On 19 September 2012, the Norton Rose Construction and Engineering team presented a breakfast briefing titled: “Financial Distress in Construction Projects: What happens when the wheels fall off?” 

This briefing identified the warnings signs of insolvency, what steps parties can take to minimise exposure, how best to respond to a party’s insolvency and the options available to prevent insolvency in the first place.

Following the collapse of hundreds of construction companies in Australia, the NSW Government has now released a Discussion and Issues Paper Inquiry into Construction Industry Insolvency in NSW (Issues Paper) in an attempt to address and protect the interests of subcontractors in the construction industry. 

The Issues Paper follows an annual report of corporate insolvencies released by ASIC in September 2012, ‘Insolvency statistics: External administrators’ reports 1 July 2011- 30 June 2012 ’.  These statistics confirmed that the construction industry had sustained the single highest number of insolvencies for the financial year 2011-12, with the construction industry accounting for 22.1% of the more than 10,000 insolvencies that occurred across Australia.

The Issues Paper addresses a wide range of issues affecting the construction industry in NSW.  Some of those key issues are as follows:

  • The extent and cause of insolvency in the construction industry in NSW – the two most common forms of business failure recorded by ASIC are poor strategic management of the business and inadequate cash flow or high cash use.
  • The effectiveness of trust arrangements in protecting subcontractor payments retained by a lead contractor or principal – construction trust fund provisions are considered as a potential protection that can be mandated in all construction contracts.  The Inquiry examined the statutory trust provisions in Ontario, Canada and the UK concept of Project Bank Accounts as example models for NSW legislative reform.
  • The options available for improving the priority given to unsecured creditors where the debt results from a subcontracting relationship – the Inquiry does not presently favour an amendments to the Corporations Act 2001 (Cth) so as to give unpaid subcontractors a preferred position in the ranks of creditors in an insolvency.
  • The opportunities available to simplify the debt collection processes – the Inquiry considered the establishment of a mechanism similar to the Consumer Trader and Tenancy Tribunal (CTTT) to provide a quick and efficient means of resolving such dispute.  It also considered the adoption of a legislative framework for prompt payment provisions.

A copy of the Issues Paper can be found here: http://haveyoursay.nsw.gov.au/document/show/516