Grocon’s Fall, Bathla’s Fallout: The Cashflow Lessons for Builder-Developers

Third-generation Grocon boss Daniel Grollo has declared bankruptcy, closing the final chapter on one of Australia’s biggest construction companies. Grocon, one of the country’s biggest construction companies, collapsed in 2020. Over more than 70 years in business, it built skylines in Australia and across the globe, from Sydney’s 1 Bligh Street and Melbourne’s Eureka Tower to assisting on the Burj Khalifa. At the time, Grocon blamed both Covid-19 and the costly legal battle over Central Barangaroo, in which Lendlease and Crown Resorts successfully appealed against a $2-billion development Grocon had won the rights to develop . ▲ Grocon built the Crown Entertainment Complex, the biggest casino in the Southern Hemisphere. But, as the recent collapse of Bathla Group has shown, construction failures are rarely caused by one event, says insolvency practice Jirsch Sutherland partner Chris Baskerville. “A major dispute or external shock may ultimately be the tipping point, but often the underlying pressure has likely been building for some time,” Baskerville says. Company structuring and risk Administrators KordaMentha eventually found 88 Grocon-related companies—more than double those initially reported. It owed around $100 million to external and third party creditors, $13.7 million to the Australian Taxation Office, and $500 million in intercompany and related party loans. Two Grocon companies had already called in administrators in 2019 after a legal dispute with Dexus over unpaid rent and lease obligations at the 480 Queen Street office tower in Brisbane. Grocon initially put legacy construction companies into administration, while other parts of the group remained operating, enabled by the complex structures taken on by major contractor groups. Special purpose vehicles (SPVs) are not unusual, as companies seek to quarantine project risk and satisfy financiers. But they can make insolvencies even more complex. “In the absence of a pooling order by the Court—where you treat the assets and liabilities of each separate entity as one large entity—you really have to take the surgeon’s knife to each individual entity,” Baskerville says. Deed of Company Arrangement In the case of Grocon, a full liquidation was avoided when the creditors of the companies agreed on a pooled deed of company arrangement (DOCA). The rescue plan meant that employees and small creditors owed under $10,000 were paid in full—an unusual outcome and not standard practice for a DOCA. “[But] paying those creditors in full can simplify the administration and recognise the disproportionate impact a bad debt can have on a small business,” Baskerville says. ▲ Grocon was behind other major tower developments including the Rialto Towers skyscraper in Melbourne. In Grocon’s DOCA large contractors (despite their objections) reportedly received fractional returns, of around 2.5 to 2.9 cents in the dollar. The ATO received a $6 million upfront payment, or around 43.8 cents in the dollar. A recent ASIC report found that 44 per cent of voluntary administrations resulted in a DOCA, rising to 48 per cent for companies with more than $10 million in liabilities. Almost half of DOCAs involved continued trading, 22 per cent involved a business or asset sale and 63 per cent included third-party funding. “A DOCA can be much more than creditors simply agreeing to take cents in the dollar. It can provide a mechanism to preserve or realise value and potentially produce a better return than an immediate liquidation. Ultimately, creditors decide whether to accept that trade-off,” Baskerville says. Reverberating impact of an insolvency The impact of an insolvency does not necessarily stop with the company that fails, Baskerville says. The implosion of UK construction giant Carillion in 2018, for example, created a domino effect through the subcontractor and supplier network. Within 24 hours of Carillion’s failure, subcontractors disclosed multi-million-pound exposures and began laying off staff. The first subcontractor liquidation hit within two weeks, sparking a wave of distress. Associated failures continued for at least 18 months. “It’s particularly relevant in construction because subcontractors can effectively become the cashflow buffer for businesses higher up the chain,” Baskerville says. ▲ Grocon’s skyscraper Eureka was the tallest residential tower in the world when it was built. Bathla had 638 subcontractors associated with its projects , considerably fewer than Carillion and Grocon, which were each thought to have thousands. But Baskerville expects NSW construction insolvencies to rise over the next three quarters as the fallout from Bathla’s collapse continues. Although the businesses are different and collapsed under different circumstances, both show that a large development pipeline and significant underlying assets don’t necessarily translate into liquidity, Baskerville says. Lessons to be learned Baskerville says there are signs that we are moving into a more creditor-driven phase of insolvencies . Voluntary administrations have dipped to 10 per cent of all administrations, instead of an average of 35 to 40 per cent in previous years, he says. “Once lenders, the ATO or other creditors start driving the process, the range of restructuring options can narrow very quickly.” ▲ Grocon also developed 1 Bligh Street in Sydney. The lesson from the Grocon and Bathla collapses, Baskerville says, is that cashflow needs to be managed as closely as profitability. “Builder-developers should stress-test projects for cost increases, delays, slower settlements and financing problems, and have clear visibility over intercompany funding and guarantees. “They also need discipline around pricing. In construction, taking work simply to maintain turnover can be dangerous if the margin doesn’t adequately price the risk.” The collapse of Bathla will inevitably draw comparisons with previous insolvencies like that of Grocon, and this in turn attracts greater regulatory and government scrutiny—already ASIC has waded in and asked the administrators of Bathla for transparency. “But intervention also needs to avoid creating an expectation that the government will rescue large developers when projects run into difficulty.”

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Clare Burnett
Wed 07 Oct 26

Grocon’s Fall, Bathla’s Fallout: The Cashflow Lessons for Builder-Developers

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