In our last article we discussed the circumstances in which Qld’s Project Bank Account legislation could apply to a head contractor.
Below, we take a detailed look at the steps the relevant head contractor must take to establish and then operate their PBA.
Setting up the PBA
The head contractor bears the obligation to establish the project bank account.
A project bank account is made up of a series of trusts over the following amounts –
- An amount paid by the principal to the head contractor under a building contract;
- An amount a subcontractor is entitled to be paid by the head contractor under a first tier subcontract;
- A retention amount withheld from a subcontractor under a first tier subcontract
- An amount that is the subject of a payment dispute.
Thus the head contractor is the trustee of the project bank account. The head contractor and each subcontractor are the beneficiaries.
The subcontractor ceases to be a beneficiary of the trust when paid all amounts owing to it under the subcontract. This includes any retention amount.
Subcontractors are beneficiaries, suppliers are not
As noted above, a subcontractor is a beneficiary of the project bank account.
Subcontractor means a first tier subcontractor to the building contract.
A supplier is not a subcontractor and not a beneficiary of the PBA under the BIF Act.
However, those engaged to manufacture or significantly modify goods for incorporation into, or for use in connection with, the building work, are deemed to be subcontractors. Thus they are not suppliers in the strict sense, and can be subcontractor beneficiaries under the BIF Act.
Accounts forming the Project Bank Account
The head contractor’s project bank account must be made up of the following trust accounts, which must be opened at the office or a branch of a financial institution within the State –
- A general trust account for amounts paid under the head contract, paid under a subcontract with a subcontractor beneficiary or authorised to be deposited under s.28(e);
- A retention account for amounts held as a retention amount for a subcontractor with a subcontractor beneficiary;
- A disputed funds account for amounts the subject of a payment dispute.
The head contractor must ensure the account’s name includes the words ‘trust account’.
The head contractor must establish the project bank account within 20 business days after the head contractor enters into the first subcontract for the building subcontractor.
An exception to this arises if the building contract provides for the relevant date. However, the date prescribed must be no earlier than 20 business days after the building contract is entered into, and no later than 20 business days after the head contractor enters into the first subcontract for the building subcontract. A further exception arises if a regulation prescribes a maximum period within which a project bank account must be established.
Notifications to Subcontractors
Before entering into a subcontract for the building contract, the head contractor must give the subcontractor the following information using the approved form –
- That a project bank account will be used for making payments to the subcontractor; and
- Details of the financial institution at which the trust accounts for the project bank account are to be held.
If the head contractor entered into a subcontract for the building contract prior to becoming obliged to create a project bank account, then the head contractor must give the subcontractor the information within 10 business days after becoming aware of their obligation.
Establishing The Project Bank Account
Generally, within 20 business days of entering into the first subcontract for the project, the head contractor must establish a Project Bank Account (PBA).
The PBA must include the following trust accounts:
- a general trust account;
- a retention account; and
- a disputed funds account.
Payments by Principal into Project Bank Accounts
The head contractor will be the trustee of each account with both the head contractor and subcontractors as beneficiaries.
A payment claim will be submitted by a subcontractor to the head contractor on and from the reference date in the usual way..
The head contractor will submit their payment claim to the principal, and their claim will naturally incorporate their entitlement to be paid for works carried out by their subcontractors.
But from this point on, things change.
Instead of the principal paying monies directly to the head contractor’s account, they will pay their assessment of the claim into the general account of the PBA..
Distributions out of PBA by head contractor
The head contractor (as trustee) will hold the PBA monies on trust, and distribute it by:
- paying the subcontractor beneficiary the amount entitled under the subcontract;
- paying into the retention account the subcontractor’s retention entitlement;.
- paying the head contractor beneficiary the amount entitled under the head contractor for which it is not liable to pay the subcontractor; and
- paying into the disputed funds account an amount the subject of a payment dispute, that is, the difference between:
- the head contractor’s scheduled amount (i.e the amount they proposed to pay); and
- the ‘instructed amount’ being the amount the head contractor actually instructed be paid to the subcontractor in respect of that payment claim.
The head contractor must, as soon as practical after giving the financial institution a payment instruction, ensure a copy of the information contained in the payment instruction is given to –
- the principal; and
- if the payment is to a subcontractor beneficiary – the subcontractor beneficiary.
The copy of the information need only include the information prescribed by regulation.
The principal must inform the commissioner of any discrepancies in the payment instruction as soon as practicable after becoming aware of the discrepancies (as defined) or after it ought to reasonably have known of the discrepancies.
Head contractor must first pay subcontractor
The head contractor must not pay itself until the scheduled amounts have been paid in full.
However, the head contractor may withdraw an amount before paying subcontractors if the withdrawal is to make a payment ordered by a court or for an adjudication under the Act.
Head Contractor must cover any Shortfall
Section 30 requires the head contractor to cover the shortfall between:
- the amount available in a trust account; and
- the amount to be paid from a trust account.
The shortfall must be paid into the trust account.
Once paid in, it must then be paid out in accordance with Section 31 of the Act.
The “amount available in a trust account” is self explanatory. It generally represents the amount paid in by the principal and the shortfall amount transferred to that account by the head contractor as explained above.
The “amount to be paid” is not defined.
Most commonly, the “amount to be paid” will be the head contractor’s scheduled amount. Although, based on section 32(3) of the Act, it may also be the amount determined under a BCIPA determination or the amount a court orders the head contractor pay to a subcontractor.
If insufficient amounts available, Head Contractor must pay on proportionate basis
But what if there are insufficient funds in the trust account?
In that case, the Act requires the head contractor must pay their subcontractors on a proportionate basis.
The example given in the Bill is as follows:
If one subcontractor beneficiary is due to be paid $50,000 and another subcontractor beneficiary is due to be paid $30,000, but only $40,000 is available, the beneficiaries are to be paid $25,000 and $15,000 respectively.
As you would expect, the interim proportionate payment to subcontractors does not relieve the head contractor of paying each of the subcontractors the full amounts to be paid.
Use or Transfer Retention Amounts
The head contractor must not withdraw any part of the amount from the retention account unless the withdrawal is to make:
- payment to a subcontractor beneficiary of an amount withheld under the subcontract;
- a payment to the head contractor of an amount to correct defects in the building work, or otherwise to secure, wholly or partly, the performance of the subcontract; or
- payment ordered by a court.
Payment into Disputed Funds Account
A payment dispute occurs if the head contractor:
- prepares a payment instruction to pay an amount from a trust account which is less than the amount stated by the head contractor in the payment schedule; or
- fails to serve the payment schedule by the due date under the BIF Act, thus becoming liable to pay the subcontractor beneficiary the amount claimed in the payment claim.
In these circumstances, the head contractor must transfer an amount to the disputed funds account that is equal to the following (as relevant):
- the difference between the head contractor’s payment schedule amount and the amount stated in the head contractor’s payment instruction (the amount must be transferred when the head contractor prepares the payment instruction for payment); or
- the difference between amount the head contractor is liable to pay and $0, assuming the head contractor did not prepare a payment instruction (the amount must be transferred when the head contractor becomes liable to pay the subcontractor beneficiary for the progress payment).
Once transferred, the head contractor must immediately, in writing, inform the subcontractor beneficiary of when the amount was transferred into the disputed funds account.
The monies paid into the disputed funds account must only be paid out by the head contractor to –
- the subcontractor beneficiary; or
- the head contractor in accordance with the outcome of a dispute resolution process; or
- another person in the circumstances prescribed by regulation.
The only exception applies if the amount has been held in the disputed funds account for 60 days since the notice of the transfer was given to the subcontractor by the head contractor.
In this circumstance, the head contractor must, as soon as practicable, return the amount to the trust account from which it has been transferred unless the amount is the subject of an ongoing dispute resolution process.
Particular requirements for PBAs
The head contractor must ensure:
- Deposits to and withdrawals from trust accounts can only be made using electronic transfers;
- Withdrawals from and transfers between trust accounts can only be made using a payment instruction given to the financial institution.
The principal can view deposits and withdrawals from trust accounts, and information relevant to payment instructions given to a financial institution about the project bank account, and account payment reports.
Notifications to Principal
Within 5 business days after entering into a subcontract for the building contract, the head contractor must give the principal the information prescribed by regulation.
The head contractor must within 10 business days notify the principal in writing, in the prescribed form, of any trust accounts opening, changing their name or closing.
If there is a change in information given to the principal (e.g the addition of a subcontractor beneficiary), the head contractor must advise the principal of the change using the approved form.
Ending project bank account
While a project bank account is required for a building contract, the head contactor must not dissolve the project bank account.
The head contractor is taken to dissolve a project bank account if it closes any of the trust accounts while a project bank account is still required for the building contract.
The head contractor may only dissolve a project bank account if:
- there are no longer any subcontractor beneficiaries for the project bank account (including retentions); or
- the only remaining building work to be carried out under the building contract is maintenance work.
The head contractor dissolves a project bank account by closing the trust accounts and giving written notice to the principal that the project bank account has been dissolved.
Interest Entitlement
When dissolving a project bank account, the head contractor may pay itself any amount that is interest the contractor is entitled to under s.44 which includes all interest earned on amounts held in a trust account for a project bank account (payable once every 12 months or on the dissolution of the project bank account).
The head contractor may also pay itself any remaining amount that is not otherwise owing to another person.
Effect of Insolvency or termination of building contract
In certain circumstances, the principal may give a written notice to the head contractor advising that the principal will replace the head contractor as trustee of the project bank account.
The circumstances include:
- the contract is terminated by the principal for a default by the head contractor;
- if the head contractor is an individual – he or she is an insolvent under administration within the meaning of the Corporations Act, section 9 (i.e undischarged bankrupt);
- if the head contractor is a company –
- the company has a provisional liquidator, liquidator, administrator or controller appointed; or
- the company is wound up, or is ordered to be wound up by the Court within the meaning of the Corporations Act, section 9;
- another circumstance prescribed by regulation.
From the day of the notice by the principal, the head contractor is discharged as trustee for the project bank account.
The head contractor (and relevant individuals) must as soon as practicable give the principal the information required by the principal to act as trustee of the project bank account (e.g details of the financial institution, details of subcontractor beneficiary, details of the subcontractor’s bank accounts). The head contractor must also inform the relevant financial institution of the change in trustee.
However, the head contractor continues to be entitled to an amount of interest that the head contractor would have been entitled to under the BIF Act, up to the divestment.
Principal’s obligations upon becoming trustee and protection from liability
As trustee of the project bank account, the principal may only make the payments to the subcontractor beneficiaries or head contractor (as a beneficiary) that are required to be made in the BIF Act.
The Act specifically states:
- the principal as trustee is not entitled to any payment from the project bank account, other than payment of an amount for interest earned under s.44;
- the head contractor is not relieved of their obligation to top-up any shortfall in the project bank account under section 30;
- the head contractor continues to be a beneficiary of the project bank account;
- the principal as trustee is responsible for preparing any payment instructions required for payments from the project bank account;
- an amount paid, or required to be paid, into a project bank account can not be –
- used for payment of the debt of a creditor of the principal; or
- attached or taken in execution under a court order or process by a creditor of the principal; or
- used to pay bank fees.
A principal appointed as trustee under section 54 does not incur civil liability for performing function or exercising a power of a trustee if the conduct is engaged in good faith and without negligence.
Further, the BIF Act expressly states that nothing in the legislation supports a right of action against the principal by a subcontractor beneficiary, or the head contractor, as a beneficiary of a project bank account.
Other obligations of head contractor
Other rights and/ or obligations include that the head contractor:
- must not use amounts in the project bank account to pay their debts (other than a subcontractor beneficiary);
- must not invest funds held in a trust account for the project bank account in any form of investment;
- may employ or engage an agent or delegate to do any act relating to the project bank account on behalf of the contractor, but will be liable for any acts and defaults of that agent;
- is not entitled to payment from the project bank account, or from a subcontractor beneficiary, for any amount relating to administration of the project bank account by the contractor, or fees payable for the project bank account;
- must keep written records of all transactions involving amounts held in a trust account for a project bank account, as prescribed in the Act. The records must be kept for no less than 7 years.
- must note that any assignment by the head contractor of an entitlement of the head contractor to an amount held in trust under the project bank account is of no effect.
Right of head contractor to apply to Supreme Court for directions
The head contractor may apply to the Supreme Court for directions about:
- an amount held in trust under a project bank account; or
- the administration of the project bank account; or
- the exercise of a power by the head contractor.
The head contractor must serve a copy of the application on all the subcontractor beneficiaries, unless otherwise directed by the Supreme Court.
A principle of equity relating to trusts applies for a project bank account except to the extent that the principle is inconsistent with the BIF Act.
Application of Personal Property Securities Act 2009 (Cwth) (PPSA)
A project bank account:
- is declared to be a statutory interest to which s.73(2) of the PPSA applies; and
- has priority over all security interests (as defined in the PPSA) in relation to all money held in trust under the project bank account.
Application of Trust Account legislation
The Trusts Accounts Act 1973 and the Trusts Act 1973 do not apply to a project bank account or a trustee or beneficiary of a project bank account.
Conclusion
So as you can see there are a heap of obligations to comply with under the BIF Act.
Head contractors and other industry participants will need to adapt their processes and procedures so they don’t breach these obligations.
Especially given the penalty provisions under the BIF Act for failing to comply are severe, as summarised here.