Project bank accounts are in the spotlight again. If you use one yourself, make sure you’re aware of all the pros and cons, particularly with regard to insolvency

Project bank accounts are nothing new: Latham and Egan were recommending them in the nineties. But the recent publication of the Office of Government Commerce’s (OGC) Fair Payment Guide has brought them to the fore again, particularly in the public sector.

Last month Barclays and Bank of Scotland showcased their project bank account products at a conference in the House of Commons. Standard form drafting bodies have advised they are looking to introduce them as options.

The Highways Agency announced its intention to use them on contracts from 1 January 2008, but has recently said that it is looking to find a job to trial their use. This is amid some dissent from main contractors. But are project bank accounts all they’re cracked up to be?

The aim of the account is to shorten the payment chain by allowing money to pass directly to subcontractors from an employer. The OGC guide suggests the saving in construction costs could be about 2.5%, based on cash-flow surety and reduced finance charges.

The type of account proposed by the OGC will involve the employer, main contractor and subcontractors entering into a trust deed that will detail how the designated account will operate. The deed will provide for the authorisations required before payments can be made.

The employer’s team continues to certify payment to the main contractor in the normal fashion. On certification, money is paid directly into the account by the employer. Release of this money is then authorised (by the employer and the main contractor).

Important points to consider in looking at a project bank account are whether it impinges on other aspects of the relationship between the main contractor and subcontractor and what happens if one of the parties to the account becomes insolvent.

Project bank accounts are simply a mechanism by which payment is made … they offer little more protection on insolvency than would normally exist

As far as the relationship between main contractor and subcontractor is concerned, how does the main contractor preserve rights of set off? As we know, set off involves deducting from a payment to be made under a certificate or valuation. If the payment is not passing through the main contractor, how can it be made? A provision would be required in the deed to regulate this.

Of more concern, perhaps, is the protection project bank accounts afford in an insolvency. Since all that is paid into the account is the certificate or valuation just issued, they do not operate as a security for the subcontractors. Rather, they are simply a mechanism by which payment is made.

To that extent, save in relation to stage payments, they offer little more protection on insolvency than would normally exist.

Another issue arises on the insolvency of the main contractor. When a party goes into liquidation there is the “pari passu” rule, which requires creditors to share equally in the company’s assets. Subcontractors in these situations will still be creditors for the sums certified. If they receive full payment of their debt through the project bank account and other creditors do not, the payments may be contrary to this rule.

Even if liquidation does not occur, but the company goes into administration, there are issues with these direct payments. This means employers run the risk of having to pay the same sum once to the subcontractor through the project bank account and again to the liquidator or administrator.

To what extent have the implications been thought through? The OGC was aware that insolvency would be an issue as it stated: “The trust status of the account is essential to avoid problems if the contractor goes into receivership. The account, in effect, is held on trust on behalf of the whole of the supply chain … This prevents a receiver seizing the proceeds of the account.” What was not identified were the risks of insolvency rules prevailing over the trust. This is what those ready to sign up will need to consider.