Project Bank Accounts in Formal Appointments

The building and construction industry has featured in a number of recent¹ formal appointments in Western Australia.²   Insolvencies in these industries can involve large numbers of sub-contractors who have completed works under discrete contracts with their head contractor as unsecured creditors.

In response to similar issues the Queensland Government introduced the Building Industry Fairness (Security of Payment) Act.³  The Act aims in part to secure payment of sub-contractors through the use of Project Bank Accounts (PBA).⁴  While PBAs have been previously proposed as a means to ensure payments for services rendered by sub-contractors are received by them in the event of a head contractor’s insolvency,⁵  the Act represents the first large scale adoption in Australia. In Western Australia, PBAs are currently only required for contracts involving the Department of Finance (Building Maintenance and Works).⁶

Given that Western Australia already uses PBAs in a limited capacity and there have been calls from within the industry for more widespread use, we set out below some of the features of PBAs and their potential implications.⁷

PBAs are trust accounts into which the funds for the specific building project are paid by the principal as the works are certified.⁸   The head contractor, as the party with overall responsibility for completing works is the trustee as well as a beneficiary of the PBA. The sub-contractors are also beneficiaries in respect of amounts equal to works performed by them for which invoices have been rendered. When sub-contractors complete their work they submit claims to the head contractor.  The head contractor notifies the principal, who pays the certified work value into the trust account, from which the sub-contractors are ultimately paid.⁹

Sub-contractors, as beneficiaries of the trust created by the PBA have a greater chance of recovery of funds in the event of insolvency of the head contractor than they might otherwise.

Additionally, it is important to note that at least in the Queensland model, while the first tier of sub-contractors may be protected by PBAs, sub-sub contractors will not be expressly included as beneficiaries of the PBA.

Under the Queensland legislation, the head contractor administers the PBA and so there remains a risk as to non-payment of subcontractor debts, albeit the Act specifically disallows the PBAs from being used to pay the head contractor’s debts.¹⁰  Moreover, when disputes arise between head contractors and sub-contractors, the disputed funds are required to be transferred into a separate trust account while disputes are resolved.¹¹

Lavan Comment

While PBAs may provide comfort for some sub-contractors, they are not a perfect solution for ensuring funds flow to the proper party once works are completed.¹²  The Queensland legislation specifically excludes suppliers - that is contractors who only supply goods or services without carrying out building work - from being beneficiaries of PBAs.¹³   The contractual provisions in the head contract still govern payment for works (including any subcontracted works) and an assessment on the merits (set in the contractor’s scope of works) remains necessary.

From a practitioner’s perspective PBAs (regardless of not being mandatory) may provide a convenient means for appointees to re-engage key sub-contractors post-appointment to ensure continuity of critical works and deliver value returns to unsecured creditors by achieving practical completion.