What to Do When a Client or Contractor Goes Insolvent

Practical steps to protect your position and recover money when insolvency hits.

When a client or contractor becomes insolvent, the impact on your project or business can be immediate and severe. Payments may stop without warning, works may stall, and your legal rights can be lost if you don’t act quickly.

In the construction and commercial sectors, insolvency is unfortunately common — and knowing what to do in the first 48 hours can make the difference between recovering funds and writing off a loss.

In this guide, we outline the practical, legally sound steps you should take to protect your position and maximise your recovery.

1. Confirm the Insolvency and Gather Key Information

Rumours or delayed payments don’t always mean insolvency — but they are warning signs. If you suspect insolvency:

• Check the public registers: Search ASIC’s insolvency notices or the Personal Property Securities Register (PPSR) for appointments of liquidators, administrators, or bankruptcy trustees.

• Request formal confirmation from the party or their appointed external administrator.

• Collect your documents: Contracts, payment claims, correspondence, variations, and site records. You will need these for any proof of debt or legal action.

Tip: In construction projects, the formal insolvency date can be critical for enforcing rights under security of payment legislation or the Building Industry Fairness (Security of Payment) Act in Queensland.

2. Act Quickly to Enforce Security Rights

If you have security (e.g., a bank guarantee, retention money, personal guarantee, or registered PPSR interest), enforce it as soon as possible — delays can be fatal.

• Bank guarantees: Present them immediately if contractual triggers are met.

• PPSR registrations: Check they are valid and perfected — and take possession of goods if entitled.

• Retention funds: Review the contract to confirm whether you can draw on them.

Many creditors lose out simply because they wait too long or misunderstand how their securities work.

3. Suspend Works or Deliveries — But Do It Lawfully

If you continue supplying goods or services after insolvency, you may not get paid. In construction contracts:

• Review termination and suspension clauses before acting.

• Ensure any suspension notice complies with contractual and statutory requirements.

• Consider whether suspending will trigger rights to claim additional costs or damages.

An unlawful suspension can expose you to claims — so get legal advice before pulling off site.

4. Lodge a Proof of Debt

Once an external administrator or liquidator is appointed:

• Lodge a proof of debt to be recognised as a creditor.

• Attach supporting documents (contracts, invoices, statements, adjudication determinations).

• Monitor communications from the administrator for creditor meetings and voting opportunities.

While unsecured creditors often recover little, lodging a proof of debt preserves your rights and may still result in partial payment.

5. Consider Statutory and Contractual Remedies

Depending on your circumstances, you may be able to:

• Use security of payment legislation to recover progress payments owed before insolvency.

• Claim against a payment guarantee or project security.

• Pursue directors personally under personal guarantees or insolvent trading provisions (where applicable).

Construction insolvency law is complex and time-sensitive — the sooner you act, the more options you preserve.

6. Review and Strengthen Your Contracts for the Future

Insolvency events are an opportunity to reassess your risk management:

• Tighten payment terms and make security a condition of doing business.

• Include clear insolvency termination clauses.

• Require PPSR-registrable rights over goods or materials supplied.

The best protection against insolvency losses is strong, enforceable contract terms — implemented before you start work.

Key Takeaways

• Act fast: Your recovery prospects diminish by the day after insolvency hits.

• Know your rights: Security, statutory remedies, and contract terms are your best tools.

• Document everything: Evidence is essential for proving your claim.

• Plan ahead: Strong contracts and risk management reduce exposure in the next project.

Need tailored advice? If a client, contractor, or subcontractor you deal with has become insolvent — or you suspect they’re heading that way — speak to us immediately. We act quickly to protect your position and recover what you’re owed.

📞 Contact our team for urgent, confidential advice on construction and commercial insolvency matters.