INSOLVENCY IN THE CONSTRUCTION INDUSTRY

Written by Cristian Fuenzalida

The construction industry has faced significant challenges over the past year, with the impacts of Covid-19, including border restrictions and material shortages, ultimately impacting construction costs and leading to insolvency. Two of Australia’s largest construction companies, Probuild and Condev Constructions, went into liquidation in 2022, with Clough Group placed into voluntary administration at the end of 2022.

According to ASIC, 1072 construction companies’ external administration during the first half of the 2022-2023 financial year. This has accounted for 28% of all company collapses in Australia over the past six (6) months as of March 2023, proving that the construction industry has been hit harder than any other industry.

Experts warn the trend will continue throughout 2023 with inflation, rising interest rates, and material and labour shortages.

What is insolvency?

Insolvency is the term used when a company or individual is unable to pay their debts as and when they fall due. Companies in Australia are regulated by the Corporations Act 2001 (Cth) (the Act).

Section 95A of the Act defines insolvency as:

1. A person is solvent if, and only if, the person is able to pay all the person’s debts as and when they become due and payable; and
2. A person who is not solvent is insolvent.

Understanding insolvency is important for both individuals and companies, as it can have significant legal and financial implications. Seeking legal advice and support is crucial in navigating this process and managing it in a responsible and effective manner.

The following factors are indicative that a company may be insolvent or in financial distress:

• The company is experiencing ongoing losses;
• Poor cash flow with a larger value of debt than liquid assets;
• Overdue Commonwealth and State taxes;
• Inability to borrow funds or obtain finance;
• Unpaid creditors outside the trading terms;
• Dishonoured cheques;
• Solicitors’ letters, summonses, judgments, or warrants issued against the company; and
• Inability to produce timely and accurate financial information to display the company’s
• Trading performance and financial position and making reliable forecasts.

What happens if a company is insolvent?

If a company is insolvent, a company should not trade or continue conducting business as usual, as this could result in civil penalties and criminal charges under the Act. It is, therefore, imperative that directors are fully aware of a company’s financial position at all times.

The most common options available to an insolvent company include voluntary administration or winding up (liquidation).

Voluntarily Administration

Voluntary administration is a process designed to assist financially distressed companies.

It is a formal, short-term arrangement that can allow a company to restructure and avoid liquidation. The administrator will take control of the company’s affairs and investigates its financial position to determine the viability of the company and develop a plan for the future. At that time, recommendations will be made to either wind up the company, continue trading (usually in some limited capacity) or for the company to be returned to the control of its directors.

The process of voluntary administration is outlined below:

1. An independent registered liquidator takes full control of the company and is appointed as a voluntary administrator.
2. The voluntary administrator must hold the first meeting of creditors within eight (8) business days of being appointed unless the court allows an extension of time.
3. The voluntary administrator must investigate the company’s affairs and report to creditors on the alternative options available to the company.
4. The voluntary administrator must hold a second meeting to decide the company’s future within twenty-five (25) business days of being appointed.

During this process, creditors are temporarily prevented from taking legal action against the company to recover their debts and provide the company with the necessary breathing space to try and work through some of its financial constraints and recover.

Liquidation

The liquidation or winding up of an insolvent company is the process of appointing a liquidator to take control of a company to sell its assets and distribute the proceeds to creditors. The liquidator has an obligation to ensure that creditors are treated fairly as part of the liquidation, and their primary duty is to maximise the return for creditors.

There are two types of insolvent liquidation:

• Creditors’ voluntary liquidation; and
• Court liquidation.

In a creditor’s voluntary liquidation, the company’s creditors resolve to liquidate the company and appoint a liquidator, or the creditors may vote for liquidation following a voluntary administration.

In a court liquidation, a liquidator is appointed by the court to wind up a company following an application (usually by a creditor). After a company goes into liquidation, unsecured creditors are unable to commence or continue legal action against the company unless it is permitted by the court.

Once the liquidation is complete, the company will be deregistered and cease to exist as a legal entity.

Receivership

Receivership occurs when a secured creditor (via a receiver) takes control and sells some or all of the company’s assets. This may be done for the company to repay debts owed to the secured creditor.

A court-appointed receiver may also take control of and sell company property.

The secured creditor can appoint a receiver because they hold a security interest that allows them to appoint a receiver, such as a mortgage.

What to do if your company is experiencing financial difficulty?

If you think your company may be insolvent, you should seek professional legal advice as soon as possible. This gives your company the best chance of surviving and avoiding further debt and can limit the personal exposure of company directors. As a company director, one of the director’s duties that you have to inform yourself of your company’s financial position and not to trade while the company is insolvent. A breach of the above duty could have serious legal consequences for you personally as a director.

How can we help with insolvency?

If you believe your company is at risk of insolvency and need legal advice, please do not hesitate to contact our expert insolvency lawyers at Madison Marcus to see how we can help you.