Testing Times for Builders
ASIC data shows that 1236 construction companies have collapsed since July 2022. In late March 2023, Porter Davis homes also announced that it was going into liquidation. Grant Thornton was appointed as the liquidators and approximately 1,700 home building projects were left in limbo, the majority of which are in Victoria.
Although this is an ongoing matter, two major questions have arisen which are important for building practitioners generally to consider.
Domestic Building Insurance
Under the Domestic Building Insurance Ministerial Order, builders in Victoria are required to buy domestic building insurance policies on behalf of homeowners before they take deposits, or any money, for projects over $16,000. The penalty under the Building Act 1993 (Vic) (Building Act) is 2500 penalty units, which is currently a maximum fine of $462,300.
In April, the Victorian Government announced a $15 million support package for victims of the Porter Davis collapse. It is aimed at assisting the 560 families who paid a deposit on a build that was never commenced after the builder took their deposit, but had never applied for the requisite insurance from the Victorian Managed Insurance Authority (VMIA). The package is aimed at providing ‘insurance-type’ cover to the affected people, to effectively put them in the position they would have inhabited had Porter Davis obtained the requisite insurance.
As a Government bailout is far from assured in future cases, builders must comply with the Building Act, by ensuring that they do not enter into a domestic building contract for over $16,000 without:
- taking out the required domestic building insurance first; or
- including a clause in the contract that the client does not have to pay any money under the contract until domestic building insurance is taken out.
Builders must not commence works or collect any money from clients (including deposits) before the insurance is obtained. Clients must also be given a copy of the certificate of insurance within seven days of the builder receiving the policy documents. A failure to comply with these requirements leaves a builder vulnerable to significant fines.
While it may be unlikely that fines will be issued against Porter Davis, given there would not appear to be funds from which these fines can be paid, the Victorian Government has not ruled out taking action against individuals involved in the Porter Davis collapse.
Trading while insolvent
Individuals can be held responsible when a company fails, if the company is found to have been trading while insolvent. In the case of Porter Davis, while nothing has been confirmed, or any charges laid, the company’s liquidators, Grant Thornton, have described trading while insolvent as “an area of investigation”. Section 588G of the Corporations Act 2001 (Cth) provides that a person commits an offence if:
a) a company incurs a debt at a particular time; and
aa) at that time, a person is a director of the company; and
b) the company is insolvent at that time, or becomes insolvent by incurring that debt, or by incurring at that time debts including that debt; and
c) the person suspected at the time when the company incurred the debt that the company was insolvent or would become insolvent as a result of incurring that debt or other debts; and
d) the person‘s failure to prevent the company incurring the debt was dishonest.
Where the above applies, the directors of companies can be held personally liable for incurring debts that remain unpaid.
Trading while insolvent exposes directors to criminal conviction, the risk of which is often a prompt to directors putting a company into voluntary administration. When this occurs, an insolvency practitioner takes over the running of the business, giving the business a chance to pause and work out the best plan of action. Where directors of a company form the view that the company has the potential to become insolvent, serious consideration needs to be given to appointing an administrator.
Key takeaways
- Builders need to comply with legislated insurance requirements to avoid hefty fines.
- If you suspect your company has the potential to become insolvent, consider or seek advice as to the company being placed into voluntary administration, which may assist in ensuring that company directors are not vulnerable to criminal sanctions for the company trading while insolvent.
