My Builder Has Gone Bust: What Do I Do Now?

A builder going bust can leave homeowners with an unfinished project, halted construction and significant financial uncertainty.

Builder insolvency has become increasingly common across Australia’s residential construction sector. In the 2023–2024 financial year, almost 3,000 construction companies entered external administration, representing about 27% of all corporate insolvencies in Australia.

When a builder becomes insolvent through liquidation, voluntary administration or bankruptcy, control of the business passes to an insolvency practitioner.

What Happens When a Builder Goes Bust in Australia?

When a builder becomes insolvent, an insolvency practitioner such as a liquidator, voluntary administrator or bankruptcy trustee may be appointed to administer the builder’s affairs. Once appointed, the practitioner assumes control of the builder’s financial position, including company assets, records and outstanding liabilities.

In almost all cases, construction work on existing projects stops, or may have halted months prior giving an indication of financial turmoil. However, in some instances an administrator may continue operating the business while assessing whether the company can be restructured or sold.

The administrator may also propose a Deed of Company Arrangement (DOCA) that allows the company to continue trading. Whether work on a particular project continues depends on the administrator’s decision and the financial position of the company. However, just because a company enters into a DOCA does not mean that you must be bound by that agreement and you may elect take a different path (see further below for lodging a domestic building insurance claim).

Further, homeowners who have paid for incomplete work may be treated as unsecured creditors. Under Australian insolvency law, unsecured creditors are paid only after secured creditors and employee entitlements, meaning any recovery depends on the remaining assets available in the administration.

You may also be treated as a debtor to the company if the Builder carried out works for which you have not yet paid for. This can arise where a substantial amount of work has been undertaken for a particular stage of the build, such as lock-up, but the Builder did not bring a claim for its work prior to an insolvency practitioner being appointed.

Understanding the Insolvency Process When a Builder Becomes Insolvent

Once a builder has entered a formal insolvency process, homeowners may receive communication from the appointed insolvency practitioner about the administration and the steps creditors can take. This may include a notice inviting creditors to lodge a Proof of Debt if money is owed.

However, creditors are not always contacted immediately. If you suspect the builder may be insolvent, you should confirm the builder’s status independently before taking further action.

You can verify insolvency through the following registers:

• AFSA National Personal Insolvency Index if the builder operates as a sole trader or partnership
• ASIC Companies Register if the builder operates as a company

Once insolvency is confirmed, homeowners should take the following steps.

Contact the insolvency practitioner

Identify and contact the practitioner appointed to administer the builder’s affairs. They may not yet be aware that you engaged the builder, that the building work is incomplete or defective, or that you may have a financial claim arising from the building contract.

You then have two options as to whether you would like to engage with the appointed insolvency practitioner or whether you would like to proceed with making a claim under your Domestic Insurance Policy. Which item is more appropriate to you will depend on a number of factors and we strongly recommend you obtain legal advice to discuss the approach, strategy and suitability of the options available to you.

1. Making a claim from the insolvency practitioner; or
2. Making a claim through the DBI Insurer.

Option 1 – Dealing with the appointed insolvency practitioner

Lodge a proof of debt

If you are owed money for incomplete work, defects or overpayments, you may lodge a Proof of Debt using the form provided by the insolvency practitioner. Claims may include debts already owed as well as contingent claims where the exact loss has not yet been determined.

Provide supporting evidence

The proof of debt should be supported by documents such as the building contract, payment records, invoices, photographs of the works and any expert reports or quotations identifying incomplete or defective work.

Assessment of the claim

The insolvency practitioner will assess the proof of debt and may admit or reject the claim in whole or in part. If a claim is rejected, the creditor may apply to the court to review that decision under section 5.3B.60 of the Corporations Regulations 2001 (Cth).

Participation as a creditor

Creditors who lodge a claim may receive reports about the builder’s financial affairs and participate in creditor meetings. These meetings may consider matters such as the conduct of the administration or proposals affecting creditor recovery.

Review compromise proposals

External administrations may conclude with a compromise between the builder and its creditors. If a builder elects to enter into a DOCA and the creditors vote to approve, your building works may resume, or alternatively the contracts may be sold to alternative trades to take over construction of your property. If you receive any offers from the insolvency practitioner regarding your property if it is only partially built we strongly recommend you obtain advice before making any decisions.

For example, a voluntary administration may result in a DOCA while bankruptcy proceedings may involve a Personal Insolvency Agreement. Creditors who have lodged claims may vote on whether to accept such proposals.

Option 2: making a claim pursuant to your Domestic Building Insurance Policy

Domestic Building Insurance in Victoria for Builder Insolvency

In Victoria, section 137B of the Building Contracts Act 1995 (Vic) requires builders to obtain Domestic Building Insurance (DBI) for residential building work valued above $16,000.

DBI protects homeowners if the builder dies, disappears or becomes insolvent before the building work is completed. In such circumstances, homeowners may claim compensation for incomplete or defective building work.

The Ministerial Order for Domestic Building Insurance made under the Building Act 1993 (Vic) prescribes the limits and duration of DBI coverage. Under that Order, the policy provides:

• Coverage of up to $300,000 per dwelling (for buildings which have reached Occupancy);
• Protection for structural defects for up to six years from completion; and
• Protection for non-structural defects for up to two years from completion.

How Homeowners Can Lodge a Domestic Building Insurance Claim After Builder Insolvency?

Homeowners may take the following steps when preparing a DBI claim:

Notify the insurer of the insolvency event

The insurer should be notified as soon as possible after becoming aware that the builder has entered liquidation, voluntary administration or bankruptcy.

In Victoria, a Domestic Building Insurance claim generally must be lodged within 180 days of becoming aware of the insolvency event. Your policy will have a definition of an ‘insolvency event’.

Provide the core project documents

The insurer will usually require the signed building contract, DBI insurance certificate, payment receipts or bank records for progress payments, approved plans and specifications, and photographs showing the current stage of construction.

Document incomplete or defective works

Homeowners should obtain a report from a suitably qualified expert and written quotations or other reports from a licensed builder or building consultant identifying and differentiating between unfinished works, defective works and the estimated cost required to complete the project.

Cooperate with the insurer’s inspection

The insurer will usually appoint an independent building assessor or loss adjuster to inspect the property. The inspection is used to identify unfinished work, defective work, and the estimated cost required to complete the construction.

Homeowners should ensure the site condition is properly documented before any further work begins.

Review the insurer’s determination

The insurer will issue a written decision setting out whether the claim is accepted and the amount payable under the policy. If the claim amount does not reflect the actual cost to complete the works, legal advice may be required before accepting the determination.

You may also wish to appeal any written decision of the insurer, which requires an application to the Victorian and Civil Administrative Tribunal (VCAT). This step must be undertaken within explicit statutory timelines and if you have received a decision from a DBI insurer that you are not satisfied with please contact PCL Lawyers to obtain prompt advice as to any application to Appeal the decision at VCAT.

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.