On Tuesday the High Court ordered that the receivers take charge of the retentions held by Ebert under the Construction Contracts Act (CCA) and distribute them to subcontractors entitled to share in the retention fund.

The Court’s decision is sensible and will hopefully result in payments being made to some subcontractors before Christmas. Below we look at the Court’s judgment and provide our comments.

Situation

On 31 July, BNZ appointed receivers to Ebert, a large construction company with 100 staff and over 150 subcontractors. At the time receivers were appointed, Ebert owed its trade creditors (including subcontractors) about $24.5m. The company held $3.7m in its retention account, with subcontractors owed considerably more. Liquidators were subsequently appointed to Ebert.

Court application

The receivers responsibly applied to Court for directions as to how the funds in the retention account should be distributed. The application was supported by Ebert’s liquidators. Two subcontractors responded to the application and both supported the application in principle. One subcontractor raised a concern about the haste of the application and the proposal that the receivers’ costs be paid from the retention fund. The other subcontractor supported the receivers’ proposal that costs should be approved by the Court.

Issues

The Court had to determine:

1. Whether the receivers should be appointed to manage and distribute the retention fund.
2. Which subcontractors had a claim to the fund and on what basis.
3. How to distribute the fund if there was a shortfall. 

Should the receivers be appointed to manage and distribute the retention fund?

The Court said “yes”. Legal ownership of the fund was with Ebert, but equitable ownership lay with the subcontractors. The receivers had no right to the fund and, in the absence of a court order, would not be entitled to administer it. The Court has an inherent power to appoint the receivers to manage and distribute the retention fund and it was appropriate that their costs be met from the fund (and reviewed by the Court).

Which subcontractors had a claim to the fund and on what basis?

Retention claims fell into four categories:

1. Reconciled and transferred retentions, totalling $3.7m and relating to 131 subcontractors in respect of 182 construction contracts on 19 projects.
2. Calculated but not transferred retentions, totalling $475,000 and relating to 80 subcontractors in respect of 97 contracts on 12 projects.
3. Uncalculated and not transferred retentions, totalling $380,000 and relating to 70 subcontractors in respect of 83 contracts on 12 projects.
4. Released but not paid retentions, totalling $69,000 and relating to four subcontractors. 

In determining these contested claims to the retention fund, the Court looked at the three certainties required for the creation of a trust:

• intention to create a trust
• subject matter of the trust; and
• object (or beneficiaries) of the trust

The Court found that only the reconciled and transferred retentions and the released but not paid retentions met the three certainties required for the creation of a trust. Because Ebert defaulted on its obligations under the CCA, the other categories had no claim on the retention fund. Ebert had no intention to place retention monies in trust when it did not make any retention deductions. Therefore subcontractors who fell within the category of calculated but not transferred retentions did not have any interest in the retention fund. The position was similar for uncalculated and not transferred retentions – no intention to create a trust and no compliance with the requirements of the CCA.

Subcontractors who were wrongly classified by Ebert as having pre-1 April 2017 contracts (the retention trust regime came into effect on this date) also unfortunately missed out on sharing in the retention fund.

As to interest on the retention fund, the Court made no decision but, given the significant overall shortfall, suggested that the pragmatic approach may be to ignore any interest component or use the interest to off-set the receivers’ fees and costs in administering the retention fund.

Outcome

The Court appointed the receivers of Ebert to manage the retention fund and ordered that they are able to make payments to subcontractors entitled to share in the fund on a pari passu basis and to make interim payments on the basis of 75% of nominal entitlement (or such other percentage as seems prudent to the receivers). The receivers are entitled to deduct their fees, costs and expenses from the fund, with their account to be approved by the Court.

Our comments

The Court has released a quick decision, no doubt in response to the receivers’ declared desire to distribute funds to subcontractors before Christmas. While some subcontractors receive a “win” from the outcome, many will be disappointed that Ebert’s failure to comply with the CCA means that they will not see any of their retentions. The receivers’ application would not have been necessary had the CCA prescribed what should happen to retention funds when insolvency practitioners are appointed to a retention holder. While the CCA makes it clear that a retention holder is not entitled to payment for managing a retention fund, court-appointed receivers are usually entitled to be paid out of a fund and it is reasonable for the receivers to be paid for stepping up and dealing with the fund. It would be helpful if the CCA was amended to deal with insolvent retention holders and to provide for consequences where the retention regime has been breached or ignored altogether. It will be interesting to see what, if any, action Ebert’s liquidators take in respect of this matter.

If you would like to know more about the High Court’s decision, please contact us.