If you are a lender to a contractor in the building industry, the recent law reforms regarding project trust accounts are likely to affect your business.
We have published many articles on how project trust accounts work, but here is a quick refresher.
A project trust account is similar to what were previously referred to as project bank accounts in that it is a statutory account through which all payment is to be made for construction contracts to which the scheme applies.
A retention trust account is an account which receives cash retention amounts withheld under a construction contract to which the scheme applies. These amounts are withheld until the cash retention amounts are due to be released.
The recent (and continuing) changes to the regime in Queensland can significantly impact on the viability and collectability of debts. For example:
- The Queensland Building and Construction Commission (QBCC) now has the ability to give directions for money not to be taken out of project trust accounts without the QBCC’s written approval. Obviously, if the QBCC did this, it could have significant impacts on a contractor’s cash flow, potentially liquidity and ability to pay its creditors, including financial institutions;
- The QBCC also has the ability to give financial institutions directions not to allow withdrawals from project trust accounts without the QBCC’s written approval. Again, if the QBCC did this, it could significantly affect cash flow, liquidity and the ability of various participants in the contractual chain to repay their creditors, including their financiers;
- In certain circumstances, there can also be what is known as a Payment Withholding Request which, especially operating in conjunction with securities created under the Personal Property Securities Act 2009 (Cth) (PPSA), could also interfere with money flowing down the contractual chain, thereby again potentially affecting various financiers involved;
- The recently induced right to place charges on land if adjudicated amounts are not paid on time, can also affect real property security held by financiers; and
- The comparatively new personal liability for ‘executive officers’ of a business in the contractual chain, could have implications for guarantors and thereby indirectly, the financiers involved.
How does the reform affect my business?
One of the greatest implications that the reforms will have is to keep the money moving down the contractual chain, but as can be seen from some of the examples above, that will not always necessarily be so. Generally, it is to be expected that the winners under the scheme will be subcontractors because they have to be paid first.
Where the scheme applies, all payments for work under the construction contract must come out of the project trust account or retention trust account. One of the great benefits for those receiving such payments is expected to be that money paid out of either such trust account will not be able to be “clawed-back” by administrators and liquidators, much to the relief of those who receive the money (and potentially their financiers) and the disappointment of administrators and liquidators (and potentially the financiers of the party in administration or liquidation).
A quick refresher on the phases of implementation for Project Trust Accounts and Retention Trust Accounts
Not all projects and contracts will fall within the scheme. And, the Queensland Government has recently again pushed back part of the roll-out, so they now will not commence until after the next State election.
We have published several articles on this on our website, but by way of a quick refresher, here is a brief summary of which projects and contracts fall or will fall within the scheme and when.
When does your financed client need a Project Trust Account?
Generally, it is only the head contractor which is required to set up a project trust account but be warned, businesses which ordinarily consider themselves to be “subcontractors”, can, in certain circumstances, also be required to set up a project trust account. In simple terms, your financed client would be required to do so if the following criteria are met:
- During the particular phase of the rollout, your financed client meets the head contractor criteria and the contract price specified during the phase (or an earlier phase);
- More than 50% of the contract price is for “project trust work”, (which has a particular meaning under the Building Industry Fairness (Security of Payment) Act 2017 (Qld) (BIF Act); and
- There is at least one subcontractor engaged for all or part of the contracted work.
Are there any circumstances in which my financed client might be exempt?
Although it is not quite as simple as this, generally speaking, your financed client may be exempt from requiring a project trust account if:
- The contract relates to small-scale residential construction work;
- The contract is solely for maintenance work;
- The contract is between the State and a State Authority;
- The contracting party or contracted party is an entity prescribed by regulation;
- The contract is solely for professional design, advisory or contract administration work;
- It is a short-term contract for work to be completed in less than 90 days;
- It is a subcontract unless it meets the exceptions in sections 14C and 14E of the BIF Act.
When does my financed client need a Retention Trust Account?
If your financed client is a contracting party (that is, the party for whom the construction work is being undertaken), your client will be required to have a retention trust account if:
- The head contractor has or is required to have a project trust account;
- The contracting party, being the person withholding the retention amount, is subject to the scheme during that phase of the rollout; and
- The contracting party withholds retention amounts in the form of cash from the contracted party. It does not apply to bank guarantees being held in substitution for cash retentions (one of the weaknesses of the BIF Act).
Regardless of the above criteria being met, a Commonwealth, Queensland Government, State Authority or Local Government which is the contracting party is said not to be required to have a retention trust account. However, we have been involved in a major infrastructure project which is structured as what was described as “an alliance”, where, in our view, those exceptions do not apply. The project is currently under construction so it will be interesting to see what happens if there is any significant dispute.
Payments from a Project or Retention Trust Account
All beneficiaries of a project or retention trust account must be paid from the trust account. All amounts relating to the project trust contract must be paid through the project trust account. Additionally, all cash retention amounts held in a retention trust account and must only be paid from the retention trust account.
Each project will be allocated a separate project trust account and funds can only be applied and recovered from the project trust account allocated to the relevant project. If you are a lender to a contractor in the building industry, we urge you to investigate each project and consider the viability of each project before advancing funds. If funds are lent to a contractor for a project, and the project does not succeed, you, as a lender, will only be able to recover costs from that particular project trust account.
If you are involved in any factoring, invoice discounting or similar, funding a client for a major project in which the client is involved in the project trust account scheme, can be very tricky. If that is your position, we urge you to seek specialist advice from us as to how it might apply to your business.
If you are concerned about how the reforms might affect your business and its clients who you finance or just want more information, please feel free to contact us. Non-compliance with the project trust account and retention trust account requirements can result in very significant penalties under the BIF Act.
For further information regarding the above, please contact the author or any member of our Banking & Finance team.
This information and the contents of this publication, current as at the date of publication, is general in nature to offer assistance to Cornwalls’ clients, prospective clients and stakeholders, and is for reference purposes only. It does not constitute legal or financial advice. If you are concerned about any topic covered, we recommend that you seek your own specific legal and financial advice before taking any action.
 A subcontract is eligible for a project trust if—the subcontract is a first tier subcontract for a head contract; and a project trust is required for the head contract; and the subcontractor is a beneficiary of the project trust for the head contract; and the subcontractor is a related entity for the contracted party for the head contract or the subcontract is a type of subcontract prescribed by regulation (see ss 14C and 14E of the BIF Act).