Opposite directions: Phoenix busting or second chance?

In the last week of August the Queensland Government tabled legislation which is intended to better protect construction industry subcontractors from the risk of non-payment.

The Building Industry Fairness (Security of Payment) Bill 2017 available here includes a number of measures.

Project Bank Account Regime

PBAs are effectively trust accounts which operate to quarantine money paid to a head contractor that is expected to be on paid to their subcontractors.

Initially the PBA regime will apply only to Queensland Government projects, and will only protect ‘first tier’ subcontractors – it will not extend to those subcontractors who directly or indirectly work for the first tier subcontractors.

However, the legislation provides a mechanism for extension of the PBA regime to all construction projects over $1m- ie whether government or private – by proclamation.  Likewise there is a mechanism to extend the regime to all subcontractors – not just tier 1 subcontractors – by a separate proclamation.

Dispute Resolution and adjudication

The legislation incorporates the existing Subcontractors’ Charges Act 1974 regime, but it tightens the rules which require a head contractor to respond to a sub-contractor’s ‘payment claim’ with a ‘payment schedule.’

The extent to which criminal sanctions will apply is noteworthy.  Head contractors apparently commit an offense if they do not:

  • Provide a payment schedule on time.
  • Pay an amount owed when it falls due.
  • Pay an adjudicated amount within five business days of receiving a written decision.

Financial Reporting

The legislation will reinstate requirements for licensed builders to provide financial information to the Queensland Building and Construction Commission.  The QBCC will also be given power to require the production of financial information so that it can better assess whether a builder continues to meet the minimum financial requirements.

Phoenix-busting

The legislation includes a measure that is described as clamping down on ‘corporate phoenixing’ – by restricting those involved with a recent financial failure from holding a QBCC license.

The current licensing regime already bars those who were a director or secretary of a construction company in the twelve months prior to its liquidation or administration from holding a building license.  The amendments will extend the period to cover the two years prior to liquidation or administration.  Further, the exclusion mechanism will also take into account the activities undertaken by a person – not just the office they occupy – including those who:

  • act as the chief executive officer or general manager
  • give instructions to officers of the company which are generally acted upon
  • participate in making decisions that affect a substantial part of the business
  • present themselves to others in such a way as to lead them to believe that they control or influence the business.

The intention is to ensure that the regime also captures ‘shadow directors’ – those who manage companies without holding the office formally.  Whilst the Corporations Act extends the definition of directors to those who act in the position of a director, as demonstrated most recently in the Akron Roads decision that extension may not cast the net as widely as once thought.  In Akron Roads it was held that a person who:

  • dealt with creditors,
  • attended executive meetings,
  • negotiated with the bank and attempted to obtain finance,
  • had financial accounts prepared and was responsible for short-term cash flow,  forecasting and cash management

was not a shadow director, because none of those activities ‘involve a board decision or fall within the responsibilities of the directors…[who] do not carry out managerial tasks.’

The exclusion will also apply to those who directly or indirectly control 50% or more of a class of shares in the company.

Opposite Directions?

The Federal Government is undertaking reforms that are intended to de-stigmatise business failure, and encourage entrepreneurialism.

The Queensland government appears to be moving in the opposite direction however,  by introducing a ‘one-strike’ regime specifically aimed at preventing those involved in a financial failure from going straight back into business.

The new focus on activities will require a qualitative assessment, and so it will be critical that the QBCC has the skills and resources to take the assessment process in a new direction.

If the Queensland initiative is successful in tackling phoenix activity, there will some who use its success to argue the framework should be applied more widely in a universal director-licensing regime.


Update: on 12 September 2017 the Federal Government announced its own anti-phoenix measures, details here.

Further update: The Building Industry Fairness (Security of Payment) Act 2017 was passed on 26 October 2017, with some measures to be effective from 1 January 2018, however most of the measures await proclamation.  The 143 amendments to the original draft legislation detailed here are mostly matters of clarification, correction of typographical errors, or the consolidation of definitions.  However there are some noteworthy changes: allowance for ‘reasonable excuse’ into some offence provisions, and a review of operation after 12 months.

And another update: On 12 June 2018 the Queensland government announced that the commencement of security of payment changes had been changed from 1 July 2018 to 17 December 2018.

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