Construction and early-stage firms primed for further insolvencies

Oksana Patron

5 May 2023

The construction firms and early-stage businesses are the most likely to see further insolvencies due to their often “fraudulent and inflexible structure”, according to HLB Mann Judd Sydney restructuring and risk advisory partner, Todd Gammel.

The property and construction sector in this inflationary environment will continue to see collapses unless the parties involved come to commercial and financial agreements and take advice around their options from restructuring experts.

“Historical fixed price contracts [across the construction/property sector] are continuing to cause headaches but fortunately there is increasing willingness to explore options on how to complete projects without formal insolvency processes if they can be avoided,” Gammel said.

“Things are starting to fall over. The stereotypical problem is real estate development where a builder has a loan and churns through money, but is only 70 to 75 per cent through the build. The cost of labour and materials have increased increasing the costs, developers can then lose confidence and one or all of the parties take advice around their respective positions and options from restructuring experts, lawyers and the like.”

Another market segment that was likely to see a growing number of collapses was, he believed, early-stage businesses which enjoyed their popularity among investors during the COVID pandemic when interest rates were zero.

However, in the current market environment, investors have become more reluctant to invest in this pocket of the market due to its “uncertainty of material investment return”.

Head of Consulting at US-based Rehmann, Chip Hoebeke, said that the main difference between now and the previous crisis, the Global Financial Crisis (GFC), was that it was an issue of liquidity while the current situation resembles a more traditional recession.

“In 2007/08, we had the tech company layoffs, real estate pressures, banking receiverships, and we’re starting to follow a very similar pattern now, both in the US and Australia.

“All of those fingerprints have re-emerged. The government is trying to fend it off through inflation but there’s conjecture as to whether that’s the right way. We’ve been in catch up mode and rate rises are biting hard,” he said.

Hoebeke is currently in Australia raising awareness of the Cayman Islands Restructuring Officer regime under which a debtor will be allowed to seek  the appointment of a restructuring officer who would supervise a company’s restructuring process, including in any formal court proceedings.

He said while the legislation is yet to be tested, the likelihood of forthcoming insolvencies could see it utilised by Asia Pacific investors, funds and creditors.

“It will prove to be an extraordinarily useful tool to help creditors recover money in times of trouble. In utilising this legislation, an Australian creditor, for example, has a say in how the process will happen and the potential means of extracting money.

“In times of global uncertainty, when investment structures are under pressure, the new regime is a way to manage the process efficiently and fairly without damaging the underlying assets,” he added.