Direct deeds – not the protection expected

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.

Case

In Sanson v Ebert Construction Limited [2015] 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.

Implications

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...