Australia: Corrs High Vis: Episode 20 - Proposed reforms to Queensland security of payment legislation

In our latest Corrs High Vis podcast we consider the Building Industry Fairness Bill of 2017. The Bill proposes further significant reforms to Queensland's security of payment legislation.

In this episode Senior Associate Todd Spiller speaks to Partners Andrew McCormack and Matthew Muir about the proposed amendments and what they will mean for those working in the construction industry.

This podcast series, brought to you by Corrs Construction team, offers analysis and insights to help you make smarter decisions.

These podcasts do not provide legal or other advice. Obtain legal or other professional advice as required.

TEXT VERSION

Todd Spiller: Commentator

Andrew McCormack: Corrs Chambers Westgarth – Construction Partner, Brisbane

Matthew Muir: Corrs Chambers Westgarth – Construction Partner, Brisbane

TODD: Hello and welcome to High Vis the Corrs Chambers Westgarth Construction podcast. My name is Todd Spiller and I'm a senior associate in the Construction team here at Corrs. Today, we are talking about proposed reform to the Security Payment legislation in Queensland. I'm talking of course about the Building Industry Fairness Bill of 2017 which was recently introduced into Queensland parliament and which proposes the most significant changes to the Security of Payment regime in Queensland for over a decade and certainly since 2014. In addition to making substantial amendments to Queensland's Security of Payment framework the bill, among other things, introduces a requirement to establish Project Bank Accounts and increases the powers of the building watchdog in Queensland, the QBCC, to address issues such as corporate phoenixing. I'm joined by Brisbane partners, Andrew McCormack and Matthew Muir to discuss these changes.

Andrew, if I can come to you first. Perhaps if we can start with the proposed introduction of Project Bank Accounts. Can you tell us what is a Project Bank Account, how does it operate and when will you need one?

ANDREW: Okay, Project Bank Accounts is a trust arrangement designed to protect amounts that a subcontractor may be entitled to in the event of a head contractor insolvency. A Project Bank Account or PBA achieves this by ring-fencing contract amounts within this trust arrangement and that means that those amounts are not available to general creditors in the event of a liquidation or the administration of a head contractor. The head contractor is the trustee and is also a beneficiary of the Project Bank Accounts but it can't pay itself from funds in the Project Bank Account until amounts that are to be paid to its subcontractors for the same work have been paid. Now a Project Bank Account actually comprises three separate trust bank accounts. There is a general trust account. There is a payments are to be made into by the principal and made out of to the subcontractors by the head contractor. There is also a retention account which is used for holding retention moneys as the name would suggest and also there is a disputed funds account where amounts that are in dispute are to be placed. Now the head contractor is responsible for establishing these three trust accounts and for administering them. Interestingly, head contractors are not entitled to be paid for establishing or maintaining the Project Bank Accounts so this all done at their own cost although, presumably, will have some flow through to the contractor's corporate overhead on a job - albeit indirectly. So that's what a Project Bank Account is. I think the second part of the question you asked me was well when do you need one. The regime is actually being introduced in two phases. Phase 1 will apply from the 1st of January 2018 assuming the legislation is passed and phase 2 will apply from the 1st of January 2019.

In phase 1, the PBA regime has a more limited effect it only applies to building contracts where the principal is the State of Queensland or a state authority. It also needs to be for a contract price that's between $1 million and $10 million. If those criteria are satisfied then a PBA needs to be established.

In phase 2, the meaning of a PBA contract where a PBA is required is broadened to include all building contracts whether the principal is a government entity or a private entity. It also applies to building contracts as long as the value is $1 million or more. Interestingly, another key difference is in phase 1, Project Bank Accounts is only required if the building contract is a head contract. Once we get to phase 2 and the more broader application of the PBA regime it applies to any contract whether it's a head contract or a subcontract that satisfies those criteria that we talked about before, that is principally that the value of the particular contract whether it's a head contract or a subcontract is more than $1 million and is for the performance of building work.

Now there are some exceptions where a Project Bank Account won't be required. Importantly, they are where the work is residential construction work there's no PBA required or if the contract is for maintenance work. The Explanatory Notes to this bill also state that a PBA will not be required for engineering contracts. Now the Explanatory Notes say that engineering contracts will include contracts for building roads, bridges and transport but doesn't make an express reference to rail, interestingly. The concept of engineering contracts is not actually further discussed in the bill and it's assumed and we'll wait and see but that will be dealt with in more detail in the regulations that will accompany the legislation when it's come back from Parliamentary Committee.

TODD: Okay, thanks Andrew. Matthew, if I can turn to you. The "Biff Bill" also proposes some fairly significant changes to Queensland Security of Payment legislation. Can you provide a summary of the most important changes?

MATTHEW: Todd that's right there are some really significant changes to the Security of Payment legislation which are proposed in this bill. The first and probably most significant amendment that's proposed is to incorporate the NSW's recent changes around payment claims such that any payment claim whether it's endorsed as being a claim under the relevant SOP legislation or not will be a payment claim for the purposes of the legislation. It's a significant change one which I think will have a very significant impact in the industry. It essentially means that all recipients of a payment claim under the contract must presume that the claim is also a claim made under the Act with the consequences which can follow. That's going to add, I think, a fairly significant administrative cost to the assessment and management of payment claims going forward.

The second and I think equally significant change is the change in relation to the provision of payment schedules. Previously the legislation like legislation in the other States allows for a second chance to put in a payment schedule. Here there is no second chance it's entirely removed which means essentially that if you don't put in a payment schedule within the statutory limit being 10 business days you're done. You cannot later put in a payment schedule explaining the reasons for your assessment of the amount being less than the amount claimed and significantly if you don't put in a payment schedule and the matter goes to adjudication you cannot put in an adjudication response. Some might say that's unfair you can all have your own views about it but certainly it's a very significant and draconian consequence for the period to put in a payment schedule within the required time. Also, interestingly, by way of further penalty for not putting in a payment schedule it is actually an offence to fail to do so and it's punishable by up to 100 penalty units and it's also grounds for disciplinary action under the QBCC Act which means that ultimately it could be lead to removal of a company's licence to operate in the building industry – a fairly significant consequence I think everyone would agree.

Lastly, I'll mention another change that's proposed around the adjudication response that a party might put in so there is provision for the regulations to limit the length of submissions that can be included in the adjudication response. As I read it there is no similar provision for the limitation of an adjudication application so this could have a really significant consequence where there are, say, significant issues that have to be responded to and in an adjudication application the respondent in those circumstances will be severely limited and could be limited to a page length. Let's hope that doesn't happen. Let's hope that if it does happen it's reasonable, otherwise we're going to see adjudication responses in point 8 font with no margins, top/bottom, left or right.

TODD: Thanks Matthew. Staying with you, I understand the "Biff Bill" will consolidate all existing Security Payment legislation not only the [09.40] Act but also the Subcontractors' Charges Act. A peculiar piece of legislation well-known to Queensland practitioners. Can you tell us a bit more about that?

MATTHEW: That's right Todd the bill will consolidate the Security Payment legislation and the Subcontractors Act all into one legislative instrument. It will mean that it's a one-stop shop for all things relating to Security of Payments and Subcontractors' Charges something that's peculiar to Queensland in any event. The Subcontractors' Charges provisions within the bill remain with the same structure as the old Subcontractors' Charges Act. There are some changes there. There is some improvement around the language used. You may know that the Subcontractors' Charges Act has been referred to as the "worst drafted piece of legislation in Australia". I think may be that's a little unfair but certainly there is some improvement around the drafting of the relevant provisions. There are some changes consequent upon the Project Bank Accounts which Andrew has spoken about. Essentially, you cannot use a Subcontractors' Charge to charge money in any Project Bank Account that's fairly significant in the limitation on people's ability to go up the line in the contracting chain to be able to secure payment for the work that they performed. Probably the intent is that the Project Bank Accounts will cure any failure to flow money through the contractual chain. We will wait and see whether that is the panacea for the problem but certainly with the changes they have implemented you won't be able to charge money in a Project Bank Account. The previous law around having to elect between using the Security of Payment legislation or using a Subcontractors' Charge and not being able to use both at the same time is retained and that will continue to be the case – so no great change there. The Subcontractors' Charges Act has been and will, I think, continue to be a very effective legislative set of rights for people to be able to use It certainly will retain its force it might not have force on projects that have Project Bank Accounts but it will still be very relevant within the industry and we look forward to seeing those changes.

TODD: Thanks Matthew and finally one last question for you, Andrew. It strikes me that amid all of these reforms we shouldn't overlook that changes are also proposed to the powers of the building industry watchdog in Queensland – the QBCC. What, in your view, is the most significant proposed change to the powers of the regulator?

ANDREW: I think the most important change to the QBCC Act, that's the act that governs the powers of the regulator of the construction industry in Queensland are the changes that have been introduced to address what's known as "corporate phoenixing". Corporate phoenixing is when a person who has control or influence over a construction company has a pattern of restructuring its corporate affairs so as to continue operating its business interests even where previous companies have failed. So, in particular, this is where a person has a company which is deliberately liquidated to avoid paying its creditors and then the business rises again from the ashes like a phoenix under the guise of a new construction company, a new body corporate. Now the new legislation seeks to tackle this by stating that a person who can be excluded from holding a QBCC licence which is required to undertake building work in Queensland can include what's known as an influential person so an influential person can be banned from being a licence holder. An influential person is someone who is not necessarily and, indeed, doesn't need to be a corporate officer – so a director or a company secretary – but who nevertheless controls or substantially influences the construction company's conduct. The Explanatory Notes state that the intent and the clear intent of these amendments is to address corporate phoenixing and to ensure that those influential persons who have been instrumental in the collapse of a construction company are prevented from holding a QBCC licence in the future. This is, I think, to be seen by many as a very positive development. It's difficult to see any justification for not introducing these provisions and it will close off the avenue of corporate phoenixing for a way for people who have left creditors out of pocket continuing to run their business and accrue further debts which they can then leave behind and move on again. I think it's a very positive development.

TODD: Matthew and Andrew thank you for joining me today. It's fair to say that even outside the State of Origin series a "bit of biff" is still flavour of the month in Queensland. To our listeners we hope you will join us again for the next episode of Corrs High Vis. Thank you and goodbye. This podcast is for reference purposes only. It does not constitute legal advice and should not be relied upon as such. You should always obtain legal advice about your specific circumstances.

This podcast is for reference purposes only. It does not constitute legal advice and should not be relied upon as such. You should always obtain legal advice about your specific circumstances.

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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