Dissecting the insolvency crisis in the construction sector

Garreth Hanley:
This is With Interest, a business, finance, and accounting news podcast, brought to you by CPA Australia.

Jennifer Duke:
Hello, and welcome to With Interest. I'm Jennifer Duke, external Affairs lead at CPA Australia. In this episode, we are delving into a crisis that has the nation catching its breath, the wave of construction companies collapsing across the country. Construction businesses are going into liquidation at a record rate, leaving home buyers, trades people, employees, and the industry in shock. A raft of names, including big brand businesses like Porter Davis have been added to the list. It's fair to say there's plenty of fear in the economy right now. This fear has knock on effects for the economy and for businesses trying to operate within it. There's also plenty that business owners and directors need to be doing to operate in this new normal. Joining me to discuss what all of this means for businesses and the nation is CPA Australia's insolvency expert, Kristen Beadle. Welcome to with interest, Kristen.

Kristen Beadle:
Thanks, Jen. Pleasure to be here.

Jennifer Duke:
So Kristen, this is clearly a crisis. How did we get into this situation?

Kristen Beadle:
Well, I think we could probably start with COVID there, and I think the slowdown in the economy at that time. But then coming out of that, we've had significant inflation pressures hitting the construction sector in particular, probably twice the rate as everywhere else in the economy, and that has really affected those businesses that have been locked into fixed term contracts for many years prior to these high inflationary times.

Jennifer Duke:
Clearly some of those financial effects are very real, but are some of these collapses happening because businesses are leaving it too late?

Kristen Beadle:
Look, I think so. I think though some of the situations could be that businesses should be really looking at the way in which they are running their affairs. We're now hitting new times in the economy because of this high inflation where businesses should be looking at the way in which they are actually doing their business. So the way in which construction is looking at costing these jobs and not racing to the bottom, for want of a better phrase, but really building into those contracts, these high inflationary times and increased costs. So obviously you can't do that retrospectively in construction, but I think going forward there are ways in which businesses can look after themselves.

Jennifer Duke:
So we often hear about contagion risk whereby one business going under has a knock on effect to others. So does delaying the inevitable increased contagion risks more than if the business was wound up sooner?

Kristen Beadle:
Look, I think it does, and the reason why I say that is your external creditor doesn't know what's going on with you internally. So it just thinks that you are going to pay its bill as and when it falls due. So when that doesn't happen, that business, it has its own employees and it has its own creditors, so it needs to pay them. Take for example, again, we're talking about construction, we've seen large larger companies go down over the last sort of 12 months, and now we're seeing that flow and effect happening. So we're seeing large plumbing businesses, for example, going into voluntary administration, but we're also seeing the small level cabinet maker, the mum and dad proprietary limited company also needing to appoint registered liquidator, for example, because its large debtor is no longer paying them. And recently, as early as April 2023, earlier this month, we actually saw a debtor finance company in the construction space also need to appoint voluntary administrators because it has covered the construction industry and it's now no longer getting its investment back. So we are seeing it happen all over that ecosystem, and I think it won't stop anytime soon.

Jennifer Duke:
So given these pretty significant flow on effects, what are the benefits for businesses of pulling the pin earlier and why do they too often not do that?

Kristen Beadle:
So I think pulling the pin earlier gives you a lot more options. So if you recognise early that your business is having trouble paying its debts or that you suspect something outside your control is going to happen, go and seek some advice from your CPA and say, "What is it that I can do in my business now that will help me safeguard against future events outside my control?" And those benefits are you have more options, if you do need to appoint a registered liquidator for example, you have options open to you where you could appoint a small business restructuring practitioner, which is a director led type of administration where you can continue trading your business and you're put forward a plan to your creditors. If you've traded to the point where you have no capital, you can't do that. And so you have the ability to actually save your business to save your employees jobs and continue going forward. But people don't often do this because they either A, don't know what's available to them. So again, seeking that advice early, it becomes paramount in that conversation, but B, people really get stressed about it and they don't know where to turn. So they really should be out there looking for advice which is credible from their CPA.

Jennifer Duke:
So what action can ASIC take against companies that leave it too late?

Kristen Beadle:
Registered liquidators have a positive obligation to advise the ASIC of contraventions to legislation, and part of that can include illegal phoenix activity and insolvent trading.

Jennifer Duke:
So how often do we see criminal charges imposed and is it time we see more criminal prosecutions?

Kristen Beadle:
So Jen, it's not often that we see criminal charges imposed, particularly around insolvent trading and illegal financing in really still in its infancy, given the COVID years. But I think what we should be seeing is ASIC taking a lot more proactive approach in those areas where people have obviously done the wrong thing and not paid their creditors.

Jennifer Duke:
So we're really clear now on what the issues are and the federal budget is in a matter of weeks. What does CPA Australia ask the government to do for businesses to try and limit the damage?

Kristen Beadle:
We as an organisation have for a few years now said to the government, "There needs to be incentives for business to go and seek advice from their CPA or trusted advisor." And part of that is funding for advice. So a voucher system similar to what some of the state governments do. But we've also asked for ASIC to be funded a little bit more to enable registered liquidators who are appointed over jobs where there is no way for them to be paid for their exertion to be looked after because an appointment of a registered liquidator in these times is actually of benefit to the economy. So we can see what's gone on in business as well as see what conduct the directors have undertaken in running that business.

Jennifer Duke:
And one of the big barriers to business owners is the stigma of failing. How can we overcome this as a society and what can accountants, governments, and the public do to change the stigma?

Kristen Beadle:
Well, this is something I'm actually very passionate about and I would really like to see governments, politicians, the media, everyone accept that business exits are part of the business cycle that may or may not include an insolvency event. So I think we start to really need to get into this mindset that business exits actually benefit the economy because capital can be reinvested elsewhere. Our Asia-Pacific survey is showing that Australia and New Zealand have an ageing population in entrepreneurialship. So we really want the language to be around getting people into business and running businesses, not out of it through fear of failure.

Jackie Blondell:
If you're enjoying this podcast, you should check out our in-depth business and finance show INTHEBLACK. Search for INTHEBLACK on your favourite podcast app today. And now back to With Interest.

Jennifer Duke:
So the government's been reviewing the corporate insolvency regime at the moment, CPA Australia's made submissions. You yourself have attended public hearings on our behalf. What have you been asking them to consider?

Kristen Beadle:
There's a range of things that we've been asking them to consider, but one of them is around access for insolvency laws for businesses, and that's around state versus federal legislation in construction. There's some real problems there that we've foreseen, but also around making the small business restructure a lot more accessible to business. And that is increasing the thresholds of debt levels to enable someone who's running a business, a very viable business, access to that regime so they can restructure.

Jennifer Duke:
Those asks will make a lot of sense. When do you think we can see some progress on them and are you confident we will get the improvements that we need?

Kristen Beadle:
Look, I think there was a genuine desire by those asking the questions in the inquiry that there needs to be some change and they want positive change. They want people running businesses. When can we see this progress? It's a tough year for it. We've got a budget coming down in the next few weeks. There's a lot of things on the agenda. So look, we're hopeful that we can see some legislation up for consultation towards the back end of the year. I think what we've asked for includes some minor tweaks that I think would make it better, such as what I was just saying around the small business restructure. There's also going to need some wholesale changes. I think they'll take a lot longer, but if we could get those tweaks in, I think that'd be a real win for business.

Jennifer Duke:
It looks like improvement is on track in the sort of medium term, but there will be people listening right now who are in the middle of the biggest expense of their life, or at least considering it. That is they want to build a new home. What would you suggest they do to protect themselves and should they hold off doing anything right now?

Kristen Beadle:
It's very difficult to say to hold off because obviously everyone's circumstances are different. So in that regard, they should really seek advice. But building is quite credit heavy and obviously there's a lot of upfront expenses. So it's about... If you're worried about building something in the short term or appointing a builder, you really need to do your due diligence on that particular builder, understand where they're at, if they're publicly listed or if they have to put in accounts to a particular government body, check those accounts to see what their bottom line looks like. Do you think that they'll be able to sustain you going forward? You won't be able to do that for every business that is out there, but there's certainly ways in which you can do it. You can run credit checks to see whether or not there's been wind up applications made or if there's any court hearings coming up for that particular business. And whilst these things cost money, I think a small upfront payment to do something like that and do your due diligence will cost you a lot less in the long run if they eventually need to appoint a liquidator.

Jennifer Duke:
I think that's a great suggestion. And what are some of those warning signs that a business you're dealing with is in crisis?

Kristen Beadle:
Look it's funny, it can go from financial, that we as accountants would know from financial statements. For the average lay person, it could be your builder's not coming back to you, not returning your calls and then coming back to you months and months later going, "Okay, let's go and look for a doorknob now." That kind of thing. So it's a bit of that keeping mum thing. That's actually a true story. So it's something as basic as that. But things like understand that if there's not work at your site for a few days, you'd want to know why. So those kind of things. Things that you can observe that you think that's out of the ordinary is usually a factor.

Jennifer Duke:
And I know previously we've spoken about them bringing forward possible charges. How might that work on a sort of fixed contract?

Kristen Beadle:
Look, it is going to be hard because obviously you need to get buy-in from the banks on that. So this is part of a broader conversation that we need to have. So people need to be weary that if you pay for something upfront, you are taking the risk. But there might need to be changes around the ways in which contracts in the building industry are structured, for example, that allows for movement in inflation or movement in costs that people signing upfront will be aware of, but also will protect the builder as well. So you want the consumer to be protected as well as the builder.

Jennifer Duke:
Definitely. And the inflation story is continuing to carry on in the news probably will for the rest of this year. Do you think this situation around the building industry and around businesses and insolvency is going to worsen over 2023? When do you think we're going to see a light at the end of the tunnel or are you already seeing one?

Kristen Beadle:
We hear things about the way the economy's tracking and the levels of insolvency in construction and other areas as well. It's certainly hitting food and beverage cafes, all that sort of stuff. So we are hearing... It's being a lot more magnified. I don't think the economy's as bad as what everyone's saying. There's just been some really robust monetary policy being implemented at the moment and that's working. We've seen a slight decrease or reduction in the speed in which inflation has been rising. So that's what monetary policy is. So I don't think it's time to panic, but I certainly think it's time to be really cautious if you're running a business, for example, understanding who you're doing business with and if you're a consumer, just know that if your employment's quite good right now, but going forward, if you have a mortgage for example, there's going to be a lot of people coming off those fixed mortgage rates this year and you might need a little bit of rainy day money. So it's not as bad as what people are making out, but there's certainly areas under stress more than others, and consumers have been hit in their hip pocket.

Jennifer Duke:
Dare I say, you're sounding cautiously optimistic.

Kristen Beadle:
Very unlike me, Jen.

Jennifer Duke:
That's true. So lastly, what's your message to businesses who are concerned about their future in this uncertain environment right now?

Kristen Beadle:
Look, I think there's a lot that you can do, and it goes back to that question around acting early and increasing your options. So we might not be talking insolvency events here, but it's important to go out and see your CPA and say, openly and honestly, "This is where I'm at in terms of this business. We think that we can do better or we might need to reduce expenditure, et cetera, et cetera. Where can I start? What do I need to do and how can you help me?" And that is exactly where your CPA works. They can help businesses do that.

Jennifer Duke:
I think that's a terrific suggestion. Unfortunately, that is all we've got time for today. Thanks very much to our guest, CPA Australia's Kristen Beadle. With Interest is a weekly podcast. If you like what you've heard today, why not subscribe to With Interest on your favourite podcast app. By subscribing you'll receive notifications when a new episode becomes available. From all of us here at CPA Australia, thanks for listening.

Garreth Hanley:
You've been listening to With Interest, a CPA Australia podcast. If you've enjoyed this episode, help others discover With Interest by leaving us a review and sharing this episode with colleagues, clients, or anyone else interested in the latest finance business and accounting news. To find out more about our other podcasts and CPA Australia, check the show notes for this episode. I hope you can join us again for another episode of With Interest.