Liquidators vs the Humble Subcontractor – Voidable Payments

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.

See also Hamish Fletcher’s article in the NZ herald today.

Posted in Banking & Finance, Business Law, Commercial Property, Construction Law, Property Law, Residential property | Tagged , , , , | Leave a comment

Glen William Cooper – sentenced.

Further to this post, Glenn Cooper was sentenced to nineteen months jail for his five guilty pleas on charges of dishonestly using a document.

Short article regarding the offences can be found here.

Congratulations to the Serious Fraud office, and we are given to understand that further charges may be on the way.

Apparently the reason sentencing was so delayed was because the sentencing judge had to excuse themselves from the case by virtue of having been involved in the assault case against Curtis Haiu, who punched Cooper in the face after losing half a million dollars.  Haiu was discharged without conviction by the judge, and Cooper’s lawyer felt the judge describing Haiu as a “victim” of Cooper, when no wrongdoing had been proven (the guilty pleas by Cooper were about transactions with other people, not Haiu), showed bias.  Or good sense, some might say.  It was definitely one or the other.

Posted in Banking & Finance, Commercial Property, Criminal Law, Litigation, Property Law, Residential property | Tagged | 1 Comment

Bank Loan Approvals – A word of caution

They don’t mean anything, and they never have.

You may think you can go and make your offer in safety.  You can’t.

All bank loan approvals are “indicative”…ie they merely indicate what the bank “might” be prepared to lend.  They all have language which lets the bank pull back from the loan and relieves it from any responsibility at all.

Anyone who doubts this can talk to the hundreds of people that bought apartments off the plans in 2006-7, only to find that when the apartments were completed, their bank reneged on the loan approval, changing (for example) from 80% of purchase price to 65% of the then current valuation (which had of course dropped substantially from the global financial crisis)….assuming they were willing to lend anything at all.

Some of those people have lost everything they own as a result.  Some are now bankrupt.

Banks are not your friend.  They are not loyal.  They will not suck up a loss that can be passed on to you.  They will not take a risk on your behalf and, to be fair, neither they should.  But what they should do is be more up front that their indicative loan approvals are not worth the paper they get printed on.  Buyers beware.

Posted in Banking & Finance, Business Law, Commercial Property, Property Law, Residential property, Securities Law, Subdivisions | Tagged , , , , | 1 Comment

Auctions: The good, the bad, the ugly

Ran across an interesting article here on the auction process, written by an experienced property investor and occasional developer, and I generally agree with everything in it.

It’s too long to quote from…I’d have to cut and paste a lot of it to give the sense of it…so you’ll have to visit the site (which is well worth a read through).  Basically, Davo’s contention is that:

….. auctions primarily benefit agents.  Not buyers, not seller, but the agents themselves…

…and he goes on to say why in great detail.  Read it here in Why Auctions Are Good For Agents.

The only time auctions, in my opinion, are a decent method of selling property is right about now…when the market is hot and people are paying over the odds.

Conversely, in a soft property market, my personal opinion is that there is no worse method of trying to sell your property than an auction…which is usually yet another blow for owners getting their property mortgagee sold that way.  Why security holders did this during 2008-2011 is a mystery to me, but they mostly did as a matter of policy, despite a “normal” sale backed by valuation being a much better option.

Anyway…read on.  It is an excellent rant!

Posted in Commercial Property, Property Law, Residential property | Tagged , , | Leave a comment

A person best avoided – Glenn William Cooper

Glenn William Cooper (39) plead guilty in the Manukau District Court yesterday to charges laid by the Serious Fraud Office of dishonestly using a document.

Essentially Cooper, through various associated interests, bought motel units and onsold them contemporaneously to vulnerable pacific islander victims for up to $200,000 more than the amount he had just paid for them, while purporting to be setting them up in a wonderful investment that would consolidate their debt and provide them with a considerable return.

False documents were generated to conceal these vastly inflated margins from purchasers and banks, and the loan applications to banks on the families behalf were likewise untrustworthy.

The SFO has released a media statement in which they describe the case as:

“an example of preying on investors who needed budgeting advice and realistic solutions rather than a scenario of further debt.  The investors were sold on a fantasy that purchasing these investment properties would successfully consolidate debt and solve their problems. Mr Cooper played on the affinity he had built with one family in particular. This has only added to their financial strife. Investors need to remain aware of their vulnerability in such situations.”

The Sunday Star Times has previously reported on the damage caused.

Posted in Banking & Finance, Commercial Property, Criminal Law, Litigation, Property Law | Tagged , , | 1 Comment

Buying an Apartment in Auckland Part One: Body Corporates

…or anywhere else in New Zealand really, but Auckland is a better search engine keyword for the title than New Zealand.

The genesis of this post is a conversation I had with Diana Clement,  a freelance journalist specialising in personal finance and property investing articles.  We went through a whole heap of issues in a largely unstructured conversation, so this is going to be somewhat stream of conciousness over a number of posts.  Nevertheless, it may be helpful to people.

Task number one: Always have a read of the Body Corporate Rules. A careful one. Including any changes, and you may have to look at the Unit Titles Act 2010 or its predecessor the Unit Titles Act 1972 and their regulations, which will make you unhappy unless you are a professional statute reader.  Just think of it as personal growth.

There can be all sorts of onerous provisions about things you haven’t thought of.  Is your pet allowed?  Can you put washing on a frame on the balcony?  Are you allowed aerials on the roof (common property)?  Are you restricted in curtain/blind colours?  Are there restrictions on guest visiting hours?  Can the maintenance people barge into your flat any time of the day or night?  Does your responsibility for repairs to the roof or to services increase the higher up in the building you are?  Are you required to have your windows and external unit surfaces cleaned regularly, instead of this being organised by the body corporate? The smaller the number of apartments, and particularly if they are standalone, the more likely you are to find tasks devolve on the owners rather than the body corporate as a whole.

Does the Body Corporate have a professional secretary?  This can be good thing, but do note the costs, especially with smaller buildings where the owners could and really should form a committee to do it themselves.  There does, however, come a point where professional help is required – but on contractual terms that suit the owners.

Was the secretary/manager appointed by the developer, or did they purchase a management contract put into place by the developer?  These types of contracts are usually stacked sky high with provisions favouring the manager and passing cost on to the owners, for example the exclusive right to control leasing within the building, or a guaranteed series of rises in management fee coupled with a long term, plenty of renewals at the manager’s option, and an enormous termination fee.  Such contracts can sometimes be successfully challenged, but why buy yourself the fight?  Best to avoid.

Does the developer still own enough units that they control the body corporate?  That can be no fun at all and is best avoided.  One of the pitfalls of buying off the plans.

How often are the levies and when?  Make sure they aren’t going to arrive at an inopportune moment, such as early January….always a bad time for business owners.  Conversely, assuming you yourself are a good payer, what are the provisions for enforcing payment from those that don’t pay?  Is the body corporate reasonably ruthless on collection so that you personally don’t end up subsidising defaulters?  Are there a lot of levy defaulters?  Ask the agent/secretary.

What is the long term maintenance plan?  How much is the sinking fund?  What major items have been paid from it over the past few years?  What major items are proposed to be paid and is there expected to be enough in the fund to cover it when the time comes?  If the lift, for example, requires replacement in the near future, you need to have taken account of this in your purchase price.

Is there an Owner’s Association that runs and controls the common areas?  These are fairly rare….more usual for things like resorts, but you can run across them anywhere from time to time.  Although they are not necessarily designed to do so (being usually perfectly legit), they hive costs off from the Body Corporate itself, so the body corp costs can look artificially low if you aren’t also being given the budget for the association at the same time.

Is there a maintenance person/manager on site?  Did you actually want a professional body corp seretary?  If you’re a busy person, you may be happy to have one, rather than going to the trouble of dealing with body corporate matters….especially with the likes of long term maintenance plans, sinking funds, and chasing other people for levies.

Exactly what facilities are you going to make use of?  Having a gym and a lap pool sounds  great in theory, but you’re 78 with an arthritic hip and a fear of water.  Are you just going to be paying for other people to enjoy the facilities?

That is probably enough to be going on with.  It isn’t intended to be exhaustive and I may add some more points in other posts.

Posted in Commercial Property, Property Law, Residential property, Unit Titles | Tagged , , , , , , | 1 Comment

Unit Titles Act 2010 – Proposed Changes and consultation

The Ministry of Business, Innovation and Employment has its sights set on “innovating” the Unit Titles Act, following a review by the NZLS property section and a letter to the minister (copy here).

You can find the list of proposed changes here, to both the principal Act and to the Regulations.

There are a lot of cleanups of areas of confusion, such as whether matters delegated by the body corporate can be the subject of body corporate resolutions.

Notice timeframe provisions would also be tightened up…there are some disconnects between time frames for disclosure timeframes in the Act and deemed notice timeframes in s.205.

Cancelling a contract where pre-settlement and/or additional disclosure hasn’t been made would become immediate, rather than the farcical ten working days notice of cancellation now required.

Another interesting proposal is to vastly increase the range of orders available to the Tenancy Tribunal, including:

  1. The power to order a party to do anything necessary to rectify a breach (section 77(2)(l) of the RTA).
  2. The power to order a party to refrain from doing anything which constitutes a contravention (section 77(2)(m) of the RTA).
  3. The power to order a party to pay damages or compensation (section 77(2)(n) of the RTA).
  4. The power to make orders of a consequential or ancillary nature (section 77(2)(q) of the RTA).
  5. The power to order the payment of exemplary damages (section 109(4) of the RTA)

Far more extensive than the powers presently enjoyed, and necessary if the Tenancy Tribunal is to be effective.  Presuming, of course, that we all have boundless confidence in the competence of the Tribunal members to reach defensible decisions on very complex matters.  Apparently the idea is to have a separate division of the Tenancy Tribunal dealing in Unit Title matters, an idea I would strongly support.

Submission forms are here, for those interested in commenting.

Posted in Commercial Property, Property Law, Residential property, Unit Titles | Tagged , , | Leave a comment