Australia: Inquiry into Construction Industry Insolvency in NSW – Final Report

In August 2012 the NSW Government commissioned an Independent Inquiry into Construction Industry Insolvency. The Inquiry was asked to assess the causes and extent of insolvency in the building and construction industry and to recommend measures to better protect subcontractors from the effects of insolvency.

In November 2012, Norton Rose released a Briefing Paper that examined the NSW Government Discussion and Issues Paper Inquiry into Construction Industry Insolvency in NSW, commissioned as part of the Inquiry.

The NSW government has now released the Final Report of Bruce Collins QC. The Final Report (a copy can be found here) makes 44 recommendations to minimise the effect of construction company insolvencies on jobs and major projects in the state. The key recommendations of the report include:

  1. Creation of the NSW Building and Construction Commission;
  2. Creation of a statutory "construction trust";
  3. Financial Health Checks; and
  4. A licensing system for all.

The report also addresses the Adjudication process and contains a number of recommendations in respect of the Security of Payment Act and its implementation.

Our comments on the key recommendations are as follows:

  1. Creation of the NSW Building and Construction Commission (see Final Report page 351) – this recommendation is purely practical. The commission is described as a necessary body through which appropriate reforms may be instituted, implemented and monitored. The Inquiry's recommendation also accords with the opinions of industry bodies to consolidate the functions that currently exist into the one body in order to simplify the debt recovery processes, reduce inefficiency and remove the dividing lines between the commercial and residential sections of the industry. This recommendation is also in line with the recent announcement of a Civil and Administrative Tribunal of New South Wales to consolidate and replace various existing tribunals, which is further detailed here.
  2. Creation of a statutory "construction trust" (see Final Report page 355) – as one of the most significant issues indentified in the Issues Paper, the report proposes that any payment over $1 million by a principal to a head contractor or by a head contractor to a subcontractor be held on trust in a separate account for the head contractor, subcontractor, sub-subcontractor and supplier. Construction trust fund provisions are considered as a potential protection that can be mandated in all construction contracts and are currently widely used in Canada and the UK.
  3. Financial Health Checks (see Final Report page 354) – this recommendation proposes a financial checking, monitoring and auditing system implemented by the NSW Building and Construction Commission for the purpose of reducing the number of insolvencies in the building and construction industry in NSW. The NSW Building and Construction Commission will be resourced with trained officers from the forensic accounting sphere who will have the power, acting upon reasonable information, to conduct spot audits and to require the production of relevant financial information from contractors who are in or may be in impending financial difficulties.
  4. A licensing system for all (see Final Report page 353) – this recommendation includes the establishment of a licensing system which requires all builders and construction contractors operating in the commercial building sector to qualify within a particular graduated licence category according to their net financial backing. The result will be that the work of builders and construction contractors will be restricted to the category of project value for which they have demonstrated financial backing and licensed accreditation. The report proposes that licensing will work alongside other reforms such as capital backing and net tangible asset thresholds as mandatory requirements to operate in the industry.

What Happens Next?

The NSW Finance Minister, the Hon. Greg Pearce MLC, has announced that the NSW government will now consider the recommendations and consult with stakeholders and the public about potential legal and policy changes until 21 February 2013. The construction industry now has an opportunity to comment on and respond to any of the recommendations contained in the Final Report.

If you have any questions, comments or feedback, we encourage you to contact us.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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