House of cards: how one construction company’s collapse could trigger a wave of insolvency

• Businesses within the sector need to understand the basics of insolvency
• In some cases, contractors have had to return money to liquidators, for clients that have gone into administration
• Also, on-site materials could become the liquidators property

A leading litigation lawyer on the Gold Coast has stressed that the construction industry is like a house of cards, whereby the collapse of one company could send others into liquidation/bankruptcy.

Ben Twomey of Twomey Dispute Lawyers said that those within the sector need to understand the basics of insolvency for their own protection. If they don’t, they will put themselves at risk.

“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,” said 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.

Ben Twomey, Twomey Dispute Lawyers

“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 Towmey noted that those within the industry who have previously worked with an insolvent company need to consider what actions, if any, a liquidator can take 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 said.

“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 said that despite this being a prevalent and series issue in the sector, defences are available, and now is the time to take action as a precautionary measure.

“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 owning, 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.

Mr Twomey’s advice comes as Lanskey Constructions QLD went into administration earlier in the week.

On-site materials could become liquidators’ property

Mr Twomey noted that the other major hardship event insolvency can trigger is that a contractor’s on-site materials could become the liquidators property.

“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,” said 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 also said that varying levels of protection are available to all parties, from contractors to principals and even developers.

“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),” said 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,” he concluded.

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