It's all about the money: key changes to the construction retentions regime
Some key changes to the retention money regime under the Construction Contracts Act 2002 (CCA) are one step closer to coming into effect. The Construction Contracts (Retention Money) Amendment Bill (Bill) was introduced to Parliament on 1 June 2021, and recently passed its first reading on 8 June.
The regime under the CCA applying to retentions came into effect on 31 March 2017. Retentions under construction contracts entered into or amended after that date were required to be separately accounted for, and a trust regime was required to be created. However, funds were not required to be held by either a principal or head contractor in a separate bank account. Also, among other things, the consequences of a party failing to comply with the regime were not spelt out. These issues were put in stark relief by Bennett & Ors v Ebert Construction Limited (in receivership and liquidation) where subcontractors suffered significant losses in the insolvency of Ebert. A subsequent report by KPMG reviewing the regime noted a range of limitations and potential improvements.
The Bill changing the existing regime is the Government's response to these issues. It is also part of the Government and industry's attempts to transform the sector via the Construction Sector Transformation Plan.
What you need to know about the changes
A key change is that retention money held on trust will need to be kept separate from other money or assets. This mirrors overseas regimes and, in our view, has always represented good practice.
Regardless of whether retentions are in fact set aside or the principal/head contractor takes any of the other required steps, the Bill proposes to create a trust as soon as the relevant amount meets the definition of retention money. This is an attempt to address the issues arising in the Ebert case where the High Court found that the CCA did not in fact create a deemed trust and losses to subcontractors occurred because the relevant trust was never created. This may well be a helpful clarification but might not address all scenarios, particularly in an insolvency where the principal/head contractor has entirely disregarded its obligations under the CCA and there are no relevant funds available at any relevant time.
Accordingly, the above change to the CCA goes hand in hand with the introduction of an offence regime under which the principal/head contractor and directors (including shadow directors) can be liable to criminal fines. There is also an enhanced transparency regime under which principals/head contractors are required to give information about the retention money (including total amount and bank account details) to beneficiaries as soon as practicable after an amount becomes retention money and then at least every 3 months until the retention money trust ends.
Insolvency practitioners who are appointed to manage the affairs of principals/head contractors will welcome the certainty of provisions clarifying their role as trustee of retention money which includes the ability to deduct fees for collection/administration costs.
The Bill has been referred to the Transport and Infrastructure Committee. Submissions are due by 23 July, with the report due by 11 November. Industry players can also keep up to date with the progress of the Bill here.
Like the original retention changes, it is proposed that most of the new provisions will only apply to contracts entered into or amended after the Construction Contracts (Retention Money) Amendment Act comes into force (which is intended to be six months after royal assent). However, the changes regarding the role of the liquidator/receiver will sensibly apply to all liquidations/receiverships, regardless of when the contract was entered into.
In the meantime, all industry players should consider their retention practices and ensure that they are well placed to meet the more stringent requirements. As always, our team will keep you posted as the Bill progresses.