An improved ‘Mark II’ retentions scheme, to come into effect on 5 October this year, will remedy the weaknesses of the Mark I version – providing more security for contractors in the event of insolvency and a clearer definition of what constitutes retention money.
We set out the new requirements in detail and will be happy to provide advice on your compliance obligations.
The changes were legislated for in the Construction Contracts (Retention Money) Amendment Act, which was passed by Parliament last week. They provide that:
- An amount becomes retention money at the point where the construction contract allows it to be withheld from party B;
- Retention money must be held on trust separately from party A’s other money and assets and must be paid into a bank account in a registered New Zealand bank, or held in the form of a complying instrument, such as an insurance policy or guarantee;
- Holders of retention money must comply with a number of accounting and reporting requirements intended to ensure that party B is kept aware of the status of its retentions; and
- Party A must follow contractual procedures and provide notice prior to using any retention money.
New penalties will apply for failure to keep retention money as required, and for non-compliance with accounting and reporting requirements, with liability extending to both the retaining entity and its directors.
Use and management of retention money
Retention money must be held separately from the retention holder’s other money and assets:
- in a compliant bank account at a registered bank in New Zealand; or
- in the form of a complying instrument.
This must occur as soon as is practicable.
The retention trust established under the CCA comes to an end when the retention money:
- is paid to party B;
- is released from any claim in writing by party B;
- is used to remedy defects in the performance of party B’s obligations under the construction contract; or
- otherwise ceases to become payable to party B.
Compliant bank accounts
Party A as account holder
A bank account is considered compliant where:
- the account holder is party A in its capacity as trustee of the retention money;
- party A has informed the bank that the account is for the purpose of holding retention money under the CCA; and
- the account is used solely for the purposes of holding retention money.
An account can, however, hold retentions of more than one party B and/or hold retentions under more than one construction contract.
Alternative party as account holder
Retentions can also be held by certain classes of account holders being: a lawyer or an incorporated law firm; the Public Trust; a trustee company; a chartered accountant; a person holding a licence under the Auditor Regulation Act 2011 or such other person as prescribed by regulations.
Party A must inform the account holder that the money to be held in the account is retention money held on trust by party A under this Act.
The requirements relating to these are unchanged from the original legislation.
Use of retention money
Retention money may only be used where:
- the purpose is permitted under the contract and the relevant contractual procedure is followed; and
- party A gives party B written notice at least 10 days prior to use, setting out details of the defect to be remedied, and party A’s intention to use the retention money for that purpose.
Any interest earned on retention money held is the property of party A unless the construction contract specifies otherwise.
Accounting and records requirements
Party A must keep accounting records of all retention money. Such records must:
- include details of all bank accounts or complying instruments in which retention money is held for Party B;
- be appropriate having regard to the amount of retention money and the circumstances of the case;
- include any other information required by (currently non-existent) regulations and kept in a way that is compliant with any regulatory requirements; and
- be made available to party B for inspection at all reasonable times and without charge.
Accounting requirements for bank accounts
Where party A elects to hold retentions in a bank account, the records must:
- identify the bank account as a bank account in which retention money is held for party B;
- identify the construction contracts under which that money is retained;
- include details of all payments into and out of the account;
- identify if the bank account holds retention money for multiple party Bs; and
- if applicable, comply with the ledger requirements set out below.
Bank account ledger requirements
Where an account holds retentions for more than one party B, or more than one construction contract, separate ledger records must be kept for each party B and/or construction contract.
Such ledger records must identify the party B and the construction contract to which it relates, and must record each relevant payment in or out of the account.
Accounting requirements for complying instruments
Records for complying instruments held by party A are required to include a copy of each instrument, and for each instrument:
- a record of party B’s interest in the instrument, including the protected amount;
- if the instrument is also held for the benefit of one or more party Bs:
- for each of the parties, a record of their interest in the instrument and the protected amount; and
- the total of all protected amounts under the instrument; and
- if the issuer’s liability under the instrument is limited, details of that limitation;
- evidence that the premium or other money that is, or that may become payable to the issuer has been fully paid by party A; and
- a record of any failure to comply with the terms and conditions of the instrument.
Party A must provide to party B:
- each amount retained, the construction contract under which it is retained, and the date of its retention;
- the total amount of retention money held by party A for party B under each construction contract held between them;
- the account or instrument details for any bank account or complying instrument in which any of the retention money is held; and
- a statement that party B may inspect the accounts and records required to be kept by party A.
This must be reported as soon as practicable after an amount becomes retention money held for party B, and at least once every three months until the retention money trust ends.
Penalties for failure to comply
Penalties for non-compliance include fines of up to:
- $200,000 for failure to keep or use money as required;
- $50,000 for failure to keep accounting records as required; and
- $50,000 for failure to provide regular reports on retentions held.
Each director of party A may also be personally liable for a failure to keep retention money as required. A director may be fined up to $50,000. Fines can be cumulative for multiple breaches.
A defence to liability for failure to keep and use money in the manner required is that all reasonable steps were taken both by Party A and by the directors of Party A to ensure compliance.
Special thanks to Andrew Smylie for writing this Brief Counsel.