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Tips for Subcontractors on getting paid and insolvency

It is important that all parties, including subcontractors, understand the risks of insolvency and take steps to protect themselves from the fall out of businesses in the industry going broke. Finding out that the business you are working for has become insolvent and may be unable to pay you what you are owed can be concerning. However, there are things you can do to protect yourself at every stage of the contract process.

Early prevention is key 

Businesses should understand the ‘red flags’ of insolvencies to prevent a debt from either occurring, or escalating. Some signs that a business may be in financial distress include:

  • Regular late payment. 
  • Sale or repossession of assets. 
  • Other contractors and suppliers complaining of late or non-payment. 
  • Change in employment status or reduction in employees. 
  • Issues with payment for materials and supplies. 

Pre-contract due diligence

Subcontractors should take the following steps to minimise the risk of working with a business that may be in financial trouble:

  • Licence check: Where applicable, subcontractors should undertake a licence search as this may confirm whether they have been suspended, received demerit points or have unpaid judgments debts.
  • Credit check: Perform a trade credit check via a credit reporting agency. This check will provide you with company and director information including credit defaults and judgments.
  • Contractual options: Use trade credit agreements which include personal guarantees against the company directors. These agreements should also include a retention of title clause and security interest provisions with respect to the materials supplied. These clauses can help to protect you by providing you with a right to retain your interest in the goods in the event the other party defaults on your agreement.
  • PPSR: Register your interest immediately on the Personal Property Securities Register (PPSR) in accordance with the terms of your contract. Find out more about the PPSR.

  • Heard a rumour? Don't ignore information from other businesses. If you hear rumours of late payments or credit issues about a contractor or business, this is a sign of trouble.

During the works

Change to the scope of work

During any project, it is important that you perform the works in accordance with the terms of contract. This includes making sure that any change to the scope of works is confirmed in writing and in accordance with the variation requirements of the contract. By following the correct contract procedures, you will minimise your risk of non-payment arising from the completion of works that were not a part of the original scope of works.

Non-payment during the work

Sometimes you may need to take action such as issuing a notice of suspension of works if your head contractor does not make payment. This not only sends a strong signal regarding how you respond to such action but also prevents you incurring further cost associated with continuing with the work.

Interest and legal costs

Most contracts contain a right to charge interest on any overdue amounts from the due date until the date of payment. Additionally, you may be able to recover any legal costs incurred as a result of the non-payment (for example, in the event you need to commence legal proceedings).

Terminating a contract

Unfortunately, sometimes parties may need to terminate a contract because they are no longer financially able to proceed with the contract. Parties may mutually agree to terminate a contract, and in which case they are able to agree to the terms of the termination.

Read more about mutual termination of contracts.

Can I terminate if the other party is insolvent?

HIA contracts include clauses which allow one party to terminate if the other party is subject to an insolvency event. However, there are laws in place which may prevent a party from enforcing these types of clauses for a period of time. This is to allow the party who is facing insolvency to attempt to trade their way out of trouble.

You should immediately seek legal advice if you become aware that your client or contractor is:

  • Under administration.
  • Under the control of a managing controller.
  • Being restructured.

Parties can still rely on termination for insolvency clauses where it relates to personal insolvencies.

A contract can be terminated where the other party is facing an insolvency event, provided that there is another legitimate termination right or breach of contract.

However, HIA strongly advises that legal advice should be sought prior to taking steps under a termination clause including a termination for insolvency clause.

When works have been completed

When you have finished the project, it is important that you are following your contract administration processes, including issuing your tax invoices and following up payment in a timely manner. Where necessary, in the event of non-payment there are a number of options available, including:

  • A security of payment claim
  • Issuing a letter of demand
  • Serving a statutory demand where there is no dispute
  • Commencing legal proceedings to recover the debt as a judgment debt.
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