Proof of Debt After a Residential Builder Collapses: How Homeowners and Subbies Lodge a Claim

What it is

When a residential builder fails, the people owed money do not get paid by chasing invoices. They become creditors of an insolvency proceeding. To take any share of the assets that the liquidator, trustee or administrator collects, each creditor must formally prove the debt. The process is the proof of debt or claim. It is a regulated procedure with a form, a deadline and a ranking that determines who gets paid in what order.

This entry walks the proof of debt process for both insolvent companies (winding up under the Corporations Act 2001 (Cth)) and bankrupt individuals (bankruptcy under the Bankruptcy Act 1966 (Cth)). The mechanics differ slightly but the logic is the same.

When a proof of debt is needed

A creditor needs to lodge a proof of debt before the liquidator or trustee can pay any dividend. The liquidator or trustee usually calls for proofs by sending a notice to all known creditors, posting a notice on the ASIC published notices website for companies, or the AFSA Insolvency Notices website for bankruptcies, and setting a date by which proofs must be lodged.

If a creditor does not prove by the call date they may be excluded from that distribution. Most liquidators will accept late proofs if there are funds remaining, but a creditor cannot claw back a dividend already paid to others.

The form and what to attach

For a company winding up the relevant form is the Form 535 Formal Proof of Debt or Claim required by the Insolvency Practice Rules (Corporations) 2016. The form asks for the creditor's name, the amount owed, the consideration for the debt, whether the creditor holds security and what category of debt is claimed.

For a personal bankruptcy the form is the AFSA Proof of Debt. It captures similar information about the bankrupt person and the basis of the claim.

Attach the evidence. Invoices, signed contracts, progress claim certificates, statements of account, photos of work completed, letters of demand and any correspondence with the builder. The trustee or liquidator will assess the proof on the documents, not on the strength of the creditor's belief.

Special categories that need extra care

Homeowners with a defective home covered by statutory home warranty insurance lodge with the insurer (icare HBCF in NSW, VMIA in Victoria, QBCC in Queensland and so on) rather than with the liquidator for the warranty component. The proof of debt to the liquidator is then for any uninsured loss, such as a deposit above the cap.

Subcontractors holding a retention or a bank guarantee should claim under the security separately and only prove for any shortfall after the security has been called.

Subcontractors in NSW or Queensland working on a residential project with a head contract value above the project trust threshold should check whether their payments were held in a project trust account, because trust monies are not part of the company's assets in liquidation.

The priority waterfall

Section 556 of the Corporations Act sets the order of priority for unsecured creditors in a winding up. After secured creditors take their security, the remaining assets are distributed in this order:

Top of the waterfall

Costs and expenses of preserving and recovering assets come first, including the liquidator's remuneration. Then deferred expenses of the liquidator.

Employee entitlements

Employee wages and superannuation, leave entitlements, retrenchment payments and Fair Entitlements Guarantee subrogated claims rank next. Where there are insufficient funds, employees can claim under the FEG scheme administered by the Department of Employment and Workplace Relations and the Government takes a subrogated claim in their place.

Ordinary unsecured creditors

Unpaid trade suppliers, subcontractors without trust protection, homeowners owed money beyond warranty cover and the ATO for unpaid tax all rank as ordinary unsecured creditors. They share the leftover assets pari passu, which means each one gets the same cents in the dollar.

Bankrupt estates follow a parallel priority under section 109 of the Bankruptcy Act with similar layers.

Realistic dividend expectations

In a residential builder failure, ordinary unsecured creditors commonly receive between zero and 10 cents in the dollar. Most builder collapses follow weeks or months of mounting losses, so the asset base is already shallow by the time the liquidator is appointed. Secured creditors and the bank usually take most of what remains.

Homeowners covered by statutory insurance fare better through the warranty scheme. Subcontractors with PPSR-perfected retention of title over materials supplied may recover the materials directly. Subcontractors in adjudication under security of payment legislation at the time of collapse usually lose adjudicated amounts unless funds have already been paid in.

Practical sequence

For a homeowner: read the notice from the liquidator, check whether the build is covered by statutory warranty in the state, lodge a claim with the insurer where applicable and lodge a proof of debt for any uninsured component. For a subcontractor: check the PPSR for any registered security, check whether project trust account legislation applied, lodge with the liquidator for the unsecured part, and consider a separate claim against any director personal guarantee. For both: keep evidence including signed variations, certificates and emails because nothing gets paid without documents.

The proof of debt is not the end of the process. Liquidators can adjust, reject or call for more evidence. A rejected proof can be appealed to court under section 1321 of the Corporations Act. The lodgement is the start of being recognised as a creditor of the failed builder, not the recovery itself.