Dempsey Wood Civil Ltd v Gapes
[2021] NZHC 2362
•10 September 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 2362
UNDER the Companies Act 1993 and the Fair Trading Act 1986 BETWEEN
DEMPSEY WOOD CIVIL LIMITED
Plaintiff
AND
ANTHONY JOHN GAPES
Defendant
Hearing: 8 to 17 March 2021; further submissions 24 April 2021 Appearances:
E St John and SP Maloney for the Plaintiff JWA Johnson and WL Porter for the Defendant
Judgment:
10 September 2021
JUDGMENT OF FITZGERALD J
This judgment was delivered by me on 10 September 2021 at 12.00pm, 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, Auckland
DEMPSEY WOOD CIVIL LTD v GAPES [2021] NZHC 2362 [10 September 2021]
Introduction [1]
The pleaded claims [11]
Factual background [27]
Introduction and early events [27]
Crown is replaced by Koi [30]
The Development is in trouble [35]
The search for a new funder [44]
Cancelling the pre-sales [47]
The “hive down” structure [53]
Events leading up to 15 October 2015 [55] The Koi Facility expires/the Webber Capital transaction is executed [63] Webber Capital cancels its agreement [78]
Dempsey Wood remains concerned about payment [83]
The lead-up to receivership [92]Koi appoints receivers[96]
Later events [104]
The experts’ evidence [112]
Mr Shephard’s evidence [113]
Mr Hoole’s evidence [123]
Mr Vance’s evidence [130]
Overall assessment of the expert evidence [142]
Section 135 of the Act [147]
Legal principles [147]
Analysis [157]
Section 136 of the Act [182]
Legal principles [182]
Analysis [200]
Section 131 of the Act [206]
Legal principles [206]
Analysis [210]
Section 301 of the Act [217]
Legal principles [217]
Analysis [225]
FTA claim [239]
Legal principles [239]
Analysis [244]
Result and next steps [263]
Introduction
[1] Mr Gapes is an Auckland based property developer. He is the sole director and a majority shareholder of the property development company Redwood Group Ltd (Redwood). Mr Gapes was also the sole director of a related company named Panama Road Development Ltd (PRDL). PRDL was incorporated as a special purpose company to carry out the development which is the subject of these proceedings.
[2] The development, which commenced in 2013, was located in Mt Wellington and branded the “Springpark development” (the Development). The Development was initially funded by Crown Financial Limited (Crown). Crown put PRDL into receivership early on in the life of the Development, though Crown’s funding was fairly quickly replaced with a $30 million development facility provided by Koi Structured Credit Pty Ltd (Koi), a Singapore based lender (the Koi Facility).
[3] By the end of November 2013, PRDL had secured agreements for sale and purchase of the completed lots within the Development “off the plan”, with a total value of approximately $60 million (the pre-sales). The pre-sales contained “sunset” clauses, which provided for their termination in certain circumstances if titles had not issued by 20 December 2015 (the Sunset Date).
[4] Physical works on the Development commenced in late September 2014. The plaintiff, Dempsey Wood, was contracted by PRDL to carry out the civil works. By mid-2015, however, the Development had run into serious trouble. There were significant cost overruns and associated delays. It was clear that the Development would not achieve practical completion and that titles would not issue by the Sunset Date.
[5] The Koi Facility expired on 15 October 2015. By that time, Mr Gapes and his advisers had been looking for an alternative funder for some months. Also on 15 October 2015, PRDL entered into a conditional agreement to refinance the Development with Webber Capital Ltd (Webber Capital). But that agreement was cancelled by Webber Capital a few weeks later, after carrying out due diligence. A key problem was that given the significant cost overruns and delays, the Development was no longer profitable so long as the pre-sales remained in place. Valuation advice
at the time suggested that the Development would yield an additional $20 million in revenue if the pre-sales could be cancelled and sold at (then) market prices (the market having shifted significantly since the pre-sales had been entered into). Funders were, however, evidently cautious about PRDL’s ability to unilaterally cancel the pre-sales, at least without associated cost and litigation risk.
[6] Koi was willing, for a time at least, to continue to permit drawdowns from the Facility while Mr Gapes continued to search for a new funder. That changed, however, in early December 2015 when Koi appointed receivers to PRDL. The receivers cancelled the pre-sales upon the passing of the Sunset Date, and sold the Development in March 2016 for $25 million. This resulted in a shortfall of some $2 million to Koi, as well as unsecured creditors being left unpaid in a total amount of around
$1.6 million. Approximately half of that related to Dempsey Wood’s last invoice on the Development (for works carried out in November 2015), plus its (approved) claim for an extension of time (EOT).
[7] Dempsey Wood sues Mr Gapes in his capacity as a director of PRDL, alleging that he breached a number of his director’s duties under the Companies Act 1993 (the Act), including reckless trading (s 135) and agreeing to PRDL incurring obligations when he did not have reasonable grounds to believe they could be met when due (s 136).1 Dempsey Wood seeks an order that Mr Gapes pay compensation pursuant to s 301 of the Act in an amount no less than the total outstanding unsecured creditors’ claims, plus the costs of the liquidation.
[8] Dempsey Wood also sues Mr Gapes pursuant to the Fair Trading Act 1986 (the FTA). Dempsey Wood says it was misled by Mr Gapes when in mid-November 2015, he gave it an assurance that there were sufficient funds remaining in the Koi Facility for Dempsey Wood to be paid for work carried out by it after that time.
[9] Mr Gapes denies that he breached his duties as a director, or that he misled Dempsey Wood in breach of the FTA.
1 Dempsey Wood also alleges Mr Gapes breached s 131 of the Act, namely his duty to act in the best interests of PRDL. A claim was also brought pursuant to s 137 of the Act (negligence), but was not pursued.
[10]The balance of this judgment is structured as follows:
(a)First, a summary of Dempsey Wood’s pleaded case (including my decision on a pleading matter raised on behalf of Mr Gapes).
(b)Second, a summary of the factual background. Given the highly contextual nature of many of the issues to be determined, it is necessary to traverse the factual background in some detail.
(c)Third, a summary of the expert evidence and my overall assessment of it.
(d)Finally, my assessment of each of Dempsey Wood’s claims.
The pleaded claims
[11] The Court of Appeal in Yan v Mainzeal Property and Construction Ltd (in liq) (Mainzeal) emphasised the importance of pleadings, and that claims are to be assessed according to the pleaded case.2 This is particularly relevant in this case, given aspects of Dempsey Wood’s case at trial expanded beyond its pleadings. Before summarising the pleaded claims, however, I note that Mr St John, Dempsey Wood’s counsel, confirmed that Dempsey Wood’s claim pursuant to s 137 of the Act could be disregarded. He also confirmed that Dempsey Wood’s FTA claim was its “primary claim”, with its claims pursuant to ss 135, 136 and 131 of the Act each being of “approximately equal merit.”
[12] As a preliminary point, Dempsey Wood’s pleading alleges that Mr Gapes formulated “a plan” to:
(a)avoid the pre-sales;
(b)allow PRDL to default on its obligations under the Koi Facility;
(c)liquidate PRDL; and
2 Yan v Mainzeal Property and Construction Ltd (in liq) [2021] NZCA 99 at [493]-[494].
(d)create a new entity to take over and rebrand the Development, and re- sell the lots for inflated prices in the (then) prevailing market.
[13] In response to a question from me during his opening submissions, Mr St John confirmed that the existence of such a “plan” was not necessary to Dempsey Wood’s claim, but bolstered it. I observe at this point that I do not consider any such “plan,” at least in the active sense, to be made out on the evidence. Rather, the significant cost overruns and delays meant the Development was not financially viable with the pre- sales remaining in place at their existing prices. As a result, it was necessary for the Development’s survival that they be cancelled, rather than this being an active “plan” pursued by Mr Gapes. Further, the evidence does not suggest there was an active “plan” to liquidate PRDL and create a new entity to take the Development to market; rather the sale of the Development to a third party was ultimately how a refinance of the Koi Facility was to be structured.
[14]Turning then to Dempsey Wood’s claims under the Act, it pleads the following:
(a)In relation to the alleged breach of s 135 of the Act:
(i)By pursuing his plan to cancel the pre-sales and liquidate PRDL, Mr Gapes caused and/or allowed PRDL’s business to be carried on in a manner likely to create a substantial risk of serious losses to PRDL’s creditors.
(ii)By instructing and/or allowing Dempsey Wood to continue with the civil works in September, October and November 2015, Mr Gapes agreed to the carrying on of the business of PRDL in a way likely to create a substantial risk of serious loss to PRDL’s creditors, as he knew that PRDL would not be able to meet its increased obligations to Dempsey Wood, and thus was in breach of s 135 of the Act.
(iii)As a result of Mr Gapes’ breach of s 135, Dempsey Wood suffered loss of $729,664, being its unpaid November 2015 invoice and its EOT claim.
(iv)That pursuant to s 301 of the Act, the Court ought to order Mr Gapes to contribute to the assets of PRDL a sum not less than the outstanding creditor claims in PRDL’s liquidation of approximately $1.4 million, plus the costs and disbursements of liquidation.
(b)In relation to the alleged breach of s 136 of the Act:
(i)When instructing and/or allowing Dempsey Wood to continue with the civil works in September, October and November 2015, Mr Gapes did not at the time have reasonable grounds to believe PRDL was or would be able to meet its increasing obligations under Dempsey Wood’s contract when required to do so. This is particularised on the basis that:
1. a reasonably prudent director would have realised PRDL was insolvent, or nearing insolvency, by September 2015; and
2. by September 2015 it was clear PRDL could not complete the Development as budgeted, meet the pre-sale Sunset Dates or meet its obligations under the Koi Facility, such that default and receivership were inevitable.
(ii)As a result of Mr Gapes’ breach of s 136, Dempsey Wood suffered loss of $729,664, being its unpaid November 2015 invoice and its EOT claim.
(iii)That pursuant to s 301 of the Act, the Court ought to order Mr Gapes to contribute to the assets of PRDL a sum not less than
the outstanding creditor claims in PRDL’s liquidation of approximately $1.4 million, plus the costs and disbursements of liquidation.
(c)In relation to the alleged breach of s 131 of the Act:
(i)By instructing and/or allowing Dempsey Wood to continue with the civil works where he knew PRDL was insolvent or nearing insolvency, Mr Gapes breached his duty to act in good faith and in the best interests of PRDL. This is particularised as follows:
1. From September 2015 (and possibly earlier) PRDL was insolvent, nearing insolvency, and/or of doubtful solvency.
2. Mr Gapes (in his capacity as director) was required to take into account the best interests of PRDL’s creditors during this period.
3. Mr Gapes failed to consider whether PRDL would be able to meet its increasing liabilities to Dempsey Wood as the civil works progressed through September to December 2015.
4. Mr Gapes ought to have known, or at least should have appreciated, that allowing Dempsey Wood to continue the civil works while PRDL was insolvent or nearing insolvency was likely to cause loss to Dempsey Wood.
(ii)By causing or allowing PRDL to default on its obligations under the pre-sales and Koi Facility such that it was put into receivership, Mr Gapes breached his duty to act in good faith and in the best interests of PRDL. This is particularised as follows:
1. Due to rising house prices, Mr Gapes formulated a plan to ensure the cancellation of the pre-sales and re-sell them at higher prevailing prices.
2. Mr Gapes allowed the Sunset Dates to pass and encouraged the pre-sale purchasers to cancel the agreements.
3. Mr Gapes knew that cancelling the pre-sales and return of the deposits would cause PRDL to default on its obligations and be unable to obtain further financing.
4. Mr Gapes wrongfully pursued this course of action with the objective of benefitting other entities (such as Redwood and the successor entity which would inherit the Development) and himself through his personal interest of those entities.
5. Mr Gapes’ actions caused receivers to be appointed over PRDL by Koi and caused approximately $1.4 million dollars of loss to PRDL’s creditors.
(iii)By prioritising the interests of his related companies in the Redwood group over the interests of PRDL and, by extension, its creditors when PRDL neared or entered insolvency, Mr Gapes breached his duty to act in good faith and in breach of the best interests of PRDL. This is particularised as follows:
1. Mr Gapes charged PRDL exorbitant management fees for services rendered by the “Redwood Group”, a group of companies and trusts in which Mr Gapes has a personal interest.
2. Mr Gapes prioritised the payment of the Redwood fees over the financial health of PRDL.
(iv)As a result of Mr Gapes’ breach of s 131, Dempsey Wood suffered loss of $729,664, being its unpaid November 2015 invoice and its EOT claim.
(v)That pursuant to s 301 of the Act, the Court ought to order Mr Gapes to contribute a sum not less than the outstanding creditor claims in PRDL’s liquidation of approximately $1.4 million, plus the costs and disbursements of liquidation, to the assets of PRDL.
[15] During the course of the hearing, and by the time of Dempsey Wood’s closing submissions, the pleaded claims summarised above had narrowed to a focus on insolvency, or near insolvency, as at 15 October 2015. Accordingly, while the pleadings suggest a possible “breach date” of some point in September 2015, I proceed on the basis of a suggested breach date of no later than 15 October 2015.
[16]Turning to the FTA cause of action, Dempsey Wood alleges the following:
(a)During September, October and November 2015, Mr Gapes made false and/or misleading representations to Dempsey Wood to the effect that PRDL would be able to meet its increasing obligations to it. Other than, however, the particularised matters set out below (the essence of which is alleged misrepresentation by omission), no particularisation of the alleged positive representations is given.
(b)Mr Gapes did not indicate at any of the regular site meetings held up to and including 2 December 2015, or in the parties’ ongoing correspondence, that “[PRDL] was in financial trouble and was unable to meet its current liabilities”.
(c)Mr Gapes “failure to disclose [PRDL]’s financial troubles, combined with his instructions to continue works, amounted to a representation that [PRDL] had the means to continue to pay for the works”.
(d)That on 12 November 2015, Mr Gapes emailed Dempsey Wood confirming the amount held in a dedicated project account, and that this “was earmarked for civils and consultants”, but that that advice was misleading because PRDL was in default under the Koi Facility and Mr Gapes knew that the money in the account “would soon be used by Koi to repay its secured debt”.
[17] Dempsey Wood pleads that it relied on these representations in agreeing to continue with the civil works. It alleges that as a result, it suffered loss in an amount of $729,664, again being its last, unpaid invoice, together with its approved EOT claim.
[18] For completeness, in his statement of defence to the FTA cause of action, Mr Gapes pleaded that “at all relevant times he was acting for or on behalf of [PRDL] and not in his personal capacity”. The capacity in which Mr Gapes made any representations was not, however, listed by Mr Gapes’ counsel as an issue for determination, or addressed in counsel’s (comprehensive) opening or closing submissions. I accordingly proceed on the basis that the point was not pursued on Mr Gapes’ behalf.
[19] Finally, an issue arose during the hearing in relation to the pleadings which it is convenient to address now. In his statement of defence, Mr Gapes pleaded that “at all material times he reasonably expected that [PRDL] would be able to meet its obligations by relying on the Koi Facility Agreement and/or through refinancing the Project”. Dempsey Wood did not reply to that pleading, on the basis of which Mr Gapes says this aspect of his pleading must be deemed as having been accepted.3
[20] In this context, Mr Johnson, counsel for Mr Gapes, submits that this pleading goes to both Mr Gapes’ subjective belief and also whether, objectively, he had reasonable grounds for that belief. He says that following discovery, it was open to Dempsey Wood to deny both Mr Gapes’ subjective and objective belief, including through putting Mr Gapes to proof on those matters. Mr Johnson acknowledges that while pleadings arguments are “unattractively technical”, the rules serve a purpose,
3 High Court Rules 2016, rr 5.62 and 5.63.
including shaping the evidence adduced to prove the pleaded allegations. Mr Johnson suggests that Mr Gapes could have adduced evidence from an independent expert on development finance but did not do so, and this ought not to prejudice Mr Gapes. Mr Johnson accordingly submits it is not open to the Court to find other than that Mr Gapes believed, on reasonable grounds, that he could continue to rely on the Koi Facility and/or refinance of that Facility.
[21]I do not accept the submissions made on Mr Gapes’ behalf.
[22] First, and as raised with Mr Johnson at the hearing, if the pleading point were valid, it would have been a “knock out” point on most if not all of the claims under the Act. On this basis, and after the close of pleadings date had passed, it would have been open to Mr Gapes to apply to strike out those causes of action. He did not do so, and instead the point was first raised in Mr Gapes’ opening submissions part way through the substantive trial.
[23] Second, no detail was provided about what additional expert evidence would have been called on this topic, and thus whether it would have passed the threshold of being substantially helpful to the Court.
[24] Third, counsel for Mr Gapes, in his opening submissions, listed as one of the issues to be determined on the pleaded claims as whether “at the relevant point in time, Mr Gapes subjectively believed, on reasonable grounds, that [PRDL] would be able to meet its obligations when they fell due”. Aspects of the expert evidence called by Mr Gapes was specifically tailored to the reasonableness of continuing to trade after 15 October 2015, as well as the reasonableness of continuing to incur liabilities after that date. That evidence was presumably advanced in recognition of the issues arising for determination (otherwise it would have been irrelevant). A substantial part of Mr Gapes’ evidence was also directed to this issue. It is accordingly difficult to conclude that Mr Gapes has been prejudiced, either at all or in any substantive way, by any pleading point.
[25] Finally, but perhaps most importantly, the purpose of pleadings is to define the issues for determination and to ensure parties are aware of the case they must meet. Dempsey Wood’s pleading expressly alleges in a number of places that in September, October and November 2015, Mr Gapes did not have reasonable grounds to believe that PRDL would be able to meet its ongoing obligations. The pleading in the statement of defence to which Mr Johnson refers was in fact pleaded in response to these allegations. Accordingly, the reasonableness of Mr Gapes’ belief was put in issue on Dempsey Wood’s pleaded case. I do not consider rr 5.62 and 5.63 have the effect of deeming to be accepted a proposition which is contrary to a pleaded allegation on the plaintiff’s own case. Rather, and as commentary to r 5.62 suggests, the need for a reply is when a pleaded defence makes “positive allegations which are unrelated to or go beyond mere responses to allegations by the plaintiff.”4
[26]I turn now to the factual background.
Factual background
Introduction and early events
[27] Redwood purchased the land to be used for the Development in April 2012. The original plan was to develop the land in four stages (which was later amalgamated into three stages), with different settlement dates for each stage. Stage 1 was to comprise 107 townhouses, 44 terraced houses, 4 apartments and 150m2 of retail. As noted above, the Development was initially funded by Crown.
[28] PRDL was incorporated on 24 May 2012. As noted, it was a special purpose company to undertake Stage 1 of the Development. It was beneficially owned by interests associated with Mr Gapes. Redwood, of which Mr Gapes is the sole director, and which at any given time had several employees, provided management services to PRDL in relation to the Development (and charged management fees for doing so).
[29] The Development was taken to market in 2013 as an affordable housing development. 149 sale and purchase agreements were entered into for sales “off the
4 Robert Osborne and others McGechan on Procedure (online loose-leaf ed, Thomson Reuters) at [HR 5.62.01].
plan” (that is, the pre-sales). The revenue to be earned from the pre-sales (once they settled) was expected to be approximately $60 million. For the large majority of the pre-sales, the date for practical completion was 15 September 2015, with the Sunset Date for the issue of title being 20 December 2015. These dates, and the related provisions concerning termination of the pre-sales, were addressed in cl 30.1 of the pre-sales in the following terms:
Sunset date: This Agreement may be cancelled by either party serving written notice on the other if:
(a)Practical Completion has not been achieved;
(b)a Code of Compliance Certificate has not issued in respect of the Dwelling; or
(c)a separate Title has not yet issued for the Property,
by 20 December 2015 (“Sunset Date”), subject to the occurrence of any event of delay referred to in cl 23.2 [essentially delays outside of PRDL’s reasonable control], in which case the Sunset Date shall be extended for such reasonable period as determined by the Engineer to allow for the delay.
Crown is replaced by Koi
[30] On 30 April 2014, Crown appointed receivers to PRDL. The background to and reasons for this were not explored in any real detail in the evidence, but it was not long before the Development was refinanced, with PRDL entering into the Koi Facility in June 2014. Mr Gapes personally guaranteed PRDL’s obligations under the Facility.
[31] Koi agreed to provide $30 million in funding for the Development, split into two $15 million tranches. The first tranche was to repay the Crown debt, with the second tranche to be paid into trust accounts held by PRDL’s solicitors Russell McVeagh, to be drawn down from time to time to fund the Development works. There were two such trust accounts: one to pay construction costs to the Development’s builder, KN Construction (the Construction Account), with the other (the Project Account) to meet other development costs, including those of Dempsey Wood.
[32] Importantly, payments from the Construction and Project Accounts could only be made with Koi’s prior approval, and no more frequently than once per month. The Koi Facility agreement provided that Koi would only be obliged to direct a payment
from the Project Account if Koi had received a consultant’s certification on matters including:
(a)certification of the cost of the works to be carried during Stage 1 of the Development, together with certification of the “Cost to Complete” (being, at any given point in time, the estimated cost to complete those works); and
(b)that all previous contractors’ and subcontractors’ claims had been paid.
[33] Koi’s consultant for the certification process was Kingstons. Kingstons provided monthly drawdown reports to both Koi and PRDL, a number of which were produced in evidence. I say more about what these reports showed over the course of 2015 later in this judgment.
[34] In September 2014, PRDL entered into the civil works contract with Dempsey Wood. The original contract sum was $5.384 million (excluding GST), later increased by some $2 million in approved variations.
The Development is in trouble
[35] It was common ground that as the Development progressed, there were serious delays and cost overruns.5 By at least June 2015, the issues were attracting negative publicity. Mr Gapes accepted that by July 2015, it was clear to him that the Development was going to cost more than initially budgeted.
[36] The Koi Facility was due to expire on 15 October 2015. Although Mr Gapes’ evidence was that there was no clear point at which he was told by Koi that it would not be extending the Facility, from around June 2015, he and his advisers were looking at potential replacement funders. For example, from June 2015, Mr Gapes received advice and a number of refinance proposals from Reesby & Company Limited
5 PRDL’s position was that significant aspects of these delays were caused by Harrison Grierson, who were the design consultants and engineers to the Development. In August 2015, PRDL terminated Harrison Grierson role as engineer, and replaced it with Dodd Civil.
(Reesby & Co), who Mr Gapes described as one of New Zealand’s leading property finance brokers.
[37] In July 2015, a consultant with whom Mr Gapes was working, a Mr Larry Ede, reported that without an “injection” of additional funds into the Stage 1 development, the Koi Facility would be exceeded during the August 2015 drawdown from the Project Account.
[38] On 21 August 2015, PRDL sold what was known as the “Superlot” (being the land that had been intended to be used for Stages 2 and 3 of the Development) to Happyland Development Ltd (Happyland). PRDL and Koi had agreed that the net proceeds of sale, being approximately $14.78 million, would be paid into the Project Account – thus serving as a fresh injection of capital into the Stage 1 Development.
[39] Kingstons’ drawdown report no. 11, released on 27 August 2015, confirmed the issues then being experienced on the Development. It noted that the project contingency was forecast to be overrun by some $4.3 million (with an actual overrun to that point in time of $2.147 million). Kingstons observed that they were not privy to the “overall development cashflow”, and were therefore unable to confirm that the
$30 Koi Facility “will be sufficient to cashflow the development until individual house settlements are received”. Kingstons also reported that:
Given the delays incurred to date, in our opinion there is no ability for the works to be completed prior to the defined Practical Completion date of 15 September 2015.
[40] Kingstons also advised that the majority of the Sunset Dates were “unachievable”.
[41] The report concluded that due to the forecast overruns, “there is insufficient funds remaining within the Cost to Complete to complete the Project Works”. Kingstons certified for a drawdown of $1.107 million from the Project Account at the end of August, to pay contractors’ most recent monthly invoices.
[42] Around the same time, Dempsey Wood was becoming frustrated at delays in paying its invoices. On 29 August 2015, it issued a notice of intention to suspend
works. Mr Conal Dempsey, the sole director of Dempsey Wood, described such steps as Dempsey Wood “conditioning” its clients. In response to the notice of intention to suspend works, Mr Gapes advised that the August 2015 drawdown had been processed and he would follow up on payment. In the event, Dempsey Wood’s invoice was paid on 31 August 2015 (following Kingstons’ certification discussed at [41] above).
[43] I interpolate to note that much attention at the hearing was devoted to delays in paying some of Dempsey Wood’s invoices, and what the parties had agreed, if anything, about when Dempsey Wood was to submit its invoices. I do not, however, consider these matters material to the issues I must determine. In effect, PRDL itself never had any funds to pay Dempsey Wood’s (or other contractors’) invoices, all funds coming from the Construction or Project Account, and all payments subject to Koi’s approval. Accordingly, some relatively short delay in payment of some of Dempsey Wood’s invoices in 2015 does not itself reflect on PRDL’s solvency at any point in time. Rather, I am satisfied it reflected the timing of Dempsey Wood submitting its invoices (and thus their due date for payment), versus the timing of Kingston’s monthly certification process. In other words, the terms of payment for Dempsey Wood’s invoices were not fully “aligned” to the quite detailed and formal drawdown approval process for payments to be made from the Project Account. And in the event, and other than its last invoice, all of Dempsey Wood’s 2015 invoices were paid, albeit some of them a few days after their due date.
The search for a new funder
[44] Turning back to the chronology, Mr Gapes said that “following the sale of the Superlot”, PRDL worked hard to refinance the Koi Facility before its expiry on 15 October 2015. Mr Gapes said that “we knew all the players” and “basically talked to everyone”. He continued to receive advice from Reesby & Co. Some interest was shown by some parties,6 but by early October 2015, nothing had come to fruition. Mr Gapes also said that he was working closely with Koi during this time, and spoke with his contact at Koi most days. The overall thrust of Mr Gapes’ evidence was that there was no suggestion to him from Koi that the “tap would be turned off”
6 For example, Spinnaker Capital, a non-bank lender for property developments, and associated with Reesby & Co, as well as New Zealand Mortgages and Securities (associated with the Manson family).
immediately upon the Koi Facility expiring, and that like many development facilities, Koi would permit the Facility to run on while a new funder was found.
[45] In September 2015, PRDL received a claim from Crown, relating to an “exit fee” of $10 million it said was payable as a result of the sale of the Superlot to Happyland. While Crown did later issue formal court proceedings in relation to its claim, Mr Gapes did not consider the claim genuine, noting that in the event, it was settled for $40,000.
[46] On 4 September 2015, Koi advised that the amount required to repay the Facility was approximately $37.568 million, less the net sales proceeds from the sale of the Superlot, less whatever was the cash balance of the Construction and Project Accounts at the time of refinance. Thus it was clear that as at the date of Koi’s Facility being refinanced, whatever was “left” in the Construction and Project Accounts would be returned to Koi in reduction of the amount owed to it. On the basis of the information received from Koi, Reesby & Co advised Mr Gapes on 4 September that “the draft cashflow forecast indicates the Koi debt to refinance will be approx
$22.5 million”.
Cancelling the pre-sales
[47] As well as looking for a new funder, PRDL was also exploring ways to maximise the value from the Development – which in turn would obviously enhance the prospect of securing new funding. This included:
(a)using some of the land within the Development (which was to have been purchased by Auckland Council) to build 20 additional houses;7 and
(b)exiting the pre-sales and re-selling the properties at current market value.
7 This was expected to generate a further $11.286 million in revenue, with associated costs of some
$4.3 million.
[48] In relation to (b) above, a Jones Lang LaSalle valuation commissioned by PRDL in early September 2015 assessed the difference in gross realisation between seeking an extension to the Sunset Date in the pre-sales and cancelling the pre-sales and selling the lots at market value to be around $20 million. Similarly, a “cashflow feasibility” based on these two scenarios and dated 25 September 2015 estimated that the “re-set” Development would result in a profit of $16.073 million, or a return on capital of 18.9 percent.
[49] The Jones Lang LaSalle valuation also valued the Development as at early September 2015, namely:
(a)$13.3 million, on the basis the pre-sales remained in place; and
(b)$21.8 million, on the basis the pre-sales were cancelled and resold at market rates.
[50] Both scenarios included large “profit and risk” discounts. Mr Gapes explained that he did not agree with the valuations, because of the size of those discounts. No- one from Jones Lang LaSalle was called to give evidence on this topic, nor was there evidence of PRDL commissioning any further valuation advice from Jones Lang LaSalle (or any other valuer).
[51] Much attention was devoted at the hearing to the strategy of exiting the pre- sales, described by Dempsey Wood as “burning off” the pre-sale purchasers. Mr Gapes did not shy away from the fact that PRDL intended to exit the pre-sales, or that from the purchasers’ perspective, this was not an attractive outcome. He explained, however, that securing the additional value from (re)selling the lots at increased market values was a necessary and vital step to ensure the Development was financially viable. Mr Gapes explained that without doing so, it would have been extremely difficult, if not impossible, to secure new finance, and without new finance, the pre-sales could not be completed in any event.
[52] As noted earlier, the pre-sales gave both the purchaser and PRDL the option to terminate the agreement in the event title did not issue by the Sunset Date. But as can
be seen from the sunset clause set out at [29] above, the agreement envisaged the Sunset Date could be extended in certain circumstances. Mr Gapes explained that some parties were more cautious than PRDL about the ability to unilaterally terminate the pre-sales.8 Nevertheless, Mr Gapes said that he was confident at the time that PRDL could legally exit the pre-sales at the Sunset Date, but that in any event, he was confident from a commercial perspective that once purchasers understood that it was simply impossible for the Development to be completed at the original pre-sales prices, many (if not all) of them would elect to take their deposits and walk away, rather than engage in litigation. In cross-examination, Mr Gapes highlighted the importance of being able to cancel the pre-sales and re-sell at higher market prices, observing that “[y]ou can either cancel them or you can’t. If you can’t cancel them then the land probably isn’t worth anything and if you can, then it’s worth plenty”.
The “hive down” structure
[53] Another aspect of the proposed refinancing that attracted significant attention at the hearing was that it was to be structured as a sale by PRDL of the Development to a third party (referred to as Newco), with the sales proceeds (plus whatever remained in the Construction and Project Accounts) used to repay Koi; that is, rather than a straight refinancing of the Koi Facility. The proposed structure was described at the hearing as a “hive down”.9
[54] Dempsey Wood put significant emphasis on this being a strategy and structure that took no account of the interests of PRDL’s unsecured creditors, which would be “left behind” with their claims against an empty PRDL. However, I consider this somewhat of a red-herring. A “hive down” structure would not necessarily demonstrate that Mr Gapes breached his director’s duties. What was important in any scenario was the position of PRDL’s unsecured creditors, rather than the particular structure deployed to effect the refinance. Mr Gapes’ evidence was that it was preferable to transfer the development into a “clean entity” which would be more attractive to a new funder, given the “taint” of the Development to that point. This
8 For example, he noted that Spinnaker Capital was “cautious” on this topic.
9 A “hive down” is generally used to describe a transaction whereby the valuable parts of a company are transferred to a subsidiary that is then sold. This has the effect of keeping the valuable parts of a going concern together and freed of the company’s debts.
would also enable the lots to be taken to market again but under a different brand. Mr Gapes also explained that from his perspective, any sale of the Development to a third party would incorporate creditors’ existing invoices being met, and existing contractors, including Dempsey Wood, being retained to continue the Development – given it would make no commercial sense for the purchaser to spend the time and cost of getting new contractors set up on site.
Events leading up to 15 October 2015
[55] At the end of September 2015, Dempsey Wood issued another notice of intention to suspend works, not having received payment of its most recent invoice (which had been due for payment on 18 September 2015). At the same time, Mr Gapes signed off on an approximately $2 million increase to the value of Dempsey Wood’s contract, reflecting approved variations to that point.
[56] Also at the end of September 2015, PRDL requested that Crown defer commencing legal proceedings in relation to the exit fee, stating that they could affect PRDL’s ability to refinance the Koi Facility. Crown (unsurprisingly) did not agree to do so, and commenced legal proceedings at the end of that month.
[57] Kingstons’ drawdown report for the end of September 2015 painted a similar picture to that issued at the end of August 2015. Again, Kingstons advised that there was insufficient “Cost to Complete” to complete the project works, and that the Practical Completion and Sunset Dates were unachievable. Kingstons certified further invoices totalling $1.523 million (including Dempsey Wood’s invoice due for payment on 18 September 2015) as properly payable under the Facility. Payments were duly made from the Construction and Project Accounts.
[58] By at least early October 2015, Mr Gapes was in discussions with Webber Capital about a possible refinance of the Development. While the precise relationships were not clear from the evidence, Webber Capital broadly represented the interests of a Mr Clint Webber and the Chow brothers. Clearly alternative financing arrangements were not, at that time at least, thick on the ground, Mr Gapes himself acknowledging that Webber Capital and the Chow brothers were “tier 4” (or lower) lenders. He explained that until the pre-sales were cancelled, “we were dealing with more
expensive, less reputable funders”, and that “the fact the pre-sales were not cancelled was what was holding people back”.
[59] On 1 October 2015, Reesby & Co provided Mr Gapes with a Finance Proposal to present to Webber Capital. The document recorded that Koi had “advised that [the Koi Facility] will not be extended”. It also recorded that:
PRDL had decided to sell the Stage 1 site to repay the Koi loan. All consents and material contracts will be novated to [Newco] to allow the civil & construction works to continue on site.”
[60] The proposal stated that after the sale to Newco, Newco would “complete all civil works via Dempsey Wood”. The proposal also stated that “the existing presales will not be novated from PRD[L] to [Newco] and the units will be marketed and re- sold at current market values.”
[61] On 7 October 2015, Kingstons completed a draft “Refinance Report”. The report stated that Kingstons had been advised by Reesby & Co that PRDL intended to refinance the development with Spinnaker Capital and in that context, required a refinance report setting out the current Cost to Complete. Kingstons estimated that in addition to the $27.982 million costs incurred to that point in time, a further $54.396 million would be required complete the project works (hence a total “Development Budget of $82.379 million). Discussions with Spinnaker did not, however, progress to a concluded transaction.
[62] At some point prior to 12 October 2015, Mr Dempsey became aware that the Development was to be refinanced. Mr Gapes emailed him on 12 October 2015, stating “as you know we are replacing our Singaporean funders – can you meet with the new funder on Wednesday this week”? The “new funder” was Webber Capital. I discuss the meeting proposed by Mr Gapes later in this chronology.
The Koi Facility expires/the Webber Capital transaction is executed
[63] The Koi Facility expired on 15 October 2015. On the same day, PRDL entered into an agreement for sale and purchase of the Development to Webber Capital for
$22.5 million (the Webber Capital agreement). As will be apparent, the $22.5 million
purchase price amount matched that amount advised by Reesby & Co in September 2015 as the projected amount to repay Koi (after taking into account the balances remaining in the Construction and Project Accounts). The Webber Capital agreement was accompanied by an agreement pursuant to which PRDL would provide management services to Webber Capital (to essentially carry out the Development), as well as a put and call agreement, which gave an entity associated with Mr Gapes the right to repurchase the Development at a later date.
[64] The Webber Capital agreement was conditional, among other things, on Webber Capital’s due diligence of the transaction. The agreement also provided for the purchase price to increase by an amount equal to the costs incurred by PRDL in relation to the Development between 16 October 2015 and the sale settling (effectively reflecting contractors’ costs over that period).10 The agreement also required PRDL to continue the Development pending settlement, a point Reesby & Co raised with Mr Gapes the day before the agreement was executed. Reesby & Co advised that that obligation “means the October drawdown needs to be funded somehow” and “this will likely need to come from Koi”, such that the actual refinance amount would need to be $22.5 million plus the October 2015 drawdown.
[65] It is also apparent from the contemporaneous documents that $1 million from the sales proceeds from the Webber Capital agreement was to be provided to Mr Gapes to repay a debt to Westpac on a separate project. Mr Gapes explained that “Westpac were giving me some grief around repaying that loan, so that would’ve been a payment to Westpac to keep them from pursuing me further”.
[66] On 16 October 2015, Koi served PRDL with notice pursuant to s 119 of the Property Law Act 2007 (the PLA), which recorded that in the absence of repayment on or before 17 November 2015, enforcement rights under the Facility would become exercisable. Mr Gapes said that he was not particularly troubled or surprised by the notice being issued, and through his ongoing discussions with Koi, was aware that it would be. He described this as an expected step for a financier to take when a facility
10 Excluding amounts paid out of the Construction Account, and capped at $750,000.
has expired, and not confirmation or a suggestion to him that Koi would take enforcement action immediately upon expiry of the notice.
[67] It is not in dispute that Mr Gapes did not inform PRDL’s creditors that the PLA notice had been issued.
[68] The precise date is not clear, but in or around mid-October 2015, Mr Gapes and Mr Dempsey met with the Chow brothers and Mr Webber. This was presumably in the context of Webber Capital’s ongoing due diligence. Mr Dempsey described it as a not very pleasant meeting. Mr Gapes generally agreed with Mr Dempsey’s description of the meeting, including that the meeting got quite heated at times (emanating mainly from the Chows) and that there were a lot of “egos” in the room.
[69] Mr Dempsey said that in the context of this meeting, and his expressed concerns about the Development’s financial viability (and Dempsey Wood getting paid as a result), Mr Gapes had threatened that he could simply allow PRDL to default on its obligations to Koi and go into receivership. Mr Gapes denied he said this, but was quite candid that one of the Chow brothers had made such a “threat” at the meeting. He described this as “posturing”, and that he was uncomfortable about what was being said.
[70] On 21 October 2015, Dempsey Wood issued another notice of intention to suspend works, as its most recent invoice, due for payment that day, had not been paid. Kingstons replied to Dempsey Wood the same day, advising that they had “received the Springpark drawdown information yesterday and [were] currently processing”.
[71] On 22 October 2015, Kingstons distributed its October 2015 drawdown report. The report noted that Kingstons had been advised by Koi that there was no need to update the anticipated Cost to Complete given “this is to be [Koi’s] last drawdown before funding of the project will transfer to a new funder.” I interpolate to note that although Kingstons’ report stated that the October drawdown was to be the last, Koi did authorise a further payment out of the Project Account which occurred on 25 November 2015. There was no specific evidence of what discussions Mr Gapes had had with Koi about payments beyond the October 2015 drawdown.
[72] Also on 22 October 2015, Kingstons forwarded to Dempsey Wood email communications between Koi and Kingstons confirming that Koi had approved Dempsey Wood’s most recent invoice for payment.
[73] The same day, Koi gave formal consent to PRDL proceeding with the transaction with Webber Capital on certain conditions (largely aimed at reserving Koi’s rights under its Facility). A tripartite agreement between Koi, Webber Capital and PRDL was also executed that day, which addressed, among other matters, arrangements between the parties prior to settlement under the agreement with Webber Capital. It also recorded an agreement that $8,000,000 would be paid out of the Project Account to Koi the day following entry into the tripartite agreement (which duly occurred).
[74] The following day, on 23 October 2015, Dempsey Wood submitted its invoice for the period ending 31 October 2015, in an amount of approximately $998,000.
[75] On 29 October 2015, Dempsey Wood’s solicitor, Mr Alan Jones, sent a letter to PRDL/Mr Gapes setting out Dempsey Wood’s concerns at recent events, including the meeting with the Chows and Mr Webber. It is helpful to set the contents of the letter out in full. It is broadly consistent with each of Mr Gapes’ and Mr Dempsey’s evidence about the meeting with the Chows and Mr Webber, and provides context for later representations made by Mr Gapes which are the basis of Dempsey Wood’s FTA claim. Mr Jones said the following in his letter:
1.We act for Dempsey & Wood Civil Limited which is party to a construction contract with Panama Road Developments Limited (PRDL).
2.Further to your recent meeting with our client (and the Chow interests), and recent telephone discussions, we confirm that:
(a) You have advised that PRDL intends to sell the development;
(b) PRDL’s purpose in selling the development is two-fold;
(i)it does not have the resources to complete the development and;
(ii)it cannot afford to honour the existing sale and purchase agreements which are now considered to have been sold too low compared to the current market of the properties;
At the meeting, our client was told that the Chow interests wanted to move quickly and take over the contract with contractors. But since that meeting more than a week ago, there has no update from PRDL;
(c) Our client was told that one of PRDL’s options was to go into receivership and thus repudiate its obligations to our client. Our client has serious concerns about PRDL’s financial position and its ability to meeting the ongoing obligations under the contract.
3.Our client requires, and will continue to require, PRDL to meet its full payment obligations under the construction contract. This will include an EOT claim expected to be in the vicinity of $1 million.
4.Given further works are required to complete the contract, my client requests that you provide the following directly to me by 5pm Friday, 30 October 2015;
(a) Confirmation that PRDL intends to meet all its payment obligations under the construction contract; and
(b) Evidence of the funding available to PRDL to meets its payment obligations including the EOT claim foreshadowed above. This would include the monies said to be in the trust account of Russell McVeagh.
5.In the event PRDL does not and cannot meet its payment obligations, my client will look for recourse against Mr Gapes personally as director of PRDL and the person who has represented the company.
(emphasis added)
[76] PRDL did not formally respond to the letter by the requested 30 October deadline.
[77] At the end of October 2015, and in the context of Webber Capital’s ongoing due diligence, there was an exchange of correspondence between the solicitors for each of PRDL and Webber Capital on PRDL’s ability to lawfully terminate the pre- sales upon the Sunset Date being missed. Webber Capital’s solicitor stated that “[m]y client advises me that unless the pre-sale agreements can be successfully terminated there is no development margin left in this project and the land is worthless”. Mr Gapes responded to the email, suggesting the parties and their respective lawyers meet to discuss the issue.
Webber Capital cancels its agreement
[78] On 5 November 2015, Webber Capital gave notice that it was not satisfied with the results of its due diligence and terminated the Webber Capital agreement.
[79] Negotiations between PRDL and Webber Capital nevertheless continued for a short time. On 8 November 2015, Mr Gapes wrote to Webber Capital setting out a range of options as he saw it. The letter included a proposal to correspond with purchasers under the pre-sales, including informing them that:
The development has taken too long and we have had too many issues like contamination, a receivership etc and there is now no profit in the development and we cannot get new development funding although we have been trying hard in the last few months.
[80] Unsurprisingly, the contents of this letter were put to Mr Gapes in cross- examination. He stated, however, that the contents were somewhat self-serving, as the proposed letter to the purchasers would be designed to highlight the difficulties in the Development, as a means of discouraging them from taking legal action in the event of cancellation of the pre-sales at the Sunset Date.
[81] Webber Capital made a further offer to purchase the Development on 8 November 2015. It said that it valued the risk around the cancellation of the pre- sales at around $5 million and proposed that that risk be “shared” 50/50 between Koi and Webber Capital. On this basis, it offered to purchase the Development for $20.75 million (which also reflected Koi’s payment of the October 2015 drawdown). The proposal was unacceptable to both PRDL and Koi. Mr Gapes said he viewed it as a cynical attempt by a “bottom feeder funder to chip the debt”.
[82] Mr Gapes said that after the deal with Webber Capital did not progress, he “began discussions with Nomura, a large Japanese lender, who I was advised on multiple occasions was ‘keen on doing a deal’”. No particular details of this were adduced in evidence, though it appears from correspondence on 3 December 2015 that discussions had not progressed to any material extent.
Dempsey Wood remains concerned about payment
[83] In the meantime, Mr Dempsey remained concerned about PRDL’s financial position and emailed Mr Gapes about this on 11 November 2015. Again, given its relevance to Dempsey Wood’s FTA claim, it is helpful to set out the email’s contents in full:
Hi Tony it was good to talk today re subject of the Chow Bros./Webber Capital re financing deal falling over for the Panama Road contract.
This makes it even more imperative that all of our concerns outlined in our letter sent by AJLP dated 29 October are addressed.
The lack of communication recently has also not helped matters and is decreasing our level of confidence in the ability for PRDL Ltd to continue to fund this project.
In our discussion today you again re-affirmed that there was $3.9 million deposit in a Russell McVeigh (sic) Trust account with the specific purpose of assuring payment for the civil works for this project.
You agreed today to organise a written statement from Russell McVeigh to this effect. Can you please forward this to us by close of business today.
[84] Mr Gapes responded “Hi Conal I have asked RMcV for this – will chase today.”
[85] At the same time, Koi was also taking steps itself in relation to the Facility, though Mr Gapes was not advised by Koi at the time about what it was doing. Koi had retained Whillans Realty Group Ltd (Whillans Group) to assist it in selling its loan position. In an email from Whillans Group to NZMS, Whillans advised that the loan outstanding was $27.5 million, and was secured by assets estimated to be valued at
$41 million, which included the amounts in the Construction and Project Accounts, and also the Stage 1 land and improvements. This email was forwarded to Reesby & Co on 11 November 2015, who in turn forwarded it to Mr Gapes the same day. Mr Gapes accepted in cross-examination that the money which had been set aside “for the civils, was part of what was on the market to another lender”.11
11 For completeness, I note that no party sought to rely on the assessment of value suggested in this email, which if correct, meant that PRDL’s assets exceeded its liabilities by some margin. No one from Koi or Whillens were called to give evidence, such that the email would be inadmissible hearsay evidence in any event, to the extent it was relied on for the truth of its contents.
[86] The following day, 12 November 2015, Russell McVeagh sent Mr Gapes an email confirming the Project Account balance was $4,172,351.07. This was in response to an email from Mr Gapes to Russell McVeagh seeking confirmation of the amount remaining in the Project Account and stating “Conal Dempsey would like some comfort we have the money still available to pay him”. In an email which is the focus of Dempsey Wood’s FTA claim, Mr Gapes forwarded the full email chain to Mr Dempsey, stating “Hi Email below from Dan Williams at RMcV. The $4.172 is for civils and consultants etc”. Mr Dempsey said that on the basis of this email, Dempsey Wood continued to work at site, observing “it was a nervous few weeks”.
[87] On 13 November 2015, Mr Dempsey approached Russell McVeagh directly with some further queries about the funds in the Project Account.12 He said as follows:
Hi Daniel, thanks for the confirmation of the Project Account balance. It is great to see there seems to be an allowance for funding of works at Panama Road. What DW require from yourselves is verification of what the Project Account funds are for. It would be very helpful to know the answers to the following questions.
*Is the fund specifically for the payment of the Civil contract works?
*Is the fund able to pay out upon the producing of a monthly payment certificate or are their other requirements needed to gain access to the fund?
*Is the purpose of the fund to allow for any shortfall in the financing of the project from Olympus Capital?
Thanks and look forward to hearing from you.
[88] Jumping forward in the chronology for a moment, just under two weeks later, Russell McVeagh responded on 24 November 2015 (copied to Mr Gapes) stating:
Hi Conal
We respond to your queries as follows:
·The funds held in the project account are to fund the project works (excluding the costs incurred by KN Construction, for which there is a separate account). The project works are those works relating to Stage 1 to be designed and constructed in accordance with the relevant design documents.
·We are unable to pay out of the account unless PRDL’s lender has approved the payment. PRDL’s lender will only approve the payment
12 Mr Gapes said he was not concerned about this, and was happy for Dempsey Wood to approach PRDL’s solicitors directly.
if it has received certification from a quantity surveyor acceptable to PRDL’s lender.
·We understand that the purpose of the funds in the project account is to finance all costs associated with the project works (excluding the costs incurred by KN Construction).
Please advise if you have any further queries.
[89] Mr Dempsey circulated this response to his colleagues at Dempsey Wood stating “Finally. It looks positive”.
[90] Mr Dempsey said in his evidence in chief that what was communicated to him by Russell McVeagh satisfied him that “what Mr Gapes had told me was correct”. He also described his follow up queries of Russell McVeagh as a “tick the box and double check exercise”, given as far as he was concerned, the project still had many months to run, and it was “really good to see [Russell McVeagh] backing up what Mr Gapes had said”. He also said that “based on these assurances, Dempsey Wood continued to work on the Development until 3 December 2015”.
[91] On 19 November 2015, Dempsey Wood gave PRDL further notice of intention to suspend works for failure to pay its most recent invoice (relating to its work in October 2015). The notice stated that the invoice was due for payment that day. Mr Gapes replied:
This is getting silly because we get one of these every month because you keep lodging your invoice earlier than everyone else. We do one drawdown per month and we need to get all the invoices in together to enable them to be processed by Kingstons and Russell McVeagh. We need to get you aligned with KN and the others.
The lead-up to receivership
[92] Kingstons issued a further drawdown report on 23 November 2015. It contained much of the same information as earlier reports and certified for payment costs for the prior month totalling $1,126,904. This included Dempsey Wood’s most recent invoice, referred to in the preceding paragraph.
[93] On 25 November 2015, Koi confirmed that payments could be made out of the Project Account for the most recent round of consultants’ costs. The email (copied to Mr Gapes) noted that “this instruction should not be construed as waiver of Koi’s rights or the borrower’s defaults and Koi continues to reserve all of our rights under the facility documents”. In the event, on Koi’s instructions, on 25 November 2015, approximately $1.27 million was paid out of the Construction and Project Accounts (including in payment of Dempsey Woods’ invoice for October 2015 work).
[94] On 26 November 2015, Dempsey Wood submitted its claim for an EOT in an amount of $200,279.40. This was later approved by Dodd Civil as engineer to the contract, though shortly after PRDL had gone into receivership.
[95] A PRDL balance sheet as at 30 November 2016 was produced in evidence. It recorded total assets of $28.687 million and total liabilities of $27.641 million, and thus net shareholder equity of $1.046 million. There was considerable expert evidence given in relation to this balance sheet, including its accuracy and whether it demonstrated that PRDL was balance sheet solvent (or insolvent) as at the end of November 2015. I return to this topic later in this judgment.
Koi appoints receivers
[96] On 1 December 2015, Koi gave PRDL formal notice that it intended to appoint receivers as of midday the following day, 2 December 2015. Mr Gapes said that he received a telephone call from Koi shortly before the written notice was issued, when he was in a carpark in Queenstown. He said it came as a “complete and utter shock” in the context of his ongoing discussions with Koi. The notice as originally issued referred to the amount outstanding under the Koi Facility as $35.279 million. That did not, however, take into account the $8 million payment referred to at [73] above, and a revised notice was issued showing an updated amount outstanding of
$26.752 million.13
13 This error is relevant, given the expert evidence for Dempsey Wood proceeded on an assumption that the liability to Koi shown in the 30 November 2015 balance sheet was understated by $8 million, the experts working off the amount outstanding shown in the original – but incorrect – notice to appoint receivers.
[97] On 2 December 2015, a regular fortnightly project meeting was held on site between various contractors, consultants and PRDL. Nothing about Koi’s appointment of receivers was raised at that meeting (which Mr Gapes did not attend; presumably his attention was focused elsewhere at the time). Mr Gapes said the fact that Koi’s recent steps were not discussed at the meeting was understandable, given it was a site focused “business as usual” type meeting. The following day, Mr Gapes sent an email to Mr Dempsey informing him that PRDL had been put into receivership. Dempsey Wood ceased work on site at that point.
[98] On 7 December 2015, Dodd Civil certified payment for Dempsey Wood’s work up to 3 December 2015 in an amount of $503,373.85 (GST inclusive).
[99] On 23 December 2015, Dodd Civil approved Dempsey Wood’s EOT claim in the amount of $200,279.40. These additional costs claimed and approved did not solely relate to the October/November 2015 period, however, but spanned the whole project.
[100]Dempsey Wood formally cancelled its contract with PRDL the same day.
[101] A schedule of aged creditors as at 30 November 2015 was produced in evidence, which showed the following:
(a)Dempsey Wood being owed $503,373.
(b)The other large creditor with “current” amounts due being Harrison Grierson, though a number of the underlying invoices related to periods of time prior to October/December 2015 (dating back as far as March/April 2015).14
(c)A number of (much) smaller current and 1-30 day creditors.
(d)No creditors aged 31-90 days.
14 These claims were disputed by PRDL, which also claimed against Harrison Grierson for what it said was Harrison Grierson’s failings in its earlier role as engineer to the project. PRDL’s receivers later settled these claims.
(e)$414,088.41 of creditors with aged balances of 90 days or greater, the large majority of this relating to three creditors (Auckland Council,
Murray Capital and Studio of Pacific Architecture Ltd).15
[102] From the above, therefore, and excluding Auckland Council and a small number of disputed debts, the large majority of PRDL’s aged creditors were “current”.
[103] On 20 December 2015, being the Sunset Date in the pre-sales, the receivers took steps to cancel the agreements. As at 21 March 2016, the receivers confirmed that 149 of the 151 pre-sales had been cancelled.
Later events
[104] Mr Gapes and Mr Dempsey kept in touch during the early part of 2016, in the context of Mr Gapes continuing to seek a refinance of the Koi Facility. On 17 February, Mr Gapes sought information on Dempsey Wood’s expected costs to complete the civil works, which contemplated Dempsey Wood being paid for its outstanding invoice if it agreed to continue with the project. Also in February 2016, Mr Gapes asked Mr Dempsey to accompany him to a meeting with a potential new financier (Qualitas, an Australia property financier), which Mr Dempsey agreed to do.
[105] Qualitas signed an indicative term sheet on 12 March 2016. The accompanying mandate letter stated that Qualitas was willing to seek its Investment Committee (IC) approval to “assist with the refinance of the project … and subsequently to (sic) the SPV … to acquire the Land from [PRDL] and undertake development works to [complete the Development]”. The mandate letter stated that provision of the related facilities was “subject to satisfactory due diligence, documentation as well as the satisfaction of any conditions contained within the indicative term sheet”. The
15 Mr Gapes said that he believed the Auckland Council amount related to the new consents for the additional 20 units (but had been unable to confirm this); the Murray Capital amount was in fact payable by Redwood “in the first instance” as it related to the balance of Murray Capital’s fee for brokering the Koi Facility, and that it had been agreed that it would not be paid until later in the Development and thus he did not consider it payable at that time (the documentation indicates that this view was not shared by Murray Capital); and that Studio of Pacific Architecture was the previous architect to the Development, and had been replaced following a dispute. Mr Gapes said that he was not aware of Pacific Architecture ever pursuing this amount.
mandate noted that any commitment to provide the facilities was subject to the same matters, as well as IC approval.
[106] The indicative term sheet related to two proposed facilities – Senior Debt Facility A and Senior Debt Facility B. The purpose of Facility A was to pay out the Koi Facility,16 discharge the receiver and “pay other costs agreed to by Qualitas (in its absolute discretion)”. The Facility was to accrue interest at 25 per cent, capitalised monthly, and was to be repaid out of the sales proceeds received from the sale of the Development to the Qualitas SPV. While the term sheet did not expressly address payment of contractors’ past invoices, one of the conditions precedent was a signed contract “with Dempsey Wood or another civil contractor acceptable to Qualitas and [PRDL], to complete the civil works….”. Facility B was to enable the Qualitas SPV to purchase the Development and to fund the development costs of the project. It contained similar interest provisions to Facility A. The interest provisions were put to Mr Gapes in cross-examination, on the basis that they were extremely onerous and to suggest that viable refinance offers were few and far between. Mr Gapes said that the arrangement was more akin to a profit sharing arrangement, hence the higher interest rates.
[107] In the event, however, on 22 March 2016, Koi confirmed that it had entered into an unconditional sale of the Development to a third party (the details of which were confidential at that stage). It later became known that the third party was Happyland (by then known as the Wilshire Group), and the purchase price was
$25 million.17
[108] Mr Gapes emphasised that when he notified Qualitas on 22 March 2015 of the sale, his contact responded “can we discuss – we can get an approval by COB today which sees Koi get fully repaid”. No further evidence was given about this, however. Mr Gapes said that at the time, he had thought he had more time to complete the Qualitas transaction, given the receivers were yet to openly market the Development.
16 Stated in the term sheet to be “indicatively $25.5 million”, with Facility A stated to be for an amount “up to $26 million”.
17 Mr Gapes’ view at the time was that the sale was at an undervalue, though neither he nor PRDL’s liquidators took any formal steps in this regard.
[109] On 6 April 2016, PRDL was put into voluntary liquidation upon the resolution of its shareholders. Mr Gapes explained that he did this so the liquidators could scrutinise the receivers’ sale of the Development. Iain Shephard and Heather Gair were appointed as liquidators. Mr Shephard gave evidence for Dempsey Wood at the hearing. I discuss Mr Shephard’s evidence later in this judgment.
[110] The receivers’ final report (dated 8 November 2017) recorded that $2.575 million remained owing to Koi, and that unsecured creditors in the receivership totalled $1.41 million. Proofs of debt totalling only $433,000 were made in PRDL’s liquidation. Mr Dempsey explained that Dempsey Wood did not submit a proof of debt given it was clear there were no funds available for its claims to be met.
[111]I turn now to the experts’ evidence.
The experts’ evidence
[112] Expert evidence was given by three insolvency practitioners: Mr Shephard and Mr Hoole for Dempsey Wood, and Mr Vance for Mr Gapes.
Mr Shephard’s evidence
[113] Mr Shephard’s initial opinion was that PRDL was both balance sheet and cashflow insolvent as of 16 October 2015 (thus immediately after the expiry of the Koi Facility). However, as his evidence progressed at the hearing, and while he remained firmly of the view that PRDL was cashflow insolvent as of 16 October 2015, he was a little less “firm” that the company was also balance sheet insolvent as of that date. In this context, and through cross-examination, he accepted that some of the matters upon which he had based his assessment of balance sheet insolvency required further analysis or clarification.
[114] On balance sheet insolvency, Mr Shephard said that PRDL’s financial position had been precarious from around July 2015. This was because there was increasing evidence (and by August 2015, confirmation) that there had been such a significant cost overrun that the Development could not be completed within its original budget. Mr Shephard then focussed on the PRDL balance sheet of 30 November 2015 which,
as noted at [95] above, recorded total assets of $28.687 million and total liabilities of
$27.641 million, resulting in equity or shareholder funds of $1.046 million.
[115] Mr Shephard’s initial view was that the amount due to Koi as shown in that balance sheet was understated by some $8 million (Mr Shephard working off the initial letter appointing receivers, which incorrectly set out an amount outstanding of approximately $35 million). This would have of course immediately led to negative shareholder funds of some $7 million. Mr Shephard accepted in cross-examination however, that the amount due to Koi was correctly stated in the 30 November 2015 balance sheet, given the $8 million repayment to Koi by that time.
[116] Nevertheless, in the context of the $1 million shareholder funds, Mr Shephard stated that the figure included in the balance sheet for “Work in Progress” of $23.923 million, being PRD’s only real asset, was “effectively worthless” given the significant cost overruns to that point. Mr Shephard accordingly suggested that the amount for Work in Progress was overstated by between $5 million and $10 million, though accepted he had not conducted any detailed assessment to arrive at this range, and rather it was based on his experience as an insolvency practitioner.
[117] In terms of factors leading Mr Shephard to that assessment, he confirmed that he took into account an inevitable discount to the value of the Development being sold in an insolvency scenario. He also explained that part of his assessment was based on the then stated development margin of $6 million being completely overwhelmed by additional costs of the Development to that date of some $14 million. Mr Shephard accepted, however, that given the $14 million costs including the cost to build the additional 20 houses, the analysis would need to take into account the revenue to be earned from those 20 additional houses (estimated to be $11 million). On this basis, Mr Shephard accepted the analysis would return to a slightly positive margin. Mr Shephard emphasised, however, that the overall profitability of the Development was highly uncertain, and depended significantly on the ability to cancel the pre-sales without resulting loss or claims.
[118] Mr Shephard agreed that his assessment of balance sheet solvency turned significantly on the valuation of a development asset. Taking into account the
proposed sale of the Development to Webber Capital for $22.5 million, Mr Shephard noted that that could act as a proxy for the Work in Progress in the balance sheet. He was also concerned, however, that the 30 November 2015 balance sheet did not sufficiently record contingent liabilities, which he estimated to be between $2 million to $4 million. Mr Shephard again noted, however, that he had not conducted any particular calculations in this regard, and this was also an estimate based on his own experience.
[119] Ultimately, Mr Shephard’s evidence-in-chief was that it was “impossible to say for certain what PRDL’s financial position was at 15 October 2015, due to confusion in the financial records at this time”. Mr Shephard’s overall conclusion was that at the very least, PRDL was “nearing insolvency” by 15 October 2015, and “likely balance sheet insolvent by $1 million to $2 million”.
[120] Mr Shephard considered the expiry of the Koi Facility to be a significant trigger event for PRDL, and while he did not suggest the company ought to have been put into immediate liquidation, his evidence was that this was the time when Mr Gapes ought to have been taking formal insolvency advice and actively considering steps to protect unsecured creditors. Mr Shephard stated that once the Webber Capital offer had been withdrawn on 5 November 2015, this was the point in time at which he would have expected a director of a troubled company to begin formal insolvency processes.
[121] As to what insight could be drawn from Koi’s willingness to continue to finance payment of the unsecured creditors after its Facility had expired, Mr Shephard stated that Koi would have only been interested in protecting its own secured debt, and thus was willing to give Mr Gapes some time to pursue alternative financiers so long as it was comfortable PRDL’s assets were sufficient to meet that secured debt. Mr Shephard noted that the “tipping point” for Koi had plainly come by the time when its secured debt had reached $26.752 million, and reflecting that it would recover any remaining amounts in the Construction and Project Accounts.
[122] Mr Shephard was adamant that Mr Gapes (and Mr Vance) were “extraordinarily optimistic” about the prospects of refinancing. Mr Shephard said this was in the context of refinancing having been explored for some months prior to the
expiry of the Koi Facility. He said that the Webber Capital transaction did not alter his view, given it was a conditional arrangement, and that the “number of conditional finance deals I have seen that don’t come to fruition doesn’t bear counting”. Mr Shephard accepted that it was appropriate for Mr Gapes to continue to explore refinancing options after the Koi Facility had expired, but that was in the context of a company that “is or is about to become insolvent”, and thus Mr Gapes ought to have had an eye to the “counter factual”, and taken appropriate steps to ensure unsecured creditors were protected.
Mr Hoole’s evidence
[123] Mr Hoole’s initial position (in his primary brief of evidence) was that PRDL was balance sheet insolvent by 7 October 2015 and cashflow insolvent by 16 October 2015. The former was based on Kingstons’ advice on 6 October 2015 that the additional costs of the Development had grown by $14 million, which effectively wiped out the projected margin. However, and like Mr Shephard, Mr Hoole accepted that this did not take into account the revenue to be earned from the additional 20 houses, and agreed that this aspect of his brief would therefore require “further analysis.”
[124] Mr Hoole had also opined that the Koi debt was understated in the 30 November 2015 balance sheet by $8 million, but for the same reasons discussed in relation to Mr Shephard, accepted that the figure shown in the balance sheet was likely to be correct. But his evidence was that PRDL was nevertheless balance sheet insolvent by around $1 million to $2 million in October 2015, given his assessment that the amount included in the balance sheet for Work in Progress was overstated (like Mr Shephard, by around $5 million to $10 million), and that the balance sheet failed to include a number of contingent liabilities (which, again, like Mr Shephard, he had assessed at $2 million to $4 million).
[125] Much of the cross-examination of Mr Hoole focussed on his evidence that the Work in Progress was overstated in the balance sheet. Mr Hoole disagreed that the sale of the Superlot land for $28 million suggested that the Development land alone was worth in that region, given it was 50 percent smaller and only part developed,
which would have made it difficult to market. Mr Hoole originally accepted in cross- examination that the subsequent price paid by Happyland of $25 million could represent an approximate value of the Development in October/November 2015, given there had not been significant work carried out after October 2015. However, in re- examination, Mr Hoole adjusted his position, saying that “dropping” the $25 million into the 30 November 2015 balance sheet was too simplistic, and a more realistic approximation was the revised offer made by Webber Capital of $20.750 million in mid-November 2015.
[126] In relation to contingent liabilities (which, as noted, Mr Hoole also estimated to be $2 million to $4 million), his view was that the balance sheet liabilities did not include amounts due to KN Construction, Murray Capital, Harrison Grierson and Crown. However, he accepted that upon reviewing the aged creditors schedule as of 30 November 2015, which totalled $1.420 million,18 at least Harrison Grierson and Murray Capital were included. He also accepted that the claim by KN Construction had been dismissed by the engineer earlier in November 2015.
[127] Mr Hoole said that Mr Gapes should have stood down the contractors on the site as of 15 October 2015 given:
(a)PRDL could not pay existing debts;
(b)it was in default of the Koi Facility and Koi could therefore appoint receivers at any time;
(c)a PLA notice had been issued;
(d)the Development in its existing form was on any view unprofitable;
(c)As can be seen from the contents of this judgment, the picture around PRDL’s insolvency, or near insolvency, in October/November 2015 was not particularly stark or obvious. In other words, this is not a case like some where it is obvious that a company has been hopelessly insolvent for some time, yet the director permits it to continue to trade regardless.
(d)That the breach by Mr Gapes was neither lengthy or particularly egregious is reinforced by the fact that PRDL’s liquidators did not take
81 Goatlands Ltd (in liq) v Borrell (2006) 3 NZCCLR 726 (HC) at [134].
any action against him, which might have been expected if the position was as stark as Dempsey Wood suggests.
(e)The jury points made on behalf of Dempsey Wood do not assist. Mr Gapes was entitled to defend Dempsey Wood’s claims, and broad notions of “remorse” are not relevant in my view to the s 301 inquiry. Further, Mr Gapes’ breach did not “rob” purchasers of their first homes; that resulted from the very significant cost overruns and delays in the Development. And in the event, it was the receivers, not Mr Gapes, who cancelled the pre-sales.
(f)Finally, the unpaid amounts to unsecured creditors largely – and in the case of Dempsey Wood (the largest of those creditors) wholly – relate to work carried out in the last month of the Development, before PRDL ceased trading. While those amounts were not minor for the purposes of s 135, the position is nevertheless that the manner in which Mr Gapes permitted PRDL to carry on business largely resulted in all but the last four to six weeks of creditors’ claims being met.
[233] As the Court of Appeal observed in Mason v Lewis, the question of relief necessarily has to be approached in a relatively broad-brush way, and the jurisdiction to order recompense is of an “equitable” character.82 I must stand back and ask, in the circumstances summarised at [232] above, what proportion of the deficiency to Dempsey Wood is it fair for Mr Gapes to meet personally? Given those factors above, I consider an appropriate award is one-third of the amount of loss, and in rounded terms, $100,000. There will be an award in that amount.
[234] There is one final point for determination, namely whether it would be appropriate for this amount to be paid by Mr Gapes to PRDL or directly to Dempsey Wood. Dempsey Wood’s pleading is somewhat muddled in this context, in that it limits the obligations the subject of the s 136 claim to Dempsey Wood, but then seeks a contribution by Mr Gapes in an amount reflecting unpaid obligations to all unsecured creditors. Further, the s 135 claim only encompasses all unsecured creditors’ losses
82 Mason v Lewis [2006] 3 NZLR 225 (CA) at [118].
insofar as it relates to Mr Gapes’ alleged “plan” to cancel the pre-sales and liquidate PRDL. I have found such a plan is not made out on the evidence. Like the s 136 claim, that aspect of the s 135 claim which relates to Mr Gapes causing or allowing PRDL to continue trading in a manner likely to give rise to a substantial risk of serious loss is limited to Dempsey Wood.83
[235] When an application pursuant to s 301 is made by a creditor, as in this case, s 301(1)(c) expressly permits the Court to order that the director pay the relevant amount, or any part of it, to the creditor. My preliminary view is that such an order may be appropriate in this case, given:
(a)The pleading points noted above, which in relevant respects, limit the claims to Dempsey Wood’s losses.
(b)Dempsey Wood has brought this proceeding at its own expense.
(c)Despite the passage of time since PRDL’s liquidation, the liquidators have not taken any steps.
(d)If the amount is paid to PRDL, it will presumably be allocated to secured creditors, i.e. Koi, with no distribution to Dempsey Wood or other unsecured creditors.
(e)Conversely, payment to Dempsey Wood would be compensatory in nature. In this way, the basis for the award would “match” the stakeholder to benefit from the award.84
(f)Finally, the unpaid obligations to unsecured creditors which were incurred after the breach date are largely limited to Dempsey Wood in any event.
83 Amended statement of claim at [40].
84 See the discussion in Mainzeal, at [297], of the “mis-match” when the award is paid to the company.
[236] The parties did not make any submissions on this issue. I do not consider the form of Dempsey Wood’s pleading forecloses the Court exercising its jurisdiction under s 301 to make an order that the award is paid to Dempsey Wood rather than to PRDL. There appears to be limited authorities (in this jurisdiction at least) in which this issue has been considered (most applications pursuant to s 301 being brought by liquidators).85 Before reaching a concluded view, it is appropriate that the parties have an opportunity to comment on whether the award ought to be paid to PRDL or Dempsey Wood. The parties also ought to submit on what interest, if any, should be awarded on that sum, and how a payment to Dempsey Wood ought to interact with any award made pursuant to the FTA claim (for example, whether it should be paid in addition to any award on the FTA claim).86
[237] The parties may file supplementary submissions on this issue on or before 1 October 2021.
[238]I turn now to Dempsey Wood’s claim under the FTA.
FTA claim
Legal principles
[239]The broad principles are not in dispute. The issues for consideration are:
(a)first, whether there has been a breach of s 9 of the FTA;
(b)second, in the event of breach, and moving to s 43 of the FTA,87 whether the claimant was actually misled by the respondent’s breach;
(c)third, whether the respondent’s breach of s 9 was an operative cause of the claimant’s loss;
85 See, for example, Marshall Futures Ltd v Marshall [1992] 1 NZLR 316 (HC) and Sanders v Flay
(2005) 9 NZCLC 96-989 (HC).
86 My preliminary view being it should not. Given the coincidence of timing, in terms of the breach date and the point from which I have concluded Dempsey Wood suffered loss as a result of Mr Gapes’ breach of s 9 of the FTA, it is arguable that Dempsey Wood would be “double compensated” for its loss.
87 Pursuant to which a court may grant relief where the claimant has suffered, or is likely to suffer, loss or damage “by” the respondent’s breach of s 9.
(d)fourth, the relevance, if any, of the claimant’s own conduct, and any suggested failure to take reasonable care; and
(e)finally, the overall discretion to be exercised pursuant to s 43.
[240] The leading authority is the Supreme Court’s decision in Red Eagle Corp Ltd v Ellis (Red Eagle).88 As to the first question of breach, the Court stated the following:
[28] It is, to begin with, necessary to decide whether the claimant has proved a breach of s 9. That section is directed to promoting fair dealing in trade by proscribing conduct which, examined objectively, is deceptive or misleading in the particular circumstances. Naturally that will depend upon the context, including the characteristics of the person or persons said to be affected. Conduct towards a sophisticated businessman may, for instance, be less likely to be objectively regarded as capable of misleading or deceiving such a person than similar conduct directed towards a consumer or, to take an extreme case, towards an individual known by the defendant to have intellectual difficulties. Richardson J in Goldsbro v Walker said that there must be an assessment of the circumstances in which the conduct occurred and the person or persons likely to be affected by it. The question to be answered in relation to s 9 in a case of this kind is accordingly whether a reasonable person in the claimant’s situation – that is, with the characteristics known to the defendant or of which the defendant ought to have been aware – would likely have been misled or deceived. If so, a breach of s 9 has been established. It is not necessary under s 9 to prove that the defendant’s conduct actually misled or deceived the particular plaintiff or anyone else. If the conduct objectively had the capacity to mislead or deceive the hypothetical reasonable person, there has been a breach of s 9. If it is likely to do so, it has the capacity to do so. Of course the fact that someone was actually misled or deceived may well be enough to show that the requisite capacity existed.
(citations omitted)
[241] As to reliance, the Supreme Court observed that it does not follow from the fact that a reasonable person would have been misled that the particular claimant was actually misled or deceived. That is a factual question, usually to be answered by drawing an inference from the evidence as a whole.89
[242] If reliance is established, the court must then be satisfied that the respondent’s breach was an “operative cause” of the claimant’s loss. The breach need not be the
88 Red Eagle Corp Ltd v Ellis [2010] NZSC 20, [2010] 2 NZLR 492.
89 At [29].
only effective cause, so long as it is an effective cause.90 The breach will not be an effective cause if it was, in the end, “immaterial” to the suffering of loss or damage.91
[243] An, or the, operative cause of the claimant’s loss may also be its own conduct in failing to take reasonable care to look after its own interests.92 The fact a claimant may have contributed to its own loss does not disqualify the claim. In the event, and given the discretion to be exercised, the exercise of the power to make an order for payment under s 43 is “a matter of doing justice to the parties in the circumstances of the particular case and in terms of the policy of the Act”.93
Analysis
[244] Dempsey Wood’s pleading of its FTA claim is summarised at [16] above. The focus of the claim became Mr Gapes’ communication with Mr Dempsey on 12 November 2015, confirming the amount held in the Project Account and that this “was earmarked for civils and consultants”. To recap, Dempsey Wood says this representation was misleading because at the time it was made, PRDL was in default of the Koi Facility and Mr Gapes knew that the Project Account “would soon be used by Koi to repay its secured debt”.
[245] Whether Mr Gapes’ representation was misleading must be considered in the context it was made. That context includes Dempsey Wood’s solicitor’s letter of 29 October 2015, which included a request for evidence of the funding available to PRDL to meet its ongoing payment obligations to Dempsey Wood. Additional context is the evident telephone discussion between Mr Gapes and Mr Dempsey on 11 November 2015, in which Mr Gapes had made Mr Dempsey aware that the Webber Capital agreement had fallen over. Mr Dempsey noted in his follow up email that that development made it “even more imperative” that the concerns outlined in Dempsey Wood’s solicitor’s letter of 29 October 2015 were addressed. Mr Dempsey also recorded that in his telephone discussion with Mr Gapes, Mr Gapes had “re-affirmed that there was $3.9 million deposit in a Russell McVeigh (sic) Trust account with the
90 At [29].
91 At [29].
92 At [30].
93 At [31].
specific purpose of assuring payment for the civil works for this project” (emphasis added). In his reply email, Mr Gapes did not dispute Mr Dempsey’s summary of their earlier discussion.94
[246] That Mr Gapes knew that Dempsey Wood was seeking assurance that it would be paid for ongoing works, rather than simply a request for what was then remaining in the Project Account, is also evident from Mr Gapes’ instructions to Russell McVeagh when asking for the (then) current balance of that account. In his email to Russell McVeagh on 11 November 2015, Mr Gapes’ stated “Conal Dempsey would like some comfort we have the money still available to pay him”. As noted at [86] above, that full email chain, including Russell McVeagh’s confirmation of the dollar amount remaining in the Project Account, was then forwarded to Mr Dempsey with the confirmation that “the $4.172 is for civils and consultants etc”.
[247] Counsel for Mr Gapes argue that given what Mr Dempsey knew at the time, Mr Gapes’ email was not capable of being misleading, particularly given it was a representation made to a sophisticated businessman. Counsel refer to the fact that Mr Dempsey knew of the general concept of a secured lender and that they would have priority over unsecured lenders; how property funding worked at a basic level; that Koi’s quantity surveyor was required to sign-off any payments; that Koi’s approval was also required to any payments; that refinance was needed to continue the Development; and that receivership of PRDL was a possibility (given the threat made at the meeting with Webber Capital and the Chows).
[248] I am not persuaded these matters affect whether, in an objective sense, Mr Gapes’ email was capable of being misleading. The state of knowledge of the hypothetical reasonable person in Mr Dempsey’s position will of course be relevant. But it was no doubt because of that knowledge, even accepting for present purposes that Mr Dempsey was aware of all those matters referred to at [247] above, that led to Dempsey Wood seeking assurance from Mr Gapes on PRDL’s ability to pay. For example, had PRDL not been in a difficult financial position, if refinance was not being sought, and if receivership had not been threatened, Dempsey Wood would no
94 See [84] above.
doubt not have perceived there to be any real risk that it would no longer get paid. And even if Mr Dempsey was aware that Koi had to approve payments, he was seeking assurance from Mr Gapes, PRDL’s sole director, who had the relationship and dealings with Koi. To reiterate: given what Mr Dempsey did and arguably knew, his request was not one of academic interest as to what amounts remained in the Project Account. Rather, and in a “real world” and commercial sense, he was pressing Mr Gapes for an assurance that Dempsey Wood would be paid if it continued to work.
[249] In this context I consider Mr Gapes’ email was capable of misleading or deceiving the hypothetical reasonable person in Mr Dempsey’s position. In the context described above, his email conveyed that the funds in the Project Account would be available to meet Dempsey Wood’s ongoing claims. Mr Gape’s assurance was not qualified in any sense. Mr Dempsey could reasonably have understood the email to suggest that given Mr Gapes’ current knowledge and arrangements with Koi, the funds would be available to pay Dempsey Wood.
[250] But at that time, the funding position was in fact quite different to that conveyed by Mr Gapes’ email. The Koi Facility had expired and Koi had issued a PLA notice. Mr Gapes was aware that the amounts remaining in both the Construction and Project Accounts were already earmarked to be repaid to Koi in part repayment of the Facility. At the time of Mr Gapes’ email, there were no other arrangements on the table which would have seen contractors get paid if Koi did “hoover up” the amounts remaining in the Construction and Project Accounts. Mr Gapes had also been put on notice the previous day, 11 November 2015, that Koi was trying to sell its Facility, including the amounts remaining in the Project Account.
[251] I accept that Mr Gapes subjectively thought Koi would continue to support PRDL until refinance was secured. But he had no clear, written or reliable assurances from Koi to this effect. In any event, Mr Gapes’ subjective belief is not relevant to whether his 12 November 2015 email breached s 9 of the FTA.
[252]I accordingly find that breach of s 9 is made out.
[253] The next question, and what I see as the real issue on the FTA claim, is whether Dempsey Wood relied on Mr Gapes’ email, given on 13 November 2015, Mr Dempsey followed up with further and more specific queries of Russell McVeagh.95 Counsel for Mr Gapes’ submit that the very fact these follow up questions were asked confirms that Dempsey Wood did not believe what Mr Gapes said in his 12 November 2015 email and thus did not rely on it.
[254] I disagree. It is easy in hindsight to focus on particular words and conduct at any one point in time (and on specific questions asked and answers given by Mr Dempsey on this topic in cross-examination). What is required, however, is an appraisal of the whole of the evidence, looking at the matter in a practical and common sense way.96 In the context of Mr Dempsey’s inquiry of Mr Gapes, and his reply, I am satisfied that Dempsey Wood relied on that assurance in continuing to work on the Development over the short term. Mr Dempsey’s follow up request of Russell McVeagh was to seek further assurance and detail around what was a fairly short and benign response from Mr Gapes, and when Mr Dempsey understood the Development still had several months to run. The catalyst for Dempsey Wood’s request had been confirmation that the Webber Capital agreement had fallen over, thus “ratcheting up” Dempsey Wood’s concern about PRDL’s ability to continue to pay it. That Mr Dempsey wanted that further detail and assurance does not in my view mean Dempsey Wood did not rely on what Mr Gapes told it, in quite clear and unqualified terms. Dempsey Wood did, after all, continue to work for a number of weeks before Russell McVeagh responded to Mr Dempsey’s 13 November email.
[255] I accept Mr Dempsey’s evidence that, in the context of what he did know about the difficulties in the Development, the threat of receivership and Mr Gapes’ ongoing search for finance, in the absence of Mr Gapes’ assurance, Dempsey Wood would have “downed tools” in some shape or form. In this way, Dempsey Wood continuing to work in the short term in response to Mr Gapes’ email is similar to the “provisional commitment” to the loan in issue in Red Eagle. In that case, the claimant was found to have relied on the respondent’s statement as to security for the loan, despite almost immediately thereafter stating he would need further detail of the security and
95 See [87] above.
96 Red Eagle at [34].
recording in the loan agreement that it was the later, more detailed information relied on.97
[256] I accordingly conclude that Dempsey Wood did rely on Mr Gapes’ email, and that it was an operative cause of Dempsey Wood’s loss, namely the cost of the work carried out by it after 12 November 2015 and for which it was never paid. Other than Russell McVeagh’s later email (and Dempsey Wood’s own conduct, which I address below), no other operative causes are suggested. As to Russell McVeagh’s later email, I am satisfied the assurance provided by Mr Gapes continued to be an operative cause of Dempsey Wood’s loss after 24 November 2015. In effect, the two email communications complemented each other, with the latter giving further detail to “flesh out” the earlier assurance.
[257] I do not accept counsel for Mr Gapes’ submission that Dempsey Wood cannot have relied on the representation given it was already contractually obliged to continue the civil works. While that might be so from a strict legal perspective, from a factual and commercial perspective, I accept Mr Dempsey’s evidence that he would have stopped work and “worried about the legals later”. In a sense, and given Mr Gapes’ evident desire to keep work on the Development going while he searched for new finance, Dempsey Wood threatening to or actually downing tools would have no doubt resulted in some frank discussions between the two men, and enabled Dempsey Wood to engage with Mr Gapes on preserving Dempsey Wood’s position.
[258] I also reject counsel for Mr Gapes’ submission that Dempsey Wood did not look after its own interests and this was an operative, or even the operative, cause of its loss. Counsel for Mr Gapes submit that Dempsey Wood did not insist on the money being held separately on trust, or did not ask questions directly of Kingstons or Koi. Counsel submit that such a failure to take due care serves to break the causal connection. I disagree. Again, Dempsey Wood was approaching the sole director of PRDL seeking assurance on payment. Mr Gapes gave that assurance. In that context, it was not necessary for Dempsey Wood to insist on the money being held separately on trust or ask to ask questions directly of Kingstons or Koi. The proper and first port
97 At [36].
of call was PRDL’s director. In light of Mr Gapes’ response on 12 November 2015, Mr Gapes would have no doubt have taken umbrage had Dempsey Wood made direct contact with Koi at that time. I acknowledge that Mr Gapes directed Dempsey Wood to Russell McVeagh, but they were PRDL’s solicitors, and thus subject to PRDL’s instructions as to what was said, and when, to Dempsey Wood in response.
[259] In terms of the quantum of loss flowing from Mr Gapes’ breach of s 9, for reasons already discussed earlier in this judgment, I exclude the EOT claim from the suggested loss. Further, only a portion of the certified amount for Dempsey Wood’s November 2015 work of some $503,000 could have flowed from the misrepresentation, together with the first three days in December. Using the daily apportionment discussed at [230] above, 15 working days following 12 November 2015 and up to and inclusive of 3 December 2015, at $20,974 per day, results in a prima facie loss of $314,610.
[260] I accept, however, counsel for Mr Gapes’ submission that the loss would not extend to the full amount of the unpaid invoices corresponding to the relevant period of time, given that measure of damages would include an amount of profit which would not have been earned on Dempsey Wood’s “drop tools” counterfactual. The usual approach to damages under the FTA is that they are assessed on the tort measure of loss,98 rather than the contractual (expectation) measure. On this basis, the loss to Dempsey Wood is the costs incurred by it in providing services to PRDL after 12 November 2015.
[261] Again, a relatively broad-brush approach is all that is possible on the evidence. The starting point is the $314,610 calculated above. Mr Dempsey gave evidence that a common margin for civil works (though not specifically relating to the Development) would be between 7 and 11 percent. I infer that Dempsey Wood made a similar margin on this project, there being nothing to suggest otherwise. Adopting a halfway point of a 9 percent margin, I ascribe a value of $286,295 to the cost of Dempsey Wood’s continuing work on site following 12 November 2015 and for which it was never paid.
98 Cox & Coxon Ltd v Leipst [1999] 2 NZLR 15 (CA).
[262] I do not consider there to be any other factors influencing the discretion to be exercised pursuant to s 43 and which would operate to reduce the award. Ultimately, at the time of Mr Gapes’ email, PRDL was in a very vulnerable position, with the risk of PRDL’s failure falling entirely on its creditors rather than PRDL or its shareholders. And as the aged creditors summaries produced in evidence demonstrate, as at November 2015, Dempsey Wood was the unsecured creditor at most risk, and by some margin.
Result and next steps
[263]For the reasons set out in this judgment, I have concluded as follows:
(a)Mr Gapes breached s 135 of the Act, with a breach date of 13 November 2015.
(b)Mr Gapes breached s 136 of the Act, with a breach date of 13 November 2015.
(c)Mr Gapes did not breach s 131 of the Act.
(d)It is not possible on the evidence to conclude that there was a net deterioration in PRDL’s financial position between the breach date and the date of receivership (or even if there was, to reliably assess what the net deterioration was).
(e)The appropriate remedy for the breaches of the Act is the new debt approach, confined to PRDL’s payment obligations to Dempsey Wood incurred after 13 November 2015.
(f)PRDL’s payment obligations to Dempsey Wood incurred after 13 November 2013 are assessed at $293,636.
(g)I make an order pursuant to s 301 of the Act that Mr Gapes is to contribute one-third of that amount, rounded to $100,000.
(h)Mr Gapes’ email to Dempsey Wood on 12 November 2015 breached s 9 of the FTA.
(i)I make an order pursuant to s 43 of the FTA that Mr Gapes is to pay Dempsey Wood the sum of $286,295.
(j)The parties are invited to make further submissions, on or before 1 October 2021, on:
(i)whether the amount to be paid pursuant to (g) above ought to be paid to Dempsey Wood or to PRDL;
(ii)the question of interest; and
(iii)the interaction of the s 301 award and that made pursuant to the FTA.99
[264] I invite the parties to confer and seek to agree costs. My preliminary and non- binding view is that Dempsey Wood is the successful party overall, though a costs award in its favour ought to be reduced somewhat given it has not succeeded on all aspects of its claims, particularly those under the Act. Costs ought to be assessed on a 2B basis.
[265] If the parties cannot agree costs, Dempsey Wood may file a memorandum as to costs on or before 1 October 2021. Mr Gapes may file a memorandum in response on or before 8 October 2021. No memorandum is to be longer than five pages in length.
Fitzgerald J
99 See [236] above.
5