In August 2012 the NSW Government announced an Inquiry into Construction Industry Insolvency in NSW, to be chaired by Bruce Collins QC.  The inquiry has now published its discussion and issues paper.

The discussion paper is very focussed on the interests and rights of subcontractors, being the group perceived to be most directly affected by contractor insolvency.  Although the comments in the introduction to the discussion paper appear to concede that much of the problem is created by cyclical commercial pressures and subcontractor mismanagement, the paper proposes significant changes with a view to reducing the risk to subcontractors of further contractor insolvency.  The underlying premise to the proposals is that, without intervention, subcontractors are not sufficiently able to protect their interests when contracting or during the course of a project.
 
Trust arrangements
 
The most significant recommendations relate to how project specific funding is dealt with.  In particular, the following options are suggested:
 

• the creation of a statutory trust in favour of subcontractors, to separate their progress claims from the contractor’s other cash flow;
• requiring that retention money be placed in separate trust accounts;and
• establishing project bank accounts, which has recently been implemented in UK government projects.

Each of these proposals is based on similar methodology and they overlap to a large degree.  The intent is that money ultimately intended for subcontractors be separated, to potentially be available to those subcontractors in the event of the contractor’s insolvency.  However, it is acknowledged in the paper that this will have an effect on the ability of contractors to financially manage their businesses.

Although the discussion paper expressly states that no definitive views have been formed as to a recommendation concerning these trust arrangements, it appears the inquiry is proposing to support at least some of them.  Many of the criticisms of the proposed trust arrangements are characterised as administrative concerns only and there are references in the paper to the proposals being difficult to argue with on moral grounds.

However, at this stage, the inquiry is only seeking further submissions on these proposals.

Other significant recommendations

Other significant recommendations include:

 

• providing for maximum payment terms mandated by legislation, to speed up cash flow to subcontractors;
• extending licencing to all categories of contractors, rather than just residential builders; and
• increased auditing of licensees.

 

The existing Queensland legislative regime, and in particular the Queensland Building Services Authority Act referred to in the report, would likely be used as a model for these changes.

The discussion paper also proposes increased education for subcontractors and more diligent enforcement of existing protections, such as the prohibition on insolvent trading and the requirement for statutory declarations in support of payment claims.

Proposals not recommended

Although no proposal has been entirely discounted at this stage, the discussion paper does not support the following:
 

• priority for subcontractors in the event of insolvency, which would require changes to the Corporations Act;
• the implementation of a mandatory insurance scheme, as there was little support from the industry for this proposal; and
• the establishment of a mutual fund, as again there was little support for this proposal.

Next steps

The inquiry is seeking further submissions by 2 November 2012, although it appears that there will be more time for further comments as there is significant work still to be done to develop any of the proposals.

If you require further information we can discuss any of these issues with you or assist you in providing a response to the discussion paper.