The recent collapses of major builders St Hilliers, Kell & Rigby and Reed Constructions have caused such concern that the New South Wales Government has launched a public enquiry into the issue.

Given the tough economic conditions, it is timely to review your corporate obligations and the risks involved in managing debts, consider how to protect your business if a contractor or principal encounters financial difficulty, and what you can do to minimise damage to your business.

Understanding your obligations as a director

Directors owe a fundamental fiduciary duty to the company to act in good faith for the benefit of the company. The scope of the duty includes:

  1. a duty to avoid situations where there is a conflict between the interest of the director and the interest of the company; and
  2. a duty to exercise powers for proper purposes.

The Corporations Act 2001 also imposes a duty upon directors to prevent a company incurring a debt while it is insolvent (i.e. where the company is unable to pay all its debts, as and when they become due and payable). The very serious potential consequences for a director of a company which traded while insolvent include:

  1. being held personally liable for all debts incurred while the company was insolvent;
  2. being held liable for a civil penalty under the Corporations Act;
  3. being convicted of a criminal offence under the Corporations Act, penalties for which can include imprisonment;
  4. being banned from acting as a director; and/or
  5. being excluded from holding a building licence under QBSA.

How to protect your business against a company in financial difficulty

Fundamental protections can be achieved through a carefully drafted contract which adequately manages the potential risks for the company. The simplest way to improve your company’s position is to ensure that it is not liable when unexpected events affect a project.

It is also essential that everyone involved in the project is aware of their responsibilities under the terms of the contract, but there are also other fundamental steps that can be taken to protect your business, including:

  • for new clients, researching the background of the company’s and the major individuals behind the company, including searches of the ASIC register;
  • obtaining personal guarantees where credit is provided;
  • obtaining security over the company’s assets;
  • including retention of title clauses in your contracts to protect ownership of materials and equipment;
  • registering all security interests (including rights under retention of title clauses) in the Personal Property Securities Register so that they are enforceable in the event of insolvency;
  • ensuring that all claims for variations and extensions of time are properly notified and claimed under the contract;
  • utilising the right to suspend work under the contract, for non-payment;
  • keeping regular and accurate records, including records of verbal communication;
  • promptly lodging claims; and
  • not allowing late payments to occur without taking action.

To obtain payments quickly, Claimants should always look to the Security for Payment legislation as an efficient and inexpensive method of resolving disputed claims.

When there is the potential for serious financial difficulty and/or insolvency, it might be necessary to take a more aggressive approach to protect your interests. Some options include:

  • considering recourse against any security or retention amounts held;
  • exercising any rights to take work out of the hands of the contractor or the subcontractor;
  • lodging a subcontractors’ charge or a notice of claim for a contractors’ debt or lien (depending on the State) to obtain some priority; and
  • promptly taking steps to enforce any adjudication decision or judgment.

In Queensland, there is scope for subcontractors to apply further pressure to contractors when a judgment is obtained. Recent legislative changes to the Financial Requirements for Licensing (FRL) under the Queensland Building Services Authority Act 1991will see building contractors who fail to pay judgment debts face the possibility of having their licence suspended or cancelled. The new changes in the FRL are in addition to existing provisions for judgment debts, which can apply demerit points for unsatisfied judgment debts.