Victorian Government to crack down on phoenix activity in the building industry

Introduction

The Victorian Government proposes to expand the financial probity requirements for being a “fit and proper person” to be registered as a building practitioner. The proposed reforms respond to concerns that some building companies are deliberately going into external administration to avoid liability for defective building work. The Government says that “illegal phoenix activity” — when a new company is created to continue the business of a company that has been deliberately liquidated to avoid its liabilities - will not be tolerated.

The proposed reforms are contained in the Building and Environment Protection Legislation Amendment Bill 2019 (Vic) and, if passed, will come into force on 1 December 2020 (unless proclaimed earlier).

Background to the proposed reforms

Under the Building Act 1993 (Vic) (Act), when deciding whether to register an applicant as a building practitioner the Victorian Building Authority (VBA) must consider whether the applicant is a “fit and proper person to be registered”, having regard to certain personal and financial probity requirements. Where the applicant is a body corporate, these requirements apply to each director of the body corporate. Once an applicant is registered, these requirements are still relevant, because the VBA can bring disciplinary action (and potentially cancel the practitioner’s registration), if it believes on reasonable grounds that the practitioner (or director) does not meet these requirements.

The proposed reforms

The proposed new financial probity requirement is whether the applicant (or any director of a body corporate applicant) was a director, secretary or “influential person” in relation to a body corporate within 2 years before that body corporate went into external administration.

The current financial probity requirements already include whether the applicant (or director) was an officer of a body corporate within 2 years before it went into external administration,¹ so the most significant expansion in the proposed reforms is the inclusion of “influential persons”.

An “influential person” is defined as a person who is in a position to control or substantially influence the body corporate's conduct. There are exclusions from the definition, and also persons who will be taken to be influential persons, including CEOs, general managers, some shareholders, instructors and decision makers.²

Queensland has a similar regime to the proposed reforms, including a very similar definition of “influential person”.³ There are QCAT decisions interpreting the phrase, which may be useful in Victoria if the reforms are passed.

Key takeaways

If the proposed reforms are passed:

• the financial probity requirement relating to phoenixing will be expanded beyond officers to influential persons. This might prevent some applicants from being registered as a building practitioner, and might also expose some practitioners to disciplinary action;
• the reforms might reduce phoenixing in the building industry.

The mutual recognition scheme in the Mutual Recognition Act 1992 (Cth) could also limit the impact of the reforms. Unless other states or the Commonwealth Government make similar reforms, applicants who have engaged in phoenixing might be able to avoid the reforms, by getting registered in another State and then relying on the mutual recognition scheme to get registered in Victoria. There is recent High Court authority that a state authority cannot refuse to register a building practitioner who is registered in another state.⁴

If you would like further information on how these proposed reforms could impact you, please contact Luke van Grieken on +61 3 8686 6080 or at luke.vangrieken@nortonrosefulbright.com.

Links:

• Building and Environment Protection Legislation Amendment Bill 2019
• Second reading speech