Re PBS Building (Qld) Pty Ltd

In this case, the liquidator of a building company sought directions that it was entitled to funds held on project and retention trusts established under the Building Industry Fairness (Security of Payments) Act 2017 to meet its costs of the liquidation. The Court held that the Act excluded the trustee’s right of indemnity in respect of trusts established under the Act. That exclusion extended to prevent the liquidator from taking the benefit of the indemnity. However, in obiter, the Court noted that it could be possible for the liquidator to recover their costs as a result of the fact that their exertions would produce benefits for the beneficiaries.

Brown J

3 June 2024

PBS Building (Qld) Pty Ltd was the head contractor for two projects in Queensland. [2]. PBS entered into contracts in relation to those projects which were eligible contracts within the meaning of the Building Industry Fairness (Security of Payments) Act 2017 (“BIF Act”). [11]. As a result, PBS opened project trust accounts and a retention trust account as required by the BIF Act. [12]. PBS subsequently went into liquidation and the funds available to PBS were insufficient to cover the costs of the liquidator. [15]–[16]. The liquidator applied for directions to the effect that the liquidator was entitled to be paid their reasonable remuneration, expenses, and costs incurred in the administration of the trusts from the proceeds of the trusts. [62].

The BIF Act requires the establishment of project and retention trusts in order to ensure that subcontractors are paid for the work they do. [21]–[23], [101]. Under s 11B, the subcontractor is given a beneficial interest in the amounts they are entitled to be paid from the trust. [26]. The head contractor has a beneficial interest in the remainder of the funds, to the extent that there is surplus. [26]. Importantly, s 51C deals with costs incurred in the administration of a project trust or a retention trust. [40]. Under that provision, the “trustee for the project trust or retention trust is not entitled to recover the costs from a beneficiary or the funds held in trust for a beneficiary”. [40]. Similarly, s 51E, prevents the trustee from recovering the costs of employing or engaging an agent to do any act in relation to the trust. [40]. In addition, s 51A, prevents the trustee from using trust funds to pay its creditors. [40]. Under s 56A and 56B, the application of the Trusts Act 1973 is excluded and principles of equity relating to trusts apply except to the extent of their inconsistency with the BIF Act. [46].

There was little dispute between the parties that the trustee’s right of indemnity had been effectively abrogated by the terms of the BIF Act. [101]. In addition, in Carter Holt Harvey Woodproducts Australia Pty Ltd v Commonwealth (2019) 268 CLR 524 it was held that funds held on trust by a company are not generally company property to which creditors could be entitled. [49]. As such, the liquidator could not gain the benefit of the ordinary trustee’s indemnity.

The primary contention of the applicant was that the BIF Act only excluded the application of the trustee’s indemnity as against the trustee, but did not prevent the liquidator from having the benefit of the indemnity. [47]. That argument was to the effect that the word “trustee” in s 51C (and elsewhere) should be read as limited to the party responsible for establishing the trust. [47]. In addition, the liquidator was not an “agent” of the company for the purposes of s 51E. [47].

The Court rejected that construction for inter alia three reasons. [122]. First, it would be inconsistent with the abrogation of the trustee’s indemnity if that right could be enlivened for the purposes of external administration. [122]. Second, it would be inconsistent with other parts of the legislation to read “trustee” as being limited to the party establishing the trust. [122(b)]. In particular, the purpose of the scheme was to give a priority interest to subcontractors, particularly given the higher risk of insolvency in the building industry. [122(b)(i)]. It runs against that purpose to allow funds from the trust to be paid to the liquidator. [122(b)(iii)]. Even if the applicant’s construction of the Act was correct, it would make the liquidator a creditor of the trustee, and the funds from the trust cannot be used to pay creditors as a result of s 51A. [122(c)].

Accordingly, the trustee’s right of indemnity was abrogated by the BIF Act, and the liquidator was not in a better position than the trustee. [128].

However, the Court did note the possibility of another way for the liquidator to recover their costs. Under the principles in Re Berkeley Applegate (Investment Consultants) Ltd (in liq) [1989] Ch 32 and Re Universal Distributing Co Ltd (in liq) (1933) 48 CLR 171, the fact that the beneficiaries of the trust would not gain the trust funds without the exertions of the liquidator could be relied on as a basis for allowing recovery by the liquidator from the trust funds. [85]. Those cases contemplate a personal right, rather than a right that attaches to the trust, such that it would not be excluded by the BIF Act. [129]. However, in order to make a claim based on those principles, the liquidator would either need to identify the work done to realise the benefit to the beneficiaries (under Berkeley Applegate) or identify the work that they undertook, which would have been necessary for the beneficiaries or their receiver to carry out to obtain the trust funds (under Universal Distributing). [129]. That work has not yet been completed.

Accordingly, the Court dismissed the liquidator’s application for directions. [136].

L Inglis