,

The remedies for building and construction companies facing insolvency

What are the reasons behind so many building and construction companies trading insolvent in Australia? We look at the causes and what can be done to remedy the situation.

By John Christian – June 15, 2022
The remedies for building and construction companies facing insolvency

As of May 2022, 50% of Australian building companies are insolvent. There is a huge wave of concern across the industry as more and more big names are collapsing. Three of the most recent victims include Condev, Surfers Paradise-based Pivotal Homes, and Cleveland-based Solido Builders. They join a long list of building and construction companies trading insolvent right now. As a small business owner in the building and construction sector, it’s important to understand the key challenges the sector is currently facing and what remedies can be put into place in the unfortunate event that you are unable to repay your debts.

The question here is, why are all of these companies going insolvent? What’s causing all the issues within the construction industry? More to the point, what options do you as a business owner have in the event of insolvency?

Rest assured, we will answer all of these questions in this blog post.

Reasons why building companies are collapsing

We can pinpoint a variety of reasons that the building sector is struggling at this current moment in time. Unfortunately, it’s a case of poor timing – many different things are happening at once, each making life difficult for building companies and strain on profits.

COVID-19

The coronavirus pandemic has hit this industry like a freight train. For the last two years, construction companies in Queensland and the surrounding area have been scuppered by COVID-19 shutdowns. Months passed by without anyone doing any work, putting a strain on business finances and resulting in construction company profits plummeting. Now, with the recent housing boom, labor costs are rising significantly leaving many employers struggling to get the staff needed for certain jobs. This results in companies pushing back the handover dates on homes. In turn, this costs the builder more money as they often have to absorb the additional running expenses.

Rising Costs & Short Supplies

Coinciding with the pandemic problems, the building industry is falling victim to a supply shortage. It is much harder to acquire common building supplies – like timber, steel and concrete – than it used to be. Part of this is down to the ongoing conflict in Ukraine and bans on certain imports from Russia. When resources are in short supply, it means their cost will rise exponentially. Indeed, timber prices are up between 50 and 100 percent when compared to this time last year. Steel has also seen a 30 to 60 percent increase, with concrete rising by 20 to 40 percent. In essence, companies in this industry are severely lacking in operational funds. The only solution is to gain some sort of cash injection – much like Metricon gained from its owners. The company received a $30 million cash injection to help keep it afloat, which goes some way to showing just how extreme the situation is in this industry.

What happens when a construction company collapses?

When construction firms collapse and they are no longer able to pay their debts, they become insolvent. Key indicators assessed by the QBCC are conducted to determine the company’s state of solvency. Some of the indicators that will be assessed include the ability to raise future capital, dishonored cheques, and the ability to produce timely and accurate financial information to display the company’s trading performance and financial position.In almost all cases, if an insolvency event occurs the builder will become an excluded individual, they will lose their QBCC license and operations will cease immediately.

What does this mean for your customers?

At this point, the QBCC provides assistance through Queensland’s Home Warranty Insurance Scheme to assist homeowners that are affected by insolvency. The QHWS kicks in to provide a premium on all projects worth more than $3,000. However, whether the customer receives compensation or not heavily depends on how far along they are in the build.

What are the remedies for building and construction companies trading insolvent?

It’s essential to understand what’s involved in the insolvency process, so you as a business owner are better equipped to navigate it. Due to the reasons stated above, it’s imperative that business owners remain vigilant during such a turbulent time in the industry. Not every insolvency will lead to liquidation, and for some, insolvency can be only a temporary hurdle.

Primarily, there are three possible remedies to consider. They are: 

  • Voluntary Administration
  • Receivership
  • Liquidation

Voluntary Administration

On the other hand, a company can go into administration. Here, the business will be put into the hands of licensed insolvency practitioners. Essentially, these experts will manage the company and work out ways of paying off debts to keep the company afloat. This is regularly seen as the preferred remedy as it can result in your company avoiding liquidation and insolvency. However, if the situation is dire, administration can lead to liquidation as well.

Receivership

Receivership is a legal process that sees a receiver appointed by a floating charge holder – this is typically a bank or lender. The receiver will then receive any company assets that are eligible to be liquidated, assisting in repaying debts and getting the company out of trouble.

Liquidation

Liquidation is the process of selling all of a company’s assets before dissolving the company entirely. This process can also be referred to as ‘winding down.’ This is often seen as the last resort for building companies as it does mean the business is over. However, liquifying all the assets will allow the company owners to pay off as much debt as possible. Naturally, your key concern is wondering which of these solutions is right for you. The only way to find out is by working with a team of legal experts that know how to help companies in this situation. You must find lawyers that specialise in insolvency law, ensuring that they have all the skills and knowledge to assess your situation and come out with the best possible outcome.

Prevention is key

Unfortunately, it’s looking increasingly likely that more and more building and construction companies will become insolvent. Current industry conditions are terrible, with the pandemic still creating problems throughout the sector. To compound the misery, price hikes and supply shortages mean that companies are finding it increasingly difficult to operate. As such, it’s more important than ever that businesses in the building sector find insolvency lawyers to help them during this difficult period. At Victor Legal, we don’t just provide insolvency advice; we also offer pre-insolvency guidance and have the necessary experience to assist building and construction companies to find positive outcomes. If you’re seeking insolvency advice or would like to discuss any of the information in the article, contact us today for a no-obligation consultation.


Share this post

Subscribe for updates

Stay up to date with the latest legal news and LawChat podcasts