The failure of Sommer and Staff Constructions reveals financial reporting questions.
The failure of Sommer and Staff Constructions Pty Ltd (S&S) as it has been reported by the Courier Mail and the appointment of a voluntary administrator to manage the affairs of the company on 14 September 2018 appears likely to cause severe financial hardship to unsecured creditors of the company but in particular subcontractors. The Courier Mail reports that subcontractors are owed $9M but I suspect that this figure will increase substantially over coming weeks.
According to the S&S website, by my count, the company was involved in eight major projects at the time of their collapse, including refurbishment of the Maryborough Government Office Building. The website of S&S identifies a history of doing work on behalf of the Government, listing numerous completed projects.
Could the collapse of S&S have been foreseen?
I believe that in view of the projects S&S were apparently involved in at the time of its collapse, the company is likely to have been the subject of three different Government financial reporting requirements, namely:
- ASIC financial reporting requirements for large proprietary companies (that are not disclosing entities);
- QBCC Minimum Financial Requirements for licensing (MFR’s); and
- Government Capital Works Management Framework, Contractor PQC Financial Requirements.
In an earlier article entitled “Construction industry issues. The good, bad, ugly, missteps and unresolved” I discussed several issues concerning the MFR’s and in the process referred to section 5.2 which states:
“If a Licensee or any company within its group of companies is required to provide an auditor’s report or review report to the ASIC or ASX, then within 30 days of the report being signed and/or submission to the ASIC or ASX a copy of the report must be submitted to the Commission. All Licensees or companies who were required to provide an auditor’s report or review report to ASIC or ASX for the 2014–15 financial year must submit a copy of the report to the Commission within 30 days of this policy commencing. Failure to provide the required information may result in the Commission determining the Licensee fails to meet the Minimum Financial Requirements.”
The obligation for a licensed company to provide a copy of a financial report required by ASIC to the QBCC under the MFR’s came into effect on 9 October 2015.
Significantly this requirement allows the QBCC to have an annual ‘line of sight’ on all major construction companies that fall under an ASIC financial reporting requirement and in the process does not impose any new regulatory costs on the industry.
The Government has recently released a discussion paper entitled “The proposed improvements to the Minimum Financial Requirements for licensing in the building and construction industry” (discussion paper) where it described these requirements in the following manner.
“If a licensee or any company within its group of companies is required to provide an auditor’s report or review report to ASIC or the ASX, they must also supply a copy of that report to the QBCC within 30 days of it being signed or submitted to ASIC or ASX. These reports include statements of financial position, statements of profit and loss, cashflows, changes in equity, and director’s and auditor’s reports.”
This statement highlights the fact that financial information of this nature is robust (audited), detailed and therefore extremely valuable to the QBCC in assisting them to identify any licensed company that falls under the ASIC financial reporting regime and who may not be meeting the MFR’s.
A search of the ASIC company register reveals that S&S has a history of lodging financial reports for large proprietary companies that are not disclosing entities, with the last report of this nature been lodged with the corporate regulator for the 2016 FY.
While there may well be a good explanation for the fact that the ASIC public company register does not reveal the lodging of such a report for the 2017 FY, I have observed a comment attributed to an S&S representative on the Subbies United website where it is alleged he stated:
“We are disheartened to hear that subcontractors are feeling disadvantaged by our suspension of the Ivory Street Project, as indicated in your recent article posted on 05/10/17. Unfortunately, we had to exercise our rights under BCIPA in order to protect ourselves and more importantly our subcontractors.
The external accountants have just completed the 2017 audited financials, these will be lodged with ASIC and QBCC by 28th October should anyone wish to review”(highlighting my emphasis).
In view of the information I have outlined above I believe that the Voluntary Administrator of S&S needs to provide answers to the following questions in order for unsecured creditors to be able to gain an appreciation as to whether the company has complied at all times with its financial reporting obligations.
I must stress that I do not know the answers to these questions and the entire circumstances surrounding the appointment of the Administrator but my opinion is that the situation at least justifies some questions being asked of the Administrator.
Was S&S required to lodge any type of financial report with ASIC for the 2017 FY? If the answer is ‘no’ please explain the reasons for this change in reporting requirements (if known) and proceed to question 8.
If the answer to question 1 is ‘yes’, can you confirm that S&S fulfilled its obligations in this regard?
If S&S did lodge a financial report with ASIC for the 2017 F/Y, can you explain why it does not appear on the ASIC public register?
If S&S lodged a financial report with ASIC for the 2017 F/Y, did the company receive any correspondence from ASIC querying any concerning aspects of the report?
If S&S was required to lodge such a report with ASIC and failed to do so for the 2017 F/Y, did the company receive any correspondence from ASIC in relation to this legislative non-compliance on its part?
Assuming S&S lodged a financial report for the 2017 F/Y with ASIC, did the company subsequently satisfy the MFR’s for licensing and provide a copy of such a report to the QBCC by the due date?
If S&S provided a copy of such a report to the QBCC, did the company receive any correspondence from the QBCC querying any concerning aspects of the report?
Since 1 July 2017 and up until your appointment, how many Government projects was the financial position of S&S evaluated against the contractor PQC financial requirements? In answering this question also please provide all relevant project details to unsecured creditors.
Did the financial information provided by S&S to the Government under the contractor PQC financial requirements reflect all significant financial issues that an audit of the company financial position as at 30 June 2017 may have identified, assuming such an audit was performed? In answering this question please provide all relevant financial details to unsecured creditors.
I noted that Mick de Brenni, Minister for Housing and Public Works in the earlier referred to discussion paper stated:
“Insolvencies have taken a great toll on this industry and the broader community, and I am committed to ensuring that the QBCC has sufficient industry oversight to reduce the risk of insolvencies and mitigate their impacts as much as possible. This is why the MFR for licensing are so crucial in supporting the wider security of payment initiative within the building and construction industry, and why the Act provides the ability for the MFR to be prescribed in regulation.”
Elsewhere in the discussion paper, under the heading ‘Executive summary’ it is stated:
“The Queensland Building Plan (QBP), published in October 2017, recognised that more needed to be done regarding MFR for licensing. A key part of the Queensland Government’s security of payment reforms delivered under the QBP is its commitment to create new laws that strengthen the MFR and enable the QBCC to better regulate those requirements.”
I understand the desire of the Government to engage with the industry and examine if the MFR’s can be strengthened. However, I do have concerns that in this instance there may have been a failure on the part of the S&S to fully comply with the existing industry financial reporting framework, which the current MFR’s are a feature. I think therefore another question is, how did this happen in the face of the current protections?
I am of the view that before new tougher MFR’s are proposed, licensees are entitled to be satisfied that compliance by licensees with all relevant current financial reporting requirements is been achieved.
The first meeting of the creditors of S&S will be held on 26 September 2018. I believe that subcontractors affected by this company collapse are entitled to answers to the 9 questions I have outlined in this article.
If you have any questions about the financial requirements for licensing I am happy as always to use my insight to help. You can connect with me on LinkedIn or email me at firstname.lastname@example.org. If you need the help of a lawyer please contact Earl Tan or Janelle Kerrisk at Helix Legal.