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High Court of New Zealand Decisions |
Last Updated: 17 October 2018
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IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
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CIV-2018-404-970
[2018] NZHC 2379 |
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UNDER
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the Companies Act 1993
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AND
IN THE MATTER
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of the liquidation of POLYETHYLENE PIPE SYSTEMS LIMITED (in
liquidation)
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BETWEEN
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DAVID ROSS PETTERSON as liquidator of Polyethylene Pipe Systems Limited
(in
liquidation) Applicant
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AND
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McCONNELL DOWELL
CONSTRUCTORS LIMITED
First Respondent
DAVID CHARLES BROWNE
Second Respondent
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Hearing:
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20 August 2018
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Appearances:
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B Gustafson for the Applicant G Neil for the First Respondent
D Russ for the Second Respondent
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Judgment:
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11 September 2018
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JUDGMENT OF ASSOCIATE JUDGE R M BELL
This judgment was delivered by me on 11 September 2018 at 11:30 a.m. pursuant to r 11.5 of the High Court Rules 1985.
Registrar/Deputy Registrar
..........................................
PETTERSON v McCONNELL DOWELL CONSTRUCTORS LTD [2018] NZHC 2379 [11 September 2018]
[1] Liquidators sometimes lack the resources and funds to get in and realise assets of the company for creditors. Parliament has decided that one solution is to incentivise unsecured creditors to fund the recovery of assets or give an indemnity for expenses by promoting such a creditor in the preferential claims under schedule 7 of the Companies Act 1993. That is found in cl 1(1)(e) of the schedule:
(1) The liquidator must first pay, in order of priority in which they are listed-
...
(e) to any creditor who protects, preserves the value of, or recovers assets of the company for the benefit of the company’s creditors by the payment of money or the giving of an indemnity-
(i) the amount received by the liquidator by the realisation of those assets, up to the value of the creditor’s unsecured debt; and
(ii) the amount of the costs incurred by that creditor in protecting, preserving the value of or recovering of those assets.
[2] In this proceeding, the liquidator of Polyethylene Pipe Systems Ltd (in liquidation) seeks directions whether he should recognise two claims to priority under cl 1(1)(e). He believes that McConnell Dowell Constructors Ltd has a sound claim, but not Mr D C Browne. He also seeks a direction that the amount of Mr Browne’s claim as a non-preferential unsecured creditor is $201,316.
[3] McConnell Dowell says that it is an unsecured creditor for $2,236,940.49 and that it has funded litigation by the liquidator, which has recovered $1,114,253 for creditors. It paid the liquidator $297,748.80 to bring those proceedings and it is funding further litigation by the liquidator: this application and a claim under s 301 of the Companies Act. It seeks priority under cl 1(1)(e)(i) for $1,114,253 and under cl 1(1)(e)(ii) for $297,748.80. If the further proceedings it is funding result in more recoveries it seeks similar priority under the clause for the unpaid balance of its unsecured debt plus the costs it incurs for those recoveries.
[4] Mr Browne, a director and shareholder of the company, is a failed secured creditor. He held a general security agreement as security for his advances to the
company and appointed a receiver. He funded litigation by the receiver. The receivership resulted in a net recovery of $201,316. His security was set aside under s 299 of the Companies Act and he was ordered to refund the $201,316. He claims priority for that amount, but says the company’s total debt to him is $523,579 plus interest. He also seeks priority for $90,688.42 for the costs of the litigation for which he has not been reimbursed.
[5] I find that McConnell Dowell’s claim under the clause is sound, but not Mr Browne’s. He is a non-preferential creditor but his claim is not limited to $201,316.
[6] Where the court reviews a liquidator’s decision to reject or admit a claim, it decides the matter afresh.1 It is not bound by the liquidator’s decision and is not concerned whether the liquidator acted reasonably or not. Here, in applying for directions under s 284 of the Companies Act, the liquidator has asked the court to decide the matter for him. The court deals with the merits in the same way that it reviews a decision to reject a claim. It is not concerned with the way the liquidator decided the matter. The parties may give evidence of matters that may not have been dealt with before. Having surrendered the decision to the court, a liquidator may be adversarial in urging one outcome over another.2
Background
[7] I set out the facts generally. It will be necessary to go into some of them in greater detail later.
[8] Polyethylene Pipe Systems Ltd supplied polyethylene pipes and fittings for wastewater, stormwater and irrigation projects. Mr Browne had related companies, including David Browne Contractors Ltd and David Browne Mechanical Ltd. These two advanced significant funds to Polyethylene Pipe Systems Ltd.
[9] In 2007 Polyethylene Pipe Systems Ltd became a sub-contractor to McConnell Dowell Constructors Ltd. The contract was to weld polyethylene pipes to be laid on
2 Tanning Research Laboratories Ltd v O’Brien (1990) 169 CLR 332 at 341.
the floor of Lyttelton Harbour as part of a sewer out-fall project for the Christchurch City Council. Some welds failed. In 2008 McConnell Dowell Constructors Ltd wrote to Polyethylene Pipe Systems Ltd holding it liable and advising that it had suffered significant losses. While Polyethylene Pipes Systems Ltd contested liability, McConnell Dowell prevailed. In 2009 in an adjudication under the Construction Contracts Act 2002 it obtained an award of $2,965,334 plus costs of $31,590. The amount payable under the award has been reduced to $2,236,940 because of a payment by McConnell Dowell’s insurer.
[10] In June 2008, shortly after McConnell Dowell sent its letter holding Polyethylene Pipe Systems Ltd liable, the directors of Polyethylene Pipe Systems Ltd resolved to repay loans to David Browne Contractors Ltd and David Browne Mechanical Ltd and to repay Mr Browne his current account balance of $340,600. In July 2008, the directors of Polyethylene Pipe Systems Ltd approved new borrowings from Mr Browne to assist its working capital and cash flow requirements. Mr Browne advanced $450,000 to Polyethylene Pipe Systems Ltd secured by a general security agreement. Following that, the company repaid advances received from David Browne Contractors Ltd, David Browne Mechanical Ltd and Mr Browne. In February 2009, Mr Browne made demand on Polyethylene Pipe Systems Ltd to repay his advance of $450,000.
[11] In July 2009, after the adjudicator had issued his award against Polyethylene Pipe Systems Ltd in favour of McConnell Dowell, Mr Browne appointed Mr Glen Stapley, a Christchurch insolvency practitioner, as receiver of Polyethylene Pipe Systems Ltd. At the start of the receivership, the company owed Mr Browne $523,579 plus interest. In August and September 2009, Mr Stapley made interim distributions to Mr Browne totalling $256,922.3
[12] On McConnell Dowell’s application, Polyethylene Pipe Systems Ltd was ordered into liquidation on 5 October 2009 and Mr Petterson was appointed liquidator. At the outset there were no assets available to meet the claims of unsecured creditors.
3 Summarised by the Court of Appeal in Petterson v Browne [2016] NZCA 189 at [58].
[13] As receiver, Mr Stapley brought a proceeding in the name of Polyethylene Pipe Systems Ltd against Bosch Irrigation Ltd. As Polyethylene Pipe Systems Ltd was in liquidation, he applied for leave to bring the proceeding under s 248 of the Companies Act 1993 and s 31(2) of the Receiverships Act 1993.4 Wylie J granted leave.5 The liquidator did not formally appear at the hearing, but filed a memorandum and an affidavit. Wylie J recorded that while Mr Petterson did not oppose Mr Stapley continuing the proceeding in the name of the company, he was concerned that Mr Browne, as the secured creditor, should undertake to cover all costs incurred in continuing the proceeding, including any adverse costs award and expert costs, and that Mr Browne should not be able to claim those costs under his general security agreement.6 Wylie J required Mr Browne to pay security for costs sought by Bosch, to give an indemnity for any adverse award of costs above the security paid and to pay all legal costs and witnesses’ expenses. So long as Mr Browne complied with those conditions, Wylie J considered that there could be no detriment to unsecured creditors.7 He noted also that the terms of the general security agreement allowed Mr Browne to recover legal costs arising from or related to any default under the security and from any enforcement or exercise of the security-holder’s rights and remedies. Accordingly, any legal costs and expenses which Mr Browne spent on the proceeding against Bosch Irrigation Ltd were secured under the general security agreement. Wylie J recognised that he was entitled to priority for those costs under his general security agreement.8
[14] The Bosch case went to hearing in late November 2012. A settlement was reached when it was part heard. Bosch paid $201,250 to Polyethylene Pipe Systems Ltd. In his final report for the receivership, Mr Stapley recorded total receipts of
$481,983 and payments of $201,316 to the secured creditor. In cross examination he acknowledged that Mr Browne had received a further sum of $76,922 from the
6 Above at [8].
7 At [15].
8 At [16].
receivership, derived from the sale proceeds of shares owned by the company before the start of the liquidation.9 Mr Stapley resigned as receiver on 27 May 2013.
[15] In 2014, Mr Petterson began two voidable transactions proceedings, one against Mr Browne and the other against David Browne Contractors Ltd and David Browne Mechanical Ltd. In his proceeding against Mr Browne, Mr Petterson sought orders that $340,600 paid to Mr Browne on 2 September 2010 be set aside as an insolvent transaction under s 292 of the Companies Act and that the general security agreement be set aside as a voidable charge under s 293 or as a security in favour of a director under s 299. Associate Judge Matthews dismissed the claim against Mr Browne.10 Mr Petterson was, however, successful on appeal.11 The Court of Appeal set aside the general security agreement under s 299 of the Companies Act and ordered Mr Browne to pay Polyethylene Pipe Systems Ltd $201,316. It did not order Mr Browne to repay the $340,600 he received in September 2010.
[16] In the second proceeding, Mr Petterson sought orders under s 295 of the Companies Act requiring David Browne Contractors Ltd and David Browne Mechanical Ltd to repay money they had received from Polyethylene Pipe Systems Ltd. While Mr Petterson failed at first instance, the Court of Appeal ordered David Browne Contractors to pay $565,303 and David Browne Mechanical Ltd to pay
$347,634. It also held that Mr Browne, David Browne Contractors Ltd and David Browne Mechanical Ltd were entitled to claim as creditors in the liquidation to the extent of the amounts they had been required to refund under the court’s orders. David Browne Contractors Ltd and David Browne Mechanical Ltd appealed to the Supreme Court unsuccessfully.12 Mr Browne, David Browne Contractors Ltd and David Browne Mechanical Ltd have repaid the sums ordered plus the costs of those proceedings.
[17] Mr Petterson did not have funds for these proceedings. McConnell Dowell Constructors Ltd paid for them—$297,748.80. It says that as a result the liquidator
10 Petterson v Browne [2015] NZHC 866.
11 Petterson v Browne [2016] NZCA 189.
12 David Browne Contractors Ltd v Petterson [2017] NZSC 116, [2018] 1 NZLR 112.
has recovered $201,316 from Mr Browne, $565,303 from David Browne Contractors Ltd, and $347,634 from David Browne Mechanical Ltd, a total of $1,114,253.
[18] McConnell Dowell has paid the liquidator for more proceedings: this application and a claim against Mr Browne under s 301 of the Companies Act for alleged breach of duty as director in selling a parcel of shares, a company asset, at an alleged undervalue.
[19] McConnell Dowell says that it has received two interim distributions from the liquidator—$500,000 on 17 August 2017 and $300,000 on 15 December 2017. While there are some minor creditors, McConnell Dowell, Mr Browne, David Browne Contractors Ltd and David Browne Mechanical Ltd are the significant creditors in the liquidation.
Schedule 7, cl 1(1)(e)
[20] The idea of giving incentives to creditors to indemnify or fund liquidators comes from Australia.13 The Corporations Act 2001 (Cth) s 564 says:
Power of court to make orders in favour of certain creditors
Where in any winding up:
(a) Property has been recovered under an indemnity for costs of litigation given by certain creditors, or had been protected or preserved by the payment of money or the giving of indemnity by creditors; or
(b) Expenses in relation to which a creditor has indemnified a liquidator have been recovered;
the court may make such orders, as it deems just, with respect to the distribution of that property and the amount of those expenses so recovered, with a view to giving those creditors an advantage over others in consideration of the risk assumed by them.
Australian courts have recognised that the section provides a reward to creditors who have taken a financial risk with a view to enhancing the funds for all creditors.14 The Law Commission proposed a similar measure for New Zealand in its study paper,
13 The promotion in rank was enacted in the Companies Amendment Act 2006.
Priority Debts in the Distribution of Insolvent Estates (1999).15 But there is a difference. Whereas the Australian courts have a discretion whether to give relief, what relief and how much, schedule 7, cl 1(1)(e) is a black letter rule that establishes a creditor’s entitlement upon protecting, preserving or recovering under the clause, states the relief and sets its rank in the preferential claims.
[21] While an asserted purpose of liquidation is to treat all unsecured creditors equally so that losses arising from a company’s insolvency fall on all rateably,16 some are given priority for policy reasons. Section 312 of the Companies Act provides for preferential payments in a liquidation:
312 Preferential claims
(1) The liquidator must pay out of the assets of the company the expenses, fees, and claims set out in Schedule 7 to the extent and in the order of priority specified in that schedule and that schedule applies to the payment of those expenses, fees, and claims according to its tenor.
(2) Without limiting clause 2(1)(b) of Schedule 7, the term assets in subsection
(1) does not include assets subject to a charge unless the charge is surrendered or taken to be surrendered or redeemed under section 305.
Schedule 7 includes these groups of preferential claims:
(a) administration costs—cl 1(1);
(b) employee-related claims—cl 1(2);
(c) layby sales claims—cl 1(3);
(d) costs of compromise—cl 1(4); and
(e) revenue claims—cl 1(5).
[22] The administration costs are: (a) the fees and expenses incurred and remuneration of the liquidator, (b) the fees and expenses incurred and remuneration of
16 Attorney-General v McMillan & Lockwood Ltd [1991] 1 NZLR 53 (CA) at 58.
the administrator under Part 15A, (c) the costs of the applicant for the liquidation order,
(d) expenses of the liquidation committee and (e) claims of creditors who pay for or give an indemnity for recovery of assets. Under (e) a creditor has a double preference:
(i) the claim which would otherwise rank equally with other unsecured creditors and
(ii) the costs of recovery incurred by the creditor once liquidation has started. The promotion of claims under cl 1(1)(e)(i) is significant. I make that comment from my experience in reading liquidators’ reports when considering their remuneration. In many cases there are no funds for unsecured creditors and the most frequent preferential creditor, the Commissioner of Inland Revenue, receives only a partial recovery. In a typical court-ordered liquidation a creditor under cl 1(1)(e) will come third behind the liquidator and the petitioning creditor but ahead of the revenue. By giving such a high rank Parliament intended to give a strong incentive to creditors to assist in recovering assets for the liquidation.
[23] That is reinforced once it is seen whether other creditors could stand to benefit from recovery of assets as a result of steps taken under cl 1(1)(e). The proceeds of any realisations will go into the pool to be distributed under s 312, schedule 7, and s
313. The cl 1(1)(e) creditor will be paid their claim up to the amount of the recovery and costs incurred after higher-ranking administration claims but ahead of any lower- ranking creditors. The other creditors can only benefit if assets realised under cl 1(1)(e) yield more than the cl 1(1)(e) creditor’s claim and costs of recovery. If the yield is less than the 1(1)(e) creditor’s claim and costs, other creditors get no benefit and may be worse off.
[24] There are questions of interpretation. So far as counsel are aware, cl 1(1)(e) has been considered in only one other case, Noyce v Parnell Property Investments Ltd.17 While the case gives useful guidance, it should be noted that the claimant was undeserving, his evidence was not believed, his claims lacked any merit and he did not have legal representation at first instance.
17 Noyce v Parnell Property Investments Ltd [2015] NZHC 2037. There was delay in prosecuting an appeal and an extension of time was refused: Fifer Residential Ltd v Noyce [2016] NZCA 88. My comments in Reynolds v James [2012] NZHC 2132 at [50]- [51] can be disregarded.
[25] To be eligible under the clause, a creditor must first have an admissible claim under s 303 of the Companies Act. Such a claim must be legally enforceable.18
[26] Claims under cl 1(1)(e) may be made only when payments have been made or indemnities given after the start of the liquidation.19 Many creditors may confer value on a company before liquidation by supplying goods, services or funds on credit, but for that they stand equally with all other unsecured creditors.
[27] The clause recognises only two forms of assistance, paying money and giving an indemnity. Supplying goods and services do not count.
[28] The clause requires some success. The claimant must be able to show that their payments or indemnity did result in protection, value preservation or recovery of assets for the benefit of all creditors. The extent of success matters, as it sets a cap on the amount for which a creditor’s claim is promoted under cl 1(1)(e)(i). There is however no requirement that the benefits obtained must exceed the costs. After all, the creditor claiming under the clause is paid their claim to the extent of the recovery plus their costs in obtaining it.
[29] For the liquidator and McConnell Dowell, it was submitted that a secured creditor cannot claim under the clause. To a certain extent that is obvious, because s 312 deals with distributions to unsecured creditors. But the submission was directed at an earlier time: a creditor cannot claim if they were secured when they protected, preserved the value of or recovered assets of the company or gave an indemnity under the clause, even if they were only partly secured or the security was later set aside. Their purpose was to deny Mr Browne’s preferential claim, as he was a secured creditor at the earlier stage. These arguments were put forward:
(a) Under Part 16 of the Companies Act a secured creditor is a creditor for only limited purposes and this is not one of them. The definition in s 240 was cited:
18 Government of India v Taylor [1955] AC 491 (HL).
19 Noyce v Parnell Property Investments Ltd at [74].
In this Act, unless the context otherwise requires,—
creditor means a person who, in a liquidation, would be entitled to claim in accordance with section 303 that a debt is owing to that person by the company; and includes a secured creditor only—
(a) for the purposes of sections 241(2)(c), 247, 250, and 289; or
(b) to the extent of the amount of any debt owing to the secured creditor in respect of which the secured creditor claims under section 305 as an unsecured creditor
(b) Under s 306 a creditor’s claim must be decided at the time of liquidation, not later,20 and Mr Browne was a secured creditor who did not surrender his charge or claim for a balance due under s 305(1)(b) and (c).
(c) Section 312 excludes payments from assets subject to a charge, unless the charge has been surrendered, taken to be surrendered or has been redeemed. The general security agreement met the definition of “charge”.21
(d) Mr Browne had to elect at the start of the liquidation under s 305(1) whether to realise property subject to the charge, value the property subject to the charge and claim as unsecured creditor for the balance or surrender the charge. As he had enforced his security and had not made the other choices, he was irrevocably a secured creditor and could not change his status.
[30] Mr Russ for Mr Browne relied on s 305(3)(a):
(3) A secured creditor who realises property subject to a charge—
(a) may, unless the liquidator has accepted a valuation and claim by the secured creditor under subsection (6), claim as an unsecured creditor for any balance due after deducting the net amount realised:
20 Citing Stotter v Equiticorp Australia Ltd (in liq) [2002] 2 NZLR 686 (HC) at [39].
21 Section 2: charge includes a right or interest in relation to property owned by a company, by virtue of which a creditor of the company is entitled to claim payment in priority to creditors entitled to be paid under section 313, but does not include a charge under a charging order issued by a court in favour of a judgment creditor
I accept his point. A secured creditor who does not obtain full recovery from their security is entitled later to make a claim as an unsecured creditor, even if they have not elected to be treated as unsecured earlier. Equally, a creditor, who believes that they have a sound security and enforces it, but has to disgorge the fruits of enforcement on the security being set aside, may claim as an unsecured creditor. It is not fatal to their claim that they appeared to have security at the start of the liquidation. An unsecured creditor under s 305(3)(a) has the same rights as other unsecured creditors. They are not disqualified for having held an ineffective or invalid security. Their rights include being able to claim preferential ranking under schedule 7, if they meet the requirements.
[31] For the liquidator and McConnell Dowell it was also submitted that there could only be a claim under cl 1(1)(e) if the payments claimed by the creditor were incurred with the consent of the liquidator.22 While I accept that the liquidator’s consent will help establish a case for promotion, it is not necessarily essential. The clause does not state that consent is required. There may be occasions where the creditor has incontrovertibly obtained a benefit for creditors, but the liquidator has not given his consent to payments by the creditor. As an example, in the period immediately after a company goes into liquidation, there may be uncertainty or confusion or liquidators may not be available or able to give prompt instructions. There may be circumstances similar to those in which the law recognises an agency of necessity and allows a person incurring expenses in preserving or protecting property to recover their costs from the person for whose benefit they were spent.23
[32] There is possible overlap with another part of cl 1(1). Expenses incurred at the behest of the liquidator may be recoverable directly from the liquidator, whether or not they come within cl 1(1)(e). The liquidator will able to claim for priority for those expenses under cl 1(1)(a) and the creditor may be able to claim by subrogation under cl 4. Presumably a creditor claiming priority for expenses under cl 1(1)(a) would not also be able to claim promotion under cl 1(1)(e)(i).
[33] Any payment of funds or indemnity given to protect, preserve the value of or recover assets must be “for the benefit of the company’s creditors”. The parties differed on its meaning. For Mr Browne it was submitted that it was sufficient for the payments or indemnity to result in benefits for creditors. For the liquidator and McConnell Dowell it was submitted that there was a further requirement: a creditor could claim priority under the clause only if their payments or indemnity were for the purpose of benefiting creditors.
[34] For context, I take the facts in Tolcher v National Australia Bank, an Australian case.24 The bank, a secured creditor, claimed successfully under s 564 of the Corporations Act. It had appointed a receiver and had funded him to examine directors about the affairs of the company. The receiver co-operated with the liquidator, including inviting him to attend the examination and use the information obtained. The examination led to a mediation that resulted in recoveries. These went to the liquidator, not the receiver. In finding for the bank, Barrett J said:25
The result to which the National thus contributed financially was a result that benefited the general body of creditors, not, as the National expected or hoped, the secured creditor alone. But the disappointed expectation or hope of the National in that respect does not detract from the outcome to which it in fact contributed, being an outcome which was to the benefit of the general body of creditors. While that was not the outcome the National sought, it was the outcome actually achieved. The court is entitled to look at matters with the benefit of hindsight in circumstances such as this...
While this does not appear from the report, I take it that the bank was partly unsecured. It would not have claimed under s 564 if it had recovered in full under its securities. The bank’s case was assisted by the receiver’s co-operation with the liquidator. The prospect of possible recovery for the general body of creditors was present. Tolcher is authority that in Australia the courts may look to results, even if the creditor’s purpose was to obtain recovery only for itself. On the other hand, in Noyce v Parnell Property Investments Ltd the claimant’s purpose was entirely self-serving and that counted against him (as well as other matters).26
24 Tolcher v National Australia Bank [2004] NSWSC 6, (2004) 182 FLR 419.
25 At [30].
26 Noyce v Parnell Property Investments Ltd [2015] NZHC 2037 at [75].
[35] The question is not likely to arise where the creditor pays funds with the liquidator’s consent or gives him or her an indemnity. In those cases the liquidator could hardly say they were not for the creditors’ benefit. So the issue counts in cases where a claim is made for payments for asset protection or recovery without the liquidator’s consent. In my judgment it must be shown that a purpose of a creditor claiming under cl 1(1)(e) was to benefit creditors other than themselves. It need not be the only purpose or even the preponderant purpose, but it must still be significant. That is because the purpose of the clause is to encourage assistance in funding the recovery of assets by offering a reward. That purpose does not require the reward to be given to those who recover assets for other reasons. The wider Australian approach can be explained on the basis that s 564 of the Australian Act allows a discretionary assessment that takes into account the risk assumed by the creditor and other matters. The New Zealand provision is all or nothing. There is no room for a nuanced, flexible approach. It would be disproportionate to promote the claim of a creditor who was thinking only of themselves and had no thought of benefiting other creditors.
McConnell Dowell’s claim
[36] McConnell Dowell says that because it successfully funded the liquidator’s proceedings against Mr Browne and his companies with recoveries of $1,114,253, its claim to the extent of those recoveries is promoted under cl 1(1)(e)(i) and it can claim under cl 1(1)(e)(ii) for the costs of $297,748.80 it paid. It reserves the right to claim for further proceedings it is funding if they result in recoveries under the clause. It accepts that it has not yet established any such entitlement for the further proceedings.
[37] McConnell Dowell’s claim comes comfortably within the clause. It is exactly the case Parliament had in mind when it enacted the clause. It has proved its expenses and shown that they resulted in the recoveries.
[38] Mr Browne generally accepts the claim but makes two points. One, acknowledged by McConnell Dowell, is that the new proceedings have not finished and it is not known what the outcome will be. To that I add this about this proceeding. It is about distributions to creditors, not about protecting, preserving the value of or recovering assets. While McConnell Dowell is funding the liquidator for this
proceeding, it will not have a claim under cl 1(1)(e). It may have a claim against the liquidator for paying his remuneration, fees and expenses incurred in the liquidation and the liquidator’s payments for those expenses come at the highest level under cl 1(1(a).27 Under sch 7 cl 4, McConnell Dowell may have a subrogation claim, which will have the same priority.
[39] Mr Browne’s other point is that the liquidator recovered costs of $98,917.35 in the proceedings funded by McConnell Dowell and they should be taken into account. In my view, the costs are part of the assets of the company recovered by the liquidator and are to be distributed under the statutory rules, s 312, schedule 7 and s 313. McConnell Dowell will be paid only if higher-ranking claims are paid in full. Its priority claim under cl 1(1)(e)(i) will be calculated on the basis that the costs recovered in the proceedings are part of the recoveries it funded. There should not be any deduction from McConnell Dowell’s claim on account of the costs awarded to the liquidator.
[40] Accordingly, I uphold McConnell Dowell’s claim under cl 1(1)(e).
Mr Browne’s claim
[41] Mr Browne claims priority under cl 1(1)(e)(i) for $201,316. That was his net recovery from the receivership of Polyethylene Pipe Systems Ltd. He says that it was for the benefit of creditors because he paid that to the liquidator after the Court of Appeal’s judgment. Under cl 1(1)(e)(ii) he claims $90,688.42 for costs he incurred on the Bosch litigation but was not reimbursed. He also says that he is an unsecured creditor for $523,579. Not only was his security set aside and he was required to repay what he received from the receivership, but he was never fully secured and has other unsecured claims. For his priority claims he does not rely on any recoveries by the receiver before the company was ordered into liquidation, but on the result of the Bosch litigation. He says that he gave two indemnities, one to the receiver on appointment and the second at the start of the Bosch litigation. Both resulted in recoveries during the liquidation.
[42] Before Polyethylene Pipe Systems Ltd was ordered into liquidation, the receiver paid Mr Browne $256,922.28 When the general security agreement was set aside, the Court of Appeal ordered Mr Browne to repay $201,316, the net amount he had received from the receivership, as shown in Mr Stapley’s final report. While the company was in liquidation, the receiver brought the claim against Bosch Irrigation, but that was not cost effective. The recovery under the settlement was $201,250 but the costs in obtaining it were more. The legal fees came to $154,446.56. They were met partly from Mr Browne and partly from funds held by the receiver ($60,370.75). Mr Browne says that he has been reimbursed for some costs29 but that in addition he paid these further costs for which he was not reimbursed:
|
Costs of an expert witness water engineer
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$10,647.56
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Setting down fee
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$3,141.80
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Hearing fees
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$28,276.20
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Pipe testing costs30
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$48,622.86
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Total
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$90,688.42
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[43] The liquidator and McConnell Dowell say that the only benefit that Mr Browne can point to is $21,215.56. That is the sum of payments by Mr Stapley to Mr Browne after the Bosch litigation at the end of the receivership.31 Any earlier payments were before the company went into liquidation or were reimbursement of costs incurred. In response Mr Russ submitted that the Court of Appeal’s assessment of benefit counted and binds this court as a matter of issue estoppel. He relies on this passage in the Court of Appeal’s decision, where it was considering what relief to order on the general security agreement being set aside:32
[107] ... Mr Petterson only seeks to recover monies paid in May 2013 from the realisation of assets after the commencement of the liquidation. These funds came from the settlement of a claim Mr Stapley pursued on PPS’ behalf against Bosch Irrigation Ltd. That claim was settled on 7 December 2012 by Bosch agreeing to make a payment of $201,250 to PPS.
28 Paragraph [11] above.
29 A payment of $106,631.42 in January 2013.
30 This is part of a charge of €91,218 by a German company. The apportionment was not contested.
31 $21,135.56 in June 2013 and $180 in February 2015.
32 Petterson v Browne [2016] NZCA 189 at [107]- [108].
[108] We are satisfied that it is appropriate to make an order under s 299(3) of the Act requiring Mr Browne to repay PPS the sum of $201,316 which he received in May 2013.
The argument ran that because the Court of Appeal found as a fact that Mr Stapley paid Mr Browne $201,316 in May 2013, this court could not receive evidence or find that the payments were later and were for less.
[44] The Court of Appeal appears to have gone by Mr Stapley’s statement of receipts and payments in his final report and treated the sum shown for distributions to the secured creditor as a single payment made at the end of the receivership. For its decision, it did not matter when any payments were made or whether there was one or more. It was only concerned to set aside the benefit Mr Browne had received from the receivership. There can be an issue estoppel only if the finding is fundamental to the decision.33 As a rule of thumb a finding is not fundamental if it is not possible to appeal it. Neither Mr Petterson nor Mr Browne could have appealed against the Court of Appeal’s finding that Mr Browne was paid $201,316 in May 2013. It was not fundamental to its decision. I am not bound by the Court of Appeal’s finding. I accept that the payments at the end of the receivership were only $21,215.56. Earlier payments before liquidation do not count. Of the $201,316 Mr Browne was required to pay the liquidator only $21,215.56 can be attributed to recovery of assets during the liquidation from costs paid or indemnities given by Mr Browne.
[45] The Bosch case was run independently of the liquidator. As is apparent from Wylie J’s decision on the leave application, the liquidator did not consent to Mr Browne running up litigation costs on the Bosch case for which the general body of creditors would have to answer. Wylie J recorded that Mr Petterson gave consent to the application on a conditional basis, because he wanted to ensure that the general body of creditors was not exposed to costs and expenses and the position of unsecured creditors was not adversely affected.34 Accordingly Mr Browne cannot rely on the consent of the liquidator for incurring litigation costs or giving an indemnity to the receiver for the litigation costs.
33 Talyancich v Index Developments Ltd [1992] 3 NZLR 28 (CA) at 37–38.
[46] Mr Browne cannot show a case for priority in the absence of the liquidator’s consent. There are no circumstances that generate a requirement to pay for benefits, notwithstanding the absence of consent. The claim against Bosch was a potential asset to be realised, but there was nothing akin to an agency of necessity that would require the liquidator to pay for its costs. Besides, there was no incontrovertible benefit as the costs exceeded the amount of recovery.
[47] The Bosch claim was not brought for the benefit of creditors generally. The receiver brought the claim to collect an asset so that the proceeds could be applied to reduce the debt under the security. It was solely for the benefit of the secured creditor, Mr Browne. The receivership was for Mr Browne alone.
[48] Accordingly, Mr Browne does not have a case for priority under cl 1(1)(e), as the liquidator did not consent to costs for the Bosch case being incurred at the expense of unsecured creditors, there was no incontrovertible benefit to creditors and the costs of the case were incurred only for Mr Browne. If he had a claim under the clause, the amount realised for the liquidator would be only $21,215.56.
[49] I do not need to deal with the position if Mr Browne did have a claim under the clause. In case the point should arise, I record Mr Neil’s submission that cl 1(1)(e) has its own priority. Promoted claims under (i) come ahead of costs claims under (ii) because of the words at the beginning:
The liquidator must first pay, in the order of priority in which they are listed...
As McConnell Dowell’s claim for $1,114,253 and Mr Browne’s claim for $21,215.56 would rank equally, they would abate rateably in the proportions 98.13%/1.87%. If those claims were paid in full, they would be paid for their costs incurred in recovery, again rateably but in different proportions.
The amount of Mr Browne’s claim as an unsecured creditor
[50] The liquidator sought a direction that Mr Browne is a creditor in the liquidation only for $201,316. The basis for the submission was the Court of Appeal’s order:35
35 Petterson v Browne [2016] NZCA 189 at [143].
We make an order pursuant to s 299(3) of the Act requiring Mr Browne to pay PPS the sum of $201,316. Mr Browne is entitled to claim as a creditor in the liquidation of PPS for the amount paid him pursuant to this order.
That reads too much into the court’s decision. It made the order under s 299(3) of the Companies Act which allows a court setting aside a security or charge to
... make such other orders as it thinks proper for the purpose of giving effect to an order under this section.
The Court of Appeal was only making it clear that Mr Browne would be entitled to claim in the liquidation for the amount that it required him to pay the liquidator. It did not set a limit on what Mr Browne could claim in the liquidation for other unsecured claims. If it had, it would have gone beyond the purpose of s 299(3). Section 295 of the Companies Act gives remedies when a voidable transaction or charge is set aside under s 294. It has been recognised that the purpose of orders under s 295 is to eliminate any element of preference benefiting a creditor.36 It is not to be used punitively. Section 299(3) has the same remedial purpose. It should not be used to take away Mr Browne’s rights as an unsecured creditor. Mr Browne had not recovered the full amount of his debt from the receivership and was partly unsecured. He is entitled to claim as an unsecured creditor for any indebtedness, including any that existed before the Court of Appeal set aside the security.
[51] Mr Russ submitted that after paying the sum ordered by the Court of Appeal, Mr Browne was an unsecured creditor for $523,579.00. He provided a schedule of transactions on Mr Browne’s loan account with the company to show that the company’s debt to Mr Browne was the same as at the start of the receivership after distributions during the receivership and repayment in 2016. Not all transactions seem to have been brought into account. A payment of $76,922 in September 2009 has been left out.37
36 Reynolds v HSE Holdings Ltd HC Whangarei CIV-2009-488-738, 17 September 2010 at [28]; Farrell v E & E APS [2012] NZHC 417, (2012) 11 NZCLC 98-004 at [35]; Grant v Lotus Gardens Ltd [2013] NZHC 1135, [2013] NZCCLR 16 at [25] (overturned on appeal, but not on this point: Grant v Lotus Gardens Ltd [2014] NZCA 127, [2014] 2 NZLR 726); Farrell v Max Birt Sawmills Ltd [2014] NZHC 3391 at [43]; and McIntosh v Fisk [2017] NZSC 129 at fn 13.
37 It is one of the payments in [11] above.
[52] I am not confident that I have all the accounting records to complete a reconciliation of the transactions on the loan account. That is mainly an accounting exercise which the parties should be able to do without the assistance of the court. At the risk of stating the obvious, I note that at the date of liquidation interest on the amounts advanced stopped running.38 Mr Browne’s claim may also be subject to adjustment if the liquidator’s claim against him under s 301 of the Companies Act is successful. That is outside what I am required to decide in this proceeding.
Outcome
[53] While McConnell Dowell has not shown that its recent expenditure on further proceedings by the liquidator is a claim under cl 1(1)(e), it should have the opportunity of making such a case once the outcome of the litigation is known. This decision is not meant to bar that.
[54] The liquidator and Mr Browne have had divided success. Mr Browne has failed in his priority claim, but succeeded in showing that his non-preferential unsecured claim is for more than $201,316. The greater part of the case was concerned with the claim under cl 1(1)(e). In those circumstances the liquidator will have three- quarters of standard costs. There is nothing else in the case to warrant increased or reduced costs.
[55] McConnell Dowell entered an appearance, as it did not oppose the liquidator’s application. Mr Browne generally accepted its priority claim. While McConnell Dowell did support the liquidator’s case that Mr Browne did not have a preferential claim, the main purpose of its appearance was to protect its own position, which was not contested. In those circumstances it is not appropriate to follow a “costs follow the event” approach for it.39
[56] I make these orders:
38 Companies Act, s 306.
39 High Court Rules 2016, r 14.2(1)(a).
(a) McConnell Dowell Constructors Ltd is a preferential creditor in the liquidation of Polyethylene Pipe Systems Ltd for $1,114,253 under schedule 7 cl 1(1)(e)(i).
(b) McConnell Dowell Constructors Ltd is a preferential creditor in the liquidation of Polyethylene Pipe Systems Ltd for $297,748.80 under schedule 7 cl 1(1)(e)(ii).
(c) Leave is reserved to McConnell Dowell Constructors Ltd to claim under schedule 7 cl 1(1)(e) for paying for further litigation, if it can show it has met the clause’s requirements.
(d) Mr Browne is not a preferential creditor under schedule 7 cl 1(1)(e).
(e) Mr Browne’s claim in the liquidation is not limited to $201,316. Leave is reserved to apply for further directions if the parties cannot agree on the amount of his non-preferential unsecured claim.
(f) Mr Browne will pay the liquidator three-quarters of standard costs on the application. If the parties cannot agree costs, memoranda may be filed. There is no order for costs for or against McConnell Dowell Constructors Ltd.
....................................
Associate Judge R M Bell
Mr B Gustafson, Barrister, Auckland
Mr B Russell (for the Applicant), Lane Neave, Solicitors, Christchurch Mr G Neil and Ms H Jones, Meredith Connell, Solicitors, Auckland Mr D Russ, Fletcher Vautier, Solicitors, Richmond, Nelson
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URL: http://www.nzlii.org/nz/cases/NZHC/2018/2379.html