Introduction
In the context of the construction industry, a preferential payment arises where:
- A builder has paid money to a subcontractor;
- The builder has gone into liquidation or administration the payment was made to the subcontractor within six (6) months prior to the date of liquidation/administration; and
- Something happened to satisfy some complex and arbitrary rules which result in courts finding that the subcontractor should have known the builder was insolvent even if the subcontractor did not know.
What does that mean for subcontractors?
What that means is that when a builder goes into liquidation, the liquidator can look at all the payments made by the builder to subcontractors in the six months prior to liquidation and recover them.
The consequence is that you have to pay back anything you were paid for materials and labour for those six(6) months.
Direct payment by developers
Payments by third parties on the insolvent builder’s behalf are still a preferential payment.
That is, if the developer pays the subcontractors direct, you will still have to pay the money back to the liquidator.
How bad is it?
Preferential payment claim are not just a technical possibility.
Preferential payment claims have been the principle source of income for liquidators over the last few years and it is an emerging phenomenon that even the old hands have not seen as a common practice during previous times of financial disruption.
I spent most of January and February 2020 doing nothing but defend subcontractors against preferential payment claims arising out of the insolvencies of builders that have occurred over the last three years.
The only reason those matters could be defended was the subcontractors had not committed any of the deadly sins referred to below and application of emerging lines of cases.
The shock to the system
Many of the things that:
- are recommended by business coaches or even worse, credit control organisations; or
- seem to be obvious, clever or brilliant ways to make sure you get paid.
will often drop you straight into the line of fire from a liquidator
To make matters even worse, FEG funds the liquidators to take that action.
This is something subcontractors should be very worried about in good times and terrified of in bad times.
Why are subcontractors now liable for preferential payments?
In the past, liquidators were able to make a rich living and cover the costs of the liquidation out of the last remaining funds left in a company at the time of liquidation and any easily recoverable debts owing to company by debtors.
Over the last decade there has been a rise in restructuring or insolvency advisors who assist the owners of the company to liberate all assets out of the company and maximise the most opportune time to appoint a liquidator.
The consequence is that the liquidators turn to the next easy source of income which is to pursue subcontractors for preferential payments.
New strategies
During the good times it can sometimes be rewarding to risk a preferential payment in the expectation that the builder will go under slowly and six months will go by before that eventually happens.
In tough times the builder usually goes under fast. In most cases, just the two months necessary to gut the company and liberate its assets.
Therefore, any strategies you used in the past to hope you just squeak across the line are likely to be a trap in the current environment.
You might also like to read the article on heroic project rescues which are also likely to result in you losing money.
Deadly sins
There can be many things that can drop you within the scope of the preferential payment claim system.
However, there are a number of things that are guaranteed to be fatal to any chance you may have of defending a preferential payment claim.
The deadly sins are:
- Being told by a builder they are insolvent;
- Telling a builder you think they are insolvent;
- Stopping supply or work on site; or
- Entering into a payment plan
Do NOT, under any circumstances think you can reword, use euphemisms or code words to overcome the deadly sins. The courts will look at what you really meant and cause you financial pain anyway.
Being told a builder is insolvent.
The builder does not actually have to use the word Insolvent
.
You only have to be told that they cannot pay you or are suffering difficulty.
Suggestions of a heroic project rescueheroic project rescue also fall into this category.
The current trend of builders demanding discounts is an obvious indication of insolvency which must be addressed.
If you receive such a demand you must respond in a very specific way which can vary with the circumstances. If you are confronted with this you should contact us immediately.
Telling builders you think they are insolvent
For some unknown reason, some people seem to think that blurting out that they believe a builder is insolvent is enough of an insult to ensure they get paid.
It is just plain stupid and must not be done under any circumstances.
Stopping supply or work on site
There are some interesting emerging lines of cases on this topic.
There are ways this can be done but you have to show a history of administering your contract properly and use the right words at the right time.
This requires specialised help which we can provide.
Payment plans
Any request or suggestion that a builder pay in instalments or defer payment is a payment plan.
You should NOT agree to a payment plan under any circumstances and you will need to provide a specialised written response. We can prepare that for you.
If in doubt
If you are in doubt, confused or worried, contact us.
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