11.05.2020

Administration of Retentions Trust: Oorshot v Corbel Construction

In 2018 the decision of Bennet & Ors v Ebert Construction Limited (in rec and liq) [2018] NZHC 2934 (Ebert) established an important precedent for the administration of retentions under construction contracts, confirming that retention moneys under commercial construction contracts are to held on trust for affected subcontractors.  Importantly, retentions are not “deemed” to be on trust.  On 8 April 2020, the High Court delivered another important judgment in Oorschot v Corbel Construction Ltd [2020] NZHC 723 (Corbel).  The Corbel decision closely followed the approach in Ebert. Importantly, the decision notes that a Liquidator cannot administer a retention fund as of right, and must apply to the Court and be appointed as Receiver and Manager of the Retention Fund in order to deal with retention moneys.

Our previous summary of the Ebert decision can be found here.

Background 

Corbel was a construction company that was involved in projects primarily in Auckland and Christchurch. Corbel was placed into liquidation by its shareholders.  Mr Oorschot (the applicant in the proceedings) was appointed as liquidator of Corbel on 3 December 2018.

At the date of liquidation, Corbel held a retention fund which totaled to $109,871.76 (the Retention Fund) in accordance with Corbel’s obligations under the Construction Contracts Act 2002 (the Act). However, the Retention Fund did not have sufficient sums to satisfy the claims of affected and entitled subcontractors once Corbel was put into liquidation.

Mr Oorschot filed an application with the High Court seeking orders and directions in relation to the administration of the Retention Fund as follows:

  1. That Mr Oorschot should be appointed as Receiver and Manager of the Retention Fund;
  1. That Corbel holds the Retention Fund on trust for the subcontractors under commercial contracts entered into after 31 March 2017 in accordance with ss 18A and 18I of the Act;
  1. As Receiver, that Mr Oorschot should be entitled to administer the Retention Fund and distribute moneys to the subcontractors with valid claims; and
  1. That Mr Oorschot should be allowed to deduct costs and expenses which he incurred in administering the Retention Fund in his capacity as Receiver. 

The Decision 

In applying the Ebert decision, the Court had no difficulty appointing Mr Oorschot as Receiver and Manager of the Retention Fund for the purpose of distributing the retention moneys held on trust for the entitled subcontractors.  In doing so, the Court noted that there was “no obvious conflict” between Mr Oorschot discharging his duties in his capacity as both a liquidator and Receiver of the Retention Fund. This outcome is important as without a Court order, Mr Oorschot would not be entitled to administer the Retention Fund under the Act since retention monies (being held on trust) is not property of the company and therefore falls outside the Liquidator’s usual powers.

The Court also confirmed, following the approach in Ebert, that it was appropriate to allow Mr Oorschot to recover “such reasonable costs” as relate to the administration of the Retention Fund. Mr Oorschot was allowed to deduct $18,698.64 as reasonable costs incurred in administering the Retention Fund. Importantly, if Mr Oorschot was not appointed as Receiver and Manager, he would be precluded by section 18E of the Act from deducting any costs or expenses. The Court made the observation that there would be no “prejudice” to the affected subcontractors in allowing Mr Oorschot to deduct such reasonable costs and expense. This point illustrates that the exercise of the Court’s discretion will always be balanced against the interests of the affected subcontractors.

Outcome 

Consistent with the approach in Ebert, the Court permitted Mr Oorschot, as Receiver, to make a distribution to entitled subcontractors who fell within the categories of “Calculated and Transferred Retentions” and “Released but Not Paid Retentions” in accordance with ss 18A and 18C(1) and (3) of the Act.  The distributions were to be made by way of interim distribution in accordance with the terms of the relevant subcontract, the Court orders, and the Act. 

Takeaway points and Implications 

As with the Ebert decision, the Corbel decision illustrates that contractors (and subcontractors) will only be protected to the extent that the retention holder is responsible and diligent in its handling of retentions.  Contractors have a limited safeguard of a right of inspection under the Act.

While the Ebert, and now Corbel, approach remains in place, it is important that contractors are aware of the risks associated with retentions being held by Principals.  In late 2019 MBIE commenced a review into the retention regime under the Act.  We support a thorough and robust review which substantively evaluates the retentions regime under the Act and other potential options, including whether retentions are appropriate at all.  We encourage all participants in the industry to provide input to the review process.

If you have any questions in relation to the retentions regime under the Construction Contracts Act or insolvency in the construction industry, please get in touch with our Construction Team or your usual contact at Hesketh Henry.  

 

Disclaimer:  The information contained in this article is current at the date of publishing and is of a general nature.  It should be used as a guide only and not as a substitute for obtaining legal advice.  Specific legal advice should be sought where required.

 

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Kerry
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