Construction Industry Insolvency
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.
If you wish to discuss, please contact: