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Legal Win Led by Master Electricians & Ford Sumner Lawyers
The judgment of Associate Judge Brittain in the Auckland High Court represents a landmark victory for subcontractors across New Zealand. 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 recovered by Waterstone after Stanley Construction Limited and Stanley Construction (Auckland) were placed into liquidation on 5 September 2019.
Electrotechnology industry organisation Master Electricians 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 $2,175,559.90 of retentions. None of those monies have reached the subcontractors affected by the liquidation, whose invoices remain unpaid.
The key details of the judgment, issued on 29 August following a 25 August hearing:
- 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 has 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.
Jaesen Sumner, Partner at Ford Sumner Lawyers, which acted for the subcontractors, says, “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.”
Dr. Alexandra Vranyac-Wheeler, CEO of Master Electricians says, “We are 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.
“It’s disappointing that the subcontractors involved have had to police the liquidators’ behaviour, but Master Electricians is delighted with the result and the precedent this achieves for all of the industry.”
The 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.
Ms Vranyac-Wheeler says, “We will continue to support subcontractors through the next phase of this process, including ensuring fair distribution of the recovered funds.”
Current legislation is intended to protect subcontractors: 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.