Con­struc­tion Indus­try Insolvency

In Brief

In August 2012 the NSW Gov­ern­ment announced an Inquiry into Con­struc­tion Indus­try Insol­ven­cy in NSW. The Inquiry released its Dis­cus­sion and Issues Paper in Octo­ber 2012 which pro­pos­es a num­ber of poten­tial reme­di­al mea­sures for the industry.

Con­struc­tion Indus­try Insol­ven­cy in NSW

In August 2012 the NSW Gov­ern­ment announced an Inquiry into Con­struc­tion Indus­try Insol­ven­cy in NSW, to be chaired by Bruce Collins QC. The Inquiry came about fol­low­ing the col­lapse of numer­ous con­struc­tion com­pa­nies in Aus­tralia, includ­ing Reed Con­struc­tions and St Hilliers. In the finan­cial year end­ing 2012, the con­struc­tion indus­try account­ed for 22.1% of the more than 10,000 insol­ven­cies in Australia.

• The key terms of ref­er­ence for the Inquiry include:
• The extent and cause of insol­ven­cy in the con­struc­tion industry;
• Pay­ment prac­tices and pro­tec­tion for sub­con­trac­tors (includ­ing a manda­to­ry insur­ance scheme for subcontractors);
• Sim­pli­fy­ing the debt col­lec­tion process and improv­ing finan­cial man­age­ment of projects;
• Imple­ment­ing trust arrange­ments and/​or project bank accounts for project funds.

The Inquiry released its Dis­cus­sion and Issues Paper (Paper) in late 2012.

The Paper notes that there are var­i­ous caus­es of insol­ven­cy in the con­struc­tion indus­try in NSW, includ­ing: the large num­ber of com­pet­ing con­trac­tors and slow mar­ket demand; a gen­er­al­ly poor appre­ci­a­tion of risks when pric­ing jobs; low cap­i­tal back­ing and the effects of the glob­al finan­cial crisis.

The Paper is pri­mar­i­ly con­cerned with the rights of those most affect­ed by con­trac­tor insol­ven­cy — sub­con­trac­tors. The Paper notes that ​“it is often the case that those who are least able to man­age the risks asso­ci­at­ed with a con­struc­tion project, are often those who bear a dis­pro­por­tion­ate amount of that risk – sub­con­trac­tors.” The Paper notes that cur­rent­ly sub­con­trac­tors are often not able to pro­tect their inter­ests when con­tract­ing or obtain reg­u­lar pay­ments dur­ing the course of projects. 

The Paper con­sid­ers how pro­pos­als such as insur­ance schemes, trust arrange­ments, com­pul­so­ry con­tract pro­vi­sions and var­i­ous oth­er devices could assist to pro­tect the inter­ests of sub-con­trac­tors. In sum­ma­ry, the Paper notes that an inte­grat­ed approach to the terms of ref­er­ence may involve some of the fol­low­ing measures:

• Trust arrangements;
• An over­all con­trac­tor licens­ing sys­tem along the lines of the Queens­land Build­ing Ser­vices Author­i­ty Act 1991;
• More thor­ough check­ing of con­trac­tors by prin­ci­pals and subcontractors;
• Con­sid­er­a­tion of amend­ments to improve the oper­a­tion of the NSW Build­ing and Con­struc­tion Secu­ri­ty of Pay­ment Act 1999 (SOPA); and
• The intro­duc­tion of prompt pay­ment legislation.

The Paper con­sid­ers the appro­pri­ate­ness and effec­tive­ness of trust arrange­ments as a means of pro­tect­ing progress pay­ments paid to head con­trac­tor and sub­con­trac­tor. In this regard, the Inquiry is con­sid­er­ing whether a statu­to­ry trust pro­vi­sion (as mod­elled on cer­tain Cana­di­an leg­is­la­tion) should be adopt­ed in NSW. The Inquiry also con­sid­ers whether Project Bank Accounts (PBA), such as those oper­at­ing in Gov­ern­ment projects in the Unit­ed King­dom, are worth con­sid­er­ing in NSW. A PBA is essen­tial­ly an account from which pay­ments are made direct­ly and simul­ta­ne­ous­ly to a lead con­trac­tor and mem­bers of the sup­ply chain.

The Paper also iden­ti­fies prob­lems with the cur­rent debt col­lec­tion process­es in the indus­try (i.e. court pro­ceed­ings) and notes that con­sid­er­a­tion should be giv­en to estab­lish­ing a body sim­i­lar to the Con­sumer Trad­er and Ten­an­cy Tri­bunal for the pur­pose of pro­vid­ing a quick and effec­tive means of resolv­ing dis­putes of a cer­tain size e.g. less than $50,000.

In terms of leg­is­la­tion, the Paper notes that whilst the SOPA has brought about a gen­er­al improve­ment for sub­con­trac­tors rights, there is a ten­den­cy to over­state the effec­tive­ness of this Act in the build­ing com­mu­ni­ty, not­ing that many sub­con­trac­tors fail to utilise the leg­is­la­tion effec­tive­ly and often feel uncom­fort­able or under­pre­pared to claim pay­ment through this process.

The Inquiry’s Final Report is now avail­able.

Three Con­sul­ta­tion Sum­ma­ry Papers are also being released cov­er­ing the Final Report’s rec­om­men­da­tions in rela­tion to:

• changes to the Build­ing and Con­struc­tion Indus­try Secu­ri­ty of Pay­ment Act 1999
• the licens­ing of com­mer­cial builders
• statu­to­ry con­struc­tion trusts

Indus­try now has an oppor­tu­ni­ty to com­ment on and respond to any of the rec­om­men­da­tions con­tained in the Final Report.

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