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How to avoid or minimise the big “sting”after the head contractor is wound up

Construction Law News | June 2015

It is a hard learned lesson when a sub-contractor is left without having been paid for huge amounts of money in the wake of the liquidation of a head contractor on a commercial or a multi-unit residential building site. The common consequence of this type of scenario is that the unpaid sub-contractor may have to liquidate as well, and possibly this will affect the sub-sub-contractor and/or other suppliers to the sub-contractor.

At Forum Law we have been asked to advise and assist many sub-contractors before, during and after many catastrophic liquidations of head contractors. Why are so many people left scratching their heads wondering how this catastrophe could have been avoided or minimised?

Progress payments should be smaller, more frequent and tied to stopping work

We advise sub-contractors to “play smart” when setting up their relationships with all head contractors, no matter how well established the head contractor appears.

It starts with establishing the right foundations in the tendering/quoting process and managing the expectations of head contractors and others. We suggest that sub-contractors have terms and conditions which include a payment schedule comprising smaller and more frequent progress payments. If the sub-contractor requests such a system of progress payments from the outset, as far as they possibly are able to, then the exposure to being left “hanging dry” can be managed more effectively. Under the Building and Construction Industry Security of Payments Act [NSW] a strict timeframe for the payment of progress claims will allow a sub-contractor to stop work if payments for progress claims are not paid on time. By adhering to the regime, a sub-contractor can identify a bad-paying client sooner rather than when it’s too late to “stop the rot”. It is far more beneficial to a sub-contractor to be short paid early in a job, rather than later in a job when substantial amounts are owed for an unpaid progress claim.

In the case of a recent corporate collapse of a fast-growing building company, some subcontractors were unpaid up to $600,000. If the progress claims had been smaller, and the sub-contractor stopped work upon non-payment of the smaller amount, then the sub-contractor would have been able to stem the damage which has ensued.

This may allow you to keep your money after the head contractor goes into liquidation

Also, a sub-contractor who is a creditor, who receives payments for work done and goods supplied, within 6 months of a company going into liquidation may be required to pay back the amounts received in that 6 month period, to the liquidator of the company. These types of payments are often referred to as “preference payments”.

To avoid having to pay back the money to the company’s liquidator, the sub-contractor can assert that they had no “suspicion” that the company was not able to pay its debts as they fell due. If a liquidator wanted to pursue such a claim then the liquidator would investigate the conduct of the liquidated company before they made the payment. For example, were there requests by the company to pay a progress claim by instalments, or bounced cheques, or unfulfilled promises to pay?

Secure your goods onsite properly, so they stay yours

Another way of minimising damage after a corporate collapse, is to ensure that any goods (like form work or scaffolding or equipment) left on the building site by a sub-contractor are “secured” so the liquidator does not have a priority claim to those goods once a liquidator [or receiver or administrator] takes possession of the site, thereby depriving the rightful owner (the sub-contractor) from having access to their goods. Forum Law can advise you on the process for securing your goods on a building site, so you can retain your ownership of your goods.

Forum Law, solicitors in Leichhardt, have particular expertise in building and construction law and insolvency law. If you require any legal advice in these areas please call us on 02 9560 3388.

Forum Law is an active member of several reputable law and industry associations. We have recently obtained ISO9001 accreditation.