Australia:

Should the civil and construction industry re-evaluate the need for legal protection against the impact of insolvency?


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In our most recent construction law update, Building and Construction and Dispute Resolution Special Counsel, Daniel Morris, and Director, Murray Thornhill provide an update suggesting
there may be good cause for the civil and construction industry to
re-evaluate the need for legal protection against the impact of
insolvency. One simple and, we think, commercially sensible,
measure to absorb some of the shock of insolvency is the use of
statutory, cascading trust accounts.

We suspect the civil and construction industry been deterred
away from such measures by the unwieldiness of traditional Project
Bank Account structures. The traditional model requires two (in WA)
or even three (in Qld) bank accounts to be created and administered
for each civil or construction project. We agree that any trust
regime that creates unnecessary administrative burdens and
unnecessarily ties up contractors’ working capital is not the
answer and may even cause unintended economic harm.

However, that is not the model proposed by John Fiocco or John
Murray who instead propose a model of cascading, statutory trust
accounts with these basic elements:

A. Whilst solvent, each contractor in a contracting chain except
the last, will have a dedicated trust account for receiving and
disbursing progress payments down the line of contractors.

B. After each round of progress payments, each such contractor
is free to use the balance of monies received into its trust
account as it sees fit.

C. Upon any such contractor’s insolvency, the law
automatically deems it a trustee for itself and all subcontractors
down the contracting chain.

This is thought to benefit all contractors downstream of an
insolvency as their status is elevated from mere unsecured
creditors to trust beneficiaries.

For reasons explained in Daniel Morris’s ICLR paper, a
regime of cascading, statutory trust accounts is unlikely, by
itself, to have the desired effect of preserving civil and
construction contractors’ payment rights against the superior
claims of banks and other secured creditors. To achieve this, there
must also be appropriate Personal Property Securities Act (PPSA)
protections. As observed in an ICLR publication by Louise Hall,
these legal protections already exist in one form or another in the
UK and Canada, where they are reported to have been well-received
by civil and construction contractors generally.

Ultimately, meaningful, cultural change within the industry will
require more than laws alone can deliver, such as improvements in
contractor education and confidence well thought-out, collective
action by industry representatives and participants. In the
meantime, though, it is suggested that cascading trust and PPSA
protections will go some way towards keeping civil and construction
contractors paid and working on Australian construction sites, in
circumstances where, sadly, construction contractor insolvencies
appear set to continue for the foreseeable future.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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