When do we ask for security?
If the building entity experiences financial weaknesses and issues identified through the Eligibility assessment process, we prefer to ask for security from the indemnifying parties.
This in turn protects HBCF and exposes assets outside of a building company and meets the minimum Assessed Net Tangible Asset (ANTA) thresholds for eligibility.
Eligibility Deeds of Indemnity, Project Specific Deeds of Indemnity and Deeds in Respect of a Former Business
When HBCF requests a deed of indemnity from an applicable party, the amount sought is defined by HBCF’s minimum equity requirements.
HBCF will not accept Deeds from persons outside the building entity (i.e. spouses or unrelated party).
The minimum amount sought for an Eligibility Deed is $200,000 (with exceptions outlined in the HBCF Eligibility Manual) and for a project specific Deed, 10 per cent of the contract price or 50 per cent of the maximum loss (future claim) is available under the HBCF policy for the project (whichever is the lesser).
Eligibility Deeds of Indemnity expire 36 months after the completion date of the last building project, and a claim or loss notification is not received.
Project Specific Deeds expire 78 months after the completion date of the building project, and a claim or loss notification is not received.
Eligibility Deeds, should not be used to remedy:
- non-financial deficiencies
- deficiencies in working capital, gross margin or profitability
- perceived lack of funding capacity to support growth.
Where a new Eligibility is sought for a builder who was formerly a principal or shareholder of another licensed building company and where the HBCF has issued Certificates of Insurance, a Deed in Respect of a Former Business should be sought.
Group Trading Agreements (GTA)
Where there is evidence of related loans or other financial dependence providing working capital and equity (Group Treasury Arrangements) within entities which are controlled by common interests in a building group, a GTA will be required.
Entering a GTA with suitable entities within a Group allows HBCF to conduct a Group assessment; in turn potentially leading to maximisation of a building Group’s working capital and borrowing capacity being assessed.
A GTA ensures that corporate groups can meet the ongoing statutory warranty obligations of the building entity if it is wound up or sold. It also provides for group positioning of capital for maximum returns and capacity for a group treasury arrangement to exist for working capital and borrowing support.
The below circumstances require a consolidated group assessment and a GTA:
- Related loans activity (a group treasury function) which moves funds between group members and there are fluctuations in current or non-current related loan balances from year to year;
- The building entity’s exchange management or licensing fees with other related entities at non-commercial rates;
- There is evidence of internal cost recovery between related entities;
- The assets in a non-building related entity provide security for an external loan facility in the building entity which would have a material impact on its borrowing capacity;
- There are collateral liabilities (third party borrowings in a related entity or a cross guarantee) on the building entity.
The outcome of a consolidated group assessment creates an aggregate open job limit for all builders in the group. The GTA also allows the sharing of eligibility limits without further financial assessment. If there are more than one related entities that are licensed in NSW and hold Eligibility, a group assessment must be conducted.
A GTA should be waived where ANTA and other requirements can be satisfied by an eligibility Deed or capital injection. In this instance, the wider current and non current liabilities and external guarantees of the indemnifying party are to be tested.