By Stuart Robertson (Partner) and James France (Solicitor) in Dentons Kensington Swan’s Construction and Major Projects team
In 2015, in response to renewed pressure from contractors and subcontractors alike, Parliament passed the Construction Contracts Amendment Act 2015. This introduced the retentions regime controlling how retention monies were held and used. Unfortunately, following the Ebert decision in late 2018, a widespread lack of compliance from the industry, and the regime’s own lack of teeth, the regime was of limited effect.
As the Ebert decision revealed, unless the retained money was dealt with as being subject to a trust in favour of the payee (giving the payee a right to those funds over and above creditors of the party holding the retentions (payer)) those monies became general funds of the payer and if the payer was in liquidation the payee became an unsecured creditor. The retention regime had been expected to protect against just that situation.
The construction sector has been vocal with feedback. In response, the Ministry of Business Innovation & Employment in 2020 announced changes to the retention regime and as a result Parliament has now introduced a Bill. In this article we will briefly touch on some of the main changes proposed in the Construction Contracts (Retention Money) Amendment Bill.
While everybody understood the CCA required retention money to be held on trust, the High Court decision in Ebert found that a trust was not deemed into effect by the CCA, and that whether a trust was in existence in any given instance was a question of fact for the court, applying the usual three-pronged test for the existence of a trust. This complication has now been cured by the Bill: retentions will now be trust property, and a trust will be expressly deemed to be created the moment money is withheld as security by the payer.
Separate bank account/co-mingling
The current regime allowed retention money (if it was not secured by way of a complying instrument) to be held in a common bank account co-mingled with other funds of the payer. Our recommendation to payers was to set up a separate bank account if for no other reason than for ease of retention fund management. Recent company collapses have shown that allowing retention money to be co-mingled with working capital creates a myriad of issues. It is therefore a positive step that the Bill now requires money held as cash to be held in a separate bank account (named as a trust account), and the bank to be notified of that account’s status. Payers cannot co-mingle retention funds with their working capital, but may co-mingle it with other retention monies so long as proper accounting records are in place.
This segues nicely into the improved processes and better clarity around the level of accounting records required. They are slightly more onerous, but also easier to understand under the Bill by the express reference to ‘generally accepted accounting practice’ (as defined in section 8 of the Financial Reporting Act 2013).
Proof of compliance
Whereas previously it was for the payee to request confirmation from the payer that it was holding the retentions as required by the CCA, and to request access to the accounting records, this onus has now been changed under the Bill. It is now for the payer to advise the payee of various information at the time retentions are retained and at least once every three months thereafter until the retention money trust ends:
- details of how the retention monies are being held,
- bank account details,
- statements in accordance with generally accepted accounting practice, and
- any other information that may be specified in regulations to the CCA.
This does of course add an additional layer of administration for payers.
A key failing of the existing regime is there are no consequences for a payer failing to comply. The Bill now introduces penalties for failure to comply with the requirements to hold retentions on trust, a maximum fine of $200,000; if the payer fails to keep proper accounting records, a maximum fine of $50,000; and if the payer fails to provide regular reports on retentions, a maximum fine of $50,000. It is a defence to a charge if the payer can prove that it took all reasonable steps to ensure compliance with the regime.
What will be of some more importance to payers is that the directors will also be liable if the payer fails to keep retention money as required by the Bill. If the payer is found to be in breach then the directors can be liable to a maximum fine of $50,000. The definition of ‘director’ in the Bill is wider than the definition in the Companies Act 1993, which may cause its own issues.
When does it all happen?
As the Bill goes through the select committee process, the critical question is what contracts will be affected (and when). The provisions of the Bill will come into force six months after being passed, and only apply to contracts entered into after that date or to contracts entered into before that date but amended afterwards. So for those payers that currently hold retention money co-mingled with other funds, such as with working capital, they can continue to do so for existing contracts, but for all new contracts entered into after the commencement date of the new retention regime, the new trust, bank, and reporting requirements will apply.
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