According to the latest statistics from the Australian Securities and Investments Commission (ASIC), the construction industry has faced sustained and accelerating financial distress over the past four years. Since FY 2021-2022, the number of insolvency appointments has almost tripled, with nearly 4,900 cases in FY 2024-2025 alone. And, the 744 cases already recorded for FY 2025-2026 indicate the construction industry continues to suffer severe financial distress. ASIC’s statistics also show that creditor’s voluntary liquidations dominate over other approaches, which highlights that many construction firms are collapsing late in the financial distress cycle.
Insolvent trading ranked as the leading form of misconduct in the construction sector, according to the latest ASIC statistics (2023–2024 ASIC Insolvency Statistics Series 3.2). Recently, a de facto director was ordered to pay over AUD 10 million because he allowed the company to incur debts while insolvent (see our discussion in In the matter of Trinco).
In the first article of this series, Ironbridge Legal outlined key red flags and precautionary measures for counterparties in the construction industry. As the trend of construction companies collapsing predominantly in the late financial stress cycle continues, this instalment shifts the focus inward to how directors, accountants and private lenders can protect themselves in the early stages of the financial stress cycle.
Building Early Warning Systems for Directors
ASIC’s statics show that poor cash flow is the leading cause of financial distress for construction companies. Directors must take a proactive and structured approach to assessing their company’s solvency to meet their statutory duties and to protect themselves from personal liability. Directors who fail to prevent insolvent trading expose themselves to significant legal risk. To prevent potential personal liability, directors should adopt rigorous financial health monitoring practices and implement board-level reporting disciplines.
Financial Health Monitoring
Financial health monitoring refers to a systematic and ongoing process of assessing a company’s solvency and overall financial position. The relevant monitoring tools should not only track immediate obligations but anticipate upcoming liquidity constraints over, at least, a rolling 12-month period. This period accords with the accounting and audit practice standard in Australia as the management’s going concern assessment and auditors’ evaluation must look forward at least 12 months. Going concern is the assumption that an entity will continue its operation for the foreseeable future and will not need to liquidate, cease trading, or seek protection from creditors. Lenders typically evaluate a borrower’s ability to service debt at an early stage when assessing covenant compliance. Bank lenders, for example, are required to evaluate adverse changes in loan performance, which is important to the credit risk measurement process according to para 66 of the APG 220 Credit Risk. Aligning internal monitoring with lender expectations strengthens the ability to negotiate support or refinancing.
To avoid potential liability for insolvent trading, directors may be able to take advantage of the safe harbour defence. ASIC’s RG 217 highlights the importance of robust financial health monitoring by emphasising that the regulator will look for whether the board actively monitored insolvency, investigated financial difficulties, obtained qualified advice, and acted in a timely manner. Without the implementation of a robust financial health monitoring system, the safe harbour defence may be difficult to establish.
The Strategic Role of Accountants
Accountants play an important role in helping directors to avoid the risk of personal liability for insolvent trading and ensure financial transparency by identifying the early warning signs. They also support directors in invoking potential defences by maintaining detailed, contemporaneous records of professional advice, actions taken, and decisions made.
Practical Strategies for Lenders
As the insolvency of construction companies continue to increase, a proactive risk management system is important for lenders to implement. At the beginning of the project, lenders should not only assess the collateral but also undertake comprehensive due diligence on borrower’s solvency and governance structures, and the actual project plan. Covenant-driven lending is a good measure. Covenants should include clear financial and operational conditions, such as minimum liquidity ratios, to detect risks early and trigger protective measures before defaults occur. And, when there is any sign of distress, seeking advice from insolvency and restructuring specialist early allows lenders to achieve better recovery outcomes by considering all strategic options before the point of fatal distress.
Key Takeaways
Early engagement of professional advisers is critical not only to help directors avoid personal liability for insolvent trading and other insolvency claims, but also to secure better outcomes for lenders. Whether you are a director, lender or an accountant, our team can assist in managing insolvency risks and provide strategic approaches.
Further Information
For more information about liquidation, insolvent trading, safe harbour and directors’ duties, please the author of this article:
