RETENTIONS - DEALING WITH ISSUES OF TRUST(S)...

By Alan Johnston November 16, 2018 Full Credit

Some key outtakes on retentions from the Ebert Construction case.

The industry blinked when Ebert Construction went into receivership on the first day of August.

Three months later and the general disquiet about this case and what it means for some of the Ebert subbies in terms of retentions has been renewed following a High Court Judgement from Justice Churchman of 12 November.

We’ll return to this below (see the full judgement here) but let me backtrack a little for a moment.

 

PROTECTING RETENTIONS

In March 2017, Parliament’s Commerce Committee reported back on the Regulatory Systems (Commercial Matters) Amendment Bill (RSB) to clarify requirements for protecting retention money in construction contracts.

New requirements for protecting retention money came into effect on 31 March 2017, as set out in the Construction Contracts Amendment Act 2015 (CCAA).

The CCAA’s retention money provisions were designed to ensure payment of retention money to subcontractors, even in the event of insolvency while the RSB clarified that these provisions will only apply to contracts entered into, or renewed, on or after 31 March 2017.

The Commerce Committee also recommended an alternative option for protecting money.

Thus, developers and head contractors who chose to withhold retention money would have two options:

  1. The default option – holding retention money on trust in the form of cash or other liquid assets readily converted into cash.
  2. The proposed new option – obtaining insurance or a payment bond (about which there would be strict requirements) to provide third-party protection of retention money.

However, although Ebert Construction opted to hold retention funds on trust, the sum held in the Retention Fund were short of where they should have been.

The key reason for this was because there had been no reconciliation of the fund or further allocations to the Fund in the two months prior to receivership, even though Ebert took on more projects, and hired more subcontractors during this time.

However, Justice Churchman has ruled that the subcontractors who were hired and working during this period hadn’t been paid anything to that point, therefore there were no retentions applied to their (non) payments and they weren’t entitled to a share of the existing Fund.

Tough on these 70 subbies!

Even those subbies that Ebert “wrongly classified” (see the full judgement here) and were therefore disadvantaged by the company’s poor accounting won’t be party to any payout from the Fund.

This is particularly galling for them because, in these instances, although money was deducted, it never made it to the Fund!

 

ITEMS OF MEANING

Other than that, there are a few items of meaning in the recent judgement:

Paragraph 62 clarifies the failings of the legislation, as identified at the outset.

The redemption funds are “deemed to be held in trust…”

In other words, the head contractor (Ebert) only had an obligation to hold the funds ON trust, not IN a Trust.

There is always going to be a problem when working capital becomes scarce and a bank account holding retention monies is close at hand...

Also of note is the fact that the receivers of the company (PWC) did not have access to the Retention Fund as a matter of course.

A separate receivership action had to be taken to actually put the Fund into receivership.

I don’t think many people would have been aware that this was a required action.

This makes sense though, since the receiver is only acting on behalf of the General Security Agreement holder (in this instance the BNZ) and they should have no rights to the Retention monies.

I also note that, when action needed to be undertaken to administer and receive these funds, and a funding pool was requested, only two subbies applied out of the 130-odd eligible.

It is a case of “double jeopardy” where the subbie has already been disadvantaged monetarily, but then faces the double whammy of having to find further funds to contribute to this case, which was to challenge the rights of the receiver to the monies held in the fund, and have a chance of getting some of his original debt back!

Paragraph 63 clarifies earlier concerns I had, that the intent of the legislation was not backed up with adequate wording to clarify the position:

“….there were gaps in the legislation and the language used was imprecise”, says Justice Churchman.

 

ITEMS OF INTEREST

Justice Churchman’s ruling this week does not address the issue of whether Ebert had sufficient funds in its retention account– in fact this case does not involve Ebert or its Directors (it is merely to determine entitlement to the Retention funds).

However, it does throw up some interesting points that subbies and others need to be aware of:

  • Only sub-contractors that have received a payment statement outlining the retentions that are being held on their behalf have a chance of getting any money in a receivership / liquidation.
  • Even those subbies who have received a payment statement outlining that retention funds have been deducted cannot be sure that these funds have been transferred to the appropriate Retention Account or that they will share in any future payout from the Fund in the event of insolvency.
  • Even in the event a Retention Fund is “fully funded” so to speak, the necessity to appoint separate receivers to this fund (and their entitlement to take fees and disbursements from the fund before payouts), means there will always be a shortfall for subbies of some amount.
  • One way the subbie can be truly comfortable that their retention monies are protected in a Fund is by taking up their “audit rights”. Sadly, my perception is that this will never happen, much in the way the subbies seldom insist upon, or fully utilise, their rights under the Construction Contracts Act.

 

IS THERE A BETTER OPTION?

To my way of thinking, the best option is for subbies to insist on and for contractors to agree to take out retention insurance, which means that:

  • The contractor is qualifying their financial stability (they won’t get the insurance if they are financially unstable).
  • The contractor then doesn’t have to tie up working capital by putting money aside in a Retention Fund.
  • The subbie knows the insurance is in place and that he is dealing with a viable and responsible contractor.
  • The subbie is designated as the beneficiary, for the specific amount of his retention.

That would make for a good night’s sleep, all round!

 


Regular NZ Hardware Journal columnist Alan Johnston is General Manager of CreditWorks Data Solutions Ltd, and has been involved in credit management for 35+ years.

CreditWorks are recognised by the NZ Leaders organisation as Industry Experts.

Email Alan at alan.johnston@creditworks.co.nz or call him on 09 520 8133 to find out more.

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