What builder liquidation means for Victorian homeowners
Following the well documented spike in mid and post-pandemic costs, driven largely by inflation and global supply shortages, many industries have seen the cost of doing business increase significantly. For many of these industries, in order to remain viable, these additional costs have been (at least in part) handed on to the consumer. Unfortunately for those in the domestic building industry in Victoria, this option is not always available.
Often, building contracts are entered into months prior to the commencement of works. Given the legislative prohibitions on cost-plus contracts and price-escalation clauses in Victoria, many builders have been ‘left holding the bag’, contractually obliged to undertake works which no longer result in any profit.
Unsurprisingly, given their already thin profit margins, it has been volume builders hit the hardest by these price increases. As a result, we have seen the collapse of a number of Australia’s most prominent domestic building companies, headlined recently by the collapse of Porter Davis Homes.
What follows, is that many Victorians have been left with incomplete homes, increasing mortgages, and a great deal of uncertainty about how to proceed.
What does liquidation mean?
Broadly, insolvency occurs when a company is unable to satisfy its debts when they fall due. When a building company finds themselves in a position of insolvency, it will generally be placed into liquidation, administration or deregistration. For the purpose of this article, we will address the liquidation of a company.
When a company enters liquidation, a liquidator is appointed to investigate the affairs of the company to realise the company’s assets. Once the pool of company assets has been ascertained, the liquidator will then set about selling company assets, distributing the proceeds of the sales to pay off creditors.
What to do if your builder goes into liquidation
Contact the Domestic Building Insurer and lodge a claim
In Victoria, if you engage domestic building works valued at more than $16,000, your builder is required to take out domestic building insurance.
Domestic builder insurance provides homeowners with a level of security and protection if their builder dies, disappears or becomes insolvent before the works are complete, or in circumstances where the works are defective.
Assuming that the builder has complied with its statutory obligation to take out domestic building insurance, a homeowner may be entitled to make a claim to the insurer, up to $300,000.
It is essential that you immediately notify the insurer upon becoming aware that the building company has gone into liquidation. The insurer should immediately put in place various steps, namely, commencing the claim process and arranging for an inspection of the property by a building consultant.
Whether or not the claims process continues, will largely depend on how the liquidator deals with contract. Where the contract is assigned and an alternate builder takes on the contract, the insurance claim may fall away, or may be limited in other ways.
Contact the liquidator
The most pressing thing for a homeowner affected by a building company’s liquidation is the question of when and how will our home be completed. In addition to making a claim under your domestic building insurance, a homeowner should contact the appointed liquidator to see what intentions are held for the contract.
A builder’s profitable contracts are a company asset which will be considered by and dealt with by the liquidator. As a first step, homeowners should contact the liquidator in an effort to understand how the liquidator intends to deal with building contract. A common question might be:
Does the liquidator intend to take steps to try and assign the building contract to another builder (therefore, enabling the build to continue)?
If the liquidator does not intend to seek an assignment of the contract, will the liquidator be seeking to disclaim the contract?
Similarly, the liquidator may have questions for a homeowner, namely:
What stage are the works at?
Are there any payments owing to the builder?
As a customer of a builder who is wound up, any claim you may have against the builder under the contract (delay damages, variations), will be unsecured. As an unsecured creditor, you need to inform the liquidator of your claim/debt. You can do this by contacting the liquidator and providing it by way of a written proof of debt form.
What not to do if your builder goes into liquidation
It is important that you do not immediately proceed to appoint an alternate builder or take steps yourself to finish the building works. If you do, you could find yourself significantly out of pocket.
Lessons learnt from Porter Davis Homes
Porter Davis Homes’ failure to obtain domestic building insurance prior to accepting deposits, as they are statutorily required to do, has left home-owners without the protection of domestic building insurance, and having to rely on government bail-outs.
While the Victorian Government has committed itself to providing this relief to homeowners, the collapse of Porter Davis Homes acts as a stark reminder about the importance of practicing due diligence prior to entering a major domestic building contract (or any contract for that matter).
Contact a lawyer
For many Victorians, building or renovating a home is the biggest financial commitment that they will ever make. Despite this, far too often homeowners enter domestic building contracts without properly understanding their rights and obligations under the contract.
The obligation on the builder to obtain domestic building insurance prior to accepting payment is just one example of the contractual rights and obligations of parties to a domestic building contract which, if not properly understood at the time of entering the contract, can present a significant financial risk to both sides.
Whether you:
are considering entering a domestic building contract, and want advice regarding the rights and obligations conveyed on you by the contract;
suspect that your builder is having financial difficulties, and want advice regarding your right to terminate the contract; or
find yourself in a situation where your builder has gone into liquidation, and want advice on how to navigate through the liquidation and insurance processes;
We strongly encourage that you obtain legal advice.
To discuss this article further, or for more information, please get in contact with:
Ben Broadhead
Principal
T 03 5226 8549 | M 0413 561 332
E bbroadhead@ha.legal
James Hickey
Lawyer
T 03 5225 5239
E jhickey@ha.legal
