Since the pandemic, rising material costs and difficulties in accessing labour and finance have led to a number of Australia’s prominent builders entering into external administration or facing serious financial woes. This includes Melbourne-based Porter Davis (Australia’s 12th largest home builder) which abruptly ceased all construction works and entered into liquidation on 31 March 2023. Porter Davis had approximately 1,700 builds underway in Victoria and Queensland. That same day, another major builder, Lloyds Group, collapsed with 29 projects underway.
This has left many Australian homeowners in a challenging position. In this article, our building dispute lawyers address some of the key issues homeowners must consider, and the steps to take, in the event that their builder collapses.
Contact the External Administrator
If you become aware that your builder has entered into external administration, make contact with the appointed external administrators ASAP. The type of external administration (liquidation, administration or receivership) will determine what happens next so it is critical that you seek legal advice, but here’s a few key steps to take:
- Immediately cease making any further payments of progress claims issued by the builder until you’re in a position to obtain advice on your rights.
- Inform the external administrator that you wish to be kept informed as to the status of the administration or liquidation and ask for copies of all reports to creditors. You may also wish to attend any meetings of creditors.
- Seek advice on submitting a claim with the external administrator for any defective works, delays or additional costs incurred (or likely to be) as a result of the builder’s insolvency. These claims will be in the form of a formal ‘proof of debt’ provided by the insolvency practitioner and may (down the track) need to be substantiated by an expert report and supporting invoices and photos.
- Note that the builder may not ultimately have any money to pay a dividend to unsecured creditors.
- Seek legal advice if the external administrator writes to you seeking payment of any amounts alleged to be owed to the builder under the contract. The advice will clarify how to respond and whether there’s any potential set-off or counterclaim for losses suffered.
Consider Termination
In many cases, when the builder goes into external administration, they (and any subcontractors) will immediately stop work on site. If they do, the homeowner may wish to terminate the contract based on the builder’s repudiation and appoint another builder to complete the works without delay. Before doing this:
- Determine whether the builder is ‘insolvent’ under the contract or in breach. This isn’t always straightforward and will impact what rights you have. For example, the terms of the contract may prohibit the termination of a contract by reason of the insolvency of the builder.
- Whether the consent of any financier is required before terminating the building contract or whether the provisions of any tripartite agreement provide for the appointment of a new builder (or for the lender to step in and complete the work themselves).
- Take control of the site and ensure it’s secured. You may also be asked to help with the return of hire equipment located on the site to the relevant owner.
- Consider whether you need insurance to provide coverage for any damage to the site or theft that may occur during this period.
Get Advice on Bank Guarantees, Retention Funds and Other Security
When a building contractor enters into external administration, it’s important to consider whether or not any security was provided by the building contractor as a matter of priority.
Security may be in the form of a bank guarantee, retention funds or other security sustained by the principal/home owner as a consequence of the building contractor’s possible breach or repudiation of the contract. Where a building contractor goes into external administration and is in breach of the contract, you may have recourse to the security.
Obtain advice early as to whether or not you have such recourse by, for example, accessing the monies held in retention or claiming the money held in the separate account or from the bank guarantee. This may assist in limiting your losses arising from the builder’s insolvency.
New Builder - who will Complete the Project?
If the works are incomplete (or if there are defective works under the contract), in order to mitigate your losses, you may consider engaging another builder to complete the works. Note that a building inspector may need to inspect the site and report on what works are required to complete the contract.
Issues surrounding the incoming builder’s liability for existing works should be dealt with at the time of negotiation and before works commence. It’s also important to conduct due diligence on the incoming builder and ensure they’re licensed and insured.
Domestic Building Insurance
You may be able to claim for unfinished or defective works under the builder’s domestic building insurance. This is a mandatory insurance policy taken out by the builder for all domestic building works performed. It can be triggered in the event the builder dies, disappears or becomes insolvent.
Limits and criteria apply as to what claims and costs are covered. Visit the Victorian Managed Insurance Authority to learn more and see their webpage dedicated to Porter Davis claims if you’ve been impacted by this group’s collapse.
On Thursday, 20 April 2023, the Victorian government announced that the government had identified about 560 families who, despite paying deposits to Porter Davis, were not covered by this compulsory insurance. The Victorian government has said that it will reimburse deposits (of up to 5% of the contract price) paid by these families left without insurance.
We’re Here to Help
Having your builder collapse is a stressful time for anyone, especially those who have unfinished or defective building works with an insolvent builder. Make sure you seek professional advice at an early stage to help manage your risks and determine next steps.
BlueRock Law boasts a team of experienced building, construction and insolvency lawyers ready to help you navigate any legal situations. Get in touch below to discuss what steps to take when a builder enters into external administration.
Annabel Clarke
Senior Associate
0408 182 719
annabel.clarke@thebluerock.com.au
Claudia Baskett
Director
0408 241 212
claudia.baskett@thebluerock.com.au
Kathryn Finemore
Associate Director
0421 209 108
kathryn.finemore@thebluerock.com.au
Disclaimer: This article is general commentary on a topical issue and does not constitute legal advice. If you are concerned about any topics covered in this article, we recommend that you seek legal advice.
