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Contractor retentions regime a lemon, industry told

Wednesday 23rd October 2019

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A legal expert says the retentions regime meant to protect subcontractors has turned out to be a lemon that will not protect them in the vast majority of construction company collapses. 

Martelli McKegg partner Geoff Hardy told delegates at an industry conference that the law which makes the holding of retentions on trust compulsory was misconceived. 

The industry continues to consider how the regime applies following construction collapses such as Ebert Construction, Orange-H, Arrow Construction, Stanley Group and Tallwood Holdings. So far there has been only one court ruling outlining how the regime should work. 

Building and Construction Minister Jenny Salesa said earlier this month she will soon make announcements about strengthening the regime. 

Speaking yesterday at the Building and Construction Regulation and Law Conference in Auckland, Hardy acknowledged that in some cases, without the retention rules, no money would have been put aside. 

However, he said the regime only works when big construction companies fail. 

“In the vast majority, the regime is going to be defeated and the legislation turned out to be a lemon,” he said. 

He said the problem is that somebody has to go to court each time to apply to be a receiver, and they would charge fees diminishing the pool of funds. 

While retentions were distributed following Ebert Construction’s collapse, in the failures of Stanley Group and Accent on Construction, the liquidators found there were no retentions held.  

The lawyer points out that when small to medium-sized construction companies fail, they are going to miss out on the retentions regime because either their retentions weren’t held or the sum is too small to be covered by the receiver. 

“It is a wholly unsatisfactory situation where construction companies are falling over ... and no-one is accountable.”

Hardy also blamed a lack of government consultation with lawyers and insolvency practitioners for the bad law. 

“There was not enough consultation for people who really look into this stuff. There’s a whole society for construction law for god's sake - that’s 40-50 people who deal with this every day.”

BDO’s 2019 construction survey found that only 30 percent of subcontractors actively inspect their head contractors' trust records. Of those who did ask to inspect them, almost half found one customer was not holding funds in trust. 

The survey found that 72 percent of respondents held cash in a separate account in trust, while 28 percent said they had sufficient cash. 

Hardy said while this survey was useful, the level of compliance with the law was probably worse than the BDO study captured as the type of people likely to answer such a survey were also more likely to be the conscientious ones who follow the rules.


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