New scheme to prevent subcontractor rip-offs

The NSW Minister for Fair Trading is expected to today announce a new trust fund scheme designed to prevent insolvent builders from keeping money that is owed to subcontractors after the job is completed.

The new retention trust scheme is the first of its kind in Australia, and was developed in response to a 2012 enquiry into the causes of insolvency in the building industry (click here to see the enquiry’s Discussion and Issues paper).

Builders typically hold back party of the payments due to subcontractors until the work is completed, and any defect issues identified and dealt with.  Unfortunately this sometimes means that troubled builders use the funds for their own purposes.

The proposed scheme requires builders to retain funds owed to the subcontractor in a separate trust account – thereby protecting the money rightly owed to subcontractors, irrespective of the builder’s financial position.

The scheme will initially only apply to head contractors and their direct subcontractors on projects valued at more than $20 million.

Non-compliance with the scheme will incur fines of up to $22,000.

It is expected that the NSW Government will also conduct a review of security of payments legislation.

OTPPhoenix building company rising from the ashes

An example of a situation which the new scheme hopes to prevent is the case earlier this year of Walton Construction.  After the global financial crisis, Walton hit financial difficulties in the 2011-2012 financial year, so it recruited a corporate advisory group.  Walton subsequently transferred its assets into 2 new (“phoenix”) companies: Peloton Builders (later called Tantallon) and Lewton Asset Services.  Walton then went into liquidation, leaving plenty of subcontractors as unsecured creditors.  One subcontractor in particular was owed $696,000.

The Queensland Building and Construction Commission is holding a public examination of the case, including investigation into the key people in the matter.

ASIC also started investigating the matter when there were questions raised about the independence of the corporate advisory group (directors of whom were appointed directors in the 2 new companies) and the appointed liquidator.  ASIC sought to have the liquidators removed, but this was rejected by the Federal Court.  It is understood that ASIC is now appealing that decision.

Contact Melissa Lammers if you have any questions about subcontractors and the building industry.

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