ASIC puts the microscope on contractors

Articles, Restructuring + Insolvency

Since 2014, ASIC’s surveillance program aimed at eradicating illegal phoenix activity has been broadened to focus on the use of false statutory declarations in Australia’s building and construction sector.

The concern voiced by small businesses, industry bodies, and government agencies was that officers of larger companies had falsely declared that they had paid small businesses contracted to work on commercial and residential projects when that was not the case.

The focus of ASIC’s surveillance was on:

  1. Principal contractors requiring contractors to provide statutory declarations to confirm that the contractors have paid all amounts owing to employees and secondary contractors, before principal contractors pay the invoice issued by the contractor; and
  2. Contractors signing statutory declarations and providing it to the principal contractors, in circumstances where it appears that contractors may not have paid all secondary subcontractors at the date of swearing the statutory declaration.

ASIC’s findings

ASIC recently provided a media release on its surveillance program and found a number of contractors may have provided statutory declarations that falsely claimed secondary contractors had been paid.  ASIC has since issued warnings to the contractors and advised the contractors to review their compliance system.

The making of false statutory declarations about payment is something of significant concern as it exposes secondary contractors (often small businesses) to cash flow risk.  It is also an indicator that the contractor may itself be under financial distress.

A possible solution to this issue is the creation of a mandatory trust model for the construction industry.  The basic approach of a statutory trust for the construction industry operates whereby a contractor receives a progress payment upon trust to pay workers, subcontractors and suppliers.  Only after these parties have been paid does the balance go to the builder.

The New South Wales Government has introduced a similar scheme under the Building and Construction Industry Security of Payment Amendment (Retention Money Trust Account) Regulation 2015 (NSW).  However this scheme only applies to contracts between head contractors and subcontractors for non-residential building projects worth over $20 million.  We have previous published an article on this scheme, which can be viewed here.

Given the findings of ASIC’s surveillance, it will be interesting to see if the trust scheme is expanded to include building projects under the value of $20 million.

For further information, please contact us.

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