When it comes to business insolvencies in Australia, the construction industry has been overrepresented for years. More than one in five companies that undertook insolvency proceedings in the 2018/2019 financial year were construction businesses.  

Now, in the current environment, we’re set to see an even greater influx of construction insolvencies in the year ahead. 

What will cause insolvencies to rise?

Many construction businesses will be experiencing legitimate hardship at the moment. The Master Builders Association of Australia is forecasting a 27 per cent fall in homebuilding activity in the 2020/21 financial year. 

Others may be opportunistic and avoid paying debts by going down the insolvency path. Unfortunately, phoenixing - where companies will deliberately liquidate to avoid paying debts, only to create a new company to continue the operations of the former company - is extremely common in the construction industry. In 2017-2018 in NSW, 561 construction businesses were found to have been involved in phoenixing behaviour.  

Another complicating factor is the increased leniency and protection from personal liability in the current period. From March, insolvency laws were amended to afford business owners more time and leniency to repay their debts before needing to undertake insolvency proceedings. These changes will be valid until the end of the year unless they are extended.  Once the temporary rules end, we’re likely to see a jump in insolvencies. 

A history of wrongdoing 

The construction industry has a checkered past when it comes to insolvencies. 

In the 2018/2019, external administrators reported that one in five breaches in regard to misconduct in insolvencies occurred within the construction industry. 

In the same period, 92% of construction businesses which underwent insolvency proceedings didn’t repay any of their debts to unsecured creditors like suppliers and contractors. The construction industry also had the highest number of reports out of any industry where companies owed more than $10 million to unsecured creditors. 

With it seemingly being so simple to escape paying debts, no wonder phoenixing is so popular in the construction industry. Clearly the system is broken. 

How can phoenixing in the industry be stamped out?

Gaps in regulation and difficulties with prosecuting wrongdoing have made it difficult to stamp out phoenixing. Since 1994, at least six governmental inquiries have examined phoenix activity without resolving the problem. 

Finally, in February 2020, new legislation was introduced. The Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 (Cth) (Phoenix Act) has made changes to the Corporations Act 2001 (Cth) (Corps Act), A New System (Goods and Services Tax) Act 1999 (Cth) and the Taxation Administration Act 1953 (Cth) to give regulators greater power to “detect and disrupt phoenix activity, and to prosecute directors and other professional advisors who engage in or facilitate the activity.” 

What will this mean for construction businesses? 

Unfortunately, the new phoenixing legislation is unlikely to have as much of an impact as hoped in the current environment with enforcement potentially proving more challenging in this period. We are very likely to see the pattern of insolvencies in the construction industry not only continue but increase significantly. 

It looks like we’re going to have to wait a little longer before the problem of phoenixing in the industry is solved. Until then, consumers, contractors and suppliers should be hyper vigilant when working with construction companies.