Subbies suck it up again?  Stanley Group collapse leads to calls for subbie protection

On 5 September, Auckland and Waikato-based Stanley Group/Tallwood became the latest in a long line of construction companies to go to the wall.  Initial estimates put the amount owed to creditors at $5 million, with individual subcontractors reportedly owed up to $600,000.

Stanley Group’s projects included building homes for Housing New Zealand and a Kiwibuild development.  It reportedly employed over 100 staff and had been struggling to pay creditors for some time.  Given the pattern of subcontractors bearing the brunt of construction company failures, the chorus of calls for greater subcontractor protection is growing louder.

What protections are currently available for subcontractors?

Currently, subcontractors have little protection in the event of a Head Contractor’s insolvency; even retrieving their own tools can be a fraught process.  Despite the introduction of the subcontractors’ retentions regime on 31 March 2017, which requires Head Contractors to hold money on trust for subcontractors, losses have kept mounting for subcontractors.  The failure of Ebert Construction demonstrated the problem; only $3.68 million of retentions was held in trust, whereas $9.32 million was owed under the retentions regime.  Ebert’s Receivers have advised that subcontractors are likely to experience a significant shortfall as a result of retentions not being held in trust, in addition to wider losses for unpaid work.

Further, the Court has confirmed that a Head Contractor’s failure to comply with its obligations under the Construction Contracts Act 2002 (“CCA”) is ultimately borne by the subcontractor with no remedy in an insolvency situation (see Bennett v Ebert Construction Limited (In Rec & Liq) [2018] NZHC 2934).

In our view, currently a subcontractors best protections are found in detailed due diligence before entering into a contract, and then enforcement of its rights at law and under the CCA.  First, subcontractors should be carrying out a detailed assessment of whether the risks in a proposed contract are appropriately allocated, before a contract is entered into.  Second, once a contract is entered into, subcontractors should be enforcing their rights at law and under the CCA more quickly.  Practical examples include:

• review your terms of trade to include a security interest which, if you are supplying goods in trade, will be a retention of title clause;
• register your security interest on the Personal Property Securities Register (“PPSR”).  The timeframes for doing so are complex, so best practice is to register a security interest as soon as you enter into a contract with a customer and before you give customer possession of any goods;
• ensure goods you supply are labelled clearly, to avoid mixing with goods of third parties before use, and keep goods on site segregated as much as possible;
• ensue only amounts in dispute are withheld;
• utilise adjudication more quickly to resolve disputes, and serve notices of intention to stop works quickly if payment claims are unpaid;
• exercise rights of inspection to ensure retentions are being properly accounted for by Head Contractors, to help establish a retention exists in an insolvency situation;
• ensure retentions are held in a separate trust account (not currently required under the CCA, which only requires retentions be held “in trust”); and
• engage with insolvency practitioners early.  Push back where you can and be clear on your rights.  Beware that receivers are acting to protect the interests of their appointing secured creditor (usually a bank) and so you will need to take steps to protect your rights, whereas liquidators are required to act in the best interests of all creditors.  Note that liquidators may be liable for conversion if they mistakenly deal with property that does not belong to a company in liquidation, for example, by refusing to allow subcontractors to retrieve their tools or other property where ownership rights/security interests can be established.

Possible options for reform?

Following the collapse of Stanley Group and with the experience of Ebert and Mainzeal, subcontractors are calling for further reforms to give them greater protection.

Calls for greater reform include:

• requiring Head Contractors to provide performance and payment bonds, effectively insurance to pay to complete projects if contractors go under.  This approach is common in the United States in government contracts;
• treating all debts to subcontractors as secured against any building materials and products the subcontractor had on site;
• requiring subcontractor retentions to be held in separate bank accounts, or in government-managed trust accounts, in the same way residential tenancy bonds are held; and
• reintroduction of the right for subcontractors to put a lien on the properties they work on, prohibiting sale until subcontractors are paid.  This is a return to the situation under the Wages Protection and Contractors’ Liens Act 1939, which was repealed as part of Rogernomics.  Auckland Mayoral candidate, John Tamihere, has expressed support for this approach, but given its impact on private property ownership, effectively putting property owners in the middle of disputes between contractors, we expect some strong opposition to that approach.

The Minister of Building and Construction Jenny Salesa has stated that the Government is working to transform the construction industry through the Construction Sector Accord, with a focus on poor risk management and the culture of shifting risk.  So it’s a case of watch this space.

In the meantime, for advice on protecting yourself or enforcing your rights in insolvency situations, contact Jono, Dave and Jaesen.