Residential Focus: Part 1 - Track record of insolvency – implications for licensing

Holding Redlich


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Reveals the keen focus of the regulator on using its licensing powers to clean up the NSW home building industry.
Australia Real Estate and Construction
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A recent decision of the Tribunal, affirming a licensing decision under the Home Building Act 1989 (HB Act) of the regulator to refuse an application to renew a qualified supervisor certificate, reveals the keen focus of the regulator on using its licensing powers to clean up the industry.

The applicant before the Tribunal was the director, secretary and controlling mind of a company licensed under the HB Act and was its nominated supervisor.

The company was placed into voluntary administration in 2022. Its liquidator estimated that the company had been trading whilst insolvent since 2020 and had $2.3 million in debts.

In 2023, the applicant sought to renew his qualified supervisor licence certificate. This was refused as the regulator was not satisfied that the applicant had taken all reasonable steps to prevent the liquidation or appointment of a controller or administrator and deemed that the applicant was not fit to hold the authority.

Section 33B(a)(xv) to (xvii) of the HB Act requires the regulator to not issue an authority unless it is satisfied that an applicant (with some exceptions):

  • is not concerned in the management of a Chapter 5 body corporate at the date of the application
  • was not concerned in the management of a Chapter 5 body corporate within three years before the date of the application
  • was not concerned in the management of a body corporate which became a Chapter 5 body corporate within 12 months after the applicant ceased to be a director and within three years before the date of the application.

(Chapter 5 body corporate refers to a body corporate that is, for example, being wound up, has had a receiver or a receiver and manager appointed, is under administration or is subject to a deed of company arrangement.)

There is a lifeline in section 33D, where the regulator is satisfied that the applicant took all reasonable steps to avoid the relevant insolvency.

The applicant attributed the failure of the company to:

  • the COVID-19 pandemic, which impacted material prices and labour
  • the mismanagement of the company's office manager
  • a failure by the company's accountant to bring the office manager's financial mismanagement to his attention.

The applicant did not wish to return to running a company and sought a qualified supervisor certificate to increase his income earning potential.

The regulator's position was that the applicant had not provided sufficient evidence for the Tribunal to be satisfied that the applicant had taken all reasonable steps to avoid the company going into administration. The regulator identified a long list of considerations regarding the company's financial position which had not been addressed and that, although the applicant took the decision to place the company into liquidation based on its accountant's advice, this did not constitute taking all reasonable steps to avoid the winding up. Reasonable steps may have included:

  • selling assets
  • increasing revenues through increasing fees for work
  • increasing or holding revenues steady whilst at the same time decreasing expenses
  • raising fresh capital from shareholders
  • borrowing from an external party
  • in the instance of funds already borrowed, refinancing and raising the limit of the facility.

The Tribunal agreed with the regulator that the applicant had failed to meet his responsibilities for overseeing the affairs of the company. Even if information had been requested of the accountant or office manager and withheld, the applicant should have taken the necessary steps to satisfy himself of the true financial position of the company. Had the applicant completed the company's 2020/2021 and 2021/2022 tax returns, he would have been aware of the company's financial position and could have taken one or more of the several steps identified by the regulator to avoid administration. The Tribunal noted that these are far more extensive than any failures that might be attributed to the Office Manager or the accountant.

In an industry that is well known for its phoenix activity, licence holders should take this decision as an indication of the lens that will be passed over their financial management of companies by the regulator where they have a record of association with Chapter 5 bodies corporate.

This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.

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