On commercial projects when a subcontractor is not being paid by the builder they have several options including:
- Continue to do the work and hope they get paid;
- Make an adjudication application under the Building Industry Fairness Act ("BIF") which may ultimately result in the works being suspended; or
- Lodge a subcontractor's charge under BIF ("Charge").
What are the advantages of a Charge?
They have several important advantages over other actions, as it requires the developer to retain money to be paid from the builder to pay the amount of the Charge. This means that the builder doesn't get those funds and then spend them on other debts or expenses.
The Charge also gives the subcontractor security over the funds that are payable to the builder. Even if the builder goes into liquidation the Charge will still require the developer to retain those funds.
This security also means that if the subcontractor gets paid by the Charge and then the builder goes into liquidation the liquidator will not be able to pursue the subcontractor for an unfair preference to have the money paid back.
Despite all these advantages, lodging one is the least likely action a subcontractor will take. Usually, this is because the builder will promise that payment is coming soon once they have been paid. They will also threaten the subcontractor that if they lodge a Charge the builder will never engage them again.
Consequences of failing to lodge
In our experience, this failure to lodge a Charge can have serious consequences to a subcontractor including:
- The final payment has already been made to the builder as they took too long to lodge a Charge;
- They are out of time to lodge a Charge when the builder goes into liquidation (as strict timelines apply);
- They do not get paid for the work they have done when the builder goes into liquidation;
- They do get paid but then end up having to pay back all the money (or a substantial amount of it) as the liquidator sues them for an unfair preference after the builder goes into liquidation; and
- In the worst cases, the subcontractor has ended up in liquidation themselves.
If the subcontractor had lodged a Charge these consequences might have been avoided.
Given the forecasts of a significant number of businesses going into insolvency soon, subcontractors should be closely looking at the builders who have not paid them and obtaining advice about lodging subcontractor charges to protect their cash flow and their business.
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.