Dalton v Mico Development Limited
[2022] NZHC 1913
•4 August 2022
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2021-404-2139
[2022] NZHC 1913
UNDER the Companies Act 1993 IN THE MATTER
of an application for Orders under section 295 of the Companies Act 1993
AND
IN THE MATTER
of the liquidation of Acium Construction Limited (in liquidation)
BETWEEN
SIMON DALTON AND MATTHEW PETER KEMP
Applicants
AND
MICO DEVELOPMENT LIMITED
Respondent
Hearing: 13 July 2022 Appearances:
P C Murray for Applicants (by AVL) A Davison for Respondent (by AVL)
Judgment:
4 August 2022
JUDGMENT OF ASSOCIATE JUDGE LESTER
(Voidable Transactions)
DALTON AND KEMP v MICO DEVELOPMENT LIMITED [2022] NZHC 1913 [4 August 2022]
Introduction
[1] The applicants are the liquidators of Acium Construction Limited (in liquidation) (Acium).
[2] The applicants seek an order that the respondent, Mico Development Limited (Mico), pay to Acium $1,348,666.27 (the sum). The sum is made up of several deductions made by Mico pursuant to a construction contract with Acium under which Acium was to build an apartment complex in Queenstown. The sum was subject to a voidable transaction notice served by the liquidators on Mico on 15 November 2021. Mico, if it was to object to the voidable transaction notice, had to do so by 13 December 2021. No objection was made.
[3] Accordingly, the liquidators say that the deductions, subject to the voidable transaction notice, were automatically set aside under s 294(3) of the Companies Act 1993 (the Act). This application is pursuant to s 295 of the Act.
[4] Mico opposes the application on the grounds the deductions detailed in the notice to set aside voidable transactions were not “transactions” by Acium under s 292(3) of the Act. No other challenge is made save that Mico relies on the good faith defence under s 296(3) of the Act.
[5] It is common ground that unless the deductions are transactions under s 292(3) they cannot be subject to the voidable transaction regime, albeit Acium may have other avenues of recovery.
Background
[6] The contract under which Acium agreed to build the apartment complex for Mico was a fixed price contract — the contract sum being $10,482,306.12 plus GST. The contract was under NZS3910:2013 with a number of modifications. Mico had pre-sold apartments in the project with a sunset clause in respect of those sales of 10 December 2020.
[7] For various reasons, the construction project did not run smoothly. COVID lockdowns intervened. Acium considered there were variations to the contract which Mico had either without justification failed to accept or ignored. Mico considered there were works included in the contract that were disputed by Acium. Acium declined to complete the disputed areas of work. As a result, Mico concluded Acium was in breach of contract and made deductions in respect of the passive fire protection works and an aspect of the cladding. As will be detailed below, deductions for these “descoped” items are included in the sum.
[8] Further, due to cashflow issues at Acium, Mico and Acium agreed Mico would pay some suppliers and sub-contractors direct. This is a separate category of deductions made by Mico included in the sum.
[9] The third category of deduction was in respect of the final payment claim lodged by Acium before its liquidation and arose from Mico’s concerns about the defects liability period and whether retentions would be sufficient to cover defects.
The deductions in more detail
[10] Mr McConnell, the director of Acium, describes the process by which Acium tendered a monthly payment claim to Mico’s Quantity Surveyor (QS). Following liaison with Mico’s QS, Acium would finalise and submit its payment claim which would be approved by the QS.
[11] The QS then issued a provisional payment schedule and Mico had an opportunity to make amendments or deductions. Once Mico advised the QS of amendments or deductions called “Principal Deductions”, the payment schedule was updated to include those changes sent to Acium and payment was then made. The amount for payment as approved by the QS was reduced by the amount of the Principal Deductions, that is, the amounts claimed by Mico.
[12] Mr McConnell describes that towards the end of the project, Mico started making Principal Deductions of amounts it was claiming from Acium. They are the transactions which are the subject of this application.
[13] Mico’s position is that it was contractually entitled to make the deductions. The timing of the deductions and their nature and quantum is as follows.
[14] To put the following timing in context, practical completion was achieved the day before the sunset clause applied, that is, on 9 December 2020. Acium was placed in liquidation by its shareholders on 9 February 2021. Accordingly, the six month restricted period under s 292(4C)(a) of the Act commenced on 10 August 2020. The effect of the restricted period is that Acium is presumed to be unable to pay its debts in that period unless Mico establishes otherwise.
First deduction – Payment Claim No. 13
[15] Acium made a payment claim under the Construction Contracts Act 2002 (CC Act) for the period 1 October 2020 to 31 October 2020.
[16] The engineer’s provisional payment schedule in response to that payment claim has a line item “Principal Deduction (DART invoices as per Principal Deduction)” and the deduction was $67,851.36.
[17] The payment schedule has a note that the payment schedule was a replacement progress payment schedule following advice from Mico invoking the Principal’s right under cl 12.2.4 of the Conditions of Contract to make deduction. Under that clause:
… the Principal may notify the Engineer in writing (with a copy to the Contractor) of any amendments or deduction that the Principal intends to make from the sum certified by the Engineer. Such notice shall show the reasons for the amendments or deductions and the manner in which they have been calculated.
[18] I note here that while the payment schedules do not refer to special condition 12.14, that clause provides:
Set off
The Principal shall be entitled to set off against any sums that would otherwise be due to the Contractor, whether certified by the Engineer or otherwise, amounts in respect of any claims against the Contractor, including damages for breach of contract by the Contractor or liquidated damages.
[19] The payment schedule listed the DART Engineering (DART) invoices making up the deduction. DART was a sub-contractor to Acium on the project, but with Acium’s agreement, Mico paid DART direct. There is an email from Mico to Acium recording Mico had received invoices from DART re-addressed to it. That email recorded DART would not return to site until they are paid. The email sought confirmation that Acium could not pay those invoices with Acium’s response being “Correct. Cashflow [was] affected by outstanding variations.” Acium was asked by Mico in the email if it agreed with the invoiced amount, which they did, and whether “Acium [were] fine for Mico to pay these and deduct the amount from [the] next payment claim”. Acium responded that it agreed.
Second deduction – Payment Claim No. 14 issued 30 November 2020
[20] The second deduction was made in respect of the payment claim covering the period 1 November 2020 to 30 November 2020.
[21] The payment schedule issued on 15 December 2020 is entitled “engineer replacement payment schedule of amount due to contractor”. While that payment schedule is labelled “Payment Schedule 13”, it is common ground that is an error. The previous payment schedule referred to was No. 13. The payment schedule for the November 2020 works is No. 14.
[22] The Principal Deduction made in respect of that claim was $1,003,600.19. The engineer’s note in respect of payment schedule No. 14 records “[t]he Principal has provided the attached documents outlining the calculation and reasons for the [Principal’s Deductions] in accordance with [cl] 12.2.5(c)”. Clause 12.2.5(c) requires the payment schedule to contain the reasons for and the manner in which a deduction has been calculated. The Principal Deduction is said to be made pursuant to cl 12.2.4 already referred to. The components of this Principal Deduction are as follows:
Passive Fire................ $355,248.13
Balustrade ………… $ 32,188.72 Direct Paid Invoices...................... $403,873.70
Site Power ………… $ 6,786.13 Cladding................................... $205,503.51
[23]The above components make up the Principal Deduction of $1,003,600.19.
[24] The note in respect of the passive fire protection works claim gives the Principal Deduction reason as:
Descoped as per DCF’s letter dated 6/07/2020 due to contract breach outlined in Anderson Lloyd letter dated 14/072020.
[25] The 6 July 2020 letter is from the engineer to Acium. It advises, pursuant to cl 9.1.1 of the contract, the passive fire protection works are removed from Acium’s contract by way of variation. That is, the work Mico claimed was covered by the contract then “descoped” from the contract. The letter records the Principal, or at least the Principal’s parent company, was directly engaging separate contractors to undertake the passive fire protection works “to mitigate any further programme delays” arising from Acium’s refusal to complete these works. The letter recorded Acium considered the works were a variation to the contract but that the engineer did not accept that in terms of the contract. The letter advised: “[t]he costs associated with this variation will be deducted from Acium’s Contract Sum as provided for under cl 9.1.5”.
[26] I note here that in the payment schedules on which the Contract Sum is detailed, that sum is not amended as foreshadowed by the engineer in his 6 July 2020 letter.
[27] I also note here that Payment Schedule No. 14 was accompanied by the invoices from the independent contractor that completed the passive fire protection works. There are two invoices from that contractor dated 25 June 2020 and an invoice dated 26 June 2020 – those three invoices total approximately $180,000 excluding GST. Further invoices are dated 23 July 2020 for approximately $60,000 plus GST, August 2020 for approximately $40,000 plus GST, September 2020 for approximately
$36,000 plus GST and October 2020 for approximately $55,000 plus GST.
[28] With there being three invoices issued at the end of June 2020, it is clear that the independent contractor must have been engaged sometime prior to the engineer’s letter of 6 July 2020, already referred to.
[29] Why Principal Deductions were not made before December 2020 when invoices from the independent contractor started coming through in June 2020 is not explained.
[30] There is the further point made by Ms Davison, counsel for the liquidators, that in reality the amounts claimed in respect of this deduction are in the nature of damages rather than a variation to the contract price. It is clear that Mico approached the issue of the passive fire protection works variation as if Acium had been in breach — such is made express by Mico as noted at [24] above. The Contract Sum adjustment had nothing to do with the price quoted or allowed by Acium. Rather, the amount deducted was the cost of getting a third party in to do the work. This appears to be a claim for damages based on the cost of the independent contractors rather than a QS exercise to work out how the Contract Sum should be adjusted. In any event, Acium denied the passive fire protection works was included in the contract works. The liquidator has requested the engineer review this deduction under the contract but he has refused to do so on the basis he has a fee dispute with Mico.
[31] The next deduction, the steel balustrade, is another descoping exercise; this being pursuant to a separate letter of the engineer dated 6 July 2020, with it again being said that the “variation will be deducted from Acium’s Contract Sum”.
[32] In August 2020, Mico’s solicitors wrote to Acium’s solicitors claiming that Mico had to engage with the balustrade sub-contractor because that sub-contractor was not comfortable entering a contract with Acium. Mico’s solicitors suggested that this was done to mitigate a prior breach of contract by Acium. While this work was said to be removed from the contract in July 2020, a quote from the company engaged to provide the balustrade is dated 1 November 2020. The quote is for $32,188.72 which is the amount of the deduction. Again, this deduction is in the nature of damages arising from Mico asserting Acium had breached the contract.
[33]The next deduction in Payment Schedule No. 14 is “Direct Paid Invoices” of
$403,873.70. I will not deal with this category in detail as Mr Murray, counsel for Mico, provided a Schedule to his submissions breaking down the direct payments to sub-contractors and identifying payments Mico accepts were made pursuant to an
agreement with Acium. While Ms Davison submitted all payments to suppliers or sub-contractors by Mico were paid with Acium’s consent, there is no evidence to that effect.
[34] The next deduction is $6,786.13 for site power paid by Mico. I will deal with this as part of the previous category.
[35] The next deduction made by Mico in Payment Schedule No. 14 relates to the cladding issue. This is a deduction of $205,503.51.
[36] The dispute concerned what was included in the cladding specification. Mico’s position is, it was “Descoped as per DCF’s letter of 26 June 2020 due to contract breach outlined in email dated 3 July 2021”. Accordingly, this is another alleged breach very similar to the descoping of the passive fire protection works.
[37] I note, of the $205,503.51 deducted in December 2020, just over $160,000 in invoices from third party suppliers had been received by Mico by July 2020. Again, there is no explanation for the delay by Mico in seeking to recover these amounts.
[38] The engineer’s letter of 26 June 2020 refers to the cladding works to be removed from the contract by way of variation.
Third deduction – Payment Claim No. 15 – issued 7 January 2021 (incorrectly labelled No. 16)
[39] The third payment claim covers the period 1 December 2020 to 31 December 2020.
[40]The Principal Deductions made in respect of this claim are a further
$277,214.72 made up of five supplier or sub-contractor invoices Mico paid direct, a deduction of $122,322 described as: “[e]stimated value of defects outstanding beyond contracts defects liability period retentions – see attached schedule”. There is a further $100,000 with the narration: “RWD defects increased due to defects being continually advised by purchasers”.
[41] Under the contract, the defects liability period for the contract works was six months.
[42] Accordingly, the deductions subject to this proceeding fall into three categories albeit spread across three payment schedules. The largest are payments made by Mico to sub-contractors and suppliers directly. The second largest are the descoping claims, that is, the passive fire protection works and cladding issues along with the claim for balustrades in Payment Claim No. 14. Finally, the so-called defects liability deductions.
What are Principal Deductions under the contract?
[43] When the engineer includes a Principal’s Deduction in a payment schedule, the engineer is not thereby ruling that the deduction is approved or confirmed. This is because cl 12.2.7 of NZS3910:2013 provides:
When including in a Progress Payment Schedule any amendments and deductions requi5red by the Principal, the Engineer shall be acting only as the agent of the Principal under 6.2.1(a) and not under 6.2.1(b).
[44]Clause 6.2.1(a), referred to above, provides:
(a)As expert adviser to and representative of the Principal, giving directions to the Contractor on behalf of the Principal, and acting as agent of the Principal in receiving payment claims and providing Payment Schedules on behalf of the Principal; and
[45] Valuation of variations is dealt with by s 9.3 of NZS3910:2013. No amendments to s 9.3 were made by the parties and the process set out in s 9.3 under which the engineer arrives at a variation value was not carried out.
[46] I conclude the inclusion of a Principal’s Deduction in a payment schedule is not an adjustment to the contract price by the engineer. Such would require the completion of the process under s 9.3 of the agreement and would require the engineer to act under cl 6.2(1)(b), that is, independently of either party and to fairly and impartially make the decisions entrusted to him/her under the contract.
[47] Accordingly, while the descoped items were said by the engineer to be variations, the engineer did not value them as required by s 9.3 of the contract. The amount claimed by Mico for the descoped items was just that, a claim for a deduction for what it considered a breach of contract by Acium rather than a determination by the engineer resulting in a reduction of the contract price.
Legal issues
[48]Section 292(3) of the Act provides:
(3)In this section, ‘transaction’ means any of the following steps by the company:
(a)conveying or transferring the company’s property:
(b)creating a charge over the company’s property:
(c)incurring an obligation:
(d)undergoing an execution process:
(e)paying money (including paying money in accordance with a judgment or an order of a court):
(f)anything done or omitted to be done for the purpose of entering into the transaction or giving effect to it.
[49] Unless the amount the liquidators seek to recover is a transaction within the above definition, it will not be an amount recoverable by way of the voidable transaction procedure. The defence primarily relies on this point, the argument being a deduction made by Mico is not a step by Acium. The argument is that a unilateral set-off is not a transaction by the company in liquidation. It is therefore necessary to consider the true character of the three different types of deductions in this case.
[50] While counsel referred to Mico’s deductions as “set-offs”, it is worthwhile being more specific in that regard. The recent Court of Appeal decision in Cummins v Body Corporate 172108, is helpful in defining when a set-off will extinguish a claim.1
1 Cummins v Body Corporate 172108 [2021] NZCA 145, [2021] 3 NZLR 17.
[51] Legal set-offs are limited to liquidated cross-claims, that is, for:2 “… sums capable of ascertainment without valuation or estimation”. Equitable set-off is not limited to liquidated cross-claims but includes unliquidated claims for damages.3 A legal set-off cannot be raised for an unliquidated or contingent claim.4
[52] In the summary judgment context, an equitable set-off is a defence to a summary judgment as if the claimed set-off is finally established at trial it extinguishes the plaintiff’s claim. A legal set-off, that is, where claims and cross-claims are either established by judgment or the cross-claims are acknowledged and accepted, extinguishes the respective claims.
[53] A set-off by express agreement of liquidated amounts has the same effect as a legal set-off in that both debts are treated as paid.5
[54] With those categories in mind, I now consider each of the categories of Principal Deductions made and whether they are susceptible to the voidable transaction regime.
Payments to suppliers by agreement
[55] Mr Murray’s Schedule of Payments made direct to sub-contractors records payments by agreement of $505,813.02. Included in this amount is $66,480 in invoices from DART between 11 November 2020 and 8 December 2020. Mr Murray’s Schedule does not record these as being expressly by agreement but the earliest of these invoices falls within the range of invoices subject to express agreement, that is, the date range 10 November 2020 to 19 November 2020. With Mico being careful to obtain agreement that it could deduct payments to DART direct from amounts due to Acium, there is no reason to suspect Mico would seek approval to deduct for some and not all payments being made at the same time.
2 Stein v Blake [1996] AC 243 at 251, cited in Cummins v Body Corporate 172108, above n 1, at [49].
3 Cummins v Body Corporate 172108, above n 1 at [48] and [50].
4 Cummins v Body Corporate 172108, above n 1 at [51].
5 Trans Otway Ltd v Shephard [2005] 3 NZLR 678 at [31].
[56] I see no reason why some of DART’s invoices would be paid by Mico with it being expressly agreed the payments would be deducted from Acium’s next payment claim, when others in the same date range were not.
[57] Ms Davison classified these as set-offs by agreement and therefore recognised by the Court of Appeal as “payments” for the purposes of s 292(3)(e) of the Act.6 These set-offs were for liquidated amounts being the amount paid by Mico to sub-contractors.
[58] Mr Murray was driven to accept that where there was agreement a supplier or sub-contractor would be paid direct and Mico could deduct that sum from amounts due to Acium from Mico, such was an agreed set-off and therefore a transaction for the purposes of s 292 of the Act. So much follows from applying Trans Otway Ltd v Shephard.
[59] In Trans Otway there was express agreement a transaction would be settled including a set-off of debts owed by each party to the other.7 Acium was owed money by Mico under the payment claim, as the deduction made by Mico was from the amount the engineer determined was payable by Mico in the Payment Schedule before Mico claimed its deduction. Mico said it was owed money by Acium for suppliers and sub-contractors to the project which it had paid. Both debts were quantified. Mico set-off its claim by way of Principal Deduction made by agreement from the amount it would otherwise have paid to Acium. As the Court of Appeal said in Trans Otway, this is a classic example of the setting-off of money claims against each other.8
[60] Accordingly, I conclude the agreed deductions made by Mico were transactions for the purposes of s 292 of the Act. As the Court of Appeal in Trans Otway put it, while no physical cash was exchanged and while there was not a cheque swap, payments were nonetheless made.9 The doctrine of set-off sees both debts paid. There is no material difference between the set-off agreement here and the one
6 Trans Otway Ltd v Shephard, above n 5.
7 Trans Otway Ltd v Shephard, above n 5.
8 At [24].
9 At [31].
in Trans Otway. The same outcome must follow. It will be necessary to consider the positive defence in respect of this aspect of the claim.
The descoping deductions
[61] Mr Davison submitted the descoping deductions were a unilateral set off by Mico. Mr Murray submitted the descoping deductions were a recognition that the overall price of the contract needed to be reduced as a result of works being removed from the contract.
[62] A unilateral set-off is described in Derham on the Law of set-off, in a passage quoted by the Court of Appeal in Trans Otway:10
… If a creditor is empowered by a prior agreement to act unilaterally to set off mutual money obligations as between it and the debtor, is the creditor’s act in effecting a set-off, in circumstances where the cross-demands otherwise would not have been set off in the bankruptcy, properly categorized as a payment ‘by’ the debtor so as to be voidable as a preference?
(footnotes omitted)
[63] The Court recorded the learned author’s opinion that the answer to that question is “no”.11 The set-off constitutes a payment but is not a payment “by” the debtor.
[64] In relation to the deductions made for the three descoped areas, all involve what Mico considered to be a breach by Acium. I do not consider the claims by Mico for descoped works to involve liquidated amounts. That is because their true character is in the nature of damages for the alleged breaches. The mechanism by which Mico responded to the alleged breaches was to have the works “Descoped”, that is, removed from the work to be undertaken by Acium under the contract and to have that work undertaken by third parties and to deduct the third party costs from the value of work approved for payment by the engineer. The amount deducted is not one “capable of ascertainment without valuation or estimation”. Nor, as I have explained above, was the contractual process for adjusting the value of the contract followed.
10 Rory Derham on the Law of set-off (4th ed, Oxford University Press, New York, 2010) at [16.10] cited in Trans Otway Ltd v Shephard, above n 5 at [33].
11 At [34].
[65] In my view, these descoped deductions were neither legal nor agreed set-offs. I understand the liquidators do not accept the validity of the deduction relating to the passive fire protections works safety issue. I do not know their position on the other descoped items. A Principal’s Deduction is nothing more than the Principal asserting a basis not to pay the full amount of the claim. At worst, the Principal’s position is a spurious attempt to avoid payment based on a meritless claim to have a set off. At best, the Principal’s claim of set off will be vindicated at trial or at arbitration. Clause 12.14 set out at [18] above, confirms the Principal’s ability to make the deduction but claiming a set-off/deduction which is not accepted or agreed by the creditor does not extinguish the creditor’s claim. The Principal asserting a basis for not paying a debt is not a payment, that is, a transaction by Acium under s 292(3) as the Principal’s claimed set-off is not an agreed set-off. It is simply the raising of a dispute as an excuse, justified or otherwise, not to pay. In my view, the liquidator is free to pursue a claim in debt in respect of any of the amounts that were deducted by Mico for descoped work.12
[66] Accordingly, I conclude that the deductions made by Mico in relation to the descoped works are not transactions by Acium. Acium does not accept it has a mutual money obligation as regards the descoped items. In substance, this is a disputed debt collection situation rather than one involving a voidable transaction.
Defects deduction
[67] There was no real attempt by Mico to identify a breach of contract justifying its retaining $222,322 against the sum the engineer had confirmed was payable. The purported justification for retaining $122,322 is “[e]stimated value of defects outstanding beyond contract defects liability period retentions”. The defects liability period was six months. The right of a contractor to rectify defects is a thing of value to the contractor.13
12 Cummins v Body Corporate 172108, above n 1, at [58]-[61].
13 Even without a defects liability period, the contractor should be given an opportunity to rectify a defect: see T & P Developments Ltd v Yu HC Auckland CP18-SD99, 11 April 2001, upheld on appeal Yu v T & P Developments Ltd [2003] 1 NZLR 363. See also Smeaton Construction Ltd v Garrett Pasquale Ltd [2012] NZHC 3079.
[68] This deduction assumes Acium would not rectify defects within the six month defect liability period. That says something about Mico’s expectations of Acium’s viability going forward. The claim of the round $100,000 sum for “RWG defects increase due to defects being continually advised by purchasers” appears, to put it bluntly, a straight “money grab” by Mico.
[69] On the material I have seen, neither deduction has any justification beyond a bare assertion of future breach of Acium’s obligations to rectify defects. Both amount to a refusal to pay the full amount approved by the engineer for payment in the Payment Schedule.
[70] The question is whether this unilateral failure/refusal to pay without contractual grounds or justification is a transaction by Acium.
[71] Mr Murray submitted the deduction is a set-off as Mico was deducting from the amount due to Acium an amount on account of loss suffered due to defects in the works. I cannot accept this submission when the defects liability period commencing with practical completion had months to run and there is no evidence of any refusal by Acium to rectify. On Mico’s analysis, it seems it apprehended there would be a breach by Acium to rectify defects and so considered it had a damages claim for that anticipated breach, albeit the time for performance had not concluded. It intended to exercise a set-off in order to be compensated for the damages it expected would be caused by that anticipated breach.
[72] The insolvent transaction regime is targeted at payments or, more broadly, transactions by the company in liquidation.
[73] I have come to the conclusion that Mico withholding monies otherwise due and payable to Acium is not a transaction by Acium for the purposes of the voidable transaction regime. Instead it was a refusal by Mico to pay a sum properly due to Acium, as it had been approved for payment by the engineer under the Payment Schedule. The deduction is based on a claim for damages which, as I have said, on the material I have seen, was of dubious merit. The attempt by Mico to raise what would, at best, be an equitable set-off is not the setting-off of mutually due debts.
[74] What the liquidators have sought to do through issuing a voidable transaction notice is, in effect, undertake a debt collecting exercise in relation to that part of the approved Payment Schedule that was subject to Mico’s Principal’s Deduction. Nothing in what Mico has done is a barrier to the liquidators seeking to recover an amount that Acium argues should not have been deducted.
The positive defence
[75]Mico relies on s 296(3) of the Act which provides:
…
(3) A court must not order the recovery of property of a company (or its equivalent value) by a liquidator, whether under this Act, any other enactment, or in law or in equity, if the person from whom recovery is sought (A) proves that when A received the property –
(a)A acted in good faith; and
(b)a reasonable person in A’s position would not have suspected, and A did not have reasonable grounds for suspecting, that the company was, or would become, insolvent; and
(c)A gave value for the property or altered A’s position in the reasonably held belief that the transfer of the property to A was valid and would not be set aside.
[76] Mr Murray, in his submissions, accepted that to satisfy the second limb of the above test, Mico must show that a reasonable person in its position would not have suspected and did not have reasonable grounds for suspecting Acium was or would become insolvent.14 The onus rests with Mico.
[77] In making its assessment, the Court will consider the commercial circumstances at the time, as the parties perceived them, rather than with hindsight.15
[78] There must be cause for a positive feeling, actual apprehension or mistrust of the solvency of the company.16 There is a distinction between knowledge of illiquidity and knowledge of insolvency.17
14 Levin v Timberworld Ltd [2013] NZHC 3180 at [62].
15 Morrison’s Company Law (online ed, Lexis Nexis) at [63.8].
16 Levin v Timberworld Ltd, above n 14 at [63].
17 Madsen-Ries v Donavan and Drainage Earthmoving Ltd [2016] NZCA 301 at [32].
[79] Mr Murray, while accepting that Mico had knowledge of Acium’s illiquidity or cashflow issues, says Mico did not have a reasonable basis for suspecting insolvency.
[80] I do not accept Mr Murray’s submission. Mr Murray refers to the payments made by Mico direct to suppliers and sub-contractors as simply indicating cashflow issues. Mr Murray submits that in the property development context, cashflow issues are more the norm than not. Had the only indication of insolvency been that Mico was making advance payments to smooth out cashflow issues then Mr Murray’s submission might have carried more weight.
[81] However, knowing that Acium was stretched in terms of cashflow, three further factors mean that a reasonable person would have suspected Acium would become insolvent. They are:
(i)Mico’s refusal to approve claimed variations;
(ii)the timing of the deductions for descoped items; and
(iii)what I have described as “the money grab” in relation to retentions.
[82] The reason advanced by Acium in mid-2020 for its cashflow difficulties is that there were a number of claimed variations made by Acium that had either not been accepted or ignored. Acium met the cost of these claimed variations from within the payments it had received, so the fact there were variations claimed of some $600,000 that had not been processed meant Acium was exposed on that issue. The issue of the unaddressed variations was such that Acium instructed its solicitor in November 2020 to formally raise the issue. Of course, this is in the context of Acium at the same time being unable to pay sub-contractors in a timely way. More than that, significant sub-contractors were refusing to do further work for Acium unless they had certainty of payment from Mico. This was not merely a smoothing out of cashflow issues. That third parties were refusing to do further work for Acium indicated that suppliers and sub-contractors had no confidence in Acium’s ability to pay. Accordingly, the broader industry saw that Acium was at risk of failing.
[83] In my view, the compelling factor is the timing of the Principal’s Deductions. As I have outlined above, the earliest point from which Mico could make Principal Deductions was June/July 2020 when Mico started to receive invoices from other contractors for the descoped work. Rather than make those deductions when the invoices were received, Mico accumulated them to claim them as a lump sum virtually at the end of the project. No good reason for accumulating and delaying these deductions was advanced. Again, this is the context of Mico knowing Acium was having cashflow difficulties.
[84] Of the deductions of $1,003,600.19 made by Mico from Payment Claim No. 14, $400,000 was for direct paid invoices so Acium knew that was coming. However, $600,000 of further deductions were also claimed, not as previously advised by the engineer to be dealt with under the variations part of the contract, but by way of a Principal Deduction of which it seems Acium was not given any prior knowledge.
[85] Clearly, by the time of the final Payment Claim, Mico had no confidence whatsoever that Acium would survive. Such is not surprising given the deductions it had made from the last Payment Claim. The commercial reality is that Mico retaining the $222,322 on the basis of its claim relating to the rectification of defects is only explicable by Mico believing Acium had no prospect of being able to honour its obligations during the defects liability period.
[86] In short, Mico knew Acium was struggling and suppliers/sub-contractors had reached their own conclusion that they were unwilling to deal with Acium. This was not Mico assisting with an advance payment to assist Acium through a temporary cashflow issue. Mico had to step in to keep key suppliers happy or they would not return to site.
[87] Further, Mico did not step in to assist in the payment of all unpaid suppliers and sub-contractors – it did so only in respect of those whose continued involvement was necessary for the completion of the project.
[88] Mico’s claims that it believed Acium’s cashflow and financial difficulties were temporary cannot be reconciled with Mico’s intention to deduct in excess of $600,000
for Principal Deductions at the conclusion of the project. Such a deduction could only compound Acium’s difficulties. How Mico could believe Acium was going to come right when Mico intended to make the deductions for descoped work at the end of the project is not explained. I say “intended” as Mico had been receiving invoices for the descoped work from third parties for some time and had not deducted them as they were received while knowing that the project was nearing completion. That can only mean it was holding the third party invoices for the end of the project. Nor is it consistent with Mico’s failure to deal with the $600,000 variations despite those being repeatedly raised. This is reinforced by the deduction to remedy defects that might arise in the future. Nothing in the circumstances would have led Mico to believe that Acium’s financial position was back on track.
[89] Mico was aware that Acium was a construction company for which a project of this size was a first. This was not a situation where there was reason to believe Acium had other assets behind it to act as a counter to the above concerns.18
[90] Mico’s concerns as to Acium’s ability to perform were long standing hence the descoping of the cladding for alleged delay and the other descoping items. Objectively, the circumstances mean at the time, the agreed deductions to suppliers and sub-contractors were made (such deductions being made from each Payment Claim) I find a reasonable person in Mico’s position had reasonable grounds for suspecting Acium was, or would become, insolvent.
[91]It follows the positive defence is dismissed.
Orders
[92] I order, pursuant to s 295(a) of the Companies Act 1993, that Mico Development Ltd pay to the applicants the sum of $505,813.02. That sum is to bear interest from the date of liquidation of Acium Construction Limited to the date of payment.
18 See Madson-Ries v Donovan Drainage and Earthmoving Ltd, above n 17.
Costs
[93] Mico is to pay the applicants’ costs on a 2B basis together with disbursements as fixed by the Registrar.
Associate Judge Lester
Solicitors:
Jackson Russell, Auckland (for the Applicants) Paterson Legal Limited, Auckland (Respondent)
Copy to counsel:
P Murray, Barrister, Auckland (for Respondent)
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