Property 101: ASIC warns directors of construction companies using false declarations

As part of its ongoing work to curb illegal phoenix activity, ASIC has completed a proactive surveillance program that monitored the integrity of the payment systems in the Australian Building and construction industry.

The surveillance program, carried out during the 2014/15 financial year, targeted eight large commercial construction projects across New South Wales, Victoria and Qld. ASIC checked the payment processes and systems of 40 individual building and construction companies (contractors) working on those projects.

The campaign identified concerns about the conduct of some companies within the building and construction sector, which may be falsifying statutory declarations when claiming payment from principal contractors for work undertaken. 

The focus of ASIC’s surveillance centred on:

(a) principal contractors requiring contractors to provide statutory declarations to confirm that the contractors have paid all amounts owing to employees and secondary contractors, before principal contractors pay invoice issued by the contractor; and

(b) contractors signing statutory declarations and providing it to principal contractors, in circumstances where it appears that contractors may not have paid all secondary subcontractors at the date of swearing the statutory declarations.    

As a result of surveillance campaign, ASIC found that two contractors may have provided principal contractors statutory declarations that falsely claimed that secondary contractors had been paid at the time of signing the statutory declarations.  ASIC also found that once the contractors had received payment from the head contractors, they subsequently paid all secondary contractors the amounts owing. 

Both contractors were issued warning letters about their conduct and advised to review their internal compliance systems and processes. 

ASIC has also identified a further two matters, outside of this surveillance program, where contractors have been engaged by a number of local councils and who have allegedly provided false statutory declarations where it appears that subcontractors had not been paid at the date that the statutory declarations were signed.  ASIC is investigating that matter. 

ASIC Commissioner Greg Tanzer said, 'While this conduct may benefit contractors by improving their cash flow, the flow-on effect is likely to cause significant detriment to other operators in the supply chain, such as other businesses engaged to work on these projects, in particular secondary contractors. Secondary contractors are often small business operators engaged by contractors to complete building works.  The viability of their businesses is often dependant on being paid by contractors in a timely manner.  They usually are not in a position to carry cash flow risk imposed upon them by contractors. 

'This practice by contractors, in addition to being an offence, can cause secondary subcontractors to suffer cash flow problems and experience financial distress, placing them at risk of insolvency', Mr Tanzer added. 

ASIC encourages anyone who has suffered loss as a result of these practices to report their concerns to us on 1300 300 630 or to lodge a report of misconduct online. 

Background

The surveillance program was undertaken following feedback received from small business, industry bodies and other government agencies about the endemic use of false statutory declarations in the building and construction industry.

The falsification of statutory declarations to obtain payment from a head contractor could be an indicator that contractors are experiencing cash flow problems and may be in financial distress. This may subsequently give rise to illegal phoenix activity.

While false statutory declarations and fraud matters are matters for other regulatory and enforcement agencies, company officers who knowingly make a false statement regarding payments to creditors may find themselves facing criminal or civil action by ASIC.

Under the Corporations Act, ASIC can also take administrative action against company officers who engage in misconduct.