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Construction companies warned to be careful who they contract with

8 June 2016

As bankruptcies of contractors in the construction industry rise at a rate of five liquidations a month, contractors and sub-contractors are warned that payments can be clawed back from them if their contracting counter-party winds up in liquidation.

In addition, upfront payments to a contractor before the commencement of a project may be viewed by a liquidator as a payments made when the employer was in fact insolvent ( de facto insolvent), which would allow the liquidator to unwind that upfront payment.

Taryn van Deventer is a senior associate at MDA, a specialist commercial advisory practice in the construction environment. She says, ”This situation is not uncommon and extends to work completed, invoiced and paid at a time when the debtor is insolvent on account of liabilities exceeding assets after making the payment.”

“The bottom line is that you need to be very careful with whom you choose to contract. Ensure that the business or individual is financially stable enough to fund the project, or has backing from a financial institution.”.

Section 29 of the Insolvency Act deals with situations when payments are made prior to insolvency. Section 30 allows liquidators to reverse the transaction via the courts. “So, it is a reality that funds can be demanded from you by a liquidator where your contracting counterparty winds up in liquidation after having made payment,” she says.

A video of Taryn Van Deventer discussing this topic is available here.

For further information, please contact Despina Harito, Turquoise PR & Marketing Communications on despina@turquoisepr.co.za or 011 452 1840 / 084 453 1755.