'Six-year nightmare': Shattered investors left with no one to sue for faulty units
By Carrie Fellner and Nigel Gladstone
Updated December 16, 2019 — 5.46pm first published at 12.00am
A "defective" business model that experts say has reached epidemic levels in the NSW building industry is leaving investors financially broken.
Aidan Ellis, 75, was stunned when the developer and builder of his apartment block could "walk away scot-free" after his companies went into liquidation midway through a battle over defects estimated to be worth in excess of $2 million.
Aidan Ellis was left with no one to sue after the builder of his penthouse apartment liquidated the company during a battle over defects. Credit:James Brickwood
The "six-year nightmare" has forced Mr Ellis into temporary accommodation while his apartment is a demolition site.
The business model, known as phoenixing, refers to behaviour that becomes illegal when it is proven a company was deliberately wound up to avoid paying debts, such as tax and GST.
"It's disgraceful," Mr Ellis said. "Thousands of ordinary Australians are losing their life savings."
The Herald has spoken to several apartment owners like Mr Ellis who are left with no one to sue for defects they did not cause. Most of them will not speak publicly for fear of harming their resale values.
But the effects are real and devastating: they speak of broken marriages, mental breakdowns and unbearable financial strain.
At the heart of their misery lies a broken business model that experts say has reached epidemic proportions in the NSW building industry: developers and builders creating $2 companies to carry out apartment projects, taking the profits and then shutting them down before they can be pursued in court over any defects bill.
The Berejikilian government and newly anointed Building Commissioner David Chandler have both failed to publicly lay out plans to address the problem and did not respond to questions from the Herald, sparking accusations their response to the building defects crisis has been "defective".
It comes after industry experts, lawyers, academics, unions and the peak body representing apartment owners all demanded action at a recent parliamentary inquiry, where the business model was referred to as "phoenixing".
The inquiry was launched following the evacuations of Sydney's Opal Tower, Mascot and Zetland apartment buildings, which rocked public confidence in multi-storey units.
David Christie, an engineer with more than 50 years' experience, said: "The industry is full of $2 companies, doing quick and dirty developments, with little oversight or control.
"They open a specific company for each development for the very reason that if something goes wrong ... they can just pull the pin and walk away. At the end of the day, it is the poor consumer that wears the full brunt of it all."
Stanton Legal told the inquiry that phoenixing was the "most significant factor" in the cascading number of defective buildings. Associate Professor Hazel Easthope from the University of NSW said it left fixing defects contingent on the "goodwill of those developers and builders".
Former treasury secretary Michael Lambert, who led a landmark review into NSW building regulations in 2015, said it was "very disappointing" that phoenixing hadn't been addressed.
"It's quite clear that the building regulation is defective," he said.
A Herald analysis of recent Supreme Court defects cases found five where a developer had been liquidated, two where the builder had been wound up and three where both the developer and builder no longer existed.
Buildings across Sydney have been evacuated due to safety concerns. Credit:Kate Geraghty, Nick Moir, Brook Mitchell
The Australian Securities and Investments Commission prosecutes illegal phoenixing and has been open about the difficulty it has faced in proving intent, especially when the phoenixing is assisted by unscrupulous liquidators and business advisers.
To further complicate the matter, the federal government has jurisdiction over corporate laws including phoenixing, while the state has jurisdiction over the building industry.
The Morrison government introduced new laws this month to curb the practice by introducing director identification numbers (DIN). It is also creating new penalties for illegal phoenixing.
However, Australian Small Business ombudsman Kate Carnell said the DIN "doesn't solve the problem" of phoenixing and could be more than a year away from implementation.
There are concerns the laws will do little to dismantle the type of phoenixing that is commonplace within the industry, and that while not it is necessarily illegal it is wreaking havoc for buyers left with the bill.
Queensland, ACT and Victoria have intervened to protect consumers by introducing their own legislation aimed at phoenixing.
The Queensland Building and Construction Commission runs a licensing scheme that can exclude builders from the industry for life once they have been involved in multiple insolvencies.
"An excluded person cannot (overtly, or covertly) own or otherwise 'be calling the shots' of a licensed building company," a spokesperson said.
Australian Restructuring Insolvency and Turnaround Association chief executive John Winter said licensing was the "only way" to hold developers to account for a history of insolvency and poor building quality.
In its interim report last month, the Greens and Labor-led parliamentary inquiry found the NSW building industry was trapped in a "vicious cycle" of phoenixing.
It recommended there be an increase to the 2 per cent bond paid by the developer at the outset of a project to cover any defect repairs needed down the track, subject to economic modelling on the effect of the change.
Sydney's Opal Tower suffered from construction defects. Credit:AAP
In a dissenting statement on behalf of the government, Trevor Khan said such a change was "likely to have a major impact on the cost of new buildings and negatively affect housing affordability".
The Berejiklian government reforms are focused on the registration of practitioners who carry out building work, including principal contractors, designers, architects and engineers.
When the senior bureaucrats developing the reforms were quizzed in Parliament about Queensland's approach, they said they had not dealt with phoenixing "within the ambit of this bill" but "could look into that".
They pointed out that "there is a lot of work being done at both commonwealth and state levels on the issue of phoenixing more generally".
Better Regulation Minister Kevin Anderson and Mr Chandler did not respond to requests for comment.
The Urban Development Institute of Australia NSW said it took a "hard-line approach" on illegal phoenixing but defended the use of individual companies for individual building projects.
Chief executive Steve Mann said they gave investors confidence their capital would be spent on only a specific project, and other projects would not affect the security of the finance.
None of this implies that Ecove or Icon are involved in phoenixing activity.
Off-the-plan market
Carrie Fellner
Carrie Fellner is an investigative reporter for The Sydney Morning Herald.
Nigel Gladstone
Nigel Gladstone is an investigative journalist at The Sydney Morning Herald.