Arnerich v DHC Assets Ltd

IN THE COURT OF APPEAL OF NEW ZEALAND

I TE KŌTI PĪRA O AOTEAROA

CA555/2019
CA276/2020
[2021] NZCA 225

BETWEEN	ANTONY IVO ARNERICH Appellant
AND	DHC ASSETS LIMITED Respondent

Hearing:	4–5 November 2020
Court:	Goddard, Duffy and Nation JJ
Counsel:	J D McBride, and A J Steel for Appellant F J Thorp and L J Turner for Respondent
Judgment:	3 June 2021 at 10.00 am

JUDGMENT OF THE COURT

AMr Arnerich’s appeal is allowed in so far as it relates to the award of interest on the sum of $367,768.12. The award of interest in the High Court is set aside, and remitted back to that Court to be determined in accordance with this judgment.
BDHC’s cross-appeal is allowed. The proceedings are remitted back to the High Court to determine the amount of any further claim DHC may have against Vaco under the construction contract, and, in light of that determination, to make such further orders against Mr Arnerich under s 301 of the Companies Act 1993 as may be appropriate.
CMr Arnerich must pay costs to DHC on the appeal and cross-appeal, in each case for a standard appeal on a band A basis, with usual disbursements. We certify for second counsel.

____________________________________________________________________

Table of contents

Para No

Introduction and summary

Background

Establishment of Vaco and Vaco Trust and purchase of Lincoln Road property
Vaco enters into construction contract with DHC
Financing arrangements with ANZ
DHC carries out the construction work — disputes develop
Further payment claims and disputes
DHCs letter to Mr Beagley (6 March 2013) enclosing extension of time related materials and submissions
DHC Final Payment Claim — Payment Claim 17
Vaco sale of Lincoln Road property
Payments made by Vaco following sale of Lincoln Road property
Vaco tax liability paid by other Arnerich entities
Final Payment Schedule No 17
DHC’s follow-up email on 8 August 2013
Further correspondence in relation to DHC’s claims
Liquidation of Vaco
Adjudication proceedings
DHC refers its claims to arbitration

DHC’s proceedings against Mr Arnerich

DHC’s allegations against Mr Arnerich
Mr Arnerich’s defence

High Court judgment

Legal framework for the claim
Ability of the High Court to determine Vaco’s liability to DHC
Findings in relation to Mr Arnerich’s knowledge about DHC’s claims
Breach of s 131 of the Companies Act
Relief under s 301 of the Companies Act

Issues on appeal

Principles governing DHC’s s 301 claim

Liability under s 131 of the Companies Act
The implications of the trading trust structure
Relief under s 301

Should the High Court have determined the amount of DHC’s claim against Vaco?

Did Mr Arnerich breach s 131 of the Companies Act?

Mr Arnerich’s submissions on appeal in relation to s 131
DHC’s submissions in relation to s 131 breach

Discussion

Liability under s 301 of the Companies Act

Potential liability to Vaco under s 131
Liability under s 301
Treatment of GST

Interest

Remittance back to High Court

DHC’s retention claims

Result

REASONS OF THE COURT

(Given by Goddard J)

Introduction and summary

The respondent, DHC Assets Ltd (DHC), is a construction company. It is an unpaid creditor of Vaco Investments (Lincoln Road) Ltd (Vaco). Vaco was put into voluntary liquidation on 1 July 2014. Mr Arnerich, an experienced property developer, was the sole director of Vaco. Vaco was the vehicle through which Mr Arnerich carried out a property development at a site on Lincoln Road in Auckland.
The structure Mr Arnerich put in place for the Lincoln Road development project also involved a trading trust: the Vaco Investments (Lincoln Road) Trust (Vaco Trust). Vaco was the sole trustee of the Vaco Trust. The discretionary beneficiaries of the Vaco Trust were (ultimately) Mr Arnerich and members of his family. Vaco acquired the property at Lincoln Road as trustee for the Vaco Trust, and carried out the development project in that capacity.
DHC claims it is owed some $1,088,156 plus interest by Vaco under the construction contract it entered into with Vaco to design and build a commercial building on the Lincoln Road property. DHC was awarded $367,768 in an adjudication under the Construction Contracts Act 2002. DHC has pursued claims against Vaco for the further amounts to which it says it is entitled. Vaco cannot pay DHC any part of the sum awarded in the adjudication, or the further sums DHC has claimed: Vaco has no assets of its own, and there are no remaining assets of the Vaco Trust out of which the payment could be made by Vaco as trustee.
DHC brought proceedings under s 301 of the Companies Act 1993 alleging that Mr Arnerich had breached his duty to act in the best interests of Vaco (as required by s 131 of the Companies Act) by causing Vaco to make substantial distributions to the beneficiaries of the Vaco Trust before DHC’s contractual claims had been ascertained and paid by Vaco. DHC sought an order under s 301 that Mr Arnerich pay the amount DHC is owed by Vaco direct to DHC.
DHC’s claim succeeded in part in the High Court.[1] Davison J found that Mr Arnerich had breached his duty to act in the best interests of Vaco.[2] He made orders requiring Mr Arnerich to pay DHC the sum of $367,768 awarded in the adjudication.[3] But he declined to determine whether DHC was owed further amounts by Vaco, and declined to make any further orders against Mr Arnerich, on the basis that the construction contract required DHC’s claims against Vaco to be determined by other mechanisms, and those claims had previously been referred to arbitration.[4]
[1]DHC Assets Ltd v Arnerich [2019] NZHC 1695 [High Court judgment].
[2]At [345] and [352].
[3]At [348]–[350] and [353].
[4]At [351].
Mr Arnerich appeals to this Court. He says that he acted throughout in good faith and in what he believed to be the best interests of Vaco: he did not breach s 131 of the Companies Act. He genuinely believed that DHC had ceased to pursue its claims, and that those claims lacked any merit. He made provision for the further claims that he believed might be made against Vaco by DHC and other creditors, then distributed the balance of the Vaco Trust’s assets to the beneficiaries of the Vaco Trust.
DHC cross appeals, seeking orders that the High Court determine the amount it is owed by Vaco, and that Mr Arnerich be required to pay the whole of that amount direct to DHC under s 301 of the Companies Act.
We have concluded that Mr Arnerich breached s 131 of the Companies Act by causing Vaco to distribute its remaining funds to his family and associated interests as beneficiaries of the Vaco Trust, without ensuring that Vaco retained sufficient funds to meet contingent claims by DHC. Mr Arnerich had an obvious conflict of interest in making these decisions, which directly benefited him and his family while depriving Vaco of access to trust funds to meet any successful claims by DHC. We doubt Mr Arnerich turned his mind to the interests of Vaco as a separate entity. But in any event, no rational director could have considered that it was in Vaco’s best interests to make those distributions, and risk having insufficient trust funds in hand to meet DHC’s claims if successful.
We therefore uphold the High Court’s order under s 301 of the Companies Act that Mr Arnerich must pay DHC $367,768.12 plus interest, though we modify the interest award.
We have also concluded that the High Court should have determined the total amount that Vaco owed to DHC, and awarded DHC compensation from Mr Arnerich for the full amount of Vaco’s unpaid debt to DHC — a debt which Vaco would have been able to meet but for Mr Arnerich’s breaches of s 131. We therefore refer the proceeding back to the High Court to determine the amount that DHC was owed by Vaco, and to make such further orders for compensation as may be required in light of that finding.

Background

The history of the dealings between DHC and Vaco is set out in considerable detail in the High Court judgment.[5] For the purposes of this appeal, a summary of those dealings is sufficient.

Establishment of Vaco and Vaco Trust and purchase of Lincoln Road property

[5]At [5]–[218].

On 5 November 2010, Vaco Investments Ltd (VIL) entered into a conditional agreement to purchase a property at Lincoln Road for the sum of $1.4 million. Mr Arnerich is the sole director and shareholder of VIL. The parties subsequently agreed to reduce the purchase price to $1.325 million.
On 15 April 2011, Mr Arnerich incorporated Vaco as his vehicle to carry out a proposed development at the Lincoln Road property. The company’s initial name was Rawhiti Property Holdings Ltd. On 16 August 2011, the name of the company was changed to Vaco Investments (Lincoln Road) Ltd. VIL was the sole shareholder of Vaco, and Mr Arnerich was Vaco’s sole director.
On 4 November 2011, Mr Arnerich executed a deed establishing the Vaco Trust. The deed appointed Vaco as the sole trustee of the Vaco Trust. The discretionary beneficiaries of the Vaco Trust were (ultimately, via other trusts) Mr Arnerich and members of his family.
The purchase of the Lincoln Road property settled on 17 November 2011. There is a dispute between the parties about the manner in which that purchase was effected. DHC says that Vaco had been nominated as the purchaser of the property by VIL, and purchased it for $1.325 million. Mr Arnerich says that VIL agreed to sell the property to another company which he controlled, VDT Securities Ltd (VDT) for $1.325 million. VDT entered into an agreement for sale and purchase with Vaco, under which Vaco, as trustee of the Vaco Trust, agreed to purchase Lincoln Road from VDT for the sum of $3.2 million. However, it is common ground that Vaco only ever paid $1.325 million for the property, and that the balance of the purchase price that Mr Arnerich says was payable to VDT has never been paid. Mr Arnerich says it was a contingent liability that VDT has never claimed. We return to this below at [174].
Mr Arnerich identified ASB Bank as the principal tenant for the two-storey commercial building that he proposed to build on the Lincoln Road site. An agreement was entered into between VIL and ASB to lease retail commercial banking premises to be constructed on the site. The lessor was to be VIL “or an associated company related to the Lessor yet to be formed”. VIL also entered into an agreement to lease with The Coffee Club Properties (NZ) Ltd for a smaller tenancy on the ground floor of the building.

Vaco enters into construction contract with DHC

On 18 October 2011, Vaco and DHC entered into a fixed price lump sum design and build contract which provided for DHC to carry out the construction work on the development for the sum of $2,129,838. The construction contract included terms that significantly limited the scope for claims by DHC for extensions of time, and for additional payment for variations. The construction contract also set out detailed procedures to be followed in relation to variations and extensions of time. These terms — which had been proposed by DHC — were intended to give Vaco a high degree of confidence that the construction work would be completed by the agreed date of 27 July 2012, with liquidated damages of $600 per calendar day excluding GST payable from that date until practical completion.
The construction contract contained detailed provisions in relation to determination of disputes between the parties. The dispute resolution mechanisms contemplated by the contract included formal engineers’ reviews, mediation, and arbitration. The contract also recognised the ability of the parties to refer disputes to adjudication under the Construction Contracts Act.

Financing arrangements with ANZ

With those agreements in place, Vaco was able to obtain financing for the project. On 10 October 2011, ANZ National Bank Ltd (ANZ) conditionally approved Vaco’s application for project finance. On 10 February 2012, Vaco entered into a facility agreement for $5,155,000 with ANZ. The facility agreement was entered into by Vaco as trustee of the Vaco Trust. Vaco Investments (Basque Road) Ltd as trustee of the Vaco Investments (Basque Road) Trust and Mr Arnerich were named as guarantors. The facility was intended to fund the purchase of the site for $1.325 million, and to fund the amount payable to DHC under the construction contract.
Mr Beagley of Davis Langdon was appointed as the engineer under the construction contract. The construction contract described the role of the engineer as follows:
6.2 Role of Engineer
6.2.1The dual role of the Engineer in the administration of the contract is:
(a)As expert adviser to and representative of the Principal, giving directions to the Contractor on behalf of the Principal and issuing Payment Schedules on behalf of the Principal at due times; and
(b) Independently of either contracting party, fairly and impartially to make the decisions entrusted to him or her under the Contract Documents, to value the work and to issue certificates.
…
Mr Beagley was also appointed by ANZ as the bank’s quantity surveyor for the purposes of payment arrangements in relation to the construction work. The manner in which DHC’s progress claims under the contract would be processed was set out in a letter dated 11 November 2011 from ANZ to DHC which read as follows:
VACO INVESTMENTS (LINCOLN RD) LIMITED – BANKING AND RETAIL CENTRE AT 290 LINCOLN ROAD, HENDERSON
With regard to the above project, I can confirm as follows:
ANZ National Bank Limited (the “Bank”) has an approved Development Facility available to Vaco Investments (Lincoln Rd) Limited that includes an allocation sufficient to meet the Construction Contract Sum of $2,129,838 (excluding GST). Upon receipt of QS certification of each progress claim and subject to there being no defaults under the Transaction Documents, the Bank will pay the progress claim direct to the account nominated by [DHC].
The Bank will retain the monthly retention sums within the Development Facility until Practical Completion has been achieved. Upon Practical Completion being achieved and the initial release of retentions having been certified, the balance of the retentions will be paid to an account in the joint name of Vaco Investments (Lincoln Rd) Limited and [DHC] for subsequent payment in accordance with the Construction Contract.
If you have any queries, please let me know.
Kind regards
Michael Wright
Manager – Property Finance

DHC carries out the construction work — disputes develop

DHC proceeded to carry out the construction work at the Lincoln Road property. Mr Arnerich was closely involved in the construction process. So too were representatives of ASB. At an early stage of the construction work, ASB notified its requirements for a number of variations from the original drawings for the building, on the basis of which DHC had priced the building work, and which had been submitted for building consent. In the course of the construction project, ASB required approximately 18 contract variations, some of which were significant and resulted in additional planning, construction work and time for DHC.[6]
[6]The High Court judgment, above n 1, refers at [64] to ASB requiring approximately 80 contract variations. This appears to be a typographical error.
The project encountered a number of delays as a result of the ASB variations, delays at the front end of the project affecting design work, ground conditions which required piling work that had not been contemplated by the construction contract, and a number of other matters. DHC ultimately, towards the end of the project, submitted four formal extension of time claims to the engineer under the contract. Vaco disputed DHC’s entitlement to claim extensions of time under the construction contract and rejected all four of these claims.
Some of the contract variation instructions were dealt with in the formal manner contemplated by the construction contract. However, in many other instances, the variation requests were made in a less formal manner, with Vaco forwarding requests from ASB on to DHC by email. In some instances, the variation requests were made by Mr Arnerich orally to DHC’s site manager, during visits by Mr Arnerich to the site, or by telephone to the DHC project manager. These variation requests were usually confirmed by DHC in an email to Vaco. Variations and their status were noted in construction reports prepared and distributed by DHC for the regular project control group meetings attended by DHC, Vaco and Davis Langdon.
As the construction work progressed, DHC made monthly payment claims in accordance with the procedure contemplated by the construction contract. DHC submitted its payment claim to Vaco and to the engineer. The engineer then assessed the claim and issued a provisional Progress Payment Schedule to Vaco, copied to DHC. Vaco had three working days to notify the engineer of any amendments or deductions that it required. The engineer, acting as Vaco’s agent, would then issue a Progress Payment Schedule (PPS) showing the sum certified by the engineer under the contract as the value of DHC’s payment claim, taking into account Vaco’s amendments.
By September 2012, the construction work was nearing completion. ASB took possession of its tenancy area in the building to begin its fitout work on 7 September 2012. This was later than the date contemplated by the construction contract which, as noted above, was 27 July 2012. In his email to ASB confirming that date, Mr Arnerich said:
As discussed in our recent telephone conversation regarding the handover date I have a confirmed date [from DHC] of 7 September 2012. We have collectively tried very hard to keep as close as possible to the end of August. [DHC] realise the importance of this handover date and really put in the extra effort to make this happen.
By this stage of the project, disagreements had arisen between DHC and Vaco in relation to DHC’s claims for variations and for extensions of time.
On 20 September 2012, Mr Beagley issued PPS 11, noting the value of the work completed to 31 August 2012 was $2,134,743.00 (excluding GST) and certifying the value of payment under PPS 11 at $307,665.44 (excluding GST). Mr Beagley then issued a Drawdown Valuation and Payment Schedule to ANZ to enable a drawdown of $265,439.00 (excluding GST) to be made on the Vaco Lincoln Road project finance facility.
On 30 September 2012, DHC issued Payment Claim 12 for $528,807.87 (excluding GST). The payment claim was addressed to Vaco and copied to Mr Beagley. The payment claim was to be reviewed and assessed by Mr Beagley in accordance with the terms of the construction contract. On 2 October 2012, Mr Arnerich sent an email to Mr Beagley attaching a copy of Payment Claim 12 on which he had crossed out the amount claimed and written: “Crap! … We need to go through this — fine tooth comb!” Mr Arnerich had made a series of handwritten comments on the payment claim indicating which of the variations Vaco accepted or rejected, querying the claimed amounts, and commenting that there was a need for a number of items to be substantiated. In his email to Mr Beagley, Mr Arnerich said:
Hi Scott
I have attached my comments on [DHC’s] claim for you to review and have copied in Anthony Parkin though I am not sure if he will be assisting you on this?
In any event I think we are getting very close to the point of having to take these guys to task on allot [sic] of these additional variations which are clearly not approved or warranted.
I will be away from Friday 5^th till Monday 15^th and will be available by phone or email if you need to contact me to discuss. In terms of the ASB variations some of these have almost doubled again which they will no doubt flip out over so any correspondence I receive to that regard I will copy you into. This time round the points I think need to be covered off are the Liquidated damages which currently stand at $39,000 Plus Gst and the rejection of all of the [extension of time] claim based on the email below which outlines our contractual position on [extensions of time] for weather and time. I know that you though[t] it might be antagonistic last time but I think it needs to be done now.
Also I think it is important that you reiterate your comments to the contractor regarding the ground risk conditions they accepted as part of the initial review. This is getting really ridiculous now again more than doubling!!
Apart from these minor technicalities the site is looking better now every day and the ASB are make [sic] good progress on their fitout….and we should have our subdivision consent [out] next week.
Thanks
Antony Arnerich.

On 11 October 2012, Mr Beagley issued provisional PPS 12. The value of payment certified for was $114,187.50 (excluding GST) compared with the sum of $528,807.87 (excluding GST) sought in Payment Claim 12. In his covering email of 11 October 2012 sending the provisional PPS to Vaco and DHC, Mr Beagley said that the ASB variation payment values had not been included in the schedule, and that they would be included once confirmation was received of agreed progress payment values by Vaco, ASB and DHC. The provisional PPS noted a number of other items claimed that had not been certified for payment.
Mr Moore of DHC responded in an email sent to Mr Beagley and Mr Arnerich on 16 October 2012:
Scott [and] Antony
Please be advised that we are in disagreement to the attached Payment Schedule and wish to arrange [an] urgent meeting to discuss. In particular we refer you to our emails (5 October) attached that addressed our concerns to the Provisional Payment Schedule to which we have had no response or correspondence in an attempt to address. We find this situation very disappointing considering we have made concerted efforts to provide as much information as possible to our entitlements with the claims we have made and all we have received in return is a Payment Schedule with minimal response to what we believe to be demonstrated entitlements.
Given the difference in claim and certification I would have thought some urgency would have been put into meeting to discuss in an attempt to at least understand all parties positions and viewpoints. This level of difference is untenable and we kindly request [an] urgent meeting before the certificate is issued.
Please advise your availability.
Regards
Andy
Mr Beagley summarised the situation as regards completion of the works and the outstanding DHC payment claims and extension of time claims in a letter to ANZ on 26 October 2012, reporting the status of the funding facility for the project for the period ending 30 September 2012. In his letter, Mr Beagley confirmed that handover of the premises to the ASB to commence its fitout had occurred on 7 September 2012, and DHC had applied for practical completion on 15 October 2012 subject to connection of the electric power supply (which was connected on 16 October 2012).
DHC issued Payment Claim 13 on 31 October 2012, in which it claimed $489,805.44 (excluding GST). In a covering email, DHC advised that substantiation for any new variations or increases to existing variations would follow shortly. Mr Arnerich responded requesting invoices and information for each and every variation requested by ASB and Vaco. On 2 November 2012, Mr Reyneke of ASB sent an email to Mr Arnerich commenting on the variation claim, which had been received by ASB the previous day. Mr Reyneke said that ASB considered the costs to be extremely high. He set out a list of information the bank required regarding completion of items on ASB’s defects list and other items that were yet to be completed or attended to. On 15 November 2012, Mr Beagley issued PPS 13 for an amount of $269.20 (excluding GST).
On 10 November 2012, prior to practical completion having been certified and without DHC’s consent, Vaco took possession of the premises other than the ASB tenancy area. Almost a year later, on 4 October 2013, Davis Langdon, on behalf of the engineer to the contract, issued a certificate dated 28 June 2013 that the contract works had reached a state of practical completion on 21 November 2012.

Further payment claims and disputes

DHC issued Payment Claim 14 on 30 November 2012 seeking payment of $429,193.96 (excluding GST). On 13 December 2012, Mr Beagley prepared provisional PPS 14 in which he calculated that DHC owed Vaco $41,132.77. In this schedule, Mr Beagley disallowed the DHC variation claims for the extensions of time and for the soft spots in the basement area, as well as disallowing the majority of DHC’s claims for variations, noting in each case that Vaco had assessed there to be no entitlement until the variation costs were substantiated. In relation to variation 38751, in which DHC claimed extension of time costs of $75,000, Mr Beagley’s schedule reads:
[Extension of time] Claim (received 17Sept12) has been referred to the Engineer for review. Details of $40k claim value (time?) increase in the period to be provided by [DHC]. Time related costs to date are deemed to have been included within the P&G costs associated with the respective variations
DHC responded to provisional PPS 14 in an email sent to Davis Langdon and Mr Arnerich on 27 December 2012:
Antony [and] Scott
We acknowledge receipt of your Progress Payment Certificate No.14 and the content and comments made, however despite our best efforts in both meetings, discussions and correspondence to provide additional information and substantiation to the significant differences between claims made and certification it appears we are no nearer in reaching any agreement. This situation and difference has now been ongoing for some months now and has become untenable from our perspective as we believe the negotiable approach is not being reciprocated by all parties concerned.
Based on the Progress Payment Certificate issued by The Engineer under Clause 12.2 we wish to further formally record that we are in disagreement and see no further reason to proceed with the disputed amounts pursuant to Clause 13.2 (Engineer’s Review) as The Engineer has been involved in the initial meetings, discussions and correspondence and has issued the Payment Schedule continuing to agree with the disputed items, noting a “formal decision” has not been stated. We therefore wish to notify of our intention to seek reimbursement of the disputed items pursuant to either Clause 13.3 (Mediation) or 13.4 (Arbitration) of the Conditions of Contract.
To reiterate, these disputes have been ongoing sometime now with our belief that no real or reasonable consideration or urgency has been shown to resolve considering the significant amounts involved, therefore leaving us no other option than to pursue the items and amounts through the disputes provision of the Contract.
It should also be noted that we do not consider the ASB Payment Schedule (review of our variations) to be a document that can be relied on as a true review [of] our claims pursuant to Clause 9 of the Conditions of Contract. We have no contractual relationship with the ASB (being the Principals Tenant), therefore any review of our variation claims should be carried out and issued under Clause 9.3, at this moment “Assessed in accordance with ASB Payment Claim attached” is contrary to the provision of the Contract.
I trust you will understand our position here and advise we will be in contact in order to commence proceedings as soon as possible, noting any response from yourselves in respect of this notification will be considered and reviewed.
Regards
Andy
DHC issued Payment Claim 15 on 31 December 2012, seeking payment of $388,246.96 (excluding GST). Mr Beagley issued provisional PPS 15 on 7 January 2013 in which the value of the payment was negative $12,070.00 (excluding GST).
DHC issued Payment Claim 16 on 31 January 2013, seeking payment of $392,582.41 plus GST.
On 4 February 2013, Mr Arnerich forwarded to Mr Beagley and Mr Parkin of Davis Langdon a marked up copy of DHC’s Payment Claim 16 on which he had made handwritten comments relating to a number of contract variations for which payment was claimed. For example, his comment in relation to 14 of the claims was simply: “No”. Other claim items were noted: “$0 - refer to Eng[ineer].” In some instances, Mr Arnerich wrote, “ASB”, indicating that he considered that ASB was responsible for that claim. In his covering email Mr Arnerich said:
Hi Scott and Anthony
Please see my marked up version of the claim.
Please accept this as notification that under no circumstances are you to release any part of the retentions as claimed. The contractor has not made any progress as to making good works [on] site which are substandard most particular the faulty drainage resulting in water egress [through] the block walls and piles etc.
There has been no one on site for a long time.
…
On 13 February 2013, Davis Langdon sent Mr Arnerich Provisional Progress Valuation No 16. In the covering email, Davis Langdon advised Mr Arnerich that as principal to the contract, Vaco had two working days after receipt of the PPS to notify the contract engineer of any amendments or deductions that the principal required to be made from the sum certified by the contract engineer. The schedule prepared by Mr Beagley listed some 80 variations for which payment was claimed by DHC. In the “Comments/Reasons” column were notations which directly correlated to Mr Arnerich’s handwritten comments as previously provided to Davis Langdon. In those instances, where Mr Arnerich had noted, “No” in his handwritten note, Mr Beagley’s schedule states: “Vaco do not agree this cost”. In relation to the extension of time claim (item 38751) the schedule states:
No Entitlement, [extension of time] Claim referred to the Engineer for review. Details of claim value to be provided by [DHC]. Time related costs to date are deemed to have been included within the P&G costs associated with the respective variations. Further request for information submitted.
Mr Beagley issued provisional PPS 16 on 13 February 2013, in which he certified the value of payment as $0.00.
On 5 March 2013, Mr Beagley sent Drawdown Valuation 15 to ANZ, copied to Mr Arnerich. Mr Beagley noted that practical completion had been effectively achieved on 28 November 2012 with the code compliance certificate being issued by Auckland Council, although the practical completion certification was yet to be obtained. He said:
….
We note as previously report[ed] that significant construction variation claims/risk ($567,000 claimed vs. cost liability provisioning of $363,000 included in the current cost to complete assessment) remain, with the major disputed claims having been recently referred for a formal Engineer’s Review.
…
VARIATIONS
Construction variations (actual and potential, although excluding ASB and Coffee Club changes) identified to date remain provisionally assessed at approximately $160,000.
We note that [DHC] have identified variation claims to date in the total amount of approximately $629,000 (including credits for works not completed and including unsubstantiated [extensions of time] and soft-spot claims etc.) for which liability of $363,000 ($174,109 paid) has been included within the current budget and cost to complete provision as summarised below:
…
Vaco / [DHC] continue to negotiate variation claims and incomplete/defect works with a view to conclude a Final Account value. We note (as above) that variation claims totalling $320,000 have recently been referred for a Engineer’s Review in accordance [with] the conditions of contract.
ASB tenant variations (identified and noted for separate payment to Vaco from that ASB) [sic] remain assessed in the order of $205,000.
Extension of time claims (EOT), variation claims relating to “soft spots” in the basement, time related construction expenses and credits for contract works not completed remain identified as the remaining significant variation cost risk at this stage of the project.
…
CONTINGENCY
…
There is effectively no remaining unallocated contingency for the project. Which whilst not ideal, we note that with the project having achieved both Practical Completion and [Code Compliance Certificate] subject now only to sale (waiting for settlement), we do not anticipate any further significant cost to complete requirements. We do however note that there remains significant construction variation/final account agreement risk that identifies a potential shortfall, that would require additional equity/funding to be contributed should [DHC] be awarded variation values as currently claimed.
Negotiation and settlement of the construction variation claims, associated Final Construction Account agreement and incidental consultant and holding costs associated with a protracted development period are identified as the significant remaining contingent cost risk at this stage of the project.
…
Mr Arnerich sent an email to Mr Irvine of ANZ on the same day, 5 March 2013, recording that he disputed the DHC claims:
Hi Mr I[rvine]
By all means give me a call to reconfirm that most of if not all of the contractors [sic] claims are fanciful and not worth printing out and are comprised of items clearly outside the [contract]...Also I not[e] there is no mention of the pending $72,000 + GST liquidated damages that are yet to be applied.
I am very confident regarding the entitlement to these…and [in] any event this will drag on way past settlement of the property and will in effect become solely my problem as the bank will not have any exposure.
I have forwarded you a copy of the instruction to Davis Langdon to review these outrageous claims.
PPS[sic]-No problem for the survey
Speak to you tomorrow
Thanks
Antony Arnerich

DHCs letter to Mr Beagley (6 March 2013) enclosing extension of time related materials and submissions

On 6 March 2013, Mr McClatchy of DHC sent an email and letter to Mr Beagley responding to requests for information to support DHC’s claims for variations and extensions of time. The email and its attachments, which included detailed marked‑up project programme schedules, were also copied to Mr Arnerich. In the letter, Mr McClatchy set out a summary of the circumstances which had given rise to the project time delays and the grounds upon which Extensions of Time 1, 2 and 3 were based. Mr McClatchy advised that DHC would welcome the opportunity to meet with Mr Beagley to clarify any other items that he might require and to discuss the claims in more depth.
On 12 March 2013, Mr Parkin sent DHC a list of the variation claims that “[they were] currently reviewing”. He asked if the list was complete. DHC replied with comments on each of the claims to be reviewed. Davis Langdon forwarded DHC’s email to Mr Arnerich for his information.

DHC Final Payment Claim — Payment Claim 17

On 15 March 2013, DHC submitted their final account, Payment Claim 17, which was sent to Vaco and copied to Mr Beagley. The payment claim was for $553,095.10 (excluding GST), which was the total calculated pursuant to the Variation Schedule listing each of the claimed contract variations. As at that date Mr Beagley was yet to issue his further formal review decision.
Upon receipt of Payment Claim 17, Mr Arnerich sent an email to Mr Beagley:
Hi Scott
Please refer to the final account from [DHC]. There seem to be new items in this claim please review and add those to the Engineers reviews that are currently underway.
Also after receipt of this claim it seems an appropriate time to review and
re-evaluate where everything sits.
I still do not have the required documentation to get a practical completion certificate so will need to review and re-evaluate the date of when this finally gets resolved as clearly it isn’t. Also as part of this process works to be completed to my satisfaction on site will need to be taken into account.
Thanks
AA
On 15 March 2013, Mr Arnerich sent an email to Mr Beagley and Mr Parkin, attaching a copy of Payment Claim 17 on which he had entered either “X” against those items that he did not accept, or “ASB” against those items which he considered were ASB’s responsibility. Apart from marking the items in that way, he did not provide any other comments. In his email to Mr Beagley and Mr Parkin, Mr Arnerich said:
Hi Scott/Anthony
Looking at the final claim [from] [DHC] there seems to be more wild movements in items [from] claim to claim. I have marked up the variation schedule as attached noting items to look at. In terms of the [practical completion] date they are now technically 231 day[s] late or $138,600 plus GST. As mentioned in my previous correspondence based on the information contained in the claim I will now re-look at the date for [practical completion] when we get all the required information …
On 18 March 2013, following a meeting between Mr Tim Fraser of DHC and Mr Parkin to discuss the variation claims, Mr Fraser of DHC sent Mr Parkin an email addressing each of the claims which were to be reviewed by Davis Langdon and Mr Beagley. Mr Parkin referred Mr Fraser’s email to Mr Arnerich, who then forwarded some further comments to Mr Parkin and Mr Beagley regarding the variations which he disputed.
On 28 March 2013, Mr Parkin sent an email to Mr Arnerich in which he set out his assessment of the DHC variation claims. Mr Parkin explained that he was still working on three of the variation claims and that his assessment did not cover all of them. In a schedule he had prepared, Mr Parkin noted the differences in the amounts claimed by DHC compared to the Davis Langdon assessment. The schedule recorded that several of the items listed were being reviewed. Mr Arnerich said in his evidence that having regard to this assessment and to DHC’s late extension of time claims which had only been substantiated by DHC’s further materials provided in March 2013, he considered at that time that there was no prospect of any further payments to DHC being certified by Davis Langdon.
On 3 April 2013, Mr McClatchy sent an email to Mr Beagley in which he said he wanted to get an update from him as to where he understood everything was at regarding the ASB project. Mr McClatchy said that DHC was keen to get some sort of movement on the matter, have a payment certificate issued and any outstanding money due to DHC paid. On the afternoon of 4 April 2013, Mr Arnerich sent an email to Mr McClatchy inquiring about when some remaining work at the building would be done. Mr McClatchy responded the same day. He said that he had been trying to contact Mr Beagley to find out how long it would take him to provide a response to DHC on all the matters that had been referred to him for determination, and he asked Mr Arnerich whether he had received any updated information on the matter.

Vaco sale of Lincoln Road property

Meanwhile, on 7 November 2012, Vaco had entered into an agreement to sell the Lincoln Road property for $8.4 million, with settlement in April 2013. DHC was not aware of this sale.
In an email dated 27 March 2013, ANZ advised Vaco’s solicitors of the amount required to discharge the bank’s mortgage over the property that secured the project finance facility. In addition to the amount required to repay the principal and accrued interest of the project finance facility, ANZ stipulated that it would retain a total sum of $641,674 to be held on term deposit, to cover retentions and the outstanding costs of completion of the project. Of that amount, $515,076 was to be retained to cover the construction costs to complete, and $80,559 would be retained as contractor retentions.
The Lincoln Road property sale settled on 3 April 2013.

Payments made by Vaco following sale of Lincoln Road property

The Lincoln Road proceeds of sale of $8.4 million were applied to repay the ANZ facility, which then totalled some $5,507,700. In addition, ANZ retained $561,115 to cover costs to complete, as contemplated by its 27 March 2013 email. The sum of $80,559 which ANZ had said would be held to cover contractor retentions was not however retained by ANZ. Instead it was paid direct to Vaco’s ANZ bank account. The reason for this departure from ANZ’s earlier indication is unclear.
Over the following days, the bulk of the balance of $2,312,761 was distributed to Mr Arnerich himself, to Arnerich’s family members, and to related business interests. On 8 April 2013, approximately $1,175,000 was paid to ASB to repay borrowings by Mr Arnerich’s interests. On 9 April 2013, the sum of $1,036,131 was paid into Mr and Mrs Arnerich’s joint bank account. These payments are the primary focus of DHC’s claims that Mr Arnerich breached s 131 of the Companies Act.

In May 2013, ANZ agreed to release to Vaco the full balance of the costs to complete amount it was holding on term deposit, on the basis that there was no “Direct Agreement” in place requiring ANZ to make payments to DHC, the property had been sold and settled, the ANZ facility had been repaid, and the final account had been issued with $96,000 shown as owing to Vaco. Mr Irvine of ANZ noted in an email dated 17 May 2013 that:
The Bank expects that any further payments which may become payable under the construction contract (e.g. [extensions of time], retentions or otherwise) will be settled between the parties to the contract.
Over the period May 2013 to October 2013, Mr Arnerich made, or authorised, a number of payments from Vaco’s bank account to creditors of Vaco out of this “cost to complete” provision. In particular, Mr Arnerich paid ASB an agreed amount for fitout credits of $363,838.50 (excluding GST).
Mr Arnerich also authorised further payments to his family and business interests out of the funds in Vaco’s bank account, including:
(a)$50,000 on 11 June 2013;
(b)$30,000 on 2 July 2013;
(c)$30,000 on 25 July 2013;
(d)$45,000 on 20 August 2013; and
(e)$9,900 on 19 September 2013.
DHC says these further payments to the Arnerich interests also involved breaches by Mr Arnerich of s 131 of the Companies Act.

Vaco tax liability paid by other Arnerich entities

It appears that Vaco incurred a liability for tax in connection with the Lincoln Road development of at least $311,218. This was paid on behalf of Vaco on 20 May 2014 by Mr Arnerich’s solicitors, Martelli McKegg. They advised that to “make the tax payment for Vaco Investments (Lincoln Road) Trust, we journaled funds of $239,396.24 from Vaco Investments (Basque Road) Limited and $71,821.76 from Vaco Investments Limited”.

Final Payment Schedule No 17

On 1 May 2013, Davis Langdon issued Final Payment Schedule No 17. The value assigned to the payment amount certified was $0.00, and the schedule stated that the net position was that the Principal’s Deductions totalling $95,728.00 (plus GST) were payable by DHC to Vaco. Attached to the Certificate of Payment was a schedule on which each of the DHC variation claims was listed and in respect of which there was a brief note setting out the reason or reasons why the variation was disallowed. In many instances the reason given was: “Vaco do not agree …”.
Although it was described as a “final” payment schedule, in relation to DHC’s extension of time claim for $182,462 the schedule noted:
No Entitlement, [extension of time] Claim referred to the Engineer for review. Details of claim value to be provided by [DHC]. Time related costs to date are deemed to have been included within the P&G costs associated with the respective variations. Further request for information submitted.
It appears that in preparing Final Payment Schedule No 17, Davis Langdon had overlooked the letter from DHC to Mr Beagley dated 6 March 2013 which provided additional information requested by Mr Beagley in relation to the variation and extension of time claims. DHC says that this letter contained much of the information that Final Payment Schedule No 17 treated as outstanding, and as preventing certification of further claims.
In his evidence, Mr Arnerich said that as he heard nothing from DHC following receipt of Final Payment Schedule No 17, he concluded that DHC had finally accepted that they had no further claims against Vaco given their delay achieving practical completion and their consequential exposure to significant liquidated damages.
However, on 6 May 2013, Mr McClatchy sent an email to Mr Beagley which was copied to Mr Arnerich. He wrote:
Scott
Further to our conversation last week and all my previous emails can you please advise where we stand with the [practical completion] documentation for this project.
In the latest schedule the client has made a deduction of 118 days for [liquidated damages] that given the fact a [practical completion] date hasn’t been finalised and that all of the [extensions of time] have not been responded to and also deducted off the schedule seems extremely harsh. Hence we would like to have some direction on where the [practical completion] sits and also if we would have a response on the [extension of time] situation.
Regards
Stuart McClatchy
On 13 May 2013, Mr Fraser sent an email to Mr Parkin and copied it to Mr Beagley. In his email Mr Fraser advised that DHC did not agree with the assessments which had been made in Final Payment Schedule No 17. He addressed a number of the variation claims in detail, referring to the supporting documentation that had previously been provided by DHC.

DHC’s follow-up email on 8 August 2013

On 8 August 2013, Mr McClatchy sent an email to Mr Arnerich to inquire about the final account. He noted that DHC had not heard anything from Davis Langdon for a “very long time”. He said that DHC was not prepared to waste any more time with Davis Langdon, and would prefer to deal directly with Mr Arnerich over the final account, if he was willing to do so. He asked if a meeting could be arranged. Mr McClatchy received an automated reply advising that Mr Arnerich was out of his office for an extended period and would be returning to New Zealand in mid-September 2013. The automated message advised that any queries should be referred to relevant staff or to Mr Arnerich’s solicitor.
Mr Arnerich said in evidence that he was “shocked” when he received Mr McClatchy’s 8 August 2013 email, and he immediately sent an email to Mr Parkin which read:
…
I have had an email from Stuart McClatchy saying they haven’t heard anything from [Davis Langdon] for a long time? He also says that he wants to sort out the final account? I thought it was sorted in that they owe us almost $100k?
You think they are fishing ?
AA
Mr Parkin responded to Mr Arnerich by email that evening. He said:
I wasn’t aware we needed to contract [sic] [DHC], I understand we are still waiting on outstanding documentation in order to issue [practical completion]? Final account I am not sure where we got to. I will follow up with Scott but to the best of my knowledge we had communicated our stance on the outstanding issues.
Mr Arnerich replied:
Yes I thought so. Can you please check but I thought we issued the final account as at minus $99k ish.
If you could see where we are at with this and let me know?
Once we know I will suggest to [Mr McClatchy] he contact you for an update.
On 19 September 2013, Mr Arnerich sent an email to Mr Beagley attaching a copy of Progress Claim No 17. He said:
Hi Scott
Yes they did issue their final claim….I will forward the final progress valuation to them that [Davis Langdon] sent. If you can review with Mr Parkin on Monday that would be good….Looking at this though it is pretty clear what the position is ie we are owed plenty.
Thanks
AA
Shortly following this email, Mr Arnerich sent another email to Mr Beagley attaching Final Payment Schedule 17 and commenting: “This was the final progress valuation/payment made to them. Let’s talk Monday…”
On 24 September 2013, Mr McClatchy telephoned Mr Arnerich and asked for a meeting with him. Mr Arnerich said he would be unable to meet until after he had seen the engineer to the contract’s decision on the variations.
On 4 October 2013, Mr McClatchy followed up his telephone conversation by email to Mr Arnerich asking if he could advise when he would be available to meet in order to finalise the account. Later that same day, Mr Parkin sent an email to Mr McClatchy that he copied to Mr Arnerich and Mr Beagley, attaching the certificate of practical completion for the project. The certificate was dated 28 June 2013, and certified that practical completion was achieved on Wednesday 21 November 2012.
By 4 October 2013, Vaco had ceased trading. The only remaining asset of the company at that time was a credit balance of $6,440.25 in its ANZ cheque account.

Further correspondence in relation to DHC’s claims

It is unnecessary for us to set out in detail the extensive continuing dealings between DHC and Vaco in relation to the DHC claims. Correspondence continued into 2014. By letter dated 24 March 2014, DHC wrote to Vaco and Mr Arnerich to advise that as their attempts at negotiating a resolution had failed, DHC were giving formal notice that DHC was in dispute under the contract. On 2 April 2014, Vaco’s lawyers wrote to DHC denying any further liability.

Liquidation of Vaco

On 1 July 2014, Mr Arnerich, acting in his capacity as the sole director of VIL, passed a shareholder’s resolution appointing Victoria Toon, a chartered accountant, as liquidator of Vaco. In his evidence, Mr Arnerich said that by that point he had had enough. The Vaco Trust had been wound up, and Vaco had no assets.
On 2 July 2014, a lawyer acting for DHC sent an email to Mr McBride, attaching by way of service a notice of adjudication. Mr McBride replied stating that he was “instructed to respond as follows:”
1.Neither DHC Assets Ltd nor Vaco Investments Limited were parties to the construction contract, which was between Clearwater Construction Ltd and Vaco Investments (Lincoln Rd) Limited. Your Notice of Adjudication is of no effect.
2.Vaco Investments (Lincoln Rd) Limited was placed into liquidation on 1 July 2014. If Clearwater Construction Ltd wishes to commence any adjudication claim against it, it will first need to seek the leave of the court: Companies Act 1993, s 248(1)(c)(i).
On 4 July 2014, DHC lodged a proof of debt with the liquidator claiming that as at the date Vaco was placed into liquidation it was indebted to DHC in the sum of $703,731.68.
DHC’s Proof of Debt was noted by the liquidator, and DHC was included in the list of Vaco’s creditors prepared under s 255(2)(c)(ii) of the Companies Act and attached to the liquidator’s first report dated 8 July 2014. In her report, the liquidator said:
4. Events Leading to Appointment
The liquidator has been informed by the Director that the company ceased trading last year as the purpose for which the company was incorporated is no longer applicable. We have been advised that the company has no known assets.
On 10 July 2014, DHC filed an amended proof of debt in which the debt claimed was increased to $809,291.
By notice of rejection dated 31 July 2015, the liquidator rejected DHC’s claim to be a creditor on the basis that the DHC debt included claims for variations to the building contract which had been the subject of formal reviews by the engineer, and the decisions made by the engineer had not been challenged under the disputes procedure in the contract. The liquidator’s notice of rejection stated that the engineer had decided in the final Payment Schedule that DHC was not a creditor of Vaco, but a debtor owing the company $95,728 plus GST, and Davis Langdon had advised that the time limit for challenging the engineer’s decisions under the disputes procedure in the contract had expired.
At a meeting of creditors on 1 August 2014, the liquidator informed the creditors that Vaco was a corporate trustee which had no assets and which had held the land at Lincoln Road as a trustee only.

Adjudication proceedings

In February and March 2015, DHC, through its solicitors, requested the liquidator to take steps to investigate the distribution of funds by Vaco following the sale of the Lincoln Road Property in April 2013, and to pursue recovery of those funds. DHC contended that the distributions were effected by Mr Arnerich in breach of his duties as a director, as he was aware of DHC’s claim to be a creditor of Vaco at the time he arranged the distributions. In its correspondence with the liquidator, DHC also maintained that the engineer’s review was fundamentally flawed and could not be relied upon. DHC asked the liquidator to ascertain the value of DHC’s claim by either consenting to proceedings being commenced by DHC against Vaco, or directing the engineer or another expert to consider and advise on the claim. However, the liquidator responded that she was not prepared to have the validity and quantum of DHC’s claim against Vaco determined by means of an adjudication.
In May 2015, DHC applied to the High Court for an order granting it leave to commence adjudication proceedings against Vaco (in liquidation). The application was opposed by the liquidator on several grounds. Duffy J heard the application on 2 September 2015 and 3 February 2016. In a judgment delivered on 12 February 2016, Duffy J granted leave to DHC under s 248(1)(c)(i) of the Companies Act to commence adjudication proceedings under the Construction Contracts Act against Vaco (in liquidation).[7]
[7]DHC Assets Ltd v Toon [2016] NZHC 140 at [35].
In October 2015, Mr Arnerich executed a deed of indemnity under which he indemnified the liquidator in respect of all the liquidator’s costs, expenses and disbursements in relation to the liquidation of Vaco. The terms of the deed included an acknowledgment that Vaco had insufficient funds to pay the indemnified sums, and provided for the liquidator to render invoices to Mr Arnerich for all indemnified sums. The recitals to the deed recorded that the liquidation had been presented to the liquidator on the basis that the company was solvent at the time of liquidation on 1 July 2014. The recitals also recorded that a third party had issued proceedings against the liquidator, claiming to be a creditor of Vaco, and that the indemnifier had agreed to indemnify the liquidator against potential costs arising from the liquidation of Vaco, and in particular against the costs of defending the litigation.
After leave had been granted by the High Court, DHC commenced the adjudication proceedings. Although he was not a party to the adjudication, Mr Arnerich participated in the proceedings. He funded the liquidator’s participation in the adjudication, and also made his own submissions.
The Adjudicator’s determination was dated 5 October 2016, and was released to the parties on 12 October 2016.[8] The Adjudicator, Mr John Green, recorded that DHC sought the following determinations:
a[Vaco (in liquidation)] is liable to pay [DHC] the sum of $686,208.11 including GST or any other sum the Adjudicator may determine; and
b[Vaco (in liquidation)] is liable to pay interest on the above sum at the contractual rate of 12.4%;
c[Vaco (in liquidation)] is liable to pay [DHC]’s legal costs;
d[Vaco (in liquidation)] is liable to pay the whole of the adjudicator’s fees and expenses in accordance with section 57 of the Act;
ea determination in respect of [DHC]’s entitlement to an extension of time under the Contract; and
f a determination regarding the release of the Performance Bond.
[8]DHC Assets Ltd t/a Clearwater Construction v Vaco Investments (Lincoln Road) Ltd (in liq) BDT2016-08744, 5 October 2016.
The Adjudicator rejected Vaco’s submission that the engineer’s review decisions were an effective bar to the DHC claims because those claims were made out of time. He noted that under the relevant general conditions of contract, any decision by the engineer to reject a late claim is discretionary, as there may be valid reasons for delay and the lateness may not prevent a proper investigation. He further noted that the relevant guideline in the construction contract provides that an engineer should not refuse to grant an extension of time on the ground of late application unless the lateness is such as to cause real difficulty in making a proper assessment. He concluded:
64Contrary to Vaco’s submission, it is clear that under the Contract, an Engineer, in the proper exercise of his or her duties under the Contract, should investigate, and where appropriate, grant an extension of time where the Contractor is properly entitled to the same in circumstances where the contractor fails to give adequate and timely notice in terms of GC10.3.1, unless the lateness is such as to cause real difficulty in the making of a proper assessment.
65There is no evidence in this case that the lateness of [DHC]’s applications for [extensions of time] caused the Engineer any difficulty investigating and assessing those claims. In fact, by letter dated 20 December 2012, the Engineer expressly invited [DHC] to provide further information in support of claims for [Extensions of Time] 1, 2, and 3. [DHC] responded substantively by letter dated 6 March 2013. The Engineer then dallied and delayed for some seven months before ruling on [DHC]’s [extension of time] claims, even if his assertion that he made and posted his Engineers Review 2 on [21] October 2013 were accepted, which it is not.
66Rather, I have found it more likely that the Engineer’s Review 2 was provided to [DHC] on 20 January 2014 for the first time, irrespective of when it was actually made, and that such review did not take into account the further information provided by [DHC] on 6 March 2013 when rejecting [DHC]’s [extension of time] claims.
67Taken overall, I reject any suggestion by Vaco that delay on the part of [DHC] making applications for [extension of time] caused any difficulty for the Engineer in making a proper assessment of those claims, such that the Engineer had any basis for rejecting the applications on that ground alone.
The Adjudicator upheld all four of DHC’s extension of time claims totalling 147 calendar days.[9] As a consequence, the Adjudicator also upheld DHC’s claim that Vaco was wrong to deduct $70,800 from the Final Payment Schedule as liquidated damages for a period of 118 days from 28 July 2012 to the date of practical completion on 21 November 2012.[10]
[9]At [107].
[10]At [108]–[110].
The Adjudicator also determined that Vaco was required to pay DHC the sum of $300,763.12 together with interest at a daily rate until payment. Included within that sum was an amount of $131,909.15 for contract variations.[11]
[11]At [268].
However, the Adjudicator disallowed DHC’s claim for time-related costs related to extensions of time to the due date for completion totalling approximately $200,000.[12] The Adjudicator found that the insuperable difficulty for DHC was that the time-related costs it had claimed related to P&G costs, which were precluded by the terms of cl 4.4 of the Contract Performance Agreement.[13]
[12]At [176]–[180].
[13]At [142]–[146].
The Adjudicator considered that the merits of the parties’ cases should be reflected in the costs awards. He said:
278[DHC] has clearly been the successful party in this adjudication. Each party took the risk that its stance on the matters at issue would be vindicated in an adjudication and, on that point, it is [DHC]’s view as to its entitlement to extensions of time, release of the bond and payment for improper deductions in respect of liquidated damages, variations and Principal’s deductions that has prevailed substantially.
The Adjudicator allocated responsibility for paying his fees and expenses between DHC and Vaco at 25 per cent and 75 per cent respectively. He directed that Vaco pay 75 per cent of DHC’s costs and expenses, and directed Vaco to pay costs to DHC of $29,775 together with a further $7,590 as part reimbursement for the payment DHC had made of $20,000 as security for the Adjudicator’s fees and expenses.[14] The Adjudicator also directed that DHC was entitled to release of the performance bond it had provided under the terms of the contract.[15]

DHC refers its claims to arbitration

[14]At [283]–[286].

[15]At [262] and [292(b)].

Following receipt of the Adjudicator’s determination on 12 October 2016, DHC sought the liquidator’s consent to refer the DHC claims which the Adjudicator had disallowed to arbitration pursuant to cl 13.4.2 of the General Conditions of the Contract. The liquidator declined to consent to the commencement of arbitration proceedings.

On 15 March 2017, following a formal proof hearing in the High Court, Lang J made orders granting DHC leave under s 248(1)(c) of the Companies Act to commence arbitration proceedings against Vaco (in liquidation), and to apply to the District Court pursuant to s 73(2) of the Construction Contracts Act for the Adjudicator’s determination to be enforced by entry as a judgment.[16] On 26 April 2017, DHC applied to the District Court at North Shore for the Adjudicator’s determination dated 5 October 2016 to be enforced by entry as a judgment. Vaco was served but took no steps. On 11 May 2017, the District Court entered the determination as a judgment of the District Court in favour of DHC against Vaco in the sum of $367,768.12 (including GST).[17]
[16]DHC Assets Ltd v Vaco Investments (Lincoln Road) Ltd (in liq) [2017] NZHC 454.
[17]DHC Assets Ltd v Vaco Investments (Lincoln Road) Ltd (in liq) DC North Shore
DHC then proceeded to refer to arbitration the claims in relation to time-related costs and P&G costs that had been disallowed by the Adjudicator. Mr John Walton was appointed as the arbitrator.
In August 2017, Mr Arnerich commenced a separate proceeding in the High Court against Vaco (in liquidation), the liquidator, and DHC, seeking orders directing the liquidator to bring a counterclaim in the arbitration, or in the alternative that he be given leave pursuant to s 165 of the Companies Act to bring a counterclaim in Vaco’s name in the arbitration as a derivative action. All three defendants opposed Mr Arnerich’s application. On 28 March 2018, Associate Judge Sargisson declined to grant Mr Arnerich leave to seek an order that the liquidator be directed to file a counter‑claim in the arbitration.[18] Mr Arnerich’s application to rescind that order was dismissed by Associate Judge Sargisson on 3 August 2018.[19] The application for leave to bring a derivative action was subsequently discontinued.
[18]Arnerich v Vaco Investments (Lincoln Road) Ltd (in liq) [2018] NZHC 560 at [22(d)].
[19]Arnerich v Vaco Investments (Lincoln Road) Ltd (in liq) [2018] NZHC 1974 at [40]–[43].
The arbitration has not proceeded to a hearing. It appears the parties saw it as superseded by the proceedings brought by DHC against Mr Arnerich which are the subject of this appeal.

DHC’s proceedings against Mr Arnerich

In March 2017, DHC brought proceedings against Mr Arnerich under s 301 of the Companies Act. DHC applied for summary judgment. The application was unsuccessful.[20]
[20]DHC Assets Ltd v Arnerich [2017] NZHC 1460.
Following the refusal of summary judgment, DHC re-pleaded its claim and proposed that the liquidator be joined as a party in the proceeding. However, that application was made at a late stage, and by minute dated 26 July 2018 Associate Judge Bell ruled that the proceeding should continue without the liquidator being joined, on the basis that any judgment in the decision would be binding on both DHC and Mr Arnerich in relation to the standing of DHC as a creditor of Vaco, and in relation to the amount of any liability of Vaco to DHC. In response to that minute, the liquidator filed a memorandum dated 17 August 2018 in which she noted, among other things, that the liquidator had previously advised the Court by memorandum dated 3 November 2017 that she was willing to abide the decision of the Court on the amount that is found to be due under the construction contract in the proceedings between DHC and Mr Arnerich, and that remained her position.
From this point onwards all parties proceeded on the basis that the amount (if any) owed by Vaco to DHC, over and above the amount awarded in the adjudication, would be determined in these proceedings. Hence their decision not to progress the arbitration before Mr Walton.

DHC’s allegations against Mr Arnerich

The proceedings went to trial on the basis of DHC’s third amended statement of claim dated 2 August 2018, in which DHC pleaded two causes of action. DHC’s pleading set out its claims against Vaco under the construction contract. The pleading alleged that with full knowledge of those outstanding claims by DHC as a creditor of Vaco, Mr Arnerich procured Vaco to make distributions out of the proceeds of sale of the Lincoln Road property to himself and his family interests.
The first cause of action alleged that by distributing Vaco’s assets to himself and his family interests Mr Arnerich had breached his fiduciary duties and his duty under s 131 of the Companies Act. DHC sought orders under s 301 of the Companies Act that Mr Arnerich pay DHC $1,088,156.17 plus contractual interest. Alternatively, DHC sought an order requiring Mr Arnerich to contribute such sum to the assets of Vaco by way of compensation as would serve to cover all monies owing by Vaco to DHC, including GST and contractual interest, taking into account any liquidator’s fees and any claims that might be lodged by other creditors.
The second cause of action was concerned with alleged misapplication of the retention monies. DHC claimed that retention monies of approximately $80,559 should have been paid to DHC in May 2013. DHC alleged that Mr Arnerich breached s 131 of the Companies Act by procuring payment by ANZ to Vaco of the retention monies held by ANZ, and paying those retention monies out to third parties rather than to DHC. DHC sought orders under s 301 of the Companies Act that Mr Arnerich pay to DHC the amount of the retention monies plus contractual interest.

Mr Arnerich’s defence

Mr Arnerich denied that he had breached s 131 of the Companies Act. In his defence to the third amended statement of claim, he denied that any further sums were owed by Vaco to DHC. He denied that DHC was entitled to payment of the retentions under the construction contract. He said that while he was aware that DHC was unhappy with some of the engineer’s decisions under the construction contract, DHC never took any steps to formally challenge those decisions within the timeframes required by the construction contract. At the time he authorised distributions to himself and his interests from Vaco’s ANZ Bank account, DHC had taken no steps to formally challenge any of the engineer’s decisions, and had not commenced or threatened to commence any mediation or arbitration process. He had proceeded on the basis that DHC had no valid claims against Vaco, and DHC was not taking any formal steps to pursue the claims it had raised in correspondence.
Mr Arnerich pleaded by way of affirmative defence that no further monies were owing to DHC under the construction contract. As a second affirmative defence, he pleaded that he had relied on the advice given by Mr Beagley to ANZ about the appropriate amounts to be retained on term deposit to meet the forecast cost to complete the development, including an allowance for possible claims for additional variations by DHC. He had acted in good faith and reasonably in relying on that advice.

High Court judgment

The trial took place before Davison J in late 2018, with two further hearing days in March 2019. Davison J delivered his judgment on 27 September 2019. The judgment was re-issued on 2 October 2019.[21]

Legal framework for the claim

[21]High Court judgment, above n 1.

As the Judge noted, both causes of action were founded on an alleged breach by Mr Arnerich of s 131 of the Companies Act, which as relevant provides:
131Duty of directors to act in good faith and in best interests of company
(1)Subject to this section, a director of a company, when exercising powers or performing duties, must act in good faith and in what the director believes to be the best interests of the company.
…
After referring to relevant authorities and texts, the Judge summarised the question he was required to decide as follows:[22]
… if it appears that when [Mr Arnerich] authorised the payments from Vaco’s bank account in order to distribute all its assets to [the Vaco] Trust and which progressively reduced and ultimately exhausted the assets of the company thereby rendering it insolvent, he was not acting bona fide and in good faith by failing to have proper regard to [DHC] and its claims asserting that it was a creditor of [Vaco], he will have breached the duty in s 131 of the Companies Act 1993, and will accordingly be liable.
[22]At [244].
As the Judge noted, a director’s duty under s 131 of the Companies Act is owed to the company, not to creditors of the company.[23] DHC was able to bring its claim in relation to alleged breach of s 131 by virtue of s 301 of the Companies Act, which as relevant provides:
[23]At [242], quoting Nicholson v Permakraft (NZ) Ltd [1985] 1 NZLR 242 (CA) at 249.
301Power of court to require persons to repay money or return property
(1)If, in the course of the liquidation of a company, it appears to the court that … a past or present director … of the company, has misapplied, or retained, or become liable or accountable for, money or property of the company, or been guilty of negligence, default, or breach of duty or trust in relation to the company, the court may, on the application of the liquidator or a creditor or shareholder,—
(a)inquire into the conduct of the promoter, director, manager, administrator, liquidator, or receiver; and
(b)order that person—
(i)to repay or restore the money or property or any part of it with interest at a rate the court thinks just; or
(ii)to contribute such sum to the assets of the company by way of compensation as the court thinks just; or
(c)where the application is made by a creditor, order that person to pay or transfer the money or property or any part of it with interest at a rate the court thinks just to the creditor.
…
The Judge proceeded on the basis that it was open to him to award compensation direct to DHC under s 301(1)(c), if a breach of s 131 was established.[24]
[24]At [249], quoting Sanders v Flay (2005) 9 NZCLC 263,906 (HC) at [18]–[19].
The Judge briefly touched on the relationship between Mr Arnerich’s duties as a director of Vaco, and Vaco’s role as trustee of the Vaco Trust.[25] The Judge referred with approval to the observation of Associate Judge Bell, in an earlier judgment in the proceeding dealing with an interlocutory application, to the effect that the trusteeship was irrelevant to DHC’s claim against Mr Arnerich.[26] A director of a corporate trustee may come under duties to have regard to the interests of creditors in the same way as the director of any other company. Whether or not Vaco owned the Lincoln Road property as trustee, Mr Arnerich arguably breached his duties as director if he disposed of company assets without providing for the alleged creditor, DHC.[27]

Ability of the High Court to determine Vaco’s liability to DHC

[25]At [250]–[253].

[26]At [252].

[27]At [252], quoting DHC Assets Ltd v Arnerich [2018] NZHC 1865 at [28].

The Judge then addressed what he saw as the preliminary question of whether he was able to determine the liability of Vaco to DHC for the purpose of assessing the compensation that might be awarded against Mr Arnerich, independently of the Adjudicator’s determination and in spite of the contractual disputes procedure set out in the construction contract.[28]
[28]At [256].
The Judge concluded that the High Court did not have jurisdiction to determine Vaco’s contractual liability to DHC.[29] He considered that the contractual dispute procedure agreed by DHC and Vaco required disputes under the construction contract to be addressed by prescribed processes, which could include adjudication, formal review by the engineer, mediation and arbitration.[30] The contract did not anticipate either party bringing court proceedings in relation to a dispute arising under the contract.[31]
[29]At [259].
[30]At [260].
[31]At [261].
The Judge considered that in the proceedings before him, Mr Arnerich could not challenge the existence of the debt found owing by Vaco to DHC by the Adjudicator. Accordingly, the Judge proceeded on the basis that DHC had established the debt owed to it by Vaco as determined by the Adjudicator.[32]
[32]At [268].
However, as regards the parts of DHC’s contractual claim that had been disallowed by the Adjudicator, and subsequently referred to arbitration, the Judge found that the dispute provisions of the contract were engaged and underway, but were yet to be completed. The Judge could not determine whether Vaco was liable to meet the DHC claims that had been rejected by the Adjudicator. The process for determining those issues under the contract was by arbitration.[33]

Findings in relation to Mr Arnerich’s knowledge about DHC’s claims

[33]At [269].

The Judge considered that at all relevant times Mr Arnerich was aware that DHC had not given up on its claims, and was still pursuing those claims.[34] DHC was asserting those claims in correspondence with the engineer and with Vaco. Contemporaneous documents prepared by Davis Langdon referred to outstanding and unresolved claims by DHC. In the Drawdown Valuation 15 dated 5 March 2013 that Mr Beagley had prepared for ANZ, (and copied to Mr Arnerich), Mr Beagley advised that significant construction variation claims, and risk, remained “with the major disputed claims having been recently referred for a formal Engineer’s Review”. Mr Beagley’s report to ANZ concluded by commenting that negotiation and settlement of the construction variation claims were identified as the significant remaining contingent cost risk at that stage. Although Mr Arnerich dismissed DHC’s claims as “fanciful” and “not worth printing out”, he was well aware that DHC was pursuing them.[35]
[34]At [293]–[298].
[35]At [310].
The Judge found that DHC’s claims, and their yet to be determined status, meant that DHC was a contingent creditor of Vaco. Mr Arnerich’s duties as a director required him to have proper regard to DHC’s interests as a contingent creditor when making decisions about distributing Vaco’s assets.[36]
[36]At [314].
The Judge did not accept Mr Arnerich’s evidence that he had concluded that DHC must have accepted that it had no further claims against Vaco. The Judge said:[37]
Despite his assertions to that effect, I do not consider that Mr Arnerich could have actually held that subjective belief, as no sensible basis existed for him to reach such a conclusion. Moreover, and without taking any steps to ascertain whether his belief that [DHC] had abandoned its claims against Vaco was indeed correct, he proceeded with energy and haste to secure release of the retention funds held by the ANZ. … All of this occurred … while dispute resolution mechanisms for establishing its claim were still available to [DHC] under the contract.
[37]At [317].
The Judge was satisfied that throughout the relevant period, Mr Arnerich did not genuinely believe that DHC had abandoned its claims.[38] He found that DHC was asserting itself as a creditor, and Mr Arnerich was aware that there was a real dispute between the parties. The Judge found that Mr Arnerich did not believe that DHC’s claims had been finally determined by Final Payment Schedule No 17.[39]

Breach of s 131 of the Companies Act

[38]At [320].

[39]At [327].

The Judge then went on to consider whether Mr Arnerich had breached his duties under s 131 of the Companies Act when he authorised the payments to himself and his family interests. Mr Arnerich gave evidence that he was comfortable with making those payments for five reasons:
(a)the payments were made by the Vaco Trust, to its creditor, ANZ, and to its beneficiaries.
(b)DHC had contracted with Vaco and not the Vaco Trust.
(c)DHC had acknowledged that Mr Arnerich had no personal liability and their recourse for payment pursuant to the contract was with ANZ, who would pay on receipt of a certificate issued by the engineer.
(d)DHC’s work at Lincoln Road had concluded, and there were no outstanding monies owing as had been determined by the engineer. Despite threatening to commence legal proceedings in an email of 27 December 2012, DHC had not taken any steps.
(e)ANZ had retained $561,115 to be held on term deposit to cover costs to complete should the engineer decide to approve some of the DHC claims in Payment Claim 17 or any future claims relating to the project.
The Judge considered each of these five reasons and rejected them as grounds on which Mr Arnerich could have considered that it was in Vaco’s best interests to distribute funds to himself and his interests.[40]
[40]At [331]–[344].
The Judge held that at the time Mr Arnerich made those distributions, he was not acting in good faith, as he was not having sufficient regard to the interests of DHC as an unpaid creditor of Vaco.[41]

Relief under s 301 of the Companies Act

[41]At [345].

The Judge considered that this was a case where it was appropriate for Mr Arnerich to compensate DHC directly.[42] He directed Mr Arnerich to pay DHC the amount found owing in the adjudication: $367,768.12.[43] The Judge considered that DHC was entitled to interest on that sum from the date of the adjudicator’s determination at the contractual rate of 12.4 per cent compounding monthly.[44]
[42]At [347].
[43]At [348]–[349].
[44]At [350].
The Judge said that because the final amount of Vaco’s indebtedness to DHC was yet to be determined, and could not be determined other than by means of the arbitration which was adjourned, DHC could not recover any further sum found owing by Vaco directly from Mr Arnerich under s 301 of the Companies Act other than by means of a further proceeding. The Judge considered that this situation was unfortunate, but was the consequence of DHC having chosen to pursue the s 301 proceeding before concluding the arbitration with Vaco.[45]
[45]At [351].
The Judge made an order under s 301(1)(c) of the Companies Act that Mr Arnerich pay directly to DHC the sum of $367,768.12, with interest on that amount from the date of adjudication compounding monthly at the contractual rate of 12.4 per cent per annum. DHC was awarded costs.[46]

Issues on appeal

[46]At [353]–[354].

The central issue raised by the appeal is whether the Judge was right to find that Mr Arnerich breached s 131 of the Companies Act by authorising distributions to himself and his family interests in the period April to September 2013.
The appeal also raises the following issues:
(a)Did the High Court err in declining to determine the amount of DHC’s claims against Vaco?
(b)Did the High Court err by treating the adjudication as determining the (minimum) amount of Vaco’s liability to DHC?
(c)Did the High Court err in its approach to compensation under s 301 of the Companies Act? In particular, should the High Court have identified which (if any) of the payments made by Vaco breached s 131, and why, and whether these had to be repaid to Vaco?
(d)Did the High Court err in awarding compensation on a basis that included the GST payable by Vaco to DHC?
(e)Did the High Court err in awarding interest on the whole of the adjudication award, including GST and costs components, at the contractual rate of 12.4 per cent?
Mr Arnerich sought orders allowing his appeal and setting aside the judgment against him.
The central issue raised by the cross-appeal was the same as the first issue raised by the appeal: whether the High Court erred in declining to determine the amount owing by Vaco to DHC. DHC sought orders remitting that issue, and the award of relief against Mr Arnerich under s 301 in respect of any further amount owing by Vaco, to the High Court. DHC also sought, in the alternative, orders that would enable the amount of DHC’s claims against Vaco to be determined by the arbitrator, with the question of relief against Mr Arnerich under s 301 to be addressed by the High Court following the arbitration.

Principles governing DHC’s s 301 claim

Liability under s 131 of the Companies Act

As noted above, DHC brought its claim under s 301 of the Companies Act, which permits a creditor of a company in liquidation to apply to the court for relief in connection with breaches of duty by a director of that company. The breach alleged in this case is a breach of Mr Arnerich’s duties under s 131 of the Companies Act to act in good faith and in what he believed to be the best interests of that company.
The Supreme Court has recently confirmed in Madsen-Ries v Cooper (Debut Homes) that the test under s 131 is subjective:[47]
[112] … The test is subjective. This follows from the wording of s 131 (expressed subjectively) and the legislative history (the fact that the Law Commission’s reasonableness requirement was not enacted). This aligns with the common law test and policy considerations. Courts are not well equipped, even with the benefit of expert evidence, to second-guess the business decisions made by directors in what they honestly believed to be in the best interests of the company. The courts would also be judging directors’ decisions with all the dangers of judging with the benefit of hindsight. A subjective test is consistent with English authority. Further, there is also already an objectively-judged statutory duty of care in s 137.
[113] Commentary and caselaw suggest that there are, however, a number of exceptions and qualifications to the subjective test:
(a) where there is no evidence of actual consideration of the best interests of the company;
(b) where, in an insolvency or near-insolvency situation, there is a failure to consider the interests of creditors;
(c) where there is a conflict of interest or where the action was one no director with any understanding of fiduciary duties could have taken (although some would suggest these may rather be treated as breaches of the duty of good faith (as the High Court did in this case) or of s 133 (powers must be exercised for a proper purpose)); and
(d) where a director’s decisions are irrational.
[47]Madsen-Ries v Cooper [2020] NZSC 100, (2020) 29 NZTC 24-088 [Debut Homes] (footnotes omitted).
As the Supreme Court went on to explain, factors (a) and (b) are not in fact exceptions or qualifications to the subjective test:[48]
The point is that directors cannot subjectively believe they are acting in the best interests of the company if they have failed to consider the interests of the company or, where required, the interests of all the creditors, including prospective creditors.
[48]At [114].
The Court did not need to decide whether factors (c) and (d) are qualifications or exceptions to the subjective test. The Court noted that in an insolvency situation where the interests of creditors have not been considered, a conflict of interest may well exacerbate the breach.[49]

The implications of the trading trust structure

[49]At [115].

In determining whether Mr Arnerich failed to comply with s 131 when authorising the payments to himself and his interests, it is important to bear in mind the “trading trust” structure he put in place to carry out the Lincoln Road development. Vaco was the sole trustee of the Vaco Trust. It purchased the Lincoln Road property in that capacity. It entered into the project finance agreement with ANZ in that capacity. Although the construction contract was entered into by Vaco shortly before the trust was settled, it is clear that the development of the property was undertaken by Vaco in its capacity as trustee of, and for the benefit of, the Vaco Trust. The construction work took place on land that was held by Vaco in that capacity, and was paid for by funds borrowed by Vaco in that capacity. The proceeds of sale of the completed development were treated by Vaco as funds held pursuant to the Vaco Trust, and were distributed for the benefit of the beneficiaries of that trust.
At an earlier point in the proceedings, Mr Arnerich appears to have argued that the construction contract was entered into by Vaco for its own benefit, and not as trustee of the Vaco Trust.[50] But it was not suggested before us that the obligations incurred by Vaco to DHC for work performed under the construction contract were incurred other than in Vaco’s capacity as a trustee of the Vaco Trust, or that expenditure by Vaco on the construction work that DHC performed on the property was not properly payable out of the assets of the Vaco Trust. An argument to that effect would have had no prospect of success, on the facts of this case.
[50]It appears this argument was advanced in opposition to DHC’s summary judgment application: see DHC Assets Ltd v Arnerich, above n 20, in particular at [26]–[30].
It follows that:
(a)Vaco incurred liabilities as work progressed under the construction contract to make payments to DHC as and when they fell due under that contract.
(b)Those liabilities were incurred by Vaco in its capacity as trustee of the Vaco Trust.
(c)Vaco was entitled to meet those liabilities directly from the trust property. Alternatively, if Vaco paid amounts due under the construction contract out of its own funds, Vaco was entitled to reimbursement from the trust property.[51]
(d)Vaco as trustee was entitled to a lien over the trust property to protect its right of indemnity in respect of existing and future liabilities (including contingent liabilities) to which it was exposed as a trustee. This lien arises by operation of law and can be asserted even against absolutely entitled beneficiaries.[52]
[51]Compare s 81 of the Trusts Act 2019, which reflects the pre-existing law.
[52]Andrew Butler (ed) Equity and Trusts in New Zealand (2nd ed, Thomson Reuters, Wellington, 2009) at [16.6.6]; In Re Pauling’s Settlement Trusts (No 2) [1963] Ch 576; and X v A [2000] 1 All ER 490 (Ch) at 493–494.
When Vaco made distributions of trust funds to discretionary beneficiaries of the Vaco Trust, Vaco was not paying away money that Vaco owned beneficially. These were not Vaco’s own funds. But by making those payments, Vaco lost its ability to meet liabilities it incurred in its capacity as trustee out of those trust funds, lost the ability to reimburse itself out of those funds, and lost its lien over those funds. When considering whether Mr Arnerich breached s 131, the focus must therefore be on whether he acted in the best interests of Vaco in deciding that Vaco should make those distributions at the relevant time and, as a consequence, lose its ability to have recourse to those funds in the event that an existing or future claim by DHC (or any other creditor of Vaco in its capacity as trustee) was made out.

Relief under s 301

As this Court recently observed in Yan v Mainzeal Property and Construction Ltd (in liq), s 301 is essentially procedural in nature.[53] Where a claim is brought under s 301 in respect of a breach of duty by a director, the plaintiff must establish all the elements of a cause of action for breach of that duty. Directors cannot be required to pay more under s 301 than could have been awarded against them in a direct claim by the company for breach of that duty.[54] The court has a discretion to award less under s 301 than would be awarded in a direct claim for breach of duty brought in the name of a company. There remains some uncertainty about the extent of the s 301 discretion.[55]
[53]Yan v Mainzeal Property and Construction Ltd (in liq) [2021] NZCA 99 at [299].
[54]At [301].
[55]At [303]–[307].
Section 301(1)(c) expressly provides for an application under s 301 to be made by a creditor of the company. As this Court observed in Mainzeal, where the application is made by a creditor, the court can order the defendant to pay or transfer money or property to the creditor under s 301(1)(c).[56] It has been held in the High Court that this power is available where the defendant has misapplied or retained or become liable or accountable for money or property of the company, but not in relation to compensation for breaches of a duty owed by a director to the company.[57] However, in Debut Homes, the Supreme Court expressly left the question of when an award can be made to a creditor for decision in a case where the issue arises directly.[58] We do not consider that the issue needs to be resolved in the present case, in circumstances where:
(a)The liquidator was aware of the proceedings and advised the Court that she abided by the Court’s decision.
(b)Mr Arnerich did not oppose an order that any amount found to be payable be paid direct to DHC. In response to a minute issued by this Court on 2 November 2020, before the hearing of the appeal, Mr Arnerich filed a memorandum submitting that an order could not be made for payment direct to a creditor under s 301(1)(c) in respect of a claim for breach of a director’s duties owed to the company. But in the course of the hearing, Mr McBride, counsel for Mr Arnerich, confirmed that there had been no argument in the High Court about the appropriateness of a direct payment to DHC. In response to questions from the Court about whether it was too late to take the issue now, Mr McBride indicated that the issue had no practical significance because DHC is the only remaining creditor in the liquidation. In those circumstances, the issue was not pursued further before us.
[56]At [309].
[57]Mitchell v Hesketh (1998) 8 NZCLC 261,559 (HC) at 261,562.
[58]Debut Homes, above n 47, at nn 179 and 191.
Thus if Mr Arnerich breached s 131, the starting point for determining the appropriate relief under s 301 is the compensation that Vaco could have recovered from Mr Arnerich if it had brought a direct claim for breach of that duty.[59] That sets a ceiling on the amount that could be awarded under s 301. It is then necessary to go on and consider whether there is good reason to award a lesser amount.
[59]Yan v Mainzeal Property and Construction Ltd (In Liq), above n 53, at [301].
The approach to awarding relief for breach of a duty owed by a director to a company, where that claim is brought by the company, depends on the provision breached and on the nature of the breach. If a director breaches the fiduciary obligations set out in s 131, the remedy will be assessed in accordance with the principles governing claims for breaches of fiduciary duty.[60]

Should the High Court have determined the amount of DHC’s claim against Vaco?

[60]At [288].

We begin by considering whether the High Court should have determined the amount (if any) that DHC was owed by Vaco under the construction contract.
Before this Court, both DHC and Mr Arnerich submitted that the High Court erred in failing to determine whether DHC had valid claims against Vaco for payments in respect of variations and extensions of time. We accept that submission. As we explain below, the High Court had jurisdiction to determine this issue and needed to do so in order to determine DHC’s claim.
It was an integral element of DHC’s claim that it was owed further amounts by Vaco, and had been denied payment of those further amounts as a result of Mr Arnerich’s breaches of s 131 of the Companies Act. In order to determine the amount that DHC could have recovered from Vaco but for the alleged breaches, it was necessary for the High Court to determine what amount, if any, DHC was contractually entitled to claim from Vaco.
At the risk of stating the obvious, the High Court had jurisdiction to hear and determine DHC’s claim against Mr Arnerich. It necessarily had jurisdiction to determine any question of fact or law relevant to that claim, absent some limit on its jurisdiction established by statute or by common law. In this case, there was no relevant limit on the High Court’s jurisdiction. There was no arbitration agreement between DHC and Mr Arnerich referring a dispute between them to arbitration. And even where parties have agreed to arbitration of their dispute, that does not deprive the court of jurisdiction. Rather, where parties to proceedings before the court have agreed to refer that dispute to arbitration, the court will at the request of a party decline to exercise its jurisdiction, and stay the proceedings as required by the Arbitration Act 1996, unless one of the exceptions set out in that Act applies.[61] One of those exceptions is where a stay is requested by a party after submitting their “first statement on the substance of the dispute”. Thus, for example, if one party brings proceedings before the court and the other party does not seek a stay, or takes a substantive step in the proceedings before requesting a stay, the court has jurisdiction to hear the claim and will proceed to do so.
[61]See Arbitration Act 1996, cl 8(1) of sch 1.
The court may also, in the exercise of its inherent jurisdiction, grant a stay where essentially the same issue has been referred to arbitration by related parties.[62] But the court will do so only in rare and compelling circumstances.[63] And of course it will do so only if a party seeks a stay.
[62]See for example Danone Asia Pacific Holdings Pty Ltd v Fonterra Co-operative Group Ltd [2014] NZHC 1681 at [33]–[39].
[63]At [55], citing Reichhold Norway ASA v Goldman Sachs International [2000] 1 WLR 173 (CA) at 186.
In this case, neither party sought a stay at any point in the proceedings before the High Court. Both parties agreed that the issue of DHC’s contractual entitlement against Vaco should be determined by the Court. Vaco also agreed to this approach, through its liquidator. The Court had jurisdiction to determine that issue and should have done so.
We accept DHC’s submission that in these circumstances, the proceeding should be remitted back to the High Court to determine the question of what, if anything, Vaco owes to DHC over and above the amount determined by the adjudication process, if that issue is relevant to the award of relief under s 301 of the Companies Act in this proceeding. We return to the question of relief below.

Did Mr Arnerich breach s 131 of the Companies Act?

Mr Arnerich’s submissions on appeal in relation to s 131

Mr Arnerich submitted that the High Court Judge erred in finding that Mr Arnerich had failed to act in what he believed — subjectively — to be the best interests of Vaco. He says that at the time the Lincoln Road property was sold, and the trust funds distributed, he genuinely believed that DHC had no further valid claims under the construction contract. He knew that DHC was unhappy with Vaco’s refusal to pay any further amounts, and with the decisions made by the engineer to issue payment schedules denying their claims. But he considered that DHC had, albeit reluctantly, decided not to take any formal steps to pursue those claims. And in any event, even if DHC did pursue its claims further, he saw those claims as hopeless. So there was no need to retain funds to meet such claims.
In support of that proposition, Mr Arnerich pointed to his correspondence with Mr Beagley, in which he consistently expressed a firm view that DHC had no further claim. When DHC sent an email to Mr Arnerich on 8 August 2013 inquiring about the final account, Mr Arnerich’s email to Mr Parkin recorded that he thought the claim was “sorted in that they owe us almost $100K”. Mr Arnerich asked if Mr Parkin thought they were “fishing”. His views as recorded in other correspondence at the relevant time were that the claims by DHC were “fanciful”, “outside the contract”, “outrageous”, and that he was “very confident” that they had no basis.
Mr Arnerich also emphasised that following the sale of the Lincoln Road property, Vaco set aside a provision of $561,115 at the instigation of ANZ, to cover costs to complete the project. Mr Arnerich submitted that he genuinely believed in April 2013 that this provision was adequate to meet any further claims from DHC or others. He says he relied on the fact that this amount was seen by ANZ as an adequate provision, based on advice from Mr Beagley (the engineer under the construction contract and the quantity surveyor advising ANZ). The figure recommended by Mr Beagley included $197,161 for claims by DHC and $317,915 for ASB’s tenant fitout contribution.
That provision was progressively depleted by Mr Arnerich over the balance of 2013, by way of payments to Vaco’s creditors. Some payments were also made to his interests, but these were of relatively modest amounts. Throughout this period, DHC failed to take any formal steps to pursue its foreshadowed claims.
By retaining this provision, Mr Arnerich submitted, he had acted in good faith in the best interests of Vaco. Even if it was subsequently established that DHC had further claims against Vaco, that did not cast doubt on whether Mr Arnerich had acted in good faith when authorising payments in 2013.
In those circumstances, Mr Arnerich submitted, it was not open to the High Court Judge to make adverse findings about Mr Arnerich’s conduct. In particular, it was not open to the Judge to find that he did not genuinely believe that DHC was not likely to take any further formal steps to pursue its claims. And the Judge failed to address his argument that having regard to his genuine view of the merits of those claims, he had made adequate provision for any such claims at the time the Lincoln Road property was sold. In the absence of any further steps by DHC to pursue its claims, he then acted in good faith in paying away that provision over a period of months. The Judge was wrong to suggest that he had done so with “haste”.[64]

DHC’s submissions in relation to s 131 breach

[64]High Court judgment, above n 1, at [317].

DHC sought to uphold the Judge’s findings. Mr Thorp, counsel for DHC, emphasised that DHC had consistently advanced its claims for further payment. The Judge was right to find that Mr Arnerich could not have genuinely believed that DHC had abandoned the pursuit of those claims.
Mr Thorp emphasised that the letter dated 4 March 2013 from Davis Langdon to ANZ, which was copied to Mr Arnerich, was the source of the figures on which the $561,115 provision was based. But in that same letter Davis Langdon advised ANZ that:
(a)Significant construction variation claims/risk ($567,000 claimed versus cost liability provision of $363,000 included in the current cost to complete assessment) remained, with the major disputed claims having recently been referred for a formal engineer’s review.
(b)DHC had identified variation claims to date amounting to approximately $629,000, of which $363,000 had been included within the current budget and cost to complete provision.
(c)Extension of time claims, variation claims relating to “soft spots” in the basement, time-related construction expenses and credits for contract works not completed were the remaining significant variation cost risks at this stage of the project.
(d)There was effectively no remaining unallocated contingency for the project.
(e)There remained “significant construction/final account agreement risk that identifies a potential shortfall, that would require additional equity/funding to be contributed should [DHC] be awarded variation values as currently claimed”.
(f)Negotiation and settlement of the construction variation claims, associated Final Construction Account agreement and incidental consultant and holding costs associated with a protracted development period were the significant remaining contingent cost risks at this stage of the project.
Mr Thorp drew our attention to the email Mr Arnerich sent to ANZ on 5 March 2013, in which he emphasised that he was “very confident” in relation to the DHC claims, and added that “in any event this will drag on way past settlement of the property and will in effect become solely my problem as the bank will not have any exposure”. Mr Thorp submitted that this was an acknowledgement that the dispute was likely to continue, with the risk of liability to be borne by Vaco.

Mr Thorp also emphasised that DHC’s final account, Payment Claim 17, was sent to Vaco on 15 March 2013 after the correspondence between Mr Beagley and ANZ and Mr Arnerich earlier that month. So it would have been obvious to Mr Arnerich that the views expressed in Davis Langdon’s 4 March 2013 letter did not take into account the additional claims made by DHC in Payment Claim 17. Upon receipt of that payment claim, Mr Arnerich sent an email to Mr Beagley asking him to review the claims, and add them to the engineer’s reviews that are currently underway. This was a further acknowledgement that the claims had not been finally resolved.

Discussion

We consider that it was open to the Judge to find that Mr Arnerich did not (subjectively) believe that DHC had abandoned its claims. Just a matter of weeks before the sale of the Lincoln Road property, DHC submitted its Payment Claim 17. DHC had been rather disorganised and desultory in pursuing its claims, and had been reluctant to escalate those claims to formal dispute resolution procedures. But it remained open to DHC to do so. It was implausible that DHC would fail to take further steps to pursue the very substantial amounts that it claimed were owing to it, if an agreed resolution could not be achieved. Similarly, it is implausible that Mr Arnerich believed that DHC would take no further steps to pursue its claims.
The Judge did not make a finding on whether Mr Arnerich believed that the claims were so lacking in merit that there was no need to retain funds to cover them. There is considerable force in Mr Arnerich’s submission that the contemporaneous correspondence confirms that this was indeed his view. We accept that he believed that the risk of a successful claim by DHC was very low.
Thus if the s 131 test were purely subjective, Mr Arnerich would have a respectable argument that in making decisions about dealings with funds held by Vaco, he could disregard the risk of claims by Vaco in excess of the amount set aside by way of provision when the Lincoln Road property was sold.
That is not the end of the matter, however, as it remains necessary to consider whether any of the four riders in relation to the subjective approach to s 131 recognised by the Supreme Court in Debut Homes applies. We set them out again for ease of reference:[65]
(a) where there is no evidence of actual consideration of the best interests of the company;
(b) where, in an insolvency or near-insolvency situation, there is a failure to consider the interests of creditors;
(c) where there is a conflict of interest or where the action was one no director with any understanding of fiduciary duties could have taken (although some would suggest these may rather be treated as breaches of the duty of good faith (as the High Court did in this case) or of s 133 (powers must be exercised for a proper purpose)); and
(d) where a director’s decisions are irrational.
[65]Debut Homes, above n 47, at [113] (footnotes omitted). As the Supreme Court noted, not all of these are truly exceptions to a subjective approach: see [135] above.
We consider that in this case, a number of the four riders do apply.
In early April 2013, Vaco had a choice: it could pay out the funds as distributions to beneficiaries of the Vaco Trust, or it could retain sufficient funds to meet any possible DHC claims until such time as those claims were finally resolved. Vaco had no obligation as trustee of the Vaco Trust to make any distributions to the trust’s discretionary beneficiaries at that time. Vaco had a lien over the Vaco Trust’s funds to protect it from any contingent liability in respect of DHC’s potential claims, and Vaco was entitled to rely on, and exercise, that lien.
Making substantial distributions before all claims arising out of the development project had been ascertained, and paid or provided for, conferred no benefit of any kind on Vaco as a separate entity. Vaco’s interests were not advanced in any way by making distributions at that time.
Conversely, there was a clear disadvantage to Vaco as a separate entity in making those distributions: it lost the ability to have recourse to the trust assets to meet any liabilities that might subsequently be established. Making distributions that left Vaco exposed to any (non-negligible) risk of liability to DHC or other claimants, without the ability to resort to trust funds to meet those claims, was self-evidently contrary to Vaco’s interests as a separate entity.
A rational director who turned their mind to the best interests of Vaco would take steps to identify all (non-negligible) risks Vaco faced, and the amounts that Vaco needed to retain to protect itself from those risks. A rational director would not disregard the possibility that their personal assessment of the risk — without the benefit of legal advice — might be proved wrong. At the very least, before taking the irreversible step of paying away all or almost all of the trust funds, a rational director who was considering whether payment was in the best interests of Vaco would identify all potential liabilities that Vaco might face in its capacity as trustee of the Vaco Trust, including the maximum conceivable liability to DHC, and ensure that Vaco retained access to funds sufficient to meet that maximum liability if it materialised.[66]
[66]Either by actually retaining the funds, or (depending on the circumstances) by retaining the ability to have recourse to the funds, for example by providing them to beneficiaries as advances rather than outright distributions, or by making distributions subject to indemnities from the beneficiaires.
It seems clear from the reasons Mr Arnerich put forward to explain why he felt comfortable with making the distributions that he did not in fact understand, or give consideration to, the interests of Vaco as a separate entity during the period when he was approving substantial distributions to himself and to his interests. There was no evidence that he actually turned his mind to Vaco’s best interests. He did not seek any formal advice on Vaco’s exposure to DHC. He did not prepare, or ask anyone else to prepare, a schedule of Vaco’s potential future liabilities to DHC, the IRD and other creditors. This was not mere carelessness: rather, the interests of Vaco as distinct from the Vaco Trust and his family simply were not on his radar.
The reason for Mr Arnerich’s lack of concern about Vaco’s interests appears to have been the result of two factors: his failure to understand the implications of the legal structure he had put in place, and his obvious conflict of interest in relation to the payments to his interests. The irresistible inference is that Mr Arnerich was acting throughout in the best interests of himself and his family, and did not genuinely turn his mind to the interests of Vaco as a separate entity, or seek to pursue those interests.
In these circumstances, riders (a), (c) and (d) apply in relation to all the payments made to Mr Arnerich and his interests, from April 2013 onwards. It is in our view clear that Mr Arnerich did not actually consider the best interests of Vaco as a separate entity before authorising these payments. He had an obvious conflict of interest. No director with any understanding of fiduciary duties could have acted as he did. It would be irrational for a director who understood their fiduciary duties, and was seeking to act in Vaco’s best interests, to act in that way.
There is also a strong argument that rider (b) applies. The effect of the distributions was that Vaco became insolvent or near-insolvent as it progressively lost the ability to resort to trust assets to meet claims. Indeed one of the puzzling features of this case is that on Mr Arnerich’s evidence, Vaco (in its capacity as trustee of the Vaco Trust) was substantially indebted throughout the relevant period to VDT for the balance of the purchase price of the Lincoln Road property. And Vaco had a contingent tax liability in connection with the profit it made on the project, which as noted at [61] above resulted in a payment of $311,218 in May 2014. Taking into account the unpaid purchase price that Mr Arnerich said was owed to VDT, and contingent tax liabilities, it appears Vaco was seriously insolvent as a result of the distributions made in early April 2013. The financial statements for the Vaco Trust as at 31 March 2014 record a balance sheet deficit of $2,269,280 even without taking into account DHC’s claims. If Mr Arnerich genuinely believed that Vaco owed $1.875 million to VDT, it is difficult to see how the distributions made in 2013 could have been made after taking into account the interests of creditors. But we put this to one side, as it is not essential to our conclusion, and DHC did not plead the case on the basis that Vaco was insolvent or near-insolvent because of liabilities to third parties.

Liability under s 301 of the Companies Act

Potential liability to Vaco under s 131

If Vaco had brought proceedings against Mr Arnerich for breach of fiduciary duty in authorising the 2013 distributions for the benefit of himself and his family, without turning his mind to whether Vaco retained access to sufficient trust funds to meet any claims that might be made against it in connection with the development, Vaco would have been entitled to recover the lesser of the value of the distributions made from 3 April 2013 onwards, and the amount of the indemnity of which it had been deprived as a result of those actions. If Mr Arnerich could show that some distributions could properly have been made, consistent with his fiduciary duties, then that would in principle reduce his liability. But Mr Arnerich did not make any attempt to establish an amount that could have been distributed while still retaining sufficient funds to protect Vaco as trustee in respect of all the claims that a trustee acting properly would have taken into account. So we need not consider that possibility.
It follows that Vaco could have recovered from Mr Arnerich the full amount of any liability it had to DHC in respect of the claims advanced by DHC, which are substantially less than the amount of the distributions authorised in breach of s 131.

Liability under s 301

If a liquidator of Vaco had brought a claim against Mr Arnerich under s 301 of the Companies Act in respect of these breaches of s 131, there would be no good reason to award less than the amount required to enable the liquidator to meet creditors’ claims in full. These were clear breaches of fiduciary duty by Mr Arnerich for his own personal benefit, and for the benefit of his associated interests. There is no conceivable justification for exercising a discretion to reduce the amount of compensation awarded.
Essentially the same reasoning applies in relation to the present claim by DHC as a creditor of Vaco. There is no good reason to deny DHC the full recovery that it would have obtained in the absence of Mr Arnerich’s breaches, or to allow Mr Arnerich and his interests to retain any part of the proceeds of those breaches at the expense of DHC.
Vaco took no steps to challenge the determination by the Adjudicator in respect of the claims on which DHC was successful at adjudication. We consider that the Judge was right to direct that Mr Arnerich pay the amount awarded by the Adjudicator to DHC immediately. But for Mr Arnerich’s breaches, Vaco would have been able to pay the whole of this debt, which became enforceable as a judgment against Vaco.
However, the Judge erred in declining to determine DHC’s claims for additional payments. The Judge also erred in proceeding on the basis that DHC could bring a further s 301 claim in respect of any additional amounts to which it might be found to be entitled. Quite apart from any limitation issues that might arise in respect of a further s 301 claim, a creditor must bring all its claims under s 301 in one proceeding. It would be an abuse of process to seek to bring successive s 301 claims.

Treatment of GST

We consider that the Judge was right to make an award against Mr Arnerich that included the GST claimed by DHC and awarded in the adjudication. DHC’s claim is in effect a claim for payment for services that it supplied to Vaco. We are not persuaded that DHC will avoid liability for GST merely because the award is made against Mr Arnerich, a director of Vaco, and requires direct payment from Mr Arnerich to DHC rather than payment via Vaco. It is still a payment in respect of services provided by DHC, even if it is made by a person other than the person to whom the services were provided. The GST difficulties that this may give rise to for Mr Arnerich are of his own creation, and should not result in DHC being
under-compensated.

Interest

Mr Arnerich submitted that interest should not have been awarded by the High Court from the date of liquidation onwards. He submitted that s 311 of the Companies Act prevents the payment of contractual interest post-liquidation.
Section 311 provides:
311 Interest on claims
(1)The amount of a claim may include interest up to the date of commencement of the liquidation—
(a)at such rate as may be specified or contained in any contract that makes provision for the payment of interest on that amount; or
(b)in the case of a judgment debt, of the amount that is payable on the judgment debt.
(2)If any surplus assets remain after the payment of all admitted claims, the specified interest must be paid on those claims from the date of commencement of the liquidation to the date on which each claim is paid, and if the amount of the surplus assets is insufficient to pay interest in full on all claims, payment shall abate rateably among all claims.
(3)If any surplus assets remain after the payment of specified interest in accordance with subsection (2), interest must be paid, on all admitted claims referred to in subsection (1)(a), of an amount equal to the difference between the specified interest paid under subclause (2) and the interest that would have been payable under the contract for that period and, if the amount of the surplus assets is insufficient to pay interest in full on all those claims, payment must abate rateably among them.
(4)For the purpose of subsection (2), specified interest means interest calculated in accordance with Schedule 2 of the Interest on Money Claims Act 2016.
We do not accept this submission. Section 311(3) expressly provides for payment of the full contractual rate of interest applicable to any debt, if the company’s assets are sufficient to meet all claims. In this case, the assets are insufficient only as a result of the breaches of duty by Mr Arnerich. The compensation he pays to DHC should be assessed on the basis that his breaches did not occur, and thus on the basis that if Vaco had been placed in liquidation on 1 July 2014, it would have retained access to sufficient trust funds to meet the whole of the debt to DHC.
Mr Arnerich is on surer ground in relation to his challenge to the award of contractual penalty interest at a rate of 12.4 per cent per annum, compounding monthly, in respect of the whole of the sum awarded by the adjudicator. Contractual interest should be confined to the items in respect of which it is properly payable under the construction contract, and should not include the amounts which the adjudicator held should not attract penalty interest, or the amounts awarded in respect of GST and the costs of the adjudication. Interest in respect of those components of the determination — which was entered as a judgment — is recoverable in the same manner as interest on any other judgment.
We allow Mr Arnerich’s appeal against the award of interest in the High Court, and remit that issue back to the High Court for determination (if the parties cannot reach agreement).

Remittance back to High Court

The proceeding should be remitted back to the High Court to determine the amount which Vaco owes to DHC, and to make any further order for compensation to be paid by Mr Arnerich to DHC in light of that finding.
We note that this staged approach is consistent with the approach adopted by the High Court in Debut Homes, where leave was granted to the liquidators to re-apply to the High Court for an increase in compensation in certain circumstances. The orders made in the High Court were restored by the Supreme Court on appeal.[67]

DHC’s retention claims

[67]See Debut Homes, above n 47, at [4] and [190].

In light of our findings set out above, we need not address DHC’s claims in relation to payment of the retentions to Vaco. These claims add nothing to DHC’s successful claims in relation to the distributions made to beneficiaries of the Vaco Trust. However, we note that we have real difficulty in seeing how steps taken by Mr Arnerich to procure payment to Vaco of sums held by ANZ could be contrary to the best interests of Vaco. Mr Arnerich did not owe any duty to DHC to ensure that Vaco (or ANZ) complied with their contractual obligations to DHC in relation to retentions.

Result

Mr Arnerich’s appeal is allowed in so far as it relates to the award of interest on the sum of $367,768.12. The award of interest in the High Court is set aside, and remitted back to that Court to be determined in accordance with this judgment. Mr Arnerich’s appeal is otherwise dismissed.
DHC’s cross-appeal is allowed. The proceedings are remitted back to the High Court to determine the amount of any further claim DHC may have against Vaco under the construction contract and, in light of that determination, to make such further orders against Mr Arnerich under s 301 of the Companies Act as may be appropriate.
Costs should follow the event in the usual way. Mr Arnerich must pay costs to DHC on the appeal and cross-appeal, in each case for a standard appeal on a band A basis, with usual disbursements. We certify for second counsel.

Solicitors:
Doug Cowan, Auckland for Appellant

Duthie Whyte, Auckland for Respondent

CIV-2017-044-546, 11 May 2017.

[2021] NZCA 225

3 June 2021 at 10.00 am