Introduction

The Australian building industry is facing an unprecedented crisis, with a wave of construction companies becoming insolvent. Triggered by the after-effects of the COVID-19 pandemic, including soaring material costs and supply chain disruptions, the collapse of a builder has become a distressing reality for many homeowners, developers, and lot owners across NSW, leaving projects unfinished and investments at risk.

The situation can feel overwhelming when your builder goes bust, but taking swift and informed action is crucial to protect your financial interests. This guide provides a crisis-action plan, outlining the essential steps to navigate a builder’s insolvency, from securing your site and making a claim with the Home Building Compensation Fund (HBCF) to understanding your rights as a creditor and appointing a new builder to complete the work.

First Steps After Builder Insolvency

Confirming Builder Insolvency & Securing the Site

Before taking any significant action, please ensure your builder has become insolvent. Suspicions that work has stopped, or the builder is in financial trouble are insufficient.

You can verify a company’s status through several official channels:

• Search the insolvency notices on the Australian Securities and Investments Commission (ASIC) register, which will show if a liquidator or administrator has been appointed
• For a sole trader, check the National Personal Insolvency Index (NPII)
• Verify the builder’s licence status on the NSW Fair Trading portal, as licences are often automatically suspended or cancelled upon liquidation

Once we have settled our insolvency, your priority is securing the construction site. The builder’s insurance may become void when they enter administration, leaving your property uninsured and vulnerable. It is your duty to take care of any other loss, which is often required for insurance purposes.

Key steps to secure your building site include:

Security Measure	Action Required
Restrict Access	Change the locks if the project is at the lock-up stage, and install temporary fencing and warning signs to prevent unauthorised entry.
Arrange Security	Consider hiring security guards or installing remote monitoring, as abandoned building sites are common targets for theft and vandalism.
Protect the Property	Weatherproof any exposed areas of the building to prevent damage from the elements.
Audit and Document	Conduct an audit of all materials and equipment left on site. It is essential to determine legal ownership, as your contract may state that title to materials passes to you upon delivery, not upon payment.

Stopping Payments & Notifying Key Parties

It is critical to protect your financial position by immediately ceasing all payments to the builder who has become insolvent. Contact your bank or financial institution to stop any progress payments being processed. This action helps minimise your financial losses and preserves funds needed to engage a new builder to complete the work.

After making payments, you will need to immediately notify all key parties involved in your building project. Clear and immediate communication is essential to protect your rights and begin the recovery process.

You should contact the following stakeholders:

Stakeholder	Reason for Contact
Your Lender	Inform your bank, finance broker, or other lender about the builder’s insolvency. You will likely need to discuss the status of your construction loan, a potential extension, and a revised assessment.
The Insolvency Practitioner	Contact the appointed administrator or liquidator to register as a creditor, ensuring you are informed about the liquidation process and any potential for a dividend payment.
Your Insurer	Notify your HBCF insurer in NSW as soon as possible. Strict time limits apply to making a claim, and any delay could jeopardise your ability to receive compensation.
Legal Advisor	It is highly recommended that you seek expert advice from a lawyer specialising in construction law for guidance on your specific rights and obligations under your building contract and the law.

Gathering Documents & Reviewing Your Building Contract

Collecting and organising all project-related documentation is vital when your builder goes bust. These records are essential evidence for insurance claims, financial recovery efforts, or potential legal action. You should gather every document you can access, since this paper trail will be crucial for proving your position with insurers and the liquidator.

Your file of essential documents should include:

Document Type	Description / Contents
The Building Contract	The fully executed contract and any signed variations or addenda.
Financial Records	All progress claims, invoices, receipts, and proof of payments made to the builder.
Plans and Approvals	Council-approved plans, engineering reports, and specifications.
Insurance Certificate	Your HBCF certificate of insurance.
Correspondence	A complete record of all emails, letters, and meeting minutes exchanged with the builder.
Site Records	Detailed photos and videos documenting the state of the project, including work completed, visible defects, and materials on site.

Alongside gathering documents, you will need to carefully review your building contract with a legal advisor. Your contract contains critical clauses that outline your rights and obligations in the event of your builder’s insolvency. However, you should not terminate the contract without first seeking legal advice.

A builder becoming insolvent is not always sufficient grounds for termination, and provisions in the Corporations Act 2001 (Cth) can prevent termination simply due to an insolvency event. Acting incorrectly could be considered a breach of contract, creating further legal complications.

Navigating Your HBCF Claim in NSW

Understanding Your HBCF Coverage & Claim Limits

In New South Wales, the HBCF is a critical safety net for homeowners undertaking residential building works valued at over $20,000. This compulsory insurance protects you if your builder becomes insolvent, dies, disappears, or has their licence suspended.

Before commencing any work or making payments, you should have received a certificate of insurance from your builder. This document is essential proof of your coverage under the scheme.

The HBCF compensates for specific losses, subject to strict limits and conditions. Key areas of coverage include:

Coverage Area	Details and Claim Timeframes
Incomplete Work	Covers the cost to finish building works, capped at 20% of the original contract price. A claim must be lodged within 12 months of work stopping.
Defective Work	Covers the cost to rectify defects. Claims for major defects must be made within six years of completion; for non-major defects, the period is two years.
Deposit Loss	Provides cover for the loss of a deposit, typically capped at 10% of the contract value.

It is essential to understand that any combination of claims has a maximum payout limit. For policies issued after 1 February 2012, the total amount claimable is capped at $340,000 per dwelling.

The HBCF Claim Process & Critical Timelines

When your builder goes bust, you must act swiftly to protect your rights under the HBCF. The process is managed by icare, the sole provider of HBCF insurance in NSW, and involves several steps.

You must notify the insurer in writing as soon as you become aware of the builder’s insolvency, as any delay can jeopardise your claim. The claim process typically follows this timeline:

1. Lodge a “Notification of Loss” form with icare
2. icare will appoint a loss assessor to investigate your claim
3. The assessor will inspect the building site to determine the extent of incomplete and defective works
4. A detailed scope of work for rectification and completion will be prepared

While icare aims to determine claims within 90 days, the entire administrative process before work can restart often takes approximately three to four months. This period includes:

• Initial claim lodgement
• Site inspections
• Scoping the works
• A tender process to appoint a new builder

The insurer will typically seek tenders from a panel of approved builders. If you proceed with the claim, you will likely need to engage one of these selected contractors to complete the project.

Managing Legal Risks & Financial Recovery

Terminating Your Building Contract & The Insolvency Process

You cannot terminate the building contract immediately when your builder becomes insolvent. Acting rashly could be considered a wrongful termination, which may be a repudiatory breach of contract, potentially exposing you to a claim from the builder’s insolvency practitioner.

The Corporations Act 2001 (Cth) contains ipso facto provisions that prevent you from terminating a contract simply because the other party has entered an insolvency event like administration. Before taking any action, it is essential to:

• Seek legal advice
• Carefully review your building contract for specific clauses outlining your rights
• Follow the required procedures for termination

A lawyer can help you issue the correct notices, such as a notice of breach or a show cause notice, to ensure the termination is lawful.

The insolvency process typically follows one of two paths:

Insolvency Path	Description and Outcome
Administration	An administrator is appointed to take control of the company to rescue it, potentially through a Deed of Company Arrangement (DOCA) to continue trading.
Liquidation	If the company cannot be saved, a liquidator is appointed to sell the assets and distribute proceeds to creditors. The company ceases to trade permanently.

The appointed administrator or liquidator should reach out to you. However, it is a good idea to proactively contact them to register yourself as a creditor, ensuring you are informed about the insolvency’s progress.

Lodging a Proof of Debt & Other Financial Protections

To formally register your financial claim against the insolvent builder, you must lodge a “Proof of Debt” with the appointed liquidator. This form details the amount you are owed, including costs to rectify defective works, complete the project, and other damages resulting from the builder’s breach of contract.

However, managing your expectations regarding financial recovery through the liquidation process is essential. As a homeowner, you are typically classified as an unsecured creditor. This places you low on the priority list for payment from the sale of the builder’s assets, behind secured creditors (such as banks) and employee entitlements.

Consequently, the amount recovered by unsecured creditors is often minimal, sometimes only a few cents on the dollar, if anything at all.

Beyond lodging a proof of debt, you should investigate if your contract provides other financial protections, such as:

Protection Mechanism	Description
Bank Guarantees	Financial instruments that can be called upon to cover losses if the contract permits it and the builder has defaulted.
Retention Funds	A percentage of each progress payment withheld as security can be used to offset the cost of completing works or fixing defects.
Personal Guarantees	A guarantee from a director of the building company, which may allow for the pursuit of the director’s assets to recover losses.

Appointing a New Builder to Complete Your Project

Assessing the Work & Preparing for a New Contractor

Before you can appoint a new builder to complete your project after your original builder has become insolvent, conducting a thorough and independent assessment of the project’s current state would be essential. This assessment will give you an objective understanding of what has been done, what remains, and the quality of the existing building works.

Engaging a qualified professional, such as a building consultant or quantity surveyor, is critical in this process. An expert inspection will produce a detailed report identifying any defective or non-compliant work, vital evidence for an insurance claim with the HBCF.

This report also establishes a precise scope of work for rectification and completion. The documentation is a crucial part of the package you will provide to prospective builders.

To prepare for a new contractor, you should:

Preparatory Step	Details and Purpose
Commission an independent building report	This assessment should detail all incomplete works, identify any structural and non-structural defects, and estimate the cost to rectify and complete the project.
Gather all project documentation	Compile a comprehensive file containing the original building contract, all variations, council-approved plans, engineering reports, and records of all progress payments.
Prepare a tender package	Use the independent report and project documents to create a clear and detailed package for potential builders to review, allowing them to provide accurate quotes.

Vetting the New Builder & Negotiating the Contract

Finding a new builder to take over an incomplete project can be challenging, as many contractors are reluctant to assume responsibility for another’s work. Those willing may price in the additional risk, resulting in a higher contract price to complete the project.

It is therefore crucial to conduct rigorous due diligence to select the right builder and avoid future problems.

When vetting a potential new builder, you must verify several key details to ensure they are reputable and financially stable.

Important steps include:

Vetting Action	Key Verification Details
Checking their licence and insurance	Confirm the builder holds a current licence with NSW Fair Trading and has the necessary insurance, including eligibility for HBCF cover.
Assessing their financial viability	Research the builder’s history on the ASIC register for any past insolvencies, and consider obtaining a credit reference to check their payment history with suppliers.
Verifying their experience	Prioritise builders with specific experience in takeover projects. Ask for and contact multiple references to discuss their reliability and quality of work.

Once you have selected a builder, you must execute a new, comprehensive building contract. This should not be a simple amendment to the old agreement but a fresh contract that clearly outlines the remaining scope of works, a firm timeline, and a clear payment schedule tied to verified milestones.

Having a construction lawyer review this new contract before you sign is highly advisable to ensure your interests are protected. If you are making an HBCF claim, be aware that the insurer, icare, may require you to use a builder from their approved panel or cover any cost difference if you choose to appoint your own.

Special Considerations for Strata Schemes 

The Owners Corporation’s Role & Responsibilities

When a builder working on a strata scheme becomes insolvent, the owners’ corporation assumes a central role in managing the crisis. Its primary responsibility is to the common property, which requires immediate action to secure the site against further damage, theft, or vandalism. This duty to mitigate loss is critical, as failing can affect future insurance claims.

The owners’ corporation is tasked with navigating the claims process on behalf of all lot owners for issues affecting common property. This involves making a collective claim under the HBCF, which provides cover for residential building work in NSW.

Key responsibilities in this process include:

Key Responsibility	Description of Action
Making a Home Building Compensation Fund Claim	The corporation must lodge a claim for incomplete or defective building works on common property, using the scheme’s HBCF certificate of insurance.
Engaging Professional Advice	It is highly recommended to engage a specialist building consultant or engineer to independently assess the works for evidence and scoping.
Raising Special Levies	If the HBCF payout is insufficient, the owners’ corporation will likely need to raise funds by issuing special levies to all lot owners to cover the financial shortfall.

Pursuing the Developer & Managing Building Disputes

If a developer engaged the insolvent builder, the owners’ corporation may have an alternative path for recovery. Under the Home Building Act 1989 (NSW), the owners’ corporation may have grounds to pursue the developer for building defects, particularly if the developer was also the original land owner and initiated the construction.

Managing building disputes within a strata scheme requires a coordinated effort and clear communication with all lot owners. The process can be complex, often involving multiple parties and significant financial stakes. For this reason, seeking expert legal advice is crucial to navigate the dispute resolution process effectively.

Should disputes arise, the owners’ corporation can escalate the dispute to the NSW Civil and Administrative Tribunal (NCAT) to seek orders for rectification or compensation. Collaborating provides a significant advantage, allowing lot owners to share the financial burden of legal fees and present a unified front. A construction lawyer can guide the owners’ corporation through its options, ensuring all lot owners’ actions are lawful and in the best interests.

Conclusion

When your builder becomes insolvent in NSW, taking immediate steps like securing your site and halting payments is crucial, while understanding your rights under the HBCF. Successfully navigating the crisis involves managing your contract’s legal termination, correctly lodging claims, and carefully appointing a new builder to complete the work.

Dealing with the complexities of a builder’s collapse requires specialised knowledge to protect your legal and financial position. For trusted expertise in navigating construction disputes and insolvency, contact the building and construction lawyers at PBL Law Group today to secure your project and achieve peace of mind. We could help with recovering your money if your builder goes bust.

Frequently Asked Questions (FAQ)