One in three NSW company collapses are building firms: State building inquiry

The NSW government has set out the full terms of reference of its NSW building industry insolvency inquiry.

The inquiry was launched this week in response to the recent collapse of high-profile building firms St Hilliers Construction, Kell & Rigby and Reed Construction, as well as hundreds of other smaller building firm collapses, which have left around 24,000 unsecured creditors – mainly suppliers and sub‑contractors – out‑of‑pocket, some owed millions of dollars.

Among the things the inquiry will examine will be payment practices affecting sub-contractors and the existing protections in place for them as well as possible changes to the legislation to reduce the incidence of building firm insolvencies as part of its independent inquiry into insolvency in the building industry.

The full terms of reference are included in a NSW government document, which reveals in stark terms the impact the failing building industry is having on the wider state economy.

It says the building industry accounts for a significant 15% of businesses in NSW, but worryingly, makes up to 30% of the companies going into administration in the state, the NSW government has confirmed.

“The government is concerned about this high rate of insolvency and the impact it is having on the community, small businesses, the NSW economy and the government’s construction program,” says the NSW government.

The independent inquiry chaired by Sydney barrister Bruce Collins, QC, and ordered by NSW Finance Minister Greg Pearce will accept submissions from the construction industry, financial professionals, relevant government regulators and the public.

Separate to the inquiry, the NSW government has established a taskforce to “review government procurement and contract administration processes”.

High-profile recent building firm collapses included St Hillers Construction and Reed Construction, which had social housing and infrastructure contracts with the state government.

“The inquiry will also consider the work of this taskforce," says the state government.

However, the inquiry will not make findings “in relation to particular incidences of company failure” – the role of ASIC – but examples of failure may inform consideration of policy and legislative options.

Submissions close on September 14 with the inquiry reporting within three months of being established.

The full terms of reference are: 

1. Assess the extent and cause of insolvency in the construction industry.

2. Consider payment practices affecting sub-contractors, existing protections for subcontractors and the impacts of insolvency on sub-contractors.

3. Consider legislative or other policy responses that can be taken to minimise the incidence and impact of insolvency in the industry, including:

a. options for improving the priority given to unsecured creditors where the debt results from a sub-contracting relationship

b. opportunities to simplify debt collection processes

c. strategies to improve financial management skills in the industry

d. a mandatory insurance scheme to secure payments to sub-contractors

e. a discretionary mutual fund to compensate contractors from losses arising from insolvency of a lead contractor or principal

f. the effectiveness of trust arrangements in protecting sub-contractor payments retained by a lead contractor or principal

g. mechanisms to ensure appropriate and effective financial disclosure between contracting parties, including disclosing payment of sub-contractors

h. other relevant issues or innovations raised by the Small Business Commissioner or stakeholders.

4. In developing recommendations the inquiry should consider the impact of Commonwealth jurisdiction over insolvency.

5. The inquiry will receive advice from an industry reference group including industry key associations and the Small Business Commissioner.