Last year I met a local family with a small plastering business.
A building company they were contracting to became insolvent and, as was the case with many other local businesses, the plastering company was left with unpaid invoices of around $30,000.
A debt of this size is incredibly difficult for a family owned, small business to absorb.
For many, it will take years to overcome the setback; some never recover.
This family , expecting their first child, told me of their distress when they discovered the proprietor of the failed company was once again operating a business in the residential construction industry, shortly after the former venture had failed.
Their story is far too common.
There is an issue plaguing the construction industry and hurting small businesses, including those on the Central Coast.
Phoenixing – named after the myth of a phoenix, the bird that is reborn from its ashes – is where assets are stripped from a company, bankruptcy is declared, creditors (including the ATO) are left with debts, only for the company director to start up again, debt-free.
In 2015 the Productivity Commission estimated that some 2,000 companies were engaged in phoenix activity each year. This behavior is particularly rife in the building and construction sector.
A Senate Inquiry into insolvency in the Australian construction industry found that, over the past decade, up to a quarter of all insolvencies in Australia were in construction.
On the Central Coast, there are around 20,000 small businesses in operation. Of these, around a quarter are in the construction industry.
This is reflected nationally. The latest figures from the Australian Bureau of Statistics shows construction has the highest number of businesses operating in Australia, with a count of 346,499 businesses in June 2016.
There is a culture problem plaguing the sector, made up largely of sole trader and small business contractors in the industry.
There have been numerous enquiries spanning decades, but every year there are still subcontractors not getting paid for the work they have done.
The construction industry is reported to have around $3 billion in unpaid debts each year, including subcontractor payments, employee entitlements and tax debts.
The Labor Opposition has proposed a series of measures, costed by the Parliamentary Budget Office, including a requirement for all company directors to obtain a unique director identification number with a 100-point identification check; increasing the penalties associated with phoenix activity; introducing an objective test for transactions depriving employees of their entitlements; and clarifying the compensation orders against accessories.
The Productivity Commission, the Australian Institute of Company Directors, the Australian Small Business and Family Enterprise Ombudsman, the Australian Chamber of Commerce and Industry, Master Builders Australia, the Australian Council of Trade Unions, the Australian Restructuring Insolvency and Turnaround Association and the Tax Justice Network have all supported the proposal for a director identification number.
The director identification number with a 100-point ID check is important – currently it is tougher to open a bank account than to become a director. This would enable government agencies and other bodies to track company directors for their relationships to other companies and other people.
Recently, the Government announced its support for the Directors Identity Number and we look forward to seeing further details about this measure.
Small businesses and sub-contractors in the construction industry need certainty that they will be paid for the work they do. We know that the majority of small businesses are micro operations; hardworking, family businesses where working ‘in’ the business generally takes priority to working ‘on’ the business.
We need to ensure small businesses, including those on the Central Coast, are protected from incurring large losses through unethical business practices of lead contractors and proprietors.
This article was published in Central Coast Business Access, Issue 5, October 2017.