NSW: Bigger Changes Needed to Prevent Construction Insolvencies

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Wednesday, December 18th, 2013
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Changes to the Security of Payments Act in New South Wales do not go far enough to address underlying problems associated with building industry insolvency in that state, a Sydney based debt collection expert says.

Contractors Debt Recovery managing director Anthony Igra acknowledges changes contained in the Building and Construction Industry Security of Payment Amendment Bill 2013, which passed last month in New South Wales, are well intentioned and represent merely the first tranche in broader reforms promised by the government to address construction industry insolvencies in the wake of high profile corporate collapses.

He says, however, that the changes announced to-date fail to deal with the main problems identified in an inquiry into insolvencies in the sector and may even have some unintended consequences themselves.

Anthony Igra

Anthony Igra

“In my view, you’ve got two choices after a Collins Inquiry, it’s incremental change or revolutionary change,” Igra said, adding that “it’s always easier to go with incremental change, which is what this [the Bill] is.”

He said far more revolutionary change, including the introduction of construction trusts, was needed to address the main underlying problem of insolvency.

Introduced into Parliament last month as the first part of the government’s response to the Inquiry into Construction Industry Insolvency in NSW chaired by Bruce Collins QC (otherwise known as the Collins Inquiry), the Bill sets out maximum due dates for progress payments on construction contracts (15 business days after a payment claim is made for payments to a head contractor, 30 business days for payment to subcontractors) and removes a requirement that a payment claim must state it is a claim made under the Security of Payments Act (where that is indeed the case).

The Bill also requires head contractors to provide a ‘supporting statement’ in effect saying all sub-contractors have been paid amounts due and payable when serving claims upon the principal and provides for the appointment of officers to enforce compliance in this area.

Igra says there are a number of problems with the new provisions.

He argues that payment claims which do not specify whether or not the claim is made under the Act, for instance, simply create confusion while merely requiring statements that subcontractors had been paid is meaningless unless accompanied by appropriate means to verify that this is indeed the case.

Indeed, Igra says the new rules in this area are actually weaker than those under the former statutory declaration regime, whereby there was provision for those making false statements to be prosecuted under the Oaths Act.

As for the maximum due dates for progress payments, Igra says these in many cases provide for less favourable terms for sub-contractors, who under the previous regime were entitled to payments within 10 business days after a payment claim in absence of contractual provisions stating otherwise – not 30 business days as per the new arrangements. Moreover, the setting of maximum due dates misses the underlying problem in terms of contractors simply not being paid by the due date or not at all.

He says the real solution revolves around the establishment of construction trusts – the principal recommendation of the Collins Inquiry involving the establishment of an industry-wide trust accounts which would hold all payments due to a head contractor, subcontractors, sub-subcontractors and suppliers for projects worth more than $1 million in order to ensure subcontractors were the first to be paid in the event of a building company collapse. While the Trustee of the Trust might become insolvent, the money itself would remain in the Trust account and available for payment to subcontractors.

“It’s not that contractors have a cash-flow problem because the due dates for payment are too long,” he said. “They’ve got a problem because they are not being paid on the due dates. In fact, [often] they’re not being paid at all.”

“The whole idea [about an effective payment system] is that anyone can argue about how much I am owed but once an adjudicator decides how much is owed, the money is there. If the cash isn’t there, you can have all the due dates for payment you like [and it won’t make a difference].”

The crisis associated with insolvency in the construction industry in New South Wales was the subject of considerable public attention following high profile corporate collapses such as Reed Construction, Hastie Group, Kell & Rigby and St Hilliers.

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