Beyond the Brink: Rebuilding Success After Insolvency in Construction

In the past financial year, nearly 3,000 building companies in Australia have gone into liquidation. This alarming statistic, highlighted in a recent article by the Australian Financial Review, is a stark reminder of the challenges the construction industry faces amid economic turbulence. However, while insolvency and bankruptcy often carry a stigma and evoke strong emotional responses, they do not necessarily mark the end of the road for a business or an individual. There are a number of proactive steps that companies and their officers can take to front and navigate solvency issues at an early stage to create opportunities for renewal and future success.

Economic Pressures and the Writing on the Wall

The economic landscape has been under pressure for some time, caused by (among other things) high inflation and the continuation of legacy issues unearthed by the global reaction to the COVID-19 pandemic. In early 2023, John De La Hoyde, a director at Madison Marcus specialising in commercial litigation and insolvency, highlighted that the pandemic’s impact on businesses was profound and long-lasting. The government’s initial response involved significant financial support and relaxed insolvency laws to stabilise the economy. However, these measures created a temporary buffer rather than a permanent solution. He said:

“We’ve been through a couple of very challenging years of I suppose not just unrest but uncertainty… The economy should have taken a quick downturn, but the handouts… sort of left a bit of a standstill for that period,”

-De La Hoyde explained in a podcast from April 2023.

This temporary relief led to a period of complacency for many businesses, including those in the property development and building & construction sectors. As the support measures were withdrawn and interest rates began to rise to combat inflation, the true extent of financial stress became apparent. Companies that had delayed addressing underlying financial issues found themselves in dire straits.

Key Factors Leading to Insolvencies

Several key factors have contributed to the wave of insolvencies in the construction industry:

1. Rising Costs and Supply Chain Disruptions:

The pandemic caused significant supply chain disruptions, leading to increased costs for materials like timber and steel. These increased costs remain today, with inflation figures in the construction industry exceeding the standard rate of inflation across other sectors. Labour shortages and rising wages have further compounded these challenges.

2. Interest Rate Increases:

As the Reserve Bank of Australia (RBA) raised interest rates to curb inflation, the cost of borrowing increased, putting additional strain on already struggling businesses.

3. Delayed Financial Planning:

Many companies needed to seek timely advice on restructuring or financial management.

“A lot of businesses are leaving it too late to seek advice… they’ve got creditors lined up to the hill… it’s just too much,”

-De La Hoyde noted.

4. Legal and Regulatory Changes:

The reversion to pre-pandemic insolvency thresholds and the end of government support payments exposed the fragility of many construction companies’ financial positions.

5. Increased Regulatory Pressures:

The increased intervention of the Building Commissioner of NSW, followed by the introduction of Project Intervene and additional legislation, including the Design Building and Practitioners Act 2019 (NSW) (DBPA) has resulted in increased pressures on builders and developers to undertake works that are free from defects. The DBPA in particular and recent decisions of the NSW Courts have confirmed that directors, officers and key personnel engaged to undertake works can also be held personally liable for defective works undertaken by their respective companies; all of which has mounted additional pressure on an already strained industry.

The Benefits of Early Intervention and Legal Advice

Proactively addressing financial distress can significantly alter the outcome for struggling construction companies.

Here are some key benefits of seeking early advice and taking action:

1. Restructuring Opportunities:

Engaging with legal and financial experts early can open up possibilities for restructuring.

This might involve renegotiating terms with creditors, consolidating debts, or even selling off non-core assets to stabilise the business.

2. Maximising Returns for Creditors and Stakeholders:

Early intervention allows for a more controlled approach to dealing with insolvency.

Appointing an administrator before the situation worsens can lead to better outcomes for both the business and its creditors.

3. Preserving Business Value:

By addressing issues before they escalate, companies can preserve more of their value.

This makes it easier to attract new investment or to facilitate a smoother sale or merger.

4. Reducing Personal Liability:

Directors and business owners can limit their personal liability by acting swiftly and responsibly.

Insolvent trading laws, for example, impose severe penalties on directors who allow their companies to continue trading while insolvent.

It may also limit creditors seeking to enforce personal guarantee given by creditors.

5. Emotional and Psychological Relief:

Facing financial difficulties is undoubtedly stressful.

Taking proactive steps and knowing that you have a plan in place can alleviate much of the anxiety associated with insolvency.

6. Further Education:

It is vital in a time of drastic change that those who continue to carry out construction works are aware of the ongoing legislative changes as well as the Court’s interpretation of those changes to ensure they understand what is expected of them and what their exposure might be if things do not go according to plan.

Legal Considerations and Expert Guidance

Engaging with legal experts early in the process is crucial. Lawyers specialising in insolvency and restructuring can provide invaluable guidance on the best course of action. They can help navigate complex legal landscapes, ensure compliance with all relevant regulations, and offer strategic advice tailored to the business’s specific circumstances.

John De La Hoyde emphasises the importance of legal support:

“I think there’s going to be a lot of opportunities for lawyers to assist clients in restructuring their businesses, negotiating with lenders… using their soft skills as well as their legal technical skills” .

This underscores the multifaceted role that legal professionals play in guiding businesses through financial distress.

Embracing a Proactive Mindset

The key to transforming insolvency from a crisis into an opportunity lies in adopting an unemotional, proactive approach. This means recognising the signs of financial distress early, seeking expert advice, and being willing to make difficult but necessary decisions.

By taking these steps, construction companies can turn the challenge of insolvency into a stepping stone for future growth. They can close one door with the confidence that another will open, leading to new opportunities and a more resilient business model.

The recent wave of insolvencies in the construction industry serves as a critical lesson for all builders and construction companies. The economic landscape remains uncertain, and adapting and responding proactively to financial pressures is essential. By understanding the causes of these insolvencies and taking strategic actions, companies can better position themselves to weather future economic storms.

The thought of insolvency can be daunting. However, with the right mindset, timely intervention, and expert legal support, construction companies can navigate these challenges effectively and emerge stronger. This proactive approach not only mitigates the potential negative impacts but also lays the foundation for a more secure and prosperous future.

For more insights into the causes and implications of these challenges, you can refer to the full podcast episode featuring John De La Hoyde.