Retentions law reform in sight as Stanley-Tallwood liquidator plans director deal
The liquidator for Stanley Group, Tallwood Holdings and associated companies wants to cut a deal with its directors and get them to pay subbies to make up for the lack of retentions held.
And as he does so, the building and construction minster Jenny Salesa says she will soon make an announcement about strengthening the retentions regime, having sought advice from officials.
Subcontractors owed money by the group of construction companies are fuming after liquidator Damien Grant told them last month that no funds had been properly set aside for them, despite it being a requirement under the law.
Grant’s initial reports estimate a shortfall of more than $16 million within the group of companies.
Fresh from cutting a deal with Housing NZ, which enabled the government department to directly pay the subbies, Grant now reckons he can get the directors to sign a deal to pay the remaining amounts owed to the subbies, if the receiver forgoes the right to sue them.
“As liquidator acting in the interests of the retention creditors, I will seek to do a commercial settlement effectively between the directors and the retention creditors.”
Grant told BusinessDesk that, since March 2017, about $900,000-$1.3 million that should have been held in retentions, and the exact amount is still being calculated.
The liquidator said he thinks he can get a deal done within months, but won’t give any more details.
Under the rules in force since March 2017, some money is meant to be held back from a payment made under a construction contract, to protect the subcontractor.
This retention money is supposed to be held in trust but, despite Labour MPs' objections when the Construction Contracts Act was passed, the legal meaning of this doesn’t require a separate bank account.
BusinessDesk has viewed emails between several different subcontractors and Stanley Group executives, sent in the months leading up to the liquidation, reassuring them their money had put aside in compliance with the Act. Under the law, subbies have the right to inspect the main contractor’s trust accounts.
The Stanley executives provided tables which showed specific jobs and had a separate column stating “held in trust.”
Grant says Stanley’s directors told him their bonds worth $1.8 million could be considered to be held on trust. The directors also claimed the Stanley companies were owed retentions from other companies.
The liquidator says the bonds weren’t liquid enough to be considered properly-held retentions, and some hundreds of thousands of dollars in cash was intermingled with other funds. Stanley managing director Kevin Stanley refused to comment, telling BusinessDesk it is not a matter to be litigated in the press.
Creditor Dave Burt of Team Cabling says he is urging other creditors to contact the Serious Fraud Office and police to complain about the lack of retentions. Failure to comply with trust law is ultimately a crime that directors could be jailed for.
Burt is collecting funds for a legal action although it is very early days.
Because the law is so new, - although the Act itself was passed in 2002, it was amended in 2015 to specify what should happen to retentions - there is little precedent on how to deal with failed companies where retentions aren’t held properly.
Following the collapse of Ebert Construction, it was discovered that its directors, up to a period, had diligently put some money in a separate account, but there were some subcontractors who didn’t get their retentions because of mislabelling and non-compliance closer to when the company went under.
While the Ebert situation was referred to the Ministry of Business, Innovation and Employment, the government agency said that the Crown hasn’t taken any criminal prosecutions in relation to retentions.
“To take a criminal case, the sub-contractor would need to provide evidence to establish that there was an intention to defraud them,” the department says in an emailed response to questions.
MBIE has, however, commissioned KPMG to review the “implementation and operational effectiveness” of the retentions scheme. The ministry says the review wasn’t in response to any failures but it has “considered” the downfall as Ebert as part of the review.
Minister Salesa says she has asked officials about how to strengthen the regime with the act, and hopes to make announcements alongside the release of the report.
“My key consideration is ensuring hard-working subcontractors can get on with the job of building the houses, schools and hospitals our country needs,” she adds.
BDO’s 2019 construction survey found that only 30 percent of subcontractors actively inspect their head contractors' trust records, and that of those who did ask to inspect, almost half found one customer was not holding funds in trust.
The survey found that 72 percent of respondents held cash in a separate account in trust, while 28 percent said they had sufficient cash.
In 2015, then opposition MP Phil Twyford pointed out at the third reading of the amendment that Labour’s version of the law would have made companies put the money into a trust account, not just held on trust.
“It was [former building minister] Clayton Cosgrove’s original proposal that the retentions be held in a trust account, and, as we have heard, the minister felt that this would create too much in the way of compliance costs. Well, we will see.”
“We will see whether or not a statutory obligation to hold these funds in trust provides sufficient protection. Maybe the government is right; maybe it is not,” Twyford said.
He would not comment on his position today, referring to the matter to Salesa as the more appropriate minister.