major NZ construction company voluntary administration, and subcontractors

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kingdragonfly

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#247954 4-Mar-2019 19:58

Arrow International is/was a major NZ construction company, specialising in commercial construction & project management.

I know almost nothing about commercial construction, but it seems the subcontractors get a raw deal when a construction company goes into liquidation.

https://www.stuff.co.nz/business/111003862/arrows-administrators-get-court-order-stopping-smith-removing-crane

Arrow's administrators get court order stopping removal of construction crane

Arrow International's voluntary administrators have obtained a High Court injunction ordering Smith Crane & Construction to leave one of its cranes on the site of an 18-level $28 million apartment development in Auckland.

"It looks like you can get a court injunction to get free cranes in New Zealand," business owner Tim Smith said.

Before the injunction he had been asked by the BDO voluntary administrators Andrew Bethell and Colin Gower to leave the crane in place at the Airedale St site, and he was prepared to do so for a week if they accepted the hire charges, Smith said.

"They refused to accept the charges and instead obtained a court injunction preventing us removing the crane."
...
He said he wanted a deal that included all the subcontractors to prevent cherry picking when it came to payments.
...
Other subcontractors have also complained anonymously about losing access to their tools and supplies, but many removed their belongings when rumours began to swirl late last week.

tdgeek

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#2190948 4-Mar-2019 20:11

Yes, its a shocker. Wages, IRD, secured creditors all come first. When this happens, why has it happened? Did it all come as a shock to the board, the CEO, the finance dept? When you conduct trading when either of these know its dicey, that's a problem. Its of no help to the contractors and stubbies, if the Chairman or board or CEO or finance debt were at fault. They still lose. Incarceration is an option, and it has happened, but that doesnt pay bills for your business or your employees. The liability of those in control needs to be wider. Im not suggesting that applies here. It needs to override Trusts

Goosey

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#2190975 4-Mar-2019 21:12

You should check out the hourly rate that BDO will be charging... its probally more than the value of the crane !

solutionz

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#2190980 4-Mar-2019 21:16

Yep I can understand administrators not wanting creditors to try start repo'ing materials etc but it's crazy how they are able to lockup tradies tools of trade in these cases; potentially causing a domino effect of liquidations as not only have tradies not been paid, they can take on other work...

By that logic an ambulance that happened to be on site when the pin was pulled could get tied up in the liquidation...

Aredwood

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#2190981 4-Mar-2019 21:19

There was a very recent judgement. Where the former directors of Mainzeal were ordered to pay $36 Million. For continuing to trade Mainzeal instead of liquidating it.

And yes, I think that the above judgment is stink. But it usually comes down to who either has the biggest budget for legal fees. Or who has the best connections.

The problem will be due to that court case between the car rental company and the finance company. (will find the article later) Where if you are in possession for something long enough, you effectively own it. Even if you were actually renting it.

So it means that subcontractors are effectively forced to list all their tools on the PPSR, same with hire companies and their equipment. Just so they can get it back in this situation.

Batman

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#2190983 4-Mar-2019 21:23

it's funny how there is a building boom and builders go bankrupt. mismanagement much? or corruption?

Fred99

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#2191020 4-Mar-2019 22:42

According to this article, Smiths Crane lost 1.4 million on Mainzeal.

I presume that the reason for the court order isn't because of any argument over who owes the crane, but that the cost to erect and dismantle would be substantial, that added cost would reduce the dividend paid to other creditors from sale of the project. Then you get beancounters and lawyers, a crane hire company that's been bitten hard before...

As for the Mainzeal directors. I believe that they've got directors liability insurance that covers 20 of the $36 million fine, but the way it divvies up, Shipley won't have to pay a cent.

Fred99

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#2191022 4-Mar-2019 22:53

Batman:

it's funny how there is a building boom and builders go bankrupt. mismanagement much? or corruption?

Mainzeal - corruption IMO.

A director of Mainzeal Property and Construction was in the process of buying a Waiheke Island Vineyard to develop a hotel for Chinese Communist Party officials before the company went bust.

...

The reference to the Waiheke winery related to Mr [Richard] Yan’s project to acquire vineyard interests on Waiheke Island so that it could be developed as a hotel for Chinese Communist Party officials, with cash used from Mainzeal’s accounts to assist the purchase," Justice Francis Cooke's judgment says.

So, an ex NZ PM is on the board, she'd previously been on the board of the Chinese Communist Party owned China Construction Bank, more recently on the board of the NZ division of that bank. One may think that to gain such a position, one may need expertise in both construction and finance/banking. But nah... She resigned that directorship today.

Probably best ask WTF an ex NZ PM is doing effectively reporting to the CCP (as shareholder of the CCB). She's been doing it for about a decade - nobody cares.

Arrow - wait and see. Probably they overcommitted / grew too fast and hit a cashflow wall.

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Ruphus

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#2191031 5-Mar-2019 00:27

I was speaking with a friend in the weekend who owns his own, quite large construction company. He was saying that his "commercial contracts team" saw this coming about 6 months ago. The red flags back then were that subcontractors couldn't get insurance when working on Arrow Construction jobs/sites.

Handle9

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#2191035 5-Mar-2019 06:59

The commercial construction industry is incredibly challenging. Most main contractors are running on extremely thin margins and it really doesn't take much for a contract to go pear shaped. The structure of most contracts is disproportionate to the margins that are made. Unlimited liabilities, consequential losses, large bonds and single figure margins don't work. While we are in a boom the margins of most contracts haven't gone up and labour and product costs have. It'd not a nice recipe.

It's pretty normal in most economies globally for building booms to result in failures. Cash runs out on a large contract very fast as payment claims fall due for subs effectively the month before the main contractor gets paid. In New Zealand "pay when paid" contracts are

illegal (subs claims are meant to be paid regardless of whether the main contractor has been paid) but in reality they happen. Also 5% of the project cost is held as a retention until practical completion with another 5% at the completion of the defects liability period so managing cash is a huge issue.

I've spent much of my career in the industry and it's changed a lot. The allocation of risk has become disproportionate to the margins and "design and build" contracts where the design is novated to the contractor have become normal. This article sums it up pretty well.

https://thespinoff.co.nz/business/01-08-2018/how-is-a-major-contractor-going-bust-in-the-middle-of-nzs-building-boom/

tdgeek

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#2191037 5-Mar-2019 07:17

Handle9:

The commercial construction industry is incredibly challenging. Most main contractors are running on extremely thin margins and it really doesn't take much for a contract to go pear shaped. The structure of most contracts is disproportionate to the margins that are made. Unlimited liabilities, consequential losses, large bonds and single figure margins don't work. While we are in a boom the margins of most contracts haven't gone up and labour and product costs have. It'd not a nice recipe.

It's pretty normal in most economies globally for building booms to result in failures. Cash runs out on a large contract very fast as payment claims fall due for subs effectively the month before the main contractor gets paid. In New Zealand "pay when paid" contracts are

illegal (subs claims are meant to be paid regardless of whether the main contractor has been paid) but in reality they happen. Also 5% of the project cost is held as a retention until practical completion with another 5% at the completion of the defects liability period so managing cash is a huge issue.

I've spent much of my career in the industry and it's changed a lot. The allocation of risk has become disproportionate to the margins and "design and build" contracts where the design is novated to the contractor have become normal. This article sums it up pretty well.

https://thespinoff.co.nz/business/01-08-2018/how-is-a-major-contractor-going-bust-in-the-middle-of-nzs-building-boom/

Good article and post. The old saying in the Accountancy trade is cashflow is more important than profit. You can run a business with a negative profit, but not a negative cashflow. The tight margins and lag here seems to make some projects negative profit as well.

There was a residential builder franchise here in ChCh I think that went bust, maybe Stonewood? In the middle of the housing boom. I heard of another who is REALLY well known is in trouble

kingdragonfly

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#2191042 5-Mar-2019 07:41

Fred99: So, an ex NZ PM is on the board, she'd previously been on the board of the Chinese Communist Party owned China Construction Bank, more recently on the board of the NZ division of that bank. One may think that to gain such a position, one may need expertise in both construction and finance/banking. But nah... She resigned that directorship today.

Probably best ask WTF an ex NZ PM is doing effectively reporting to the CCP (as shareholder of the CCB). She's been doing it for about a decade - nobody cares.

Arrow - wait and see. Probably they overcommitted / grew too fast and hit a cashflow wall.

Don't forget we tax payers pay for her air travel

Travel spending from July 2011 to June 2014:
Dame Jenny Shipley and spouse Burton: $70,687

surfisup1000

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#2191052 5-Mar-2019 08:41

Handle9:

The commercial construction industry is incredibly challenging. Most main contractors are running on extremely thin margins and it really doesn't take much for a contract to go pear shaped. The structure of most contracts is disproportionate to the margins that are made. Unlimited liabilities, consequential losses, large bonds and single figure margins don't work. While we are in a boom the margins of most contracts haven't gone up and labour and product costs have. It'd not a nice recipe.

This might be typical of the construction industry in general. Be it in NZ, australia, US, UK etc...

I don't know how to fix it... making construction companies hold more cash might mean projects cannot be financed.