Building company failures: the signs are there!

By Alan Johnston November 20, 2015 Full Credit

I was in Christchurch recently and had cause to talk to a number of construction companies, building supply merchants, and insolvency practitioners.

While the outlook on workflow for builders – particularly those engaged in the commercial sector – continues to be very bright, there are still many companies engaged in the building process who are operating on the smell of an oily rag and are relying on suppliers being generous with trading terms to ensure they remain in the game.

The trouble is, technically they are already insolvent. Don’t get me wrong – this situation is not unique to the Christchurch market. Auckland is also encountering similar growing pains.

So, when they fail, do you just sit back and accept it, with the justification that you couldn’t have seen it coming? I think not. There are plenty of signs, and plenty you can do about it in advance, or even after – if you know what to look for, and know how to secure your position.

 

LOOK FOR THE SIGNS

In a recent article in the NBR, McDonald Vague insolvency expert, Tony Maginness, said nearly 100 rebuild-related companies had gone into liquidation or receivership in Christchurch alone since the February 2011 earthquake and that he was seeing the same trend occurring in Auckland.

The companies that were failing were going under because they transacted more business than the firm’s working capital could sustain, he said, adding: “Some of these companies shouldn’t have been in business in the first place” and that “many don’t have the skills needed to run a business.”

Typical reasons for these failures include, said Maginness:

  • High overheads and slim margins.
  • Missed deadlines.
  • Contract disputes.
  • Cost overruns.
  • Unhelpful bureaucracy and compliance costs.

I also saw and heard enough during my visit to know there is a lot more pain to come for those credit providers who are continuing to supply these insolvent companies and for their subbies.

So let’s have a look at one of these recent failures and see what perhaps could be done to prevent the losses sustained when the company fell over?

A real company I shall call NoName Construction Ltd recently went into liquidation owing creditors just over $1.4 million. The liquidator said the Director had been “unable to determine the cause of the recent trading losses as the company had previously been profitable.”

But companies don’t just become insolvent overnight. And how did he determine “profitable”? With access to the debtor databases of over 350 national companies, I know that the writing was on the wall for this company some time ago.

 

LESSONS TO BE LEARNED

  1. Monitor your customers’ debt performance, not just by how they are performing with you, but how they are performing in the marketplace (talk to me on how best to achieve this).
  2. Watch for the signs, as outlined above by Mr Maginness.
  3. Protect yourself, by mitigating the risk. Register on the PPSR, and take a Personal Guarantee at the outset. Or, if a customer’s credit behaviour starts to concern you. Use clauses in your Credit Contract to caveat property if need be.

Remember: when a company is under stress, they need you more than you need them. You have the leverage, so don’t be afraid to push for these securities, which at the very least, will give you a seat at the negotiating table in the event of the company’s failure.

If you are a subcontractor use the Construction Contracts Act! This is what it was put in place for.

Too often I see articles highlighting the woes of subbies, and others, after a failure, bemoaning the level of debt they have been left with. Well, you can always stop supplying your product or services at the first sign of stress, and taking it to arbitration under the CCA.

More often than not, the debts have accrued because of continued supply well beyond the time they should have stopped.

Then there is the concern about the Director being able to set up another company soon after the failure of the first. They can only do this if they are not bankrupted, so anyone who has a Personal Guarantee can ensure this doesn’t happen.

If no-one has a PG, then the best solution is: don’t trade with the new company and they won’t remain in business long.

There is also the option of the liquidator applying to the Court to ban a failed Director for up to 5 years in some cases. Talk to the liquidator about this process.

Last, but not least, be prepared to act on the signs! Over the many years I have been in this business, I have seen endless examples of greed clouding good judgment.

And always remember the old adage: “It ain’t profit till it’s paid for”. So ask yourself this question: “What are the odds on me getting paid for this one?”


 

Alan Johnston is General Manager, CreditWorks Data Solutions Ltd, and has been involved in credit management for over 35 years. In 2011 he was presented with the NZCFI Credit Professional of the Year Award, for his achievements within the credit industry. Email him at alan.johnston@creditworks.co.nz or call him on 09 520 8133 to find out more.

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