Retentions reform Bill introduced

The Government laid out the key changes last June and we have been waiting for the Bill’s introduction to get a better grip on the detail.

There is a lot to absorb. We run through the main elements. 

Commentary

The Bill deals with many of the problems which have bedevilled the existing regime, but may give rise to issues of its own if passed in its current form. We identify the key takeaways below.

• A statutory trust arises as soon as retention money is retained, regardless of whether actual cash is set aside. This prevents subcontractors missing out if a non-compliant retention holder becomes insolvent – as happened with Ebert Construction Ltd. But if no cash is set aside, where are the trust assets? The Courts will likely answer that question by reference to decisions related to a similar statutory trust in section 167(1) of the Tax Administration Act 1994.
• If a payer fails to pay an amount due under a construction contract, the payer must set aside the retention portion of that amount on trust for the payee. Given the new penalties discussed below, directors of struggling construction companies may find themselves personally liable to pay a fine if there is no money to set aside.
• Reporting requirements will now be written into the statute. These were meant to have been prescribed by regulation, but that never happened. There is, however, a lack of clarity which we hope will be dealt with at the select committee stage.
  • On the one hand, reporting must be provided with every payment schedule, which could mean monthly if the contract provides for monthly payment claims (amendment to section 21), but
  • on the other hand, reporting is to be provided at least once every three months, whether or not a payment schedule is required (new section 18FD). It is unclear whether this must be provided in addition to the reporting contained in the payment schedule.
  • We think that in practice most contracts will end up with monthly reporting and we wonder whether this was the intention of the drafters.
• Directors will be personally liable for fines up to $50,000, and firms will be liable up to $200,000.
• Receivers and liquidators will automatically become trustees of retention money. This makes sense for liquidators who are tasked with winding up the affairs of the company, but may be controversial for receivers who are tasked with realising value for the appointing secured creditor.
• The legislation is also unclear about who will be responsible for administering the retention trust when multiple insolvency practitioners are appointed to a company (i.e. more than one receiver or a receiver and a liquidator).

Key changes

Provisions in the Construction Contracts (Retention Money) Amendment Bill include:

• amending the definition of ‘Retention Money’ to include any amount withheld, and the retainable portion of an amount the payee is liable to pay but does not pay
• all the rules of the common law and equity relating to trusts apply to retention trusts. This means that:
  • party A must keep the retention money separate from other money and assets
  • in dealing with the retention money, party A must act in the best interests of party B
  • party A cannot use the retention money except:
    • to remedy any defects in the performance of party B’s obligations under the contract, and
    • to pay party B when required by the contract, and
  • if party A goes into receivership or liquidation, the retention money cannot be taken by the receiver or liquidator to meet party A’s other debts
• retention money must be held in a trust account in a registered bank in New Zealand or in the form of a complying instrument (such as an insurance policy or guarantee) that requires an insurance company, a bank, or another prescribed issuer to pay to party B an amount equal to the retention money if party A does not pay the retention money to party B when required by the construction contract
• party A must keep all of party B’s retention money under a particular contract in the same account. There can be other retention money in the same account. The bank account cannot be used for any other purpose. If a single account is used for multiple party’s retention money, party A must keep proper accounting records showing to which party and which contract each payment into or out of the account was made
• retention holders must issue regular ‘transparency reports’ (as soon as practicable after money is first retained and then every three months) so that payees can be satisfied that the responsibilities imposed in the Act are being met and that their rights are protected. Currently the documentation is only available on request
• if party A withholds retention money, or already holds retention money on behalf of the payee, any payment schedule must include the details required in such ‘transparency reports’
• if party A is the Crown, the retention money must be held in accordance with the provisions in the Public Finance Act 1989 instead of the provisions of this Act
• failing to comply with retention obligations is an offence which will attract maximum penalties of $200,000 for firms and $50,000 for company directors. There is a defence to liability if the defendant proves:
  • that party A took all reasonable steps to ensure that it complied with its obligations, or
  • if the defendant is a director, that they took all reasonable steps to ensure that party A complied with its obligations.
• failing to keep proper accounting and other records of all retention money and failing to issue regular ‘transparency reports’ are both offences with a maximum penalty of $50,000
• if party A becomes insolvent, the receiver or liquidator becomes trustee of the retention money for the purposes of collecting and distributing it (and is entitled to be paid reasonable fees and costs from the trust). The retention money is subject to the trust and cannot be used to meet party A’s other debts, thereby protecting the Contractor from party A’s creditors, and
• the amendments will only apply to construction contracts entered into after this Bill commences or entered into before that date but amended afterwards. However, the new sections 18J to 18L (which relate to receivership and liquidation) apply in all cases if party A goes into receivership or liquidation after this Bill commences.

Next steps

There will be an opportunity to submit on the Bill when it goes to select committee. We are happy to assist you with the preparation of a submission.

Our thanks to Jack Edmond for writing this Brief Counsel.