Subbie survival – if the big boys go bust

The recent collapse of Mainzeal Property & Construction Limited – currently in receivership and liquidation – has again highlighted various issues for the construction industry, including:

• Can sub-contractors access the construction site to remove their tools and equipment?

• Who has the rights to any retention payments held by the company in receivership?

• What rights do unpaid suppliers have to goods supplied to the company in receivership but not paid for?

If you believe that any retention payment is being held on trust, then you should notify the receiver as soon as possible.

How receiverships work

A receiver is appointed by a secured creditor, who is generally a bank. In Mainzeal’s case, the Bank of New Zealand appointed the receivers.

The receiver will often take over management of the company. Generally, receivers can either continue to trade under existing contracts on the same terms, or refuse to continue to trade, while trying to sell off the company’s business as a whole, or sell off particular assets.

A receiver generally acts for the benefit of the secured creditor only, and not in the interests of creditors generally.

Subcontractors’ rights

In most receiverships, one of the receiver’s first tasks will be to identify who owns what. On a large construction project, this can take some time and it is not unusual for a receiver to lock everyone out of the site until they have completed that process. A receiver will be careful to avoid releasing property owned by the company in receivership and to avoid releasing property owned by one party to a third party, to avoid potential claims against the receiver.

Importantly, a receivership will generally not affect ownership of any tools and equipment owned by a subcontractor. These will usually be released by a receiver once ownership has been confirmed.

A subcontractor can assist this process by contacting the receiver and clearly identifying the items in question to be recovered and providing as much evidence of ownership as possible.

Retention payments

On a large development, the retention payments held by the company may be substantial. Prior to 1987, retention payments were secured by the Wages Protection and Contractors’ Lien Act 1939. However, since that Act’s repeal, this is not the case now unless it has been specifically agreed.

Unless the retention payment is held on trust, it is likely covered by the secured creditor’s security agreement. The receiver can pay that money to the secured creditor. The subcontractor, or other affected party, will then be left with an unsecured claim against the company.

There is support in some quarters for amending the Construction Contracts Act 2002, to provide protection for retention payments in the event that the Head Contractor runs into problems. However, there are no immediate plans to change the current legal position.

If you are concerned about a retention payment, you should seek immediate legal advice as to the status of that payment. If you believe that any retention payment is being held on trust, then you should notify the receiver as soon as possible.

Importantly, a receivership will generally not affect ownership of any tools and equipment owned by a subcontractor

Supplier protection

The Personal Property Securities Act 1999 provides protection to parties, who have supplied goods to a construction company and who have not been paid (provided certain criteria are met).

If your supply contract has a retention of title clause, and you have properly registered your security interest on the Personal Property Securities Register, then your security interest in the goods supplied (and their proceeds) will generally take priority over all other security interests.

Again, you should immediately notify the receiver if you are claiming a security interest in any property under their control.

Alternatively, if you are regularly supplying goods on credit terms without having registered a security interest on the Personal Property Securities Register, you may need to consult your solicitor for advice regarding how to register on the Personal Property Securities Register.

About Simpson Grierson

This article was prepared by Phil Shackleton and Andrew Tetzlaff, both senior associates at Simpson Grierson. If you have any questions relating to this article, or on receiverships and liquidations, please contact Andrew on (09) 977 5179, or at andrew.tetzlaff@simpsongrierson.com, or Phil on (09) 977 5443, or at philip.shackleton@simpsongrierson.com