Insolvency: Sanson v. Ebert Construction

“Direct agreement” financing structures commonly used in the construction industry to protect payments do not prevent insolvency clawbacks the High Court ruled when ordering Ebert Construction repay benefits of $1.6 million received in the days before liquidation of a McEwan family company which built the Shoalhaven apartments on Auckland’s North Shore.

The McEwans used a shell company called Takapuna Procurement Ltd to manage the Shoalhaven project.  Construction was finished in April 2008.  The company was wound up by Inland Revenue in November 2008 for unpaid GST totalling $2.7 million.

The High Court was told Ebert Construction Ltd agreed to build Shoalhaven for $33 million.  Project financing was arranged through Halifax Bank of Scotland and Strategic Finance under a direct agreement arrangement: When a progress payment was due a McEwan engineer would certify the value of the work done and Takapuna Procurement would then authorise the financiers to make payment direct to Ebert Construction.  When Takapuna Procurement went into liquidation insolvent, Ebert Construction argued it had received no payments from Takapuna Procurement, there had been no “transactions” with the company, so the liquidators had no claim to any monies received from the financiers.

Direct agreements are commonly used by the construction sector in the belief they prevent liquidators of the developer from clawing back progress payments as voidable transactions.  Associate Judge Doogue ruled they are no protection.  The progress payments made “belonged” to Takapuna Procurements, he said.  The company directed its financiers to make payments in discharge of debts it owed.  The disputed payments were made at a time when Takapuna Procurements was insolvent and Ebert Construction knew it was insolvent.

Ebert Construction was ordered to pay liquidators of Takapuna Procurement cash payments of $1.06 million received from the financiers in the three days prior to Takapuna’s liquidation and further ordered to pay $540,000 being the agreed value of a Shoalhaven apartment transferred to Ebert Construction in lieu of money due.
Sanson v. Ebert Construction - High Court (6.10.15)
15.109
 

Post judgment note: The Court of Appeal confirmed the enforceability of 'direct agreement' financing in an appeal ruling issued June 2017.