Introduction
There are many aspects of insolvency and difficulties getting paid that are caused by activities that are outright fraud under section 408C of the Queensland Criminal Code.
What is it?
For the purposes of this discussion, fraud under section 408C is constituted by a builder inducing a subcontractor to supply goods, material or services knowing that the builder cannot or is not going to pay for them.
The trap is usually sprung by the builder winding up the company or executing a phoenix operation.
How is it done?
It starts off with a builder going to see a consultant to discuss the fact that they wish to cash out or simply shed debt.
This can be done by a builder of any size.
The amount of time for execution of the scheme depends on the quality of the advice and the amount of liquidity still in the company.
It ranges from years to months.
The most prevalent is two to three months.
The name of the game is to fend of suppliers and subcontractors as long as possible while not paying them and liberating as many assets as possible out of the company and then appointing a friendly liquidator that does not pursue the directors.
Who is involved in the scheme?
One of the largest 408C frauds in very recent history was carried out by a consulting firm recommended by one of the big four banks.
In fact, this particular bank figures in most of these cases.
The consultants involved range from some very high profile professional firms to self proclaimed consultants with no professional qualifications whose only skill is 408C fraud.
Where the fraud involves a phoenix it also requires the connivance of the developer.
What about government projects?
There is some protection of the project is subject to project bank accounts.
However, there is otherwise no protection.
In fact, in a recent very large 408C fraud the State of Queensland actively assisted the builder to carry out a phoenix for the sake of completing projects.
In the circumstances, the Pre-Qualification Contractor system is of no value in protecting a subcontractor on a State of Queensland project because they just ignored it and rigged the process to make it look as if the phoenix had complied.
The State of Queensland has not taken any action against the public servants who carried out this action.
How do you protect yourself?
It can be impossible to guarantee that you will never suffer any losses due to a 408C fraud.
However, you can minimise your losses by:
- Doing the survival course so that you know what you are doing;
- Administering your contracts properly;
- Making sure you claim for everything to which you are entitled in each progress claim;
- Submitting good quality progress claims so there is no argument about you getting paid (we have such documents for you);
- Being in a position to exit the project if you need to (you can only do this if you have set things up properly – If you have not put in the work you will be subject to a damages claim and probably a Preferential Payment Claim).
Help is available
Contact us if you need suspect a 408C fraud is fermenting in the background and you need help.
Related articles
Why are project bank accounts being delayed?