Reforms to insolvency laws will prevent contracting parties relying on certain clauses in construction contracts effective from 1 July 2018.

The reforms introduce changes to the Corporations Act 2001 (Cth) and are likely to impact significantly on construction contracts.

Last year the government introduced the most significant reforms to Australia's insolvency regime for over three decades. Among other changes, reforms that will come into effect on 1 July this year (or earlier by proclamation) will have a significant impact on the ability for counterparties to exercise certain rights under contractual provisions known as ipso facto clauses.

From 1 July 2018, reforms to the Corporations Act 2001 (Cth) (the Act) will become effective including the addition of safe harbour laws and protections against ipso facto clauses.

From 1 July 2018, amendments to the Corporations Act 2001 (Cth) in the form of a new ‘ipso facto’ regime come into effect. The new amendments are part of the Federal Government’s commitment to assisting builders in financial distress.

Background

Factoring agreements are very popular with subcontractors and suppliers in the construction industry, assisting cash-flow by providing a line of credit against accounts receivable. However, like any financial product, they can present complexities, pitfalls and at times surprises when pursuing debt recovery and enforcement action. 

Where a subcontractor is factoring its debts:

The new Building Industry Fairness (Security of Payment) Bill 2017 (Qld) was assented to on 10 November 2017, which will see the introduction of project bank accounts (PBAs) into the Queensland construction industry. As the project bank account provisions will be trialled from 1 January 2018, contractors, at least those involved in State Government projects, should familiarise themselves with the relevant provisions.

What Are Project Bank Accounts?

A PBA is a trust over:

A recent Western Australia decision in the receivership and liquidation of a construction company may have overturned the hitherto accepted view that set-off remains effective against a receiver.

The case in question could cost the principal tens of millions of dollars and is under appeal. The finding is potentially relevant in New Zealand because the provisions relied on are materially identical to those in our Companies Act and Personal Property Securities Act (PPSA).

Insolvency in the construction industry is a perennial concern for contractors who can be thinly capitalised and depend on reliable cash flow to meet obligations to staff and suppliers.

This week’s TGIF examines a recent decision of the Supreme Court of New South Wales which considered whether payments made by a third party to a company’s creditors could be recovered as unfair preferences.

What happened?

On 2 September 2015, liquidators were appointed to a building and construction company (the Company) and later commenced proceedings against eight defendants for the recovery of payments considered to be unfair preferences.

Maxcon Constructions Pty Ltd v Vadasz (No 2)

Significance