The sky is falling – 24 September 2020 looms large for Construction Industry

First, a quick history lesson. Since 25 March 2020:

• Directors of companies have been able to avoid liability for insolvent trading in relation to debts incurred in the ordinary course of business between 25 March, and, at this stage 24 September 2020;
• Statutory demands:
  • Have had to be for at least $20,000.00 (previously $2,000.00); and
  • Have had an increased compliance period of 6 months (previously 21 days); and
• Bankruptcy notices:
  • Have had to be for at least $20,000.00 (previously $5,000.00); and
  • Have had an increased compliance period of 6 months (previously 21 days).

Subject to the government extending the present regulatory environment by way of regulation (noting that no such regulation has as yet been proposed), the above will come to a screeching halt on 24 September 2020.  Let’s repeat that, the above ends on 24 September 2020.

What will happen at the end of September?

Since Courts have been willing to accept that a valid Adjudication Decision (and associated Adjudication Certificate) can support a statutory demand, statutory demands have proved to be a useful weapon for contractors and subcontractors to motivate entities higher up the chain as regards to paying.  Since March 2020, we have seen a significant drop off in smaller Adjudication Applications, because:

• The statutory demand regime had lost its teeth (6 months was too long to wait for payment); and
• It was too expensive for contractors and subcontractors to pursue enforcement action in the Courts.

We suspect that there will be an uptick in statutory demands based on Adjudication Decisions which were obtained in the 6 months since March 2020. Indeed, we expect to see an uptick in the use of statutory demands more generally.

What should you do?

Keep in close contact with your registered office. The time for compliance with statutory demands is strict and failure to comply can lead to your business being wound up, even though it might not be insolvent.

First, if you have been an unsuccessful Respondent to an Adjudication Application, and if you have not paid out, you need to take steps to ensure that the Adjudication Decision is challenged, or that the Adjudicated Amount is paid.

Second, you should be giving thought to making arrangements with your creditors prior to 25 September 2020, so that you can avoid the prospect of a flood of statutory demands in late September/early October. Agreements might be struck which can prevent the need for a potential insolvency (noting that creditors often try to wind up a company without realising that money they have received can be “clawed back” by a liquidator; and this fact can often be used as a bargaining chip in negotiations). Such an approach and such negotiations should take place after you have consulted with your accountant and your lawyer (discussed in more detail below).

Third, now is a good time to undertake a proper review of your business:

• First, because in many cases, contractors and subcontractors will have obligations under their licensing regimes which need to be considered; for example licence holders under the Queensland Building and Construction Commission Act 1991 (Qld) (QBCC Act) are obliged to (at all times):
• Keep an assets to liabilities ratio of 1:1; and
• Maintain a certain level of Net Tangible Assets.

In light of the defence to insolvent trading, and the amendments, statutory demands and bankruptcy notices, not all licensees have kept their eyes on these obligations (noting that the failure to comply with these obligations can lead to the cancellation of your licence and the failure of your business); and

• Second, because your business might be insolvent. The protection from insolvent trading ends on 25 September 2020. If your company is insolvent, the directors can be made personally liable for debts incurred after this date. The appropriate “corporate” approach might be to have the company wound up in a logical way.

Fourth, from a payee’s point of view, if you have received payment recently, or if you propose to chase outstanding debts, you need to be careful to do so in a way which will not allow a liquidator to allege that you had a basis for suspecting that the payor was insolvent. Such an allegation can provide a springboard for a liquidator to make a claim that the money which you received represented a preference payment.

Stop! Before its hammertime

We recommend that you make an urgent, joint appointment to see your accountant and your lawyer.  Respectfully, your lawyer needs to be someone who has experience in the building and construction field, and in particular, experience dealing with the licensing regime in the relevant jurisdiction.

We have seen far too many cases in which contractors and subcontractors have been advised to place their businesses into external administration (which might be perfectly sensible from a corporate standpoint) only for the directors of the company to be told that the external administration renders them unable to hold a licence, or be an influential person for a construction company. This can lead to disastrous results.

Your accountant and your lawyer should review your business from both a corporate and a licensing point of view. The review should be aimed at:

• Identifying concerns with licence compliance;
• Identifying debts owed to you and possible collection strategies and timeframes;
• Identifying problem debts that might result in statutory demands/other action, and identifying strategies for dealing with some or all of them;
• Identifying cross/counterclaims in relation to any problematic debts (which might be used to fend off statutory demands);
• Identifying possible preference payments, and strategies for dealing with any liquidators which might seek to claw them back; and
• Ascertaining whether the company is solvent (again this can be used to fend off demands), and if it is solvent whether it is truly viable, noting that it may include an approach to creditors with a view to making payments over time. If it is not possible to save the company, such a review may allow the company to be wound up, whilst potentially “saving some of the furniture”.

As you would appreciate, such enquiries can take some time. As such, urgency in getting the ball rolling is required.

Conclusion

The big lesson here is if you receive any correspondence from a liquidator of a failed company or are served with legal proceedings commenced by the liquidator of the failed company, call us immediately and do not engage in negotiations with the liquidator before you seek formal legal advice.

Queries

If you have any questions about this article please get in touch with the author or a member of our Building & Construction team.

Disclaimer

This information and the contents of this publication, current as at the date of publication, is general in nature to offer assistance to Cornwalls’ clients, prospective clients and stakeholders, and is for reference purposes only. It does not constitute legal or financial advice. If you are concerned about any topic covered, we recommend that you seek your own specific legal and financial advice before taking any action.