The construction industry has its fair share of failed businesses. Not being able to pay debts when they fall due is a reality because of the pay when paid nature of the industry.
If you can’t pay debts when they fall due, and you’re still trading, then you are trading while insolvent and that is an offence.
If your debtors are chasing you, and you can’t pay, you might find yourself in a situation where your only option is to declare bankruptcy or wind up your company.
If you have a choice in the matter, it’s important to first understand what the licensing ramifications will be if you declare bankruptcy or wind up your company. We don’t intend to discuss the ins and outs of insolvency in this article. The focus instead is what are the licensing ramifications when you’re insolvent?
The QBCC’s role
In Queensland, the Queensland Building and Construction Commission (‘QBCC’) regulates the building and construction industry. It licenses contractors and monitors their activities to ensure compliance with relevant legislation (such as the Queensland Building and Construction Commission Act 1991 and the new Building Industry Fairness (Security of Payment) Act 2017).
The QBCC has very strict rules when it comes to poor financial management.
Insolvency Event
If the QBCC considers that you are involved in an insolvency event, the consequences are serious.
An insolvency event occurs where a person who holds a QBCC contractor or Nominee Supervisor licence:
Becomes bankrupt or enters into a Part IX or Part X agreement; or
Is responsible for a company failure.
To be considered responsible for a company failure, the person would be a director, secretary or influential person for a construction company within the period of two years before the company appoints a provisional liquidator, liquidator, administrator or controller, or is wound up or ordered to be wound up for the benefit of a creditor.
An influential person is an individual other than a director or secretary of the company who is in a position to control or substantially influence the company’s conduct.
Excluded Individual
If a person is involved in an insolvency event (the QBCC must notify the person that they have been involved in an insolvency event), the QBCC will consider them to be an Excluded Individual.
If the QBCC considers you an Excluded Individual, for a period of three years, you won’t be able to:
Hold a QBCC contractor or nominee supervisor’s licence, or
Run a QBCC-licensed company, or
Be in partnership with a QBCC licensee.
Your licence will be cancelled and you won’t be able to apply for another licence until three years have passed. You will also be prohibited from being a director, secretary or influential person for a QBCC-licensed company during the exclusion period.
If you’re involved in two separate insolvency events, you bear the risk of being considered a Permanently Excluded Individual. This means that you will never be able to hold a QBCC licence again.
Excluded Company
If you are notified by the QBCC that you are an Excluded Individual and you are a director, secretary or influential person of a QBCC-licensed construction company, the company will be considered an Excluded Company.
It’s also important to note that recent changes to the Queensland Building and Construction Commission Act (‘QBCC Act’) mean that if you were a director, secretary or influential person for a company within two years of a relevant company event (for example, a liquidator is appointed to the company), you will be considered to be an Excluded Individual. The only way out is if you can satisfy the QBCC that at the time you ceased to be an influential person, director or secretary for the construction company, the company was solvent (meaning the company could pay its debts as they fell due).
The same implications exist for an Excluded Company as for an Excluded Individual. However, if the Excluded Individual stops being a director, secretary or influential person, the company will be able to apply for another QBCC licence.
What is an “influential person”?
Prior to the 2017 amendments to the QBCC Act, an influential person was defined as:
“an individual, other than a director or secretary of the company, who is in a position to control or substantially influence the conduct of the company’s affairs, including, for example, a shareholder with a significant shareholding, a financier or a senior employee.”
This definition has been expanded and a person will now be considered an influential person if he or she:
(a) is the chief executive officer or general manager of the company, or holds an equivalent position in the company; or
(b) is acting in a position mentioned in paragraph (a); or
(c) directly or indirectly owns, holds or controls 50% or more of the shares in the company, or 50% or more of a class of shares in the company; or
(d) gives instructions to an officer of the company and the officer generally acts on those instructions; or
(e) makes, or participates in making, decisions that affect the whole or a substantial part of the company’s business or financial standing; or
(f) engages in conduct or makes representations that would cause someone else to reasonably believe the person controls, or substantially influences, the company’s business.
Paragraphs (d) and (e) are the most concerning for employees of construction companies. If you are in a position where you give instructions to others or you participate in making decisions that affect the business (for example a project manager or a financial officer), you will be considered an influential person for the purpose of the QBCC determining whether the company is an Excluded Company. It will also mean that you may be considered an Excluded Individual because of your involvement as an influential person for the Excluded Company.
Penalties
This means that the risk of becoming an Excluded Company arises from:
Not paying your debts; or
Having an Excluded Individual engaged as an influential person to your company.
How can you avoid this?
1. Be proactive with your business finances.
It is our experience that subbies often get into financial trouble for two reasons:
They haven’t been paid; or
They haven’t properly dispute an invoice, before it is too late.
So understanding the rules around payment and especially the new BIF changes is vital. See our articles:
2. Check that all influential people in your company are not excluded.
If you need any further clarification, please call our helpful team on 07 3128 0120 or email at subcontractors@arbuildinglaw.com.au.
