If Your Client Goes Bust, Are You Protected?

The survival guide on how to stay solvent when your client isn’t.

Lately, just about every construction headline has been talking about the Auckland developers that went into liquidation, together owing more than $40 million. On paper, these were thriving projects with glossy renders and strong pre-sales. In reality, when the dust settled, it was the subcontractors, consultants, and suppliers left counting the losses.

One subcontractor told a reporter, “We thought we were winning work. Turns out we were working for free.”

Every time this happens, the pattern repeats, big debts, small survivors, and another reminder that in construction, you can’t build security on trust alone.

So, When the Money Stops, Who Gets Paid First?

Here's how things works.

If your client goes into liquidation, all assets are gathered and sold to repay debts. But not all debts are treated equally.

They come in on a priority list:

1. Top of the list - Secured creditors – those with legally registered security over the debtor’s assets (like banks or anyone who registered a PPSR charge).

   
   

2. Middle of the list - Preferential creditors – mainly IRD (for GST, PAYE, and income tax) and employees owed wages or leave.

   
   

3. Bottom of the list - Unsecured creditors – that’s where most subcontractors, suppliers, and consultants sit.

If you’re unsecured, you’re at the very end of the queue, and by the time it’s your turn, there’s usually no money left for you.

So, the question isn’t “will my client pay me?” It’s “where do I sit in the queue if they can’t?”

What Does It Mean to Be a “Secured Creditor”?

A secured creditor has a legal right to seize or claim specific property if the debtor defaults.

Think the banks hold mortgages over land or property.

Some suppliers hold security interests in goods or materials they’ve provided until they’re fully paid.

These interests are recorded on the Personal Property Securities Register (PPSR), a public record that establishes who has first claim on assets.

Here’s the harsh truth: many small construction firms never register their security interests, even when they supply expensive materials or equipment. So when liquidation hits, they’re just another unsecured creditor hoping for cents on the dollar.

If you deliver goods or materials before being paid, you can register your ownership or interest on the PPSR. It costs a few dollars and could save you tens of thousands later.

Six Ways to Protect Yourself Before Trouble Starts

Let’s turn the focus from fear to strategy.

Here’s how you can protect your business before your client’s financial trouble becomes your problem.

1. Review Your Retention Clauses

Retentions should have:

• Clear trigger points for release (e.g., at practical completion or after CCC).

• A defined timeline — no “we’ll release when we can.”

• Evidence of being held in a Retention Money Trust Account, which is now a legal requirement under the Construction Contracts (Retention Money) Amendment Act 2023.

If you’re not receiving retention statements or trust confirmations, that’s a red flag.

2. Use the Construction Contracts Act (CCA) Properly

The CCA gives you a statutory right to be paid, but only if you follow the process.

That means:

• Submitting valid payment claims with all the required information.

• Tracking the response deadline, if the client doesn’t issue a payment schedule in time, your claim becomes due in full.

• And don't forget that Form 1.

  
  

  It’s the simplest, strongest protection you have.

  Yet many small contractors still treat payment claims like optional paperwork.

  They’re not.

  
  

3. Include an Insolvency or Default Clause

Your contract should give you the right to:

• Suspend work if payment isn’t made within a certain timeframe, or if there’s evidence of insolvency risk.

• Terminate before the client officially enters liquidation.

Once a liquidator is appointed, your options narrow drastically, so your contract needs to give you flexibility before that moment arrives.

4. Ask for a Personal Guarantee

When dealing with small or newly formed development companies, ask for personal guarantees from the directors.

This may sound bold, but genuine clients understand that small firms need security. A guarantee means if the company collapses, the individual remains personally liable for unpaid amounts.

5. Register on the PPSR

If you supply goods, materials, or equipment, register your interest on the Personal Property Securities Register.

It takes minutes and costs under $20, but it elevates you from unsecured to secured creditor status.

Note:

This is not the silver bullet. Being “secured” does not equivalent to having a mortgage over land or having priority over all creditors. Certain interests (e.g. IRD among preferential creditors) may still outrank your claims in some situations.

Also, if someone else holds a general security agreement (GSA) or other prior registered interest, their claim may precede yours.

But it is still worth to do it.

6. Do Your Homework Before Signing

Before starting work:

• Run a quick credit check or company search.

• Look for past liquidations or overdue IRD filings.

• Read the Companies Office notes, directors with multiple failed ventures often leave patterns.

• Trust your gut. If something feels off during negotiation, delayed replies, sudden contract changes, or excessive retentions, it usually is.

Prevention Is Always Cheaper Than Recovery

One of the hardest lessons in construction is that you can’t recover from a risk you didn’t see coming.

Every time I run in-house training for contractors, someone realises that a single overlooked clause, or one unregistered PPSR, could decide whether they survive a client collapse.

We often focus on project delivery, not business protection. But the two are inseparable.

You can’t build a stable company on unstable contracts.

Bonus: Quick ChatGPT Prompt for Contract Risk

Here’s a simple ChatGPT prompt you can use next time you’re reviewing a contract:

“Read this construction contract and list any clauses that would put me at risk if the client becomes insolvent or delays payment. Highlight issues related to security, retention, or termination.”

It won’t replace professional advice, but it will give you a fast, accessible first pass before you sign. No more excuses for not checking.

Final Thought

The Auckland developer collapses remind us you can’t control whether your client stays solvent, but you can control how exposed you are if they don’t.

Before you start your next project, ask yourself one question:

If my client goes bust tomorrow, would I survive the week after?