Like many people, the placement of Ebert Construction Ltd into receivership last week certainly caught our attention. You could almost hear the collective tightening of sphincters throughout the building fraternity.
The NZ Herald reported last Thursday that 95 staff face an uncertain future. That’s extremely sad and disruptive for the employees and their families but you’d probably bet on them finding gainful employment fairly quickly. What’s probably more concerning is the estimated $40 million of debts that Ebert reportedly carry on their books, a sum which will probably affect many family construction businesses spread around the country. That $40 million impact might be a lot harder to absorb.
It’s no secret Ebert’s demise had us worried. While we weren’t exposed to a loss from Ebert, we did go back and look at our ability to secure monies owed, and especially our equipment should it be caught on the site of a sudden receivership.
New Zealand thankfully has a pragmatic piece of legislation in place to help secure assets and debts. The Personal Property Securities Act allows parties to register a security interest with the New Zealand Companies Office (http://www.ppsr.govt.nz) but only if there is a valid security agreement between the debtor and the secured party.
Security interests can include:
- hire purchase agreements (for example, over a work vehicle or piece of equipment purchased on HP)
- long term leases (for example, a lease over an excavator for a lease period of 12 months or more).
- retention of title clause or so called “Romalpa” clauses (for example, when a manufacturer supplies goods to a customer and has a term in their invoice that they keep title to the goods until the invoice is paid)
- loans which have personal property as security (for example, a vehicle used as security for a loan).
The failure of a construction company impacts many people, but probably three important parties:
- The employees, who may have their own tools and equipment on site, and will probably be owed wages and holiday pay.
- The subcontractors, who also have their own gear on site, and will probably be owed for work to date, often on 7 – 30 day terms.
- The suppliers of materials and equipment to the company and the site.
According to the rumours, a receivership is seldom a harmonious affair. It’s painful and upsetting and often brutal. The pecking order is clearly defined: the IRD, employees and secured parties get first dibs at whatever is left. Unsecured parties seldom get a look in.
From a hire industry perspective, we’re a little lucky with the protection afforded to us under the PPSR. We don’t hire anything for longer than 12 months, so haven’t had to worry about securities over specific items. Like all suppliers we do have the ability to file a PPSR security over larger customers for unspecified amounts, until such time and payments are made.
But what happens if you are a contractor working on site for a large company and you want to secure your risk?
Firstly, you can file a PPSR against your customer for your work. The procedure is a bit clunky but the PPSR helpline team are awesome at guiding you through the process. It might get you further up the pecking order should the client go belly-up. It’s still best to ensure the client is always up to date with payments.
Secondly it’s worth while ensuring you have some form of security to affirm your ownership of any expensive equipment you own. Owing money on a large item actually has its benefits. It’s almost 100% certain that the bank or finance company will have placed a PPSR on the equipment, which means the receiver has to deal with the big ugly banking gorilla, rather than the under-resourced local contractor. Hiring something from a hire company is good, as you’ll pass on any hassle to your friendly local hire business and tell them to go sort it out.
Thirdly, and most importantly, we aren’t lawyers. Don’t take our word for it: got talk to the professionals.
In line of recent developments, and the predictions that other construction companies may follow, it’s worthwhile having a look at your exposure and assessing what your risks are. Now is the time to obtain some legal advice, update your terms and condition and take steps to mitigate any potential losses.