On 5 February the Queensland Parliament was presented The Building Industry Fairness (Security of Payment) and other Legislation Amendment Bill 2020.
Most of this bill is as a result of the evaluation report being released in November last year where considerable changes were recommended to the Building Industry Fairness (Security of Payment) Act 2017 (BIF).
The wholesale amendments particularly in relation to what were known as the project bank account provisions are significant and in terms of size considerable. The whole of the provisions of the original BIF (excluding adjudication – old BCIPA and old Subcontractors Charges provisions) consisted of over 110 pages. The amendments alone are 115 pages. The changes as a whole are an improvement on the provisions that were sparingly used throughout the industry as a result of them only applying to a fairly narrow section of contracts (State government contracts between $1 million and $10 million).
No Project Bank Accounts (PBA’s)
There is now no reference to Project Bank Accounts. The system requires what is now referred to as “statutory trusts” and will be phased in as detailed in our previous article link here.
- phase 2 from July 2020 all Government projects exceeding $10 million excluding GST or over;
- phase 2A from July 2021 private projects exceeding $10 million or over are added;
- phase 3 from January 2022 private projects in the range of $3 million-$10 million excluding GST are added; and
- phase 4 from July 2022 private projects in the range of $1 million-$3 million excluding GST are added.
The timing of these phases is to ensure that the industry players most able to cope with the changes will be first affected. Changes to cash flow as a result of retention funds being unable to be used for general revenue will have large effects on some players and it was argued that some timing needed to be allowed for these effects to be prepared for. This is especially so bearing in mind the new minimum financial requirement provisions.
Major Features
Fines, Imprisonment, Personal Liability of Managers
As with the original Act there are significant fines for transgression of the various requirements under the Act ranging from notifications not carried out and small compliance issues which can have a maximum penalty of 50 penalty units (or in current language, $6,672.50 for an individual or five times that amount for a corporation) to large non-compliances where say for instance a trustee didn’t ensure that deposits and withdrawals from a retention trust account are made using only methods that create an electronic record transfer(max 500 penalty units or $66,725.00 and five times for Corporation)
Imprisonment is a feature of many of the provisions
In addition, all executive officers (defined as a person who is concerned with or takes part in the corporations management and doesn’t need to be a director) will be personally liable for certain offences if the corporation commits an offence and the officer did not take all reasonable steps to ensure the corporation did not engage in conduct constituting the offence. The executive liability provision deals with contraventions such as:
- not opening a trust account;
- the non-payment of monies to the trust account by contracting party;
- non authorised withdrawal from the trust account;
- withdrawals from the trust account without having paid the subcontractor;
- unauthorised withdrawing of monies from the retention trust; and
- withdrawing monies from the retention trust before the defect’s liability period expires.
They are generally the sections already attracting high-end penalties.
No separate trust bank account required for each contract for retentions
As anticipated the system has been somewhat simplified by no longer requiring a separate trust account for each contract retention. Contractors will only be required to open one bank account but will need to retain separate ledgers in respect of each subcontract. The disputed funds trust account has been abolished.
Personal Property Securities Act (PPSA) – Security Interest
Section 56 of the proposed Act declares that the trusts are a statutory interest under the PPSA and as such will have priority over all other security interests in relation to the funds held in those trusts. This provides a significant advantage as against other claimants to those funds, other secured creditors, the contractor and other creditors. Significantly nothing has to be done to achieve that favoured position other than the trust itself and the accounting being set up by the contractor.
Withholding payment provisions and charges
Sections 97A-H of the proposed Act deal with innovative changes to further secure funds outstanding. These provisions only operate if an adjudication decision has been made and there has been no payment as required by the decision.
A payment withholding request can be served requiring a higher party in the contractual chain to retain sufficient funds to cover the adjudicated amount. The amount retained must be out of what is referred to as “a related amount” payable to a respondent. Effectively the value of the goods or services or construction work needs to be related to sums outstanding and yet to be paid to the respondent.
These provisions can apply equally as between subcontractor, head contractor and principal or between a head contractor, principal and financier. The financier is defined in very wide terms to be an institution or a person who in the ordinary course of business supplies finance for construction contracts.
Should the recipient of a withholding request not respond whether it is not a higher party within five business days there are fines totalling 50 penalty units. A reason why you would not be higher party is if for instance the funds are no longer outstanding to a respondent as they have been paid already.
In the event that the higher party doesn’t retain funds it becomes jointly and severally liable for paying the adjudicated amount to the extent of that failure. Under section 97G the amount retained is subject to a charge in favour of the claimant securing payment.
In addition, to the charge referred to above there is a charge that can be obtained in circumstances where the claimant is the head contract and there is an adjudication decision registered as a judgement and either the developer or owner or a related entity is the registered owner of property on which the construction took place. In those circumstances a charge can be requested, and it can be registered over the title to the property. Eventually an order for the sale of the property can be applied for which can authorise the sale of the property free of all encumbrances other than what the court preserves.
Training, Records, Freezing Funds, Audit
Section 41 of the proposed Act requires that a nominated person or the trustee is to undergo training within a time to be prescribed by regulation (yet to be released). Exemptions and extensions of time to undergo training is also provided for.
Trust ledgers are to be established for each trust capable of providing separate information for each beneficiary of each trust.
Records are to be retained for seven years and monthly bank reconciliations are to occur for each of the trusts within 15 business days after the end of each month.
Section 53B details the circumstances in which the Commissioner can effectively freeze trust accounts by notice to the trustee and the bank. This can occur where the Commissioner suspects a trust account is not being used as required, there is an insolvency, the contract is terminated, or there is a licence suspension or cancellation. This will also apply if MFR provisions are not adhered to.
Each trustee is to appoint an auditor to carry out a review of the trust account at times that are yet to be prescribed by regulation. The auditors are required to be independent of the trustee and are subject to significant disciplinary procedures under section 54.
To confirm compliance the Commissioner can pursue an Audit program under s189.
Shortfall, Unavailability of trust funds and Investment
Importantly section 51 of the bill continues to require a trustee to immediately make up any shortfall in the trust account for any amounts due to a beneficiary.
Section 51A makes it clear that any monies paid to any trust account can’t be used to pay a debt owed to a creditor of the trustee or be available for execution under a court order for the benefit of a creditor of the trustee.
The trustee is unable to invest any funds in trust but can earn interest on the fund transferable to the trustee once every 12 months. No administration or fees are payable or recoverable from beneficiaries’ funds.
Adjudication
Section 75 of the Security of Payment Provisions of the Act are proposed to be amended in relation to the making of a payment claim by a first-tier subcontractor. Those payment claims must be accompanied with a “supporting statement” declaring that all subcontractors have been paid as at the date of the payment claim or stating the full amount owed giving their details and the sums outstanding as well as reasons for non-payment in full and several other details. Curiously a failure to comply by attaching or delivering with the payment claim a supporting statement will not affect the validity of the claim.
Section 76 is proposed to provide a maximum penalty of 100 penalty units should a payment schedule be issued, and payment not be made.
Section 99 is proposed to be amended so as to provide 30 business days as the time limit within which a party must serve a notice prior to proceedings. Previously there was a provision for 20 business days. This section still provides a very short time limit for taking action where there has been a failure to pay after default in delivery of a payment schedule.
The continuing effect of this section is that if the notice is not served within 30 business days there is no ability to rely upon the default by the respondent to pursue court process. The policy reasoning for this is difficult to understand.
Amendments to Section 42E QBCC Act
This section was introduced in 2017 and since then there has been little evidence that has been used to prosecute anybody. It allowed a prosecution if a person without reasonable excuse, caused another party to suffer significant financial loss because of deliberate avoidance of complying with the terms of the contract.
Amendments are now sought so as to reflect the tasksforces recommendation in relation to fraudulent behaviour. That taskforce recommended that the section be amended so as the burden of proof in showing reasonable excuse should fall on the defendant. This will make it much easier for a prosecution to pursue such a case and may mean more complaints to QBCC.
Tony Mylne is a Director within our Construction Litigation team.
Bennett and Philp will be conducting seminars concerning these changes leading up to their commencement to ensure readiness and client compliance. There will be significant disruption gearing up for these changes not the least of which will be ensuring the required trust account training has occurred. If you would like to register for these events, please email us at events@bennettphilp.com.au.
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