Auckland Trotting Club Incorporated v Canam Group Limited (aka Medway Limited)
[2023] NZHC 1685
•13 July 2023
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2022-404-001110
[2023] NZHC 1685
BETWEEN AUCKLAND TROTTING CLUB INCORPORATED
PlaintiffAND
CANAM GROUP LIMITED (a/k/a Medway Limited)
First Defendant
CANAM VENTURES LIMITED, CANAM INDUSTRIAL LIMITED
Second Defendants
LOUKAS SOTERI PETROU, NICHOLAS ARTHUR PAGE and ANDREW CROSBIE CLARK
Third Defendants
CABINETRY INVESTMENTS LIMITED, CANAM BUILDING LIMITED (now
1962Trees Limited), CANAM MANAGEMENT SERVICES LIMITED, and CANAM BUILDING SOLUTIONS LIMITED
Fourth Defendants
Hearing: 28 March 2023 Appearances:
M Black / L Wallace for the Plaintiff
No appearance for the Second Defendants
D Chisholm KC / T Lindsay for the First Third Defendant No appearance for the Fourth DefendantsJudgment:
13 July 2023
JUDGMENT OF ASSOCIATE JUDGE GARDINER
AUCKLAND TROTTING CLUB INC v CANAM GROUP LTD [2023] NZHC 1685 [13 July 2023]
This judgment was delivered by me on 13 July 2023 at 3.00 p.m. pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar Date.......................................
Introduction
[1] Auckland Trotting Club (ATC) engaged Canam Construction Limited (CCL)1 to build a large apartment complex on its land at the Alexandra Park horse racing venue in Green Lane West, Auckland. After three years, ATC terminated the contract for breaches by CCL, including failing to provide a guarantee from its parent company,
Canam Group Limited (CGL).2
[2] ATC and CCL referred their disputes to arbitration. The arbitrator awarded ATC a final award of $85,675,772.30 million (Final Award). However, by then CCL had been placed into voluntary liquidation. The Final Award has not been recovered from CCL.
[3] ATC brings this proceeding against CGL (the first defendant), Canam Ventures Limited (CVL) and Canam Industrial Limited (CIL) (the second defendants), other Canam companies (the fourth defendants),3 and current and former directors of CCL, CGL and other Canam companies: Loukas Petrou, Nicholas Page and Andrew Clark (the third defendants).
[4] In its statement of claim (Statement of Claim), ATC applies for an order that CGL and the other Canam companies contribute to its losses (the first cause of action), and for an order setting aside disposals from CGL, CVL and CIL to the fourth defendant companies through a restructuring which ATC says was intended to defeat its claim as a creditor (the fifth cause of action).
1 Now named Tribola767 Limited.
2 Now named Medway Limited.
3 Cabinetry Investments Limited, Canam Building Limited (now 1962Trees Limited), Canam Management Services Limited and Canam Solutions Limited.
[5]Against the directors, ATC applies:
(a)for relief under s 301(1)(b)(i) of the Companies Act 1993 (the Act), being a declaration that the directors breached their duties under s 136 of the Act to not allow the company to incur an obligation that it will be unable to perform, and orders for restitution and/or compensation (the second cause of action);
(b)for relief under s 301 Act, being a declaration that the directors breached their duties under s 135 of the Act to not permit the company to trade recklessly, orders for restitution and/or compensation; and declarations that the directors breached ss 131, 137 and 194 of the Act, and an inquiry and account (the third cause of action).
(c)for an award of damages against Messrs Petrou and Page for making misleading representations about the financial means of CCL in breach of ss 9 and 11 of the Fair Trading Act 1986 (the FTA) (the fourth cause of action).
[6] Additionally, ATC seeks reimbursement from all the defendants of its costs incurred in the arbitration and awarded to ATC as part of the Final Award (the sixth cause of action).
[7] In this interlocutory application, Mr Petrou applies to strike out the second, third, fourth and sixth causes of action as they relate to him, on the basis that none of them can succeed. If the Court accepts that none of these causes of action can succeed in respect of Mr Petrou and should be struck out, Mr Petrou asks that summary judgment is entered for him.
[8]The issues to be determined are:
(a)Are the second and third causes of action untenable because:
(i)They are based on the directors’ duties under ss 135 and 136 being owed to ATC rather than to CCL, and on ATC’s rather than CCL’s loss.
(ii)Relief under s 301(1)(b)(i) is limited to ordering repayment or restoration of money or property to CCL (not ATC) and recovery by a creditor under s 301(1)(c) is limited to cases of misappropriation of money or property.
(iii)Declarations are not an available form of relief under s 301.
(iv)Section 194 cannot be enforced by a creditor.
(v)An account and inquiry under Part 16 of the High Court Rules 2016 is an interlocutory step, not a final form of relief.
(b)Is the fourth cause of action untenable because:
(i)ATC claims expectation damages when the recoverable loss for breach of the FTA is reliance damages.
(ii)The cause of action is time-barred under s 43A of the FTA.
(c)Is the sixth cause of action untenable because this Court does not have jurisdiction to order the defendants to pay the arbitration costs.
Background facts
[9] On 16 October 2015, following due diligence, ATC accepted CCL’s tender submission for the construction of part of the apartment complex at Alexandra Park (the Project) known as “Building A”. On 23 October 2015, ATC and CCL entered into a construction contract amended from the standard form NZS 3910:2013 (the Construction Contract). The contract price was $78,353,000 excluding GST. Messrs Petrou, Page and Clark were directors of CCL and CGL at this time.
[10] The Construction Contract provided for CCL to provide ATC with a guarantee from its parent company (CGL), this being the Parent Company Guarantee (the PCG), in a specified form within five working days of the date of acceptance of the tender. CCL never sought the PCG and there is no dispute it was not provided by CGL.
[11] In June 2018, ATC engaged advisory firm KordaMentha to conduct an independent financial appraisal in relation to the Project. KordaMentha issued a report to ATC on 10 July 2018 (the Report).
[12] On 19 July 2018, ATC terminated the Construction Contract for breach by CCL. ATC and CCL subsequently threatened claims against each other but agreed to refer their disputes under the Construction Contract to an arbitration before Rodney Hansen KC.
[13] On 18 May 2021, Mr Hansen issued an interim award in which he determined that ATC was entitled to terminate the Construction Contract; CCL was required to procure and provide to ATC the PCG from CGL; and CCL was liable for loss and damages arising from CCL’s defaults and defective workmanship (to be quantified).
[14] In a further interim award on 10 August 2021, Mr Hansen made an order for specific performance that CCL procure and provide the PCG from CGL in the form provided in sch 4 of the Construction Contract. Immediately afterwards, CCL was placed into voluntary liquidation.
[15] On 24 March 2022, Mr Hansen issued the Final Award determining that ATC was entitled to $85,675,772.30 from CCL. The Final Award was comprised of:
(a)$12,420,000 in liquidated damages under the Construction Contract for the delayed completion of the Project;4
4 Final Award of Rodney Hansen QC dated 24 March 2022, at [8] to [11].
(b)ATC’s recovery of its costs to complete the Project (the difference between the amount ATC was required to pay an alternative contractor and what it would have paid CCL) of $67,672,944;5
(c)ATC’s costs of the arbitration in the sum of $5,582,828.26;6
[16] The parties to the arbitration and hence the Final Award were ATC and CCL. CCL took no steps to challenge or oppose the Final Award given its liquidation.
[17] The Final Award has not been recovered from CCL. The liquidators of CCL have not taken any steps against CCL’s directors.
Legal principles
Strike out
[18] The Court’s power to strike out a cause of action is provided by r 15.1(1) of the High Court Rules 2016:
(1)The court may strike out all or part of a pleading if it—
(a) discloses no reasonably arguable cause of action, defence, or case appropriate to the nature of the pleading; or
(b) is likely to cause prejudice or delay; or
(c) is frivolous or vexatious; or
(d) is otherwise an abuse of the process of the court.
[19]The relevant principles are well established:7
(a)Pleaded facts, whether or not admitted, are assumed to be true. This does not, however, extend to pleaded allegations which are entirely speculative and without foundation.
(b)The cause of action or defence must be clearly untenable.
5 At [12] to [15].
6 At [16] to [24].
7 A-G v Prince [1998] 1 NZLR 262 (CA) at 267; Couch v A-G [2008] NZSC 45 at [33]; and Murray v Morel & Co Ltd [2007] 3 NZLR 721 (SC) at [33].
(c)The jurisdiction is not excluded by the need to decide difficult questions of law requiring extensive argument.
(d)To succeed in striking out a cause of action as statute-barred, the defendant must satisfy the Court that the plaintiff’s cause of action is so clearly statute-barred that the plaintiff’s claim can properly be regarded as frivolous, vexatious or an abuse of process.
[20] The Court may have regard to whether a cause of action can be re-pleaded. However, where possible amendments would make the claim significantly different to that as originally pleaded, the pleading should be struck out. A strike-out will be appropriate where a pleading is so deficient that it requires a de novo start rather than amendment.8
Summary judgment
[21]Rule 12.2(2) of the High Court Rules 2016 provides:
The court may give judgment against a plaintiff if the defendant satisfies the court that none of the causes of action in the plaintiff’s statement of claim can succeed.
[22] Master Venning, drawing upon the commentary in McGechan on Procedure, summarised the effect of the rule in Ferrymead Tavern Ltd v Christchurch Press Co Ltd:9
…an application for summary judgment by a defendant is similar to a striking- out application except the defendant has to show that all of the plaintiff’s causes of action cannot succeed. The major difference between an application for summary judgment and a strike-out application is, of course, that a defendant making an application for summary judgment may put evidence before the Court by way of affidavit. If that evidence is disputed or is insufficient to satisfy the Court then the matter will have to proceed to a full hearing. The onus is on the defendant to satisfy the Court the plaintiff has no arguable answer to the defence raised.
8 Marshall Futures Ltd v Marshall [1992] 1 NZLR 316 (HC) at 324; and Optimiser HQ Ltd v Bank of New Zealand [2020] NZHC 1253 at [36].
9 Ferrymead Tavern Ltd v Christchurch Press Co Ltd (1999) 13 PRNZ 616, [1999] NZAR 529 (HC) at [11]. See also Webster Farm Management Ltd v Dargaville Farms Ltd (in liq) [2020] NZHC 1477 at [32]–[35].
[23] More recently, the Supreme Court has emphasised that this is a heavy onus on the defendant, observing that a defendant should apply for summary judgment only “where there is a complete and incontrovertible answer on the facts (in which case summary judgment can be entered for the defendant)”.10
[24]However, as with plaintiff applications for summary judgment,11 this Court:12
…will not normally resolve material conflicts of evidence of assess the credibility of deponents. But it need not accept uncritically evidence that is inherently lacking in credibility, as for example where the evidence is inconsistent with undisputed contemporary documents or other statements by the same deponent, or is inherently improbable…
Are the second and third causes of action reasonably arguable?
[25] In the second and third causes of action ATC claims that the directors breached their statutory duties under ss 136 and 135 of the Act (respectively).13
[26]Section 136 provides:
136 Duty in relation to obligations
A director of a company must not agree to the company incurring an obligation unless the director believes at that time on reasonable grounds that the company will be able to perform the obligation when it is required to do so.
[27]Section 135 provides:
135 Reckless trading
A director of a company must not—
(a)agree to the business of the company being carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors; or
(b)cause or allow the business of the company to be carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors.
10 Body Corporate 207624 v North Shore City Council [2012] NZSC 83 at [4] as cited in Webster Farm Management Ltd v Dargaville Farms Ltd (in liq), above n09, at [32].
11 Webster Farm Management Ltd v Dargaville Farms Ltd (in liq), above n 9, at [35].
12 Krukziener v Hanover Finance Ltd [2008] NZCA 187, [2010] NZAR 307 at [26].
13 Statement of Claim dated 13 July 2022.
[28] ATC claims relief for the alleged breaches of these duties by the directors under s 301 of the Act:
301 Power 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 person who has taken part in the formation or promotion of the company, or a past or present director, manager, administrator, liquidator, or receiver 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.
(2) This section has effect even though the conduct may constitute an offence.
(3) An order for payment of money under this section is deemed to be a final judgment within the meaning of section 17(1)(a) of the Insolvency Act 2006.
(4) In making an order under subsection (1) against a past or present director, the court must, where relevant, take into account any action that person took for the appointment of an administrator to the company under Part 15A.
Pleading of duties and loss
[29] Mr Petrou claims that the second and third causes of action are fundamentally flawed because ATC wrongly treats the ss 135 and 136 duties as being owed to ATC rather than CCL, and because ATC pleads its own rather than CCL’s loss. Consequently, ATC fails to plead a coherent cause of action based on breach of a director’s duty and loss to the company caused by that breach.
[30] ATC’s response is that it needs to have discovery, and the inquiry and account it seeks under the High Court Rules 2016, to be able to identify the losses CCL suffered because of the directors’ breaches. It has provided a draft amended statement of claim with its submissions (the Draft Statement of Claim) which it says provides an ‘indication’ of the amendments it will make to address the issues raised by Mr Petrou.
[31] I accept Mr Petrou’s submission that in this respect ATC’s Statement of Claim does not disclose reasonably arguable second and third causes of action. In my view ATC wrongly conflates its own loss caused by CCL’s breaches of the Construction Contract, represented by the Final Award, with harm caused to CCL by the directors’ alleged breaches of duties.
[32] Director’s duties owed under ss 135 or 136 are owed by the director to the company.14 The director does not owe the duty to individual shareholders or creditors.15 In this case, the directors of CCL owed their duties under ss 135 and 136 to CCL, not to ATC.
[33] Where a company is in liquidation and it appears to the court that there has been a breach of directors’ duties, the court can order relief under s 301. An application for relief under s 301 can be initiated by the liquidator, a shareholder, or a creditor. But the duties owed by directors under ss 135, 136, 131 and 137 remain duties owed to the company regardless of who subsequently initiates proceedings for breach of those duties and regardless of the procedural mechanism used to bring those proceedings.16
[34] It follows that an application for relief under s 301 is for harm to the company caused by a breach of ss 135 or 136 by the company’s directors. This remains the case even where the application for relief is initiated by a creditor.
14 Companies Act 1993, s 169(3).
15 Yan v Mainzeal [2021] NZCA 99, [2021] 3 NZLR 598 at [255(a)].
16 Yan v Mainzeal, above n 15, at [255(e)].
[35] Comments by the Supreme Court in Madsen-Ries (as liquidators of Debut Homes Ltd (in liq)) v Cooper (Debut Homes) support this view. When considering the appropriate relief for breaches of ss 135 or 136 of the Act, the Supreme Court said:17
[164] In terms of a breach of s 135, we accept that in most cases the appropriate starting point would be an amount equal to the deterioration in the company’s financial position between the date when trading should have ceased and the date of actual liquidation (the net deficiency approach). This is because the section looks at the creditors and the business as a whole.
[165] We do not, however, consider that the same measure of compensation would necessarily respond adequately to breaches of s 136. The breach of duty under s 136 is the incurring of obligations without a reasonable belief that they will be met. This section therefore concentrates on individual creditors. Section 136 is, however, like s 135 and others, framed as a duty to the company. It follows that Parliament must have considered any breach of the duty would harm the company. It is therefore appropriate that any relief ordered should operate to reverse that harm and thus be restitutionary in nature.
(citations omitted and emphasis added)
[36]The Court added:18
Where there have been breaches of duties, any relief ordered under s 301 must respond to and provide redress for the particular duty or combination of duties breached. Relief can be compensatory or restitutionary in nature and must take account of all of the circumstances, including the nature of the breach or breaches, the level of culpability of the director, causation, duration of the breach, holding the director to account and reversing the harm to the company.
(emphasis added)
[37] Returning to ATC’s Statement of Claim, the pleaded breach of s 136 occurred when the directors permitted CCL to agree to the Construction Contract, allegedly without the resources or capability to perform the contract, and without the financial backing of CGL through the PCG.19 ATC sets out particulars to support this allegation at [52](a) to (p) of the Statement of Claim ([52](a) to (r) of the Draft Statement of Claim). The essential allegation is that the directors did not have reasonable grounds to believe CCL would be able to perform the contract.
17 Madsen-Ries (as liquidators of Debut Homes Ltd (in liq)) v Cooper [2020] NZSC 100, [2021] 1 NZLR 43 [Debut Homes].
18 Debut Homes, above n 17, at [182].
19 Statement of Claim dated 13 July 2022, at [52].
[38] Consistent with the above framework, the relevant harm for which relief may be sought under s 301 is the harm to CCL from this purported breach of duty.
[39] Instead, ATC’s seeks to recover its own loss caused by CCL’s breaches of the Construction Contract, represented by the Final Award of $85,675,772.30. At [53] and
[55] of the Statement of Claim ATC says:
The [directors] were in breach of their duties under s 136 and were the effective cause of the Plaintiff’s incurring a loss under this Construction Contract.
…
Pursuant to s 301(1)(b)(i) [ATC] is entitled to orders and directions for restitution and/or compensation from the [directors]. This includes an order to “repay or restore” money or property to make good a company debt for breaches of duties owed by the … directors.
[40]Then the prayer for relief for:20
(a) Declarations and orders pursuant to s 301 that the [directors] have breached the duties and obligations owed by them as directors of CCL pursuant to s 136.
(b) Pursuant to sections 301 and 136 orders that the [directors] are liable and accountable to [ATC] and such other parties for compensation for
$85,675,772.30 or such other sum as this Court deems just.
(c) That judgment be entered against the [directors] for the sum of
$85,675,772.30 or such other sum as the court deems just.
(d) Such further orders and directions as may be necessary to implement any one or all of the above declarations and orders.
…
(emphasis in original)
[41]In terms of the third cause of action for breach of s 135, ATC claims that:21
The [directors] allowed CCL’s business to be carried on in a manner likely to create a substantial risk of loss to CCL’s creditors. [ATC] as a creditor, has been found to incur losses of $85,675,772.30 as a result of breaches of contract by CCL whose management was the responsibility of [the directors].
20 At [55].
21 At [57].
[42]ATC then sets out wide-ranging particulars of this alleged breach including:
(a)allowing CCL to enter into the Construction Contract;
(b)continuing to perform the Construction Contract without adequate capital and resources;
(c)distributing assets to other Canam companies without complying with s 52 of the Act;
(d)failing to monitor CCL’s performance of the Construction Contract;
(e)failing to procure the PCG from CGL;
(f)failing to exercise reasonable care, diligence and skill when making financial representations to ATC about CCL’s financial means;
(g)failing to ensure that CCL kept adequate accounting records and permitting CCL’s money to be combined with other Canam companies; and
(h)restructuring the Canam Group.
[43]ATC concludes:22
By reason of the above, [ATC] is entitled to orders and directions pursuant to section 135 and 301 that the [directors], jointly and severally are liable and accountable for restitution and/or compensation and damages for the sum of
$85,675,772.30 or such other sum as this court deems just.
[44] Nowhere does ATC plead harm to CCL caused by the directors’ alleged breaches of their ss 135 and 136 duties owed to the company.
[45] In the Draft Statement of Claim provided in ATC’s submissions, ATC has inserted two new particulars of the breach of s 136 duty. These are:
22 At [58].
(l) The assets of CCL were applied and depleted by the [directors] in performing the Construction Contract. This constituted a wrongful use in this application of CCL’s funds and property.
(m) The monies obtained from ATC were in breach of fiduciary duties and ought not to have been paid away by the [directors]. [ATC] seeks restoration of those monies. Further particulars will be provided following discovery.
[46] These proposed new particulars only serve to confuse the s 136 cause of action further. During the hearing, Mr Black mentioned that the loss to CCL flowing from the directors’ breaches of duties might be the provable debt in the liquidation. However, this submission was not developed further.
[47] I return to the consequences of this problem with the Statement of Claim after considering the other issues raised by Mr Petrou with the second and third causes of action.
Relief to creditor not available
[48] Mr Petrou claims that the relief sought by ATC under s 301 of the Act is not available. He submits that s 301(1)(b)(i), the subs relied on by ATC in the second cause of action, does not provide the Court with the power to allow a creditor to recover from a director. He submits that creditors have no standing under s 301(1)(b), which is limited to ordering repayment or restoration (subs (i)) or compensation (subs (ii)) to the company itself. Mr Petrou also submits that a claim for compensation for breach of directors’ duties should be brought under s 301(1)(b)(ii).
[49] Mr Petrou relies on the Supreme Court’s description of relief under s 301(1)(b)(i) as “restitutionary” and under s 301(1)(b)(ii) as “compensatory”.23 Mr Petrou submits that it was also made plain by the Court that the restitution or compensation remedy under s 301(1)(b) is in favour of the company, not an individual creditor.24 Mr Petrou submits that this is reinforced by the language of s 301(1)(c), which specifically empowers the Court to make a payment to a creditor, whereas s 301(1)(b)(i) and (ii) do not.
23 Debut Homes, above n 17, at [156]
24 Citing Debut Homes, above n 17, at [157].
[50] In the Draft Statement of Claim provided with ATC’s submissions, ATC indicates that the second cause of action will be amended to rely on s 301(1)(c) in the alternative by inserting the words “and/or 301(1)(c)” in para [55]. ATC’s existing third cause of action does not specify under which part of s 301 the relief is sought, simply referring to s 301. ATC has not indicated in the Draft Statement of Claim any intent to change to this.
[51] Additionally, in the Draft Statement of Claim the prayer for relief for the second cause of action is indicatively amended to:25
Pursuant to sections 301 and 136 orders that the [directors] are liable and accountable to [ATC] and such other parties or persons as the Court may order for restitution and/or compensation for $85,675,772.30 or such other sum as this court deems just.
(emphasis and underlined draft amendments as in original)
[52] Mr Petrou submits that ATC’s claim cannot be remedied under s 301(1)(c), which limits a creditor’s ability for direct recovery to circumstances where a director, or other relevant person, has misapplied or improperly obtained company money or property, and does not apply in circumstances where compensation is claimed due to a director’s breach of statutory duty. Mr Petrou relies on a line of cases including Mitchell v Hesketh,26 General Marine Services Ltd v The Ship “Luana” (No 2)27 and more recently Banks v Farmer & Ors.28
[53] ATC submits that it is reasonably arguable that relief under s 301(1)(c) is not limited to circumstances where a director has misappropriated money or property of the company, pointing to a different line of authority including Marshall Futures Ltd v Marshall,29 Re Cyona Distributors,30 and Sanders v Flay.31 ATC submits that the
25 An equivalent amendment has been added to the third cause of action concerning s 135 in the Draft Statement of Claim.
26 Mitchell v Hesketh (1988) 8 NZCLC 261, 599 (HC) at [4].
27 General Marine Services Ltd v The Ship “Luana” HC Auckland CIV-2010-404-2435, 7 February 2011 at [19].
28 Banks v Farmer [2021] NZHC 1922 at [557]–[585].
29 Marshall Futures Ltd v Marshall, above n 8.
30 Re Cyona Distributors Ltd [1967] CH 889 (CA).
31 Sanders v Flay (2005) 9 NZCLC 263,906 (HC).
Supreme Court recognised the existence and credibility of their argument in Debut Homes.32
[54] ATC further relies on Yan v Mainzeal,33 in which the majority of the Court of Appeal said that the discretion conferred by s 301 is broad, to be exercised having regard to all the circumstances of the breach, including concepts of causation, culpability, and duration of the breach.34
[55] ATC respectively disagrees with the approach taken by this Court in Banks v Farmer and submits that it is inconsistent with the overall history and purpose of s 301(1)(c) which it says was intended to give the Court a discretion to make awards directly to creditors, not just in cases of misappropriation of company money or property.
[56] Having considered these submissions, I am not persuaded that the second and third causes of action are untenable because the relief sought is not available.
[57] First, in Debut Homes the Supreme Court took a broad view of the relief available under s 301(b)(i). It is correct that the Court described relief under s 301(1)(b)(i) as restitutionary and relief under 301(1)(b)(ii) as compensatory. But it also said:35
[157] Section 301(1)(b)(i) provides that an order can be made to “repay or restore” money or property. The word “repay” implies that the person has received company money or property and can be ordered to return it to the company. The word “restore” suggests rather that a person can be ordered to return the company to the position it would have been in absent the breach, including making good a company debt that should not have been incurred, even if the person has not received company money or property.
[158] With regard to s 301(1)(b)(ii), the caselaw has identified three factors to take into account: causation, culpability and duration of any breach. …
(citations omitted)
32 Debut Homes, above n 17, at [156], n 179.
33 Yan v Mainzeal, above n 15, at [309].
34 At [307].
35 Debut Homes, above n 17.
[58] Moreover, the Court also observed that there is not necessarily such a dichotomy between compensation and restitution, saying that restitution can be seen as a type of compensation and therefore could come under s 301(1)(b)(ii), depending on the nature of the breach or breaches involved.36 The Court emphasised that the appropriate relief must respond to the specific duty or duties breached.37 It said that:38
Where there have been breaches of duties, any relief ordered under s 301 must respond to and provide redress for the particular duty or combination of duties breached. Relief can be compensatory or restitutionary in nature, and must take account of all the circumstances, including the nature of the breach or breaches, the level of culpability of the director, causation, duration of the breach, holding the director to account and reversing harm to the company.
[59] Based on this authority, it is not clear that relief under s 301(b)(i) is confined to the return of company money or property received by a director or other person and can include restoring the company to the position it would have been in but for a breach of duty.
[60] Second, insofar as ATC indicates an intention to amend the claim to apply for relief under s 301(1)(c), I do not consider such a claim to be inarguable, as the law concerning s 301(1)(c) is presently unsettled.
[61] As noted, Mr Petrou’s argument on s 301(1)(c) is based on a line of cases beginning with Mitchell v Hesketh. In this decision Master Venning found:39
There are thus two circumstances identified in the body of s301(1) where orders may be made. The first circumstance is where the director owes a specific item of money or property to the company, and the second circumstance is where the director has breached his duties to the company and caused loss generally to the company.
It follows in my view as a matter of construction that the reference to restoring the money or property or any part of it in s301(1)(b)(i) is a reference back to the first circumstance. The reference to the ‘money or property” and “repay or restore” are consistent with such an interpretation. [T]he more general option of contributing such sum to the assets of the company under s301(1)(b)(ii) is consistent with the second circumstance where general damage has been caused to the company. An assessment of the damage is required to be made by the Court and an order that the director contribute such sum to compensate for the damage can then be made. The reference to “such sum” in
36 At [161].
37 At [160].
38 At [182].
39 Mitchell v Hesketh, above n 26, at 4–5.
s301(1)(b)(ii) is not to an identifiable or specific sum, but to the sum assessed by the Court by way of compensation.
Against that background s301(1)(c) falls to be considered. It provides that where the application to the Court is made by a creditor the Court may order the director to pay or transfer the money or property or any part of it to the creditor. The irresistible inference is that the reference to “the money or property” is a reference back to the money or property identified in the first circumstance in the main body of s301(1) and repeated in s301(1)(b)(i). No provision is made in s301(1)(c) for the Court to order a payment by the director to the creditor of any part of the general damages sum that may otherwise be ordered under s301(1)(b)(ii).
[62] In General Marine Services v The Ship “Luana” (No. 2), Woodhouse J cited with approval Mitchell v Hesketh and found that although s 301(1)(c) does make provision for direct payment to a creditor, the “provision does not apply in respect of a director’s breaches of statutory duty”.40 I note, however, that this statement was arguably obiter, as the plaintiff had not sought relief under s 301, but rather a claim to an institutional constructive trust over the company’s property because of breaches of directors’ duties under ss 135 and 136 of the Act.
[63] Recently, Moore J upheld the same position in Banks v Farmer.41 Mr Banks, a creditor, alleged that the directors of Mako breached s 136 of the Act by allowing Mako to enter into contractual obligations when, at each time, they had no reasonable grounds to believe that Mako could repay Mr Banks. No misappropriation of company assets was alleged. Mr Banks sought relief under s 301(1)(c) based on alleged breaches of s 136.
[64] Moore J considered the line of High Court authority discussed above determining that s 301 has no application where a creditor claims a remedy for breach of a director’s duty.42 He then considered the line of authority relied on by ATC which considers that s 301(1)(c) permits creditors to recover directly for breaches of directors’ duties, supporting Tipping J’s endorsement of the following passage by Lord Denning MR in Re Cyona Distributors Ltd:43
An order can be made either at the suit of the liquidator, etc., or of a
creditor. The sum may be compensatory. Or it may be punitive. The court has
40 General Marine Services v The Ship “Luana” (No. 2), above n 7, at [19].
41 Banks v Farmer, above n 28, at [557]–[585].
42 At [562], [565] and [574].
43 Re Cyona Distributors Ltd, above n 30, at 902.
full power to direct its destination. The words are quite general: “all or any of the debts or other liabilities of the company as the court shall direct.” By virtue of these words the court can order the sum to go in discharge of the debt of any particular creditor; or that it shall go to a particular class of creditors; or to the liquidator so as to go into the general assets of the company, so long as it does not exceed the total of the debts or liabilities. Of course, when an application is made by a liquidator, the court will usually order the sum to go into the general assets, as Eve J. did in In re William C. Leitch Bros. Ltd. (No. 2), but I do not think it is bound to do so. Certainly when an application is made by a creditor who has been defrauded, the court has power, I think, to order the sum to be paid to that creditor. In short, I think the words of the section are to be given their full width.
(emphasis in original and footnotes removed)
[65] Moore J further endorsed Tipping J’s adoption of the reasoning of Danckwerts LJ, who said:44
The situation seems to me to be quite different where a creditor begins proceedings at his own expense under the section. The creditor should be entitled to his reward. I do not think that he is acting as a trustee for the general body of creditors. In any case, the court would appear to have a wide discretion under the section.
[66]Moore J concluded:
[575] To the extent that Marshall Futures suggests the Court has a wider discretion to order that a creditor recover directly, I note that such a power was expressly limited by the requirement that the liquidator must be notified of the claim. The liquidator was not notified of the plaintiff’s claim in the present case.
[576] I also note that Marshall Futures was decided under ss 319 and 320 of the Companies Act 1955, with reference to the Companies Act 1948 (UK). The wording of both statutes is materially different to s 301(1)(c). Section 319 governed a director’s failure to keep proper books of account. Section 320 governed a director carrying on the business of the company with the intention of defrauding creditors. Neither is sufficiently similar to s 301 to be of real assistance to the present issue. It follows I am satisfied that Marshall Futures is not authority for the proposition that s 301 permits personal recovery by Mr Banks.
[67] Moore J did not consider that Sanders v Flay supported the view that a creditor is entitled to claim under s 301(1)(c) for compensation for breach of a director’s duty. The director in Sanders misappropriated specific and identifiable company funds, and the Judge concluded that it was this misappropriation which Heath J determined
44 At 904.
provided a basis to order the director to pay money directly to the creditor under s 301(1)(c).
[68] Moore J concluded that a creditor claiming a breach of director’s duty may only receive personal compensation to the extent that the conduct complained of also represents a misappropriation of company funds.45
[69] It must be acknowledged however that there is no appellate authority on this point. Moreover, the appeal courts have explicitly noted the issue and left it open. In Debut Homes the Supreme Court commented in a footnote that:46
We have not been asked to decide how any relief ordered [under s 301] would be distributed amongst creditors … We also note that s 301(1)(c) provides that, where an application is made by a creditor, the court may order a director to pay or transfer money or property to the creditor. It has been suggested that under s 301(1)(c), at least in cases where the liquidator takes no steps, the Court can order all restitution or compensation to go to the particular creditor: Marshall Futures Ltd v Marshall [1992] 1 NZLR 316 (HC) (Tipping J) at 332– 333; and Sanders v Flay (2005) 9 NZCLC 96-989 (HC) (Heath J) at [18]–[19]. Note that Marshall Futures was decided under the 1955 Act, and Sanders was decided under the 1993 Act. We leave consideration of creditors’ rights under s 301(1)(c) to a case where it arises and has been fully argued.
[70]In Yan v Mainzeal the Court of Appeal said:47
Section 301(1)(c) does provide for an application under s 301 to be made by a creditor of the company. 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). 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. 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. As the present proceedings were brought by the liquidators of Mainzeal, not by creditors, we also need not decide that issue.
(footnotes omitted)
[71] I also note the following points. First, Banks v Farmer is distinguishable because in the present situation the liquidator was given notice of ATC’s claim, and the Statement of Claim was served on the liquidators. The liquidators have not taken
45 Banks v Farmer, above n 28, at [577].
46 Debut Homes, above n 17, at [156], n 179.
47 Yan v Mainzeal, above n 15, at [309].
any steps in the proceeding and have not otherwise brought proceedings against the directors of CCL.
[72] Second, a Department of Justice report on which ATC relies does not appear to have been before the Court in Banks v Farmer. Arguably this report provides relevant context for the interpretation of s 301. The Companies Bill 1990, which precedes the Companies Act 1993, did not contain a mechanism for awards to be made directly to creditors.48 At the Select Committee stage, s 301(1)(c) was added.49 While the change was not specifically referred to in the Select Committee Report, the rationale for s 301(1)(c) is explained in the report prepared by the Department of Justice:50
There are English cases indicating that in such circumstances the courts can award the compensation to the creditor. There is no direct authority on the point in New Zealand because, as noted by Tipping J in Marshall Futures
Limited v Marshall [1992] 1 NZLR 316, all the cases brought under the present sections 319 and 320 are brought by the company's liquidator. It is suggested that this matter be put beyond doubt by giving the court a discretion to award the compensation wholly or in part to a creditor bringing a recovery action.
(emphasis added)
[73] The changes proposed by the Department of Justice were unanimously adopted by the Select Committee, and the provision was passed without further change.
[74] Third, in another recent High Court decision, Dempsey Wood Civil Ltd v Gapes, Fitzgerald J gave a preliminary view that it might be appropriate to award damages for breach of the director’s duties to the company arising out of ss 135 and 136 to the creditor who had initiated the s 301 proceeding.51 Her Honour did not need to reach a concluded view, as the creditor confirmed that the award should be paid to the company.
[75] In these circumstances, I do not consider a claim by ATC under s 301(1)(c) for payment of compensation by the directors for their breaches of statutory duties to be inarguable.
48 Companies Bill 1990 (50–1), cl 264.
49 Companies Bill 1990 (50-20), cl 264(c).
50 Secretary for Justice Companies Bill – Liquidations (Department of Justice, 8 September 1992) at 10.
51 Dempsey Wood Civil Ltd v Gapes [2021] NZHC 2362 at [235].
Declarations not available under s 301
[76] Mr Petrou also claims that the third cause of action should be struck out insofar as it seeks declarations that the directors breached ss 131, 137 and 194 of the Act.
[77] I accept that in this respect the Statement of Claim is untenable. Section 301 does not give a creditor the ability to apply for declarations that a director/the board of directors has breached duties owed to the company. The relief available under s 301 is limited to an inquiry into conduct; an order for restitution or compensation to the company; or a transfer of money or property to the creditor.
Creditor cannot enforce s 194
[78] Additionally, Mr Petrou submits that a creditor cannot enforce the s 194 duty on a board of a company to ensure that correct accounting records are kept, through s 301 or otherwise.
[79] I accept that submission. Under s 164 of the Act, the company, a director, a shareholder, or entitled person may apply for an injunction to restrain the company or director from breaching s 194. A creditor is not given standing to apply for an injunction.
[80] When a company is in liquidation, a liquidator may apply to the Court under s 300 for a declaration that the directors are personally responsible for all or any of the debts and other liabilities of the company if the company’s failure to comply with s 194 has contributed to the company’s inability to pay its debt, resulted in substantial uncertainty as to the assets and liabilities of the company, or has substantially impeded the orderly liquidation of the company. Section 300 of the Act does not permit a creditor to apply for relief in respect of breaches of s 194.
Account and inquiry not appropriate
[81]ATC’s prayer for relief includes:
As required to implement any of the above orders, the taking of accounts and inquiries pursuant to Part 16 of the High Court Rules from the Defendants.
[82] Mr Petrou submits that this part of ATC’s claim should be struck out as an account and inquiry is an interlocutory procedure, not a final form of relief. He submits that any damages claim must be quantified and pleaded. He says that in any event, a standalone inquiry directed at the directors would be irrelevant to quantifying damages suffered by CCL.
[83] Rule 16.2 of the High Court Rules 2016 provides that the court may, on the application of any party, before or after the trial of a proceeding, order an account or inquiry. An order for an account or an inquiry has been held to be interlocutory in nature.52 However, McGechan notes that the traditional course is to seek within the prayer for relief orders for accounts and/or inquiries.53
[84] The jurisdiction is not to be used as a method of gaining a separate hearing on liability and damages.54 Nor does the prospect of an inquiry permit a plaintiff to avoid particularly a claim for damages.55
[85] It would be premature to strike out this part of the claim. Rather, any application will need to be assessed when it is made.
Conclusion on second and third causes of action
[86] I have concluded that the second and third causes of action in the Statement of Claim are not reasonably arguable because ATC does not claim relief to restore or compensate CCL for harm caused to CCL by the directors’ alleged breaches of duties. However, I decline to strike out these causes of action. I am not persuaded that ATC’s claim is hopeless in this respect; it is simply poorly pleaded. It is appropriate that ATC is given the opportunity to amend its Statement of Claim.
[87] In doing so, ATC must identify the specific breaches of duties it bases its claim for relief on. As currently pleaded, the s 135 cause of action contains a range of allegations spanning different statutory duties and points in time. This results in an
52 King v Lewis [1949] NZLR 52 (HC) at 55.
53 Jessica Gorman and others McGechan on Procedure (online ed, Thomson Reuters) at [HR.16.2.02].
54 Rod Milner Motors Ltd v A-Co [1999] 2 NZLR 568 (CA) at 581.
55 Cross Fit Inc v Exercise Industry Association Ltd [2016] NZHC 1028 (HC) at [130].
incoherent cause of action both in terms of the alleged breach and the consequences said to flow from that breach.
[88] I do not consider ATC’s claim to relief to be inarguable, mainly because of the appellate authority I have cited. However, this part of the claim also needs amendment to clarify the relief ATC claims and on what basis. ATC’s indicated amendments do not achieve that goal and in fact confuse the claim further. ATC must specify whether it seeks an award of damages to compensate the company for harm caused to the company by the alleged breaches of directors’ duties or seeks the restoration of company money or property. ATC should also specify whether it asks for the damages, money or property to be paid to CCL (in liq) under s 301(1)(b) for the benefit of all creditors; or to itself under s 301(1)(c).
[89] I have found that insofar as ATC applies for declarations, this is not a form of relief available under s 301. These parts of the Statement of Claim must be struck out.
Is the fourth cause of action reasonably arguable?
Expectation damages not available
[90] In its fourth cause of action, ATC alleges that CGL and the directors breached ss 9 and 11 of the FTA. It is alleged that Mr Petrou made representations as a "servant" or "agent" of CLL and "on behalf of" CGL.56 Again, ATC seeks to recover its contractual damages and costs of $85,675,772.30 awarded against CCL in the Final Award.
[91] Mr Petrou submits that by claiming expectation damages (damages to put ATC in the position it would have been in if CCL had properly performed the Construction Contract) ATC ignores settled law that damages under the FTA are restricted to reliance damages only (damages that put a plaintiff in the same position as if an alleged misrepresentation was not made).57
56 Statement of Claim, dated 13 July 2022, at [59]–[60].
57 Cox & Coxon Ltd v Leipst [1999] 2 NZLR 15 (CA); Gavigan v Eichelbaum [2018] 2 NZLR
530 (CA) at [39]; and Shabor Ltd v Graham [2021] NZCA 448, (2021) 22 NZCPR 466 (CA) at
[64]– [66].
[92] Mr Petrou does not, however, seek to strike out the fourth cause of action on that basis. Rather, his application focuses on a limitation defence.
Claim is time-barred
[93] Section 43A of the FTA provides that proceedings must be brought within three years of the date on which the loss or damage, or the likelihood of loss or damage, was discovered or ought reasonably to have been discovered.58
[94] ATC’s Statement of Claim was filed on 13 July 2022. The loss or damage, or the likelihood of loss or damage, must therefore have been discovered or ought reasonably to have been discovered no earlier than 13 July 2019.
[95] To succeed on the limitation defence, Mr Petrou must show that prior to 13 July 2019 ATC had actual or constructive knowledge of:
(a)the facts and circumstances giving rise to a tenable cause of action for contravention of the FTA;59 and
(b)it being more likely than not that more than minimal loss had been or would be caused by that potential contravention.60
[96] The following points from Tipping J’s judgment in the Supreme Court in Commission v Carter Holt Harvey Ltd provide guidance on how s 43A of the FTA is applied:
(a)"[T]ime starts running from when the applicant discovers or ought to have discovered that loss or damage has already occurred or is likely to
58 Fair Trading Act 1986, s 43A.
59 Commerce Commission v Carter Holt Harvey Ltd [2009] NZSC 120, [2010] 1 NZLR 379 at [31];
Houghton v Saunders [2014] NZHC 2229, [2015] 2 NZLR 74 at [659]–[660]; and Red Stag Timber Ltd v Juken New Zealand Ltd [2021] NZHC 2662 at [43]–[45] and [50].
60 Commerce Commission v Carter Holt Harvey Ltd, above n 59, at [22]–[27]; and Red Stag Timber Ltd v Juken New Zealand Ltd, above n 59, at [43]–[45].
occur in the future".61 It is the knowledge of the applicant that is relevant as to when the time begins.62
(b)The concept of discovering something means to become aware of it; it is not a matter of extent or degree as the applicant either will or will not be aware of the loss or damage, or likelihood of the same.63
(c)The test for "ought reasonably to have been discovered" requires the court to consider whether a reasonable person situated as the claimant was ought to have known that the loss had occurred.64
(d)For the purposes of the s 43A test, likelihood means that it needs to be more probable than not.65 The majority considered that the standard should be the same for past or future loss.66 The applicant would therefore need to know that it is more probable than not that loss or damage had occurred or would occur.
(e)It is not necessary for the applicant to become aware of the actual loss/damage that is ultimately established. Rather, it is sufficient that they become aware that some more than minimal loss or damage is likely to occur.67
[97] In this case, the alleged misrepresentation is a statement made by CCL on 24 July 2015 in its tender to ATC for the Construction Contract:68
Canam has a strong balance sheet, healthy cashflows, and no debt. The company owns significant assets, including construction plant in excess of
$7.0 m and a joinery factory.
61 At [27].
62 At [17].
63 At [29].
64 At [29].
65 At [30]. See also McKeon Group v Russell (2010) 13 TCLR 1, 9 NZBLC 103,068 (HC).
66 At [30].
67 At [32]–[34].
68 Statement of Claim, dated 13 July 2022, at [28].
[98] ATC identifies further representations in sch 2 to the tender document including:69
(e) For the construction of this project, Canam will not require any capital expenditure to fulfil our obligations.
(f) CCL already owns the construction plant required to fulfil [Canam’s] obligations on the project.
(g) CCL “expects to have … cash flow and manage the construction costs for the first two months of the project and until the first payment is received.”
(h) [Canam] has more than sufficient cash to internally manage this initial expenditure until the first payment is received.
[99]Further, under the heading “Financial capability”:70
The Canam group of companies are in an enviable secure financial position with no debt and the ability to fund operations from retained earnings.
[100] ATC pleads that these words were meant, and were intended to mean, that CCL and the Canam Group had the financial means, resources, property, value and worth to support the Construction Contract with ATC.71
[101]ATC claims that these financial representations were false and misleading:72
32.The financial representations provided by CCL referred to above were incorrect, false and misleading, including CCL’s statements and assurances that it was financially viable, had a strong balance sheet, healthy cashflow, and had no debt.
33.Following the liquidator’s first report (and thereafter) it then became apparent that, CCL was not financially viable throughout the term of the contract and did not have the means, assets and resources to perform the Construction Contract.
(emphasis in original)
[102] ATC pleads that it did not become apparent until the liquidator’s first report dated 16 August 2021 that these statements were false.
69 At [29].
70 At [30].
71 At [31].
72 Statement of Claim, dated 13 July 2022.
[103] Mr Petrou claims that prior to 13 July 2019, ATC had discovered, or ought reasonably to have discovered, facts and circumstances giving rise to a cause of action for contravention of the FTA. He says that on at least three occasions ATC became aware of, or ought reasonably to have been aware of, CCL’s resources, property, value, worth and means to perform the Construction Contract; whether it was financially viable, had a strong balance sheet, healthy cashflow, and no debt; and therefore, whether its statements to that effect were true or not. I address each of these in turn.
Pre-construction contract due diligence in September 2015.
[104] Mr Petrou claims that ATC was made aware of CCL’s financial position during the due diligence process. However, as there is a factual dispute about what financial information was provided to ATC’s CFO, Mr Petrou does not rely on the pre-construction contract due diligence for his strike-out application.
KordaMentha report in July 2018
[105] ATC engaged KordaMentha to investigate the Project in June 2018. The scope of work included to review the current status of the Project and progress to date against expectations; analyse the reasons for timing delays and resolutions taken to date; assess Canam’s new target programme and supporting cashflows, with any additional bank borrowing requirements to be identified; and undertake a risk assessment.73 KordaMentha subsequently issued the Report to ATC dated 10 July 2018.
[106] Mr Petrou highlights the following passages of the Report and submits that it plainly gave ATC the information to assess whether CCL and the Canam group of companies had the financial means to complete the Project, that being the report’s very purpose:74
Canam group’s consolidated balance sheet at March 2017 reflected shareholders’ funds of $1 million (rounded). Canam assesses itself still as profitable.
…
73 Affidavit of Lokas Soteri Petrou, affirmed 17 October 2022 at LSP-01-643. The Letter of Instruction is dated 18 June 2018.
74 Affidavit of Lokas Soteri Petrou, affirmed 17 October 2022 at LSP-01-623, at 4–15.. .
On this basis, without a renegotiation of terms, we estimate Canam faces a loss of up to $14.822 million on the contract.
…
In this case, Canam’s assessed loss reduces to $7.532 million (or, in reality, the factual extent of Trade price validity risk and remediation costs it is obliged to bear). Neither outcome seems particularly attractive for Canam.
…
We have received, on a confidential basis, the Canam group consolidated balance sheet as at March 2017. Shareholders’ funds were reported at that time at $1 million (rounded). The profit and loss statement recorded profitability, and we understand the group continues to assess itself as profitable. Canam’s implied loss on the contract in this case reduces to $5.638 million on our analysis as set out below …
…
A loss of $5.638 million on a contract could be a significant impact on Canam. It would be prudent for the Club to seek further information from Canam as to its cashflows and financial position and prospects, including shareholder support, in the context of any renegotiation.
[107] Mr Petrou says that the Report was clear – CCL did not have the means to complete the project. He says consistent with that, ATC terminated the Construction Contract a little over a week later.
[108] To strike out the fourth cause of action, I must be satisfied that it is beyond reasonable argument that through the Report ATC became aware, or ought reasonably to have become aware, that the representations CCL had made in the tender document were false, and that ATC was more likely than not to sustain a more than minimal loss because of its reliance on those false representations.
[109] I do not consider that this threshold is met. The allegedly misleading financial representations were made before the Construction Contract was entered into, in July 2015. The Report was issued in July 2018, by which time the Project had been underway for three years. It is apparent from the Report that the Project had been plagued by a variety of construction delays attributable to ground conditions, weather, and performance issues on the behalf of the consultants and Canam.75 The relationship between ATC, the consultants, and Canam had broken down.
75 Affidavit of Lokas Soteri Petrou, affirmed 17 October 2022 at LSP-01-623, at 11.
[110] In that context, the Report was a forward-looking assessment of the additional funding required to complete the Project, the likely “implied loss” to CCL if it continued the Project under three different scenarios; and an assessment of whether CCL could sustain such a loss. KordaMentha did not assess the financial means, capability, and resourcing of CCL at the date of the pre-contract representations at issue.
[111] The observation that CCL might not be able to sustain the implied loss was based on KordaMentha’s review of the group consolidated balance sheet as at March 2017 which reported shareholders’ funds of $1 million.76 KordaMentha does not report on any other financial metrics for CCL or the Canam group or record that it had reviewed any other financial information beyond this single balance sheet. Significantly, KordaMentha reported that the Canam group, presumably through its directors, continued to describe the group as profitable.
[112] Therefore, I do not accept that it would necessarily have been apparent to ATC from the Report, nor ought to have been reasonably apparent, that CCL had misrepresented its financial position some three years prior in the way now claimed.
Notice of claim to project manager in February 2019
[113] In February 2019, ATC put its project manager N-Compass on notice of a potential claim against it, on the basis that N-Compass had failed to procure the PCG from CGL. This evidence is not disputed by ATC.
[114] Furthermore, on 21 February 2019 the engineer to the Construction Contract provisionally assessed ATC’s loss on the contract at $45,082,196.85.77
[115] Mr Petrou argues that at this point ATC discovered, or ought reasonably to have discovered, that it had suffered a more than minimal loss caused by CCL’s potential contravention of the FTA. Furthermore, that it was clear to ATC that it would not be
76 Affidavit of Lokas Soteri Petrou, affirmed 17 October 2022 at LSP-01-623, at 15.
77 Affidavit of Liam Gordon Campbell, affirmed 24 February 2023 at LC-001.
able to rely on the PCG from CGL to shield it from any losses carried by CCL because of its potential breaches of the FTA.
[116] I accept that by this stage it would have been apparent to ATC that it was likely to suffer material losses caused by CCL’s defaults of the Construction Contract and ATC’s consequent termination. It must also have been apparent that there was a risk that ATC would not be able to rely on the PCG to recover any shortfall between a subsequent damages award and CCL’s assets.
[117] But CCL has not presented any evidence to establish that it would have been apparent to ATC, or should have been apparent, that CCL had made false and misleading pre-contract representations about its financial viability and means to perform the Construction Contract. There is nothing in the engineer’s provisional assessment to indicate that the directors of CCL had misrepresented CCL’s financial position pre-contract. There is no evidence of any information about CCL’s financial position being made available to ATC at this time. From what I can discern, the only financial information ATC had at this point was the limited information about the Canam Group’s balance sheet as at March 2017, conveyed by KordaMentha. As noted, this was conveyed with assurances that CCL remained profitable.
[118] For this reason, I find that the fourth cause of action is not so obviously time- barred that it ought to be struck out.
[119] The issue concerning the damages pleaded by ATC remains. The law is clear that the remedy for a breach of ss 9 and 11 of the FTA is reliance damages, not expectation damages. As Kos P noted in Gavigan v Eichelbaum:78
As a related point, a majority of a Full Court of this Court in Cox & Coxon Ltd v Leipst stated expectation damages are not recoverable under the FTA as they may be in contract. The FTA’s remedial provisions make available a remedy for loss occasioned by the representation, but not for loss of the expected position had the misrepresentation been true. The measure of the loss relates to harm caused by engaging in misleading conduct rather than requiring a defendant to honour an expectation or promise made to a plaintiff … But that is an expectation loss and Mr Eichelbaum is not entitled to it under ss 9 and 43 of the FTA simply on the basis that he expected to share in the Project Management Fee in that way. Instead, he must point to and prove the particular
78 Gavigan v Eichelbaum, above n 57, at [39].
loss that he has suffered by reason of the misrepresentations both pleaded and proved on the evidence.
[120]ATC must amend its Statement of Claim to address this issue.
Is the sixth cause of action reasonably arguable?
[121] In the sixth cause of action ATC seeks to recover from Mr Petrou costs of the arbitration of $5,582,828.26. Specifically:79
[ATC] claims from the First to Fourth Defendants being non-parties to the arbitration reimbursement of [ATC’s] costs incurred in the arbitration and awarded to [ATC] in the sum of $5,582,828.26.
[122] ATC also seeks an order for discovery against these parties for documents identifying how CCL funded the costs of the arbitration.
[123] ATC submits that with the arbitration proceeding already closed, and as all three arbitral awards have been registered as sealed judgments of the High Court, this Court is now “seized with jurisdiction of the arbitration outcome”. ATC submits that as such, pursuant to its inherent jurisdiction it has jurisdiction to order any related party/non-party who funded the arbitration to pay ATC’s costs. ATC relies on a decision of this Court where Downs J ordered a defendant to disclose its funding arrangement.80
[124] This cause of action cannot succeed. Mr Petrou was not a party to the arbitration between ATC and CCL, or the Final Award in which Mr Hansen KC awarded ATC the costs of the arbitration. The Final Award is not binding on Mr Petrou and cannot be enforced against him.
[125] While the High Court has powers to support an arbitration, including in relation to issues of costs,81 such steps needed to be taken as part of the arbitration itself (or, at least, proceedings under the Arbitration Act). The Court does not have the power in
79 Statement of Claim, dated 13 July 2022 at [96].
80 Minister of Education v H Construction North Island Ltd (in rec and liq) [2019] NZHC 1459 at
[43] and [71].
81 Arbitration Act 1996, sch 2 art 6.
these proceedings to make orders in relation to the costs component of the Final Award.
[126] ATC had the ability to challenge the costs award through art 6(3) of sch 2 of the Arbitration Act 1996. The right to challenge the award expired within three months of the award being made.82
[127] Accordingly, I find that the sixth cause of action does not disclose a cause of action against Mr Petrou and must be struck out.
Conclusion and result
[128]I order:
(a)The claim to declarations in the second and third causes of action is struck out.
(b)The sixth cause of action is struck out.
[129]Otherwise, the application to strike out is dismissed.
[130]The application for summary judgment is dismissed.
[131] I direct ATC to file an amended statement of claim addressing the issues identified in this judgment within 25 working days.
[132] As to costs, Mr Petrou has identified significant issues with the Statement of Claim that require attention. I have, for the most part, declined to strike out the causes of action, but only because ATC will be given an opportunity to amend its statement of claim. My preliminary view is therefore that ATC should pay Mr Petrou’s costs, on a 2B basis. I invite the parties to agree costs on that basis.
82 Arbitration Act 1996, sch 2 art 6(5).
[133] If agreement cannot be reached, Mr Petrou may file submissions of not more than four pages within 20 working days and ATC may file submissions of not more than four pages within a further 10 working days.
Associate Judge Gardiner
Solicitors:
Dawson Harford, Auckland Lindsay & Francis, Auckland
M Black, Auckland
D Chisholm KC, Auckland
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