Complete Limited (in liquidation) v Fuzo Woolfield Limited
[2018] NZHC 715
•18 April 2018
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2017-404-002907
[2018] NZHC 715
UNDER Part 32 of the High Court Rules IN THE MATTER OF
the liquidation of Complete Limited (in Liquidation)
BETWEEN
COMPLETE LIMITED (in Liquidation) First Applicant
DAMIEN GRANT and STEVEN KHOV
Second ApplicantsAND
FUZO WOOLFIELD LIMITED
Respondent
Hearing: 11 April 2018 Counsel:
A S Botterill and J Wong for the Applicants
G J Kohler QC and A J Thorn for the Respondent
Judgment:
18 April 2018
JUDGMENT OF EDWARDS J
This judgment was delivered by Justice Edwards on 18 April 2018 at 3.00 pm, pursuant to
r 11.5 of the High Court Rules
Registrar/Deputy Registrar Date:
Counsel: G J Kohler QC, Auckland
Solicitors: Waterstone Insolvency, Auckland Adina Thorn Limited, Auckland
COMPLETE LTD (in Liquidation) v FUZO WOOLFIELD LTD [2018] NZHC 715 [18 April 2018]
Introduction
[1] The parties to this proceeding were parties to a contract for the construction of a residential apartment development at 3 Woolfield Road, Papatoetoe.
[2] The plaintiffs (referred to together as “Complete”) sue the defendant (Fuzo) for breach of contract. Complete claims the sum of $525,749.10 which it says comprises the balance of payments due under the contract, retentions, a performance bond, and payments due for “variation orders”.
[3] On 15 March 2018, the Court granted Complete’s without notice application for a freezing order.1 The freezing order applies to the Woolfield Road property, the proceeds of sale of the 10 apartments, and funds held in Fuzo’s bank accounts with the Bank of New Zealand (BNZ) to the sum of $110,000. That order was subsequently varied so that it only applies to the sum of $575,000, which includes a provision for interest.
[4] Fuzo opposes the continuation of the freezing order. It says that Complete does not have a good arguable claim against it, and that there is no risk of dissipation of assets. In addition, Fuzo says that the freezing order should not have been brought on a without notice basis, the claim should have been arbitrated or adjudicated, and the undertaking as to damages given by one of Complete’s liquidators (Mr Grant) is inadequate.
The dispute in context
[5] Fuzo is the owner of the land at 3 Woolfield Road. In November 2015 it entered into a contract with Complete to build a residential apartment complex comprising 10 apartments at the Woolfield property. The contract incorporates the general conditions of contract set out in NZS 3910:2003 Conditions of Contract for Building and Civil Engineering Construction and was for a fixed price of approximately $2.22m. Mr Scragg, from Scragg Consultancy Ltd, was the appointed engineer under the contract.
1 Complete Ltd (in liq) v Fuzo Woolfield Ltd [2018] NZHC 451.
[6] The dispute centres around events from mid-2017 onwards. In June 2017, Complete issued a final payment claim, but subsequently received notices to fix certain defects from Mr Scragg and Fuzo. On 19 July 2017, Complete notified Mr Scragg that it had completed all remedial work.
[7] On 25 and 26 July 2017, Complete issued eight variations (referred to as “variation orders” in the affidavits filed in support of the application) for a total sum of $156,698.58. These variation orders comprise part of the total sum claimed by Complete in this proceeding (the Variation Order claim).
[8] Mr Scragg issued Progress Recommendation No 13 on 7 August 2017 and a revised recommendation was issued on 10 August 2017 (PR-13). Fuzo says that PR- 13 took into account the variation orders submitted by Complete and assessed Fuzo as owing Complete the sum of $116,821.77. That sum was paid by Fuzo the same day.
[9] On 11 August 2017, Complete issued an invoice for $116,821.77 which acknowledged that this sum had been paid. In his affidavit filed on behalf of Complete, Mr Grant says a second invoice was issued at the same time for the sum of
$178,871.14 comprising sums which Complete says were due under the contract. Neither Mr Scragg, nor Mr Younan (Fuzo’s sole director) say they received such an invoice from Complete. The payments sought in this invoice form a further component of the total sum claimed by Complete (the Payment claim).
[10] On 17 August 2017, Mr Scragg sent a letter to Fuzo recording Mr Scragg’s opinion that Complete had abandoned the contract or persistently, flagrantly, or wilfully neglected to carry out its obligations under the contract. The letter recorded that Complete was given 10 working days to complete the outstanding items.
[11] On 22 September 2017, Mr Scragg sent a notice terminating the contract and giving notice that Fuzo was resuming possession of the site under the terms of the contract.
[12] Complete was placed into voluntary liquidation by resolution of its shareholders on 13 October 2017. Mr Damian Grant and Mr Steven Khov of Waterstone Insolvency Ltd were appointed liquidators.
[13] Following Complete’s liquidation, Fuzo wrote to Westpac demanding release of the performance bond of $110,000 held by Westpac under the contract. That sum was subsequently paid by Westpac to Fuzo’s bank account with the BNZ and is currently “frozen” pursuant to the terms of the freezing order. These funds (the Performance Bond) form part of Complete’s claim also.
[14] Complete commenced this proceeding on 8 December 2017. A single cause of action for breach of contract is pleaded. The total sum said to be owed is $525,749.10. This comprises: the Payment claim ($178,871.14), the Variation Order claim ($156,698.58), the Performance Bond ($110,000) and retentions of $80,179.38 (the Retentions).
[15] Complete filed a without notice application for a freezing order at the same time as it filed its statement of claim. Brewer J issued a minute noting that there was a good arguable case for at least some money, although not the full amount claimed in the statement of claim. However, he did not accept that there was a danger that a judgment or a prospective judgment would be wholly or partly unsatisfied because assets would be dissipated. The without notice application was accordingly dismissed, with a direction that if the applicants wished to proceed they would have to do so on notice.
[16] Despite that direction, a further without notice application was filed on 7 March 2018 and subsequently granted on 15 March 2018. As noted above, the freezing order was subsequently varied so that it only applies to the total sum claimed, plus a provision for interest, being $575,000.
[17] Mr Scragg deposes to practical completion of the development being achieved on 19 February 2018. This also appears to be disputed by Complete. Mr Scragg issued a final Progress Recommendation No 14 on 19 March 2018 (PR-14). In that progress recommendation, Mr Scragg has assessed Complete as owing Fuzo the sum of
$361,059.99 due to Complete’s defaults and failure to complete construction. This sum includes a deduction for retentions in the sum of $78,898.93. It also includes a calculation of liquidated damages in the sum of $251,600 pursuant to the terms of the contract. Complete disputes Mr Scragg’s calculations in PR-14 and the conclusion that Complete owes Fuzo, rather than Fuzo owing Complete. Fuzo, however, submits that PR-14 shows that in fact Complete owes Fuzo money and not the other way around, although it contends that the sum owed is in fact much higher than what Mr Scragg has assessed.
Relevant legal principles
[18] Part 32 of the High Court Rules relates to the grant of a freezing order. Rule 32.5 applies if the applicant has a “good arguable case” on an accrued or prospective cause of action that is justiciable in the court.2 If the rule applies, then the Court may make a freezing order against a prospective judgment debtor if:3
the court is satisfied, having regard to all the circumstances, that there is a danger that a judgment or prospective judgment will be wholly or partly unsatisfied because—
(a)the judgment debtor, prospective judgment debtor, or another person might abscond; or
(b)the assets of the judgment debtor, prospective judgment debtor, or another person might be—
(i)removed from New Zealand or from a place inside or outside New Zealand; or
(ii)disposed of, dealt with, or diminished in value (whether the assets are in or outside New Zealand).
[19] In accordance with r 32.7(3), Complete has the onus of satisfying the court that the freezing order should be continued or renewed.
2 Rule 32.5(1)(b)(i).
3 Rule 32.5(4).
[20] The courts have confirmed that the jurisdiction to grant a freezing order is a flexible one,4 but that generally there will be three requirements for a freezing order to be issued:5
(a)a good arguable case on the substantive claim;
(b)assets to which the order can apply; and
(c)a real risk that the respondent will dissipate or dispose of those assets.
[21] As confirmed by the Court of Appeal, the interests of justice must be considered, and the court must balance the need to protect the plaintiff so as to ensure any judgment is not rendered barren against the prejudice or hardship to the defendant and to third parties.6
[22] In this case, there is no dispute that there are assets to which the order can apply. The key issues in dispute concern the requirements in (a) and (c), and whether the other factors raised by Fuzo mean the overall justice of the case weighs against the grant of a freezing order.
Is there a good arguable case?
[23] In Hannay v Mount, the Court of Appeal said that a good arguable case against the respondent would be established if the allegations in the proposed claim were capable of tenable argument and were supported by sufficient evidence bearing in mind the early stage at which the application is likely to be brought.7
[24]The Court of Appeal in that case cited with approval the comments in
Wing Hung Printing Co Ltd v Saito Offshore Pty Ltd8 to the effect that the good
4 Bank of New Zealand v Hawkins (1989) 1 PRNZ 451 (HC) at 454; and Shaw v Narain [1992] 2 NZLR 544 (CA) at 548.
5 Bank of New Zealand v Hawkins (1989) 1 PRNZ 451 (HC) at 452; and Shaw v Narain [1992] 2 NZLR 544 (CA) at 548.
6 Shaw v Narain [1992] 2 NZLR 544 (CA) at 548; endorsing the principles in Bank of New Zealand v Hawkins (1989) 1 PRNZ 451 (HC).
7 Hannay v Mount [2011] NZCA 530 at [21]–[22].
8 Wing Hung Printing Co Ltd v Saito Offshore Pty Ltd [2010] NZCA 502, [2011] 1 NZLR 754 at [41].
arguable case test does not require the plaintiff to establish a prima facie case, and all that is required is a sufficiently plausible foundation for the claim. The threshold has also been described as not requiring an applicant to demonstrate that its case is strong enough to entitle it to summary judgment,9 but the applicant’s case must be better than one barely capable of serious argument.10
[25] Complete’s application is supported by two affidavits of Mr Grant on behalf of Complete. Affidavits from Mr Scragg and Mr Younan are relied on by Fuzo in opposition to the claim.
[26] What is evident from these affidavits is that, with the exception of the Performance Bond claim, Complete’s challenges amount to a dispute of Mr Scragg’s determinations in PR-13 and PR-14. Accordingly, in order to persuade me that there is a good arguable case, there must be some evidential foundation from which it might be said that these recommendations are in error. Each of the components of Complete’s claim are examined in light of that threshold below.
[27] The Payment Claim is for sums which Complete says are outstanding under the contract. Complete says it sent an invoice for these sums on 11 August 2017. There is a dispute about whether the invoice was received which I am unable resolve on the affidavit evidence at this preliminary stage. But even if it was received, the invoice submitted is fundamentally inconsistent with Mr Scragg’s calculations in PR-
13. To establish a good arguable case in respect of the Payment Claim there would have to be at least evidence that Mr Scragg’s calculations in PR-13 were in error, and that the correct calculations would result in a payment of $178,871.14 over and above the $116,821.77 already assessed and paid. There is no such evidence on either of these limbs.
[28] The Retentions component of the claim is also a challenge to PR-13 and PR- 14 in which Mr Scragg has deducted retention sums. In his oral submissions, Mr Botterill raised concerns about the way this sum had been dealt with in PR-14 as a
9 Wilsons (NZ) Portland Cement Ltd v Gatx-Fuller Australasia Pty Ltd [1985] 2 NZLR 11 (HC) at 21–22; citing Barclay-Johnson v Yuill [1980] 1 WLR 1259 (Ch) at 1265.
10 Ninemia Maritime Corp v Trave Schiffahrtsgsellschaft mbH “the Niedersachsen” [1983] 1 WLR 1412 (CA) at 1417.
matter of accounting. He submits it should have been dealt with as an independent item. However, the only evidence directed to this issue is contained in Mr Grant’s affidavit in which he simply states that he is unsure why the Retentions have been deducted when they are outstanding and due to Complete. There is no evidence which lays a foundation for why these monies are in fact owing to Complete, and why Mr Scragg’s deductions are in error. A mere assertion that the Retentions are due and owing and should not have been claimed is not sufficient to establish a good arguable case on the Retentions.
[29] The Variation Order claim is also a challenge to PR-13 and PR-14 as those variation orders were either allowed or disallowed by Mr Scragg as reflected in both recommendations. Again, there is no evidential foundation for a challenge to Mr Scragg’s determinations. This is the minimum required to show that there is a good arguable claim that any or all of the Variation Order claim is owed by Fuzo to Complete.
[30] In his reply affidavit, Mr Grant takes issue with particular aspects of Mr Scragg’s calculations in PR-14 insofar as they relate to Mr Scragg’s assessment that $361,059.99 is due by Complete to Fuzo. But the nature of the evidence is to simply raise questions or queries about some of the invoices accepted by Mr Scragg and the basis upon which the liquidated damages claim has been made. I do not consider there to be enough of an evidential foundation to show that Mr Scragg’s determinations and calculations were in error. But even if there was, at the most, this would reduce the sum Mr Scragg says is due from Complete. It would not show a good arguable claim that Fuzo owed Complete the sum of $525,000.
[31] The Performance Bond component of Complete’s claim does not involve a challenge to PR-13 and PR-14. Complete’s complaint in respect of this claim appears to be that Fuzo requested release of the bond without any advance notice to Complete that it was going to do so. But Complete does not contend that this was a breach of the terms of the surety deed for the Performance Bond or the terms of the contract. A full copy of the surety deed was not produced in evidence. However, the clauses from that surety deed reproduced in Fuzo’s letter of demand provide that insolvency is an act of default. Such an act of default presumably triggers a right to demand payment.
Further, the deed provides for any payment made to be without reference, and notwithstanding any instruction from, the contractor not to pay. Again, there is a lack of evidence in relation to this head of claim to show a good arguable case that Fuzo breached the contract resulting in a payment of $110,000 due and owing to Complete.
[32] Standing back and considering the evidence overall, I accept that the proceeding is at an early stage, and that there is a significant factual dispute between the parties which cannot be resolved on the affidavit evidence. However, as matters currently stand, there is a lack of evidence that shows a good foundation for a breach of contract claim against Fuzo, let alone one which may result in payments of
$525,000 being due to Complete. Accordingly, for the purposes of determining the application for a freezing order, I am not satisfied that there is a good arguable claim for all or any of the sum of $525,000.
Is there a risk of dissipation?
[33] The third requirement for a freezing order concerns the risk of dissipation. Although it is expressed as a “risk of dissipation”, the central issue is whether there is a real risk that a judgment in favour of the applicant will be partly or wholly unsatisfied if the freezing order is not made.11
[34] There must be sufficient evidence of a “real risk”. It will not be enough for an applicant to merely assert that the respondent might dissipate its assets – the belief must be substantiated.12 However, affirmative proof of likelihood of dissipation, or of nefarious intent, is not necessary.13
[35] In Raukura Moana Fisheries Ltd v The Ship Irina Zharkikh, William Young J described the threshold for the required risk as follows:14
[122] It is perfectly clear that a judge must not infer a risk of dissipation merely because a foreign defendant has assets within the jurisdiction of the court. Nor is a risk of dissipation to be inferred merely because the defendant plays its financial cards close to its chest … On the other hand, the test which the plaintiff must satisfy is not unduly exacting. The plaintiff must point to
11 Oaks Hotels & Resorts NZ Ltd v Body Corporate 358851 [2013] NZHC 2695 at [18]–[22].
12 Mogilin v Jo HC Auckland CIV-2011-404-1584, 26 August 2011 at [34].
13 Oaks Hotels & Resorts NZ Ltd v Body Corporate 358851 [2013] NZHC 2695 at [17].
14 Raukura Moana Fisheries Ltd v The Ship Irina Zharkikh [2001] 2 NZLR 801 (HC).
circumstances from which a “prudent, sensible commercial man, can properly infer a danger of default”.
[36] Although the risk is expressed as a danger that “a judgment or prospective judgment will be wholly or partly unsatisfied”, the courts have confirmed that the jurisdiction is not to be used as a means of providing an applicant with pre-judgment security.15 In Ilion Technology Corporation v Johannink, Venning J held that the risk that there might be no fund to satisfy a judgment is a position that a number of plaintiffs potentially face, but it is not a basis for the grant of a freezing order (or a Mareva injunction as it was then known).16
[37] Furthermore, the purpose of making a freezing order is not to prevent the payment of validly owed debts. That principle is reflected in rule 32.6(3) which states:
(3)The freezing order must not prohibit the respondent from dealing with the assets covered by the order for the purpose of—
(a)paying ordinary living expenses; or
(b)paying legal expenses related to the freezing order; or
(c)disposing of assets, or making payments, in the ordinary course of the respondent’s business, including business expenses incurred in good faith.
[38] In Palmer v Leespower SED Ltd, Fisher J held that the payment of validly owed debts was not dissipation of assets for the purposes of the freezing order jurisdiction, and such an order would not be granted if its effect would simply be to give the plaintiff preference over other creditors.17
[39] There is little evidence before the Court as to Fuzo’s current financial position. Mr Kohler QC informed me from the bar that nine of the 10 apartments are subject to sale and purchase agreements. They have been sold for between $400,000 and
$500,000 each. The final apartment was subject to a sale and purchase agreement but that has been subsequently cancelled by the purchaser. Seven of the agreements have now settled. Those funds have been used to discharge the first registered mortgage
15 Oaks Hotels & Resorts NZ Ltd v Body Corporate 358851 [2013] NZHC 2695 at [20].
16 Ilion Technology Corporation v Johannink HC Auckland CIV-2004-404-3358, 17 August 2004 at [39]–[40].
17 Palmer v Leespower SED Ltd (1995) 8 PRNZ 694 (HC) at 696.
over the property to BNZ. Settlement on the sale of the other two apartments was imminent at the date of the hearing. Those funds will be used to discharge the second registered mortgage. Mr Kohler advises that Fuzo expects there to a net balance of proceeds once the second registered mortgage is discharged. The quantum of that net balance is unknown.
[40] Complete submits that Fuzo will dissipate its assets so that any judgment in its favour will not be satisfied. It says that risk arises out of Fuzo’s status as a “special purpose vehicle”, the imminent sale and settlement of the apartments, and Fuzo’s other commitments to third party creditors.
[41] There is no real dispute that Fuzo is set up as a special purpose vehicle. Mr Younan, on behalf of Fuzo, does not dispute Mr Grant’s contention that the purpose of this company structure is to ring-fence any costs and potential litigation liability related to the development. To that extent, the structure of the company poses a risk of dissipation. But, I do not accept that this is the type of dissipation risk to be met by a freezing order. It is a risk which arises from Fuzo operating in accordance with the very purpose for which it was structured, and in the ordinary course of its business.
[42] Similarly, the fact that Fuzo will shortly receive net funds from the sale of all 10 apartments is not enough, on its own, to substantiate the risk of dissipation. An ability to dissipate funds is not the same as evidence of a real risk that dissipation will occur.
[43] Finally, the use of funds to pay genuine unsecured creditors is not a risk which is intended to be captured by the freezing order jurisdiction either. So long as the payments to the unsecured creditors are to be made in the ordinary course of business, and in good faith, then the fact that such payments might result in a risk that a judgment will be wholly or partly unsatisfied is not relevant to the exercise of the freezing order jurisdiction.
[44] In his reply affidavit, Mr Grant raises concerns about the genuineness of some of the invoices raised by the proposed unsecured creditors. In particular, he raises concerns about invoices in the sum of $60,117.29 which have been approved from
companies which appear to be related to Fuzo in some way. I do not consider the related nature of the companies, without more, is enough to show that the work claimed was not done, or that the invoices are not genuine. Those invoices have been accepted by Mr Scragg as genuine and valid invoices for payment in PR-14. There is no evidence to suggest that his determination is arguably incorrect or that the payment to these creditors will not be made in good faith. On the evidence before the Court, I am not persuaded that payment to these creditors would be the type of dissipation captured by the freezing order jurisdiction.
[45] On balance, I accept that there is a risk that any judgment against Fuzo will be left unsatisfied. But I am not persuaded that this risk arises out of the type of dissipation captured by the freezing order jurisdiction.
Overall interests of justice
[46] It follows from the above that I am not satisfied that the requirements for a freezing order have been made out in this case. That necessarily tips the overall balance of the interests of justice against the continuation of the freezing order jurisdiction. On that basis, I need only deal with the other matters raised by Fuzo in very brief terms:
(a)I agree with Fuzo that, in light of Brewer J’s minute in December 2017, the imminent sale of the apartments was not enough to warrant a further without notice application. However, although there were some factual inaccuracies in the affidavits filed in support of the application, I do not consider that, overall, they breached the strict requirements of candour in seeking a freezing order on a without notice basis.
(b)I share Fuzo’s concern that the undertaking filed in support of the application, signed only by Mr Grant and not Mr Khov, may not offer real protection.18
18 For completeness, I record that this view was reached on the position put to me at the hearing and without regard to the additional memoranda filed by the parties following that hearing.
(c)Finally, I accept that the nature of the claims, and the quantum in dispute, weigh in favour of alternative dispute resolution by way of adjudication under the Construction Contracts Act 2002 or private arbitration.
[47] There is nothing in the overall balance that would weigh in favour of a freezing order. If anything, these factors provide further reasons why an order should not be granted in this case.
[48] In the absence of evidence to show a good arguable case, and a real risk of a dissipation of the kind captured by the freezing order jurisdiction, I am not satisfied that a freezing order should be granted. With the benefit of additional evidence, it is clear that the original order must be discharged.
Result
[49] The application for a freezing order is dismissed and the freezing order is discharged accordingly.
[50] Fuzo is entitled to costs. I am presently minded to award costs on a 2B basis with no allowance for second counsel. If counsel cannot agree on quantum then any application for costs may be made by memorandum of counsel filed within 15 working days of receipt of this judgment, with a memorandum in reply filed five working days in response.
Edwards J
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