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:
Creation of the NSW Building and Construction Commission;
Creation of a statutory "construction trust";
Financial Health Checks; and
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:
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
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.
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
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
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
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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