By Michael Brennan.
“The result of taking away options for battling license holders is that … the hole gets deeper.”
The Law of Holes
Healy’s First Law of Holes; if you are in one, stop digging. The challenge for business operators when faced with financial pressure is how to stop digging the hole and how to adopt a plan to dig in and ride out the crisis.
The Australian restructuring laws have been designed to provide a toolkit for businesses to dig in where the business can be saved. Where it can’t, the goal is to help everyone out of the hole in the best way possible.
There are a few exceptions to this concept and one of the starkest, is the position of license holders that become inoperative upon an insolvency event. The building and construction industry is the largest and most exposed sector facing this predicament.
In December 2015, the Economics References Committee of the Australian Senate handed down a report into insolvency in the Australian construction industry titled “I just want to get paid.”
Businesses operating in the Australian building and construction industry face an unacceptably higher risk than any other stand-alone industry of either entering into insolvency themselves, or becoming the victim of insolvency further up the contracting chain.
The industry’s rate of insolvencies is out of proportion to its share of national output. Over the past decade the industry has accounted for between 8 per cent and 10 per cent of annual GDP and roughly the same proportion of total employment. Over the same period, the construction industry has accounted for between one-fifth and one quarter of all insolvencies in Australia.
QBCC Excluded Individuals
In Qld, building industry participants are governed by the Queensland Building and Construction Commission Act 1991 (“the QBCC Act”). Part 3A of the QBCC Act deals with the mechanics of insolvent licensees. Insolvent license holders and their nominees are referred to as Excluded Individuals once an insolvency event occurs. Spoiler Alert! The use of the word ‘Excluded’ is a pretty strong hint as to nearly every outcome.
Under the current QBCC Act regime for licensees, businesses experiencing financial difficulty are unable to access the same suite of legislative remedies to assist their business that other non-building related businesses have.
My experience at the coal face is that the mandatory exclusion approach (unless you can show the business was solvent) has made it a zero-sum game for construction businesses in financial difficulties. They face a certain loss of license and banning from the industry. Therefore, they have little to lose in continuing to trade. Operators must decide to either act proactively and utilise the options available under the Corporations or Bankruptcy Acts knowing exclusion awaits or continue to trade and hope for the best. And hope as we know, is not a plan.
The result of taking away options for battling license holders is that the debts get bigger, the consumer damage becomes more widespread and the cost to taxpayers via the insurance scheme and damage to the economy becomes exponentially more catastrophic. In summary, the hole gets deeper.
Part 3A needs to Evolve
I have tried for more than a decade to advocate with both sides of politics for amendments to Part 3A. At various times I have also tried to get both the Master Builders and Housing Industry Associations to take on my cause, but they have faced the same political blockages I have. The results have been spectacularly unsuccessful and disappointingly consistent. It would appear that a restructuring professional leading the charge for changes that make it easier and more palatable for licensees to use restructuring laws, is a bridge to far for some to accept.
In June 2017, I wrote to the Minister for Housing and Public Works, the Hon. Mick de Brenni and the then Shadow Attorney General and Shadow Housing Minister. In a show of true bipartisanship, everyone ignored me and never bothered to respond.
At the heart of my proposal for amendments to Part 3A was the addition of a carve out for business that would meet similar requirements to the then proposed, safe harbour scheme.
Where directors take certain steps around seeking appropriate professional advice on how to restructure their business, potential liability under the existing … sections will be carved out of applying to the director.
This is designed to encourage directors to act early and seek help to try to turn their enterprises around. The carve out is not dependent upon the outcome of the restructure per se. The new litmus test is whether the proposed course of outcome would reasonably be likely to lead to a better outcome for a company and its creditors.
It is submitted that a similar carve out of the exclusion liability under Part 3A of the Act will lead to better outcomes for the building industry. License holders that take steps (including taking appropriate professional advice) that would reasonably be likely to lead to a better outcome for an enterprise and its creditors should not be penalised via the loss of the ability to further participate in the industry.
Almost no business or its directors post trigger event can show solvency. It makes the show cause process in s.54AC(4) completely illusory. However, adding the carve out suggested gives some incentive to operators to act early.
The key to improving outcomes in distressed businesses is early intervention by operators and their key advisors. Early intervention not only improves outcomes, but it also recycles resources back into the economy quicker which maintains economic momentum.
Albert Einstein is credited with saying “in the midst of every crisis, lies great opportunity”. There is no doubt that the building industry stands on the cusp of a massive challenge. There are a myriad of commentators trying to explain why the industry is teetering on a precipice. At the end of the day, those discussions are best left for once the crisis has passed. Right now, the economy and specifically the building industry, needs a circuit breaker before the knock-on effect of multiple insolvencies destroys the industry.