Trust Claims vs Contract Claims in Construction Insolvency

What it is

When a head contractor goes under, two queues form at the door of the liquidator. One is unsecured creditors holding contract debts: subbies owed progress payments, suppliers owed invoices, hire companies owed account balances. They share whatever is left in the general estate, usually cents in the dollar. The other queue is beneficiaries of trust money. They get paid first, in full, from the trust funds before the unsecured creditors see anything.

That is the gap a builder needs to understand. A contract claim is a debt: the contractor or supplier becomes an unsecured creditor and stands behind secured creditors, priority creditors and the liquidator's costs. A trust claim is a proprietary claim over money that never formed part of the head contractor's estate at all. The legislation built around this principle is the main protection subbies have when their head contractor stops trading.

The general rule for unsecured creditors

The default position under the Corporations Act 2001 is the pari passu rule: unsecured creditors of equal rank share equally in whatever the liquidator collects after secured creditors and priority claims are paid. Section 555 expresses the principle that debts and claims rank equally and abate proportionally if assets are insufficient.

For construction, that usually means a steep haircut. Trade creditors in builder collapses in Australia routinely recover under 10 cents in the dollar because secured lenders, the ATO and employee entitlements consume most of the realisations. A contract debt, however properly invoiced, gives no priority over other unsecured debts.

Why trust money is different

Trust money does not belong to the trustee. The trustee holds it for the beneficiary. On insolvency, the liquidator steps into the trustee's shoes but cannot use trust property to pay general creditors of the company. The beneficiary's interest survives the insolvency and the money is distributed to the beneficiary, subject only to the trustee's right of indemnity for proper expenses of the trust.

In construction, two statutory trust regimes turn this principle into protection for downstream contractors: project trusts and retention trusts. Both place specific money into trust accounts before insolvency, so on collapse those funds stay outside the general estate.

Queensland project trust accounts

The Building Industry Fairness (Security of Payment) Act 2017 (Qld) requires project trust accounts and retention trust accounts for certain building contracts. A project trust holds progress payments paid by a principal for the work of the head contractor's first-tier subcontractors. The head contractor holds the money on trust for itself and those subbies. Retention trust accounts hold cash retention amounts for downstream subcontractors.

The mechanics force the head contractor to deposit principal payments into the project trust account and to pay subcontractors out of that account in a fixed order. If the head contractor enters liquidation while money is sitting in the project trust account, the beneficiary subcontractors have first call on those funds. The QBCC publishes the operating rules and the legislation has been amended several times, most recently with the 2024 simplification of the trust framework.

NSW retention trust scheme

In NSW, the Building and Construction Industry Security of Payment Act 1999 section 12A and Regulation 8 require head contractors to hold retention money in a separate trust account with an authorised deposit-taking institution where the head contract value exceeds the regulatory threshold of $20 million. The scheme imposes record-keeping, ledger reporting at least every three months, and penalties up to $22,000 for non-compliance.

Retention money in a compliant trust account survives the head contractor's insolvency. A subcontractor whose retention was held in trust has a priority claim to its share against money in the account, not a ranked unsecured proof in the wind-up. Builders running below the threshold do not have the statutory trust, so subcontractor retentions can become part of the general estate on collapse.

Other state regimes

WA and Victoria have moved toward retention trust models with limited or staged commencement. WA's Building and Construction Industry (Security of Payment) Act 2021 includes retention trust requirements being phased in. Victoria's Security of Payment regime has been the subject of review, with retention trust reforms proposed. Outside these regimes, retention is typically held in the head contractor's general account and ranks as unsecured on insolvency.

The practical hierarchy

When a head contractor collapses, the queue runs:

Trust beneficiaries

Subbies entitled to project trust money or retention trust money get paid from the trust account before the liquidator touches it.

Secured creditors

Banks and financiers with registered security interests over the head contractor's assets recover from those assets.

Priority claims

Employee entitlements (wages, superannuation, leave) get statutory priority under section 556.

Unsecured creditors

Subbies and suppliers with contract debts share whatever is left. This is where most unprotected claims land.

What this means for a builder

A subcontractor's protection depends on what flavour of claim it can prove. Money traceable to a project trust account or a retention trust account is a trust claim and ranks first. Money owed under the subcontract without a trust attachment is an unsecured contract claim and ranks at the back.

The practical moves are to invoice and chase payment promptly so progress money flows through the project trust account rather than sitting in the head contractor's general account, to confirm in writing whether retention is held in a trust account compliant with the relevant Act, and to lodge proofs of debt early enough to be counted in any trust distribution. A subbie that lets retention sit unprotected for years on a sub-threshold job is taking unsecured credit risk on the builder.