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SOP Reform: Statutory Trusts – will they Help or Hurt?

As part of the reform process for the Building and Construction Industry Security of Payment legislation, the NSW Government is calling for industry input as they assess the feasability of introducing statutory trusts as a means to better protect subcontractors from contractor insolvency and the many far-reaching consequences.

The building and construction industry experiences the highest rates of insolvencies out of all industries in NSW. This is most prevalent for subcontractors who can at times be several levels deep in a pyramidal contracting chain and can only be paid if the businesses upstream are making their payments promptly.

You can read more about the amendments to the SOP Act, passed late last year and anticipated to come into effect later this year, in these recent Morrissey Law posts.

Further Reforms

With the SOP Act amendments on their way, the NSW Government is looking at further reforms, and as part of the process, they’re calling for submissions and industry input regarding the introduction of statutory trusts as a mechanism to better protect subcontractors.

Statutory trusts have remained one of the more controversial mechanisms provided under the security of payment regime and industry bodies and contractors have continued to raise concern about their impact and the compliance issues with the same.

To assist the Government’s consideration, the Department of Finance, Services and Innovation engaged consultants HoustonKemp to prepare a financial impacts analysis based on stakeholder feedback collected in 2018. From this report, the features of the statutory trust model proposed for NSW can be identified along with some notable benefits and risks.

The issues identified in the report are currently subject to an industry consultation period which is open until midnight Wednesday 24th July 2019 (so be quick!). It is an opportunity for stakeholders, industry participants and interested parties to provide their views on the issues raised in the HoustonKemp report.

Feedback can be submitted, along with supporting attachments if required, via an online form, or the form can be downloaded and returned via email.

The HoustonKemp Report and access to the feedback forms can be found here.

The HoustonKemp Report Model

The model assessed by HoustonKemp in their April 2019 Report requires a contractor who intends to subcontract to open a separate bank account for the receipt of trust funds. The trust account will need to be properly maintained including keeping ledgers on all trust fund transactions and reconciliation on a monthly basis. Once set up in this way, the key operation of the account would be to receive payments of which the contractor cannot withdraw unless all obligations to subcontractors have first been met.

As expected, the effects of the statutory trusts proposal will have mixed effects on the industry.

  • Added administration costs on the industry for the purpose of establishing and maintaining trust accounts is a major concern.
  • Larger contractors will no longer have the option of using funds destined for subcontractors as working capital and will in turn have higher working capital costs with funds held in trust no longer accessible.

However…

  • Financing costs across the industry are expected to be lower – with more efficient payment from upstream contractors, smaller contractors/subcontractors would be able to reduce the amount of working capital they need to access through finance.
  • Lowering instances of insolvency down the contracting chain by use of statutory trusts will also reduce delays and additional cost to principals as well as reducing the downstream effects of upstream insolvencies.

In their report, HoustonKemp consider that the threshold for receiving the positive effects of the proposed statutory trust accounts would be primarily for those construction businesses with a turnover of less than $5 million and in particular for those business with a turnover between $50,000 and $2 million. The point of difference is considered to the be that business with a turnover in excess of $5 million will likely suffer compliance costs which outweigh the benefits of lessened instances of insolvency down the contracting chain.

The picture that has been painted seems to depict that the proposed trusts will have a win or lose effect depending on where you sit on the contracting chain. To alleviate this, it is considered that a minimum contract cost or turnover threshold should be applied to even out the costs and benefits across the board. In practice this could see a minimum contract or turnover threshold in the region of $200,000 being applied to minimise the impact of administrative costs when the funds being protected by the trust accounts are comparatively small.

When considering the practical implementation of the proposal HoustonKemp recommend that the Government use a staged approach so as to fine tune the use of thresholds whether based on project value, contract value or construction business turnover.

Have Your Say!

The report identifies that there is a lack of data analysing contracts by value across the industry which is the basis for the consultation period underway with stakeholders.

When responding to the Department’s survey or online form, participants will be filling in this gap in the available data which will minimise the reliance on assumption and inform the Government’s ultimate decision.

Remember, submissions close at midnight Wednesday 24th July 2019, so get in quick!

Have your say here.

Disclaimer: This publication by Morrissey Law & Advisory is for general information and commentary only and should not be considered or relied upon as legal advice. Formal legal advice should be sought in relation to any matters or transactions that may arise in relation with communication.

2019-07-19T12:22:39+10:00July 19th, 2019|Construction Contracts, Construction Law, News, Security of Payment|