowledged as industry experts in all aspects of construction law and can assist you.

What is Liquidation?

Liquidation applies to a company, as opposed to a person, (legally referred to as a ‘natural person’), where the term bankruptcy is used. When a building company enters liquidation, it means that the company will cease to operate usually because the company is unable to meet its financial obligations and is experiencing insurmountable financial difficulty. When a company can longer pay its debts as and when the debts fall due and payable this is described as insolvency. Insolvency is defined in section 95 of the Corporations Act 2001 (Cth)

The Process of Liquidation

An independent liquidator will be appointed, the liquidator’s role includes assessing and collecting all company assets and redistributing the assets to creditors (people, companies and any other entities that are owed money by the company). Importantly, although independent, the liquidator will be operating with the goal of preserving and maximising the building company’s assets with the purpose of redistributing to the creditors. The liquidator’s primary duty is to the creditors of the company. The liquidator also examines if there are any breaches of directors duties, such as trading while insolvent. For further information on this topic, see our article on Company Directors Duties.

The process of liquidation or winding up of the company is addressed in Part 5.4B of the Corporations Act 2001 (Cth) and the Court may appoint a liquidator pursuant to section 472 of the Corporations Act 2001 (Cth)

What is Administration?

Companies can enter into either voluntary (initiated by the directors of the company) or involuntary administration. It occurs when a company becomes insolvent or likely to become insolvent, meaning simply that the company owes more money than it makes. An administrator is appointed to take control of the company and investigate its financial situation. The independent and registered administrator aims to achieve the best outcome for creditors. Administration may ultimately result in liquidation and the winding up of the company. However, other options that allow the company to continue to trade and are provide a better return for creditors may be found. For instance, a Deed of Company Arrangement (DOCA) which is an agreement between a company and its creditors that can include restructuring of payments.

Steps to Take when Builder is in Liquidation

In the event of liquidation there are a number of steps you can take to both safeguard your position and respond in the most effective manner, these include:

Cease making Payments

When your building company enters liquidation, it is highly likely that no further work will be undertaken on your project, and that any further payments that you make will only lead to a larger loss. Not making any further payments will mitigate your loss overall and will preserve some cash for you to engage a new builder to recommence works on your project as soon as possible.

Pursuing Termination of the Contract

When your building company enters liquidation, it is highly likely that no further work will be undertaken and the building company will abandon your project. By ceasing the work, and by becoming insolvent, (subject to the terms of the specific home building contract) the builder has breached your building contract and you will likely have a right to terminate the contract. Before making a claim or terminating the contract for such breach, it is strongly recommended that you obtain legal advice. Terminating a contract is a highly risky strategy and must be done correctly and with precision.

Please note that until termination the current home building contract may still be enforceable, and you should not enter into any other home building contract with another builder prior to seeking legal advice or terminating the contract with the building company in liquidation.

You should seek legal advice regarding the termination of the contract, arranging building reports to assess any defects or incomplete work and entering into a contract with another builder.

Communicating with the Appointed Liquidator

If you have paid monies to the building company for work that the building company has not yet completed or there are building defects or delay costs, you may be a creditor to that builder. You will therefore be entitled to seek to recover money from the liquidation process. You will need to communicate, ideally with the assistance of a legal practitioner, with the liquidator to confirm your creditor status and ensure that you are in the best position to receive all that you can claim and are owed. Early and effective communication with the liquidator will not only ensure that you get your money as quickly as possible, but it will give you clarity as to the progress of the liquidation process.

Proof of Debt

You will be required to validate your claim by submitting a formal Proof of Debt. For the purposes of this stage, it is important that you gather and collate all records of any works paid for and not complete, any defects and any additional costs that you incurred as a result of the builder’s failures.

The Principles of Payment to Creditors

Once the liquidator has assessed the status of the building company an assessment can be made of any return to creditors. The company was placed into liquidation because it could not pay its debts as and when they fell due and payable, therefore it is very unlikely that any creditor will receive a payment equal to the creditor’s losses or claim. There is likely to remain a significant loss or shortfall for you and every other creditor. In the event that a distribution is made to creditors each creditor will receive a payment that is a proportion of the creditor’s claim, that proportion is equal for all creditors. Secured creditors do not form part of the liquidation and can recover against their security (such as a bank recovering debts pursuant to a mortgage).

Home Building Compensation Cover : HBC

All builders must have Home Building Compensation (HBC) insurance (previously called Home Warranty Insurance) for all projects over $20,000.00. HBC operates to cover any losses incurred by a home owner in the event that the builder cannot complete the works due to insolvency, death or otherwise. It covers the losses directly resulting from the non-completion, and other losses including any alternative accommodation, removal or storage costs. HBC insurance offers some comfort to home owners, and is an important instrument in the recovery of losses due to the liquidation of a building company.

It is a breach of section 92 of the Home Building Act 1989 (NSW)  for any builder to undertake residential building works (with a value of over $20,000.00) without HBC.

Recommendations regarding HBC Insurance

1. It is recommended that all home owners seek confirmation of HBC cover prior to any builder commencing residential building work. If your builder goes into liquidation without HBC insurance for your project, you will not be able to bring an insurance claim against the insurer.
2. It is recommended that any claim pursuant to the HBC is undertaken with the assistance of building and construction lawyers. Claims in relation to HBC cover must be made within 6 years.

NOTE: Whilst helpful, HBC insurance is limited in its scope. The insurance policy only covers 20% of the builder’s contract price and up to a maximum of $300,000.00. There is a high probability that your losses will exceed any return from the liquidation and any HBC cover.

Other Options when your Builder is in Liquidation

In the event that that the liquidation and HBC insurance do not adequately compensate you for your losses there may be other options available that will depend on the specific circumstances of your case. For example:

1. If the home building company was trading insolvent, you may be able to bring a claim against a director personally;
2. Misleading or deceptive conduct is a breach of section 18 of Schedule 2 of the Competition and Consumer Act 2010 (Cth)  and you may be able to bring a claim against the builder personally if the builder personally committed such conduct. Your claim would be for the losses incurred as a result of such conduct; and
3. You may be able to bring a claim against the builder personally for breaches of the Design and Building Practitioners Act 2020 (NSW).

How can BSM Sydney Lawyers assist you?

Following notice that your builder is in liquidation, it is highly recommended that you obtain accurate legal advice from a specialised construction lawyer swiftly. This will help you achieve the best possible outcome.

BSM law firm Sydney has a team of expert building lawyers who can guide you through the complex legal process of dealing with liquidators and insurers and achieve the best results. BSM Lawyer Sydney has specialised construction lawyers with over 3 decades of experience. Our construction lawyers regularly deal with the problem of builders in liquidation and are able to manage the matter and advocate strongly for you. The senior construction lawyers at BSM Sydney Lawyers offer a free 20-minute consultation to discuss your individual situation and formulate a plan for you.

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BSM Lawyer Sydney has offices conveniently located in Sydney CBD, Sutherland, Parramatta, Shellharbour and Wollongong.