The recent judgment in Grant v Burt [2025] NZHC 2486 highlights issues that can arise in relation to recovered retention payments when construction companies go into liquidation.
It is common under construction contracts – including both head contracts and subcontracts – for a portion of the contract price to be withheld as a retention for an agreed period in case defects are later found in the works.
The Construction Contracts Act 2002 (CCA) provides that retentions funds must be held on trust. This ensures that where the company holding the retention fails before the retentions are paid out the trust funds are available to be paid out to the specific contractor or subcontractor that they were being held for, rather than being used to pay other debts of the company.
Stanley Construction Ltd (in liquidation) (SCL) and Stanley Construction (Auckland) Ltd (in liquidation) (SCAL) were two related construction companies that went into liquidation in 2019. The companies were not holding the retention funds that they were obliged to hold for subcontractors on trust, even though the CCA required them to do this.
Claim alleging breaches
The liquidators commenced a claim against the directors of SCL and SCAL alleging breaches of the duties of the directors under the Companies Act 1993 with regards to the companies’ failure to retain the subcontractors’ retentions on trust for the subcontractors (as required by the CCA).
The liquidators received some funds from a partial settlement of this claim and also obtained some retention funds that were paid out by principals to SCL and SCAL. However, the liquidators applied all these funds towards their own remuneration and expenses incurred in respect of the liquidations generally. This meant that there were still no funds available to pay the retentions due to the subcontractors or to pay claims from any other creditors of the companies.
The first version of the CCA retentions regime took effect from 31 March 2017 and shortly before this date the directors of SCL and SCAL had passed a resolution declaring that any retentions funds paid to the company by principals were to be held on trust for subcontractors.
The court’s findings
The court said that the obligations of the principals under head contracts to pay retentions to SCL or SCAL were transformed into liquid assets of those companies, as accounts receivable, at the point in time when the terms of the head contracts required release of the retentions. The statutory trust arising under the CCA then applied to these accounts receivable, so these funds were held on trust for the subcontractors.
With regards to the payments received as settlements in the claims against the directors, even though the claims against the directors were for breaches of the Companies Act 1993 the substance of the allegation was that the directors assisted SCL and SCAL to breach their obligations as trustees so the settlement payments were a restoration of trust funds that were also held on trust for the benefit of the subcontractors.
The court reversed the liquidators’ decision to use all of the companies’ recovered retentions and the settlement funds to pay liquidators’ costs and expenses. However, the court will consider at a later hearing whether the liquidators should be reimbursed their reasonable remuneration and expenses incurred in respect of the proceedings against the directors.
Key Points
The retentions regime under the CCA has been reformed since SCL and SCAL went into liquidation so there are now improved protections. However, contractors and subcontractors who are having retentions withheld under construction contracts should still be taking steps to understand their rights and check that any retentions are being held on trust, as per the CCA requirements.
It is vital that directors of any company withholding retentions funds ensure that the funds are being held on trust in compliance with the CCA regime because if they are not then the directors may be personally liable and/or face a fine of up to $50,000.
Under the current CCA retentions regime passed in 2023, the receiver or liquidator will automatically become the trustee of the retentions fund and be entitled to have their reasonable fees met from the retention funds. For liquidations and receiverships operating under the older regime – as in Grant v Burt, the liquidator or receiver may still be entitled to be reimbursed for the costs and expenses of administering the trust funds as trustee.
- Our Building and Construction team are experts on contract law so please contact them if you have questions on retention payments or any other aspects.
