Insolvencies are everywhere and subcontractors are owed millions!
But no one is talking about statutory deemed trusts.
Anyone who has followed my articles will know about this topic.
As a brief reminder, in recent years there have been three reports done on insolvencies in construction:
- 2012: The Collins Report
- 2015: Senate Economics Reference Committee [SERC] ‘I just want to get paid’
- 2017: The Murray Report
Each one of these reports investigated and/or recommended the implementation of a deemed trust scheme to protect contractor’s money from insolvencies. This process makes payments down the contractual chain payments deemed to be ‘held in trust’ by the party who has done the work. So for example a builder who gets paid by the client for work is deemed to be holding the subcontractors money in trust. That money then cannot be used a working capital or for any other purpose than to pay for the work. If the builder goes into liquidation, the money is held in trust until a new builder in appointed or a court appoints a new trustee. The money cannot be taken by the liquidators or administrators either. This system is running perfectly well in Canada.
But no Australian government has had the guts to get it done.
Now we are in a widespread industry malaise, surrounded by insolvencies and tragic stories of subcontractors driven to the wall. And yet, not a word from anyone about deemed trusts.
I find it interesting how differently this issue is being treated by government. And I think it is simply those (policies) that get votes get action.
The current contract in NSW is with the RABS Act and the appointment of David Chandler. After years of stories of people losing life savings on fundamentally defective apartments, and the total failure of the independent certifier regime, what did the NSW government do? It drafted and passed legislation creating a building commissioner and providing enormous powers to address the problem.
The same thing can be said of safety in the industry. No mucking about. The OHS Act was passed and again there are severe consequences for failing to provide a safe environment on building sites.
And yet despite the loss of hundreds of millions of dollars, and the recommendations of three separate reports, there is no political will to enact the one thing that will protect so many from so much harm.
What did the Collins Report of 2012 have to say?
The time has come
The present market structure may be the preferred model for the participants, however there is no doubt that a significant number of subcontractor failures are caused by the failure or default of another party in the contractual chain.252 It is convenient and orderly at this point in the Report to analyse and discuss the way in which the statutory trust has been considered in Australia. At present no Australian State or Territory has the construction trust on its statute books. Nor is there any Commonwealth equivalent.
Nevertheless, the construction trust discussion has a relatively long history in Australia and that history demonstrates that it has for some considerable time been recognised by prominent lawyers as a legally effective means by which to partially address the problem of subcontractor non-payment. Failure to pay subcontractors, particularly when the head contractor itself is being paid is one of the unacceptable faces of the building and construction industry. The time has come for that position to be regulated rather than continuously ignored.
There followed several recommendations on how the trust model can operate.
Here’s what the Senate Committee’s report said:
10.31 The committee accepts the view of the NSW Chapter of the Master Builders of Australia that poor management practices and lack of financial acumen are contributing factors to the high rate of insolvency in the industry. However, as discussed in chapter 2, these factors are but two among many causes of insolvencies and do not explain in any way the poor payment practices that are endemic in the industry. It is clear that the pyramidal structure of the industry places significant pressures on those on the bottom of the contractual pyramid.
10.32 The committee notes that the overwhelming majority of submissions that considered the issue argued in favour of the establishment of retention trust accounts. This position is consistent with the Collins Inquiry and the Law Reform Commission of Western Australia’s Report. The committee believes that a trust model for the construction industry has considerable merit and offers the prospect of ensuring subcontractors are paid, potentially reducing insolvencies down the contractual chain.
And the recommendation was:
Recommendation 31 10.57 The committee recommends that, while the Commonwealth trial of Project Bank Accounts is underway, the Attorney-General refer to the Australian Law Reform Commission for inquiry and report a reference on statutory trusts for the construction industry. This inquiry should recommend wh
That was in 2015.at statutory model trust account should be adopted for the construction industry as a whole, including whether it should apply to both public and private sector construction work
Finally, the Murray Report of 2017:
Cascading statutory trust to apply to all levels of contractual payment
Accordingly, for all the reasons set out above, I have come to the conclusion that a deemed statutory trust scheme should be established by legislation and apply to all parts of the contractual payment chain. Such legislative intervention is long overdue as it has been an issue first promoted in the early 1990s and specifically recommended in the only two previous inquiries that specifically considered the issues of financial protection and insolvency in the construction industry in Australia, namely the WA Law Reform Commission in 1998 and the Collins Inquiry in 2012. In its Report in 2015, the SERC Inquiry noted that there had been a shift in industry attitudes towards a statutory trust, and perhaps, to some extent, that may be so. Nonetheless, those opposed to the introduction of a deemed statutory trust continue to raise the same arguments that previous inquiries have rejected as baseless and unmeritorious. But for the lack of political will, reform in this area by way of the introduction of a deemed statutory trust would have been put in place many years ago and, but for the failure to introduce such reforms, many fine firms, through no fault of their own, have suffered financial hardship. It is time to stop kicking the can down the road and to introduce legislation for a deemed statutory trust that will secure certified money received from misuse and minimise the risk of not being paid due to the insolvency of the upstream party. The introduction of a deemed statutory trust will complement the security of payment laws and better protect the vulnerable parties within the industry.
Well, there you have it. Three reports all incredibly comprehensive and produced at a cost of millions no doubt [the SERC report followed after 12 months of hearings around the country] and all coming to the same conclusion.
And now we have an environment showing the awful economic and human cost of failing to Act on these recommendations.
Where is the legislation? Where is the urgency? What happened to one Federal Security of Payment Act? How about a Federal Construction Payments Commissioner?
How the issue of Statutory Trusts has fallen off the radar is amazing to me.
Perhaps if the government viewed it as a small business problem, they may realize that there are votes in this – as well as a far better protected industry.