I have recently published a journal titled ‘A Deep Dive into Security of Payment‘, which is a summary of 105 articles I have authored and published concerning various Security of Payment (SOP) issues since 2017. My initial reading of the Building Industry Fairness (Security of Payment) Bill 2017 (‘BIF Bill’), tabled in parliament on 22 August 2017, motivated me to write my first Helix SOP article.
In the executive summary of the journal, I stated:
“To say that I was astonished at the magnitude and scope of the reforms outlined in this 215-page BIF Bill would be an understatement. I was instantly concerned about certain aspects of these reforms. Based on my extensive experience in SOP issues, I knew that many industry parties would struggle to understand their obligations and responsibilities. I decided the best thing I could do was to write about my concerns in a respectful manner, but at the same time encourage parties to become informed”.
This is my first Security of Payment article since my publishing my SOP journal and it has been triggered by a thought provoking recent LinkedIn post by Kate Raymond, where she stated:
Kate then went on to outline her views on Security of Payment (SOP).
Her post got me thinking about all current things relating to SOP, but in particular, the rollout of statutory trusts in Queensland and I provided the following comment in response.
On reflection, I am happy with this prompt response, but I do want to take the opportunity to expand on my views.
As I have demonstrated in all my previous SOP articles, I seek to raise issues in a respectful manner. In doing so I have a a view to encourage contractors to become informed or better still pursue answers regarding the operations of SOP regulation they are unsure of.
Let’s be very clinical in assessing SOP proposed solution
I am at fault here as are so many people in the construction industry – when we refer to SOP, it is very important to acknowledge that underpayment or non-payment of workers or employees is not just an issue besetting the construction industry. I note an online article by Forbes Advisor that states:
“It’s an unfortunate fact that wage theft—the illegal practice of shortchanging employees—is all-too prevalent in Australian workplaces. Recent research from PWC, using data from the Fair Work Ombudsman (FWA), estimates there is a staggering $1.35 billion in underpayments occurring across Australian companies each year. Among the most common sectors impacted by underpayments include construction, healthcare, hospitality and retail–but anyone in any company and in any sector could be at risk.”
In making this point I am not, for one minute, understating the serious and detrimental life impacting consequences on construction industry businesses or workers who suffer because of unreasonable underpayment or non-payment for their services. A look at my CV details my efforts to bring about improved payment outcomes for all contractors in the industry.
However, when we use an emotive term like SOP, particularly in relation to the plight of subcontractors being paid, I think it is important for us to resist the urge to rush to embrace proposed solutions for underpayment or non-payment without applying a forensic, robust, evidence-based approach.
In other words, we must take the emotion out of our considerations.
Let’s stop picking sides when discussing SOP
I have encountered many developers, builders, subcontractors, suppliers, consultants etc over the past 28 years. Some of these people are not what I consider ethical, but the vast majority, regardless of who they are, are very decent and hard-working people.
The ethical and hard-working ones, I want to see them successful regardless of their business profile. However, these different parties face very different pressures and risks. Or do they?
For example, a developer will usually have financial issues to manage that a builder or subcontractor does not experience.
A builder will encounter tendering, contractual and procurement challenges, as well as payment issues.
A subcontractor will also largely face the same challenges as a builder but for some reason, some commentators and observers ignore this fact.
A builder or subcontractor is a contractor, and they equally deserve to be paid if they have performed in accordance with their contractual and statutory obligations.
Therefore, in looking at SOP from a high regulatory level, if the evidence reveals contractors generally are encountering unfair or unjust payment issues, then surely any proposed regulatory solutions should equally apply to all contractors and there be no distinction between subcontractors and builders.
Furthermore, in these circumstances, imposing onerous obligations on builders to pay subcontractors when they are experiencing the same payment issues with developers and not offering them the same assistance is, to me, a wrong approach unless the evidence supports such a targeted market intervention.
Let’s use the current pause in the rollout of trusts to re-evaluate their effectiveness
In an update on the Department of Energy and Public Works (DEPW) website, it is stated:
“Due to ongoing challenges within the industry, including market-wide supply and labour shortages and cost pressures, the Queensland Government extended the start dates for the remaining two project trust account phases:
- Eligible private sector and local government, statutory authorities’ and government-owned corporations’ contracts valued at $3 million or more – scheduled to start 1 April 2023 – now starts 1 March 2025.
- All eligible contracts valued at $1 million or more (full implementation) – scheduled to start 1 October 2023 – now starts 1 October 2025.
Retention trust accounts were scheduled to expand on 1 October 2023 for eligible contracts throughout the whole contractual chain on a project trust project. This expansion will now occur on 1 October 2025.”
There are three things I would like specific information on, or further discussions on during this paused implementation:
1. Clarification of Trusts Software and Compliance Issues
According to an online article, a spokesperson for the DEPW, it is stated:
“We are now looking at further ways to simplify the trust account framework and exploring ways to make it easier for contractors to comply. In fact, we are working with almost 30 leading software providers who are developing automated solutions that make trust accounting simpler and more cost-effective”.
What is the status of these matters? I believe industry parties would greatly benefit from a detailed update.
2. A recognition that Trusts do not guarantee payments to subcontractors
The collapse of PBS Building (Qld) Pty Ltd (‘PBS’) in March 2023 owing $169 million across 500 creditors. The company’s Project Bank Accounts reportedly held less than 10% of the funds owed to subcontractors.
In an update on the QBCC website it is stated:
“The QBCC is aware of an application made by the administrators for PBS Building (Qld) Pty Ltd seeking directions in the Supreme Court regarding the administration of Project Trust Accounts and a Retention Trust Account under the Building Industry Fairness (Security of Payment) Act 2017.
The QBCC has actively engaged with the administrators and the Court.
Orders have been made which require the administrators to take steps to notify subcontractors affected by the collapse of PBS Building (Qld) Pty Ltd.
The QBCC continues to actively monitor the proceeding and engage as an interested party when appropriate”.
In a statement on their website administrators of PBS, their liquidators, RSM Australia Partners (RSM) state:
“Project Trust Accounts: while the Administrators are of the preliminary view the Project and Retention Trust Accounts in NSW and Queensland have been properly maintained (my emphasis) by the companies, they have sought directions from the Queensland Supreme Court on the administration of the Queensland Trust accounts given there is no precedent for administering these accounts in an external administration”.
In a previous article titled Are Trusts the cure? I stated:
“I believe insolvencies will not be eliminated because, for example, under BIFA a Head Contractor must pay subcontractors even if they have not been paid by the principal for work done. This will mean that if they have insufficient other monies or means to raise capital to meet these payment obligations, they may succumb to insolvency.
If there is a shortfall of funds from the principal and a sustained obligation to top up the Project Trust Account (PTA) to pay subcontractors, the math is not difficult and it adds up to a cash-poor Head Contractor, soon unable to pay its debts as and when they fall due. In other words, insolvent.”
This is the situation PBS has apparently found itself in. If the project’s trust accounts were being properly managed as reported by the administrators and there is such a serious shortfall in monies held in the accounts as reported, then there can only be one explanation.
Monies from developers to PBS were not paid into the accounts. Now it is very important to recognise that there may be very justifiable reasons for this happening. Additionally, it is apparent that PBS did not have the ability to inject sufficient money into the trust accounts to ‘top up’ their payment obligations to subcontractors. However, regardless of the reasons, subcontractors who were entitled to be paid for work they did for PBS will not be paid the amount owed to them.
Why does this matter I can hear some of you say – surely the fact that other than in the case with PBS, monies are being held in trust accounts as required. It matters for this reason – it clearly reveals that the success of the trust regime is largely predicated on developers paying builders monies they are legitimately owed by due payment dates.
In saying this, I am not advocating that developers should pay builders regardless of their entitlement. Of course, they are perfectly entitled to withhold monies if the builder has not performed in accordance with their contractual and statutory responsibilities. However, it does, in my view, highlight an ineffective aspect of this regime and this needs to be acknowledged in any evidence-based appraisal of its effectiveness.
To me, it is like being sold a great location for building an expensive house but with known problematic, poor soil. You can justify its construction because it will be done in full compliance with all relevant laws and building standards. However, should there be a sudden soil subsidence event, you are told the house will collapse.
Is it wise to construct such a house knowing this fact?
3. A recognition that Trusts do not alter the preferencing laws under the Commonwealth’s Bankruptcy Act 1996 and Corporations Act 2001
In an article in the Courier Mail titled ‘GCB Constructions subcontractors could be forced to pay back $72m as boss makes new bid for control‘, it is stated:
A new report from David Stimpson of SV Partners said unsecured creditors could be forced to repay any funds received from GCB when they knew, or should have suspected, it was insolvent.
Almost $72m in payments made by GCB to subcontractors and suppliers as far back as November 2022 could be “clawed back” and shared between all creditors, the report said.”
I have read this report, and it is stated:
“We are investigating payments made to unsecured creditors during the Relation-back Period (from 27 November 2022 to 26 July 2023) to determine whether those payments are preferential. Given we are in the early stages of our investigations, we are not able to reliably estimate the total amount that may be ultimately pursued and recovered.”
It needs to be recognised, and I cannot stress this point enough, the report does not make any mention of whether any potential preferential payments were made via project trust accounts
In an update on the QBCC website it is stated:
“At the time administrators were appointed, GCB Constructions Pty Ltd had five projects that required a project trust account, with a related retention trust account:
- Air conditioning and Electrical upgrades – Robina SHS, Keebra Park SHS, Coombabah SS – Cooler Cleaner Schools Program
- 48 residential units – combination 3 and 4 bed over 29 levels – Drift Residences
- Residential – 33 levels above ground and 4 level basement – Amaya
- 34-storey residential Apartment Building – Aria Canopy
- 8-level residential apartment building – COTE Palm Beach”
In an article I published in February 2022 titled ‘Will Project Trusts protect parties in the event of industry insolvencies?‘, I referred to a report by a Panel established by the Government where it was stated:
“A stated policy intention of the BIF Act is to secure money held in the PBA in the event of an insolvency. The framework created by the BIF Act is capable of ensuring that money being held in a PBA or Retention Trust Account that is liable to be paid to a subcontractor beneficiary:
- would not form part of the assets of a head contractor on insolvency; and
- could not be called on to satisfy a debt (secured or otherwise) of the head contractor.
However, the BIF Act does not alter the preferencing laws under the Commonwealth’s Bankruptcy Act 1996 and Corporations Act 2001. It is arguable that there may be certain circumstances where money paid from a PBA could be the subject of an unfair preference claim. On advice, the Panel has been able to conclude that these circumstances are likely to be very rare in practice. The Queensland Government has done all that it can to ensure the funds in a PBA liable to be paid to a subcontract beneficiary are unable to be distributed to secured creditors in the event of head contractor insolvency.
In relation to the Retention Trust Account, the Panel has recommended that the monies held in Trust be characterised as a charge. This will make those monies a secured interest protecting them, as much as possible from the Commonwealth’s unfair preferences laws.”
“a charge over the retention funds in favour of the contracted party. This charge will apply to the funds whether they are in the Trust Account or not. This gives the contracted party priority interest over the amount for which the charge applies should the contracting party become insolvent.”
In this previous article I went on to say:
“However, as far as I am aware, the issue concerning potential unfair preference claims remains unresolved. This is most definitely a significant ‘watch this space’ issue.
If Statutory Trusts are not capable of operating as intended in the case of builder insolvency, then one of the main reasons for establishing them ceases to exist. “
I have not formed an opinion one way or the other as to whether trusts will deliver improved payment outcomes for subcontractors.
As stated above, I do believe there is a need to recognise the potential limitations of trusts in any evaluation of their effectiveness in improving payment outcomes for subcontractors.
Put simply, it appears that project trust accounts work when everyone is being paid (i.e., when they are not needed). So far, it appears they don’t work when payment isn’t flowing – e.g., in an insolvency situation.
I will also make this point. Having the objective and then achieving the securing of progress payments in discrete trust accounts for a certain type of work does not necessarily mean subcontractors will benefit from improved payment outcomes.
Furthermore, the administration and compliance costs imposed on builders and the QBCC must be factored into any evidence-based appraisal of trusts.
A transparent, robust, comprehensive, independent, expert-led, evidence-based evaluation of Trusts is in my view, urgently required.
My purpose in writing about Trusts is to open the eyes of parties impacted by them.
These parties may not fully understand the nerdy policy level I delve into but hopefully, they will gain a better appreciation of how they operate and if this is the case, then I have achieved my objective.
Not intended as legal advice. Read full disclaimer.