Michelle Cirson (00:01.25)
Hello, welcome to the Subbies' Toolbox Podcast. I'm your host, Michelle Cirson construction adjudicator, lawyer, and the founder of the Subbies Toolbox. Today on my podcast, I want to talk to you about how builders deed their way out of their debt. And this podcast was actually inspired by a conversation I recently had with another subcontractor who told me a story about a developer who got a building built for free. And it's
not how you think the builder didn't get the building built and then put their company into liquidation and take the profits and disappear into the night. It was a little bit more creative than that. So just to backtrack a little bit, about two weeks ago I flew to Melbourne to do a podcast with Jimmy Starbuck from Starbuck Excavations and Jimmy's got a podcast called Jimmy Talks Construction. So if you haven't been around the podcasting scene and seen Jimmy's podcast go and have a look because it's really, really, really good. I've
spent a lot of late nights up watching the his podcast on YouTube as anyone who is in construction will be into it. But Jimmy told me that years ago in Melbourne he did a job for a developer. He basically did the bulk excavation for an apartment building and actually I think it was a commercial building. Did a bulk excavation for a commercial building and when he finished the job, developers said to him, Mate, I can't pay you. Can't pay you
And you can take me to court, you can do all the nasty things, go and get a lawyer, do whatever you want, but if you do that, I'll just go broke. And then you will get cents on the dollar, basically. So Jim was like, what do I do? Like he's probably got a point. He wasn't owed that much money that it was justifiable that he would commence a court proceeding. And he was worried that if he did push that guy too far, that he just
He wouldn't get paid. He'd be the one who would pay all the money to wind up that developer's company. And he would basically get cents on the dollar, if anything at all. Now, the issue with this is builders use this excuse all the time. And I know this because I used to be a builder CA and I worked for builders that were in financial distress. So when they couldn't pay their bills, they would do deals.
Michelle Cirson (02:20.12)
Do a deal to de deed your way out of debt. And we talk about the deed of release all the time, but doing deeds where you'll settle for a big discount, I think there's a way that subcontractors get caught up in the drama of it and the threat of the builder and lose sight of the big picture. So I wanted to talk about it today because recently we had a builder do this where they called all the subcontractors in and said, Look, you guys can push us.
You can do all take all the legal action you like, but you won't get paid, you'll get cents on the dollar and we'll just go broke, or you could effectively take half of what we owe you, do a deal with us and walk away. So those types of deals are being done in the industry every single day, and it happens on a big level, like what Jim was talking about with this commercial building where he did the guy built and Jim showed me a photo of this building, by the way.
The developer ended up getting his entire commercial building built without paying any of the trades. And Jim did say to me that everybody waited until the end of the job and they all did end up getting paid. But what I found really remarkable about that story is that none of the subcontractors were talking to each other. And if they were talking to each other, it was because they'd already done the work and they were all getting the same story. And then so, and I'm not picking on Jim here because he was probably one of the first people on site.
He was already elbows deep in in this commitment. He'd already decided not to escalate the accounts receivable process. He decided not to go to court, decided not to use a lawyer to try and enforce that debt. And what inevitably happens is the first subcontractor will agree, and there's, you know, there's 50 more subcontractors that need to get through that job before the, you know, the stair nosings are put on and the tactiles are done and the builder the certifier comes and signs off on the building.
So what inspires 50 subcontractors to believe a human being that they can't pay, but they will get paid at the end of the project if they just don't take legal action in the meantime. And I think what happens is the subcontractors first of all believe the threat and don't look at the big picture. So what is this, the way these buildings are built, once you get far enough into the structure, there's an asset there, there's a saleable asset.
Michelle Cirson (04:43.424)
And so there is this period of dependency where the developer probably would have paid the early trades and he would have had an asset that the bank would finance. So if so I gather he owned the land. He was building on the land. Perhaps the met the land was mortgaged to the hilt. But regardless, he's gone ahead and dug a basement for a commercial building to get Jim to finish.
off his portion of scope and then all the preceding trades came through. So he's convinced a lot of people and not just subcontractors too. I gather he's convinced the concrete supplier, you know, sub maybe the lift subcontractor, the lift supplier, so on and so forth. So you can see how once the early subcontractors don't do anything about it or raise any flares, they get into this period, the the principal gets into a period where perhaps they're able to get finance because they've
Gotten so far deep in the job that the financier will take over. And I've actually acted for banks in the past where the mortgagee has taken possession of the land and finished the project because the bank will get more for the project if the project is finished and able to be sold. So I'm not saying what Jim has told me wasn't true. I absolutely believe it was true. He showed me the photo of the building and he said to me, Well, what else was I going to do? I've never seen anybody get.
cents on the dollar. I've never seen it. And I agree with him. I've spoken to insolvency lawyers who have practiced for more than twenty-five years who have looked me in the eye and said, Michelle, I've never seen anyone get cents on the dollar. So I do believe that the system in terms of the insolvency regime isn't ideal. It's I would go so far as to it's never been effective really. Perhaps it's effective for another stakeholder in that scenario, but it's not effective for the creditors.
So Jim had a good point. And look, from a commercial perspective, he got paid. He got paid a year and a half later. So he financed that principal's job by doing all of that work up front and not having any security over that guy. And then effectively that that principal got an interest-free loan from the subcontractors for a year and a half while his building was built. It beggars belief that anyone would have the audacity to do that. I'm probably a Lillywhite naive.
Michelle Cirson (07:05.686)
little pedal thinking that but I just can't imagine waking up one day thinking I reckon I've I reckon I can convince 50 50 subcontractors and 25 suppliers to build my building for free and I'll just pay them at the end. So that takes some serious ovaries and it was successful. Now Jim said to me, well what would have been my alternative? How come I always only get cents on the dollar with this regime?
If if one of my clients goes broke, why do I just always have to wait in line to see if I can get cents on the dollar? It doesn't protect me. And my answer to him was that's because you're waiting for the safety net of the system to catch you. And you can't trust the system. The system is developed by governments who have agendas about pushing money through the economy and assets so that people can do trade and commerce.
And the small business is collateral damage almost always in that instance because small businesses pop up every day of the week. There is a massive portion of the trading, financial trading sector that is built on subcontracting small businesses, and subcontractors are incredibly resilient. So if you think of the difference between a subcontractor and a developer per se, the developer might
make money on a job and then go and invest in a tech startup or they might go and start a resort property on the Hamilton Island or something like that. But subcontractors are intrinsically they identify as a tools of the trade type worker. And it's very difficult to separate yourself from that. So those of you who are listening to this who have subcontracting businesses will know that if you ever had were told you could never be on the tools again.
What would you do? It would be devastating. It's tied to your identity that you are a tradesperson. And a lot of those in the construction industry come to the trade sector because they are out there doing something they love with their hands, or they're building things that give them deep satisfaction, or perhaps they worked in their parents' contracting business and they learnt that trade from their parents. And so
Michelle Cirson (09:25.954)
To walk away from your identity like that is very rare. So what we find happens is that many subcontractors, if they are affected by losing money sent to the dollar, will throw money of their own into their business to keep trading because they don't know what else to do. And if there is no money left and they have to go completely bank personally bankrupt and their business goes broke, then they will go and work for somebody on the tools because they don't know what else to do.
So that is one element of the reason that the insolvency regime, from a small business perspective, treats the smallest people at the bottom of the chain as collateral damage. And then when you move up the ladder to build to the builders, circling back to the builders deeding their way out of debt. If you are a builder and your building company goes broke, you can start a new building company. There are ways to do that.
And we see a lot of these building companies structured so that the father and son, I don't want to get stereotypical about this, but we need to be realistic. There's not very many female building companies out there, and the ones that I know, they're not going to go broke. So the father and son's structure will be such that maybe the father was the nominee for the builder's license or was the face or the director of the building company, and you'll see them take a big step back in the business.
And just be an operations manager or an ad a board advisor or something like that. And so you'll see the changes on ASIC where they're removed as a director. So on paper, dad's nowhere now, and the son is now running the building company. And sometimes we see those setups in a way where if they're going to sacrifice a company, it's not very often that you would put your son in the driver's seat right before you kill the building company. So
I mean, perhaps that's the case, and there could be other backup plans, but if I'm a builder and I'm about to put my company into liquidation, such that I'm going to my subcontractors in bulk and saying, do a deal with me, I'm going to go broke if you don't. If you have a look at the bigger picture and the way they've structured their setup, would they really sacrifice their son in the mix of that so that their son who is actually more likely to be of a
Michelle Cirson (11:49.013)
Age where they need to be making money in the business, like they might be midway through their career. Would you put your son in the firing line if you were a dad that was of retirement age? Wouldn't it be smarter to just sacrifice your business while you're the director and then let your son have his own entity? So those are the considerations that I look at when we have a builder who says, Hey, I can't afford to pay you. If you push me too hard, I will go broke. And that's because
From a best alternative to a negotiated agreement perspective, that decision tree from the builder's camp just doesn't stack up. So you might be wondering, well, what do I do when this happens? Well, you need to have an accounts receivable escalation procedure. You need to actually have a procedure that aligns with the security of payment laws so that you can escalate your position as a creditor of this builder as quickly as possible.
so that you're the first in line for them to do a deal with. And if they're coming to you for a deal and they're also asking all the other subcontractors to do a deal as well, you don't have to do a deal with them. They're clearly got to deed their way out of 80% of the other subcontractors' debts as well. So from the 80 20 perspective, that's not a bad strategy. Like if you're a builder and you're thinking, how can I make money to pay my bills? Well what if I just didn't pay them but I just did deals not to? And, you know.
Threaten them that I might go broke if that doesn't happen. Now I preface this podcast with sometimes builders will go broke if you don't do a deal with them. But all the ones that I worked for and did deals with subcontractors with still have trading companies. So they didn't go broke. And one of the subcontractors who recently got called into a meeting like this had positioned himself to be in the best possible position. He was able to
give a payment withholding request to the developer in that circumstance. And so when that deal was put on the table, he could sit back and go, No, I don't want to do a deal with you. It's not going to feel right for me if you're still out there trading when I'm not being paid and I've done a 50% discount deal with you so that you can trade on.
Michelle Cirson (14:09.056)
It's not always fifty percent. Sometimes builders will say to you, Hey, did you realise the cost of chasing me for this will cost you more than the amount that you're owed? And we had other subcontractors negotiating with that same builder who were in those situations where they were like, Look, the cost of even dealing with this problem is gonna outweigh the amount that I'm owed. And so rather than everybody in the industry getting the spooks, pulling all their gear off site and bolting, what actually happened in that situation was
The vast majority of the subcontractors did the deal. There can be implications for you doing deals with builders about debts. So you need to think very carefully if you've got a trade credit insurance policy that might cover that debt. Particularly if your trade credit insurance policy covers retentions, or if you have what's called a notifiable event in your trade credit insurance policy wording.
A builder asking you to alter trading credit terms will be a notifiable event that you need to notify your insurer of. So even if you do do a deal with these builders who are saying, Hey, I can't afford to pay everyone, if you don't do a deal with me, I'll just go broke. You do the deal thinking, hey, I'm gonna sign my life away on half of this debt or three-quarters of this debt or even all of this debt as long as I get my retention released.
And the builder goes broke anyway, you need to be able to go back to your trade credit insurer and get the benefit of that policy. Now, why would you even do a deal if you had a trade credit insurance policy? That's a really good question. If you have a trade credit insurance policy and you have escalated your accounts receivable escalation procedure exactly in accordance with the way that your trade credit insurance policy requires you to notify them and the steps and measures that you're supposed to be taking.
You should be getting 90% of that debt from your trade credit insurer as a insurance payout, but you would need to escalate it in real time and you would need to keep them informed if you're even having discussions with the builder about doing a deal. So always, always, always, if you are going to have a conversation with your builder about being paid less and you have a trade credit insurance policy, so important that you run it by your insurer.
Michelle Cirson (16:28.532)
And if you're not sure how to do that and you want some assistance, that's the type of thing that our Subvies Toolbox members are gaming the system on all the time because they have these accounts receivable escalation procedures that support those next steps, and then they're able to come to us in our QA session two days a week to be able to say, Hey, I've got this issue, whether anonymously or if they want to name the builder, and we can help them do due diligence on that builder.
To see precisely what's going on on ASIC, whether they're being sued, and you know, whether they've been involved in any big adjudications recently and those types of measures, so we can get a full picture of how this builder is behaving and then help them make a good decision about how to whether to do a deal. Now, I want to just close out the podcast by explaining what I mean about deeding your way out of debt. Because when you do a deal with somebody, usually there's a document that
That effectively sets out what the agreement is. And in most builders' contracts, that's our deed of release. So if you did a deal with a builder and you were effectively giving the builder a big discount on what they owe you, you would almost always need to do a deed. And the deed is the document that effectively means the builder owes you less. Now, if you're going to be signing something like that, you really want to be released from any obligations to do anything from that builder moving forward.
Because if the builder can't pay you in money, they need to be able to pay you in some other kind of value. And releasing you from liability is valuable. It's valuable, very valuable. You may also, in the past, we've had developers who have given us an indemnity for preference payments where the builder has gone broke and the developer has wanted to pay through the building company to the subcontractor a settlement sum.
And then the subcontractor is to work for the principal moving forward. We have had the principal give an indemnity that if a liquidator ever comes back and says that the money that the builder paid the subcontractor was a preference payment, that the the developer will pay that subcontractor back. So sometimes you're not just doing a deal with one party. The developers in these situations where builders may be very close to going broke and everybody's well aware of it.
Michelle Cirson (18:50.434)
The developers will usually come and start talking to you. So that's another indication about whether or not your build is bluffing. If you've got a developer who's coming to you saying, hey, I've got a half-finished building, I need you to continue on, I want to do a deal with you. And your builder is saying that they're probably going to go broke. A lot of times you can get more reliable information out of the developer or at least see how the developer has triaged the situation and take notice of whether or not they're worried.
Those factors could be impacted by how far finished the building is. So if you've got a building that is completely finished, the developer's maybe not going to care if the builder goes broke if they're happy enough with the building, because they might have a big fat retention bank guarantee that they can go and rectify defects with. So it's an interesting scenario. I think if you think put yourself in a company, the the owner of a company's shoes, and for a second, let's pretend we're not in construction and say I'm a
Tire mogul. Say I've got a company that does tires for vehicles and I'm going to go broke and I can't pay my suppliers. If I'm in that situation and I'm doing a deal to deed my way out of debt, what is the point of doing that if I'm definitely going broke? They most of the time will not come to you and say, Hey, I'm gonna go broke. Most of the builders that I've witnessed.
Actually, appoint a liquidator in the last 10 years, have very quietly just appointed a liquidator without telling anyone because what they want to do is they want to keep everyone as positive as possible, including their staff, so that there's not a mass exodus, to get the most value of the work that they possibly can on site before anyone works out what's happening. And then they also want to position themselves so that.
Nobody is coming after them. So they're they're basically racing against the clock, going, I know I'm gonna run out of money in March. If I can get this building to practical completion, I can get that retention bank guarantee back. That will effectively fix my net position this much. I might be able to pay myself back some money that the company owes me in that circumstance. So there are a lot of factors in the decision tree of a company that's seriously considering putting itself down or building a building company that wants to go into liquidation.
Michelle Cirson (21:12.376)
There are lot of factors that play into that. And in my experience, my personal opinion is they don't run out and tell the world that they're going to go broke if they're really going to go broke. And any of them that do do that just speed up the process, which is short-sighted for them because they might be having some low-hanging fruit on the horizon that they might be able to bring in some cash just before they close the doors. So hopefully that imparts a little bit of insight when you have builders who are doing this where
They're threatening to go broke, but you also have this situation on a micro level when it comes to back charges. One of the things that I see commonly happen is where back charges aren't dealt with as they come along in the project, and we just let them sit there on the payment schedule until the end of the job with our head in the sand. What inevitably happens is the value of those back charges snowballs, and then the builder's CA starts banking on that money being theirs because you haven't cracked.
Whoops, yet you haven't actually escalated your accounts receivable escalation procedure, and they are thinking that you're fine with it. So having those systems in place so that you can escalate when you need to, properly understanding if you've got trade credit insurance precisely what you need to do when, and then being able to take a big step back rather than panicking when a builder comes to you and says, Hey, I can't pay you, and if you push the envelope, I'll just go broke, panicking and doing nothing.
Or panicking and signing your life away. Those are the two things that I don't recommend you do. What you should always be doing as a systematic approach is your accounts receivable escalation procedure, properly understanding how you become a secured creditor in that process. And then at any given time, if a builder goes broke or if a builder threatens to go broke, you can hand on heart say, I did everything I possibly could. I wasn't just relying on the insolvency regime as a safety net to save me when I fall.
or prevent me from getting this money. So I hope that was helpful and like I said it was a great conversation with Jimmy Starbuck about this topic and many other topics. So if you haven't checked out his podcast, go and have a look.
