A builders subcontractors' charge can help a subcontractor get paid if the building contractor goes into liquidation.
With the rise of building companies going into liquidation or becoming insolvent, a subcontractor should do everything possible to protect their business and get paid.
The main benefits of a subcontractors' charge are:
- The subcontractor becomes a secured creditor in the liquidation; and
- The subcontractor does not need to cease legal action against the company in liquidation; and
- The subcontract will not be liable to the liquidator for unfair preference claims; and
- If the head contractor / owner / developer has retained the money, then the subcontractor has a great chance of getting paid.
There are several other benefits to issuing a subcontractor's charge, but these are the main ones.
In this article, our construction and insolvency lawyers tell you how to issue a subcontractors' charge and outline the main benefits of doing so.
Builders Subcontractors' Charge
A builders subcontractors' charge is a creature of the Building Industry Fairness (Security of Payment) Act 2017 (Qld) ("BIFA").
As the name obviously suggests, this act provides contractors and subcontractors in the building industry with security for payment.
One of the ways that it does this is by prescribing a process for subcontractors to charge (secure) monies owed to them by contractors.
Chapter 4 of the BIFA relates to subcontractors' charges. We have a detailed article about subcontractors' charges here.
This article will focus on the benefits of securing money owed to you by a contractor before they go into liquidation by way of a builders subcontractors' charge.
What is a Charge?
A charge is a security interest on money owed to you by the contractor, that is still held by the person responsible for paying the contractor (developer, head contractor, owner, etc).
Section 207 of BIFA says:
"subcontractors' charge" means a charge within the meaning of section 3 of the repealed Act (Subcontractors' Charges Act 1974 (Qld)).
"repealed Act" means the repealed Subcontractors' Charges Act 1974, as in force immediately before its repeal.
Section 3 of the repealed Subcontractors' Charges Act 1974 (Qld) defined "Charge" as:
"charge" means a charge under this Act.
A charge pursuant to the BIFA is a security interest on money owed to a subcontractor by a contractor, from monies payable to the contractor by the person obliged to pay the money under the contract, such as a head contractor, owner, or developer.
If you charge that money, the person responsible for paying that money to the contractor must withhold that money until the dispute has been dealt with.
However, if the contractor goes into liquidation, you may still be entitled to those secured funds, and can seek those funds from the person responsible for paying that money to the contractor, and not simply become a creditor in the liquidation.
The Benefits of a Builders Subcontractors' Charge
As alluded to above, the main benefits of issuing a builders subcontractors' charge include:
- The subcontractor becomes a secured creditor in the liquidation; and
- The subcontractor does not need to cease legal action against the company in liquidation; and
- The subcontract will not be liable to the liquidator for unfair preference claims; and
- If the head contractor / owner / developer has retained the money, then the subcontractor has a great chance of getting paid.
We will explain these in more detail below.
The Subcontractor Becomes a Secured Creditor
The charge on the unpaid money makes the subcontractor a secured creditor if the contractor goes into liquidation.
Section 51A(b) of the Corporations Act 2001 (Cth) ("the Corps Act") says:
In this Act ... "security interest" means ... (b) a charge, lien or pledge.
Further, section 51E of the Corps Act defines a secured creditor to mean:
"secured creditor" of a corporation means a creditor of the corporation, if the debt owing to the creditor is secured by a security interest.
So, if the creditor of the company (subcontractor) has a charge (security interest) then this creditor of the company (in liquidation) is a secured creditor.
In MSI (Holdings) Pty Ltd v Mainstreet International Group Ltd [2013] QCA 27 the Gotterson JA of the Queensland Court of Appeal said (with White and Applegarth JJ agreeing):
Plainly, the charge ... was a security interest as defined. Just as plainly, at the time of commencement of the District Court proceeding ... there was a debt owed by MSI ... which was secured by the charge ... In my view, the commencement and continuation of the District Court proceeding is apt to be characterised as a realisation of [a] security interest for the purposes of s 471C.
This benefits a subcontractor because if a subbie is forced to prove for their debt in the liquidation, then they will be amongst the first creditors to get paid (if any creditors get paid).
The order of payments in the liquidation are as follows:
- The costs of liquidation (the filing fees, solicitor's fees, Court fees, liquidator's fees, etc);
- Secured creditors (they can realise their security interest in priority);
- Priority unsecured creditors (employees of the company); and
- Unsecured creditors.
This essentially makes a subcontractor first in the queue after the costs of the liquidation.
This gives the subcontractor a better opportunity for getting paid from the liquidation.
The Subcontractor does not need to Cease Legal Action
If a subbie does not want to prove in the liquidation, then it can seek leave to proceed or commence legal action against the company in liquidation.
Ordinarily, when a company goes into liquidation, the subcontractor cannot begin or proceed with any court proceedings or enforcement proceedings against the company in liquidation.
In respect of a creditor's winding up, this is because of section 471B of the Corps Act which says:
While a company is being wound up in insolvency or by the Court, or a provisional liquidator of a company is acting, a person cannot begin or proceed with:
(a) a proceeding in a court against the company or in relation to property of the company; or
(b) enforcement process in relation to such property;
except with the leave of the Court and in accordance with such terms (if any) as the Court imposes.
However, section 471C of the Corps Act says:
Nothing in section 471B affects a secured creditor's right to realise or otherwise deal with the security interest.
In respect of a voluntary winding up by the contractor, section 500(2) of the Corps Act says:
After the passing of the resolution for voluntary winding up, no action or other civil proceeding is to be proceeded with or commenced against the company except by leave of the Court and subject to such terms as the Court imposes.
It not as simple as commencing or continuing proceedings however, leave must be granted by the Court, as per 471B or 500(2) above. However, leave to proceed for a secured creditor is usually given.
The case of Ex parte FC Upton & Sons Pty Ltd (in liq) [1986] 2 Qd R 275, was a case relating to a subcontractors' charge, where the contractor was in liquidation, and addressed whether leave to proceed was necessary. In this case, Derrington J said:
Leave to proceed is necessary and, as it has been recognised in a number of cases, this is a most suitable case in which it should be granted. The leave to proceed which has already been granted is confirmed.
Further, In the Matter of Hewson and Douglas Pty Ltd (In Liquidation), Derrington J said:
The applicant applies for leave to commence proceedings against abovenamed company which is in liquidation in order to enforce a lien claimed pursuant to the Subcontractors Charges Act 1974. It is a typical case in which leave is usually granted ... Accordingly, leave to commence the relevant proceedings is granted.
After leave is granted, the subcontractor can commence or continue legal action to release the secured money from the head contractor, developer, or owner.
The Money is Retained & Subcontractor has a Chance of Getting Paid
Once served with the notice of claim, the person obliged to pay money to a contractor under a contract (head contractor, developer, or owner for example) must retain the money payable to the contractor.
Section 126(2) of BIFA says:
The person must retain a sufficient part of the money that is or is to become payable by the person under the contract to satisfy the claim until the court in which the claim is heard makes an order about to whom, and in what way, the money is to be paid.
If the head contractor, developer, or owner does not retain the money and pays it to the contractor, then they become liable for the claimed amount. Section 126(3) of BIFA says:
If the person fails to retain the money as required under subsection (2), the person is personally liable to pay to the subcontractor the amount of the claim, not exceeding the amount that the person is required to retain under subsection (2).
So once served, the person responsible for payment to the contractor has the obligation to withhold the money from the debtor company until the outcome of the legal proceedings.
If the person responsible for payment to the contractor does not dispute the debt owed to the contractor, then they will likely simply pay that amount into Court.
If the person responsible for payment to the contractor does dispute the debt (defects, unfinished work, damages, etc.) then the matter will be litigated through the Courts.
Timeframes for Subcontractors' Charges
The timeframes in the BIFA are very strict, and if you miss any of these time-critical dates then you may lose your legal right to charge that money.
The first time limit involves when a subcontractor can issue the notice of claim.
In relation to building works section 122(4) and (5) of the BIFA says:
(4) The notice of claim may be given even if the work is not completed, or payment of the money relating to the charge is not yet due.
(5) However, if the work has been completed, the notice of claim must be given within 3 months after practical completion for the work.
In relation to retention monies, section 122(7) and (8) of the BIFA says:
(7) To remove any doubt, it is declared that a subcontractor's charge on money payable under the contract includes a charge on a retention amount for the contract.
(8) If the notice of claim relates only to a retention amount for the contract, the notice ... (a) may be given at any time while work under the contract is being performed; and (b) must be given within 3 months after the expiration of the defects liability period for the contract.
A subcontractors' charge must be given to the person responsible for payment to the contractor:
- Any time that the works are still being completed; or
- After completion - within three (3) months after the completion of works; or
- After completion - within three (3) months of the expiration of the defects liability period.
If the notice of claim is not given in compliance with section 122 of the BIFA, the notice of claim has no effect and the charge does not attach.
The next critical time is the time in which the contractor must respond. The contractor must respond to the notice of claim within 10 business days.
Section 128(2) of BIFA says:
The contractor must give both of the following persons a written response to the claim within 10 business days after the contractor is given the copy of the notice of claim, unless the contractor has a reasonable excuse-
(a) the person given the notice of claim;
(b) the subcontractor.
The response to the claim must either:
- Accept liability to pay the amount claimed; or
- Accept liability to pay an amount stated in the response, but otherwise dispute the claim; or
- Dispute the claim.
If the contractor disputes the claim, then the subcontractor must commence legal proceedings in a Court with competent jurisdiction within 1 month after notice of the claim is given to head contractor, developer, or owner (for example).
Section 136 of BIFA says:
(1) A proceeding for a subcontractor's charge must-
(a) be started within-
(i) if the claim is for the retention amount only-4 months after the balance of the retention amount is payable; and
(ii) otherwise-1 month after notice of the claim is given under section 122 to the person by whom the money is payable.
If the subcontractor does not commence proceedings in the required time to prove the debt, then the charge is deemed to be extinguished.
If the contractor has gone into liquidation, then the subbie will need to seek leave to commence legal action all within the 1-month period. Extreme care should be taken , although it is possible to seek leave after the expiration of the timeframes (nunc pro tunc) it is not worth taking the risk.
The Subcontract will not be Liable for Unfair Preference Claims
Lastly, if the subcontractor is a secured creditor, then it avoids any issues with liquidators' unfair preference claims. This is one on the most-used weapons in a liquidator's arsenal.
Section 588FA of the Corporations Act 2001 (Cth) says:
(1) A transaction is an unfair preference given by a company to a creditor of the company if, and only if:
(a) the company and the creditor are parties to the transaction (even if someone else is also a party); and
(b) the transaction results in the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor , more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company;
even if the transaction is entered into, is given effect to, or is required to be given effect to, because of an order of an Australian court or a direction by an agency.
This says that unfair preferences only relate to unsecured debts.
If a building contractor goes into liquidation, a subcontractor will not be liable for an unfair preference claim for any money that was secured by a builders subcontractors' charge.
Best practice, just fire out subbies charges if you have not been paid. However, you must be mindful of the risks of builders subcontractors' charges.
Risks of Issuing Subcontractors' Charges
There are several risks with subcontractors' charges, including (inter alia):
- The person responsible for payment to the contractor has paid the contractor and there is nothing for the charge to attach to.
- The subcontractor misses a strict time limit imposed by the BIFA.
- The subcontractor tries to do it themselves and misses vital information which is required to be included in the BIFA.
- The secured creditor proves for their debt in the liquidation and surrenders their security interest.
These are just a few, but there are others.
No Money to Attach - if the person responsible for payment to the contractor has paid the contractor the money for that stage in the proceeding, then there will be nothing for that to attach to.
The best practice is to get in early, as soon as the work is finished pursuant to section 122 of the BIFA.
Missed Time Limits - if the subcontractor misses the strict time limits imposed on the subbie by the BIFA, then the charge has no effect.
The best practice is to get in early, as soon as the work is finished pursuant to section 122 of the BIFA or engage a suitably qualified solicitor.
Missed Information - it is very important that the notice of claim is drafted correctly, identifies the correct parties, and is witnessed by the correct witness.
Best practice is to engage a suitable qualified construction solicitor to draft and send it for you.
Proving for the Debt - if a subbie wants to rely on the subcontractors' charge, then is should not prove in the liquidation. Section 554E of the Corporations Act 2001 (Cth) states:
(1) In the winding up of an insolvent company, a secured creditor is not entitled to prove the whole or a part of the secured debt otherwise than in accordance with this section and with any other provisions of this Act or the regulations that are applicable to proving the debt.
(2) The creditor's proof of debt must be in writing.
(3) If the creditor surrenders the security interest to the liquidator for the benefit of creditors generally, the creditor may prove for the whole of the amount of the secured debt.
(4) If the creditor realises the security interest, the creditor may prove for any balance due after deducting the net amount realised, unless the liquidator is not satisfied that the realisation has been effected in good faith and in a proper manner.
So, if a secured creditor proves for their debt in the liquidation or votes at a creditors meeting, then they are essentially surrendering their security (charge) and will no longer be secured.
It is vital that you seek legal advice if you want to issue a builders subcontractors' charge.
Builders Subcontractors' Charges do not Guarantee Payment
There is no guarantee that a validly given subcontractors' charge will ensure payment. There are a number of things that can happen before payment, such as:
- The contractor may claim it has a genuine dispute in relation to the payment under the contract including defective works claims and/or incomplete work claims.
- Other valid builders subcontractors' charges given by other subbies resulting in a shared pool of money held by the person responsible for payment to the contractor.
- The builder going into liquidation will likely be a breach of contract, giving rise to significant loss and damage for the person responsible for payment to the contractor - they may seek to retain that secured money.
- If the subcontractor chooses to proceed with a builders subcontractors' charge, then they may miss out of the fruits of the liquidation (if any).
Because of the issues surrounding risk of a builders subcontractors' charge, it is vital that you seek legal advice before sending a charge.
Builders Subcontractors' Charge - Get Paid & Protect Yourself
As above, a builders subcontractors' charge is a great weapon to have in your toolbox. It can:
- Elevate you to the status of a secured creditor in a liquidation.
- Allow you to commence legal action against a company in liquidation.
- Protect you from unfair preference claims / voidable transactions claims.
- Greatly improves the subcontractor's chances of getting paid.
However, there are a lot of things to consider, so it is vital that you seek legal advice if you want to issue a builders subcontractors' charge.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.