High Court holds that retention monies recovered from company directors are not company assets in liquidation

The High Court in Burt v Grant [2025] NZHC 2486 has held that retention monies recovered from company directors in the event of company liquidations are not company assets and must be held separately.

Under the Construction Contracts Act 2002 retention money is money that would otherwise be payable to a party but is withheld as security for the performance of that party’s obligations under the contract.  

Retention monies must be held on trust, ensuring that sufficient funds remain available to pay the party from whom the funds are being withheld, rather than being applied towards general liabilities and debts owed by the party retaining the funds.

Background

Two related companies, SCL and SCAL went into liquidation, owing over $2.1m in retention monies to subcontractors.  The companies had evidently failed to comply with the obligations to hold retention monies on trust.  

Liquidators were subsequently able to recover retention monies from some of SCL and SCAL’s directors (under a breach of director duties claim) and recovered payments of retentions owing to those companies from principals under head contracts.

The liquidators wanted to apply the funds towards their remuneration and expenses, however a dispute arose as to whether the retention monies formed part of the general pool of the assets of the companies or whether they were held on trust for the subcontractors.  

The liquidators also argued that as they were preferential creditors under the Companies Act 1993, they should maintain priority for their remuneration and expenses ahead of company assets and retention monies.

Decision

The High Court held that because the retention monies are effectively trust monies in accordance with the CCA, they could not be included in the respective companies’ assets.  Accordingly, they could not form part of the companies’ general pool of assets which would otherwise be available to pay the liquidators.

In relation to the retention monies recovered in settlements with the company directors, the Court found that the breaches which made those funds recoverable were breaches of trustee duties, despite the liquidators claiming breaches of company director duties.  

Accordingly, the settlement amounts effectively restored the funds intended to be held in statutory trust as retention monies.  This meant that the retention monies recovered from the directors were restored to the constructive trusts of which the subcontractors were the beneficiaries, rather than being restored to the company asset pools available to the liquidators.

Regarding the obligations of the directors under head contracts to pay retention payments to the companies, the Court held that the relevant obligations were transformed into liquid assets of the companies (as accounts receivable) at the point in time when the terms of the head contracts required release of the retentions.  Accordingly, from the time the accounts receivable were received, the statutory trust then applied to the account receivable.

Summary

This decision of the High Court is important for contractors and subcontractors alike in New Zealand’s construction industry, as well as for private individuals such as homeowners who enter construction contracts.  It is always important to seek timely legal advice to ensure your position is protected.

Leading law firms committed to helping clients cost-effectively will have a range of fixed-price Initial Consultations to suit most people’s needs in quickly learning what their options are.  At Rainey Collins we have an experienced team who can answer your questions and put you on the right track.

Guy Goodwin and Raiyan Azmi