What Happens When Your Builder Goes into Liquidation Post-Completion?
- Emmolina May
- May 30
- 4 min read
In the current construction landscape of New Zealand, contractors entering liquidation is no longer a rare occurrence. The industry is facing unprecedented financial pressures, resulting in the highest rates of liquidation filings seen in recent years. The ramifications of this trend are far-reaching, affecting projects that are mid-construction as well as those that are seemingly complete.
One of my clients had just completed a mid-scale project, and the contractor involved was declared insolvent shortly afterward ( 10 days to be exact) . At first, to the client, it looked like a non-issue: the physical works were done, and everyone had packed up. However, once I explained the implications of defect liability and warranty periods, the picture changed dramatically.
This article explores the critical risks that arise when a contractor enters liquidation post-completion, the legal and financial blind spots that often get overlooked, and most importantly, how clients and professionals can protect themselves in a volatile market.
Understanding Liquidation in Construction
Liquidation is a formal insolvency procedure whereby a company’s assets are sold off to repay creditors. For construction contractors, this often spells disaster not only for employees and subcontractors but also for clients who are left holding incomplete or defect-ridden buildings.
In New Zealand, the construction sector has always operated on thin margins. Coupled with rising material costs, inflation, and project delays, many companies find themselves unable to sustain operations.
In 2025 alone, several high-profile and mid-tier contractors have filed for liquidation. The Inland Revenue Department (IRD) has also intensified its pursuit of outstanding tax debts, making it the largest single initiator of winding-up applications. The cumulative effect is a domino-style collapse of contractor networks, supply chains, and trust within the sector.
When the Dust Settles, the Legal Risks Begin
The case I encountered involved a residential development. The project was delivered slightly over schedule, but without any major issues. However, within two weeks of issuing the practical completion certificate, the contractor went into liquidation.
Initially, the client was rather relieved about the news. " We are so lucky, as they only went to liquidation after the job done?" .
However, once I clarified that the reality is not as positive, the following issues opened the client's eyes:
No retention money had been withheld.
The contract had only a vague clause about defect rectification.
Warranty issued under the company which is now going to liquidation.
Once the defects began to appear, the client quickly realised the contractor now left the client with no leverage, no financial cushion, and no clear contractual route to enforce rectifications.
Defects Liability Period: What Is It and Why It Matters
The defects liability period (DLP) is a window, commonly 12 months post-completion, during which the contractor must return to fix any issues that arise. This is not merely a "goodwill" period but a contractual obligation. It serves both as a quality assurance mechanism and a form of financial and legal protection for the client.
When a contractor is in liquidation, fulfilling DLP obligations becomes near impossible. If the contract lacks provisions for alternative enforcement (e.g., using withheld retentions or performance bonds), the client may have to fund defect rectification themselves, sometimes at significant cost.
The Role of Retention Money
Retention money serves as a financial buffer, typically 5-10% of the contract value. It is withheld from each progress payment and partially released upon practical completion, with the remainder returned at the end of the DLP. In New Zealand, the Construction Contracts Act 2002 (as amended) requires that retentions be held in a compliant trust, adhering to strict and complex requirements. This can result in significant administrative burdens for clients to ensure compliance, with severe fines imposed for any breaches. Although the CCA retention regime was initiated with good intentions, the penalties and detailed requirements have discouraged many clients from withholding any retention, including my client.
In this situation, the lack of retention meant the client had no financial safety net, leaving him exposed to greater risk with no alternative solutions.
Key Protections for Clients and Professionals
So, how can you protect yourselves?
Draft Clear and Comprehensive Contracts
Include detailed clauses on the defects liability period, scope of warranty, and procedures for rectification.
Avoid ambiguity. Specify who is responsible, what counts as a defect, and how long liabilities last.
Enforce Retentions
Enforce retention seems like a no-brainer, but make sure all retention funds must be held in a compliant trust account as well as comply with all requirements under CCA 2002.
Secure Collateral Warranties from Subcontractors
It is critical to secure warranties directly from suppliers and key trades.
This ensures enforceability even if the main contractor becomes insolvent.
Use Performance Bonds or Insurance Guarantees
Bonds provide financial recourse in the event of non-performance or insolvency.
Defects bonds can also ensure that funds are available during the DLP.
Financial Due Diligence on Contractors
Conduct background checks, credit reviews, and request evidence of financial standing.
Watch for red flags such as persistent delays in payment to subcontractors or sudden staff turnover.
Document Everything
Keep detailed site records, correspondence, and variation approvals.
If litigation or adjudication becomes necessary, this documentation will be invaluable.
Completion is Not the End
In today’s high-risk construction environment, reaching practical completion is not the same as reaching safety. The case I handled is just one of many where insolvency turned a completed job into a lingering liability.
Clients and professionals must operate with foresight, not just good faith. Contracts should be watertight, financial safeguards should be enforced, and legal rights should be understood from day one.
At EM, we help clients and contractors navigate this complexity. From contract drafting to dispute resolution strategy, we ensure you're not left exposed when the dust settles.
In a market where companies can vanish overnight, the best protection is preparation.
