Dempsey Wood Civil Limited v Gapes
[2021] NZHC 2933
•1 November 2021
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2016-404-1839
[2021] NZHC 2933
UNDER the Companies Act 1993 and the Fair Trading Act 1986 BETWEEN
DEMPSEY WOOD CIVIL LIMITED
Plaintiff
AND
ANTHONY JOHN GAPES
Defendant
Hearing: On the papers Appearances:
E St John and SP Maloney for the Plaintiff JWA Johnson and WL Porter for the Defendant
Judgment:
1 November 2021
JUDGMENT (NO. 2) OF FITZGERALD J
[As to payment of awards and interest)
This judgment was delivered by me on 1 November 2021 at 4.00pm, pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar Date…………………..
Solicitors:Wynn Williams, Auckland Alan Jones Law Ltd, Auckland
To:E St John, Auckland S Maloney
Introduction and background
[1] In my substantive judgment delivered on 10 September 2021, I determined Dempsey Wood’s claims against Mr Gapes.1 I concluded that Mr Gapes had breached his director’s duties to Panama Road Developments Limited (PRDL), namely those arising pursuant to ss 135 and 136 of the Companies Act 1993 (the Act). I also held that an email Mr Gapes sent to Dempsey Wood on 12 November 2021 was in breach of s 9 of the Fair Trading Act 1986 (the FTA).
[2] The detailed background to Dempsey Wood’s claims is fully set out in my substantive judgment and is not repeated here.
[3] In terms of relief, I concluded that the breach date for the ss 135 and 136 claims was considerably later than that advanced on behalf of Dempsey Wood, and that for the purposes of s 301 of the Act, Mr Gapes should be required to contribute only a proportion of the loss resulting from the breaches, namely $100,000.2 I will refer to this amount as the “Companies Act award”. On the FTA claim, I ordered that Mr Gapes pay Dempsey Wood approximately $286,000 plus interest, which I will refer to as “the FTA award”.
[4] At the conclusion of my substantive judgment, I sought further submissions from the parties on three matters:3
(a)first, whether the Companies Act award ought to be paid to PRDL or to Dempsey Wood;
(b)second, how the Companies Act award interacted with the FTA award, and in particular, if the Companies Act award was paid to Dempsey Wood, whether this would result in “double recovery” by Dempsey Wood; and
1 Dempsey Wood Civil Ltd v Gapes [2021] NZHC 2362. Terms defined in that judgment are adopted in this judgment also.
2 Dempsey Wood had sought a contribution by Mr Gapes of some $1.4 million, plus the costs and disbursements of PRDL’s liquidation.
3 Substantive judgment, above n 1, at [236].
(c)third, interest on the awards.
[5] The parties have since filed further submissions on these matters (and reply submissions).
Should the Companies Act award be paid to PRDL or to Dempsey Wood?
[6] This issue raises the interesting question, not yet the subject of appellate authority in this jurisdiction, of whether an award pursuant to s 301 of the Act, made in response to a finding that a director has breached his or her statutory duty to the company, can be paid directly to a creditor which has brought the proceeding.
[7]By way of background, s 301 of the Act relevantly provides as follows:
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.
[8] Section 301(1)(c) would, at first blush at least, appear to permit the court to direct that an award pursuant to s 301 be paid to the creditor which brings the claim for relief pursuant to s 301. However, in Mitchell v Hesketh, Master Venning (as he then was) held that s 301 awards could only be made in favour of creditors where a director has “misapplied, or retained, or become liable or accountable for, money or
property of the company ”.4 The same approach was recently adopted by Moore J in
Banks v Farmer.5
[9]There are, however, High Court decisions going the other way:
(a)In Sanders v Flay, Heath J made a s 301 award in favour of a creditor for breach of a director’s duty (though I note that the breach related to misappropriation by the director).6
(b)In DHC Assets Limited v Arnerich, Davison J held that “a creditor should be directly compensated when it has personally initiated proceedings against the errant director, in circumstances where the liquidator has elected not to.”7 That conclusion was not disturbed on appeal (or subject to adverse comment), though in circumstances where the Court considered that the issue of direct payment to a creditor did not need to be resolved in that case, given:8
(i)the liquidator was aware of the proceedings and advised the Court that she abided the Court’s decision;
(ii)the point did not appear to have been specifically taken on appeal, and there was no argument in the High Court about the appropriateness of a direct payment to the creditor; and
(iii)there was no practical significance in any event, given the creditor concerned was the only remaining creditor in the liquidation.
[10] In Madsen-Ries v Cooper (Debut Homes), the Supreme Court left the question of when an award pursuant to s 301 can be made to direct to a creditor for decision in
4 Mitchell v Hesketh (1988) 8 NZCLC 261,559 (HC).
5 Banks v Farmer [2021] NZHC 1922. Counsel advise that this decision is subject to appeal, including on this issue.
6 Sanders v Flay (2005) 9 NZCLCL 262,906 (HC).
7 DHC Assets Ltd v Arnerich [2019] NZHC 1695 at [347].
8 Arnerich v DHC Assets Ltd [2021] NZCA 225 at [142].
a case in which that issue directly arose.9 The Court of Appeal in Mainzeal recently took a similar approach.10
[11] In my substantive judgment, I expressed a preliminary view that payment of the Companies Act award directly to Dempsey Wood might be appropriate in this case given:11
(a)Dempsey Wood’s pleading effectively limited the claimed losses to those incurred by Dempsey Wood, rather than PRDL or PRDL’s creditors generally.
(b)Dempsey Wood had brought the proceeding at its own expense.
(c)Despite the passage of time since PRDL’s liquidation, the liquidators had not taken any steps.
(d)If the award were paid to PRDL, it would presumably be allocated to secured creditors with no distribution to Dempsey Wood or other unsecured creditors.
(e)Conversely, payment to Dempsey Wood would be compensatory in nature, and the basis for the award would “match” the stakeholder to benefit from the award.
(f)Finally, and given the Companies Act award was based on the “new debt” approach, the unpaid obligations to unsecured creditors which were incurred after the breach date were largely limited to Dempsey Wood in any event.
[12]As noted, I sought further submissions from the parties on this issue.
9 Madsen-Ries v Cooper [2020] NZSC 100, (2020) 29 NZTC 24-088 at nn 179 and 191.
10 Yan v Mainzeal Property and Construction Limited (in liq) [2021] NZCA 99 at [255(d)] and [309].
11 Substantive judgment, above n 1, at [235].
[13] In the event, it has not proved necessary to reach a concluded view on whether the Companies Act award can and ought to be paid to Dempsey Wood rather than to PRDL. This is because:
(a)first, Dempsey Wood’s pleading sought payment of the award to PRDL rather than to Dempsey Wood itself;
(b)second, Dempsey Wood has subsequently canvassed PRDL’s liquidator’s views, and advises that his view is that the Companies Act award ought to be paid to PRDL; and
(c)third and perhaps determinatively, Dempsey Wood has confirmed in its supplementary submissions that it does not seek an order that the Companies Act award be paid directly to it; rather, it submits it ought to be paid to PRDL.
[14] Mr Gapes abides the Court’s decision on this point. Accordingly, it is not necessary (or appropriate) to embark on a detailed analysis and determination of the issue, particularly where this would be without the benefit of full argument by the parties on the competing approaches.
[15] I accordingly make an order that Companies Act award made at [263(g)] of my substantive judgment is paid by Mr Gapes to PRDL.
Is there double recovery?
[16] One might assume that the issue of double recovery falls away given the Companies Act award is not to be paid to Dempsey Wood. But Mr Gapes nevertheless submits that because both the s 136 claim and the FTA claim effectively respond to the same wrong:
…. to allow Dempsey Wood to claim both remedies would lead to the prospect of double recovery and would serve as a double punishment for Mr Gapes. This would be a perverse and unjust outcome.
[17] Counsel for Mr Gapes submit that s 136 of the Act is essentially a statutory duty for directors not to mislead prospective creditors about the financial position of the company, referring to commentary on s 136 by Professor Watson and Associate Professor Noonan to this effect.12 On the other hand, counsel for Dempsey Wood submit that commentary by Professor Watts, writing in Heath and Whale on Insolvency following the Supreme Court’s decision in Debut Homes, casts doubt on the comparison between the duties owed pursuant to ss 135 and 136 of the Act and the prohibition against misleading and deceptive conduct under the FTA.13 Counsel for Dempsey Wood further submit that ss 135 and 136 do not require misleading or deceptive conduct and target a broader range of conduct, such as the negligent or reckless incurring of debts in circumstances of insolvency or near insolvency.
[18] To the extent that Dempsey Wood does not secure any financial benefit from the payment of the Companies Act award to PRDL (see further below, at [21]), there will not be “double recovery” by Dempsey Wood.
[19] I also do not consider that payment by Mr Gapes of the two awards would amount to “a double punishment” requiring an election by Dempsey Wood.14 I say this because:
(a)The Companies Act award responds to a breach by Mr Gapes not only of s 136, but also s 135.
(b)The breach of ss 135 and/or 136 of the Act is of a duty owed to PRDL and not to Dempsey Wood (as is the case in the FTA award). It just so happens that Dempsey Wood brought the ss 135 and 136 claims, rather than PRDL’s liquidator.
12 Chris Noonan and Susan Watson “Rethinking the misunderstood and much maligned remedies for reckless and insolvent trading” (2004) 21 NZULR 26 at 48.
13 Paul Heath and Mike J Whale (eds) Heath and Whale on Insolvency (online ed, Lexis Nexis) at [32.2.1] and fn 1. I note that this aspect of the commentary does not expressly discuss any suggested comparison between the two types of claim.
14 I note that the suggestion that Dempsey Wood would need to make an election between the two causes of action was first raised by Mr Gapes in his supplementary submissions.
(c)The fact the breach date for the Companies Act award is only one day later than the date for the FTA award is simply coincidence. The breach date for the Companies Act award arose given the timing of Webber Capital’s further proposal to purchase the Development, and my view that Mr Gapes ought to have had some time to consider that proposal (and possible counter-proposals), including with Koi.15
(d)The wrong to which the breach of s 136 responds is Mr Gapes permitting PRDL to continue to trade when he did not have reasonable grounds to believe it would be able to meet its debts when due. That may or may not involve a director making “representations” to creditors (unless permitting a company to trade generally is viewed as a representation by conduct). In contrast, Dempsey Wood’s FTA claim was focused on a particular representation made by Mr Gapes to Dempsey Wood in an email about the continued availability of funds in the Project Account.
(e)Section 135 of the Act concerns the carrying on the business of a company in a manner which is likely to expose creditors to a substantial risk of serious loss (or “culpably exacerbating a company’s insolvency”16). Again, that is a different and broader “wrong” than a specific misrepresentation made to Dempsey Wood for the purposes of the FTA claim.
[20] Given the different “wrongs” to which ss 135 and 136 on the one hand, and s 9 of the FTA on the other, are directed, I therefore do not consider an issue of “double punishment” arises.
[21] I am of the view, however, that should Dempsey Wood benefit financially from the Companies Act award to be paid to PRDL, this should be off-set against the FTA award to be paid to it. This is because while the underlying wrong to which each claim is directed is different, the particular manner in which Dempsey Wood’s pleading was
15 Substantive judgment, above n 1, at [227] and fn 76.
16 Heath and Whale on Insolvency, above n 13, at [32.3.1].
framed means that both the Companies Act and FTA awards respond to Dempsey Wood’s unpaid costs/invoices (as the case may be) after 12/13 November 2015 respectively. Accordingly, while the FTA award is to be paid to Dempsey Wood to compensate it for its unpaid costs over the relevant period, and the Companies Act award is to be paid to PRDL to provide restitution for the “deemed harm” caused by Mr Gapes’ breach of duties to it,17 if Dempsey Wood were to receive some or all of the Companies Act award, this would necessarily operate to reduce the amount of costs it incurred after 13 November 2015 but for which it was not paid.18
[22] I had proceeded on the assumption that if the Companies Act award were to be paid to PRDL, there would be no prospect of double recovery by Dempsey Wood. This is because the evidence suggests that more than $2 million remains owing to Koi (as secured creditor under the Koi Facility). However, counsel for Mr Gapes note in their supplementary submissions that it appears Koi may have since discharged its security.19 Counsel submit that in those circumstances, Dempsey Wood would be entitled to priority in respect of the proceeds of a claim.20
[23] I do not need to seek further information on whether Koi retains its security over PRDL’s assts. Nor do I need to express any view on whether if it does not, Dempsey Wood would be entitled to priority in respect of the proceeds of a claim. Rather, in light of the parties’ further submissions, it is appropriate and sufficient to make an order that the FTA award at [263(i)] of my substantive judgment is to be reduced by any amount received by Dempsey Wood as a result of Mr Gapes’ payment of the Companies Act award to PRDL.
17 Mainzeal, above n 10, at [295].
18 Dempsey Wood’s overall losses are of course greater (being the remaining balance of its unpaid November 2015 invoice and the EOT claim). But any receipt by it of the Companies Act award ought not to be “allocated” to those losses, as I held that Mr Gapes was not in breach of his director’s duties when they were incurred.
19 A search of the Personal Property Securities Register shows that Koi is no longer registered as having security over PRDL’s assets.
20 Companies Act 1993 sch 7 cl (1)(e).
Interest
[24] The parties agree that interest on the FTA award to the date of my substantive judgment is $52,858.20.21
[25]I make an order accordingly.
[26] Dempsey Wood submits that interest on the s 301 award should also be calculated using the Civil Debt Interest Calculator, with a start date of the breach date, being 13 November 2015. Mr Gapes does not object to this suggestion in his reply submissions, other than interest should accrue from the date of liquidation (being a commonly adopted approach in similar cases).22 I agree. I make an order accordingly, with interest to accrue from the date of liquidation, being 6 April 2016.
[27]Costs of the proceedings will be determined by a separate judgment.
Fitzgerald J
21 Using the Civil Debt Interest Calculator established by the Interest on Money Claims Act 2016.
22 Referring to Alala International Ltd (in liq) v Chen [2020] NZHC 2212, [2021] NZCCLR 6 at [82(c)]; Global Cover Insurances Ltd (in liq) v Mario [2020] NZHC 1556 at [45(b)]; Esko Group Ltd v Eskdale [2019] NZHC 1664, [202] NZCCLR 4 at [32]; Chris de Ruyter Painting Ltd (in liq) v de Ruyter [2017] NZHC 1810 at [38] and [46]; O’Neill Earthworks Ltd (in liq) v O’Neill [2017] NZHC 989 at [67(b)]; Willburn Furniture and Restorations Ltd (in liq) v Gledhill [2016] NZHC 331 at [80]; Mizeen Painters Ltd (in liq) v Tapusoa [2015] NZHC 826, [2016] NZAR 423 at [68(b)]; and Madesen-Ries v Candy [2015] NZHC 1229 at [22].
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