The " Phoenix " Sting !

The way the law is setup in New South Wales the investor who has the misfortune to buy an apartment in a bright and shiny new building that develops a construction fault may see the promoter walk away and leave him or her with the entire repair bill, and sometimes that can run to many millions of dollars.

It all starts when the person proposing a new building registers what is known as a " Two Dollar company ".   The financial liability of that company is just two dollars but it negotiates contracts that result in a multi apartment high rise building being constructed and the individual apartments sold to unsuspecting buyers.

When a building fault becomes apparent that two dollar company is wound up.  It has already received the profits from the sale of the units, but it lacks the financial ability to fund the necessary repairs.  This is known as " Phoenixing " when the same people who owned that two dollar company that failed set up business by registering another two dollar company in a different name and reengaging in new construction work.

That is a clear breach of the law when it can be proved that the company was deliberately wound up to avoid paying debts such as tax or GST but compiling that proof is usually beyond the ability of the aggrieved owners of the faulty units.   Often this " Phoenix phenomenon " is  compounded when both the promoting company and the actual builder are both two dollar companies and both bail out before the fault can be determined in court.

One of the complications to a solution is the fact that company law which permits two dollar company is a Federal matter and is settled in a Federal court while control of the building industry is a state matter.   This control discrepancy is seeing the use of these two dollar companies widely used throughout all aspects of the building industry in Australia with consequent loss falling on the shoulders of unit owners.

One promising proposal to stamp out phoenixing is the allocation of a registered number to identify the directors of two dollar companies. Anyone associated with the winding up of a building company in suspicious circumstances could have a life ban on any further involvement in any form of company management.

It is also recommended that the two percent of the contract price for building construction retained after completion for the repair of faults be sharply increased.  In fact, if the majority of the profits from a building construction be held in escrow as a guarantee of building stability and only released according to a time frame it would go a long way in curbing shoddy construction practice.

The very nature of two dollar companies is abuse of the " fair play " principle and should deliver a warning to apartment buyers to be very cautious !