Improving Security of Payment Building and Construction Industry

4. Trusts Page 39National Public Works Council IncImproving Security of Payment in the Building and Construction Industry4.7.9 Insolvency of the TrusteeIt may be that the trustee itself becomes insolvent. What effect this has on thebusiness of beneficiaries will depend on the structure of the trust.The general equitable principle, however, is that each beneficiary is rated equally andfunds should be distributed on a pro-rata basis.The implications of an insolvent trustee of a trust which is not a cascading trust,would have the same effect as if there were an insolvent beneficiary, ie funds willbecome "blocked".Any monies left in trust at the time of insolvency can be distributed to the appropriateSubcontractor without amounting to a preferential payment.4.7.10 Tax ImplicationsIt is likely that there will be tax implications arising as a result of interest earned ontrust accounts during the term of the project. This will necessarily carry with itcertain obligations at law eg accounts, tax returns etc.4.7.11 Educating the TrusteeThere are onerous requirements imposed upon trustees concerning their fiduciaryduties. In particular, the duty to account carries with it a requirement that all moneyheld by the trustee is able to be accounted for. This, in turn, carries with it strictrequirements as to the maintenance of accounts.Assuming the trustee is to be an industry participant, he will need to be trained in thearea of operating and maintaining trust accounts, as well as being required todemonstrate an understanding of the requirements of the position of trustee.It has been suggested that such a training and education requirement may be used toform the basis of a builder's or Subcontractor's licence.This requirement may be obviated if the trustee is an independent third party such asthe State Trustee, or an fund management company as they are already well versedwith the requirements of the position.4.7.12 Limitation PeriodThe law currently provides for a variety of limitation periods to proceed against atrustee for breach of trust, ranging from no prescribed period in the case of afraudulent breach of trust (except New South Wales where the period is 12 years) tosix years in the case of an innocent breach, including a failure to maintain accounts.Because of the potential crippling effect of a delay in the flow of funds down thecontractual chain, such periods provided for under the Statutes may be too long. Ashorter period, perhaps within one year from the date of completion, abandonment or