A landmark high court judgement has reaffirmed the rules for safeguarding funds designated for subcontractors. The judgment in the Auckland High Court represents a landmark victory for subcontractors across New Zealand, Master Electricians say.
The application to the Court sought to reverse and/or modify decisions by the liquidators, Waterstone Insolvency, relating to more than $2.1 million in retention funds, of which an amount was recovered by Waterstone after Stanley Construction Ltd and Stanley Construction (Auckland) were placed into liquidation in September 2019.
Master Electricians NZ, the 100-year-old industry organisation which leads education, advocacy and support for its membership funded the case on behalf of the subcontractors, who were collectively affected by the Stanley companies’ liquidation but were not in a position to take a case individually.
The Liquidation Committee, representing the subcontractors of the Stanley companies, had challenged the liquidators in the court action. The creditors’ claims received by the liquidators of the Stanley companies included claims by subcontractors for more than $2.17 million of retentions. None of those monies have reached the subcontractors affected by the liquidation, whose invoices remain unpaid.
The key details of the judgment are:
- The Court has confirmed that the funds recovered by the liquidators — both from directors and from principals — rightfully belong to the subcontractors who earned them.
- The Court noted that the liquidators had applied all the payments received for recovered retentions towards their own remuneration and expenses incurred in respect of the liquidations, with no funds available for the subcontractors or any other creditors.
- Waterstone had claimed that the subcontractors with claims for retentions would be treated as unsecured creditors, with no priority to any retentions recovered from the directors of the liquidated companies;
- Associate Judge Brittain noted that liquidators elected not to seek directions from the Court to confirm Waterstone’s belief. (Waterstone gave evidence that the liquidators settled with two of the directors of the companies in March 2024, while the claim against the remaining director continues.
In the view of the applicants, the Stanley matter exposed a serious flaw in how some liquidators handle cases where funds should be held in retention for subcontractors. The Court has now reversed those decisions and restored trust in the system.
The judgment sends a clear message: subcontractors’ retentions are not a slush fund for liquidators or directors. They are trust funds and they must be protected.
“Head contractor insolvency is a reality for the trades, but they don’t expect the professionals involved in that to let them down. We know that cash retentions are tough on our tradie clients, and in many cases, they are unnecessary. We hope this discourages the use of them,” says Jaesen Sumner, a partner at Ford Sumner Lawyers which acted for the subcontractors.
Master Electricians chief executive Dr. Alexandra Vranyac-Wheeler
Master Electricians chief executive Dr. Alexandra Vranyac-Wheeler says the organisation was funding this case because “we want to see meaningful and lasting change in the sector.
“This is a significant judgment that reaffirms the intention to protect contractors through the statutory trust regime. The Court has made it clear that trust funds are not available to liquidators or other creditors and must be safeguarded for the contractors who earned them.
“This ruling on the use of retention funds is equally applicable for the members of other industry bodies, such as Master Builders and Master Plumbers, so it is potentially far-reaching, and the liquidators of the future will be on notice,” she says.
The Master Electrician’s liquidation committee is also challenging the efficacy of the liquidators’ decisions in respect of the conduct of the retentions proceedings, with a decision yet to be made on their reasonableness of their fees.
A second hearing is scheduled to determine whether the liquidators are entitled to reimbursement for costs related to the retention’s proceedings.
“We will continue to support subcontractors through the next phase of this process, including ensuring fair distribution of the recovered funds,” Vranyac-Wheeler says.
Note: The Construction Contracts (Retention Money) Amendment Act 2023 mandates that retention money be held in trust in a separate bank account. However, it did not come into effect in time to be relevant to the Stanley liquidation. Likewise, penalties for directors who fail to ringfence retentions came into effect too late, in October 2023. But these changes do not address recovery of any missing funds from directors personally.
