In a move described by Subcontractors WA as “unprecedented”, the administrators of insolvent construction company, Cooper & Oxley, have set up special purpose bank accounts to ensure subcontractors are paid to complete their works. These special accounts, often called Project Bank Accounts (PBAs), are compulsory in government building projects worth between $1million and $100million, where they must be set up before the works commence, as a condition of contract award.
If PBAs are set up early and correctly, they can be effective in protecting subcontractors and suppliers of building materials, plant and equipment, from losing out to the banks when the head contractor becomes insolvent. PBAs offer this protection because they operate as trust accounts that are placed beyond the reach of the liquidators and administrators of insolvent head contractors.
One way for banks to get around the protections that PBAs afford subcontractors and suppliers is by registering security interests on the Personal Property Securities Register. This was recently considered in the case of Hamersley Iron Pty Ltd v Forge Group Power Pty Ltd (In Liquidation) (Receivers and Managers appointed)  WASC 152. In that case, the WA Supreme Court said that where:
- a head contractor borrowed money from a bank or other lender;
- that lender registered a security interest over the assets of the head contractor to secure repayment of the loan with interest; and
- the head contractor then became insolvent and therefore unable to make repayments on the loan,
the head contractor’s assets that were used as collateral for the loan basically become the property of the bank.
In the case of Forge, the assets in question were basically progress payment claims, or in other words, money that the head contractor had a right to be paid for work done under a construction contract, but had not yet been paid. However, there is no reason in principle why a PBA would not also become the property of a lender that has a security interest registered on the Personal Property Securities Register against that PBA.
The WA government has dealt with this issue by requiring construction contractors tendering for government contracts between $1million and $100million to arrange for their banks basically to give up their right to enforce their security interests in a way that defeats the rights of protected subcontractors and suppliers. And that is effectively what the administrators of Cooper & Oxley are seeking to do: that is, to get banks and other priority creditors to agree to forego their right to take part or all of the progress payments that subcontractors will be claiming to complete the works commenced by Cooper & Oxley before it went into voluntary administration.
This sounds like a hard ask, but really, when you think about it, it is actually a way to let the banks have their cake and eat it too, whilst at the same time, keeping subcontractors on site, doing productive work and earning a living. This will be achieved in two ways:
- First, the administrators are not proposing to interfere with the rights that the banks already have to progress payments claimed before Cooper and Oxley’s insolvency. Where the law says that a bank is entitled to take monies that were intended as a progress payment to a subcontractor or supplier, the administrators will let the banks have those monies, as the law requires them to do.
- However, as an incentive to subcontractors to see out their works to completion, the banks are being invited to forego their rights to all future progress payments where the exercise of those rights would mean that a subcontractor or supplier misses out on any further payments. Practically speaking, this may be seen as the only way to keep the existing workforce of subcontractors on site and completing the work that they have started. So, by giving up some of their legal rights in the short term, banks are likely to gain more in the long run. What they ultimately stand to gain is access to the money that will only become available to them once the works are practically complete.
Overall, then, the administrators of Cooper & Oxley should be commended for adapting the latest thinking in relation to construction project financing in a way that represents a win-win for subcontractors, suppliers and lenders alike.
HHG Legal Group has long been at the cutting edge of research and law reform in the area of construction and insolvency and often presents to industry and professional audiences about the use of PBAs in construction projects. For information about how PBAs may benefit your construction business contact our expert construction law and litigation team.
This is general information only, and does not constitute specific legal advice. If you would like further information in relation to this matter or other legal matters please contact our office at email@example.com or call us on 1800 609 945.