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 inquiry into the
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
Directors owe a fundamental fiduciary duty to the company to act
in good faith for the benefit of the company. The scope of this
a duty to avoid situations where there is a conflict between
the interest of the director and the interest of the company;
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 that traded while insolvent
being held personally liable for all debts incurred while the
company was insolvent;
being held liable for a civil penalty under the Corporations
being convicted of a criminal offence under the Corporations
Act, penalties for which can include imprisonment;
being banned from acting as a director; and/or
being excluded from holding a building licence under QBSA.
How to protect your business against a company in
Protection can best be achieved through a carefully drafted
contract which adequately manages the potential risks for the
company and to ensure that the company 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 other basic 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
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
keeping regular and accurate records, including records of
promptly lodging claims; and
not allowing late payments to occur without taking action.
To obtain payment 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
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
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
1991 may cause 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.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Whilst option to purchase clauses are more in commercial properties, they are now being included in residential leases.
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