Court Issues Warning to Directors Who Misuse Retentions

We can now expect to see summary judgment applications against directors of failed construction companies who misuse retention funds. The High Court has adopted the Canadian position that a director is deemed to have known of any statutory or trust requirements and will be personally liable to restore any missing retention money that should have been held in trust.

In Burt & Ors v Grant [2025] NZHC 2486, the High Court of New Zealand has issued a significant decision clarifying how retention monies recovered from liable directors must be handled when construction companies go into liquidation. The decision provides much-needed guidance to subcontractors, liquidators, and directors alike, and shows the value of the statutory trust built into the Construction Contracts Act 2002 (“CCA”).

Ford Sumner and Barrister, Finn Collins from Lambton Chambers, are proud to have represented the successful subcontractors in this case.

Background

Stanley Construction Limited and Stanley Construction (Auckland) Limited went into liquidation, on 5 September 2019, owing $2,175,559.90 in retentions to subcontractors. The liquidators later recovered retention funds from project principals, but also sued the directors for failing to retain the retentions. 

Importantly, the directors were not sued on trust principles; instead, the liquidators alleged the directors had breached their directors’ duties. It is now clear the claim should have been based on knowing receipt and knowing assistance, which are the traditional routes for recovering trust money from a third party.

Instead of securing these monies for subcontractors, the liquidators advised that they intended to apply them in their entirety to cover their own fees and expenses. This decision was challenged by the Stanley companies’ Liquidation Committee, comprised of subcontractors, who sought, and were granted, funding by Master Electricians.

The Decision

The Court confirmed that retention monies are held on a statutory trust from the moment they are withheld (i.e. when they are first deducted in a payment schedule). This creates the enforceable debt obligation against the party holding the retentions. It is not necessary to wait for money to be put aside before the trust is created; the trust is created when the obligation is first assumed by deducting from the earned entitlement. The debt obligation or chose in action becomes trust property.

Directors have custodial obligations where they exert any control over trust monies.  In adopting the Canadian Supreme Court’s decision in Air Canada v M&L Travel,^[1] the High Court has effectively confirmed that directors who own construction companies will be deemed to have knowledge of a statutory trust. The High Court also referenced another Canadian decision, St. Mary's Cement Corp. v. Construc Ltd,^[2] which usefully records just how difficult avoiding liability will be for directors:

Mr. Paniccia claims that he had no acknowledgement of the trust provisions of the Act and that he therefore could not know that any conduct of Construc amounted to breach of trust. It is surprising to me, to say the least, that an individual with Mr. Paniccia's length and breadth of experience in the construction industry could be wholly ignorant of the trust provisions of the legislation. However, even if that were the case, ignorance of the law is no defence. A person is deemed to have knowledge of a trust imposed by statute: Air Canada v. M&L Travel Ltd., supra, at p. 812 S.C.R., p. 608 D.L.R.

Closing comments

Burt & Ors v Grant is a great decision for the subcontractors involved and a fly in the eye for liquidators, who appeared to have seen the recovery of retention money as an exercise in cost recovery. More broadly, we anticipate this decision will be remembered as the first case in New Zealand to effectively confirm strict liability on directors for breach of the statutory trust built into the CCA. For that reason, this decision is likely to be referred to as often as the Mainzeal litigation, regarding failed construction businesses and retentions.

Whilst the CCA’s retention regime was beefed up in 2023, we predict there will continue to be some directors who fail to ensure that retention moneys are safe guarded. An obligation to restore retention money in full is also a better remedy than simply fines.

If you would like further, or more specific advice on this or general construction related issues, contact one of our experts. Rebecca Richter, Emily Gardiner, Jaesen Sumner

[1] Air Canada v M & L Travel Ltd [1993] 3 SCR 78.

[2] St. Mary's Cement Corp. v. Construc Ltd [1997] O.J. No. 1318