Insolvency in the Australian construction industry Aus Gov 2015 report summary

Aus Gov Senate standing committee report on economics insolvency in the Australian construction industry 2015 report summary.

Read full report or read summary of 4 reports from 2023 - 2014

Report overview?

Insolvency affects everyone and early detection is critical to curbing illegal phoenix activity and preventing smaller scale insolvencies from becoming more significant. Subcontractors have a right to be paid for work completed and more needs to be done to protect honest industry participants from unscrupulous individuals.?

?

• Insolvency affects everyone - The economic cost of insolvencies is significant, with insolvent construction businesses having a shortfall of liabilities over assets of at least $1.625 billion in 2013-14. The industry often ranks highest in unpaid employee entitlements. Insolvency also hinders innovation and productivity, as businesses face uncertain cash flows and non-payment for work, reducing incentives to invest in new methods, equipment, or workforce skills.??

• Structural issues - Major projects are typically managed by head contractors who do not directly employ labor but instead enter agreements major specialist subcontractors. These subcontractors often further sub-let work to other specialists. This structure has led to a concentration of market power at the top of the contracting chain, unfairly shifting risk to subcontractors, suppliers, who are less able to bear it. The industry culture has been negatively impacted, with head contractors often disregarding the competitive pressures faced by subcontractors.??

• Phoenixing - Legal loopholes allowing phoenixing need to be closed. The current legal and regulatory framework is ineffective. Some company directors in the construction industry view compliance with corporate laws as optional due to mild consequences and low detection rates. This has led to a culture of disregard for the law, with numerous reports of civil and criminal misconduct by company directors. An emerging business model involves companies obtaining pre-insolvency advice to restructure and avoid paying creditors.?

• Early detection is critical to curbing illegal phoenix activity and preventing smaller scale insolvencies from becoming more significant. Industry participants are often the first to notice financial distress in companies, so improving information flows between them and regulators is essential. Confidential tip-off lines should be developed to encourage reporting without fear of commercial consequences. Failure to pay employee entitlements can indicate cash-flow problems and potential insolvency.??

?

More needs to be done to protect against unscrupulous individuals?

• Disqualification of Directors: ASIC can disqualify directors linked to misconduct, but this power is underused, and the report recommends better resourcing for ASIC to enforce the law effectively.??

• Director Penalty Regime: This regime ensures directors meet tax and superannuation obligations but could be used more broadly. It doesn’t cover GST liabilities.?

• Transactions to Avoid Employee Entitlements are illegal but no prosecutions have occurred.??

• Financial Oversight: Effective oversight is crucial in an industry with low entry barriers and small profit margins this needs to include regular financial health checks.??

• Jurisdiction of Insolvency Matters: The committee suggests extending the Federal Circuit Court’s jurisdiction to include corporate insolvency for quicker, cheaper resolutions.??

• Valuing Debt Assignments: The Corporations Act and Bankruptcy Act differ on debt assignment values at creditors meetings. The committee recommends aligning these values and preventiingrestructuring advisors from buying into companies they advise.??

Causes of insolvency??

Key factors include inadequate cash flow, high cash use, poor strategic management, and poor financial control, including lack of record-keeping. Poor economic conditions and trading losses also contribute significantly. Non-market factors such as unequal power relations in contracts, non-payment of obligations, and civil and criminal non-compliance with corporate laws are also significant contributors. While fraud is rarely identified initially, it can play a role, especially given the industry’s pyramidal structure where one collapse can trigger others. Fraud by a contractor higher up the chain can lead to cash flow issues for businesses further down.??

Economic effects of construction industry insolvencies?

Employees are particularly vulnerable creditors in the event of corporate failure. They cannot secure their entitlements or diversify their risk and may lose significant entitlements like superannuation, annual leave, long service leave, and redundancy payments. Although they are ranked as priority unsecured creditors, this priority is ineffective if there are no funds available. Unpaid superannuation is a major loss, especially for those making voluntary contributions.??

Subcontractors and small businesses are also unsecured creditors but lack a legal mechanism to be prioritized like employees. They are only paid after secured and priority unsecured creditors.??

Insolvency in the construction industry also has a considerable effect on public revenue. The effect is both direct—companies may fail to pay their taxation liabilities leaving sizeable unrecoverable debts to the ATO—and indirect—legislative safety nets provide financial assistance to certain eligible employees who have lost entitlements as a result of liquidation or bankruptcy. The indirect cost is more extensive than merely providing assistance for unpaid entitlements as persons who lose their job as a result of insolvency may require unemployment benefits, placing a further strain on the public purse.??

+++++++++++++++

XpedePay the insolvency risk mitigation tool for construction project owners, developers, financiers & contractors, provides oversight and early warning of insolvency within your project’s supply chain. Autonomous monitoring alerts you when payment defaults occur, within the key subcontractor network working on your project, giving you time to take corrective action

.Learn more at https://xpedepay.com or https://linktr.ee/xpedepay

#ConstructionTech #ConstructionInsolvency