Recent construction companies collapses highlight ongoing problems with retentions

Tuesday, September 17, 2019

The past few weeks have seen a spate of construction companies ceasing to trade, some of which have been placed into liquidation or receivership. These include Tower Cranes, the Stanley Group and related Tallwood companies in Auckland and Waikato, and Welhaus Ltd and related company Welstruct Ltd in Canterbury.

Creditors are estimated to be owed at least $10 million from the Stanley Group. Amounts owed by the other businesses are still unknown. These sums are likely to lead to serious flow-on effects for subcontractors, and could result in more business failures. These collapses will provide a further robust test for recent changes to the retentions regime set out in the Construction Contracts Act 2002 (Act).

The liquidators of the Stanley Group have released their first report. It notes that it appears that there will be “a shortfall in the retentions held by the companies as prescribed by the Construction Contracts Act”. The extent of the shortfall is unknown. The report records that “it is the liquidator’s initial opinion that the directors may be in breach of Subpart Two A of the Construction Contracts Act” (which sets out the retention scheme).

If a contract is entered into after 31 March 2017, retentions must be held on trust for subcontractors. Retention money is an amount held back from a payment made under a construction contract, and is usually a percentage of the amount payable of each instalment. It is generally held to ensure that a contractor performs all of its obligations under the contract, and is then released either on practical completion or after the end of a defects notification period.

However, the Act does not require retention funds to be held in a designated account. The funds can also be mingled with other funds, which makes asserting a claim potentially difficult. The retention money may be held either in cash or in “other liquid assets that are readily converted into cash.” There is no definition of liquid assets in the Act, but it is likely to include assets such as term deposits, bonds, and accounts receivable in some circumstances.

The High Court considered the question of funds held on retention in an application from the receivers of Ebert Construction.[1]  The High Court determined that if a fund was set aside to hold retention money, it will only apply to subcontractors who were identified as having their retentions held in that fund. The Court did not confirm that the retentions were deemed to be held on trust (which appeared to be the Parliamentary intention when amendments to the Act were put in place), and instead relied on the accuracy of the accounting system operated by the company in liquidation. This led to some contractors being deprived of their retentions, because Ebert had failed to account for them in the specific retention account.

The Ebert decision also said that there were no retentions created until the payment of the invoice is made to the subcontractor. Unpaid invoices, despite being overdue, cannot be used to claim a retention.

Even when money is properly held on retention, it may take some time for it to become available for distribution to creditors. If a liquidator or receiver is appointed, they will need to make an application to the Court for directions about distributing those funds, because those funds are not the property of the company: “they are held on trust for the qualifying subcontractors”. Relying on payment of retentions to solve cash flow problems is therefore ill-advised.

The repercussions of failing to hold sufficient retention funds are as yet unknown. There are no enforcement provisions in the Act, and the anticipated regulations have not been issued. There is a requirement to keep records, and the ability to request them as a creditor, but again no enforcement provision for breach. As a receiver’s role is to act for the creditor who appointed them, and the liquidator’s role is to represent all creditors equivalently, it is unclear who, if anyone, would take action on behalf of subcontractors whose retentions were not properly held.

In the meantime, where permitted by the construction contract, the principal may step in to the failed company’s role, and try to keep projects on track so that they can reach completion, and money will be available for everyone to be paid. Housing New Zealand has already indicated that it is discussing this for the Stanley Group projects.

If you have concerns about a construction project that you are involved in, or questions about the retentions scheme, please contact a member of our construction team.

 

Disclaimer: the content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.‚Äč

 

[1] Bennett, Fisk and Longman v Ebert Construction Limited (in receivership and liquidation) [2018] NZHC 2934