Consequences for homeowners and trade creditors
It is unfortunate that a local Bathurst based company has recently been placed in liquidation leaving several homeowners with partially completed homes and many tradies and other suppliers with large outstanding monies unpaid. We have in recent weeks had several contacts from homeowners and trade creditors for advice on their remedies, if any, against the builder in liquidation.
Any licensed builder in New South Wales undertaking residential building work exceeding $20,000.00 in value is required to take out an insurance policy under the Home Building Compensation Fund (‘HBCF’) (formally known as Home Warranty Insurance). Home Building Compensation cover is only available from a single provider operated by the NSW Government.
However, many homeowners do not realise that Home Building Compensation Fund insurance is only insurance of last resort.
Although the insurance policy states that losses flowing from such things as non-completion of the work, defective work and breach of the statutory warranties for quality of work by the builder are covered under the policy there are significant obstacles in the way of a homeowner who wishes to make a claim under the policy.
If the builder who undertook the work is still in business the homeowner should first exercise its rights against the builder under the terms of the building contract. This might include such things as giving notice to the builder of a particular defect for failure to undertake certain works and if that notice is not complied with, withholding payment or suspending works or terminating the contract. Homeowners contemplating these actions should always get legal advice before proceeding.
However, once the contractual rights have been exhausted by the homeowner without satisfactory response by the builder, the homeowner must generally initiate a formal complaint through Fair Trading to try to have the matter resolved by an onsite meeting. If this does not resolve the problem the homeowner is then required to initiate proceedings in the NSW Civil and Administrative Tribunal (NCAT) to seek orders for damages for rectification of the defects or completion of works.
The HBCF policy will only come into force if those NCAT proceedings result in a order to do work against the builder or a money order in favour of the homeowner for the cost of rectification or in-completed works and then:
- Only if the builder then fails to complete the work or pay the money because of the insolvency, death or disappearance of the builder or the licence of the builder is suspended for failure to pay the money.
So, although the homeowner may feel comfortable that they have what they believe is an insurance policy, if the builder goes broke or fails to do work, generally if the builder is still in business the homeowner has to undertake the proceedings right through the NCAT process resulting in a final order. The builder then has to be insolvent, dead or disappeared before the conditions arise under which a claim can be made by the homeowner on the HBCF insurance.
There are also time limits for making a claim under the policy and often these time limits can be exceeded because of the requirement to first pursue all rights against the builder through NCAT. In these circumstances as soon as the “possibility” of a claim is known, it is wise that the homeowner provides a notification of the possible loss to the home building compensation insurer.
The builder goes bankrupt or into liquidation during construction
In circumstances that have occurred recently where a builder goes into liquidation with half completed homes, the HBCF policy kicks in without the requirement for the homeowner to pursue the builder firstly through NCAT. There are still time limits for making claims under the policy. These are generally not a problem for a homeowner who has a half completed home and is looking to get it completed as soon as possible.
In these circumstances, the homeowner makes a claim of the HBCF insurer which must be processed within 90 days. Generally, within a matter of weeks the insurer will appoint a building consultant to conduct an inspection summary of the partially completed home and report on two things:
- A scope of works and probable cost of completion of incomplete works;
- A schedule of items of defective work recommended for rectification.
The insurer will then seek tenders from approved builders for those works and upon the acceptance of a tender the new builder will be appointed to undertake completion of the home and rectification of defective works.
There are limits on the cover available under the HBCF policy namely:
- For non-completion of work, the policy will not cover an amount more than 20% of the contract price including variations.
- Rectification of defective work is covered but to a combined maximum including the cost of completion of $340,000.00.
This can leave a homeowner significantly out of pocket where there are substantial uncompleted and defective works.
Tradies & Supply Companies
Unfortunately, tradies and building supply companies are often left with very few remedies against a builder who has gone bankrupt or into liquidation. They can register their debt with the liquidator, but they are unsecured creditors and must stand in line behind employee wages, superannuation, Australian Tax Office etc in the distribution of any available funds.
Often a more common issue is that there are simply no funds that is the individual builder or corporate builder has run the company down to the point where there is simply not enough money to even pay the liquidator. Often, on investigation by the liquidator or Trustee in Bankruptcy, it is found that the builder has stripped money out of the company and/or sold assets of the company in an effort to defeat or frustrate claims by creditors.
In these circumstances the Trustee or Liquidator can pursue the builder, the builder’s related companies or the director of the company builder through the courts for the return of these monies. However, the liquidator needs funds to pay for its own costs in administering the builder’s affairs and also the legal costs that will be incurred in pursuing the recovery of such monies. If there are no funds, then these actions cannot be pursued.
In circumstances such as this, the various creditors of the builder can each put in some funds to create a “fighting fund” for the liquidator to draw on in pursuing the builder or related parties to recover monies back into the liquidators hands for ultimate distribution to the creditors.
Unfortunately, a builder going belly-up creates a huge ripple effect throughout the industry particularly in a regional community such as ours. Homeowners, tradies and building suppliers should be vigilant, take action, obtain legal advice and protect their rights as soon as there is any attempt by builder to obtain payment in advance of prescribed progress claims or alternatively fails to pay a tradie or a building supplier on time and within the normal terms of trade. Tradies and building suppliers should contact previous suppliers of the builder to check on credit worthiness.
John Carpenter has had 25 years’ experience in building construction works, both commercial and residential acting for homeowners’ builders and developers.