The construction industry has experienced a large number of insolvencies in the past few years.  Following on from the Collins Inquiry into Construction Industry Insolvencies, on 24 October 2013 the State Government recently released the Building and Construction Industry Security of Payment Act Amendment Bill 2013.

The bill will substantially amend the Building and Construction Industry Security of Payment Act 1999 (NSW) (“SOPA“) and will apply to construction contracts entered into after the amendments come into force.  This means there will be an interim period while older contracts run out on projects where it will be important to identify which version of SOPA the contract falls under when considering recovery of debts.

The Bill seeks to strengthen the construction industry by improving cashflow and reducing payment terms.  It is important that insolvency practitioners dealing with construction companies have an understanding of SOPA when they are advising on turnaround or insolvency matters as many of the rights under SOPA are subject to strict time limits.

The important aspects of the new amendments include:-

1. Offences and penalties for head contractors that submit payment claims without a “supporting statement” or with a false “supporting statement.”  The statement is, in effect, the current declaration that all subcontractors have been paid. The Regulations to the Act will prescribe the form of this declaration; it is unclear whether the failure of a contractor to include a “supporting statement” with a payment claim will invalidate the normal operation of SOPA, which otherwise permits a subcontractor to seek an interim judgment/adjudication against a principal or head contractor quickly and cheaply.
2. Payment claims will no longer be required to include “the magic words” that the payment claim is issued under SOPA.  This could lead to situations where a contractor (or liquidator appointed to a contractor) has rights under SOPA that may not be immediately obvious.
3. An important exception to the removal of the “magic words” is where a payment claim is issued for work “connected” to an otherwise exempt residential construction contract (since SOPA does not apply to work carried out on premises for a party who intends to reside in those premises).  Now, if a payment claim is issued for this work AND if the claim includes the “magic words” it can be considered to be a payment claim under SOPA.  This is designed to avoid home owners unwittingly becoming the subject of interim judgments for large sums in connection with residential building works.
4. Head contract payment terms will be required to be no more than 15 business days and subcontract payment terms will be required to be no more than 30 business days.  This may put an end to clauses seeking to defer the due date for payment by a lengthy period or require pre-conditions to be met before a due date arises, as any clause seeking to make payment later than these time periods will be of no effect.

These changes will impact both the pre and post liquidation landscape for construction companies as well as any financiers who are involved in invoice financing in the construction industry.