Certainty
over project financing is confirmed following a Court of Appeal ruling that progress
payments directly from financier to builder under “direct agreement” funding are
free of insolvency law clawback rules should the developer go bust.
Ebert Construction Ltd appealed
a High Court ruling ordering repayment of $1.06 million received from financier
BOS International in November 2008, days before liquidation of Takapuna
Procurement Ltd. Takapuna was developing
Shoalhaven apartments, a $33 million project on Auckland’s North Shore. Payment by BOS International was treated as a
payment through Takapuna Procurement by the High Court. Generally, payments
received shortly before insolvent liquidation must be refunded. The disappointed creditor must then prove in
the pool with other creditors getting cents in the dollar, if any, out of the
liquidation.
Given importance of
the appeal to project financing, the Court of Appeal asked for expert evidence
on use of direct agreement contracts in the construction industry. Direct agreements are three-way contracts:
the financier agrees to fund the project; the developer manages the build; the
builder gets paid direct by the financier in progress payments after certifying
staged completion. The court was told
financiers encourage direct agreements.
They gain the benefit of “step-in” rights. If the developer goes bust, the financiers
can take over the project with the same builder finishing to completion. This avoids financiers being left with an
unsaleable, partly-completed project where all contractors have walked off. Builders appreciate the benefits. While financiers do gain increased control
over the project, there is the security of continuity in the work and a
“guarantee” of payment if the developer goes bust.
The Court of Appeal
said BOS International was directly liable to make progress payments to Ebert
after receiving progress certification.
BOS was not making payment as agent for insolvent developer Takapuna
Procurement. The disputed $1.06 million payment
received by Ebert could not be challenged by the liquidators. BOSI International was obliged to pay Ebert.
There was no payment from Takapuna Procurement to Ebert.
Ebert Construction Ltd v. Sanson – Court of Appeal (8.06.17)
17.065