Dec 042015

The Senate Economics References Committee has criticised the contempt that some directors show for company laws, the “mild” consequences of non-compliance and the low likelihood that unlawful conduct will be detected.

In its report “Insolvency in the Australian construction industry: I just want to be paid” – published 3 December 2015 – the Senate Committee states:

The committee considers that the estimates of the incidence of illegal phoenix activity detailed in this report suggest that construction industry is being beset by a growing culture among some company directors of disregard for the corporations law. This view is reinforced by the anecdotal evidence received by the committee which indicates that phoenixing is considered by some in the industry as merely the way business is done in order to make a profit.

The committee is particularly concerned at evidence that a culture has developed in sections of the industry in which some company directors consider compliance with the corporations law to be optional, because the consequences of non-compliance are so mild and the likelihood that unlawful conduct will be detected is so low.

This culture is reflected in the number of external administrator reports indicating possible breaches of civil and criminal misconduct by company directors in the construction industry. Over three thousand possible cases of civil misconduct and nearly 250 possible criminal offences under the Corporations Act 2001 were reported in a single year in the construction industry. This is a matter for serious concern. It suggests an industry in which company directors’ contempt for the rule of law is becoming all too common.

[from Executive summary, Phoenixing (page xix) and paragraph 5.100 (page 87)]

Contents of Senate Report

For an overview of the numerous insolvency issues considered in the report, the Table of Contents is reproduced below (minus the page numbers).

Membership of Committee
Executive summary
Insolvency affects everyone
Early detection is critical to curbing illegal phoenix activity and preventing
smaller scale insolvencies from becoming more significant
More needs to be done to protect honest industry participants from unscrupulous
Disqualification of directors
Director Penalty Regime
Transactions entered into in order to avoid employee entitlements
Licensing arrangements
Transfer of jurisdiction of insolvency matters
Valuing debt assignments fairly
Subcontractors have a right to be paid for work completed
Retention trusts and project bank accounts
Information asymmetries
A legal obligation to warn of impending insolvency
A beneficial owners’ register and a Director Identification Number
List of recommendations
Chapter 1
Conduct of inquiry
Adverse comment
Structure of report
Part I (chapters 2–6)
Part II (chapters 7–12)
Quantifying the incidence, causes and cost of insolvency in the Australian
construction industry
Overview of Part I
Chapter 2
Overview and background
What is insolvency?
Structure of the Australian construction industry
Cultural change in the Australian construction industry
Insolvency in the construction industry
Inadequate record-keeping on insolvencies
Incidence of insolvency
Causes of insolvency
Broader economic conditions and cyclical nature of the industry
Inadequate cash flow and poor industry payment practices
Level of business acumen in the construction industry
Committee’s views
Chapter 3
Economic effects of construction industry insolvencies
Total Economic Cost
Unsecured Creditors
Public Revenue
Direct Costs—Taxation
Indirect Costs—Legislative Safety Net
Chapter 4
Broader effects of construction industry insolvencies
Social impact
Committee’s views
Effect on productivity
Committee’s views
Potential to attract criminal elements
Outlaw motorcycle gangs and debt recovery
Reasons for criminal elements
Committee’s views
Chapter 5
Illegal phoenix activity and other misconduct
What is phoenix activity?
Illegal phoenix activity
Corralling the illegal phoenix
Incidence of phoenix activity
Committee’s views
Effect of illegal phoenix activity
Cost of illegal phoenix activity
Impact of illegal phoenix activity on other businesses
Non-economic effects of illegal phoenix activity
Curbing illegal phoenix activity
Identifying illegal phoenix activity
Preventing and punishing illegal phoenix activity
Committee’s views
Other criminal and civil misconduct related to insolvencies
Incidence of civil and criminal misconduct
Nature of misconduct
Committee’s views
Chapter 6
The Collapse of Walton Constructions
The National Australia Bank’s relationship with Walton Constructions
What did the National Australia Bank know?
What should the National Australia Bank have done?
Committee’s view
Problem of pre-insolvency advice
Committee’s views
Licensing—a failure of the regulator?
Committee’s views
Impact of Walton Constructions Collapse
Assessing the legislative framework
Overview of Part II
Chapter 7
Action against directors
Disqualification of directors
Legislative requirements
Challenges in disqualifying directors
ASIC’s high profile list
Committee’s views
Director Penalty Regime
Committee’s view
Transactions entered into in order to avoid employee entitlements
Committee’s views
Chapter 8
Security of payments legislation
Early warning signs of insolvency
Security of payments protections
East Coast model
West Coast model
Skipping up the contractual chain
Timelines under the Security of Payment Acts
Are the Security of Payment Acts working effectively?
Committee’s views
Chapter 9
Problems with the Security of Payments Acts
False statutory declarations
Committee’s views
Intimidation and retribution
Committee’s views
Enforcement costs
Committee’s views
Education and support
Committee’s views
Authorised Nominating Authorities
Committee’s views
Adjudication timelines
Committee’s views
The problem of insolvency
Committee’s views
No national security of payments Act
Committee’s views
Chapter 10
A Statutory Construction Trust
Exploring a statutory construction trust model for security of payments
What is a trust?
What is retention money?
Difference between a retention trust and a trust over the entire project
In favour of the trust
Opposition to the trust
Committee’s views
How would the trust operate?
Approach in Western Australia and the Northern Territory
Approach in New South Wales
Project bank accounts (PBAs)
Chapter 11
Licensing arrangements
Capital Backing
Financial and business acumen
Fit and Proper Person Test
Chapter 12
Additional proposed reforms
Legal obligation to warn of impending insolvency
Committee’s views
Increasing transparency and verifying company directors
Beneficial owners’ register
Director identification number
Committee’s views
Problem of pre-insolvency advice
Committee’s views
Valuing debt assignments fairly
Committee’s views
Transfer of jurisdiction of insolvency matters
Committee’s views
Coalition Senators’ Additional Comments
Appendix 1
Submissions received
Answers to questions on notice
Appendix 2
Public hearings and witnesses
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