08 June 2017

Project Financing: Ebert Construction v. Sanson

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)

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