What’s bringing home-builders under pressure?
In recent times, there’s been a significant contraction within the residential building industry in Australia and an increasing number of insolvency events. According to the Australian Securities and Investment Commission (ASIC), building sector insolvencies accounted for 27.1% of the national total in the first quarter of 2023. It puts the sector on track to reach decade highs.
While there are a confluence of factors causing distress, one common contributor among home-builders is having entered fix priced contracts where the economics of these projects become unviable.
This was the case for Hobart-based Multi-Res Builders Pty Ltd, that appointed David Levi as liquidator. With a number of significant fixed-price residential housing projects still under construction, payment defaults had been submitted showing outstanding payments to construction suppliers.
Levi Consulting Director, David Levi, said that an investigation into the company’s affairs had begun: “We are working closely with the relevant stakeholders to gain an understanding of the position of the business, and the best course of action for creditors, employees, and other impacted stakeholders.”
The situation some residential home-builders find themselves often stem from the effects of the COVID-19 pandemic, particularly persistent global supply chain disruptions. These have constrained access to necessary building components, creating completion delays, further complicated by significant price increases for various materials.
These factors converge to create significant liquidity issues for builders, already operating on thin margins. In the face of these challenges, the risk of insolvent trading becomes a significant concern. Insolvent trading occurs when a company continues to operate and incur new debts, despite being unable to meet its existing financial obligations.
Directors have a legal duty to prevent insolvent trading and to act in the best interests of the company and its creditors. If insolvent trading occurs, directors may be held personally liable for the debts incurred during that period.
Proactive Measures in Navigating Financial Challenges
- Monitoring Financial Position
Directors must closely monitor the company’s financial position. This involves regular reviews of cash flow, profitability, and the ability to meet financial obligations. With such monitoring, it is possible to identify potential insolvency issues early, enabling directors to take swift corrective action.
- Seeking Professional Advice
If there is a suspicion that the company may be insolvent or nearing insolvency, it is crucial to seek professional advice. Liquidators registered by ASIC under the Corporations Act 2001 require a high benchmark of experience and qualifications. They have the necessary expertise to quickly assess the company’s financial situation, provide guidance on available options, and help formulate a strategy to address impending challenges.
They have a thorough understanding of the legal and financial implications involved and can provide valuable insights and assistance in making informed decisions about the future of a company.
Mitigating the Risk of Insolvent Trading amid Adverse Circumstances
- Taking Appropriate Action
There are several actions directors can take to mitigate the adverse financial effects the company is facing. Directors may need to consider various options such as restructuring the company’s operations, negotiating with creditors, entering into voluntary administration, safe-harbour protection, small business reconstruction, or commencing a formal liquidation process. That will depend on the company’s financial situation, and what is in the best interest of its stakeholders.
- Documenting Decisions
Directors should maintain proper records of their decision-making processes. This documentation serves as evidence of their diligent action in accordance with their duties and can provide crucial support in preventing insolvent trading if legal issues arise.
The complexity of the insolvency landscape necessitates professional advice from a Registered Liquidator to ensure compliance with legal obligations, and determine the most suitable path forward. These professionals provide valuable guidance that can help a company navigate the current challenges in Australia’s residential building sector.
Support from Levi Consulting
Levi Consulting are experts in insolvency matters and restructuring, helping businesses to navigate uncertainty amid financial distress. We’ve helped a number of clients, particularly in NSW, VIC and TAS, through either reconstruction or alternatively, insolvency processes and find the best possible resolution for creditors, employees, and other stakeholders. If your company is, or at risk of financial distress, Levi Consulting are trusted practitioners and registered liquidators, and can provide strategy.