Contractors welcome Supreme Court decision

A Supreme Court decision better protecting building contractors has also highlighted a lack of awareness about the regulatory environment they operate in 

The construction industry has welcomed a recent Supreme Court decision that prevented liquidators from clawing back payments made to contractors by insolvent companies.

In the middle of 2013, the Court of Appeal ruled in favour of liquidators seeking to reclaim payments made to contractors for completed work under the “voidable transactions” provisions of the Companies Act. The Act provides that a transaction is voidable if it is an insolvent transaction, and entered into within two years of the commencement of the company’s liquidation.

The reason for this provision is to deter companies in financial trouble – given they often know about it long before anyone else does – from paying themselves and the creditors they value most, while others are left with nothing. The provision stipulated that, if the company paid a contractor money in the two years before it went into liquidation, and that amount was more than the contractor would have gotten if the liquidation had run its course, then the money must be returned to the liquidator to be shared among the creditors.

But the Supreme Court overturned the decision in February, following an appeal jointly funded by Civil Contractors New Zealand (CCNZ) and the Specialist Trade Contractors Federation, who felt it was unjust.

CCNZ chief executive Malcolm Abernethy said “voidable transactions” were intended to recover out-of-the-ordinary payments, which did not apply to most of his members.

If the ruling had stood, firms would not know for two years whether money they received for a job was at risk of being clawed back. In one instance, a contractor would have had to repay $58,000 for work completed in 2010.

Industry applause

Cement & Concrete Association of New Zealand (CCANZ) chief executive Rob Gaimster believes the decision is in the best interests of the construction industry.

“The uncertainty created by the potential to claw back money paid to contractors could be detrimental to business confidence,” says Gaimster. “A degree of security now exists that this will not occur under voidable transactions provisions.”

The Brick and Blocklayers Federation of New Zealand (BBFNZ) chief executive Melanie McIver said that the decision was significant for subcontractors, because security of payment is critical to keep business running, particularly in an industry where there are more liquidations than any other.

“The likelihood of a main contractor going under is relatively high in the construction sector. There has always been a grey area about what signs subcontractors should look for to know if someone is trading bankrupt,” said Ms McIver.

“This decision gives them more certainty and better protection for their businesses.”

She said that she had never heard any “horror stories” involving her members and voidable transactions, and that no new regulations were required to protect contractors.

“I think the laws are already in place to protect them, they just need to understand them better.”

She said one of the most surprising things to come out of the decision was the number of people who were unaware that the voidable transaction provision existed, which she said signifies a wider problem.