CCAA retentions regime

Under Construction looks to further clarify the details of the Construction Contracts Amendment Act 2015 retentions trust regime

Since the passing of the Construction Contracts Amendment Act (CCAA) in 2015, the construction industry had been waiting to find out the details of the retentions trust regime.

With 31 March come and gone, the CCAA is now in its final form – after some eleventh-hour amendments. We’ve covered the new regulations extensively over the past few months, but builders have told us that some aspects are still unclear.

With that in mind, we’ve gone into further detail about the retentions trust regime and the most recent changes.

The main change

By far the most controversial change under the CCAA requires that all retention money withheld by a party (Company A, usually a principal or head contractor) from another (Company B, usually a contractor or subcontractor) is deemed to be held on trust.

This applies to all commercial construction contracts where the retentions are above a minimum amount. However, after consulting the building industry in 2016, MBIE decided not to specify a minimum amount. This means that the retention money provisions will apply regardless of the amount of money involved.

The purpose of the retentions trust regime is to protect retention funds in the event of an insolvency event, such as occurred with Mainzeal.

Trust funds receive special status in a receivership, liquidation or bankruptcy, as they are not the property of the party holding them. This means in Company A’s insolvency, Company B will have a claim to the retention funds above other creditors, including the IRD and banks.

Managing the funds

The CCAA specifies how Company A can hold and use the retained sums. The funds must be held as cash, or another liquid asset readily convertible into cash. Company A can invest the retentions money held, so long as they uphold their obligations under the Trustee Act 1956 (and the investment remains readily convertible into cash). Company A will be entitled to keep any benefit of this investment, but must make up for any shortfall.

Company A will also be allowed to co-mingle the retention monies in their current accounts – in other words, with Company A’s working capital. Some industry experts have expressed concerns about this, as from a trust management perspective it is not the best practice and erodes away the protections offered by a trust.

The CCAA also prescribes record-keeping requirements for the retention funds. These requirements mirror those contained in the Companies Act and will be familiar to accountants.

The CCAA provides that Company B may request a copy of the records pertaining to the trust funds they are the beneficiary of. This is a useful tool for Company B to use to ensure Company A is upholding their obligations.

Company A may only use the retention funds to remedy defects in the performance of Company B’s obligations under the contract, and they must be paid once Party B has performed all its obligations under the contract to the agreed standard. A contract clause that delays this payment, or makes it conditional, will be void.

Regulatory amendment

After years of anxious anticipation within the industry, the NZ government finally released an amendment contained within the Regulatory Systems (Commercial Matters) Amendment Bill.

The amendment clarified an ambiguity in the CCAA by confirming that the retentions regime would apply only to contracts entered into or renewed after 31 March 2017 (rather than all existing contracts as it initially appeared).

Also, in March 2017, less than a month before the regime was to come into force, an alternative to the regime was offered.

Retention alternative

The alternative allows Company A to sidestep the retention trust requirements, if they take out a ‘complying instrument’. Company A is not required to hold Company B’s funds on trust, if Company A takes out an instrument that adheres to the following criteria. The instrument must be:

• Issued by a licensed insurer, registered bank, or any other person/entity prescribed by regulations.
• Issued in favour of Company B or endorsed with Company B’s interest.
• A means of securing for Party B payment of retentions should Company A fail to do so.

The instrument can take any form, provided it complies with the above – the examples given are insurance, bonds and guarantees. However, the retentions trust regime is still the default position.