Often a three way agreement is entered into between the financier, the developer, and the construction company providing for the financier to pay the construction company directly. However, the judgment shows that payments made under such a direct agreement can still be subject to attack by a liquidator.
A careful analysis needs to be undertaken of both the contractual arrangements and how the payments have been made to determine whether payments may be avoided by a liquidator. Even where the payments are potentially voidable, the creditor may have a defence if the creditor received the payment in good faith and without suspicion of the company’s insolvency.
Contractors and builders may want to consider this risk when structuring payment arrangements with financiers. Direct agreements may still be beneficial to financiers in that they ensure the money goes direct to the builder rather than being held by the developer, but that does not protect the contractor from a voidable transaction claim.
The case
In Sanson v Ebert Construction Limited [2015] NZHC 2402, the High Court found that payments made by a property developer’s financier to a construction contractor, Ebert Construction Limited (Ebert), were voidable transactions under the Companies Act 1993 (the Act). Ebert was required to refund NZ$1.6 million to the liquidators, David Bridgman and Craig Sanson of PwC. This calls into question the effectiveness of the established practice of direct payment agreements by financiers to builders to avoid voidable claims by liquidators.
The facts
Takapuna Procurement Limited (In Liquidation) (TPL) had developed apartments on the North Shore and had entered into a NZ$33 million construction contract with Ebert to build the apartments. TPL and Ebert also entered into a direct agreement with TPL’s financiers that obligated the financiers to pay Ebert amounts that TPL was obligated to pay under the construction contract. Two payments totalling just over NZ$1 million were made by TPL’s financier, BOS International (Australia) Limited (BOSI), to Ebert within three days of TPL being placed into liquidation. At the time of the payments, Ebert was aware that an application was being brought by the IRD to place TPL into liquidation.
Were the payments made by TPL?
Section 292 of the Act requires that a transaction has been ‘by the company’ if it is to be potentially voidable. Despite this, the Courts have recognised that a transaction can be effectively treated as being by the company even though made by a third party. One type of such situation is where the third party makes payment from monies that belong to the company. In this case, the evidence was that the payments had been made by BOSI from monies that had been drawn down under TPL’s facility agreement. Here, the complicating factor was the presence of the direct agreement. Ebert argued that due to the obligations imposed on BOSI under that agreement which were well known and established in the construction industry, the payments had been made by BOSI to discharge its own debt and so the payments had not been made by TPL. The Court rejected the argument that direct agreements had any special status in the construction industry which meant they were not subject to the voidable transaction regime.
The Court found that BOSI did not owe any debt to Ebert. It only had a contractual obligation to provide the machinery to discharge the debts that TPL owed to Ebert. Accordingly, the direct agreement did not affect the position that the payments had been made by TPL given that they had been made from amounts drawn down against TPL’s facility.
The payments were found to be voidable transactions along with the transfer of an apartment in the development from TPL to Ebert made in reduction of TPL’s indebtedness. As Ebert had been aware of the company’s impending liquidation and of the risk of claw back, it was unable to raise the defence set out in the Act. The Court found the transactions had not been made in good faith and Ebert had clear reason to suspect TPL’s insolvency.
Bell Gully represented the liquidators in the case.
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