High-Rises in Construction Insolvencies 2021: Builders to Feel the Pressure from Statutory Demand Protections Lifting and Other Reversals

During the COVID-19 pandemic, the Australian and Victorian government instituted several legislative changes and policies to reduce the financial impact suffered by businesses, including instituting additional protections and financial support packages. As the Australian economy slowly comes out of the pandemic, these measures are also being slowly being removed as the country reverts to pre-COVID arrangements.

Summary of Relevant Changes

A summary of the most impactful changes on the construction industry are as follows:

• The statutory relief provided to directors protecting them from liability for insolvent trading ceased on 31 December 2021;

• Implementing additional legislative measures on director resignations to prevent phoenix activities;

• Thresholds for issuing and enforcing statutory demands reverting back to pre-COVID levels (in particular, the extension on enforcement of statutory demands reverting from 6-months back to 28 days);

• Rolling back of stimulus measures and governmental subsidy payments such as JobSeeker and JobKeeper; and

• Strong likelihood of the ATO commencing and/or following up on prior issued statutory demands.

Impact on the Construction Industry

The general impact of the above measures will mean that the quantity of insolvencies in builders and construction companies will increase in the short-term, with the majority likely to occur due to the following mechanisms:

• Builders that have had statutory demands previously issued on them will no longer enjoy the extended enforcement-free period, and all outstanding statutory demands will revert in full force to its original enforcement period;

• As the construction industry is generally a cash-flow tight industry, any builders that have been relying on governmental subsidies and supports will suffer substantial cash-flow issues due to the cut-off and may become insolvent as a result; and

• The lift on statutory demand enforcement periods will mean that agencies, companies and individuals may be more inclined to instigate proceedings against builders as there is greater certainty of enforcement.

Recommendations Moving Forward

The key recommendations for construction companies worried about insolvency due to the above are:

• Conduct a financial and risk assessment to determine the monetary and risk positions of the company;

• Seek legal and specialist advice if there is the perceived risk of potential litigation or insolvency; and

• Seek professional financial and accounting advice in the circumstances where corporate re-structuring is required.

Should you have any questions or require such assistance, please contact our Insolvency team.