Insolvency and debt recovery in the construction sector is rising thanks to high costs for building materials and supply chain disruptions. Here, Charles Lethbridge, Commercial Litigation & Dispute Resolution Partner and NSW Law Society Accredited Specialist in Dispute Resolution, and Timothy Wright, Commercial Litigation Lawyer, explore the options available for debt recovery.
Introduction
The Covid-19 pandemic has turned many industries on their heads. One of the industries most impacted is the building and construction industry where worldwide pandemic lockdown measures caused significant international supply chain disruptions. In Australia, this has resulted in the cost of building materials being hiked significantly. In some instances, building materials have tripled in price.
Unfortunately, many construction companies – both large and small – have been placed into administration or liquidation in the past couple of years because they were unable to pay their debts when they fell due. With the building and construction industry under pressure, and the economy slowing, Attwood Marshall Lawyers has seen a significant increase in instructions from companies and individuals in the construction sector either unable to pay their debts, or seeking assistance to recover debts.
There are several methods through which Attwood Marshall Lawyers recovers debts on behalf of its clients not only via the court system, but also under the Corporations Act 2001 (Cth), the Building Industry Fairness (Security of Payment) Act 2017 (QLD) (BIFA) or the Building and Construction Industry Security for Payments Act (NSW) (BCSOP).
Those options are set out below.
Making a BIFA/BCSOP Payment Claim
Making a payment claim under BIFA or BCSOP is a straightforward adjudication process that is separate from the Court system.
The BIFA/BCSOP legislation was established to enable entities in the building and construction industry to quickly obtain adjudicated decisions which can be converted to, and enforced as, Court judgments if required, without having to embark upon time-consuming, expensive litigation by the court process.
To make a “payment claim” under these Acts, a debt needs to relate to “construction work” or “related goods and services” pursuant to a “construction contract”.
There are strict time limitations for making payment claims, and there are several boxes which must be ticked before issuing one.
If an appropriate payment claim is issued upon a debtor, and the debt is not paid within the strict time frame, you may apply for adjudication via a registered adjudicator. That adjudicator will consider the facts of the alleged unpaid debt and decide whether the debt is owed by the debtor by issuing a formal notice (a decision).
The strength of the process is that if the debtor still refuses to pay the debt after receiving the adjudicator’s notice, the adjudication order may be easily converted to a Court judgment that can then be enforced on the debtor’s assets or by bankrupting or winding up the debtor.
Ordinarily, to obtain a Court judgment, a party must proceed through the often time-consuming and costly course of litigation.
Issuing a BIFA subcontractors charge
Subcontractor’s charges are charged on money owed to a contractor by a head contractor and it essentially leapfrogs over a contractor and charges the debt owed to you with the head contractor. There are also strict time limitations required by this process. If construction work has been completed, a notice of claim must be given within 3 months after practical completion of the work.
The effect of a subcontractor’s charge is that the charge is a “security interest” as defined under section 51A of the Corporations Act 2001 (Cth) and may be registered as a PPSA security interest and may be enforceable over a debtor’s assets.
The critical advantage of this is that if a debtor goes into bankruptcy or liquidation, a party with a security interest/charge is considered a secured creditor in the bankruptcy or liquidation, which means that party sits above and separate to the unsecured creditors with the effect that a secured creditor is more likely to recover its debt in the liquidation or bankruptcy.
Issuing a creditor’s statutory demand
If your debtor is a company, you can serve that company with a creditor’s statutory demand under the Corporations Act 2001 (Cth). This requires strict payment of the debt within 21 days from when it was issued. If payment is not received within that timeframe, you have grounds to commence winding up proceedings against the debtor company.
Generally, company contractors within the building industry will own assets including a business and equipment, and the directors of the debtor company will not want to go into liquidation where liquidators assume the control and ownership of company assets for sale and distribution of proceeds to creditors.
Critically, directors, secretaries or shadow directors of construction companies that go into liquidation, are considered excluded individuals under the QBCC Act for a period of two years which is another significant deterrent for them trying to get out of paying a debt when issued with a creditor statutory demand
Accordingly, issuing an appropriate creditor’s statutory demand upon a debtor company can be a powerful and compelling process.
Suing a debtor to recover a debt
To recover debts in the construction industry, launching Court proceedings against a debtor may now be considered a course of last resort.
The process involves filing a claim or statement of claim and serving it on the debtor who then has 28 days to file a defence. If they do not file a defence, you can obtain judgment by default against the debtor. That means you can enforce the judgment against the debtor by filing for bankruptcy proceedings or winding up the company or enforcing judgment against a debtor’s equipment or property.
If the debtor files a defence, then the parties must embark upon the disclosure or evidence procedure, before having the proceedings set down for a trial.
Attwood Marshall Lawyers – helping business owners navigate difficult times
Attwood Marshall Lawyers recently bolstered its Dispute Resolution ranks by hiring building and construction litigator, Timothy Wright. Previously a tradesman himself, Timothy has an enviable understanding of the machinations of the building and construction industry and has obtained significant experience in the field of building and construction litigation since his admission as a lawyer to the legal profession.
Timothy’s addition to the department is a response by the firm to the significant increased demand in the building and construction disputes sector. Attwood Marshall Lawyers has a proud history of acting for builders, tradesmen and contractors, with an enviable track record of achieving optimal results for clients.
With multiple specialist construction litigation lawyers, and a strong understanding of the legal options available to its clients, Attwood Marshall Lawyers is now one of the leading firms on the eastern seaboard specialising in this field.
If you are involved in a dispute, need advice about debt recovery, or options for your business facing liquidation and bankruptcy, please contact our Commercial Litigation Department Manager, Amanda Heather, on (07) 5506 8245, email aheather@attwoodmarshall.com.au or free call 1800 621 071 to find out where you stand.
