Of all the issues and uncertainties surrounding the collapse of the construction firm in charge of the $350 million upgrade to the Ararat Prison in Central Victoria as well as several other public housing and infrastructure projects, one of the most interesting relates to accusations that it has tried to avoid liability by placing its construction arm into administration.
In the latest development, New South Wales Finance Minister Greg Pearce has told the Macquarie Radio Network that the liquidation of St Hillers Ararat Pty Ltd was an attempt by the broader St Hillers Group to avoid liability regarding debt and guarantees in Victoria.
“(It’s) a cynical attempt to avoid their liabilities on the Victorian jail project” Pearce says, adding that the federal government should investigate whether or not the company had breached any provisions in the corporations law.
Pearce’s accusation follows the placing into liquidation of St Hilliers Ararat Pty Ltd, which is part of the Aegis Correctional Partnership consortium undertaking the prison upgrade, as well as the placing into administration of related company St Hilliers Construction Pty Ltd.
These events, in turn, flow through from a significant delays and cost overruns on the prison upgrade and a subsequent failure of the company in its effects to secure an extra $150 million in funding to meet its share of the project.
Both of the affected companies are part of Sydney based St Hilliers group, a property development, construction and asset management group. Pearce’s comments, therefore, reflect fears that the liquidation of the Ararat company may mean that debt and other obligations remain stuck in the Ararat subsidiary whilst the broader St Hilliers group escapes liability for those obligations.
(Note: DesignBuild Source is not suggesting that any parties involved have engaged in illegal or deliberately unscrupulous conduct.)
What Can Governments Do?
That raises interesting questions about what governments can do to prevent companies from avoiding liabilities for subsidiaries under their majority ownership and/or control.
A basic principle behind company law is that of limited liability – whereby shareholders are not themselves responsible for debts and obligations of companies they own. The same principle applies to companies which own other companies – the parent company is generally not responsible for debts or obligations of its subsidiary.
In order to prevent this from being abused, the federal government has implemented a number of measures over the years. The Corporations Act, for example, contains provisions to disqualify directors who have been involved in multiple corporate failures and render directors personally liable for compensation where companies enter into transactions with the purpose of avoiding employee entitlements. In terms of public revenue, the law makes company directors personally liable for any unpaid Pay As You Go (PAYG) tax relating to companies under their control.
Beyond this, however, short of breaking down the long-standing principle about corporate limited liability, there is not much law makers and regulators can do to hold parent companies responsible for unpaid debts/unfinished work when troubled subsidiaries collapse.
Every Right Not to Be Happy
Understandably, this frustrates clients, employees and subcontractors.
“What sort of business model is it that these people can come out and say well we’re going to put this company into administration to avoid our exposures to guarantees and debts?” Pearce asks, summing up the frustrations of many.
With the New South Wales government as a client, and with no one at St Hilliers mentioning the financial position of the company (Peace says) during two financial assessments of the St Hilliers just two months earlier before the company was contracted for twelve public housing projects in Wollongong, Pearce has every right to be annoyed.
“Somebody needs to take a stick to them and hold them accountable for this”.
Rightfully so, the concept of limited liability is fundamental to company law. But that does not mean that clients, workers, sub-contractors and suppliers need to be at all happy when they are left with the mess of money owing and unfinished work of collapsed subsidiaries whilst parent companies go on their merry way.