In brief - Subcontractors' charge can be a powerful tool if used correctly
The Subcontractors' Charges Act 1974 (SCA) applies in Queensland. It enables subcontractors to secure a statutory charge over money payable (or to be paid in the future) to them by their contractor. In effect, the charge is handed to the developer (owner) to redirect monies otherwise payable to the contractor to the subcontractor. This bypasses a potentially insolvent builder.
Using the SCA means you cannot use the BCIPA
A subcontractor should be aware that the giving of a notice of claim of charge under the SCA effectively suspends any rights that you may have under the Building and Construction Industry Payments Act 2004 (BCIPA) and you will be prevented from taking any steps to recover outstanding money under the BCIPA.
What parties are involved?
There are generally three parties involved in a subcontractor's charge:
- The builder or contractor who was engaged by the developer to complete a building project.
- The developer (owner) who owes money to the builder under the building contract.
- The subcontractor who is engaged by the builder to perform "relevant work" (see below) under the main building contract. The subcontractor is owed money by the builder for work performed under the subcontract.
Who can lodge a charge?
Any subcontractor who has been engaged to carry out work by a contractor is entitled to claim a charge over money payable to the contractor by a principal or superior contractor.
The definition of "work" covers almost all construction work carried out in Queensland, including mine sites, and extends to:
- unskilled labour
- the "placement, fixation or erection" of materials, plant or equipment at a site
- the manufacture or fabrication of project specific components (even if the manufacture or fabrication happens off site)
However, the definition of "work" in the SCA does not include:
- the mere delivery of the materials, plant or equipment to a site
- the supply of materials, plant or equipment under a hire agreement
- most domestic building work
- work done under a service contract
- testing of materials or taking measurements or quantities
if it is not related to the construction work carried out at the site.
What can be secured under the charge?
The subcontractor can lodge a charge only on money payable to a contractor under that building contract. This includes retention monies and any security monies held by the developer or superior contractor.
In order to recover money under a charge, the developer must still have the money and still owe a debt to the builder. Money cannot be charged after it has been paid to the builder, or if the entire debt to the builder has been paid by the developer.
This means that timing for issuing the charge is crucial, because once the money has been paid by the developer, you have no recourse to that money as the charge has nothing to attach to.
How is a charge lodged?
A notice of the subcontractors' charge must be given to both the builder and developer. The notice must specify the amount and particulars of the claim in relation to the relevant work. It must be certified by a "prescribed person" and supported by a statutory declaration from the subcontractor.
Because the charge notice may be overturned if not completed properly, if not on the prescribed form or not within the relevant time periods, we recommend engaging a solicitor to prepare the charge notice.
What are the time periods for giving a notice of charge?
A notice of charge can be given at any stage during the subcontract period, but the following time restrictions apply after the completion of the subcontract:
- for contract monies - within three months after the completion of works
- for retention monies - within three months of the expiration of the maintenance period
- for monies held under a security - within three months of the expiration of the release period
Consequences of a notice of charge
Within fourteen days after the notice of charge is received by the builder and the developer, the builder must give a "contractor's notice" to the developer, stating that the builder:
- accepts liability to pay the claimed amount; or
- disputes the claim; or
- accepts liability to the amount stated in the "contractor's notice", but otherwise disputes the claim.
When a builder provides a notice accepting the liability, the developer will pay the amount to the subcontractor and that will be the end of the matter.
If the builder does not accept the liability, the subcontractor must take the next steps to enforce the charge, which means essentially proving the debt by commencing proceedings. But at least the money will be secured, as the developer should not pay any money to the builder or risk also having to pay the debt to the subcontractor.
In most cases, the developer will pay the money into court and this will end the developer's involvement in the matter.
Leap frogging under the Subcontractors' Charges Act
Another option for subcontractor's utilising the SCA is, for want of a better word, leap frogging. Leap frogging applies where a developer engages a builder or contractor, who engages a subcontractor, who engages another subcontractor. For example:
Normally, the sub-subcontractor would only issue a notice of charge against the subcontractor and the builder or contractor. Instead, the sub-subcontractor can "leap frog" the builder or contractor and issue a notice of charge against the developer for any money that is payable to the builder or contractor.
As a matter of prudence, the sub-subcontractor should issue separate form 1 notices to the developer and the builder or contractor and separate form 2 notices to the builder and contractor and the subcontractor.
Again, because of the inherent risks associated with issuing a notice of charge which is incorrect, we recommend engaging a solicitor to prepare the charge notice and to advise whether leap frogging is a viable option.
Legal proceedings to enforce a charge
Under section 15 of the SCA, a subcontractor must begin legal proceedings to enforce the charge within one month after notice of charge has been given, and no later. If the subcontractor fails to do so, the charge is automatically extinguished.
This limitation period is crucial and care must be taken when determining the limitation period to ensure that proceedings are commenced within time to prevent extinguishment of the charge.
What happens when the builder is in voluntary administration?
Calculating the relevant limitation period can be made more difficult when the builder is in voluntary administration because of the moratorium period which applies.
In State of Queensland v Walter Construction Group, the court found that where a subcontractor gave a notice during the period of the builder's voluntary administration, the subcontractor was temporarily prevented by the Corporations Act 2001 from beginning proceedings to enforce the charge. As a result, the one month limitation period did not start running until the administration had finished.
An administration generally finishes when a Deed of Company Arrangement is executed, the company is placed into liquidation or the company is returned to the directors. This usually occurs at the second meeting convened by the administrators.
The suspension of the one month limitation period will only apply in a voluntary administration and does not apply where the builder in is liquidation or a receiver and manager is appointed. This means that it is important as a starting point to determine whether the builder is in administration or liquidation, as it will affect the relevant time period and the expiration of the charge.
Once the builder is in liquidation, or has become subject to a Deed of Company Arrangement, the subcontractor will need to begin proceedings pursuant to section 15 of the SCA to keep the charge alive.
In the past, prior to commencing proceedings to keep the charge alive, leave would need to be sought from the court to proceed against a company in liquidation. However, the recent decision of MSI (Holdings) Pty Ltd v Mainstreet International Group Ltd  QCA 27 held that the restriction contained in section 471B of the Corporations Act 2001 does not apply to secured creditors realising a security interest in circumstances where the company is in liquidation.
This means that by issuing the charge and becoming a secured creditor, it is no longer necessary to apply for leave to proceed before commencing proceedings pursuant to section 15 of the SCA to keep the charge alive.
Piggybacking under the Subcontractors' Charges Act
Where another subcontractor has commenced proceedings to enforce a charge, as long as you have issued a notice of charge within the requisite period, you may be able to join those proceedings and avoid having to commence separate proceedings within the one month period to preserve your charge.
Our solicitors can advise you whether piggybacking is a viable option for you.
Important considerations when dealing with administrators or liquidators
By giving a charge, in effect, the subcontractor is classed as a secured creditor for the purposes of any administration or liquidation. This may have some pitfalls and there are matters which a subcontractor needs to be aware of as a secured creditor.
- As a secured creditor, a subcontractor needs to be careful when lodging a proof of debt or voting as a creditor of the builder. By lodging a proof of debt for the full amount of the debt, including any amount secured by the charge, a subcontractor may inadvertently forfeit its right to assert a charge unless the subcontractor makes it clear that it is only proving for the unsecured portion of its debt (being any amount that is not subject to the charge). A subcontractor may also waive its charge if it votes in favour of the Deed of Company Arrangement.
- A subcontractor which chooses to pursue its claim as a secured creditor of the builder may miss out on benefits that are specifically given to unsecured creditors pursuant to a Deed of Company Arrangement. For example, in Re Stockport (NQ) Pty Ltd, the court found that a subcontractor who had given notice and had not voted in favour of a Deed of Company Arrangement was entitled to enforce the charge, and was not prevented by the deed from realising its securities (being the money held by the developer). However, the court also held that the subcontractor was not entitled to receive a distribution from the deed fund for any shortfall in the security as it was not a "contractor creditor" as provided for in the Deed of Company Arrangement.
Completion of projects when the builder is insolvent
Usually charges are lodged when a builder is insolvent, and many times when that occurs the builder will not be able to complete the contract.
In such circumstances, the developer may be able to withhold all monies that have been charged and that are owing to the builder and use them to complete the project (using another builder). As a result, the developer may not be obliged to pay out any of the money under a charge until after the project has been completed and those costs have been paid.
Any surplus money after the costs of completion have been paid will be available to pay the subcontractor. It is important to note that where more than one subcontractor issues a charge, the available money will be paid on a pro-rata basis.
|Simone Farrugia||Craig Sawford|
|Construction and engineering|