Special Counsel, HHG Legal Group (daniel.morris@hhg.com.au)

With insolvencies on the rise in Australia’s construction industry, increasing reliance is sought to be placed on trust structures to protect accrued payment rights under construction contracts. But can trust structures withstand the competing forces of a principal’s statutory and/or contractual set-off rights and a financial institution’s proprietary rights under the Personal Property Securities Act 2009 (Commonwealth)? The concerns of this paper are first, to critically examine the efficacy of the law of trusts in circumstances of contractor insolvency and second, to propose further law reforms to improve protections for contractor payment rights.

When a construction contractor becomes insolvent, its sub-contractors are at risk of not being paid for their work. This is because, absent special statutory protections (proposals for which are the concern of this paper), the legal status of a sub-contractor, vis-a-vis the party that has engaged it to carry out the sub-contracted works, is that of unsecured creditor. This means that, when proving its debts in insolvency, the sub-contractor will rank, in order of priority, behind the insolvent contractor’s employees, whose payment rights are protected under section 556 of the Corporations Act 2001; and behind the insolvent contractor’s secured creditors: in particular, its lenders.