Paying subcontractors direct at a time when the head contractor was having cashflow difficulties had a cost for Tony Gapes Mico Development Ltd looking to push ahead with its $10.4 million Queenstown apartments project; Mico was still liable to pay its head contractor for $505,800 of sub-contractors’ work when the head contractor subsequently went into liquidation, in effect having to pay twice.
The High Court was told Christchurch-based Acium Construction Ltd, controlled by Craig McConnell, signed up as head contractor for construction of the Queenstown apartments. The project did not run smoothly. Covid-19 lockdowns intervened. There were disputes over what were valid variations to the construction contract and further disputes over items alleged to have been ‘de-scoped;’ that is, work removed from the contract. Up front, Acium had agreed to a fixed price construction at $10.4 million.
Evidence was given that a number of sub-contractors became concerned about Acium’s ability to pay for work done. They either refused to work for Acium Construction or walked off the job unless arrangements were made for Mico Development to pay them direct. Mico was under pressure. Buyers of pre-sold apartments could cancel if the job was not finished by 10 December 2020. Mico agreed to pay direct those subcontractors critical to getting apartments finished. Practical completion was achieved on 9 December. Two months later, Acium was in liquidation, insolvent.
Acium liquidators sued, claiming Mico Developments still owed $1.34 million. Associate judge Lester ruled $804,000 of this claim was a good old-fashioned breach of contract dispute which required a full court hearing. A set-off for the $505,800 paid direct to sub-contractors was a different story; this was a voidable transaction dealt with under the fast-track Companies Act insolvency rules.
Transactions in a period six months prior to liquidation can be reversed. ‘Transaction’ is widely defined. Money need not have changed hands. Judge Lester ruled Mico Development received an advantage when it paid subcontractors direct knowing that Acium was having cashflow difficulties and then sought to deduct these payments from progress payments payable to Acium under its head contract. In economic terms, Mico was being ‘paid’ its costs of getting the job finished by in turn making deductions from the agreed contract price payable to Acium. As a voidable ‘transaction,’ Mico was ordered to pay Acium the sub-contractor payments of $505,800 it was attempting to deduct from the contract price, paying twice for the same work.
Dalton v. Mico Development Ltd – High Court (4.08.22)
22.135