The Queensland Building and Construction Commission (QBCC) will only provide a licence to a company which can meet its minimum financial requirements – except where a company is able to obtain a Deed of Covenant and Assurance. Usually, the Deed is given by the licensee company’s Director (or multiple Directors) and acts as a guarantee to provide financial backing to the licensee company up to a ‘defined amount’ determined by criteria set out by the QBCC.
In order to obtain a Deed, you will need to successfully apply by:
- complying with the “Minimum Financial Requirements” Regulations as a condition of being granted the licence;
- providing an MFR (“Minimum Financial Requirements”) report;
- identifying a “Defined Amount” for the current year – being the difference between the net tangible assets that the licensee has, and the net tangible assets that are required for the licensee to operate, having regard to its turnover;
- seeking advice and certification from a lawyer – known as a ‘Schedule B – Statement by Covenantor’s Solicitor‘ or simply a legal advice certificate, your lawyer will provide certification that you have obtained legal advice about the risks and obligations associated with being a covenantor to a company licensed by the Queensland Building and Construction Commission (QBCC). Your lawyer must certify that they have given you the required legal advice and that advice was understood
It is only after these steps are completed and the obligations and terms outlined below are fully understood that you should finalise your decision to enter into a Deed.
In the event the licensee company fails and is declared insolvent, the Deed of Covenant and Assurance will be called upon to finalise any outstanding financial requirements under the QBCC license. Should this occur, an Insolvency Trustee will be appointed and take control of the licensee company to act for the creditors. You will have no control over whether the demand is made or not.
The Defined Amount is not Fixed
Just say the original ‘defined amount’ under the Deed is $200,000, then the covenantor has agreed to cover the licensee company’s financial obligations up to this amount. However, this ‘defined amount’ is not fixed and can change as the company grows, depending upon the amount of turnover and the net tangible assets. This means that the Deed remains in force until it is revoked (possibly never), as does the liability of a covenantor, and could end up being significantly more than the initial $200,000 ‘defined amount’ and this can occur at any time without their knowledge.
Lifespan of the Deed
The Deed will be in place until such time as you are released from it, or it is otherwise revoked by the QBCC. Always insist on a written and signed revocation by the QBCC and do not rely upon a promise or assurance that the Deed will not be called upon.
Even if the licensee company is sold or you cease being a Director, your obligations under the Deed remain until such time as you obtain a signed revocation from QBCC. Until that time, the Deed (and your financial obligations) can still be relied upon “at call” by the licensee company to pay its debts should it become insolvent or cease operating. If you wish to reassign the Deed to a new owner or responsible party, you must seek a signed revocation of your Deed and the third party must enter into a new Deed before you are released from your obligations.
Revocation of a Deed
Once given, the obligation of the covenantor is difficult to release. The QBCC will only consent to release you as a covenantor if the licensee company is able to meet the minimum financial requirements on its own, or you are able to find a suitable replacement covenantor to enter into a new replacement Deed. This is at the QBCC’s discretion and you MUST obtain a signed and properly constructed revocation of your Deed in order to be released from your obligations.
A Deed of Covenant and Assurance requires your personal property, including savings, income and other assets (now and future) as security against your obligation to meet financial obligations of the licensee company. So if the covenant is called on, the QBCC can appoint an Insolvency Trustee who may seize assets, caveat the covenantor’s home or other property, and attempt to obtain orders to sell property to meet the charge.
Once given, the obligation of the covenantor can only be released if the QBCC gives written notice to the licensee and to the covenantor that the licensee has satisfied the Minimum Financial Requirements without require reliance on the deed, which can be difficult to obtain. Alternatively, the Deed can also be released if a further deed is entered into between all parties, or if a new third party successfully applies for a replacement Deed. In addition, it is important to know that even once revoked, the terms of the Deed and your financial obligations will still be binding for any amount payable during the period for which the Deed applied to you prior to revocation, even should it become payable in the future.
Accordingly, it would be prudent for any covenantor to attempt to obtain the notice releasing obligations, or the Deed, as soon as they could. Company directors, and their advisors must also be diligent in ensuring that the QBCC properly revokes any Deed in circumstances where it is no longer required to be relied upon.
While this process is often mandatory for a company to obtain or retain its building licence, directors should be aware of the personal risks they expose themselves to if this course of action is taken. For further clarification about what a QBCC Deed of Covenant and Assurance could mean for you and your company, contact Property and Legal.