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  7. Do the civil and construction industry need to re-evaluate the need for legal protection against the impact of insolvency?
27 May 2021

In our most recent construction law update, Building and Construction and Dispute Resolution Special Counsel, Daniel Morris, and Director, Murray Thornhill provide an update suggesting there may be good cause for the civil and construction industry to re-evaluate the need for legal protection against the impact of insolvency. One simple and, we think, commercially sensible, measure to absorb some of the shock of insolvency is the use of statutory, cascading trust accounts.

Civil and Construction Industry Law - HHG Legal Law

We suspect the civil and construction industry been deterred away from such measures by the unwieldiness of traditional Project Bank Account structures. The traditional model requires two (in WA) or even three (in Qld) bank accounts to be created and administered for each civil or construction project. We agree that any trust regime that creates unnecessary administrative burdens and unnecessarily ties up contractors’ working capital is not the answer and may even cause unintended economic harm.

However, that is not the model proposed by John Fiocco or John Murray who instead propose a model of cascading, statutory trust accounts with these basic elements:

A. Whilst solvent, each contractor in a contracting chain except the last, will have a dedicated trust account for receiving and disbursing progress payments down the line of contractors.
B. After each round of progress payments, each such contractor is free to use the balance of monies received into its trust account as it sees fit.
C. Upon any such contractor’s insolvency, the law automatically deems it a trustee for itself and all subcontractors down the contracting chain.

This is thought to benefit all contractors downstream of an insolvency as their status is elevated from mere unsecured creditors to trust beneficiaries.

For reasons explained in Daniel Morris’s ICLR paper, a regime of cascading, statutory trust accounts is unlikely, by itself, to have the desired effect of preserving civil and construction contractors’ payment rights against the superior claims of banks and other secured creditors. To achieve this, there must also be appropriate Personal Property Securities Act (PPSA) protections. As observed in an ICLR publication by Louise Hall, these legal protections already exist in one form or another in the UK and Canada, where they are reported to have been well-received by civil and construction contractors generally.

Ultimately, meaningful, cultural change within the industry will require more than laws alone can deliver, such as improvements in contractor education and confidence well thought-out, collective action by industry representatives and participants. In the meantime, though, it is suggested that cascading trust and PPSA protections will go some way towards keeping civil and construction contractors paid and working on Australian construction sites, in circumstances where, sadly, construction contractor insolvencies appear set to continue for the foreseeable future.

Our team are highly skilled and experienced in advising on all aspects of civil and construction, insolvency and debt recovery. Contact us today if you need advice or representation in this area.

*This is general information only, and does not constitute specific legal advice. Please consult one of our experienced Legal Team for specific advice relevant to your situation.

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