Retentions, subcontracts and trusts - Lessons from Ebert Construction
The number of construction companies which have recently collapsed has brought into focus the issue of retentions. A recent High Court decision has shed light on why sub-contractors need to be aware of their rights to retentions under the Construction Contracts Act 2002 (‘the Act’) The Act provides that for any construction contract entered after 31 March 2017, all retention money must be held by the contractor on trust for the benefit of the sub-contractor. The trust continues until either the money is paid to the subcontractor, the subcontractor agrees to surrender it, or the money ceases to be payable to the subcontractor.
In Bennett and Ors v Ebert Construction Limited (in receivership and liquidation)  NZHC 2934 the receivers applied to the Court for directions as to how retentions should be distributed. Ebert held $3.7m, but owed $9.3m.
The Court held the following:
A trust does not arise automatically under the Act. The trust must be intentionally formed, with certainty about its property and its beneficiaries.
In order for a trust to arise, the calculation of the retention amount was not enough: there must be actual payment, with only the retention withheld.
Retentions need not be held in cash, but can be held in other liquid assets. There is also no requirement that the funds be held in a separate account - they may be co-mingled.
Receivers appointed under a GSA would, in many cases, not be able to administer the retention monies without a Court order. There is a conflict between the interests of the creditor and those of the subcontractors.
For those subcontractors who were able to demonstrate an interest in the trust fund, they were entitled to share in the proceeds on a pro rata basis.
Key take aways:
Insolvency practitioners should be conscious of the potential conflict of interest that can arise when considering retentions under contracts that post-date 31 March 2017.
Contractors handling retentions should take steps to ensure that a trust fund is properly established – the Act doesn’t do it automatically.
Sub-contractors should also enquire of head contractors about what steps have been taken to ensure that the Act is being complied with. They are entitled to inspect trust instruments and accounts under s 18FC of the Act.
If you are in a situation where you owe or are owed retentions (including if you are a liquidator or receiver), and want to discuss what this decision means for you, please contact our team who will be happy to talk it through with you.