Introduction

 

Insolvencies are a common occurrence in the Australian construction industry. Statistics provided by the Australian Securities & Investments Commission demonstrate that during 2018 the construction industry contributed to 18% of all insolvencies recorded in the Australian economy. Furthermore, as noted by the NSW Small Business Commissioner , the ASIC "figures are likely to be significantly understated as only 30% of all small businesses are incorporated, the overwhelming majority trading as sole traders and partnerships."

 

In Australia it is not unusual to read about major head contractors being placed in administration, owing large sums of money to unsecured creditors, such as subcontractors and small businesses. As a result, in recent years, Australian governments have commissioned several reports, both at state and federal level, seeking to understand and find solutions to the problem. A specific reference is made to the following reports for their significance to the research proposal:

1. The Inquiry into Construction Industry Insolvency in NSW (Collins 2012) ;
2. the Insolvency in the Australian Construction Industry (Senate Economics References Committee (SERC) 2015);
3. the Review of Security of Payment Laws (Murray 2017); and
4. the Security of Payment Reform in WA Building and Construction Industry (Fiocco 2018).

The cost of insolvency

 

The total cost of construction industry insolvencies to the Australian economy is difficult to calculate accurately (SERC 2015: 29). Insolvency affects employees, company directors, creditors, and the taxation office differently. As the SERC (2015) observed, "the collapse of a business places immediate pressure on the management and employees of that business, as well as its suppliers and contractors. In regional towns, a single insolvency can affect entire communities."

 

SERC (2015) reported that in 2015 the total debt held by construction companies was 5.5B AUD of which 1.5B AUD was associated with insolvent businesses. The loss of taxation revenue is further aggravated when the costs associated with liquidating a company. Additionally, insolvency has a knock-on effect across the industry for those that remain in operation, often reflected in project delays, or higher ongoing operating costs (SERC 2015: 54).

 

However, the dollar cost of insolvencies is one way to illustrate the problem. As academic research has identified the rate of suicides is likely to increase as unemployment and work instability surges among workers in the construction industry (see Milner et al. 2017 ).

 

Based on the above, an argument can be made that the insolvency of one company results in less revenue to the taxation office, increases the operation costs for companies that were directly or indirectly trading with the insolvent company, and harms the physical and mental wellbeing of former employees. Finding ways to ease the construction insolvency problem will strengthen the economy of Australia and enhance job security to those on the tools.

 

Poor payment practices in the construction industry

 

One of the principal causes of insolvency in the construction industry is poor payment practices (SERC 2015: 22). As the SERC (2015: XXI) observed, "businesses now operate in an environment in which non-payment for work carried out is commonplace, cash flows are uncertain and businesses lower down in the subcontracting chain have little power relative to those at the top of the chain."

 

The legislation

 

The existence of poor payment practices within the construction industry has been acknowledged by Australian governments for a long time. Since 1974 more than 30 reviews, discussion papers, and inquiries, have been commissioned at state and federal level, which have, some more than others, identified and debated the Security of Payment Issue in the construction industry (Collins 2012: 436).

 

In order to tackle the problem, security of payment legislation was introduced, to allow for the rapid determination of progress claims in the construction industry. The legislation, which establishes rapid adjudication as the primary dispute resolution mechanism for payment disputes, was designed to ensure cash flow to businesses in the construction industry, and to avoid lengthy and expensive methods of dispute resolution such as litigation or arbitration. The scheme also requires payments for prolonged construction works to be processed in accordance with a statutory payment scheme.

 

New South Wales (NSW) was the first State to enact a legislative scheme in 1999, with the remaining States following suit between 2002 and 2009. In 2002, when the Building and Construction Industry Security of Payment Amendment Act 2002 No 133 was amended, Morris Iemma, the Minister for Public Works and Services, made the following observation in his speech regarding the second amendment of the bill: The main purpose of the Act is to ensure that any person who carries out construction work, or provides related goods or services, is able to promptly recover progress payments. The Government wanted to stamp out the practice of developers and contractors delaying payment to subcontractors and suppliers by ignoring progress claims, raising spurious reasons for not paying or simply delaying payment."

 

However, subsequent reports by Collins (2012) and Murray (2017) suggest a different reality. The enactment of security of payment legislation across Australia has not produced the desired scale of change in payment culture that the State and Territory parliaments had anticipated when introducing the legislation. By itself, the legislation has proven to be insufficient to alleviate the construction insolvency problem in any significant way. The inability to secure payment remains an on-going problem within the industry (Fiocco 2018:31).

 

In order to strengthen the current security of payment legislation, Collins (2012) recommended the implementation of Cascading Statutory Trusts (CSTs) for projects valued at 1M AUD or more. Murray (2017), adopting Collins's recommendation, proposed that CSTs should be considered for projects valued at 1M AUD and above. Recently, Fiocco (2018) has recommended CSTs be mandated in Western Australia.

 

The aim of my research proposal

 

PBAs and CSTs are not the only solution to address the Security of Payment Issue. The latest developments in the world of digital technology, such as Distributed Ledger Technology (DLT), should also be considered by the Australian government. DLT offers new and unique advantages as a payment system. DLT is both a database of recorded financial transactions between parties and a computational platform to execute payments based on contractual terms and conditons.