Chief Executive of the Department of Corrections v Decmil Construction NZ Limited (in liquidation)

[2020] NZHC 2976

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-A-TARA ROHE

CIV-2020-485-392

[2020] NZHC 2976

UNDER

the Companies Act 1993

BETWEEN

HER MAJESTY THE QUEEN IN RIGHT OF NEW ZEALAND ACTING BY AND

THROUGH THE CHIEF EXECUTIVE OF THE DEPARTMENT OF CORRECTIONS
Applicant

AND

DECMIL CONSTRUCTION NZ LIMITED (IN LIQUIDATION)

First Respondent

DERMOTT JOSEPH McVEIGH

Second Respondent

Hearing:

5 November 2020

Counsel:

S M Bisley and M R Evans for applicant No appearance for respondents

J E M Lethbridge for Decmil Group Limited (via VMR)

Judgment:

11 November 2020

RESERVED JUDGMENT OF DOBSON J

Introduction and procedural background

[1]    In October 2017, the applicant (Corrections) contracted with the first respondent (Decmil NZ) for the construction of nine  modular  units  at  various  New Zealand prisons. On any view, it was a major undertaking with the contract sum being approximately $196 million.

DEPARTMENT OF CORRECTIONS v DECMIL CONSTRUCTION NZ LTD (IN LIQ) [2020] NZHC 2976

[11 November 2020]

[2]    The contract has not gone well. During February 2020, Decmil NZ purported to terminate the contract, claiming that performance had become impossible or that the contract was otherwise frustrated. Corrections’ response was to give notice of termination of the contract on grounds that Decmil NZ had not remedied failures to comply with certain milestones that applied under the contract and that Decmil NZ had failed to proceed regularly and diligently with the contract works.

[3]    The contract committed the parties to a dispute resolution process that ultimately led to arbitration. In early March 2020, the parties agreed the various disputes would be referred to arbitration and on 17 March 2020 they agreed to the appointment of the Hon Raynor Asher QC as arbitrator. Exchanges occurred about procedural arrangements, some of which reflected the terms of engagement proposed by the arbitrator.

[4]    On 16 April 2020, Decmil NZ was placed into liquidation by a shareholders’ resolution at the instigation of its effective parent company, Decmil Group Limited (Decmil Group), and Mr McVeigh was appointed as the liquidator.

[5]    Early exchanges between advisers for the liquidator and for Corrections indicated that the liquidator would not consent to the claims Corrections seeks to pursue being determined by the arbitrator. Accordingly, in this proceeding, Corrections seeks the Court’s leave to continue the arbitral proceeding against Decmil NZ in liquidation, and the liquidator was joined as the second respondent.

[6]    The Court’s consent is required under s 248(1) of the Companies Act 1993 (the Act), which relevantly provides:

248     Effect of commencement of liquidation

(1)With effect from the commencement of the liquidation of a company,—

…

(c)unless the liquidator agrees or the court orders otherwise, a person must not—

(i)commence or continue legal proceedings against the company or in relation to its property; or

(ii)exercise or enforce, or continue to exercise or enforce, a right or remedy over or against property of the company:

[7]    A notice of opposition to the application was filed on behalf of the liquidator and certain initiatives taken to defer progress with this proceeding. It was scheduled for hearing on 5 November 2020 and requests for adjournment of that hearing were declined.

[8]    In light of a more recent indication from counsel retained by the liquidator that the liquidator considered himself unable to retain counsel to appear on this application, I convened a telephone conference with counsel on 28 October 2020. During that conference, I recognised the desirability of some mechanism that would enable Decmil Group, as guarantor of Decmil NZ’s liabilities to Corrections under the contract, to participate in some way. My minute after that conference dated 30 October 2020 recognised that prospect.1

[9]    On 3 November 2020, solicitors for Decmil Group filed a memorandum indicating that it intended to seek involvement in the proceeding but requesting an adjournment. On 4 November 2020, I declined the request for adjournment but indicated that I would facilitate participation of counsel on behalf of Decmil Group, either as a passive observer or on a Pickwick basis.2

[10]   Arrangements were made for Ms Lethbridge to appear by VMR on a limited basis and the hearing proceeded on what Mr Bisley accurately suggested was effectively a formal proof basis.

Factual assumptions

[11]   The relevant contract between Corrections and Decmil NZ included an obligation for Decmil NZ to procure a guarantee of its performance and liabilities under the contract from its parent company. Also in evidence were the terms of that guarantee as executed by Group in favour of Corrections. Without making a definitive

1      Department of Corrections v Decmil Construction NZ Ltd (in liq) HC Wellington CIV-2020-485- 392, minute of 30 October 2020.

2      Minute of 4 November 2020.

ruling on the scope of the guarantee, it is appropriate to assess the present application on the assumption that the guarantee is likely to be enforceable against Decmil Group for the extent of any award made in Corrections’ favour.

[12]   The potential liability of Decmil Group gives it a meaningful interest in participating in the arbitration. Its interest is likely to extend to defence of all aspects of the claims brought against Decmil NZ, drawing on all arguments that would have been available to its contracting subsidiary. Decmil Group will have an interest in reducing the quantum claimed as much as it can from the present projection of some

$60 million. Further, Decmil Group will be interested to advance all counterclaims available to Decmil NZ against Corrections. Decmil Group is the party that has a compelling interest in advancing such claims, again on all grounds that would be available to Decmil NZ. It can reasonably be assumed that the liquidator and those involved for Decmil Group will agree appropriate arrangements for the liquidator to make available to those acting for Decmil Group records and other resources now under the liquidator’s control, and for Decmil Group to confirm a financial commitment to running the defence of claims brought by Corrections and to advance counterclaims on behalf of Decmil NZ.

[13]   Directions on that aspect of any arbitration are beyond the scope of the present application, but I assess the application on the premise that there are, at the very least, realistic prospects of such arrangements being settled. At the end of the hearing, I heard briefly from Ms Lethbridge. Although she has limited instructions at this stage, her sketch of the present position adopted by Decmil Group did not cause me any concerns that this assumption in unrealistic.

The legal test

[14]   The learned authors of Heath and Whale on Insolvency characterise the question under s 248 of the Act (as to whether a claimant should be permitted to pursue a claim by means of proceedings rather than submitting a proof of debt) as ultimately one of choosing alternative forms of procedure.3 There is an emphasis in recent cases

3      Paul Heath and Michael Whale (eds) Heath and Whale on Insolvency (online ed, LexisNexis) at [21.4].

that the key question is whether the claim is more appropriately dealt with in the liquidation or by proceedings. That text cites other factors going to the Court’s discretion, including, in summary form, the following:4

·There must be equality amongst various creditors. Proceedings should not produce an advantage to a particular creditor over other creditors. …

·The assets of a company should not be dissipated in wasteful litigation, particularly if there is a more convenient method for determining the claim;

·The onus is on the party seeking leave to satisfy the court that leave should be given;

·… The question to be considered is whether there are any circumstances which render it necessary that the action be continued or whether the claim could as easily be dealt with in the liquidation. The likely attitude of the liquidator is therefore a relevant factor. If the liquidator is likely to require the claim to be proved (because, for example, of the complexity of the proceedings), would not find it easy to determine and be likely to reject it, the most appropriate way of dealing with the matter is in an action with the leave of the court;

…

·Leave under s 248(1)(c) will usually be declined if the proceedings sought to be commenced, even if successful, are likely to be fruitless.

The discretionary considerations

Complexity

[15]   Corrections’ claim has every appearance of being a many-headed dragon. A draft of its points of claim is included among the documents, running to 47 pages. The nine causes of action include claims for misrepresentation and breach of the Fair Trading Act 1986. Inarguably, pursuit of the claims will involve a highly complex dispute as to alleged breaches of a very substantial design and construction contract, likely to give rise to difficult issues of both fact and law. The contract had been in train for some two and a half years.

4      At [21.4](e) (footnotes omitted). See also the factors set out in Fisher v Isbey (1993) 13 PRNZ 182 (HC) at [19].

[16]   The liquidator is a Perth-based insolvency and restructuring specialist, qualified as a chartered accountant. He is also registered as a liquidator with the Australian Securities and Investment Commission. An assessment of the more appropriate forum as between the nominated arbitrator, whose career includes many years as a High Court and Court of Appeal Judge following a period practising as a commercial silk based in Auckland, and the liquidator presents an easy choice. Without intending any disrespect to the liquidator, in these circumstances he is clearly not as equipped as the nominated arbitrator is to conduct an adequate analysis of the claims and counterclaims, and produce a credible and accurate result. At least in the short-term, restrictions on travel from Perth to New Zealand are likely to inhibit the liquidator’s capability to deal with the issues that will arise.

[17]   In cases where disputes appear to have been various degrees more straightforward than will be involved here, courts have resolved that arbitration is the more appropriate forum. In DHC Assets Ltd v Vaco Investments (Lincoln Road) Ltd (in liq), Lang J observed:5

[9]        Many disputes are more readily dealt with within the context of a liquidation rather than through continued litigation. The liquidator has the power to admit or reject claims in whole or in part. The Court then has the power to modify or reverse the liquidator’s decision. This provides a convenient means of dealing with many disputed claims by creditors.

[10]      The present case does not fall within that category because the disputed claims are complex and cannot be readily determined by the liquidator or by the Court. Rather, they are more appropriately dealt with by a suitably qualified arbitrator. For that reason alone it is appropriate that leave be given.

[18]   Similarly, in Downer Construction (New Zealand) Ltd v One Hobson Street Ltd (in liq), Associate Judge Abbott recognised that “arbitration has long been accepted as the best method of determining large and complex construction disputes” in circumstances where one party to the dispute is a company in liquidation.6

5      DHC Assets Ltd v Vaco Investments (Lincoln Road) Ltd (in liq) [2017] NZHC 454 (footnotes omitted).

6      Downer Construction (New Zealand) Ltd v One Hobson Street Ltd (in liq) HC Auckland CIV- 2007-404-2374, 3 August 2007 at [22].

Not fruitless

[19]   The prospect of a solvent party that is liable to meet any award in Corrections’ favour means that pursuit of the arbitral proceeding would not be fruitless, to the extent that is a consideration in whether leave should be granted.

Liquidator potentially conflicted?

[20]   Mr Bisley also argued that the circumstances of the liquidation would in any event render it inappropriate for a determination of Corrections’ various claims to be left to the liquidator. Mr Bisley cited various statements and observations by the liquidator since his appointment in which he has placed emphasis on his belief that Decmil NZ’s most promising asset is the claims it has against Corrections. Mr Bisley instanced a statement by the liquidator’s solicitors on 6 May 2020 to the effect that he could not see how Corrections could claim to be a creditor. Mr Bisley suggested on the basis of a summary of costs incurred that the liquidator has expended some

$940,000 in examining the prospects of claims against Corrections. Mr Bisley referred to statements in which the liquidator has expressed confidence in the strength of such claims.

[21]   Mr Bisley also referred to the circumstances of the liquidator’s appointment. He had been retained pre-liquidation by Decmil Group to advise it, and raised at an early stage the prospects of Decmil NZ having a claim against Corrections for breach of contract and possible bases for co-operation between the liquidator and Decmil Group in advancing such claims.

[22]   In assessing unsecured creditors’ claims lodged with the liquidator for the purposes of calculating voting rights on a motion for his possible removal, the liquidator disallowed Corrections’ claims within the categories it now seeks to pursue by way of arbitration, quantified at $64 million (plus GST), except to the amount of

$1. However, the liquidator did admit claims under another head where Corrections has made payments due to subcontractors that were otherwise to have been paid by Decmil NZ in the amount of $4,376,109.29.

[23]   At a previous telephone conference where Mr Tingey was seeking an adjournment on behalf of the liquidator, he emphasised that the valuation at $1 was only a quantification of Corrections’ claims for the very limited purpose of calculating voting rights.

[24]   Ms Lethbridge cautioned against drawing any inference of a lack of impartiality on the part of the liquidator as a ground for preferring arbitration. She submitted that, in the absence of representation for the liquidator, it was inappropriate to infer that anything in the circumstances of his appointment, or conduct since then, justified a finding that he would lack adequate impartiality in determining claims brought by Corrections.

[25]   I accept Ms Lethbridge’s point that it would be unfair to make any finding of a lack of impartiality on the part of the liquidator as a ground for granting leave for arbitral proceedings, without hearing from him on the criticism. However, putting that consideration to one side, there is still a fundamental conflict between the liquidator receiving and objectively considering on their merits all claims brought by all creditors seeking to prove in the liquidation, and the liquidator’s commitment to the general body of creditors that he would pursue claims against Corrections as the most likely source of any payments to all other creditors. Pursuit of such claims will not produce a return to creditors unless they substantially exceed the amount of Corrections’ claims against Decmil NZ. This inevitable conflict supports the conclusion that the arbitral proceeding should be permitted to continue.

Not a cause of inequality among creditors

[26]   Another consideration is whether, if granted leave to pursue an arbitration, Corrections could thereby obtain some advantage over other creditors. There is no suggestion that would be the case here. Indeed, it is positively in the interests of all creditors that there be an authoritative determination of the competing claims between Corrections and Decmil NZ, a resolution of which will be needed for the liquidation to be progressed.

Liquidator’s earlier concerns

[27]   The liquidator earlier opposed this application on a number of grounds. Appreciating that they have not been advanced in argument, they can be dealt with quite shortly.

[28]   First, the liquidator argued that because Corrections has submitted a claim in the liquidation, that claim is thereby required to be determined by the liquidator. That is not a valid argument. Creditors file claims in liquidations in a range of circumstances, including as a means of preserving their position, and it cannot alter the evaluation of whether the dispute is more appropriately determined in arbitration.

[29]   Secondly, the liquidator argued that granting leave is premature because he is still investigating the claim brought by Corrections, as well as the claims  that Decmil NZ could bring against Corrections. Given the passage of time and the absence of any articulated bases for claims against Corrections, as well as the absence of any indication the liquidator has revisited his provisional determination that Corrections’ claim ought to be valued at $1, this concern by the liquidator cannot carry any weight.

[30]   Finally, the liquidator raised his earlier determination of Corrections’ claim as requiring Corrections to go through the process of challenging it, under s 284 of the Act. However, the opportunity to pursue that course, whilst an option open to creditors whose proofs of debt have not been accepted in full, it is not a mandatory requirement. In the present circumstances, the failure to take that step cannot have any bearing on whether leave is appropriately given under s 248 of the Act.

[31]   In an earlier  telephone  conference  with  counsel  on  1 September  2020,  Mr Tingey flagged an argument he contended was available to the liquidator, to the effect that Corrections and Decmil NZ had not in fact agreed to arbitrate their disputes. He did not elaborate on the respects in which he considered the arrangements between them were insufficient to be treated as an agreement to submit their differences to arbitration.

[32]   Mr Bisley submitted that this contention was untenable because the parties’ commitment to arbitrate was in the contract and any lack of agreement on procedural details could not alter the existing commitment to arbitrate. He cited the decision of then Associate Judge Gendall in Miro Property Holdings Ltd v Fletcher Construction Company Ltd where a construction contract contained a commitment to arbitrate in very similar terms.7 The Judge recognised that such an arbitration clause in a contract binds the parties to pursue the arbitral process provided for when disputes arise under the contract.8

[33]   I accept that reasoning applies in the present circumstances. Even if it did not, and for some reason the commitment in their original contract was no more than an agreement to agree, from a review of the correspondence during March 2020, I would incline to the view that the parties had agreed to arbitrate their differences before the Hon Raynor Asher QC. The details still to be agreed were within those that could be resolved by the arbitrator applying the provisions in sch 2 of the Arbitration Act 1996.

Outcome

[34]   I am satisfied that the leave sought is appropriately granted. I accordingly order under s 248 of the Act that Corrections be given leave to continue the arbitral proceeding that was in the course of being arranged at the time of liquidation.

Costs

[35]   At the time of written submissions being filed on behalf of Corrections, costs orders were sought personally against the liquidator on the basis that he had unreasonably maintained opposition to the application and ought properly to have consented to the arbitral proceeding continuing, which would have obviated the need for this proceeding.

[36]   Given the developments in the week before the hearing, Mr Bisley conceded that the application for a costs order personally against the liquidator would not be

7      Miro Property Holdings Ltd v Fletcher Construction Company Ltd HC Wellington CIV-2010-485- 2540, 31 May 2011.

8 At [34].

pursued. The opposition had not been maintained, and the prospects were for co-operation between the liquidator and those advising Decmil Group to facilitate progress with the arbitration.

[37]   Nonetheless, Corrections did seek an order for costs against the company in liquidation. In the circumstances as they have developed, I am satisfied that such an award is warranted. Had the merits of the situation been addressed earlier, the proceeding may have not been required.

[38]   I accordingly order costs in favour of Corrections and against the first respondent on a 2B basis, together with disbursements as approved by the Registrar. I certify for a two hour hearing for one counsel.

Dobson J

Solicitors:

Buddle Findlay, Wellington for applicant Anthony Harper, Auckland for respondents

Martelli McKegg, Auckland for Decmil Group Limited