Direct deeds provide limited protection for contractors.
This is the effect of the judgment arising from what is believed to be the first use of the voidable transactions regime to challenge a payment made under a direct deed.
What are direct deeds?
Direct deeds are commonly used on construction projects between the developer, the contractor and the financier. They give the financier the right to take over the role of the developer under the construction contract so that the project can be completed. Often they provide for the financier to make payments from the loan facility to the contractor directly to cover the development progress payments.
These deeds recognise that the developer often has limited personal funding available for the development and that the financier is critical to the success of the project.
In Sanson v Ebert Construction Limited  NZHC 2402 the liquidator successfully argued that payments made by BOS International (Australia) Limited (BOSI) to Ebert Construction Limited (Ebert) under a direct deed were insolvent transactions entered into by the developer, Takapuna Procurement Limited (TPL). BOSI did not take over the construction contract but continued providing funding to complete the development. The Court found that the funds paid by BOSI were the property of TPL and that the payment was made by BOSI on TPL’s behalf. BOSI had a contractual obligation to Ebert to make the payments but only as a conduit for TPL. There was no independent debt.
In our view this decision is correct. The only surprising element is that liquidators haven’t previously used the
voidable transactions regime in this scenario.
Direct deeds can take considerable time and effort to negotiate as both the financier and the contractor try to protect their interests. This case shows, however, that the protections for the contractor can be illusory. Generally, the financier is only required to pay the contractor if and when it is obligated to advance funds under their facility agreement.
If contract costs exceed the available facility, or if the developer is in default under the bank facility, the facility can be terminated – just at the time the contractor is most reliant on the financier. And even if the financier does make the payment, it can be clawed back by a liquidator.
On a default, the financier will usually have the right to step into the developer’s position under the construction contract.
Payments made by the financier after it has stepped in will be made on the financier’s own account, not on behalf of the developer, so should not be voidable.
Contractors will need to:
- monitor the solvency of the developer and, if this is in doubt
- establish more direct payment arrangements with the financier, or
- look to alternative sources of security for payment.
The deeds still have value for financiers but they need to be mindful of contractors’ concerns to ensure they stay working and complete the project.
The proceedings were filed by the liquidators almost six years after the date of liquidation. The Court held that despite the long delay there was no basis for it to exercise discretion to prevent recovery (and the statutory limitation period had not yet expired).