Queensland case sheds light on liquidators’ rights to access funds of companies in liquidation

The case involved the liquidators of construction company, PBS Building (Qld) Pty Ltd (PBS), seeking access to funds held in PBS’ project and retention trust accounts to meet their costs, expenses and remuneration.

The Supreme Court of Queensland determined that the Building Industry Fairness (Security of Payments) Act 2017 (Qld) (BIF Act) excluded the trustee of a project trust account or retention trust account from the right to compensation from these trusts, preventing the liquidators from claiming this benefit.

The court did note, however, that there could be a potential avenue for liquidators to recover their costs, expenses, and remuneration out of those accounts if their efforts produced benefits for the beneficiaries through the application of the ‘Universal Distributing Principle’ or ‘Berkeley Applegate Orders’.

Legislative framework relating to the case

The Queensland government revoked the existing system of project bank account legislation within the BIF Act in 2021 and replaced it with a new and simplified framework of project trust accounts (PTA) via the Building Industry Fairness (Security of Payment) and Other Legislation Amendment Act 2020 (Qld). No other Australian state or territory has an equivalent PTA regime.

The PTA regime requires head contractors of predominately state-run projects to open a trust account into which money is to be paid and held for eligible first-tier subcontractor beneficiaries, for payment for works and services performed under eligible contracts. This framework is intended to better secure payment for subcontractors of large building and construction projects, effectively preserving project money in case of upstream insolvencies.

There are several eligibility requirements to invoke the PTA regime. However, it has the clear intent of capturing most building and construction contracts and protecting most - if not all - building and construction subcontractors. It also introduces an array of formalities and mechanisms that head contractors subject to the regime must be familiar with. The obligations imposed on head contractors as trustees are strict, and non-compliant head contractors face financial penalties.

The new regime following the amendment also introduced new obligations surrounding retention trust accounts (RTAs) which carry equally strict penalties for the head contractor. 

Project trust accounts

The BIF Act requires a head contractor to establish a PTA for each eligible contract relating to:

• amounts that a ‘contracting party’ - the principal - pays to the ‘contracted party’ - the head contractor - under a contract;
• amounts paid by the head contractor to subcontractors under a contract; and
• amounts deposited in the PTA as required under the BIF Act.

The head contractor is appointed as trustee and beneficiary to the PTA and most subcontractors on the project will become the primary beneficiaries of the PTA. Eligible subcontractors keep a beneficial interest in the amount that the subcontractor is entitled to be paid under its subcontract and head contractors keep a beneficial interest over the remainder of the trust, to the extent that there is any surplus after payment to the subcontractors.

Retention trust accounts

The BIF Act also requires the head contractor to establish and maintain an RTA over retention amounts withheld under a contract, held primarily for the benefit of the party who will be entitled to the retention amounts. The head contractor may be able to withhold the retention amount entirely under the contract - for example, if the amount is to be paid for defects on the project, both the head contractor and the subcontractor are beneficiaries to the RTA.

The subcontractors have a beneficial interest over all retention amounts held in the RTA. The head contractor will have a beneficial interest over all amounts held in the RTA, less the amount held in relation to the subcontractor’s beneficial interest. The subcontractor’s beneficial interest will end if the head contractor becomes entitled to payment of a retention amount as set out in the subcontract - for example, in situations where that amount is to be used to correct defects. However, it will only end to the extent that the head contractor is entitled to that amount so that all remaining funds in the RTA not used to correct defects will remain in the beneficial interest of the subcontractor.

Payments from project trust accounts and retention trust accounts

There are specified limited purposes for which funds can be withdrawn by a trustee from a PTA. If the funds held in the PTA are not enough to meet all subcontractors’ costs in full, the BIF Act provides that such funds must be distributed proportionately. 

The critical provisions which were the subject of this recent decision involving PBS were sections 51A, 51C and 51E of the BIF Act governing the amounts in the trust accounts unavailable for the trustee’s debts, administration fees of the trust accounts and the employment or engagement of agents.

Crucially, the trustee cannot apply funds held in the PTA and RTA to pay the trustee’s creditors or towards a creditor’s benefit. In addition, the trustee cannot recover their administration costs or fees associated with the PTA and RTA from the funds held in those accounts or from a beneficiary.

If the trustee engages an agent on the trustee’s behalf to do any act in connection with the PTA and RTA, the costs associated with engaging that agent are also not recoverable from the funds held in either the PTA and RTA or from a beneficiary.

The application of the Trusts Act 1973 (Qld) is excluded from the BIF Act except where it is consistent with the BIF Act. In this way, the BIF Act removes the trustee’s usual right to compensation from trust assets. In addition, the trustee’s right to compensation in line with equitable principles has also been excluded from the BIF Act. Payment of such fees and expenses can only be made when the trustee is entitled to access any residual funds in their own right under the BIF Act.

Background to the case

PBS was the head contractor for two Queensland projects, within the scope of the BIF Act, and which required the establishment of a PTA and RTA. Two PTAs were opened for the respective projects and one RTA was opened. 

At the time of the liquidators’ appointment to PBS, the available funds in the liquidation were not enough to cover the liquidators’ costs, expenses, and remuneration. There was also not enough evidence before the court to demonstrate whether there would be any residual amounts held in the PTAs after subtracting all amounts that subcontractor beneficiaries were entitled to in connection with their subcontracts. As a result, it was not certain whether PBS would have any beneficial interest in any remainder amounts under the PTAs.

The liquidators applied to the court for directions under s 90-15 of the Insolvency Practice Schedule (Corporations) (IPS) to:

• be paid their reasonable remuneration, expenses and costs incurred in the administration of the PTAs and RTA - in an amount to be determined by the court - from the proceeds of the PTAs and RTA; or
• be paid an indemnity from the proceeds of the PTAs and RTA for their reasonable remuneration, expenses and costs incurred in the administration of the PTAs and RTA, in an amount to be determined by the court.

In this case, the liquidators argued that the court should interpret ‘trustee’ to only refer to the party responsible for establishing the PTAs and RTA – namely, PBS - and that the reference to ‘agent’ in section 51C of the BIF Act should not be taken to extend to an external administrator on the basis that they are not employed by or engaged by the trustee.

On this basis, the liquidators argued that there was no inconsistency between the application of equitable principles and the BIF Act and that the liquidators should not be prevented from recovering their remuneration from the PTAs and RTA based on general equitable principles.

The Supreme Court of Queensland disagreed.

The Supreme Court’s ruling

The court rejected the liquidators’ interpretation of the BIF Act and found that, in administering the PTAs and RTA, the liquidators were in fact acting as trustees of the PTAs and RTA - whether as agents or because the liquidators control the trustee company, PBS - for the purposes of the BIF Act and were therefore unable to seek payment under sections 51C and 51E of the BIF Act.

Three main reasons informed the court’s decision. Firstly, allowing the liquidators access to the compensation would contradict the BIF Act’s approach to trustee’s indemnity. Secondly, reading ‘trustee’ narrowly to refer only to the establishing party would conflict with the BIF Act’s intent to prioritise subcontractors, especially considering the high insolvency risk in the construction industry. Lastly, even if the liquidators’ interpretation was correct, the liquidators would still be considered creditors, and section 51A of the BIF Act prevented trust funds from being used to pay creditors.

The court held that, to the extent the BIF Act restricts or excludes any right of indemnity or exoneration being exercised by the trustee in equity or under the Trusts Act 1973 (Qld), an external administrator who exercises powers as trustee would similarly be excluded from relying on the trustee’s right of indemnity.

The court did not accept that the liquidators were entitled to be paid their remuneration from the PTAs and the RTA under the usual provisions of the Corporations Act 2001 (Cth) (Corporations Act) and the IPS – specifically, Chapter 5, Part 5.3A, Division 9 and Part 5.6 of the Corporations Act and s60-5 of the IPS. This was because these provisions of the Corporations Act and the IPS only apply to a company’s property and do not confer any right of remuneration from assets held on trust by a company or another person.

The court also observed the well-established principle that funds held in trust by a company are not typically considered company property accessible to creditors.

The court considered that PBS, as trustee, did not enjoy any right of indemnity relating to the funds in the PTAs and RTA that could become the property of PBS as a result of the BIF Act and to entitle PBS the right to the funds in the PTAs and RTA.

As a result, the court dismissed the liquidators’ application, with costs.

Practical implications for insolvency practitioners

The court noted two avenues available to administrators and liquidators seeking payment for their remuneration, costs, and expenses.

Firstly, the BIF Act does not prevent the personal right for recovery by administrators or liquidators under the ‘Universal Distributing Principle’ and ‘Berkeley Applegate Orders’. Therefore, appointees can recover their remuneration and costs incurred in the course of beneficiaries being paid their entitlements under the PTA and RTA, as long as the work done to realise the beneficial interests has been completed and the associated costs can be identified.

As an alternative, an application may be made to court for the appointment of a receiver and manager to administer the PTAs and RTA, which would enable the court to provide for the receiver and manager to be remunerated as a term of the orders of appointment. However, the court acknowledged that the additional appointment may not be beneficial in circumstances where it would add another layer of costs to the external administration.

The court also noted the ability for a subcontractor beneficiary to make an application under section 545 of the Corporations Act to apply for the liquidators to incur the expense of administering the PTAs and RTA, which would be conditioned on the payment of the liquidators’ expenses.

Administrators or liquidators of companies in Queensland subject to the BIF Act in situations where there are insufficient assets of the company - outside the PTA and RTA - to meet their remuneration, costs, and expenses, should seek legal advice regarding whether payment can be made against the PTA and RTA. 

Co-written by Richard Beauchamp of Pinsent Masons.