Consumers’ hopes, dreams and hard-earned cash aren’t the only things turned to ash by phoenixing, a practice which is all too common in the construction industry and sees companies go into liquidation to avoid paying bills only to re-emerge weeks or even days later under a new name and ABN.
Subcontractors are often the main victims of these unscrupulous operators; left millions of dollars out of pocket in unpaid fees with no avenue for redress.
To understand how this practice works, you need to understand how contacts work in the construction industry.
Typically, on a project, there is a lead contractor or developer that tenders for all the work involved in a development. Once successful, this party then divides up the work required on the project and subcontracts it out to specialist firms – an electrical contractor gets the electrical work, the glaziers get glass, and so on.
However, the lead contractor or developer usually receives and holds the cash paid by the client of the project, which could be individuals, private investors or even government.
It is in the lead contractors’ interests to hold this cash as long as possible to manage cash-flow. The Australian Building and Construction Commission received 614 reports, enquiries and complaints on payment matters in 2018-19. This is up more than four-fold on the 145 queries received a year earlier.
Less reputable operators can go a step further than delaying payments. If they see problems ahead, they can shift the money into other vehicles and liquidate the business that is responsible for the project and holds the agreements with subcontracting firms.
This leaves the subcontractor with no hope of receiving the money they are owed, while still needing to pay their employees and suppliers.
To rub salt in the wound, the directors of the liquidated firm then reappear at a new company.
A report prepared by PwC for the ATO, Fair Work Ombudsman and ASIC estimated the practice cost the Australian economy between $2.9 billion and $5.1 billion in 2016-17. The bulk of the cost (up to $3 billion) was borne by businesses, such as subcontractors.
That this can still go on shows we have a long way to go before we will be close to restoring trust in the construction sector.
There should be tougher penalties for the directors of phoenixing companies. The federal government’s proposed identification number of directors is a good start. We want to see it picked up by next year.
We have also seen significant work by government on security of payments to ensure subcontractors get paid in full and on-time, but the power imbalance in the industry means more radical change may be needed. My association is advocating that state and territory legislatures implement a threshold for construction industry project works to a value of $1 million, not just for those valued over $20 million.
There is an opportunity in 2020 to address these problems once and for all, and in doing so properly protect consumers and small and medium businesses – and begin rebuilding trust. It should be grasped.