By Tim Bates and Sabina Boyd, Legal Vision
In the High Court decision of Bennett & Others v Ebert Construction Ltd (In Liquidation), the court was asked to consider the retention provisions of the Construction Contracts Act 2002, and a proposal to distribute 75% of the retention fund.
On July 31, 2018 the applicants were appointed the receivers of the respondent, Ebert Construction Ltd (EC), which was a large construction company.
The Construction Contracts Act 2002 (CCA) provides that in relation to commercial construction contracts entered into after March 31, 2017, a head contractor (ie EC) must hold sums required to be paid to a subcontractor (retentions), on trust for the subcontractor.
This was implemented as a response to head contractors using subcontractors’ retentions as working capital, leaving subcontractors as effectively unsecured creditors for the retention amounts.
EC had a retention account with a balance of approximately $3.6 million. However, at the date of receivership, EC owed its subcontractors approximately $24.5 million, of which $9.324 million was subcontractor retentions.
The general practice prior to March 31, 2017 was that EC would pay out subcontractor invoices after deducting amounts to keep for retentions, but would keep those deductions in their general account.
Subsequent to March 31, 2017, EC used computer software to calculate the amount of monies to be held on retention, and the amount to be kept in their general account.
However, in June 2018, the computer system malfunctioned, which led to the retention amount not being placed in the retention account, and subcontracts being incorrectly identified.
There were three main legal issues in this case, namely:
• Whether the applicants should be appointed by the court as receivers to manage and distribute the fund?
• Which subcontractors had a claim to the fund and on what basis?
• How to distribute the fund if, as expected, there was a shortfall?
Appointment of applicants
The court held that the applicants were entitled to administer the retention fund based on the court’s inherent jurisdiction to appoint receivers and managers, for the purpose of distributing retention funds.
It held that if the receivers were not appointed, this would mean the subcontractors would be affected in that they would not be able to recover any of what they were rightly owed.
Subcontractors’ claims and how to distribute the fund
There were three months of contentious retention funds (May, June, July 2018) and, therefore, it had to be determined whether the subcontractors with invoices rendered for these months had a claim in the retention fund.
In order to establish that a trust had been created/that the subcontractor for each specific month had a claim in the fund, the court had to be satisfied of three certainties:
• Intention to create a trust,
• Subject matters of the trust, and
• Object or beneficiaries of the trust.
With regard to the retentions that were calculated but not transferred to the fund, the court held that EC had no intention to transfer monies, as these would have been transferred had there been an intention to do so.
With regard to the retentions that were not calculated and not transferred to the fund, the reasons are the same as above, in that it lacked the element of intention.
With regard to retentions that were reconciled and transferred to the fund, all elements could be said to be satisfied, and therefore these subcontractors did have an interest in the fund.
With regard to the wrongly classified subcontractors, although EC intended to pay the funds into the retention account, the funds were never transferred.
The difficulty was that while EC intended to pay the funds, they were never actually transferred into the account.
The court agreed that as much as 75% of the retention fund could be distributed on a pari passu basis — meaning “equal footing” that describes situations where two or more assets, securities, creditors or obligations are equally managed without preference— to the qualifying subcontractors.
It is noted that even though most of this fund was distributed, around $21 million will still remain owing to the subcontractors.
Overall, the retention provisions have achieved little in this particular instance in terms of protecting the subcontractors’ interests.
Note: This article is not intended to be legal advice (nor a substitute for legal advice). No responsibility or liability is accepted by Legal Vision or Building Today to anyone who relies on the information contained in this article.