From a construction group with 250 staff to six companies in liquidation: how can small contractors avoid a chain of unpaid debts?
A New Zealand construction group that once employed around 250 people and operated across residential, commercial, education, retirement village and infrastructure projects has now left six related companies in liquidation.
A New Zealand construction group that once employed around 250 people and operated across residential, commercial, education, retirement village and infrastructure projects has now left six related companies in liquidation.
The latest liquidation reports show that six companies associated with NZ Build Group collectively owe Inland Revenue (IRD) more than NZ$1,450,000, with preliminary debts to unsecured creditors of around NZ$1,660,000. Five of the six companies have declared no assets, and extensive related-party and intercompany transactions within the group are also under investigation.
The fall from a construction group employing hundreds to the collective liquidation of related companies is another reminder to the industry that size, projects and reputation do not guarantee an ability to pay. When an upstream business runs out of cash, small contractors who have already funded wages and materials are often the first to feel the impact.
Construction downturn makes internal financial support unsustainable
On 2 July this year, the High Court at Auckland ordered six related companies into liquidation on the application of the Commissioner of Inland Revenue. They included CSL Limited, CSL Management, Platform People and three companies formerly named NZ Build Group Management, NZ Build Fund Management and NZ Build Projects Regional.
Stephen White and Janet Sprosen of Teneo Financial Advisory New Zealand were appointed joint liquidators. The reports identify Clinton Webber as the companies’ ultimate controller.
The liquidators consider the significant decline in New Zealand construction activity to be the main reason for the companies’ insolvency. As projects and revenue fell, cash flow became insufficient to cover operating costs and tax.
Some of the companies had previously relied on funding from other related businesses within the group. As the financial position of the wider group deteriorated, this internal support could not continue, and liquidity problems ultimately became an inability to pay debts.
NZ Build Group’s original operating company entered receivership on 1 July. The receivers subsequently sold its assets, staff, existing contracts and intellectual property to NZ Build Group Holdings, owned by Canadian investor David Poirier.
Meanwhile, IRD had applied to liquidate the original company as early as 5 June, with the court ultimately making the order on 7 August.
The operating business sold to and taken over by the new company must therefore be distinguished from the old company and the six related entities dealing with historical debts. A business sale may preserve some jobs and contracts, but the old company’s debts do not automatically disappear.
NZ$1,450,000 in tax owed, with five companies declaring no assets
Based on the available information, IRD is the largest preferential creditor by amount owed. The six companies collectively owe more than NZ$1,450,000 in tax, including around NZ$1,010,000 owed by the company formerly named NZ Build Group Management.
Preliminary debts to unsecured creditors total around NZ$1,660,000, with creditors also including ACC, finance providers and trade suppliers. However, the liquidators still have insufficient information to establish the full number of creditors and total debts, or to determine what distributions creditors may ultimately receive.
The asset position may be even more concerning for creditors. Five of the six companies have declared no assets.
CSL Limited has no tangible assets, but its books record a debit balance of NZ$55,342 in a shareholder current account. CSL Management is the only company to have declared a registered asset: a marina berth in Bayswater, Auckland. The value of the relevant asset and the shareholder current account remain under review.
Finance providers or suppliers also have registered security interests against some of the companies. Once assets are realised, creditors with valid security generally rank ahead for repayment, while ordinary unsecured suppliers may be further down the queue.
Extensive intercompany transactions under investigation
The liquidators said there had been “extensive” related-party and intercompany transactions within the group, which are now being investigated.
Large construction groups often use separate companies to manage labour, projects, financing and assets. Loans, payments of expenses on another company’s behalf and transfers of funds between companies are not unusual, and related-party transactions do not in themselves indicate a problem.
However, when several companies become unable to pay their debts at the same time, liquidators must establish how funds moved, which amounts should be repaid and whether any assets can be recovered for creditors. No investigation findings have yet been released, and there is no evidence establishing unlawful or improper conduct by those involved. However, with five companies declaring no assets, the ability to recover money from shareholder current accounts, debts owed by related companies or other transactions will directly affect the final losses borne by ordinary creditors.
Why can even large companies suddenly be unable to pay?
Turnover, accounting profit and cash flow are different things.
A construction company may have completed work and issued invoices, but it still needs to fund wages, materials, equipment, insurance, subcontractor costs and tax before payment for the work arrives.
When the market is active, advance payments and progress payments from new projects may temporarily conceal cash flow problems. Once projects are delayed, payments slow or margins narrow, the existing funding cycle may break down.
A head contractor that has not been paid by the client may delay paying subcontractors. Small contractors, however, have already incurred wage and material costs and must also cover GST, PAYE, vehicles and insurance.
An overdue invoice worth tens of thousands of New Zealand dollars may be a short-term accounting issue for a large group, but for a small contractor it could jeopardise the following week’s wages or even bring down the entire company.
Which warning signs should small contractors watch for?
A single late payment by a business partner does not necessarily signal a financial crisis. But when several unusual developments occur together, contractors can no longer rely on the assumption that a large company will not run into trouble.
For example, a company that previously paid on time may begin delaying payments repeatedly, frequently cite the client’s failure to pay as a reason to postpone settlement, or ask contractors to add workers, buy materials or start the next stage while payments for the previous stage remain outstanding.
Confusion over the contracting entity is another warning sign. A project may use the same group brand while contracts, purchase orders, invoices and payments come from different related companies. If the business runs into trouble, small contractors may only then discover that the company legally responsible for payment has almost no assets.
Other warning signs include frequent changes of project managers or finance staff, reluctance to confirm variations in writing, account reconciliations left unresolved for long periods, and a finance department that suddenly becomes difficult to contact.
How can contractors avoid being caught in a chain of unpaid debts?
Before signing, small contractors should confirm the paying company’s full registered name, NZBN and identity as a contracting party, rather than relying solely on the group brand. If the contract, purchase orders and payments come from different companies, they should ask for a written explanation of the relationships between the parties.
Where possible, payments should be staged according to progress, with a cap on the amount outstanding. If payment for the previous stage has not arrived, contractors should not keep committing more labour and materials without safeguards.
Quotes, variations, timesheets, purchase records, site photographs, acceptance documents, emails and text messages should all be retained. A verbal promise to pay “when the next progress payment comes in” is no substitute for formal written confirmation.
Small contractors should also avoid excessive reliance on a single client. If one unpaid debt is enough to leave a company unable to pay wages, its risk is already too concentrated.
If payment delays persist, contractors should issue a formal demand for payment early and seek advice from an accountant, lawyer or industry professional. Whether to suspend work depends on the contract and the particular circumstances, but before continuing, contractors should at least understand how much additional risk they are taking on.
For a small contractor, promptly stopping an unpaid balance from growing may mean losing a project. Continuing to fund a project whose ability to pay is in doubt could mean losing the entire company.
The liquidations associated with NZ Build Group are continuing, and the final debts, recoverable assets and intercompany transactions have yet to be fully established. But the case already demonstrates that a large business’s size is no guarantee of creditworthiness. During a construction downturn, small contractors need to look beyond workmanship and cost control to understand the contracting entity, payment cycles, client concentration and the maximum unpaid balance they can afford to carry.
When an upstream business starts delaying payments, should small contractors keep working and wait to be paid, or cut their losses promptly?