Fighting For Subbies Rights
As many in trade circles would know, the actions of building company directors prior, during and post builder collapses, have left a lot to be desired of the corporate watch dog.
The process of liquidating an insolvent company has strict rules under the Corporations Act which has seen precious little change in decades.
Liquidators are still charging excessive fees which are justified by the self-governed industry association, with hourly rates as high as $700 per hour for their service. These fees can be charged for months on end, with no tangible outcome or benefit for their service or requirement to justify their performance.
When is an accountant worth $700 per hour?
When they are raking in subbies hard earned money in a builder liquidation, it's laughable.
It would take the average tradie doing back breaking work, 3 days to earn that much money but liquidators charge it in an hour and no one knows if they actually did anything for that money, or just spent the time in their favourite, inner city watering hole, toasting each others success with their lawyers.
The term “pigs at the trough” is commonly used to explain the fees structure, not only by creditors (subbies and suppliers) of liquidated company’s, but also by the insolvency fraternity itself and the lawyers who also get a feed behind closed doors of course.
Calls for changes in the insolvency industry has come from many fronts but no one is pushing for change in the practice of Liquidators and how they conduct their investigations. Rather, it has come from the pre insolvency practitioners who specialise in using the Corporations Act to advantage their clients.
We can tell you with first hand knowledge that Liquidators are not happy to be appointed to a failed company with little assets to realise so they are now also lobbying government to be registered pre insolvency advisors.
These “pre appointment processes" also called "pre-packaging", are often implemented a long time prior to any formal appointment of an administrator or liquidator and often claimed to be in the best interests of stakeholders for example:
- It keeps staff employed or
- saving the core business is often the catch cry heard in this arrangement.
This process usually boils down to the director and advisors stripping the company for all they can and leaving devastation amongst creditors and deferred unemployment of staff whose employee entitlements are adversely impacted when transferred to the phoenix company.
Pre packaging of companies in trouble is the process of illegal Phoenixing companies prior to the actual insolvency appointment.
It is commonly practiced in the UK, but heavily policed by the Insolvency Service (UK) which services investigation hotlines through its Intelligence Hub. This is something the Australian regulator could learn a lesson from. It is something ASIC is believed to be reviewing but as usual, with little appetite to act.
The UK regulators make the point that some pre-pack processes are not transparent and may have damaging effects for some groups or cause possible longer term harm and that almost always applies to subbies.
The issues raised include:
- Whether businesses or assets are being sold under-value, especially where this is to the previous owner or a connected party with no open market valuation. This is uncommercial transaction that doesn't pass the pub test
- Conflicts of interest for the Insolvency Practitioner where they work closely with the directors or when appointed by the fixed and floating charge holder
- Lack of involvement of unsecured creditors who are only informed of the deal after it has taken place
- Pre - pack companies advertising, targeted at directors of distressed companies offering services such as "asset protection, when else do you need your asset protected?"
- The question has to be asked, how is it legal to advise the director on how to protect his assets when he is soon to liquidate his company and creditors money with it?
- Giving an unfair market advantage by allowing the new company to leave behind its unwanted debts
- Causing longer term economic harm by allowing inefficient businesses to carry on trading.
See more at: http://www.bis.gov.uk/insolvency/insolvency-profession/Pre-pack%20administration%20review#sthash.kLXIB2PT.dpuf
Apply these concerns to large liquidations such as Walton Constructions, Colhart (JM Kelly Builders) and others and you can understand why subbies think ASIC is a lame duck doing very little for the good of the building and construction industry and subcontractors.
What are the Industry effects of complacent phoenix company activities?
The latest statistic from ASIC show that the Construction industry is by far the leading industry when it comes to creditors facing financial loses and the vast majority of those creditors are subbies.
Construction companies can have at any time, multimillion dollar contracts on their books, so if a company actioned a pre-pack, it would allow the advisors to have access to millions of dollars of the company’s income to set up a structure where they would later reap huge rewards.
Australian Securities & Investments Commission
Where is ASIC on this illegal activity? There have been times when they have been presented with evidence but have not acted, case closed.
Is ASIC grossly underfunded or just ambivalent to unsecured creditors needs?
Builders who are directors of companies in distress, are currently under review by ASIC as public sentiment and outrage towards Phoenixing activity in the construction industry grows.
ASIC, the corporate watchdog, has started to act on these concerns by scrutinising builders and building companies that inappropriately use the insolvency regime to benefit from their creditors but its too little too late, a much bigger effort is required.
ASIC has for several years ran a program to identify early warning for small business that may have solvency issues. The purpose of NITP is not to catch directors out and punish but to indicate to Directors their obligations and encourage directors to seek professional advice and that's where the pre pack comes in.
More recently, ASIC’s direction on these matter could be defined as grandstanding with media releases on their website referring to “crack down on construction Phoenix activity” but the crack downs focus on recovering the losses of ATO revenues, what about subbies losses?
Labour Hire, builders and developers, are standout performers in illegal Phoenixing to avoid tax. However, what of the builders who constantly under-price projects and follow a boom-bust model?
Where is the protection for subcontractors?
In an industry that is renowned for slow payment, extended terms and litigation disputes, the subcontractors inadvertently give builders huge amounts of unsecured credit for extended periods whilst waiting for payments.
These “industry norms” leaves subbies, trades & suppliers exposed to maximum damage the pre-pack advisor can muster up.