18/06/2021·4 mins to read
Reinforcing the retentions regime: Amendments to the Construction Contracts Act 2002
The Construction Contracts (Retention Money) Amendment Bill (Bill) aims to strengthen and clarify the retention money regime under the Construction Contracts Act 2002 (Act).
The Bill is a response to issues identified in Bennett & Ors v Ebert Construction Limited (in receivership and liquidation)  NZHC 2934.
Submissions on the Bill are being accepted up to 23 July 2021.
If passed, the Bill will:
deem (rather than require) retention money to be held on trust;
require that retention money held on trust is kept separate from other money or assets;
require retention money to be held in a trust account with a registered bank in New Zealand, or in the form of complying instruments (such as an insurance policy or guarantee);
impose record-keeping and reporting obligations on the trustee payer;
introduce offences and penalties for trustee payers and their directors; and
- make receivers and liquidators of payers themselves trustees of retention money trusts, and permit them to collect their reasonable fees and costs for acting as such.
Problems with the existing retention regime
Significant shortcomings in the existing regime exposed in the Ebert Construction receivership included:
the regime only applies when retention funds are calculated and deducted from an actual payment to a payee, such that where a payer (eg a head contractor) fails to meet a payment obligation, the retention money regime offers no protection to payees (eg subcontractors); and
- retention funds are held beneficially for payees, meaning that such funds fall outside of the insolvent estate of payers. This creates complications for the administration of the retention funds when the payer enters into receivership or liquidation.
A stronger regime
The Bill, if passed in its current form, makes several improvements to the Act, addressing the shortcomings identified in Ebert.
- Widening the retention money definition: The updated retention money protections apply from the time that a payer makes a payment and withholds an amount as security, or is liable to pay. These amounts become ‘retention money’ regardless of whether they have actually been calculated, set aside, recorded in a payment schedule or paid.
- Retentions are deemed to be held on trust: All retention money will be deemed to be held on trust. This means that payees will not need to rely on their payers actively declaring a trust in their favour in order to claim an interest in the retention fund.
- Separate trust account or complying instruments: All retention money must be held either in:
- a separate trust account with a New Zealand registered bank; or
- in the form of complying instruments (such as an insurance policy or bank guarantee).
Payers can have one retention money trust account for multiple construction contracts or multiple contractors (ie payees). However, where the account is for more than one payee (under one or more construction contract) all construction contracts must be identified and separate ledger accounts identifying each payee and construction contract must be kept.
Record keeping and transparency reporting: As well as mandatory accounting obligations, the Bill also provides for mandatory reporting obligations on anyone who deducts retention money. These obligations apply when the money is first retained, and then at least every three months.
Penalties: Failure to hold retentions in accordance with the retentions regime may result in a maximum penalty of $200,000 for a company and $50,000 for each director. Lesser penalties apply for failures to report or keep proper accounts and records.
- Receivership and liquidation: If the payer enters into receivership or liquidation, then the receiver or liquidator (as relevant) automatically becomes the trustee of each retention money trust, will be required to manage and distribute the retention money, and will be entitled to meet his or her reasonable fees and costs from the retention fund.
Implications for the construction sector
Missing out on retentions can significantly affect business risk for payees (sometimes representing the entire profit margin on a contract), and cause downstream insolvencies. Strengthening the retentions regime is therefore a positive step.
Separate trust accounts
Payers will need to discuss with their banks the requirements of the retention money trust accounts, and when funds can be withdrawn from these accounts.
It is unclear whether for a corporate group of companies, or a local authority in relation to its council controlled organisations, each subsidiary, or each CCO, will need to have their own retention money trust account, or whether this can be held by a parent company or Council as custodian for its subsidiaries and CCOs. We believe that this should be clarified.
The Bill requires reporting on withheld/retainable amounts as soon as practicable, and envisages that this may be done in the payment schedule. The payment schedule will need to indicate not only the amount deducted but also other required information, including bank account details, a statement as to rights of inspection and any other information that may be specified in regulations.
This requires far more information than is currently common in industry payment schedules, and many payment schedules and contract administrative processes will need to be changed as a result.
We expect the impact of the new regime on construction contracts based on NZS 3910 (and other contracts), will result in:
greater use by principals of bonds in lieu of retentions (which are not subject to the retention money provisions). While NZS 3910 provides for bonds, it does not adequately deal with when these bonds can be called on, partial release of bonds on practical completion or use of cash proceeds; and
- contract amendments to clarify when retention money can be used by payers. A payer may use retention money to remedy defects in the performance of a payee’s obligations, but only to the extent permitted by the construction contract.
The review of NZS 3910:2013 that is currently being scoped provides a potential forum for considering and addressing these matters.
Implications for insolvency practitioners
Automatic appointment as trustee
The Bill does not currently provide receivers or liquidators appointed to principals or contractors with an opportunity to consent to their appointment as trustee.
Although receivers and liquidators must consent to their appointments, where receivers and liquidators are appointed to the property of a principal or contractor, the Bill appears to assume they have also implicitly consented to their positions as trustees of retentions money trusts.
In many cases, a prospective receiver or liquidator will be aware that a principal or contractor holds retention money on trust and therefore the imposition of personal trusteeship should not come as a surprise. However, such information may not always be available prior to taking the appointment - particularly for principals not regularly engaged in the construction sector. Insolvency practitioners should, to the extent possible, conduct pre-appointment due diligence to ensure that retention money trusts are identified.
Trusteeship comes with obligations and duties that, under the general law and the Trusts Act 2019, will apply to receivers and liquidators appointed as trustees of retention money trusts.
We consider that there could be situations where a receivers’ or liquidators’ duties (in that capacity) and his or her duties as trustee could conflict - particularly if it is not clear which money has been deemed to be subject to a retention money trust.
Exploring other options
While it will be cost-efficient for receivers or liquidators of the payer to also administer the retention fund, it seems unnecessary and potentially unhelpful for insolvency practitioners to personally act as trustee. We consider that there is merit in considering other options including, for example:
leaving the payer as the trustee, but entitling a receiver or liquidator of that payer to become the receiver or liquidator of the retention money trust and permitting them to deduct their reasonable fees and costs from the fund itself (essentially achieving the outcome reached in Ebert); or
- leaving the payer as trustee but expressly authorising a receiver or liquidator to administer the retention money trust (also permitting the receiver or liquidator to deduct their reasonable costs from doing so).
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