Probuild and ConDev: What principals should do now

The big news in construction this week is that Gold Coast building contractor ConDev has just gone into liquidation.  This news follows Probuild going into administration last month. Whether this is the start of the long-feared “construction insolvency tsunami”, these collapses will have implications for the entire construction industry. 

In the first in a series of articles, we look at some things that principals and developers who could be affected by the insolvency of a head contractor might consider doing now.  Further articles in the series will consider the implications for subcontractors and other industry players. 

Background

Last month, Probuild collapsed after its South African parent company pulled its financial support from the Australian arm of the business.  Probuild took a total of 18 building businesses in Australia down with it. Around 750 employees and thousands of contractors are also impacted, with many locked out of sites across the country.

Now comes the news that ConDev has called in the liquidators, based on financial forecasts that showed its financial position was not tenable going forward.  According to media reports, ConDev’s owners seem to be trying to do the responsible thing by facing their difficulties head on, rather than letting things worsen over time.  That action, and pleas to its clients to help, was still not enough to save the business.   

ConDev’s financial forecasts have had to consider the fact that steel prices have risen as much as 80% in the last 18 months.  Where most of ConDev’s contracts are fixed price, this issue alone leaves ConDev with a serious problem.  Add to that the fact that South East Queensland (SEQ) has had around 60 weekdays of rain in the last year, slowing progress on sites for around three months of that year, plus COVID-19 and the floods, and maybe it is not hard to see how Condev hit the skids.

Like most insolvencies, Probuild’s collapse is also due to multiple factors.  As if tiny margins, COVID shortages and skyrocketing materials prices were not enough, Probuild’s parent company also cited the contractual environment in Australia and the increased difficulty in raising guarantee facilities necessary to secure new work.   

Some commentators are saying Australia’s construction sector has become increasingly high risk amid a “hard-line” approach to tackling COVID-19, and that the potential risk on mega-building projects outweighs the current margins available.  In what has become a race to the bottom, over the past decade the Australian construction industry has moved to a high revenue low margin model, leading to a culture of under-pricing already low margin work to keep revenues up.  Coupled with widespread under-capitalisation the industry is facing a structural failure, which has many players on the edge of insolvency.  Winning a project based on the lowest price is not the same as giving the client value for money.  If that’s what overseas infrastructure companies see, who is going to invest in Australian infrastructure?  

It could be argued that ConDev and Probuild are victims of Australia’s extremely adversarial contracting culture, and to some extent that it is probably true. Probuild and ConDev might even bear some of the responsibility themselves.  However, other issues like labour shortages, the global supply chain crisis, insurance premium rises and the SEQ floods have all had an impact.  

Ipso facto

So, what can developers and principals do now to address potential contractor insolvencies?

Many contracts, including the ubiquitous Standards Australia templates, allow a principal to terminate a contract or exercise other rights if the contractor becomes insolvent. These are often referred to as “ipso facto” provisions.  However, due to changes in the Corporations Act 2000 (Cth) (Corporations Act) in 2018 and again in 2021, there is a stay (or hold) put on the enforcement of certain ipso facto contractual rights against companies who are subject to any of the following:

• a voluntary administration
• a creditors scheme of arrangement (including some of the steps leading up to the scheme)
• a receivership but only where the receiver is appointed over the whole or substantially the whole of the property of the company, or
• a restructuring.

The stay only applies in the limited circumstances set out in ss 415D, 434J, 451E, and 454N of the Corporations Act, and generally lasts for three months (although it can be longer).  If you think you might be affected, you should seek legal advice.  

Importantly, the stay does not apply to most liquidations or deeds of company arrangement. 

Probuild is in administration (Deloitte was appointed) so the stay on exercise of ipso facto rights applies. In other words, if you have a contract with an affected Probuild company, you probably cannot validly terminate that contract just now on the basis of Probuild’s voluntary administration. 

ConDev on the other hand, is in liquidation so the stay on exercise of ipso facto rights will not apply and affected counterparties (developers and principals) can terminate their respective contracts on the basis of insolvency. 

The relevant question then is, should they?  That will probably need to be decided on a case by case basis, but you should consider the steps below before any termination is made.     

Next Steps for developers and principals

Prevention of insolvency on a construction or infrastructure project is almost always better than trying to find a cure.  Picking up the pieces on a project after the insolvency of a head contractor (or even a key subcontractor) almost always costs more and takes more time.  We will discuss some prevention strategies in a future article. 

For now, affected (or potentially affected) principals might consider some or all of the following to keep affected or “at risk” projects going:

1. Each project should have an effective experienced project team managing it for the principal. This project team will be key, not only to provide possible advance warning of an insolvency as they know the industry very well, but also to give principals invaluable insights and industry information to help pick up the pieces. A principal should know this project team well and look after them.
2. A developer’s first instinct if a contractor becomes insolvent is often to call on any security available to it. However, if the type of insolvency is caught by the ipso facto rules outlined above, then the right to call on the security is also subject to the stay. In other words, Probuild’s clients probably cannot call on their securities at this stage. Calling on a security wrongfully can result in the principal having to pay damages (for example, to the administrator).
3. Check who has rights over design and copyright relating to the project, and if required, obtain copies of any drawings, documents or software that are not already in your possession.
4. Check if you have any contractual rights in your head contract to pay subcontractors directly, so that work on site can continue for now.
5. Check with the project suppliers as early as possible to explore the prospect of purchasing materials directly from them on the same terms as the pre-existing project documents.
6. Check that all necessary collateral warranties have been procured in accordance with the terms of the contract, giving the principal a direct right to claim against subcontractors.
7. If the insolvent head contractor has key personnel who are critical to your project, you may want to speak with the contractor’s insolvency practitioner (if there is one) to find out how long that person is likely to be retained. You might also take some employment law advice on whether it is possible to hire the relevant people as consultants for the remainder of the project.
8. Title to materials on site can only pass to the principal if they have also been properly passed up the contractual chain. This needs to be checked in each case (or at the very least for the critical and high value materials).
9. Important documents such as approvals, or “required information” under the Queensland Building and Construction Commission Act 1991 (Qld) relating to non-conforming building products (especially on a D&C contract) should be located and secured as soon as possible.
10. Equipment on site is often leased, and the lessor usually wants it back if the lessee is insolvent. You may need to source other equipment quickly. For this, developers should rely on their project teams.
11. Check the project insurance policies to see if your situation triggers any possible claims that might help to reduce your losses.

Much of the above is simply good contract management, but it can also be important preparation just in case your head contractor becomes insolvent while building your project. 

Conclusion

Any company collapsing is a tragedy for those involved.  Where that company is a construction or infrastructure company many people will be impacted by the collapse, which can cause ripples throughout the industry.  Prevention of companies collapsing is almost always better than the cure, so if your counterparty is in financial trouble, it might be more cost-effective for a principal to explore the option of trying to address that financial problem than to let the contractor go under.  Where that is not possible however, knowing your project, your project team, your contract and your contractors can help to reduce the risks for a principal.