31 May 2017

Bankruptcy may not extinguish a QBCC claim


5 min

Where and when do the debts stop?

We’re administering a bankrupt estate that has exposed a significant and harsh anomaly. For those considering bankruptcy, the obvious question is "Where do the debts stop?".

This bankrupt could face considerable debts which, despite being a result of events prior to bankruptcy, may take up to six years after the event to crystallise and may result in the bankrupt being forced to file for bankruptcy again.

Bankruptcy’s whole purpose is to "draw a line in the sand" by giving debtors relief from their debts. Section 82 of the Bankruptcy Act 1966 broadly defines which debts can be extinguished, and specifically states:

"all debts and liabilities, present or future, certain or contingent, to which a bankrupt was subject at the date of the bankruptcy, or to which he or she may become subject before his or her discharge by reason of an obligation incurred before the date of the bankruptcy, are provable in his or her bankruptcy."

While the definition above appears to capture all debts incurred, or resulting from pre-bankruptcy events, there are a few exceptions, most notably:

  • Court imposed penalties or fines for offences against a law.

  • HECS / HELP debts.

  • Child support.

  • Unliquidated damages arising otherwise than due to contract, promise or breach of trust.

  • Debts incurred by means of fraud.

Obviously, any new debts incurred after the bankruptcy start date are not provable in the bankrupt estate and a bankrupt can be bankrupted again—even while still bankrupt—on these new debts. An example that validates this logic is where an order for costs is made by a court after the date of bankruptcy, but relating to court proceedings commenced before the bankruptcy, this debt is crystallised as at the date of the order, and therefore not provable in the existing bankruptcy. (See the High Court Decision of Foots v Southern Cross Mine Management Pty Ltd (2007) HCA 56.)

In this bankrupt estate, the bankrupt previously traded a building/construction business licensed with the Queensland Building and Construction Commission (QBCC). Anyone familiar with Queensland’s building and construction industry would be aware that:

  1. Property owners are afforded the following warranty periods for defects to building work:

  • Non-structural—six months from practical completion.

  • Structural—six years and three months from work completion.

  1. Residential building work valued over $3,300 requires Home Warranty Insurance with the builder/contractor paying the premiums and the property owner being the insured (i.e. the owner is the policy holder).

In the event of defective residential building/construction work, property owners can lodge a complaint with the QBCC to have any defective work repaired. The QBCC will then investigate and if it sees fit, will:

  1. Issue a ‘Direction to Rectify’ to the builder/contractor.

  1. If not rectified, make a claim under the Home Warranty Insurance scheme and arrange other builders/contractors to rectify the defects. The QBCC then pursues the original builder/contractor for the claim’s value.

In this bankrupt estate, the bankrupt completed approximately 25 houses in the two years prior to bankruptcy. Subsequently, several defect complaints have been lodged with the QBCC for work completed by the bankrupt.

The QBCC has since issued Directions to Rectify to the bankrupt with threats of fines if he didn't comply. Accordingly, we as bankruptcy trustees, made several submissions to the QBCC advising:

  • The bankrupt does not hold a contractor/nominee supervisor’s licence as a result of becoming bankrupt with such licence required to rectify the defects, and

  • The bankrupt does not have the funds—he's bankrupt! —to pay the fines and/or pay the cost of other builders/contractors to complete the rectification work.

Despite these submissions to the QBCC, they proceeded to pursue the bankrupt for claims under the Home Warranty Insurance scheme stating that any claims occurring after the commencement of the bankruptcy are new debts.

With respect to the QBCC's ability to seek payment from the bankrupt for claims under the Home Warranty Insurance scheme, it's noted that Section 71(1) of the QBCC Act provides:

If the commission makes any payment on a claim under the insurance scheme, the commission may recover the amount of the payment, as a debt, from the building contractor by whom the relevant residential construction work was, or was to be, carried out or any other person through whose fault the claim arose.

Based on our inquiries, it appears that Section 71(1) of the QBCC Act is triggered by the making of “any payment on a claim under the insurance scheme”, and therefore, up until the QBCC pays a claim under the insurance scheme, there is no “obligation incurred” or debt owing by a builder/contractor. As such, any claims arising after a bankruptcy’s commencement appear to be new debts, which seems concerning given that:

  • Defect claims may not arise for six years after a bankruptcy’s commencement.

  • If a defect claim arises in six years, a bankrupt may be forced to file for bankruptcy again, essentially making it nine years before they are relieved of those debts and are given a fresh start without the stigma of bankruptcy.

  • The QBCC Act provides that if a contractor is subject to two insolvency events then they potentially lose their QBCC building licence for life.

As can be seen by the above, sometimes it is not simply the case of ‘going bankrupt will stop the debts’. This is where receiving quality and experienced advice can make all the difference.

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