The collapse of Mainzeal Property and Construction Limited has been a wakeup call to many in the building industry. Since the repeal of the Wages Protection and Contractors’ Liens Act in 1987, there has been little protection afforded to subcontractors in the construction industry. The Construction Contracts 2002 was introduced to bring in a system by which subcontractors could enforce their contract claims against head contractors, regardless of whether the head contractor had been paid by its principal.
However, the new Act has merely widened the scope for head contractors to find and document reasons for not paying subcontractors claims on time. The principal deficiency of the Act however is in the area of retentions, which for most subcontractors will include their profit margin for the work performed. Retentions can be and are withheld by principals, often for unjustified reasons. Unless the head contractor is prepared to go to Court to challenge them, the retentions can be withheld for years. We have a liquidation currently where the principal, a Government Department, is claiming a right to 20 years retention over workmanship guarantees.
In the Mainzeal situation decisions will initially be taken by its receivers, who are accountable to the bank which appointed them. The bank is a secured creditor and all recoveries, net of receivership costs and preferential creditor payments, will go to the bank in reduction of its lending. Subcontractors are unsecured creditors, along with the many principals who will be left with partly completed Mainzeal buildings or other claims against the company.
Subcontractors and other unsecured creditors are only likely to receive a recovery from the liquidators appointed to Mainzeal. Unlike receivers appointed by a secured lender, liquidators are appointed to represent the interests of all creditors. In addition to the any potential asset realisations remaining after the secured creditor has been repaid, they have access to avenues for recovery which receivers do not. In particular, actions against directors for reckless trading, and the setting aside of voidable payments.
It is therefore important for unsecured creditors to register their claims with the liquidators.