Cain v Rilean Construction (Central Otago) Limited (in liquidation)

[2021] NZHC 2153

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE

CIV-2021-409-000155

[2021] NZHC 2153

IN THE MATTER

of Rilean Construction (Central Otago) Limited (in liquidation)

BETWEEN

RHYS JAMES CAIN

Applicant

AND

RILEAN CONSTRUCTION (CENTRAL OTAGO) LIMITED (IN LIQUIDATION)

First Respondent

AND

ADVANTAGE 2010 LIMITED

Second Respondent

AND

NIND ELECTRICAL SERVICES LIMITED

Third Respondent

AND

COMPLETE CABINETS LIMITED

Fourth Respondent

Hearing:	13 August 2021
Appearances:	B M Russell and M D W King for Applicant
Judgment:	17 August 2021

JUDGMENT OF ASSOCIATE JUDGE PAULSEN

This judgment was delivered by me on 17 August 2021 at 3.00 pm pursuant to Rule 11.5 of the High Court Rules

Registrar/Deputy Registrar Date:

CAIN v RILEAN CONSTRUCTION (CENTRAL OTAGO) LTD (in liq) [2021] NZHC 2153 [17 August 2021]

[1]    The applicant (Mr Cain) is the liquidator of Rilean Construction (Central Otago) Ltd (in liq) (RCCO). As its name suggests, RCCO was a construction company. At the date of liquidation, RCCO’s solicitors held on its behalf a fund representing retentions under construction contracts with subcontractors engaged on a development known as the Remarkables Residences (the Fund). Mr Cain has sought directions concerning the administration and distribution of the Fund. The application has been prepared with close attention to prior decisions of this Court in Bennett v Ebert Construction Ltd (in rec and liq)1 and Oorschot v Corbel Construction Ltd (in liq).2

Background

[2]    Several interrelated companies were established between 1985 and 2011 under the Rilean name, including RCCO. RCCO operated from Queenstown on residential and commercial construction projects.

[3]    Mr Cain is an associate partner of Ernst & Young in Christchurch and a licensed insolvency practitioner. On 22 October 2020, Mr Cain and Rhys Logan were appointed liquidators of RCCO. Mr Logan has since resigned as a liquidator of RCCO.

[4]    RCCO implemented a system to identify the amounts of retentions which were withheld on commercial construction contracts entered into after 31 March 2017 in compliance with RCCO’s obligations pursuant to the Construction Contracts Act 2002 (the Act).

[5]    The retentions were accounted for through a software programme known as CostCon. Retention balances were tracked and monitored by RCCO’s accountant and recorded in RCCO’s computer server. RCCO also engaged lawyers, RVG Law, to hold the retentions in their trust account on a project by project basis.

[6]    At the date of liquidation, RCCO’s records showed there were four projects for which subcontractor retentions were being held. In respect to the Remarkables

1      Bennett v Ebert Construction Ltd (in rec and liq) [2018] NZHC 2934.

2      Oorschot v Corbel Construction Ltd (in liq) [2020] NZHC 723.

Residences, RCCO’s retentions tracking system showed retentions totalling

$140,272.81 should have been held for 10 subcontractors and this sum was held by RVG Law. However, in fact there was a shortfall with respect to retentions held for three subcontractors totalling $4,417.57 and, in addition, RCCO did not transfer the GST portion of retained amounts to the Fund. The shortfall of the GST portion in each of the subcontractors’ retention claims totalled $19,602.53.

[7]    Mr Cain and his staff carried out a significant amount of work relating to the Fund. This included reviewing and reconciling RCCO’s financial records and retention tracking system, reviewing subcontractors’ contracts and retention claims and monitoring and responding to defects claims. The Fund has not been distributed and before doing so Mr Cain considered it necessary to seek directions, including in relation to costs.

[8]    Following the commencement of this proceeding, directions as to service were made. Three subcontractors applied and were joined as respondents to oppose the application. However, on 4 August 2021 they filed a notice withdrawing their opposition to the application and so it proceeds unopposed.

The orders sought

[9]The orders Mr Cain seeks are the following:

(a)appointing Mr Cain as the Court appointed receiver and manager of the Fund;3

(b)an order directing that the Fund is held by Mr Cain on trust in accordance with ss 18A to 18I of the Act for the subcontractors who:

(i)had a contract that was recorded in RCCO’s retention tracking system as being entered into with RCCO after 31 March 2017; and

3      The Fund was held by RVG Law but is now being held on trust in an account of Ernst & Young.

(ii)for whom RCCO subsequently transferred the retention monies related to their contracts to the Fund; and

(iii)for whom retention monies did not cease to be retention monies pursuant to s 18C(3) of the Act;

(the Reconciled and Transferred Retentions Subcontractors)

(c)an order directing that Mr Cain may determine and pay valid claims on the Fund, including by way of interim distribution, in accordance with the terms of the relevant subcontract, the Act and the orders granted herein;

(d)an order the Fund is to be distributed to, for or in respect of valid claims from the Reconciled and Transferred Retentions Subcontractors:

(i)on a pro rata basis based on the amount each subcontractor’s valid claim bears to the total of all valid claims in relation to their respective retention amounts; and

(ii)on a basis which does not pay any interest claims on any retention monies unless or until all valid (non-interest) claims on the Fund are paid in full;

(e)allowing Mr Cain to deduct from the Fund his costs and expenses relating to the management and administration of the Fund, including those in respect of this application to a limit of $25,000 without further approval of the Court; and

(f)that leave to apply to the Court for further directions be reserved.

The Act

[10]Retention money is defined in s 18A of the Act as:

… an amount withheld by a party to a construction contract (party A) from an amount payable to another party to the contract (party B) as security for the performance of party B’s obligations under the contract.

[11]   A retention is an agreed conditional deferral of part of a chose in action (i.e. a debt). Under the Act, retention money does not equate to cash in the bank.

[12]   The core obligation to hold retention money on trust is set out in s 18C of the Act:

18C Default arrangement: trust over retention money

(1)All retention money must be held on trust by party A, as trustee, for the benefit of party B.

(1A) However, see section 18D (which allows for an alternative arrangement, involving a complying instrument, to protect payment to party B if party A fails to pay).

(2)Retention money held on trust may be held in the form of cash or other liquid assets that are readily converted into cash.

(3)A trust over retention money ends when---

(a)the money is paid to party B; or

(b)party B, in writing, agrees to give up any claim to the money; or

(c)the money ceases to be payable to party B under the contract or otherwise by operation of law.

[13]   The Act therefore provides that where RCCO intended to withhold sums which would otherwise be required to be paid to a subcontractor under a commercial construction contract (CCC) dated after 31 March 2017 those funds had to be held on trust for the subcontractor.

[14]   Section 18FA of the Act gives retention monies a protection which is relevant to the issues before the Court. The section provides:

18FA   Protection of retention money

Retention money held on trust---

(a)is not available for the payment of debts of any creditor of party A (other than party B):

(b)is not liable to be attached or taken in execution under the order or process of any court at the instance of any creditor of party A (other than party B).

Mr Faul’s affidavit

[15]   Although the second to fourth respondents have withdrawn their opposition to the application it is useful to identify the issues that concerned them. An affidavit of Peter Charles Faul of 25 May 2021 sets out those concerns. It appears the opposition to the application was based on two matters, namely:

(a)that the appointment of a receiver was not necessary to distribute the Fund as the amount of the claims of each subcontractor upon the Fund is known and the solicitors for RCCO are able to make payment out of the Fund for retention claims as they fall due; and

(b)the receiver’s fees would unnecessarily reduce amounts received by the subcontractors.

[16]   Mr Cain notes that RVG Law no longer acts for RCCO and that it is not clear on what basis it is suggested that RVG Law could or would be prepared to deal with the Fund. Regardless of RVG Law’s willingness or otherwise to do so, the Fund could not simply be distributed in accordance with the claims that are made by subcontractors. The reason retentions are held is to ensure that money is available to remedy defects in works undertaken by a subcontractor. Mr Cain had to deal with defects claims and in one instance the costs to remedy defects exceeded the amount withheld as retentions by around $100,000.

[17]   Mr Cain also notes the issues with that subcontractor is but one example of defective workmanship that he has had to consider and manage with respect to the Remarkables Residences. He states, correctly in my view:

With respect to Mr Faul, he appears to be suggesting that, irrespective of any defects identified prior to the defects liability period in the work undertaken by the Entitled Subcontractors expiring, the Fund should be distributed to the Entitled Subcontractors in the amount that each of them say they are owed. I do not consider that is appropriate as under Mr Faul’s scenario a company like CDH Painting would have the retentions that RCCO’s system shows as owing

to them released, irrespective of defects in the work and the cost to remediate those defects.

[18]   In relation to the receiver’s costs, Mr Cain has detailed the tasks that have been undertaken to administer the Fund and make this application. Up to 30 June 2021, he has incurred legal costs in respect of this matter of $13,373.45 and internal costs of Ernst & Young of approximately $30,000 including GST. Further costs will be incurred. Such costs, he says, were necessarily incurred and should be met by the subcontractors with claims on the Fund and not the general creditors of RCCO in the liquidation who get no benefit at all from the work or the Fund.

The appointment of a receiver and manager

[19]   I am satisfied, having regard to the terms of the Act and the decision in Ebert Construction,4 that the only subcontractors with any claim on the Fund are the Reconciled and Transferred Retentions Subcontractors.

[20]   In Ebert Construction, Churchman J relied upon the Court’s inherent jurisdiction and Rea v Omana Ranch Ltd, to appoint receivers and managers to administer a retention fund for a construction company that was in liquidation and receivership.5 A factor that was relevant in convincing him to exercise the jurisdiction was that no-one else was managing the fund. I relied upon Ebert Construction6 and Rea7 to appoint a receiver and manager to administer a retention fund in Oorschot v Corbel Construction Ltd (in liq).8

[21]   There is no-one, other than Mr Cain, who is willing to administer the Fund. Mr Cain and his staff have undertaken a significant amount of work to date investigating the affairs of RCCO including the subcontractors’ retentions. I do not perceive any obvious conflict in Mr Cain’s role as liquidator and as receiver and manager administering the Fund. Unless the Fund is administered the subcontractors will not be paid. I am satisfied, therefore, Mr Cain should be appointed the receiver

4      Bennett v Ebert Construction Ltd (in rec and liq), above n 1.

5      At [92] citing Rea v Omana Ranch Ltd [2012] NZHC 2639, [2013] 1 NZLR 587 at [7].

6      Bennett v Ebert Construction Ltd (in rec and liq), above n 1.

7      Rea v Omana Ranch Ltd, above n 5.

8      Oorschot v Corbel Construction Ltd (in liq), above n 2.

and manager of the Fund for the purposes of resolving any issues that may arise from that process and distributing the Fund.

Distribution of the retention fund

[22]   The orders that Mr Cain seeks will see the Fund in its entirety (less Mr Cain’s costs) paid on a pro rata basis, based on the amount each subcontractor’s valid claim bears to the total of all claims upon the Fund. None of the Reconciled and Transferred Retentions Subcontractors have objected to this approach. I consider it appropriate. I do not consider that Mr Cain’s costs can realistically be apportioned on any other basis. Further, while potentially distribution in this manner may benefit some subcontractors over others, the amount by which it will do so is not significant.

Interest

[23]   Mr Cain seeks an order that no interest will be paid unless and until all valid (non-interest) claims on the Fund are paid in full. As there will be a shortfall in the Fund the practical impact is that no interest will be paid to any subcontractors. The subcontractors’ entitlement to interest earned on the fund is unclear in any event.9

[24]   Requiring Mr Cain to pay interest would add complexity and additional cost to the processing of claims on the Fund. The interest claims would also deplete the recovery rate on valid claims to the Fund. Given the modest sums of interest that will accrue the pragmatic approach is to ignore any interest component. Furthermore, the ability to make an interim distribution will enable some payments to be made in respect of valid claims to the Fund promptly alleviating financial pressure on the subcontractors.

Payment of Mr Cain’s fees in relation to management/distribution

[25]   As noted above, Mr Cain has detailed the issue of his costs and is plainly mindful of the relatively modest amount of the Fund and of minimising costs to be claimed against the Fund. I am satisfied the costs he is seeking to deduct from the Fund are reasonable.

9      See Construction Contracts Act, s 18F(2)(b).

Result

[26]I make orders as follows:

(a)The applicant is appointed receiver and manager of the Fund.

(b)The Fund is held by RCCO on trust in accordance with s 18A to 18I of the Construction Contracts Act 2002 for the subcontractors who:

(i)had a contract that was recorded on RCCO’s tracking system as being entered into with RCCO after 31 March 2017; and

(ii)for whom RCCO subsequently transferred a portion of the retention monies related to their contracts to the Fund; and

(iii)for whom retention monies did not cease to be retention monies pursuant to s 18C(3) of the Act.

(c)The applicant may determine and pay valid claims on the Fund, including by way of interim distribution, in accordance with the terms of the relevant subcontract, the Act and the orders granted herein.

(d)The applicant may make payments to those subcontractors entitled to share in the Fund:

(i)on a pro rata basis (in relation to the amount a subcontractor’s valid claim bears to the total of all valid claims as at the date of liquidation); and

(ii)on a basis which does not pay any interest claims on any retention monies unless or until all valid (non-interest) claims on the Fund are paid in full.

(e)The applicant may deduct from the Fund his costs and expenses relating to the management and administration of the Fund including those in

respect of this application to a limit of $25,000 without further approval of the Court.

[27]   I reserve leave for the applicant to apply for further directions as may be required to give effect to the orders made.

O G Paulsen Associate Judge

Solicitors:
Lane Neave, Christchurch