AUSTRALIAN CONTRACTORS, OWNERS AND BANKS: RELATIONSHIPS BUILT ON TRUST AND SECURITY?
Special Counsel, HHG Legal Group ([email protected]
With insolvencies on the rise in Australia’s construction industry, increasing reliance is sought to be placed on trust structures to protect accrued payment rights under construction contracts. But can trust structures withstand the competing forces of a principal’s statutory and/or contractual set-off rights and a financial institution’s proprietary rights under the Personal Property Securities Act 2009 (Commonwealth)? The concerns of this paper are first, to critically examine the efficacy of the law of trusts in circumstances of contractor insolvency and second, to propose further law reforms to improve protections for contractor payment rights.
INTRODUCTION: WHEN HEAD CONTRACTORS BECOME INSOLVENT, SUB-CONTRACTORS MAY NOT BE PAID
When a construction contractor becomes insolvent, its sub-contractors are at risk of not being paid for their work. This is because, absent special statutory protections (proposals for which are the concern of this paper), the legal status of a sub-contractor, vis-a-vis the party that has engaged it to carry out the sub-contracted works, is that of unsecured creditor. This means that, when proving its debts in insolvency, the sub-contractor will rank, in order of priority, behind the insolvent contractor’s employees, whose payment rights are protected under section 556 of the Corporations Act 2001; and behind the insolvent contractor’s secured creditors: in particular, its lenders.
The principal of an insolvent contractor might complain of being in the same predicament. However, principals typically have recourse to commercially valuable statutory 1 , contractual 2 and equitable 3 set-off rights
1 Pursuant to section 553C, Corporations Act 2001.
2 That right has been foreclosed in Victoria: Façade Treatment Engineering Pty Ltd (In Liquidation) v Brookfield Multiplex Constructions Pty Ltd  VSCA 247; rendered uncertain and difficult in WA: Hamersley Iron Pty Ltd v James  WASC 10, vindicated in NSW at present: Seymour Whyte Constructions Pty Ltd v Ostwald Bros Pty Ltd (In Liquidation)  NSWCA 11. However, amendments to the Building and Construction Industry Security of Payment Act 1999 (NSW) are proposed, which would prohibit parties in liquidation from taking the benefit of the Act.
3 James v Commonwealth Bank of Australia (1992) 37 FCR 445 at 458-459, Hanak v Green (CA)  2 QB 9 at 25-26, 29;  2 WLR 755;  2 All ER 141 and Galambos & Son Pty Ltd v MacIntyre (1974) 5 ACTR 10.
Pt 2] Australian Contractors, Owners and Banks