A builder entering administration or becoming insolvent can bring a residential construction project to an abrupt halt. Work may stop, progress payments may already have been made, and questions can quickly arise about unfinished construction, building defects and whether money can be recovered.
In NSW, several legal and insurance mechanisms may apply when a builder experiences serious financial difficulty. However, administration and insolvency do not always produce the same outcome.
The building contract, the stage of construction and the availability of Home Building Compensation Fund cover can all affect what happens next.
At Maguire & McInerney Lawyers, we regularly assist property owners, builders, contractors and developers with building and construction law matters, including incomplete work, building defects, payment disputes and contractual issues.
What does it mean when a builder goes into administration?
Voluntary administration does not necessarily mean that a building company has permanently closed.
Administration is a formal insolvency process. An independent administrator takes control of the company while its financial position is investigated. Creditors then consider what should happen to the company.
Possible outcomes can include:
- returning control of the company to its directors
- entering into a Deed of Company Arrangement, commonly known as a DOCA
- placing the company into liquidation.
Therefore, a builder entering administration does not automatically mean every building contract has ended.
The administrator controls the company’s affairs during this period and considers whether the business can continue or whether another outcome would provide a better result for creditors.
That distinction is important because the next steps under a construction contract may depend on what happens during the administration process.
What happens to the building contract?
A builder entering administration does not automatically cancel a residential building contract.
Instead, the terms of the contract need to be reviewed carefully.
The contract may contain provisions dealing with insolvency, suspension of work, default or termination. These clauses can determine when contractual rights arise and what notices must be given before action is taken.
As a result, terminating a contract without first checking those provisions can create further legal complications.
For example, appointing another contractor to complete unfinished work before the contractual position has been properly determined may affect later claims for losses or completion costs.
Our Building & Construction team advises homeowners on contract terms, payment obligations, delays, defects and dispute resolution. M&M’s existing building contract guidance also emphasises the importance of understanding contractual rights before taking steps to cancel or terminate an agreement.
What happens if construction work is unfinished?
Incomplete construction is one of the most immediate concerns following builder insolvency in NSW.
Work may stop at any stage of the project. For example, a home might be at frame stage, nearing completion or waiting for defects to be rectified.
Before another builder takes over, it is generally important to establish the condition of the site and the value of work already completed.
Relevant records may include:
- the signed building contract
- variations
- progress payment records
- invoices and receipts
- photographs of completed and incomplete work
- correspondence with the builder
- inspection reports
- the Home Building Compensation certificate.
An independent building inspection may also assist in identifying incomplete or defective work.
This documentation can become important when determining potential contractual losses, insurance entitlements or claims against an insolvent building company.
Does the Home Building Compensation Fund cover builder insolvency?
For eligible NSW residential building work, the Home Building Compensation Fund, or HBCF, can provide important protection when a builder becomes insolvent.
HBCF operates as a last-resort form of protection where a builder cannot complete work or rectify defects because of events including insolvency, death, disappearance or certain licence suspensions.
For applicable residential work valued at more than $20,000, HBC cover generally needs to be obtained before work starts or money is taken. NSW Government guidance currently states that HBCF can provide cover of up to $340,000 for eligible non-completion or defect claims.
However, HBCF does not automatically cover every loss.
The policy terms, type of work, payments already made and circumstances surrounding the builder’s insolvency all need to be considered.
In particular, NSW guidance warns that unauthorised or early progress payments can affect the amount recoverable under HBCF. Deposits above permitted limits may also fall outside available protection.
Therefore, the existence of HBCF cover should be confirmed early.
What happens to building defects if the builder becomes insolvent?
Builder insolvency can also create difficulties where construction has finished but defects remain.
Under the Home Building Act 1989 (NSW), statutory warranty rights can apply to residential building work. Current NSW Government guidance identifies warranty periods of six years for major defects and two years for other defects, calculated from completion of the work.
However, enforcing those rights against an insolvent company may be difficult.
Where eligible HBCF cover exists, the fund may respond to defective work if the builder cannot meet its warranty obligations because of an insured event such as insolvency.
The nature of the defect also matters.
Structural problems, waterproofing failures, non-compliant building work and defective workmanship can require technical evidence before the value and scope of rectification work can be determined.
M&M’s article on latent defects and builder liability in NSW explains how defect claims and statutory warranties can operate when problems emerge after construction.
Can money already paid to an insolvent builder be recovered?
Recovery depends heavily on the circumstances.
Where payments have been made for work that has not been completed, HBCF may provide one possible avenue if the project and loss fall within the policy.
There may also be a claim in the builder’s insolvency.
A person or entity owed money by the company may qualify as a creditor. ASIC also recognises that someone who has paid for goods or services that have not been received may be a creditor of an insolvent company.
The administrator or liquidator may require a proof of debt to be submitted.
However, being recognised as a creditor does not guarantee full repayment. The amount ultimately recovered depends on factors including the company’s available assets, competing creditors and the insolvency process.
Consequently, insurance rights and insolvency claims often need to be considered together.
What should happen when a builder goes into administration?
Early action can help preserve available options.
Relevant steps may include:
- confirming whether the builder is in administration, liquidation or another insolvency process
- reviewing the building contract and any insolvency or termination provisions
- checking whether HBCF cover applies
- documenting all completed, defective and unfinished work
- retaining payment records, variations and correspondence
- reviewing any notices issued by the administrator or liquidator
- considering whether a proof of debt needs to be lodged
- obtaining advice before terminating the existing contract or appointing another builder.
NSW Government guidance also recommends notifying the relevant HBCF insurer promptly where a builder cannot complete work or rectify defects because of insolvency, as delays can affect a claim.
The correct sequence is important. Acting before the contractual and insurance position has been established can make an already difficult situation more complex.
Builder administration and liquidation are not the same
The terms administration, insolvency, bankruptcy and liquidation are often used interchangeably. Legally, however, they describe different concepts.
Insolvency generally refers to an inability to pay debts when they fall due.
Administration is a process designed to determine the future of an insolvent or potentially insolvent company.
Liquidation generally involves winding up the company and distributing available assets according to insolvency law.
Bankruptcy, meanwhile, generally applies to individuals rather than companies.
Understanding the builder’s actual status helps determine what contractual, insurance and creditor options may be available.
How can a building and construction lawyer assist?
Builder insolvency can involve several areas of law at the same time.
A matter may require consideration of the building contract, the Home Building Act, insurance cover, defects, contractual termination and insolvency procedures.
Our Building & Construction Law team assists homeowners and building professionals with issues including incomplete works, building defects, payment disputes, contract advice and dispute resolution.
Legal advice can help clarify:
- whether a contract can or should be terminated
- what notices need to be issued
- whether HBCF cover may apply
- how incomplete or defective work should be documented
- whether losses may be recoverable
- whether a creditor claim should be lodged
- what steps are required before another builder completes the work.
Early advice can also help avoid decisions that may affect later contractual or insurance claims.
Getting advice when a builder becomes insolvent
A builder going into administration or becoming insolvent can leave a construction project uncertain, but several legal protections may still be available.
The most appropriate response will depend on the contract, construction stage, payments already made, defects present and available HBCF cover.
At Maguire & McInerney Lawyers, we provide practical advice on building contracts, incomplete work, defects and construction disputes throughout Wollongong, the Illawarra and NSW.
If a builder has entered administration or become insolvent, contact our Building & Construction Law team to discuss the contract, available protections and the appropriate next steps.
