What is Putting Pressure on the Building and Construction Industries?

Recently, there has been an increasing number of insolvency appointments, particularly among companies in the building and construction sectors. As of 19 May 2024, ASIC reported 2,566 appointments of administrators or other controllers since 1 July 2023, a 33% increase from the previous year. However, this is less than the 81% increase between 2022 and 2023 figures.

ASIC Australian Insolvency Statistics, Chart 1.2: The first time a company enters external administration or has a controller appointed – Industry type (Released 3 June 2024)

Causes of Insolvency

Insolvency in the building and construction sectors often results from fixed-price contracting, failures in quoting and failures in recovering costs. Post-Covid, material and labour costs have risen. Furthermore, companies may overtrade beyond the capacity of management and internal personnel to control or limit growth, manage profitability, cashflow, and liabilities, including employee entitlements and tax obligations.

Residential home-builders face ongoing supply chain challenges stemming from COVID-19. These disruptions constrained access to essential building components, further exacerbated by an increase in material costs, overall delaying project completions.

These factors converge to create significant liquidity issues for builders, who already operate on thin profit margins. Faced with these challenges, the risk of insolvent trading becomes a significant concern. Insolvent trading occurs when a company continues to operate and accumulate new debts despite being unable to meet its existing financial obligations.

Directors’ Duties

Directors have a legal duty to prevent insolvent trading per s 588G of the Corporations Act 2001 (Cth) and to act in the best interests of the company and its creditors. Failure to do so can result in personal liability for debts incurred during the period of insolvent trading.

Proactive Measures in Navigating Financial Challenges

1. Monitoring Financial Position

Directors must monitor the company’s financial position closely. This involves conducting regular reviews of cash flow, profitability, and the ability to meet financial obligations. Such monitoring helps identify potential insolvency issues early, allowing directors to take prompt corrective action.

2. Seeking Professional Advice

If there are concerns that the company may be insolvent or is nearing insolvency, it is crucial to seek professional advice. Registered Liquidators, registered by ASIC under the Corporations Act 2001 have extensive experience and qualifications. They can quickly assess the company’s financial situation, offer guidance on available options, and help devise strategies to address impending challenges.

They have a thorough understanding of the legal and financial implications involved and can provide valuable insights and assistance in making informed decisions about the future of a company.

Mitigating the Risk of Insolvent Trading amid Adverse Circumstances

1. Taking Appropriate Action

Directors can take several actions to mitigate the adverse financial effects facing the company. Directors may need to consider options such as restructuring the company’s operations, negotiating with creditors, entering into voluntary administration, safe-harbour protection, small business reconstruction, or commencing a formal liquidation process. The choice depends on the company’s financial situation and what is in the best interests of its creditors and shareholders.

2. Documenting Decisions

Directors should maintain proper records of their decision-making processes. This documentation serves as evidence of their diligent action in accordance with their duties and can be crucial in preventing insolvent trading claims if they arise.

Given the complexity of the insolvency landscape, professional advice from registered liquidators is essential to ensure compliance with legal obligations and determine the most suitable path forward.

Support from Levi Consulting

Levi Consulting provides the tools to help businesses navigate uncertain times. We are experts in business recovery, corporate turnaround, restructuring, and insolvency. We have helped many clients, particularly in NSW, VIC, QLD and TAS to find the best possible solution for stakeholders. If your company is facing or at risk of financial distress, Levi Consulting offers trusted professional advice, strategy, and implementation.

Directors and management teams of financially distressed businesses are encouraged to engage early with turnaround professionals with the aim of guiding companies from uncertainty to stability.

David Levi is a Registered Liquidator and turnaround professional. He is a member of peak professional associations including Australian Restructuring Insolvency & Turnaround Association (ARITA) and Turnaround Management Association Australia (TMA Australia).