Australia: Retention money trust accounts – implications for banks and insolvency practitioners


The NSW Government has recently passed the Building and Construction Industry Security of Payment Amendment (Retention Money Trust Account) Regulation 2015 (NSW) (the Regulation). This Regulation amends the Building and Construction Industry Security of Payment Regulation 2008 No. 139 (NSW) by introducing a requirement that retention money held by a head contractor under a construction contract with a subcontractor be held on trust with an approved authorised deposit-taking institution (ADI), more commonly referred to as a bank.

The new requirement only applies to contracts under which security for the subcontractor's performance takes the form of retention money, rather than bank guarantees, bonds or unconditional undertakings. It also only applies when the value of the construction project is over $20 million. If post-contract variations increase the value of the project to above $20 million, then a trust account will be required for subsequent subcontracts.

The amendment will apply to construction contracts entered into after 1 May 2015.

The amendment explained

These amendments were enacted as a result of the findings of the Collins Inquiry which was initiated in 2012 following a large number of construction company insolvencies. This inquiry found that significant numbers of subcontractors do not receive retention money when they become entitled, often because the head contractor uses those funds as working capital or to satisfy debts.

Under the Regulation, the head contractor establishes the trust account, and is able to access the funds without needing to prove its entitlement to a third party adjudicator. The Regulation prohibits the head contractor from withdrawing retention money except for the purpose of paying the money in accordance with the contract, in circumstances agreed between the subcontractor and head contractor, or by order of court. Interest earned on retention money is also held on trust, unless the parties agree otherwise. The head contractor is specifically prohibited from using the funds to satisfy its debts.

Head contractors face penalties of up to a maximum of $22,000 for non-compliance with certain of the new provisions.

What does this mean for banks?

Establishment of retention money trust accounts

The most obvious implication of the amendment is that banks are likely to see an increase in head contractors requesting that trust accounts be set up to hold retention money where such security is provided for in a subcontract.

The account may be set up as:

  1. a separate trust account for the retention money held in respect of a particular subcontractor;
  2. a separate trust account for all retention money held in connection with a particular construction project of the head contractor; or
  3. a separate trust account for all retention money held in connection with 2 or more (or all) construction projects of the head contractor.

The head contractor must notify the bank that the account is a retention money trust account.

Increasing preferences towards other methods of security

The increased protection that the trust regime provides for subcontractors no doubt comes at a cost to the head contractor in the form of reduced cash flow. The terms of its own secured debt facilities may also mean that the head contractor cannot establish a separate trust account or it is administratively and procedurally difficult to do so. Also, there may be significant negative impacts to the value of a secured lender's secured assets as a consequence of the establishment of such a trust fund. As a result head contractors may prefer to receive bank guarantees as security, rather than retention money.

Also, given that the protections are largely subject to agreement between the parties (and the fact that the head contractor controls the trust account), banks may also see subcontractors favouring the provision of bank guarantees to cover their non-performance, rather than retention money.

Banks may be directed to provide information

Banks should also be aware that the Chief Executive of the Office of Finance and Services will have the power to direct banks to provide information about retention money trust accounts and the money retained in those account. Non-compliance could attract a penalty of up to $22,000.

Do banks risk any liability for these trust accounts?

The Regulation contains a carve out providing that banks holding retention money in trust accounts of this nature are not under any obligation to control or supervise transactions in relation to the account or to see to the application of money disbursed from the account. To the extent that there is a dispute about retention money being withdrawn from the trust account, this would be a dispute between head contractor and subcontractor.

The amendments do, however, provide that banks do not have any recourse or right to money held in the trust account to cover any liability that the head contractor may have to the bank. This will prevent banks from exercising their right of set-off against the retention money to the extent that the head contractor owes the bank money (e.g. unpaid account keeping fees, facility charges, etc.). It will also affect security held by a bank over the account (discussed below).

Despite the threat of penalties under the Regulation, without a third party adjudicator controlling access to the account, the potential remains for head contractors to misuse the retention money held. In such circumstances, the subcontractor may have to resort to enforcement of its rights through the courts.

Interestingly, the draft Regulation released for public comment in December 2014 included additional obligations requiring banks to inform the Chief Executive within 30 business days of becoming aware that a retention money trust account has been overdrawn, or a cheque presented on such an account has been dishonoured. A maximum penalty of $22,000 applied for failure to comply with these provisions. These provisions were presumably removed due to concerns that banks would be reluctant to open such trust accounts.

Implications for secured lenders and their borrowers

The establishment of a trust account in relation to retention money and the regulatory framework for the treatment of money in the trust account creates some significant implications for secured lenders of head contractors and subcontractors. The parties' rights to the retention money would always be subject to the rights of subcontractors to payment under the subcontract. However, additional considerations flowing from the Regulation include the following:

  • Where the trust account arrangements are documented or otherwise supplemented by agreement between the head contractor and the subcontractor, the establishment of the trust account may give rise to a security interest under the Personal Property Securities Act 2009 (Cth) granted by the head contractor in favour of the subcontractor. If this was the case, the subcontractor would need to protect its interest in the retention money by making an appropriate registration against the head contractor. It is also likely that a subcontractor would require some contractual support in relation to the trust account to support the restrictions against withdrawals from the trust account by the head contractor. Such contractual support would likely take the form of an ADI account control deed between the head contractor, ADI and the subcontractor.
  • A secured lender to the sub-contractor would need to ensure that any security interest in favour of the subcontractor in the trust account had been perfected (as well as ensuring that its own security interest extended to and was perfected in an appropriate manner over the interest of the subcontractor in the account).
  • A secured lender to the head contractor would need to ensure that the head contractor had perfected any security interest held by it in the trust account (as well as perfection of its own interest in the account). That lender would also be limited by the Regulations as follows:
    • If the secured lender is the ADI with which the trust account is held, the security interest will be subject to the provision of the Regulation referred to above, which states that the secured lender does not have any recourse or right against money in the account in relation to any liability of the head contractor to the ADI.
    • If the secured lender is not the ADI with which the trust account is held (leaving aside the need for contractual arrangements with the account bank), it will still be subject to Regulation 10(1) which states that retention monies are not available for the payment of the debts of the head contractor or liable to be taken in execution for satisfying a judgment debt against the head contractor.

This will necessarily lead to lenders discounting the value of the trust account or requiring security to take an alternative form.

From a head contractor's point of view, it is possible that the deposit of the head contractors' money into the trust account is a breach of a head contractors' undertaking under a secured lender's security agreement not to create any trusts over any of its property. Head contractors should take care to ensure that they do not breach such an undertaking before establishing the trust account or otherwise seek the secured lender's consent.

Important considerations for the enforcement of security interests

As discussed above, the Regulation introduces the intriguing concept that the head contractor is specifically prohibited from using the funds in the trust account towards the satisfaction of its debts.

In the event of insolvency and a winding-up of the head contractor, a liquidator may also be restricted from applying any money that the head contractor would have been entitled to recover from the retention money towards the payment of creditors of the head contractor. This could conceivably include the restriction of payments to unpaid employee entitlements as well as ordinary trade creditors from the retention money which the head contractor is entitled to retain.

Retention accounts are sometimes not properly established or administered, featuring mingling of trust funds with non-trust funds. In those cases, it is possible that the secured lender, its receiver or an administrator or liquidator may be permitted to apply those funds in the usual manner, although it is usually prudent to obtain court directions if there is any doubt.

In addition the breadth of the definition of 'retention money' and the operation of Regulation 10(1) is such that there are no stipulations as to whether that money could become available for a secured lender, its receiver or an administrator or liquidator to be applied in the usual manner in circumstances where a head contractor is entitled under the subcontract to retain such funds because of the non-performance of the subcontractor.

A full copy of the Regulation can be found here.

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