The Senate has announced a national inquiry into insolvency in the Australian construction industry (Inquiry).[1] 

The Senate Economics References Committee will conduct the Inquiry and report by 11 November 2015. The Inquiry is set to canvass the scale and incidence of insolvency in the Australian construction industry, and in particular:[2]

  1. The causes and effects of industry insolvencies;  
  2. The amount of money lost by creditors in the industry;  
  3. The impact of insolvency in the industry and it’s productivity;  
  4. The adequacy of the current law and regulation to reduce insolvencies in the industry;  
  5. The incidence and nature of misconduct related to insolvencies in the industry, including ‘phoenix’ companies and unlawful debt collecting and related activities.

The terms of reference do not require the inquiry to make recommendations for reform, although this is a natural next step.

Do we need an inquiry?

The construction sector is one of Australia’s highest risk industries in which to operate. The construction industry is consistently ranked as having one of the highest rates of insolvencies of any industry in Australia, with the percentage of construction companies being placed into administration hovering around 22% to 24% annually. [3] In a speech to the Senate in August, Senator Cameron quoted a figure of $2.64 billion[4] as the estimated amount of money lost by creditors in construction related insolvencies annually.[5]

Adding to the complexity of the problem is the phenomenon of ‘phoenix companies’ where a company deliberately goes into liquidation to avoid paying tax, creditors or employees. The business then ‘resurrects’ through a different entity. It is particularly prevalent in the construction sector. This enables a company that owes money to creditors and employees to restart without paying its debts.

What is the current regulatory framework?

While various state level inquiries have sought to address the issue of high levels of insolvencies in the industry, with a recent example being the NSW Collins Inquiry,[6] the focus of such inquiries has been on reforms to the Security of Payment legislation (versions of which are operating in almost every state and territory) which provide for rapid adjudication of payment disputes in the construction industry.  It is the Commonwealth that regulates insolvency and company practices, primarily through the Bankruptcy Act 1966 and the Corporations Act 2001.

Bruce Collins QC, in his 2012 Report, laid out the following challenge to the Commonwealth entities responsible for administering and regulating such activities:

“Surely there is more work in this area to be done by the Australian Tax Office and ASIC to ensure that the honest operators in the industry, that is the overwhelmingly proportion of contractors, subcontractors and suppliers, get a better deal. The flight of the phoenix is prevalent in the building and construction industry in NSW.”[7]

Under the Corporations Act the capacity of subcontractors to make a claim against a company in administration, is limited to that of an unsecured creditor, being a creditor who does not have a charge over the company’s assets and will rank behind secured creditors.

Will the national Inquiry bring change?

The Inquiry is in a position to address issues in relation to the duties of company directors and officers under the Corporations Act.  Among other duties, the Corporations Act sets out the obligation on company directors to prevent insolvent trading and establishes the rights and responsibilities of the parties involved in the business operations of an insolvent company. Issues with practical enforcement of such laws in the construction sector may well be a focus. There is also likely to be consideration of whether the Corporations Act should be amended so as to give unpaid subcontractors a preferred position amongst creditors in insolvency.

If the Inquiry also considers ways to ameliorate the impacts of insolvency on the industry’s most vulnerable participants, subcontractors, project bank accounts and the statutory construction trust could also become areas of interest for the Inquiry (areas that are already the subject of considerable attention from legislators at state level as outlined in our update here).

We note that only 2 of the 6 members of the Committee tasked with conducting the Inquiry are Liberal/National Senators and there is no guarantee that the Government will take action in relation to the recommendations of a Labor-led Inquiry.  Nonetheless, the Inquiry may assist in sparking a national conversation on a thorny and pervasive issue within our industry.  It is also likely to add momentum to the reform agenda in relation to the regulation of distressed and insolvent construction companies across Australia and their creditors.    

Stakeholders will be following the investigations and recommendations made by this national inquiry with interest.