Deed of Covenant: An option to meet the financial requirement for a QBCC license

For builders, contractors, and developers across Queensland, maintaining a licence with the Queensland Building and Construction Commission (QBCC) is the bedrock of their operation. It’s a mark of legitimacy, a prerequisite for undertaking work, and a symbol of professionalism. However, the path to obtaining and retaining this licence is paved with stringent regulations, none more critical than the QBCC's Minimum Financial Requirements (MFR). It is within this complex financial landscape that many licensees first encounter the term QBCC Deed of Covenant.

The moment your accountant mentions you have a shortfall in your Net Tangible Assets (NTA) and suggests a Deed of Covenant as a solution, a wave of uncertainty can set in. What is this legal document? What does it mean for my business? And more importantly, what does it mean for my personal assets? As a professional in construction, you may not have specialised knowledge of complex financial instruments, and addressing these topics may present new challenges.

This article provides an overview of the QBCC Deed of Covenant. It explains what the document is, its purposes, and the main responsibilities involved, using straightforward language. We will explore the intricate relationship between your NTA, your Maximum Revenue (MR), and how a financial covenant like this one bridges the gap. Furthermore, we will differentiate it from other legal guarantees, such as a deed of cross guarantee, to provide a complete picture.

Understanding the mechanics of a QBCC Deed of Covenant is not just about ticking a box for the regulator. It's about making informed decisions that will protect your business, your personal wealth, and your future in the industry. By the end of this article, you will have a robust understanding of this topic, empowering you to have more confident conversations with your accountant, your solicitor, and the QBCC.

What is a QBCC Deed of Covenant?

A QBCC Deed of Covenant and Assurance is a legally binding tripartite agreement between a QBCC licensee, a third party (known as the "covenantor"), and the QBCC itself. Its primary function is to allow a licensee to meet the mandatory Net Tangible Assets (NTA) requirement for their licence category when their own business assets are insufficient.

In essence, it is a formal promise. The covenantor, who could be a company director, a shareholder, a related company, or even a family member with sufficient assets, legally assures the QBCC that they will cover a financial shortfall in the licensee's NTA up to a specified amount. This assurance provides the QBCC with the confidence that the licensee has the financial backing to operate sustainably and meet its debts, thereby protecting both consumers and subcontractors.

Crucially, it is important to note that a Deed of Covenant is only available for licensees in Categories 1 to 7. It is not an option for licensees in Self-Certifying categories SC1 and SC2. This is a significant limitation that affects many smaller contractors and trade businesses.

The requirement for such a deed arises directly from the MFR, as detailed in the Queensland Building and Construction Commission (Minimum Financial Requirements) Regulation 2018. This regulation mandates that every licensee must have a certain level of NTA, which is directly proportional to the Maximum Revenue (MR) they wish to have for their licence. The MR dictates the total value of building work a licensee can undertake in a financial year. A higher MR requires a higher NTA.

When a licensee's MFR Report, prepared by their accountant, reveals that their NTA is below the prescribed threshold for their desired MR, a QBCC Deed of Covenant becomes a critical tool. It allows the licensee to "borrow" the financial strength of the covenantor to satisfy the QBCC. The amount guaranteed is known as the "Defined Amount," which is precisely the difference between the licensee's actual NTA and the required NTA.

It is crucial to understand that this is not a mere formality. The deed is a serious legal instrument with profound consequences. The QBCC provides a prescribed format for the deed, and it cannot be altered in any way. Any attempt to cross out, amend, or add clauses will result in the QBCC rejecting the document. This rigidity underscores the importance the QBCC places on the unwavering nature of the guarantee. Before signing, both the licensee and, most importantly, the covenantor must seek independent legal advice to fully comprehend the risks they are undertaking. This is a mandatory step for the covenantor, who must have a solicitor sign a 'Statement by Covenantor's Solicitor' (Schedule B) confirming this advice was given.

The Mechanics: How the Deed Interacts with NTA and MR

To truly grasp the function of a QBCC Deed of Covenant, one must first understand the relationship between Net Tangible Assets (NTA) and Maximum Revenue (MR).

Net Tangible Assets (NTA) is a specific calculation of a business's financial worth. It is calculated by taking your total assets, subtracting your intangible assets (like goodwill, intellectual property, or the right to be indemnified by an insurance policy), and then subtracting your total liabilities.

NTA = (Total Assets - Intangible Assets) - Total Liabilities

The QBCC uses NTA as a primary measure of a licensee's financial health. It represents the real, physical, and financial assets a company could liquidate to cover its debts if it ran into trouble.

Maximum Revenue (MR) is the upper limit of turnover a licensee is permitted to have in a single financial year. The QBCC assigns an MR based on the licensee's NTA. The higher the NTA, the higher the potential MR. For example, a licensee in Category 2 must maintain an NTA within a specific range to be permitted a Maximum Revenue between $3,000,001 and $12,000,000.

Disclaimer: The specific NTA thresholds for each licence category are set by the QBCC and are subject to change. The figures in this article are for illustrative purposes only. You must consult the official QBCC website for the current MFR thresholds and work with a qualified accountant for accurate calculations for your MFR report.

The problem arises when a licensee has the operational capacity and the opportunity to take on projects that exceed the MR permitted by their current NTA. For instance, if their NTA only supports a Category 1 licence (MR up to $3,000,000) but they wish to tender for a project that would push them into Category 2, they must first increase their NTA to the required level for that category.

This is where the QBCC Deed of Covenant comes into play. If the licensee's MFR report shows their NTA is below the minimum required for their desired category, a covenantor can sign a deed to cover the shortfall. With this deed in place, the QBCC considers the licensee to have met the NTA requirement, and they will be granted the higher MR. This mechanism allows viable, growing businesses to secure the licence category they need to expand, but it places the covenantor's personal assets on the line. For guidance on these complex QBCC decisions, it is invaluable to consult with expert construction lawyers.

What is a Deed of Covenant Used For?

The singular, primary purpose of a QBCC Deed of Covenant is to satisfy the Minimum Financial Requirements for a QBCC licence (Categories 1-7). It is a specific solution to a specific problem: an NTA shortfall. By providing this financial assurance, the deed serves several crucial functions for a construction business.

Firstly, it facilitates licensing. For many new businesses or companies in a rapid growth phase, their operational capabilities can outpace their accumulated NTA. Without a Deed of Covenant, these businesses would be stuck at a lower licence category, unable to tender for larger, more profitable projects. The deed is the key that unlocks the door to higher-value work, enabling the business to legally operate at its desired scale.

Secondly, it enhances business credibility. While it's a mechanism to address a financial shortfall, successfully navigating the MFR process demonstrates a level of financial responsibility and forward-planning. It shows clients, suppliers, and financiers that the business is compliant with the industry's highest regulatory standards. This can build trust and provide a competitive edge.

However, the most critical aspect to understand is the risk it entails. The deed is not just a promise; it's a contingent liability that hangs over the covenantor. The "use" of the deed from the perspective of a liquidator or trustee in bankruptcy is starkly different.

The Risks: When the Covenant is Called Upon

The true test of a QBCC Deed of Covenant occurs when a licensee's business fails. If the licensed company is wound up in liquidation, or if the licensed individual is declared bankrupt, the deed is activated.

The liquidator or trustee, acting on behalf of the creditors, has the legal right to issue a written demand to the covenantor for payment of the "Defined Amount." This is the moment the guarantee is called upon. The covenantor is legally obligated to pay this amount into the pool of funds available to the failed business's creditors. A trustee in bankruptcy's powers are extensive, as outlined by the Australian Financial Security Authority (AFSA).

This is where the gravity of the document becomes clear. The covenantor's personal assets are now directly exposed. If the covenantor cannot pay the Defined Amount from their cash reserves, the liquidator can pursue their other assets. This can include:

• Real Estate: A liquidator can place a caveat on the covenantor's family home or investment properties, preventing them from being sold or refinanced, and can ultimately seek court orders to force a sale to recover the debt. This often leads to complex building and construction disputes.

• Savings and Investments: Bank accounts, share portfolios, and other investments can be targeted.

• Future Income: In some circumstances, even future earnings can be subject to recovery actions.

It's also vital to recognise that the "Defined Amount" is not fixed. It is recalculated with each new MFR Report. If the licensee's financial position worsens and their NTA drops, the shortfall—and therefore the Defined Amount—will increase, raising the covenantor's potential exposure up to the Covenanted Amount cap. This change is a direct result of the licensee's financial performance, not an arbitrary decision.

Furthermore, revoking a Deed of Covenant is not a simple matter. A covenantor cannot simply change their mind. The deed remains in full force until the QBCC formally agrees to revoke it in writing. This will only happen if the licensee can prove they now meet the MFR on their own, or if a suitable replacement covenantor is found to enter into a new deed. This can leave a covenantor tied to a business for many years, even long after they may have ceased to be actively involved. This is a significant reason why seeking advice from a specialist building and construction law firm before signing is not just recommended; it's essential.

What is a Deed of Cross Guarantee?

In the world of corporate finance and law, it's easy to get confused by similar-sounding terms. One such term that is often mentioned in the context of corporate guarantees is the "Deed of Cross Guarantee." While it involves a promise to cover debts, its purpose, context, and legal framework are entirely different from a QBCC Deed of Covenant.

A Deed of Cross Guarantee is a legal agreement entered into by a group of related companies, typically a parent company and its subsidiaries. Under this deed, each company in the group (the "Closed Group") guarantees the debts of all the other companies in the group. If one company in the group becomes insolvent, the other companies in the group are legally obligated to step in and pay its creditors.

The primary driver for entering into a Deed of Cross Guarantee is not to satisfy a construction industry regulator, but to obtain financial reporting relief from the Australian Securities and Investments Commission (ASIC). Under ASIC Corporations (Wholly-owned Companies) Instrument 2016/785, companies that are part of such a deed may be relieved from the legal requirement to prepare and lodge individual audited financial reports. Instead, the parent company can prepare a single consolidated financial report for the entire group.

This offers significant administrative and cost savings for large corporate groups, streamlining their compliance obligations. However, it creates a web of interlocking liability. The failure of one small subsidiary could, in theory, bring down the entire group because of the cross-guarantees.

Key Differences Between a QBCC Deed of Covenant and a Deed of Cross Guarantee

To avoid any confusion, let's clearly delineate the differences:

Feature	QBCC Deed of Covenant	Deed of Cross Guarantee
Purpose	To satisfy QBCC's Minimum Financial Requirements for a single licensee.	To obtain financial reporting relief from ASIC for a corporate group.
Parties Involved	The Licensee, the Covenantor (can be an individual or company), and the QBCC.	A group of related companies (a "Closed Group").
Regulator	Queensland Building and Construction Commission (QBCC).	Australian Securities and Investments Commission (ASIC).
Primary Beneficiary	The licensee (by obtaining their licence) and their future creditors in case of insolvency.	The corporate group (through reduced administrative costs).
Nature of Guarantee	A one-way guarantee from the covenantor to the licensee.	A mutual, multi-directional guarantee among all companies in the group.
Governing Document	A prescribed, unalterable deed format provided by the QBCC.	An ASIC-approved pro-forma deed (ASIC Pro Forma 24).

Understanding this distinction is crucial. A QBCC Deed of Covenant is a specific tool for the Queensland construction industry, designed to ensure a single entity is financially sound for licensing purposes. A Deed of Cross Guarantee is a broader corporate finance tool used by large, related company groups across any industry for reporting efficiency. If you are dealing with QBCC matters, you are concerned with the former, not the latter. Any confusion between the two could lead to significant legal and financial misunderstandings. If you are ever unsure about the nature of a document you are asked to sign, reviewing your building contract or guarantee with a lawyer is a critical step.

Conclusion

Successfully managing a construction business in Queensland requires more than just skill on the tools; it demands a firm grasp of the regulatory landscape governed by the QBCC. The QBCC Deed of Covenant stands out as one of the most significant financial instruments a licensee may need to engage with. It is a powerful tool that can enable business growth, but it comes with substantial, long-term risks for the person or entity providing the guarantee.

Let's recap the essential points:

• A QBCC Deed of Covenant is a legal solution that allows a licensee to meet their Net Tangible Assets (NTA) requirement by using the financial strength of a covenantor.

• It is only available for licensees in Categories 1-7, not SC1 or SC2.

• The covenantor's personal assets are placed at significant risk and can be called upon by a liquidator if the licensee's business fails.

• This financial covenant is a specific instrument for the Queensland construction industry and should not be confused with a Deed of Cross Guarantee.

The decision to enter into a QBCC Deed of Covenant should never be taken lightly. It requires careful financial planning, a complete understanding of the potential liabilities, and independent legal advice. These are not just procedural steps; they are fundamental risk management for protecting your personal and business future.

If you are grappling with a Net Tangible Assets shortfall, have been asked to sign a QBCC Deed of Covenant, or are facing any other building and construction disputes, you do not have to navigate this complex terrain alone. The next, most crucial step is to arm yourself with expert legal advice. Contact Merlo Law today to schedule a consultation and let our team of experts provide the clarity and guidance you need to understand your position and make empowered, informed decisions.

Frequently Asked Questions

Q: Who can be a covenantor for a QBCC Deed of Covenant?

A: A covenantor can be an individual (like a director or family member), or another company. The key requirement is that they must have sufficient Net Tangible Assets to cover the guaranteed amount and must obtain independent legal advice before signing the deed, which is confirmed by their solicitor on a Schedule B form.

Q: Does a QBCC Deed of Covenant affect my credit score?

A: For the licensee, the deed itself doesn't directly impact a credit score, but it is a formal record of financial assurance. For the covenantor, the deed creates a significant contingent liability. While it may not appear on a standard credit file, it must be disclosed in any future applications for finance, which could impact their borrowing capacity.

Q: What happens if the covenantor's financial position changes?

A: The covenantor must maintain sufficient NTA to back the guarantee for the life of the deed. If their financial position weakens, the licensee may no longer meet the MFR, potentially breaching their QBCC licence conditions. This could lead to the QBCC taking action, including licence suspension or cancellation, if the shortfall is not rectified.

Q: Can a QBCC Deed of Covenant be cancelled?

A: A QBCC Deed of Covenant can only be formally revoked in writing by the QBCC. This is a difficult process and typically only occurs if the licensee can prove they now meet the Minimum Financial Requirements on their own financial standing, or if a suitable replacement covenantor enters into a new replacement deed.

Q: Is a Deed of Covenant the only way to meet my Net Tangible Assets (NTA)?

A: No, it is a specific solution for an NTA shortfall for licensees in Categories 1-7. The primary method is to have sufficient assets within the licensed entity itself. This can be achieved by retaining profits or injecting capital. Consulting with expert construction lawyers and your accountant can help you explore all available avenues.

Q: What is the difference between the "Defined Amount" and "Covenanted Amount"?

A: The "Defined Amount" is the specific, calculated shortfall between the licensee's NTA and the required NTA, which is recalculated with each MFR report. The "Covenanted Amount" is a fixed upper limit specified in the deed. The Defined Amount can fluctuate based on the licensee's financial performance but can never exceed the Covenanted Amount.

Q: What happens if I don't get a Deed of Covenant when QBCC requires it?

A: If the QBCC has determined that your NTA is insufficient and you are in a category where a deed is permitted (1-7), failing to provide one will result in the refusal of a new licence or regulatory action against an existing one, including suspension or cancellation, severely impacting your ability to trade.

---

This guide is for informational purposes only and does not constitute legal advice. For advice tailored to your specific circumstances, please contact Merlo Law.

---