Every economic downturn crunches subbies – plumbers, electricians and other subcontractors – as their debtors lurch into liquidation or receivership, leaving many unpaid.
Inland Revenue pulls most plugs on shaky companies at the moment. Liquidation is the rule. Receiverships, initiated by secured creditors, are much less common.
Banks are shying away from both. They chiefly manage debtor problems themselves, and if necessary go straight to mortgagee sale to realise money from assets.
A distressed company’s undertaking generally will be worthless.
INSOL New Zealand, which groups together accounting and lawyer insolvency specialists, has given BizScene helpful advice for subbies when a big debtor strikes trouble – and before the crash comes.
Michael Bos, an INSOL national committee member, and Keiran Horne, who convenes the Christchurch INSOL group, our nearest, gave these tips.
As soon as they learn a debtor is in liquidation or receivership, subbies should contact the liquidator or receiver.
They can find out who this is from a company search on the Companies Office website.
Subbies should get their names promptly on to the list of creditors. Usually the liquidator responds with a form to fill in.
A creditor should also immediately check its terms of trade. Bos, a partner in Auckland law firm DLA Philips Fox, says the best steps a small business creditor can take are well before liquidation. So we assume the subbie has had terms of trade drawn up with legal help and uses these repeatedly.
Subbies who supply goods rather than purely services should include in their terms a reservation of title (ROT, or Romalpa) clause. This stops ownership from passing to the customer until goods are paid for.
Again, subbies need a suitable ROT format from a solicitor. A customer must sign for the ROT and subbies must register each ROT transaction on the Companies Office’s online Personal Properties Security Register
Each subbie using the site enrolls free as a user, or delegates the role to an accountant or lawyer. The PPSR charges $3 for each transaction.
ROTs apply only to collectable goods. If connected to property – for example, plumbing pipes – goods become subject to any mortgage on the property and the subbie isn’t entitled to remove them.
Subbies with valid ROTs should approach the liquidator with documents proving the claim is solid.
Bos says subbies should also be aware of their rights under the Construction Contracts Act 2002. This can be effective when they aren’t being paid before a creditor goes into liquidation, such as in problems with progress payments. He advises subbies unfamiliar with this law to talk to a lawyer or accountant.
Most Queenstown subbies caught will have done work on property developments.
These typically have at least two or three secured creditors. The first secured creditor might get paid but subbies will be well down the line among unsecured creditors. They usually have only slim chances of getting their money.
INSOL’s Horne reminds subbies who negotiated personal guarantees for their work that they can pursue the guarantor for the amount they do not receive under liquidation.
This illustrates how subbies should be diligent, seek advice and take pains at the start of the contract process.
Neill Birss will chase up your biz tips: firstname.lastname@example.org