A fix for construction industry insolvency? The Murray Report

Last month the government released the Murray Report: A Review of Security of Payment Laws. It is a welcome – if low profile – step towards a national scheme, although the lack of fanfare, and the delay between delivery of the report in December 2017 and its release in May this year, do not reflect the sense of urgency that many would be hoping for.

The review was intended to identify ‘legislative best practice’ to improve ‘consistency in security of payment legislation’ and the better protection of subcontractors: the question is clearly not whether there should be a national scheme, but rather, what a national scheme should look like.

East Coast v West Coast

One of the major issues addressed by the 382 page report (available here) is the type of model to be used – essentially a choice between the ‘East Coast Model’ – deployed in NSW, Victoria, Queensland, South Australia, Tasmania and the ACT – and the ‘West Coast Model’ used in Western Australia and the Northern Territory.

There are variations even between the states that use the same model, but in broad outline the key differences are:

The East Coast model provides a statutory payment scheme that can override contractual provisions whereas the West Coast model provides ‘legislative assistance’ to supplement the existing contractual arrangements.
The East Coast model only allows claims ‘up the line’ i.e. to a head contractor but not to a sub-contractor – compared to the West Coast Model allows claims in both ‘directions.’
Under the East Coast Model a failure to provide a ‘payment schedule’ in reply to a payment claim and to pay by the due date creates a statutory debt for the claimed amount, capable of enforcement.
The West Coast model allows the parties in dispute to select the adjudicator that they believe is best suited to resolve the dispute, an adjudicator is independently allocated under the East Coast Model.

The report recommends a modified East Coast Approach.

Statutory Trusts

Murray recommends that a deemed statutory trust model should apply to all parts of the contractual payment chain, in preference to any expansion of the limited Project Bank Account regimes currently in place in WA and Queensland.

There is extensive discussion of the administration burden imposed by PBAs, and it seems clear that some of those who welcome the protection that a PBA provides would prefer to avoid the paperwork involved in providing similar protection to their own sub-contractors!

The report states:

“…the concept of a deemed statutory trust has not only been operating in large parts of North America for many years without inhibiting the smooth functioning of the industry, but it has also (unlike the case of the various security of payment laws in Australia) not been the subject of significant critical reviews.”

Surprisingly, it seems that the review was undertaken without any input from ARITA, or any individual insolvency practitioner. Perhaps that is why the report has not identified any of the practical problems that arise from creating the type of trust arrangements that it proposes, or explained whether and how such problems have been solved in those overseas jurisdictions.

Next steps?

The website of the Department of Jobs and Small Business explains that the Government is using the Building Ministers’ Forum (BMF) – the group of Federal, State and Territory Ministers with responsibility for building and construction – to consider and respond to the review, and that Federal Government responsibility has been transferred to the Department of Industry, Innovation and Science.

For comment on the Queensland regime, introduced whilst the Murray review was under way – and recently delayed until 17 December 2018 – see here.

Two strikes? Queensland-only anti-phoenix regimes

As well as regulating labour hire, Queensland’s new Labour Hire Licensing Act includes an anti-phoenix element. This is not Queensland’s first use of industry-exclusion to address phoenixing, a similar structure was used in the 2017 Building Industry Security of Payment legislation – but the ambit of the labour hire regime is far broader than many would anticipate.

Building Industry Fairness (Security of Payment) Act

As discussed in more detail here, the Building Industry Fairness (Security of Payment) Act 2017 implemented a range of measures aimed at protecting sub-contractors from the risk of non-payment.

The anti-phoenix element arises from exclusion from the building license regime if an office bearer of a company acted as a director or secretary of a construction company that entered into insolvency administration in the prior two years.

Labour Hire Licensing Act 2018

The Labour Hire Licensing Act 2018 which commenced on 16 April 2018 to introduce a regime for registration of labour hire participants likewise includes an anti-phoenix element. The requirement that all directors of a company must be ‘fit and proper persons’ is hardly unusual, but the criteria includes two that are particularly focused on insolvency, referencing prior directorship of a company that:

entered into a formal insolvency administration.
has failed to pay tax or superannuation due to its employees.

The changes are noteworthy because the LHLA has a reach that is far broader than would be anticipated from its name. The regime is not limited only to external labour hire arrangements, it appears that it extends to internal arrangements that are very common in corporate groups: the use of a designated payroll company. As a result it seems that a group employer in any industry – whether headquartered in Queensland or not – will need to register and comply with the regime in respect of any Queensland employees.

At a time when the Federal Government is implementing changes intended to reduce the stigma of business failure, it seems that the Queensland government is heading in the opposite direction – further expanding a ‘one-strike’ regime that will restrict those involved in a financial failure from acting as company directors.

No doubt the Federal Government’s Anti-Phoenix Taskforce is aware of the Queensland approach and will be watching the outcome with great interest. If the industry-exclusion model does appear to provide a more effective means to deal with the problem of phoenixing, there may be moves to implement it more broadly.

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.