In the recent decision of Re PBS Building (Qld) Pty Ltd [2024] QSC 108, the Supreme Court of Queensland considered for the first time the operation of the State’s new project and retention trust account regime in the context of an insolvency. The decision provides useful guidance to insolvency practitioners and subcontractors as to their rights in relation to trust accounts established by an insolvent head contractor.
Key Takeaways
The Court made the following key findings:
- the Building Industry Fairness (Security of Payment) Act 2017 (Qld) (BIF Act) excludes any right of indemnity being able to be exercised by a trustee under equitable principles, or the application of the Court’s inherent jurisdiction in equity, to provide for remuneration of a trustee for work performed administering a project or retention trust account;
- the reference to “trustee” in the relevant provisions of the BIF Act is not confined to the head contractor itself but extends to an external administrator of the head contractor; and
- accordingly, the proceeds of trust accounts established by PBS Building (Qld) Pty Ltd (In Liquidation) (PBS) were not available to its liquidators (Liquidators) as trustees to pay their reasonable remuneration, expenses and costs incurred in the administration of the trust accounts, except to the extent of PBS’ residual beneficial interest in the trust accounts.
While the Court left open the possibility of the Liquidators applying for orders that they would be justified in exercising their recognised equitable lien over property they have cared for, preserved or realised to recover their remuneration, the decision creates significant uncertainty for external administrators of insolvent head contractors who have established trust accounts until such an application is made and determined. In the meantime, it is possible that the legislature will intervene to clarify the position. The Commissioner of the QBCC, who appeared as an interested party, acknowledged in submissions a “real possibility that there has been an oversight in drafting” the relevant provisions of the BIF Act..
The Statutory Regime
Chapter 2 of the BIF Act set up a statutory regime designed to ensure that funds paid to a contractor under a contract are held in a trust to protect the interests of subcontractors. The regime commenced in relation to some projects on 1 March 2021 and provides for the establishment of both project trust accounts (into which amounts paid under “non-exempt eligible contracts” must be held for the primary benefit of contractors) and retention trust accounts (into which amounts withheld from payment under such contracts must be held for the primary benefit of the party entitled to them). The trustee of a trust account for a project is the head contractor for the project.
The BIF Act contains detailed provisions relating to the administration of trust accounts. Relevantly:
- section 51A prohibits funds in a trust account being used to recover a debt owed to a creditor of the trustee;
- section 51C prohibits a trustee from recovering costs incurred for administering a trust account;
- section 51E prohibits a trustee from recovering costs of employing an agent, engaged to do any act relating to a trust account on its behalf, from funds in a trust account; and
- section 56B provides that a principle of equity relating to trusts applies to the administration except to the extent the principle is inconsistent with the BIF Act and that nothing in Chapter 2 of the BIF Act affects the Court’s inherent jurisdiction to supervise a trust account as a trust.
Background to the Application
In 2022, PBS entered into two building contracts for the construction of homes, each of which was a separate project for the purposes of the BIF Act. PBS was required to (and did) establish a project trust account and a retention trust account in respect of each project. Payments were subsequently made into the trust accounts.
In March 2023, the Liquidators were appointed as the administrators of PBS. The administration transitioned to a liquidation in September 2023. By October 2023, the Liquidators had incurred significant remuneration, costs and expenses in their capacities as liquidators and former administrators of PBS. There was a real risk that there would be insufficient funds in the liquidation to satisfy the Liquidators’ remuneration, costs and expenses in administering the trust accounts.
Accordingly, the Liquidators sought directions as to whether they were entitled to be remunerated for administering the trust accounts from the monies in the trust accounts. The Liquidators indicated that if they could not access these monies, they may elect not to administer the trust accounts given the lack of other available funds. On the other hand, if the Liquidators could access the monies, that would give them priority over the subcontractors for their remuneration and create a risk that the remaining monies would be insufficient to satisfy subcontractor claims in full.
Submissions
The Liquidators submitted that the Court should:
- construe the references to “trustee” in Chapter 2 of the BIF Act as references only to the head contractor who had established the relevant trust account, rather than an external administrator of the head contractor; and
- not construe the reference to “agent” in section 51E as extending to an external administrator on the basis that they are not employed or engaged by the trustee.
The Liquidators contended that if their construction was accepted, there would be no inconsistency between the application of equitable principles and the BIF Act, such that section 56B would not exclude their right to be remunerated from the trust accounts on the basis of general equitable principles.
The Commissioner of the QBCC submitted that the Liquidators’ construction was not supported by the text of the BIF Act. She said the BIF Act imposes a strict regime which excludes PBS and the Liquidators from having a right of indemnity and that an interpretation that would permit payment of liquidator remuneration in priority to subcontractor claims would be contrary to the purposes of the BIF Act identified in sections 3 and 7.
Findings
In making the key findings noted above, the Court held:
- the Liquidators’ construction would be inconsistent with the abrogation of a trustee’s right of indemnity by the express terms of the BIF Act and the absence of any provisions or extrinsic evidence supporting the re-enlivening of that right for the benefit of external administrators;
- the legislature evidently sought to protect subcontractors in the event of the insolvency of a head contractor, by preserve monies in trust accounts for the benefit of subcontractors;
- external administrators act as “agents or controllers” of the relevant head contractor in administering a trust account, not in their personal capacities; and
- even if an external administrator was not regarded as the trustee or an agent of the trustee, section 51A(1)(a) would prevent their remuneration being paid from the monies in the trust account given it would constitute a debt owed to a creditor of the trustee.
The Court also held that the BIF Act does not exclude external administrators’ ability to seek recovery of their remuneration, expenses and costs incurred in administering trust accounts on the basis of the personal right recognised by the principles in Re Universal Distributing Co Ltd (in liq) (1933) 48 CLR 171 and Re Berkeley Applegate (Investment Consultants) Ltd (in liq) [1989] Ch 32. Those cases stand for the proposition that external administrators have an equitable lien over property in their control to secure payment of their remuneration, expenses and costs incurred in caring for, preserving or realising that property. This would include a lien over a trust account to secure payment for work performed administering the trust account, similar to the situation in Re Ralan Group Pty Ltd (in liq) (2022) 159 ACSR 222, which involved an application for payment of remuneration out of trust accounts maintained under the Agents Financial Administration Act 2014 (Qld).
Another alternative basis for payment of the Liquidators’ remuneration, expenses and costs of administering the trust accounts was discussed by the Court. Section 545(1) of the Corporations Act 2001 (Cth) provides that a liquidator is not liable to incur any expense in relation to the winding up of a company unless there is sufficient available property. It is this section that the Liquidators relied on to suggest they may elect not to administer the trust accounts if their application was refused. However, section 545(2) provides that a liquidator may be directed to incur a particular expense if a creditor indemnifies the liquidator in respect of the recovery of the amount expended. The Court suggested that it would be open to the subcontractors of PBS to indemnify the Liquidators under this section to allow them to administer the trust accounts, although it did not consider the constitutional issues that may arise in the event of a conflict between the relevant State and Commonwealth provisions.
Insights
An external administrator of a head contractor who acts as trustee of a trust account is now unlikely to take any steps to administer the trust account in the absence of (costly) directions from the Court that they are entitled to be remunerated from monies in the trust account, unless there are other assets available to satisfy their reasonable remuneration, expenses and costs incurred in the administration of the trust accounts. The cost of the directions application and the external administrator’s remuneration would likely result in a “cents on the dollar” distribution being made to subcontractors from the relevant trust account, thus undermining one of the key purposes of the trust account regime.
If the legislature intervenes to clarify the position in the meantime, its choices appear to be between amending the BIF Act to provide that:
- external administrators may be paid their remuneration in connection with administering a trust account established by an insolvent head contractor out of the trust account if there are no other available funds, burdening subcontractors with the administration costs; or
- the QBCC is responsible for administering trust accounts established by insolvent head contractors if their external administrators decline to do so, at the cost of the taxpayer.
