16 Aug 2012

Increased incidence of insolvency in NSW construction industry leads to government inquiry

by Narelle Smythe, Mark Gillard

A particular focus of the inquiry will be the consequences of such insolvencies for sub-contractors.

In the wake of a recent spate of contractors becoming insolvent, the NSW Government has announced an inquiry into insolvency in the construction industry and is seeking submissions from interested parties. Submissions to the inquiry are due by 14 September 2012.

Over recent months a number of prominent contractors, including Kell & Rigby, St Hilliers Construction Pty Ltd, Hastie Group Limited and Reed Constructions Australia Pty Ltd, have been placed in administration. This trend has led to concerns about the broader impact of such insolvencies in the construction industry on the development of infrastructure and projects in NSW.

Protection of subcontractors

A particular focus of the inquiry will be the consequences of such insolvencies for sub-contractors which, in many cases, are left unpaid in the position of unsecured creditors. In announcing the inquiry, Minister for Finance and Services Greg Pearce noted that "[b]etween 2009 and 2011, hundreds of companies in NSW collapsed owing billions of dollars, slamming the brakes on vital projects and investment… [u]p to 24,000 unsecured creditors, including suppliers and sub-contractors, have been left out-of-pocket, some by millions of dollars".

In certain circumstances, existing legislation might provide some limited degree of protection to unpaid subcontractors. For example, an unpaid subcontractor might serve a payment withholding request under the Building and Construction Industry Security of Payment Act 1999 (NSW), in conjunction with a debt certificate under the Contractors Debts Act 1997 (NSW). However, a payment withholding request is only available in cases where the subcontractor has made an adjudication application and, in any event, could only assist a subcontractor to the extent that there are funds yet to be paid to the contractor by the principal.

In light of the increasing incidence of contractor insolvency in recent times, the present inquiry provides an opportunity to undertake a comprehensive review of ways in which subcontractors might be protected against insolvency higher up the contracting chain.

Terms of reference

The tasks to be undertaken by the inquiry as set out in its terms of reference include: 

  • assessing the extent and cause of insolvency in the construction industry; 
  • considering payment practices affecting sub-contractors, existing protections for subcontractors and the impacts of insolvency on sub-contractors; and
  • considering legislative or other policy responses that can be taken to minimise the incidence and impact of insolvency in the industry, including:
    • options for improving the priority given to unsecured creditors where the debt results from a sub-contracting relationship;
    • opportunities to simplify debt collection processes;
    • strategies to improve financial management skills in the industry;
    • a mandatory insurance scheme to secure payments to sub-contractors;
    • a discretionary mutual fund to compensate contractors from losses arising from insolvency of a lead contractor or principal;
    • the effectiveness of trust arrangements in protecting sub-contractor payments retained by a lead contractor or principal; and
    • mechanisms to ensure appropriate and effective financial disclosure between contracting parties, including disclosing payment of sub-contractors.

Submissions

The inquiry is to be chaired by Mr Bruce Collins QC and submissions are due by 14 September 2012.

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