Has your builder gone bust? Here’s what you need to do

Monday May 1, 2023

Has your builder gone bust? Here’s what you need to do

In light of the significant increases in interest rates, the cost of materials and labour shortages, a large number of builders have faced economic distress. As a result, in recent times, some builders have been placed into administration or liquidation. This includes some of the biggest names in the construction industry such as Porter Davis, Lloyds Group and Mahercorp.

When a builder faces an insolvency event, it leaves homeowners with incomplete projects, unfinished homes and a significant loss of money. This can place homeowners in a state of distress. We have been receiving a high volume of enquiries from homeowners seeking advice on what must be done in this type of scenario.

Here are a few issues to consider if your builder becomes insolvent and the steps to take:

Termination of the building contract 

The builder will often cease to trade with immediate effect. For incomplete works, before a homeowner can appoint another builder to complete the works, it is important to terminate the original contract correctly. However, before doing so, care must be exercised as wrongful termination may place a homeowner at risk of legal action.

The ipso facto provisions in the Corporations Act 2001 prohibit owners to terminate a contract (including a building contract) based solely on a builder entering administration. We recommend that legal advice is sought to address one’s termination rights to lessen the risk of a builder arguing that the contract has been repudiated or wrongfully terminated. A wrongful termination may potentially lead to legal action against the homeowner.

Documents to gather

We recommend that you gather all relevant documents concerning your contract with your builder. Examples of documents that you should gather include:

  • copies of the fully executed contract
  • signed variations
  • progress claims
  • invoices
  • payment receipts
  • claims for extension of time and
  • any other relevant documents or correspondence that you have with your builder.

Domestic building insurance

Builders in Victoria have a legal obligation to obtain domestic building insurance (“DBI”) for domestic building work for residential buildings of three or less storeys which is more than $16,000.00. These policies are activated in the event a builder becomes insolvent. Ensure that you have a copy of this policy and your certificate of insurance, as these are important documents to have when making a claim through your DBI insurer.

Incomplete and defective works by the original builder

Before engaging a new builder, it is in the best interest of a homeowner to engage a building expert to set out the incomplete works and any defective works for which the original builder is responsible, together with details of any rectification works required. A comprehensive building defects report is important for making a claim through your DBI policy and in filing a proof of debt. In some cases, the absence of such report may prejudice a homeowner’s ability to make a claim under their DBI policy. It is recommended that an owner seeks legal advice on how to obtain a comprehensive building defects report to ensure that all the necessary information is included.

Corresponding with insolvency practitioners

In the event that a builder goes into liquidation, we recommend that you immediately contact the liquidator to ensure that you are listed as a creditor and a proof of debt should also be filed with them.

If an insolvency practitioner (i.e. administrator/receiver/liquidator) corresponds with you alleging that you owe the insolvent builder a sum of money, you may wish to seek legal advice on how to respond. Issues to consider include whether you can submit a claim as a creditor of the builder to address any defective or incomplete works and/or for any additional costs required to finish the incomplete works.

Appointing a new builder

If the works in your property are incomplete and once your building contract has been correctly terminated, you will need to consider appointing a new builder to complete the works. This may be a difficult task because some builders may be reluctant to take over incomplete works and the cost to do so may exceed the remainder of the contract sum.

Before appointing a new builder, it is crucial to have discussions with them concerning their liability for existing works and any exclusions regarding same. These details should be included in the new building contract.

We recommend that the above issues and steps are addressed as soon as possible. A legal practitioner who deals with building and construction law and insolvency events will be familiar with issues that can arise.

Do not hesitate to contact Jennifer Dizon in our building and construction team on 9629 7411 with any queries.