With the property boom around Australia reaching record heights, the construction industry has similarly increased exponentially. However, statistics from the Australian Securities and Investments Commission (AISC) show that with increased expansion comes increased failure. These statistics show that of all Australian companies going into external administration, around 20% are within the building and construction industry. This article will explore some of the reasons for insolvency in the construction and issues involved.
In ASIC’s 2014 report, the main reasons cited for failure included, poor strategic management, inadequate cashflow, trading losses and poor financial control. Typically, due to the fact that construction businesses do not usually have physical assets on their balance sheets to sell or manage to meet short term demands it is critical to maintain proper balance. This is evidenced in the ASIC report, in which the fact that cashflow and financial management is key. Using potential new contracts to work out of financial issues is a very reactionary approach, which can lead to mismanagement and ultimately financial problems with increasingly severe outcomes.
There are a number of things that can happen when a company is facing potential insolvency. One of the ways is to consult a trained insolvency practitioner. These practitioners can engage in either of two ways. Firstly, an informal arrangement, which allows a practitioner to give pre-appointment advice to clients without a formal framework or insolvency administration. This allows current contracts to remain active without contractual default. On the other hand, a formal insolvency appointment can bind a company to a negotiated arrangement. This gives more weight behind the negotiations made and expedites the process.
The two types of formal arrangements typically used in the construction industry are voluntary administration (VA) and liquidation, with receivership being a rare third option. A VA is an option that gives the company a short period of time to reach a compromise with creditors and work towards a resolution. This typically resolves via liquidation, a deed of company arrangement (DOCA) or a full return of the company to the directors. In the other instance, a formal agreement can lead to the more conclusive option of liquidation which doesn’t allow any ability to restructure or tradie out of turmoil. This is a particularly important issue given the effect of licencing on the construction industry.
Amongst all the possibilities and confusion, the most important thing is to recognise financial difficulty as soon as possible to be able to prevent any further decline. However, it is important to realise that help is always available. Please contact Jonathan Paul McLeod on (07) 3004 0800 for more information.