Navigating the Insolvency of a Contractor - Subcontractor's Charge

Navigating the Insolvency of a Contractor

The building industry is facing many challenges including significant increases in building costs, a lack of skilled labour and steep interest rates. This challenging market has caused numerous large construction companies and developers to collapse, often with significant sums of money owed to sub-contractors. This leaves subcontractors in a precarious position where it is unclear whether they will be paid for the work they completed. 

Subcontractor’s Charge

In Queensland, the Building Industry Fairness (Security of Payment) Act 2017 (Qld) establishes a statutory protection known as a ‘subcontractor’s charge’ which allow subcontractors to recover money owed to them in the event that a contractor becomes insolvent. The Act explains that a subcontractor’s charge ‘secures payment… of all money that is payable, or is to become payable, to the subcontractor for the subcontracted work’. By lodging a subcontractor’s charge, a subcontractor effectively ‘leapfrogs’ the contractor and secures payment from a contractor higher in the contractual chain.

A subcontractor is entitled to claim a subcontractor’s charge where the amount owed is for work completed under a subcontract and money for the work is still owed to the contractor by a contractor higher up in the contractual chain.

The first step in claiming a subcontractor’s charge is to give written notice, ‘the notice of claim’, to the person obliged to pay the money under the contract. Notice of the claim may be given where the work is not completed or where the money is not yet due and owing. However, importantly, if work is completed, the notice of the claim must be given within 3 months after practical completion of the works. Failure to comply with this timeframe will render the notice void.

After the notice of claim is given, the contractor must give a written response to the subcontractor within 10 days business days. In the response, the contractor may either accept or dispute liability of the amount claimed. If the contractor elects to dispute their liability, they may choose to either dispute the entire amount or a portion of the claim.

If the contractor accepts liability, a person higher in the contractual chain will pay the subcontractor for that amount. However, if the contractor disputes the subcontractors claim, it will first be necessary to commence proceedings to resolve the question of the contractor’s liability.

A subcontractor’s charge is particularly advantageous where the contractor enters liquidation. Ordinarily, a subcontractor would need to file a formal proof of debt and join other unsecured creditors to await payment, if any. However, where a subcontractor’s charge has been filed, the subcontractor ‘jumps the queue’ in front of all other unsecured creditors to become a secured creditor. As a secured creditor, the subcontractor’s debt will be prioritised over all over unsecure creditors. Effectively, the subcontractor will be first in queue after the costs of liquidation are paid which gives the subcontractor a better chance of being paid.

Before proceeding to lodge a subcontractor’s charge, it may be best to seek legal advice. The team at CJM Lawyers can advise and assist you with all aspects of a subcontractor’s charge. If you are a subcontractor and are concerned about an outstanding debt owed to you by a contractor, get in contact with the team and we can discuss your best course of action. 

Disclaimer: This article is for general understanding and should not be used as a substitute for professional legal advice. Any reliance on the information is strictly at the user's risk, and there is no intention to create a lawyer-client relationship from this general communication.