Most Read Contributor in New Zealand, September 2016
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
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
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
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
establish more direct payment arrangements with the financier,
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
The information in this article is for informative purposes
only and should not be relied on as legal advice. Please contact
Chapman Tripp for advice tailored to your situation.
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Anyone with standard form contracts who deals with small business must review the contracts for potential unfair terms.
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