4. Inside the Hawkins Construction mess

Hawkins sale proceeds used to settle claim on major project, receiver says. Photo by Lynn Grieveson

Funds from the sale of Hawkins Construction to Downer EDI were recycled back into the leftover businesses to settle a claim on a major project, wind down the remaining projects, and prepare for a growing number of legal disputes, the receiver says. Paul McBeth reports on company wind-ups after quake rebuild and leaky building claims that means almost 1,000 contractors are owed about $44 million.

The Orange H Group of companies were the entities left over from the sale to Downer and were largely projects that had been completed but were still within their liability period, receiver Andrew Grenfell of McGrathNicol said in his first report. The principals of those projects required performance bonds to stay in place, but the sale meant the issuers of the performance bonds providing surety - HSBC and Vero Insurance - needed cash-backing, which used "a significant portion of the sale proceeds," Grenfell said. At the time of the appointment, the McConnells were owed $15.9 million, matching the value of performance bonds and sureties on issue.

As those bonds were released the cash was recycled back into working capital to pay sub-contractors and other creditors, and at the time of Grenfell's appointment, the McConnell family had provided $14.7 million of cash into secured bank accounts and $1.2 million held by CBL Corp-subsidiary Assetinsure to support performance bonds and sureties on issue.

"The remainder of the sales proceeds were used to settle a significant claim on a major project and as working capital to fund the completion of projects and wind down the group, including defending a number of legal proceedings," Grenfell said.

The group's cash flow deteriorated as it took longer to settle claims for the ongoing work and a number of sub-contractors issued statutory demands for overdue payment. That, combined with "the crystallisation of other significant contingent claims", led to the directors appointing receivers on May 11, less than a fortnight after the High Court ordered the ex-Hawkins companies pay $13.4 million to fix nine leaky buildings at Botany Downs Secondary School in Auckland.

Liquidators have also been appointed to a number of the ex-Hawkins entities. In a report last week, Andrew Bethell and Andrew McKay of BDO said they will look at the group's $453 million of inter-company loans, including those that led to a security interest, the Downer transaction and sale proceeds, claims faced by the company, and any potential voidable transactions. They said it was too early to say whether there would be anything available for the near-1,000 unsecured creditors owed about $44 million.

The ex-Hawkins companies face a separate claim from the Ministry of Education which is in the early stages of litigation. They are also being sued by IAG New Zealand as a third party to defective work claims from the Canterbury rebuild. A separate entity, which stopped taking on work in 2012, faced claims from Vector. The construction firm and Auckland lines company had previously clashed over work done on upgrading a $419 million substation.

The IAG dispute has already been subject to some early decisions. An April ruling by Chief High Court Judge Geoffrey Venning said Downer paid $80 million for the Hawkins assets, of which $57.5 million was paid upfront with the balance to be paid later.

Of that, some was paid to independent financial adviser Grant Samuel, a dividend was paid to McConnell Ltd which was then used as collateral for bonding, and the balance was put on deposit, used for further bonding, or added to working capital. Working capital adjustments led to a further payment to the ex-Hawkins group, which the Australian company has said totalled A$55 million.

Since the receivership, Downer has cancelled an agreement it had with the ex-Hawkins companies to manage work on the retained projects and has entered into a new arrangement with the receiver to help recover outstanding payment claims and retentions from the projects' principals.

"The receivers continue to work with principals to seek recovery of amounts due on the retained projects," Grenfell said. "In some cases this may require legal actions against principals."

Grenfell said it was too early to say if anything would be left over for unsecured creditors. That would depend on how successful he was in recovering final payment claims, retentions and collateral from the outstanding performance bonds.