Mainzeal a tough lesson for sub-contractors
When Mainzeal Property and Construction Limited was placed into receivership earlier this month, Mainzeal's employees, sub-contractors and suppliers were directly affected, as were a number of construction projects under Mainzeal's control.
Many sub-contractors found themselves locked out of the building site they had been working on, with their tools still on site. If you're a sub-contractor or supplying goods to another party, then lessons can be learned from the Mainzeal receivership.
Receivership is distinct from liquidation - a receiver is appointed by a secured creditor (in Mainzeal's case its bank), with the receiver being responsible only to recover money owed to the creditor who made the appointment. A receiver doesn't owe a wider duty to other creditors to recover money owed to them. This means that, if you're a creditor of a company which is placed into receivership, you need to take steps to protect your own interests, because the receiver is not acting on your behalf.
A liquidator, in comparison, owes duties to all creditors to realise the company's assets and distribute available proceeds to the creditors. However, some creditors take priority if they have security for the money they are owed, or are a special class of creditor, such as employees owed wages. A receiver is appointed to take charge of some, or all, of a company's assets. A receiver can take up existing contracts which had been entered into by the company in receivership, but equally a receiver has the power to terminate contracts. This means that if you're a sub-contractor who's owed money by a company that's in receivership, the receiver may try to negotiate to keep you on site to complete a project (and agree to pay you for that future work), but there's no obligation to meet your outstanding invoices for work already carried out for the company pre-receivership, but which remain unpaid.
The best way to protect yourself from a receivership or a liquidation is to make sure you've retained your property rights in any items supplied to a third party which they haven't paid for. Many sub-contractors have clauses in their standard terms and conditions which give them the right to register a security interest in goods supplied on the Personal Property & Securities Register (PPSR). Anecdotal evidence, however, says that very few sub-contractors or suppliers actually do this.
If you don't register an interest on the PPSR, and the company then goes into receivership or liquidation, items supplied by you may be sold by the liquidator or receiver, and the proceeds used to pay secured creditors.
Some contracts include terms and conditions, which attempt to retain title in items supplied until goods are paid for in full. Where items haven't been affixed to property, then this attempt to retain title is effectively meaningless, and will be trumped by secured creditors' rights. If your terms and conditions don't expressly provide a right for you to register an interest on the PPSR then you should review your terms and conditions, and amend them to give you the right to protect your interest in goods. The likely outcome from the Mainzeal receivership is that its assets will be sold to other parties. Those parties may want to retain some of the Mainzeal employees and sub-contractors to complete the current projects.
For sub-contractors, however, the outlook is likely to be grim where they have supplied goods and services which hadn't been paid for at the time the receiver was appointed.
Elspeth Horner is a partner in Wellington law firm, Morrison Kent. Information in Your Law should not be a substitute for legal advice.
Sunday Star Times