The NZ Supreme Court has struck a blow in defence of the humble subcontractor today…well…everyone that works on a building site, that is, rather than just subbies. The head contractor and other tradespeople will also benefit from some certainty or, at least, less uncertainty.
This stroke of fortune came about in the reversing a Court of Appeal decision holding that, unless a contractor is paid upfront by a company that falls into liquidation, the amounts paid to the hapless tradie can be clawed back by a liquidator as “voidable”.
Voidable transactions are those made where the company was insolvent. Briefly, when the company goes under, all transactions up to two years prior are vulnerable to being clawed back and going into an overall pool to be shared by creditors.
Now, while this has a valuable role in stopping the directors of the company from, for example, repaying related party loans to their own interests or to creditors owned by their mates or giving it all to the bank to reduce their exposure under their guarantees and leaving nothing for anyone else, it is no fun for contractors that have done the work, provided materials, been paid, to then have to hand that money back only to see it grabbed by the bank that has a charge over the debtor or mortgage over the land to which the work has been done.
Unsecured creditors don’t tend to get much or anything back, and a mortgage over land – to which your work now forms part as a fixture – tends to beat any interest you might have under the PPSR.
There is a way out when a liquidator wants money back from you. That is to show that when you received a payment from the insolvent company, you acted in good faith, had no grounds to suspect insolvency and importantly, “gave value” for the payment. (Actually, the wording is a little more complex than this…see here for the relevant Companies Act section)
The Court of Appeal took a frankly questionable view of “gave value”, holding that you had to have given value at the time you got paid. So, if you do some work for an agreed fee to be paid when you finish, levy an invoice, and get paid seven days later, it doesn’t count. You got paid AFTER you did the work. According to the Court of Appeal, in order to qualify under the section, you have to get paid up front.
Good luck convincing a developer’s construction funder bank to pay your building firm in advance before your staff have lifted a hammer, except maybe for materials. It isn’t going to happen. The practical reality is that every contractor’s payments received would, if the Court of Appeal was correct, be voidable for the two years prior to liquidation whether or not the contract had received the payments in good faith and with no grounds to suspect insolvency.
The industry was thus justifiably concerned.
Fortunately the Supreme Court has today reversed the decision. The value has clearly been given for the payment. I can only think that the lawyers for the liquidators did a masterful job to persuade the Court of Appeal otherwise. While there is a valuable role for Courts in following the statute as written and thereby pointing out the need to clarify the way a statute is drafted, I don’t personally agree that this was one of them. Sanity has been restored.
Now, having said that, the other tranches of the defence against voidable payments still apply. That would be an article in itself. For example, if your developer client is a late payer that in itself can constitute grounds to suspect insolvency, and contractors are often tripped up on similar grounds. Contractor owners must keep a close eye on payment timing and seek advice the moment matters start to drag.