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 – Photo©123RF.com
The scraps – recent decision on retentions in the Ebert case – By Ariana Stuart and Joseph Bergin
The High Court has recently released its first decision on the new retentions regime, which came into force on 1 April 2017, in the case of Bennett, Fisk and Longman v Ebert Construction and others.
Under the amendments to the Construction Contracts Act 2002 (CCA), retentions levied under a commercial construction contract must now be held on trust
(either by the principal for the head contractor, or – as in this case – by the head contractor holding retentions on trust for its subcontractors),
and not used as working capital, unless the party holding them arranges a bond or other such ‘complying instrument’.
In this case, Ebert’s receivers (Lara Bennett, John Fisk and Richard Longman of PwC), who were appointed by BNZ back in July, sought direction from the court as to how the funds in Ebert’s retention account should be distributed, as they intended to begin distribution before Christmas. The application was supported by Ebert’s liquidators and two of the 152 subcontractors who potentially had a claim against the retentions account.
At the time the company went into receivership, it held $3.7 million in its retention account, which constituted the company’s only significant cash asset, and fell well short of the $9.3 million in retentions it owed. In addition to these retentions, when Ebert closed its doors it owed its trade creditors more than $24.5 million.
The retention monies
The court categorised the retention monies into four different categories:
Reconciled and transferred retentions: these related to invoices post 1 April 2017 and up until the last deposit into the retentions account in June 2018. Totalling $3.7 million, these related to 131 subcontractors across 182 construction contracts on 19 projects.
Calculated but not transferred retentions: these were incurred from June 2018, but which were not set aside in the retentions account. These retentions totalled $475,000 and related to 80 subcontractors across 97 contracts on 12 projects.
Uncalculated and not transferred retentions: these were for work undertaken in July up to the time the company was put into receivership, but where retention sums were not reconciled on Ebert’s books, nor transferred into the retentions account. This amount came to $380,000 and related to 70 subcontractors across 83 contracts on 12 projects.
Released but not paid retentions: These were retention sums that Ebert had recorded in its financials as being ‘released’ to subcontractors, but which in fact had not been transferred to them. In total, this remaining $69,000 related to four subcontractors and remained in the retentions account.
In addition, Ebert’s financial accounts recorded a further $4.9 million of retentions owed for contracts entered into before the new retentions regime came into force on 1 April 2017. The court recognised that despite these amounts having been deducted from subcontractor invoices, they were not covered under the new regime, and so Ebert had not been obliged to hold them on trust. Those retentions had been held in the firm’s general account and therefore had ceased to exist, given the absence of funds in that account as at the date of the receivership.
Determining distribution of the retentions
In determining these contested claims to the retention fund, the court looked at the three components required for the creation of a trust:
- • The intention to create a trust
- • The subject matter of the trust
- • The 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 components 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 set aside any amounts for retentions. Therefore subcontractors who fell within the category of ‘calculated but not transferred’ retentions did not have any right to access the retention fund. The position was similar for ‘uncalculated and not transferred’ retentions – there was 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) unfortunately missed out on sharing in the retention fund.
The court has appointed the receivers of Ebert to manage the retention fund and has ordered that they are able to make payments to subcontractors entitled to share in the fund on a pari passu (‘equal footing’) 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 own fees, costs and expenses from the fund, with their account to be approved by the court.
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.
Ariana Stuart is a senior associate and Joseph Bergin a solicitor within the construction law team at Kensington Swan kensingtonswan.com