2018 Commonwealth regime relating to insolvent Builders or Owners – May restrict rights to Terminate

26/03/2019

This article relates to a situation that sometimes arises during a building project where one of the parties becomes insolvent. This insolvency may apply to a corporation or an individual and may apply to both the Builder and the Owner or principal in a project.

Contracts in these situations often have a clause which states that when there is insolvency of one party to the Contract, the other party may terminate the Contract. This provision applies even though the insolvent party may be able to trade out of the insolvency.

However from 1 July 2018 the Corporations Act was amended to provide that there is a stay on the enforcement of Contractual termination rights against a corporation during an insolvency in certain circumstances.  This means that neither the insolvent party nor the other party to the Contract, can terminate the Contract if the following events take place

(a)       There is a compromise or arrangement under Part 5.1 of the Corporations Act;

(b)       There has been an appointment of a managing controller of the property of a corporation under Part 5.2 of the Corporations Act; and

(d)       There has been appointment of an Administrator to the corporation under Part 5.3A of the Corporations Act. 

All of these situations are ones where an insolvent corporation has the opportunity to trade out of its difficult situation.  In these situations, the Federal Parliament has said the corporation should not be denied the opportunity to continue trading out just because of the insolvency.  As a result the 2018 Federal law provided that the insolvent party may not terminate the relevant Contract just because of the insolvency if the above circumstances exist.

Accordingly, where an Owner or a Builder becomes aware that the other party is insolvent, the Owner or Builder must consider carefully whether there remains a right to terminate the building Contract.

Watson & Watson solicitors can advise you on building Contracts and the rights of Builders or Owners in such Contracts, not only in the event of insolvency but on all Contractual and other aspects.  If you have any concerns regarding insolvency and how it can impact on your build please contact Richard Watson Accredited Specialist Building & Construction or his Personal Assistant Shereen Da Gloria to discuss your concerns.

This is only a preliminary view and is not to be taken as legal advice without first contacting Watson & Watson Solicitors on 9221 6011.