Recently, De Luca Corporation had their licence suspended after failing to meet The Queensland Building and Construction Commission’s financial requirements. The building watchdog has since reinstated the licence, but the suspension has served as a reminder of the importance of adhering to the tight financial requirements enforced by the regulatory body.
QBCC stated that De Luca was a large value licensee with an annual turnover of more than $230 million but it currently had a net asset position of negative $3.2 million. QBCC Commissioner Brett Bassett said this asset value represented a risk to the sector.
“Last month, we issued the company with a show-cause notice and it has been unable to demonstrate that it meets mandatory financial requirements,” Mr Bassett said in a statement issued last week. QBCC asserts that licensees which operate with insufficient liquidity and assets to support their turnover are operating with a heightened financial risk.
Deluca’s brush with the regulatory authority comes just weeks after British construction giant Laing O’Rourke had their licence suspended due to similar issues. Laing O’Rourke later had their licence reinstated after undertaking internal restructuring to better demonstrate their asset base to QBCC. Similarly, De Luca Corporation restructured its balance sheet to meet the regulator’s financial requirements.
Both of the construction giants were in a position to be able to shift their finances around and sell non-essential assets to meet requirements at short notice. However, smaller construction companies may struggle to make the required adjustments in such a short period. The inability to continue operating can put projects on hold, putting client and subcontractor relationships in jeopardy. For companies already struggling financially, this can potentially push them further into debt and make it almost impossible to regain a profitable position.
Often when people think of licencing issues regarding construction, the most serious breaches that come to mind involve workplace accidents and workplace safety issues. While these issues are of tantamount importance, this sometimes means that other licencing requirements can fall by the wayside. QBCC has a number of tight financial and reporting restrictions on licenced companies. While these restrictions are in place for the protection and stability of the industry, they’re often difficult to understand and can be an onerous task, especially for small operators.
Some of the most common financial reasons builders lose their licence include:
- Exceeding their “Allowable Revenue” threshold
- Incorrectly structured lending
- Purchasing a business that doesn’t meet financial requirements
According to QBCC guidelines, individuals can also become excluded if they:
- become bankrupt, or take advantage of bankruptcy laws by entering into an agreement under the Bankruptcy Act 1966
- are 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.
If an individual is currently excluded, this means they can no longer hold a QBCC licence, run a QBCC-licenced company, or even be in a partnership with a QBCC licensee. If an individual has been involved in 2 separate insolvency events, they face a life exclusion. These penalties clearly have the potential to have life changing impacts, especially for people who’ve built their wealth and livelihood around the construction industry.
Sometimes, financial difficulties can become so complex and overwhelming that it feels like the only option is to appoint a liquidator and be done with it. Builders need to be aware however, that their QBCC licence will be revoked if they go down the path of insolvency. Essentially, their future earning capacity will be stripped from them, negating any of the benefits of liquidating.
Another issue for smaller companies is that the intimate nature of business relationships within smaller entities can have a big impact on decision making. Close business partnerships can cause difficulties if one partner is heading towards bankruptcy, jeopardising the ability of the entire organisation to continue operating. The close-knit nature of smaller companies also puts more people at risk of being excluded, as you can become an excluded person if the Commission deems you to be a person of influence within a business that has had its licence revoked.
It’s important for individuals, and businesses involved in the construction sector to seek the advice of professionals. This includes hiring an accountant who specialises in accounting within the construction industry and has a thorough understanding of QBCC licencing and financial reporting requirements. It’s also important to consult professionals before undertaking any restructuring activity, as this also needs to be reported and adhere to QBCC guidelines.
If you believe your company is in danger of breaching its requirements and you’re considering a restructure, talk to a qualified restructuring expert first, to ensure you retain your ability to complete projects, pay subcontractors on time, and maintain positive client relationships.
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