External administrators on the hook for penalties and damages for completing building works in NSW

A trend in the market

Construction insolvencies are on the rise. ASIC data on external administration and controller appointments in this sector have risen between 2022 and 2024, both first-time appointments, and "all appointments" (including subsequent and transitional appointments, for example, where a company is placed into liquidation following administration or provisional liquidation).

Chart 1: The first time a company enters external administration or has a controller appointed–Industry type, FINANCIAL YEAR TO DATE

 

NSW is increasingly responsible for the lion's share of these appointments (taking 40% of all appointments in 2022, 44% in 2023, and 48.4% this year).

Under a relatively new legislative remit of the NSW Building Commissioner, external administrators (including receivers) of builder or developer companies ought to be mindful of the statutory powers that may be utilised by the Building Commissioner to issue certain orders, including compliance notices, and the potential expense that may be incurred as a result.

In this article we'll look at these powers, when external administrators will be at risk, and why we expect to see more exercise of them.

Chart 2: All appointments over a company including the first, subsequent and transitional appointments – Industry type, FINANCIAL YEAR TO DATE

 

Tighter regulation of the NSW construction sector since 2020

Following the national Shergold-Weir report into the industry, the NSW Government introduced in 2020 a construction industry reform package that included the Residential Apartment Buildings (Compliance and Enforcement Powers) Act 2020 (NSW) (RAB Act) and the Design and Building Practitioners Act 2020 (NSW) (DBP Act).

The DBP Act regulates certain aspects of key construction practitioners' activities across the planning, design and construction stages of a development. It does so by introducing prescribed categories of regulated designs, and requiring registered design practitioners who prepare regulated designs to issue a compliance declaration stating compliance with the Building Code of Australia. It also enacts a duty of care for construction work owed by persons carrying out construction work.

Complementing these new obligations is the RAB Act, which provides the Building Commissioner with enforcement and investigatative powers against noncompliant developers to order the rectification of serious defects identified in residential buildings and to prohibit building work from being completed.

Together, these Acts create complaince risk for external administrators where regulatory action is taken by the Building Commissioner.

Building Work Rectification Orders under the RAB Act – and why an external administrator is exposed

Under section 33 of the RAB Act, the Building Commissioner may give an order to a developer in relation to building work (a "building work rectification order" or BWRO) if the Building Commissioner has a reasonable belief that—

• the building work was or is being carried out in a way that could result in a serious defect in a residential apartment building, or
• a residential apartment building has a serious defect.

A BWRO may require the developer to take specified action to eliminate, minimise or remediate the serious defect, including to ensure specified building work is carried out or not carried out.

If a developer doesn't comply with a BWRO, the Building Commissioner can do anything necessary or convenient to give effect to the terms of order (including carrying out the required work) and to claim (or, if required, recover in court as a debt due) the associated costs from the developer.

Non-compliance is also a criminal offence attracting significant penalties of:

• in the case of a corporation – up to $330,000 and, in addition, up to $33,000 each day the offence continues; and
• in any other case – up to $110,000 and, in addition, up to $11,000 each day the offence continues.

Importantly for external administrators, if the developer contravenes the BWRO, each person who is a director of the company or who is concerned in the management of the company will be taken to have contravened the BWRO if the person knowingly authorised or permitted the contravention.

For voluntary administrators, the exposure is relatively high, as they are managing the company, though this may be mitigated if the contravention occurs without the requisite state of knowledge, or receivers and managers are concurrently appointed over the whole of the company's assets.

For mortgagees and their agents, the exposure is somewhat lower, where they are merely exercising rights to take possession and sell an asset.

There is another possible source of exposure: it's unclear if an external administrator may themselves fall within the definition of "developer" under the RAB Act. That term includes:

"a person who contracted or arranged for, or facilitated or otherwise caused, (whether directly or indirectly) the building work to be carried out." [emphasis added]

Arguably, that definition includes external administrators who "facilitate or cause" building work to be carried out, such as where a receiver undertakes works to bring a project to completion. Such an interpretation would expose external administrators to additional liabilities and obligations under the RAB Act.

Other provisions within the RAB Act, however, weigh against such an expansive interpretation. For example, there is an express provision of liability for directors and other persons involved in the management of the company for contraventions of BWROs under section 58. That may suggest that, without a similar express provision in the definition of "developer", that term is not to be read as extending to those persons.

The Courts have not yet considered this point, but we think the better view is that "developer" should not be interpreted as extending to directors and external administrators acting solely in their capacity as agents for the developer company. Nonetheless, it is an issue to keep an eye on until we have clarification from the Courts.

The statutory duty of care to avoid economic loss under the Design and Building Practitioners Act

Under section 37(1) of the DBP Act, "A person who carries out construction work has a duty to exercise reasonable care to avoid economic loss caused by defects".

"Construction work" means any of the following:

• building work;
• the preparation of regulated designs and other designs for building work;
• manufacture or supply of a building product used for building work; and
• supervising, coordinating, project managing or otherwise having substantive control over the carrying out of any work referred to above.

The final limb has been given a broad enough meaning by the NSW Supreme Court to capture an external administrator appointed to a developer, although the Court has not specifically made such a finding. The Court has found:

• the fiancé of a sole director of the builder had engaged in "construction work" by reason of holding himself out as "the builder", attending site meetings, often as the builder's sole representative, and supervising the works (Goodwin Street Developments Pty Ltd atf Jesmond Unit Trust v DSD Builders Pty Ltd (in liq) [2022] NSWSC 624; Kazzi v KR Properties Global Pty Ltd t/as AK Properties Group [2024] NSWCA 143);
• a person may have "substantive control over the carrying out of works" if they are in a position to exercise such control, irrespective of whether or not they in fact exercise such control (Owners – Strata Plan No 84674 v Pafburn Pty Ltd [2022] NSWSC 659.

Whether or not a person engaged in "construction work" is liable for breaching the statutory duty of care in section 37 will then depend on establishing the usual elements of tortious liability for negligence, including whether the breach has caused a person harm.

Key takeaways

With all this in mind, what should external administrators keep front of mind to minimise their regulatory risk?

First, where external administrators are appointed over a company with incomplete residential apartment developments, they must make a commercial decision to either sell the incomplete development to a third party (and thereby miss out on future sales profits for the completed project), or complete the works and sell to market and thereby maximize the return either to the secured party appointor (in the case of a receiver), or to the insolvent company's creditors (in the case of a voluntary administrator).

If the appointees take the latter course – which is increasingly common where projects are close to completion and the remaining steps are few – subject to the specific circumstances of the project, there is a risk they may find themselves personally exposed to penalties under the RAB Act and DBP Act for any non-compliance with a BWRO, provided they are concerned in the management of the company, and knowingly authorised or permitted the non-compliance with the BWRO. In the case of receivers, this is likely to be the case only where they are acting as controllers and managers.

Secondly, where an external administrator manages or acts in a supervisory capacity with respect to rectification works pursuant to a BWRO, they are likely to owe a statutory duty of care to avoid economic loss caused by defects in building works.

The applicability of the statutory duty of care turns on the degree and nature of the external administrators' appointment, their level of involvement in the performance of the works, and specifically whether that involvement amounts to supervision of, or control (actual control or an ability to exercise control) over, the works.