Hundreds of Porter Davis customers risked losing their deposits and the collapsed homebuilder is being investigated to determine whether it traded while insolvent, liquidators have revealed.
About 500 people attended a webinar with appointed liquidators Grant Thornton’s Said Jahani, Matt Byrnes and Cameron Crichton earlier this week to hear they could lose their deposits if work on their projects had not begun.
Porter Davis had about 470 employees and was forecasting revenue of $555 million for the 2023 financial year prior to its collapse last week.
During the webinar Said Jahani confirmed that insolvent trading was “an area of investigation”.
“Directors of companies can be held personally liable for incurring debts that remain unpaid, if the company was insolvent when they incurred those debts, and they should have known, or did know, that the company was insolvent,” Jahani said.
More than 1700 home builds have been abandoned across Victoria (1500) and Queensland (200), but the liquidators have confirmed they are in talks with builders who could scoop up the unfinished work.
“Making the decision to restructure or liquidate is an important moment of truth,” according to Salvest managing director Anthony Ferraro.
He says it will determine the future of the business, and the fortunes of all those tied to it.
But experts in the insolvency field say there are ways you can cushion the blow when a builder goes belly up.
More builder insolvencies on horizon
ASIC data shows 1236 construction companies have collapsed since July 2022, and there are no signs that this pace is slowing down. CreditorWatch data supports this with 125 construction firms declared insolvent, almost double the next industry segment, food and hospitality.
More failures are expected in construction, which is reeling from the boom-bust Covid years and ongoing supply chain disruptions.
Voluntary administration happens after the directors form the view their company has the potential to become insolvent. They then appoint an insolvency practitioner to take over the running of the business.
Trading while insolvent exposes directors to a criminal conviction and any risk of this is the usual prompt to call in the administrators.
Risk management aside, administration gives the directors an opportunity to press pause and work out the best plan of action for the company. Whereas liquidation, which may be the outcome of administration, involves selling the assets and winding up the business.
The decision is made by the administrator, after reviewing the builder’s financial records, assets and liabilities.
Jason Ireland, partner with restructuring and turnaround experts McGrathNicol Restructuring, recommends being properly prepared before pursuing the options in a time of turmoil.
“Insolvency is usually rare in most people’s career. Management teams can therefore think the worst and sometimes panic when a company is facing insolvency,” Ireland says.
“Sites might get damaged; I’ve seen all sorts. People come and collect equipment that’s not even theirs from a site because they think they will lose money.
“Without a planned administration, basic elements such as having security on site and securing assets doesn’t happen.”
Once the hygiene factors are out of the way, during an administration’s formative stages, what’s key is to understand the business’s liquidity. This is the stage at which an administrator will identify the company’s valuable parts, the parts that need to be reshaped and the parts that need surgery.
The Clough case
Sal Algeri is Deloitte’s national turnaround and restructuring lead and one of former building company Clough’s administrators. He was part of the team that negotiated Clough’s sale to its partner in the construction of the Snowy 2.0 hydro project, Italian builder Webuild.
“On Clough, we had a couple of weeks before we were appointed to understand the business and work through a plan with management and directors. We typically welcome the thoughts of management and the directors to help shape the game plan,” Algeri says.
In a restructuring, the administrator develops a rehabilitation plan to help the builder get back on its feet and become financially sustainable. If liquidation is the only option, the administrator must maximise the return to creditors, usually by selling the assets or the company. The administrator must present creditors with the company’s options so they can vote on them and decide the way forward.
The creditors can agree to receive a proportion of their debt to extinguish or delay the company’s responsibility to pay it. The decision comes down to allowing the company, or part of it, to continue trading – with or without the existing board or management – or sell the company and/or its assets.
A key decision is whether to sell the company’s shares or assets. When the company is sold, as opposed to just selling its assets, there’s no requirement to transfer assets out of thecompany to another owner.
“The new owner simply owns the shares, which was the case with Clough and Webuild. It meant the employment, construction and EPC contracts didn’t have to be novated or assigned to a new entity,” Algeri says.
“This saves a lot of time and money, particularly when you’re talking about thousands of employees, big contracts and subcontractor agreements. So for ease of transaction, it’s more efficient to do a share sale versus an asset sale.”
The Urban Developer understands Grant Thornton is due to confirm if a buyer has been found for completion of current projects later this week.
Article source: Queensland Property Investor