PROTECT YOUR TOOLS!

Law firm Duncan Cotterill provides tips on how to protect the tools of your trade as a subcontractor

Most players in the construction industry will be faced with an insolvent counterparty sooner or later. If you work as a subcontractor, you face unique risks if the head contractor goes into liquidation or receivership.

Here we look at how subcontractors can protect their tools and equipment from being seized when the head contractor goes bust.

Liquidation vs. receivership 

Though the outcome is often the same, there are a few important differences between a company going into liquidation or receivership.

Receivership: A receiver is nominated by a secured creditor (eg, a bank) and acts for the benefit of that creditor alone. A receiver decides the best way to recover the debt – they may decide to keep the company trading or may simply take possession and sell the secured assets. After this process, the company resumes possession of the remaining assets and theoretically could continue trading, but will most commonly go into liquidation.

Liquidation: A liquidator is appointed to take possession of all the assets of the company and distribute these to the creditors in order of priority. All creditors may record their debt against the company during a meeting of the creditors. Liquidators have the power to investigate the company and hold the directors personally accountable if they have breached their duties.

Risks

Liquidators and receivers have the duty of identifying the assets of the head contractor. In order to do this, it is common for the head contractor’s sites to be locked and access restricted. If your property is on site, it may be some time before it is identified, distinguished from the head contractor’s or other third party’s property, and returned to you. This may disrupt your work schedule, delay contracts with other clients, or prevent you from  working altogether. You might even lose title to your property and it could be sold as an asset of the head contractor.

Compensation 

Theoretically, you should be able to claim against the head contractor for any loss of profit while you are denied access to your tools or equipment. However, a head contractor in liquidation rarely has enough assets to even cover their secured creditors.

Access to site

Once a liquidator or receiver is appointed, the control of the site passes to them.

If you find yourself locked out of a site because a head contractor has gone under, contact the liquidator or receiver directly. Do not force entry onto the site. Accessing the site without the approval of a liquidator or receiver  could result in a trespass notice being issued and police involvement. The penalty for trespass offences is a fine of up to $1,000 or a prison term of up to three months.

Proactive steps 

It is difficult to operate totally risk-free, but there are certain steps that you can take in advance to mitigate the risks:

1. Take your goods home

The most straightforward method of protecting your property is to remove it from the site at the end of each day.

2. Clearly label and identify

If it is impractical or impossible to take your property home each day (as is the case with scaffolding, cranes, etc.), ensure your property is clearly labelled, identifiable and stored separately, and that you have good records  demonstrating ownership. Beware of storage facilities that are small and cluttered, as your property is more at risk of becoming intermingled or indistinguishable from other parties’ property.

3. Have a written contract

A written contract with the head contractor can include specific terms to protect your property. Your contract should:

• Identify your property and confirm you alone own it, including any materials you supply until paid in full.
• Include the right to enter a locked site and re-take possession of your distinguished property.
• Authorise you to register a security interest over your property – see our comments below.

Given the importance of a contract, we recommend before signing you have the contract reviewed by your advisor to ensure it is appropriate to your particular circumstances.

4. Register a personal property security interest

The Personal Property Securities Act 1999 (PPSA) governs interests in personal property (eg, materials, equipment, vehicles). If your contract with the head contractor is for an indefinite period or for more than one year, or  contains a retention of title arrangement, you can register a security interest on the Personal Property Securities Register (or the PPSR).

Failing to register your security interest can mean that you lose priority against other claimants, or even that your interest is extinguished, so it is best to register your security interest as soon as you have entered into the  contract.

5. Be alert

It is difficult to predict when a company is in financial difficulties. Insist on regular billing, follow up on unpaid invoices promptly, and stay alert to market rumours.

While these steps will provide subcontractors with some protection, they will not eliminate the risks completely when a head contractor goes under. Subcontractors need to carefully plan for how they limit this exposure to their  business.

If you have questions or would like to discuss any of the points raised in this article, please contact Alysha Hinton on (04) 4719452 or at alysha.hinton@duncancotterill.com, or your local Duncan Cotterill advisor (duncancotterill.com).

Disclaimer: the content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose. 

Duncan Cotterill is a full-service law firm with offices in Auckland, Wellington, Nelson and Christchurch. Its dedicated construction and projects team can help make your business a success by working with you to put the deal together.