DHC Assets Ltd v Arnerich
[2021] NZHC 277
•25 February 2021
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2020-404-00975
[2021] NZHC 277
BETWEEN DHC ASSETS LIMITED
Plaintiff
AND
ANTONY IVO ARNERICH
Defendant
Hearing: 19 October 2020 Appearances:
F Thorp for the Plaintiff
D A Cowan and J McBride for the Defendant
Judgment:
25 February 2021
JUDGMENT OF ASSOCIATE JUDGE GARDINER
This judgment was delivered by me on 25 February 2021 at 3.30 p.m. pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar Date.......................................
Solicitors:
Duthie Whyte, Auckland Doug Cowan, Auckland
F Thorp and L Turner, Auckland
J McBride and A J Steel, Auckland
DHC ASSETS LTD v ARNERICH [2021] NZHC 277 [25 February 2021]
Introduction
[1] Mr Arnerich was formerly the sole director of Vaco Investments (Lincoln Road) Limited (Vaco). Vaco engaged DHC Assets Limited (DHC) to design and construct a commercial building at Lincoln Road, Henderson.
[2] After practical completion, DHC submitted a payment claim which included claims for time-related costs arising out of delays in construction. Many of DHC’s claims were rejected, and DHC indicated an intention to proceed to adjudication. Before it could do so, Vaco was placed in voluntary liquidation. By that time, and unbeknownst to DHC, Vaco had sold the Lincoln Road property and Mr Arnerich had distributed all Vaco’s funds either to himself or to interests or persons associated with himself, leaving Vaco without enough funds to satisfy DHC’s claims.
[3] Since then, DHC, Vaco and Mr Arnerich have been involved in a prolonged dispute involving an adjudication under the Construction Contracts Act 2002, arbitration under the construction contract and High Court proceedings. In the most recent of these, DHC sought, pursuant to s 301(1)(c) of the Companies Act 1993, to recover from Mr Arnerich the amount it says it is owed as an unpaid creditor of Vaco.
[4] In a judgment delivered on 27 September 2019 and reissued on 2 October 2019, His Honour Davison J found that by procuring distributions and payments by Vaco shortly prior to it being placed into liquidation, Mr Arnerich had breached his director’s duties to act in good faith, by failing to act in Vaco’s best interests and by distributing Vaco’s assets to the detriment of a creditor, and by preferring his interests and those of other persons associated with him over the interests of Vaco’s creditors.1 His Honour ordered, pursuant to s 301(1)(c) of the Companies Act 1993 that Mr Arnerich pay directly to DHC the amount that had been awarded to DHC in the adjudication proceedings, with interest. However, His Honour concluded that he did not have jurisdiction to order Mr Arnerich to pay any further sums, unless and until such sums are found to be owing by Vaco to DHC through the arbitration which had been activated (but is presently adjourned).
1 DHC Assets Limited v Arnerich [2019] NZHC 1695.
[5] Mr Arnerich appealed that decision. DHC cross-appealed the finding as to absence of jurisdiction and the decision to dismiss that portion of DHC’s claim under s 301. That appeal was heard on 4 and 5 November 2020. The Court of Appeal has not yet delivered a judgment.
[6] In the meantime, DHC filed the present proceeding, which for all intents and purposes duplicates the earlier proceeding. DHC commenced this proceeding (the 975 proceeding) without prejudice to its cross-appeal of the earlier proceeding, against the possibility that the cross-appeal is dismissed and DHC’s outstanding claims against Vaco need to be resolved in arbitration, and therefore a s 301 application against Mr Arnerich would be time-barred.
[7] Mr Arnerich says that DHC’s statement of claim should be struck out and this proceeding dismissed because:
(a)the proceeding is an abuse of process because the cause of action upon which it is based is res judicata;
(b)the statement of claim discloses no reasonable cause of action because the pleading is barred by the Limitation Act 2010 as it was filed six years after the acts upon which the claim is based; namely, the payments made by Vaco to Mr Arnerich and related persons or entities set out in the statement of claim.
[8] DHC contends that its claim has never been “determined” in any forum. His Honour Davison J expressly declined to determine the claim with respect to time-related costs based on an absence of jurisdiction. Further, the claim is not time-barred because ss 11 and 16 of the Limitation Act 2010 extend the start of the limitation period for claims advanced under s 301 to the date the company is placed in liquidation (in this case, 1 July 2014). Alternatively, it filed the proceeding within the “late knowledge” period.
Issues
[9]The issues to be determined in this application to strike-out are:
(a)Is DHC’s proceeding an abuse of process because the cause of action upon which it is based is res judicata?
(b)Is the proceeding time-barred because it was commenced after the expiry of the primary and late knowledge periods under the Limitation Act 2010?
Factual background
[10] DHC and Vaco entered into a contract to design and construct a commercial building comprising a bank and other commercial spaces on a property at Lincoln Road. Mr Arnerich was the sole director and effective owner of Vaco. The contract works, initially scheduled to take 34 weeks, were delayed by 21 weeks. Practical completion occurred on 21 November 2012. DHC applied for extensions of time in respect of the delays.
[11] In March 2013, DHC submitted payment claim 17, which included claims for time-related costs arising out of the delays. Payment Schedule 17 rejected many of DHC’s claims and noted that others had been referred to the engineer for review.
[12] On 20 January 2014 the engineer issued formal decisions to DHC. The decisions were largely unfavourable to DHC. DHC, after making further efforts to pursue payment, indicated an intention to proceed to adjudication. However, on 1 July 2014, Mr Arnerich placed Vaco in liquidation. By that time, and unbeknownst to DHC, Vaco had sold the Lincoln Road property for $8.4 million on 3 April 2013; Mr Arnerich had made payments of around $2.5 million from Vaco to his own interests between 3 and 9 April 2013; and Vaco had been insolvent from 10 April 2013 as a result of those payments.
[13] In October 2016, the Construction Contracts Act adjudicator awarded DHC an additional $367,768.12. The adjudicator rejected DHC’s claims for time-related costs
associated with the delayed construction and certain other claims for preliminary and general costs (referred to together for convenience as the TRC claims). Subsequently, with the leave of the High Court, DHC commenced an arbitration to have these additional claims examined. Mr Arnerich was not a party to the arbitration. The arbitration was later adjourned, and remains adjourned sine die.2
[14] On 1 March 2017, DHC issued proceeding CIV-2017-404-307 (the 307 proceeding) against Mr Arnerich, alleging that Mr Arnerich had breached his duties under s 131 of the Companies Act 1993. In its initial pleading DHC claimed compensation under s 301:
(a)firstly, the amount which had been held to be owing by Vaco to DHC in the 2016 adjudication;
(b)secondly, in respect of the TRC claims, for such further amount as the arbitrator might find to be owing by Vaco to DHC.
[15] By the time the 307 proceeding went to trial on 31 October 2019, all contractual claims between DHC and Vaco including the TRC claims had been repleaded in the 307 proceeding. DHC sought payment by Mr Arnerich direct to DHC pursuant to s 301 of $1,088,156.17 (being the sum of the adjudication determination and the rejected TRC claims). The arbitration remained adjourned, and the liquidator had filed a memorandum expressly agreeing to abide any decision of the Court in respect of any amounts held to be due and owing to DHC under the building contract with Vaco. The parties say that they proceeded on the basis that the issue of Vaco’s liability for each of DHC’s contractual claims against it, including the TRC claims, would be resolved in the 307 proceedings. The parties pleaded, led evidence, cross- examined witnesses and advanced submissions on that basis.
[16] In his judgment dated 2 October 2019, His Honour Davison J upheld DHC’s claim against Mr Arnerich for breach of s 131 of the Companies Act and ordered Mr Arnerich to compensate DHC directly for the full amount which the adjudicator had held to be owing by Vaco to DHC. This was on the basis that Mr Arnerich was
2 With no appointed date for resumption.
not able to challenge the existence of the liability found to be owing by the adjudicator, as he had actively participated in the adjudication process.
[17] However, His Honour declined to make an order with respect of DHC’s claims for compensation in relation to the TRC claims, finding that in circumstances where the dispute resolution clause in the contract had been engaged, the Court did not have jurisdiction to do so.
[18] Mr Arnerich appealed the finding that he had breached his director’s duty. DHC cross-appealed, challenging the finding of an absence of jurisdiction to consider the TRC claims, and His Honour’s decision to dismiss that portion of the claim under 301 against Mr Arnerich. If successful, DHC seeks an order that the issue of those TRC claims, and relief in respect of them, be remitted to the High Court for determination. Alternatively, if the Court of Appeal considers that His Honour was right that the arbitration must be concluded before compensation for the TRC claims may be pursued in the High Court, DHC seeks an order reversing the decision to dismiss that aspect of DHC’s claim under s 301 against Mr Arnerich, and instead adjourning or staying consideration of it until after the conclusion of the arbitration proceedings.
[19] In the interim, DHC has commenced this proceeding without prejudice to its cross-appeal in the 307 proceeding. This proceeding has been filed to guard against the possibility that Davison J’s judgment is upheld and the cross-appeal dismissed, such that DHC’s TRC claims need to be resolved through arbitration; and to avoid the possibility of any claims upheld in arbitration and subject to a s 301 application being time-barred.
[20] Mr Arnerich subsequently applied to strike out the present proceeding pursuant to r 15.1.1(d) of the High Court Rules 2016, on the basis that it is an abuse of process of the Court, as it is a duplication of the earlier proceeding; and further, that it is time- barred.
Abuse of process
Legal Principles
[21] Rule 15.1(1)(d) of the High Court Rules provides that the Court may strike out all or part of a pleading if it is an abuse of the process of the Court. This category captures instances of misuse of the Court’s processes beyond the specific grounds in 15.1(a) to (c). It has been held to extend to attempts to re-litigate matters already determined3 and duplication of proceedings.4
[22] The onus is on the party alleging abuse of process to show that the proceeding was brought for an improper purpose. It is a “heavy onus” and one to be exercised only in exceptional circumstances.5
[23] With respect to evidence for strike-out applications, the Court may accept the pleading as proven. As expressed by the Court of Appeal in Attorney-General v McVeagh:6
The Court is entitled to receive affidavit evidence on a striking-out application, and will do so in a proper case. It will not attempt to resolve genuinely disputed issues of fact and therefore will generally limit evidence to that which is undisputed. Normally it will not consider evidence inconsistent with the pleading, for a striking-out application is dealt with on the footing that the pleaded facts can be proved…
[24] In terms of res judicata, a right of action is extinguished by final judgment given on that right of action by a Court of competent jurisdiction.7 As explained by Tipping J in Joseph Lynch Land Co Ltd v Lynch:8
The expression “res judicata” means the matter has been adjudicated. The concept of res judicata is often applied to both cause of action estoppel and issue estoppel. Traditionally its use was confined to the former. Cause of action estoppel is different from issue estoppel, which can arise where a plea
3 McGechan on Procedure (online looseleaf ed, Thomson Reuters) at [HR15.1.05(2)], citing Hunter v Chief Constable of West Midlands Police [1982] AC 529 (HL) at 541; and Collier v Butterworths of New Zealand Ltd (1997) 11 PRNZ 581 (HC) at 586.
4 At [HR15.1.05(2)], citing Otis Elevator Co Ltd v Linnel Builders Ltd (1991) 5 PRNZ 72 (HC); and Cowley v Shortland Publications Ltd (1991) 5 PRNZ 76 (HC).
5 Williams v Spautz [1992] HCA 34; (1992) 174 CLR 509.
6 Attorney-General v McVeagh [1995] 1 NZLR 558 (CA) at 566.
7 Saba Yachts Ltd v Anae HC Auckland, CIV-2007-404-1049, 27 June 2007, at [26].
8 Joseph Lynch Land Co Ltd v Lynch [1995] 1 NZLR 37 (CA), at [40].
of res judicata in the strict sense is not open because the causes of action are not the same: see [16], Halsbury’s Laws of England (fourth ed reissue) (Estoppel) at para 977. Cause of action estoppel is more precise than issue estoppel. For there to be cause of action estoppel, the cause of action sought to be estopped must be precisely the same as that upon which there has been an earlier adjudication.
[25] Res judicata / cause of action estoppel and abuse of process are distinct but related concepts. Conduct which permits the other party to raise res judicata may be abusive but will not necessarily be so. The relationship between the two concepts was discussed by the Court of Appeal last year in Craig v Stringer:9
[16] … Res judicata applies where a cause of action has been determined in earlier proceedings between the same parties or their privies –– cause of action estoppel. The doctrine prevents re-litigation of the same cause of action in any subsequent proceedings….
[17] A related principle is that the parties are required to bring forward their whole case and will generally be prevented from later attempting to re- open the same subject on a different basis. This principle was first recognised by Wigram V-C in Henderson v Henderson:10
[W]here a given matter becomes the subject of litigation in, and of adjudication by, a Court of competent jurisdiction, the Court requires the parties to that litigation to bring forward their whole case, and will not (except under special circumstances) permit the same parties to open the same subject of litigation in respect of a matter which might have been brought forward as part of the subject in context, but which they have, from negligence, inadvertence, or even accident, omitted part of their case.
…
[19] Lord Sumption explained the juridical difference between the doctrine of res judicata and the Henderson v Henderson principle in Virgin Atlantic Airways Ltd v Zodiac Seats UK Ltd [Virgin Atlantic v Zodiac]:11
Res judicata is a rule of substantive law, while abuse of process is a concept which informs the exercise of the court’s procedural powers. In my view, they are distinct although overlapping legal principles with the common underlying purpose of limiting abusive and duplicative litigation. That purpose makes it necessary to qualify the absolute character of both cause of action estoppel and issue estoppel where the conduct is not abusive.
9 Craig v Stringer [2020] NZCA 260. See also Contact Energy Ltd v Attorney-General [2009] NZCA 351 at [85]–[87].
10 Henderson v Henderson (1843) 3 Hare 100, 67 ER 313 (Ch) at 115.
11 Virgin Atlantic Airways Ltd v Zodiac Seats UK Ltd [2013] UKSC 46, [2014] AC 160 at [25].
[26] The distinction was also discussed by the High Court in Commerce Commission v Harmoney.12 The Court quotes Lord Bingham’s observations in Johnson v Gore Wood, which Lord Sumption subsequently referred to in Virgin Atlantic v Zodiac:13
Henderson v Henderson abuse of process, as now understood, although separate and distinct from cause of action estoppel and issue estoppel, has much in common with them. The underlying public interest is the same: that there should be finality in litigation and that a party should not be twice vexed in the same matter…It is, however, wrong to hold that because a matter could have been raised in earlier proceedings it should have been, so as to render the raising of it in later proceedings necessarily abusive….
[27] Somers J summarised the position in New Zealand Social Credit Political League Inc v O’Brien:14
Estoppel per rem judicatam, issue estoppel, and abuse of process in at least one of its manifestations, may be seen an exemplifying similar concepts – that a matter once determined may not be again litigated, that a matter which could and should have been raised subsequently, and that a collateral attack upon a final decision in another proceeding will not be permitted. The dual objects are finality of litigation and fair use of curial procedures.
Mr Arnerich’s submissions
[28] Mr McBride for Mr Arnerich submits that this is a clear case of cause of action estoppel, as DHC’s statement of claim in this proceeding alleges precisely the same breaches of director’s duties as the 307 proceeding. In so doing, DHC seeks to relitigate the same issues concerning those alleged breaches. For that reason, this proceeding is an abuse of process. Any complaints that DHC has about the 307 judgment must be resolved by way of its appeal, in the usual way. Mr McBride submits that DHC’s commencement of a parallel process, as a “backstop” to its appeal entitlements, is a clear and intolerable abuse of the Court’s process, that the Court should not sanction. Mr McBride contends that this is not a Henderson v Henderson situation, where the Court must consider whether the new claims might have been advanced in the earlier proceeding. Rather, it is the more egregious and objectionable
12 Commerce Commission v Harmoney [2017] NZHC 2421.
13 Commerce Commission v Harmoney [2017] NZHC 2421 at [33], quoting Virgin Atlantic v Zodiac, above n 11, at [24] citing Johnson v Gore Wood [2001] 1 All ER 481.
14 New Zealand Social Credit Political League Inc v O’Brien [1984] 1 NZLR 84 (CA) at [89].
form of res judicata, being a cause of action estoppel arising where the causes of action brought then and now are one and the same.
[29] Mr McBride relies on the Court of Appeal decision of Neylon v Dickens for the proposition that cause of action estoppel applies not just to the cause of action, but to the relief being sought.15 So, a party suing for breach of director’s duties and succeeding on some, but not all, of its damages claims does not get the opportunity to return to Court to relitigate the cause of action to make additional damages claims.
DHC’s submissions
[30] DHC’s submission is simply that the TRC claims have never been determined in any forum, with His Honour Davison J expressly declining to determine them because of an absence of jurisdiction. Davison J also expressly envisaged that a further proceeding would be filed to litigate and determine Mr Arnerich’s liability in respect of the TRC claims.
Analysis
[31] The courts have treated s 301, not as creating a new cause of action, but as providing a procedural mechanism by which a liquidator, creditor or shareholder may pursue the claims which a company in liquidation may have against, among others, its former directors.16
[32] Applications by a liquidator, creditor or shareholder for an order against a director pursuant to s 301 are to be approached in two-stages.17 First, the court considers and determines whether the director has breached a duty or is otherwise liable. Second, the court considers whether to exercise its discretion to order the director to repay or restore money or property to the company (s 301(1)(b)(i)) or to contribute a sum the court thinks just to the assets of the company by way of compensation (s 301(1)(b)(ii)). When determining the amount of compensation to be
15 Neylon v Dickens [1987] 1 NZLR 402 (CA) at [409]–[410].
16 Robb v Sojourner [2007] NZCA 493 at [53]. See also Paul Heath and Mike Whale Insolvency Law in New Zealand (3rd ed, LexisNexis, Wellington, 2018) at 647.
17 Mason v Lewis [2006] 3 NZLR 225 (CA) at [52] and [55].
paid, the authorities have identified three factors to consider: causation, culpability and duration of any breach.18 If the application is made by a creditor such as here, the court may order that the director pay the money or property or any part of it directly to the creditor (s 301(1)(c)).
[33] Here, Davison J completed the first stage of the process. His Honour determined that Mr Arnerich had breached his duty to act in good faith:19
[352] I find that Mr Arnerich, as director of Vaco, has breached his duty of good faith under s 131 of the Companies Act 1993.
[34] The first stage, the finding of a breach of duty by Mr Arnerich, is res judicata (subject to Mr Arnerich’s appeal).
[35] However, Davison J did not complete the second stage of the process for all DHC’s claims. His Honour considered that he only had jurisdiction to make an order under s 301 in respect of a crystallised, proven debt owing from Vaco to DHC:20
In order for the plaintiff to recover damages from Mr Arnerich, either directly, or through Vaco, it needs to have a crystallised debt owing to it from Vaco, and then must show that Mr Arnerich’s breach has caused it to be unable to recover that debt.
[36] His Honour’s assessment was that this Court did not have jurisdiction in this context to determine Vaco’s liability to DHC, or vice versa.21 His reasons are set out at paragraphs [260] to [267] of his judgment and do not need to be repeated here. However, his view was that Mr Arnerich could not, in those proceedings, challenge the existence of the debt found to be owing by Vaco to DHC by the adjudicator.22 To that extent, there was a crystallised debt owed to DHC by Vaco. He then completed the second part of the s 301 process in respect of that debt, determining that it was appropriate that Mr Arnerich compensate DHC directly, and to its full extent:
[347] Consistently with the observations of Heath J in Sanders v Flay, to the effect that a creditor should be directly compensated when it has personally initiated proceedings against the errant director, in circumstances where the
18 Madsen-Ries v Cooper [2020] NZSC 100 at 158.
19 Also, [244] and [345].
20 At [254].
21 At [259].
22 At [268].
liquidator has elected not to, I consider that in this case it is appropriate for Mr Arnerich to compensate the plaintiff directly.
[348] The amount which I direct Mr Arnerich to pay to the plaintiff is the same amount as found owing in the adjudication. In the present circumstances, I consider that to be a just exercise of the Court's discretion to determine the quantum of compensation. Mr Arnerich's breaches of duty by distributing the assets of Vaco to his related interests, and thereby rendering Vaco insolvent, defeated the plaintiff's ability to prosecute those claims against Vaco directly. Accordingly, as Mr Arnerich personally and via associated entities controlled by him benefitted directly from his breach of duty, I consider that he should personally compensate the plaintiff for the full amount of Vaco's debt to the plaintiff.
[37] His Honour considered that the balance of DHC’s contractual claim against Vaco, including the TRC claims, had not been determined and could not be determined by the Court. He was therefore unable to undertake the second part of the evaluation required by s 301:
[269] As regards those parts of DHC’s contractual claim that were disallowed by the adjudicator and which it has since referred to arbitration, clearly the dispute provisions of the contract are engaged, are underway, and are yet to be completed. In these circumstances and for the reasons set out above, I do not consider that the Court can in these proceedings undertake a determination of whether DHC can establish that Vaco is also liable to meet DHC’s claims that were rejected by the adjudicator. The process for determining those issues under the contract is by arbitration.
…
[351] The final amount of Vaco’s indebtedness to the plaintiff is yet to be determined and cannot be determined other than by means of arbitration which is presently adjourned. This means that although the plaintiff may in the future succeed in establishing the claims it has referred to arbitration, it cannot recover any further sum found owing to Vaco, directly from Mr Arnerich pursuant to s 301(1)(c) of the Act, other than by means of a further proceeding. However unfortunate this situation, it is the consequence of the plaintiff having elected to pursue this proceeding before concluding the arbitration proceeding and thereby determining the full extent of Vaco’s indebtedness in accordance with the dispute provisions of the contract.
Conclusion
[38] My assessment is that this Court has completed the first part of the s 301 evaluation. Davison J considered whether Mr Arnerich had breached his duty under s 131 and decided that he had. That issue is res judicata.
[39] The second part of the s 301 evaluation, assessing whether an order for compensation by Mr Arnerich directly to DHC should be made and if so what amount, has been completed for the crystallised debt that was determined by the adjudicator under the contract. That also could be said to be res judicata. So, if for example Davison J had ordered Mr Arnerich to pay to DHC a lesser sum than that determined by the adjudicator, DHC would be estopped from making a further application under s 301 in respect of that debt.
[40] However, the s 301 assessment has not been completed by the Court for the TRC claims. His Honour Davison J expressly declined to consider whether an order should be made under s 301 with respect to those claims or for how much. That aspect of the s 301 procedure is not res judicata, nor would it amount to an abuse of process for DHC to make a further application to the Court under s 301 for an order in respect of those claims. Such an application would not constitute the sort of duplicative application that might undermine the principle of finality in litigation, or waste court resources.23
[41] Mr McBride referred me to Neylon v Dickens24. Mr McBride submitted that the Court’s conclusion that “every remedy that can be claimed in respect of the same cause of action must, under New Zealand procedure, be claimed in the one action” applied here and prevented DHC from advancing the present proceeding.
[42]This case can be distinguished for two reasons. The Court of Appeal said:
Here the general principle applies that the Court should not allow issues to be raised which are so clearly part of the subject-matter of earlier litigation that it would be an abuse of process to allow a new proceeding to be started in respect of them: see the judgments in this Court in New Zealand Social Credit Political League Incorporated v. O'Brien [1984] 1 NZLR 84, 90, 95, 99 , applying such authorities as Henderson v. Henderson (1843) 3 Hare 100 , Greenhalgh v. Mallard [1947] 2 All ER 255 , and Hunter v. Chief Constable of West Midlands Police [1982] AC 529 . In the particular field of contracts for the sale of land this Court held as long ago as 1902 in Dillon v. Macdonald 21 NZLR 375, 393, that every remedy that can be claimed in respect of the same cause of action must, under New Zealand procedure, be claimed in the one action. And that as the plaintiff there could have made in the former action (an action for specific performance dismissed for unreasonable delay) her alternative claim (a claim to common law damages
23 Virgin Atlantic Airways Ltd v Zodiac Seats UK Ltd [2013] UKSC 46, [2014] AC 160 at [25].
24 Neylon v Dickens [1987] 1 NZLR 402 (CA) at [409]–[410].
for breach of the same contract) she could not by dint of having limited her prayer for relief in the first action take a second proceeding claiming another remedy on the same cause of action.
…
The purchasers should have put forward all their claims on that cause of action timeously, under the supplementary jurisdiction if need be, in the first action. They failed to do so and must accept the consequences.
(emphasis added)
[43] First, while the general principle to which Neylon refers applies, the Court’s statement that every remedy that can be claimed in respect of a cause of action must be claimed under the one action, was concerned with the “specific field of contracts for the sale of land.” This case concerns an application for relief under s 301 of the Companies Act 1993. It is a unique procedure. I do not accept that the ratio of Neyland v Dickens necessarily extends to applications for orders under this statutory provision.
[44] Further, key to the Court of Appeal’s decision was the fact that the plaintiff had failed to seek the relief she now sought in her first proceeding, when she could and should have done so. Here, DHC did not omit to seek relief in respect of the TRC claims in the 307 proceeding. It sought that relief, but the Court determined that it did not have jurisdiction to consider whether to grant the relief sought, for the reasons already recited.
[45] I have concluded that this proceeding is not an abuse of process due to the cause of action being res judicata. I have also considered whether the proceeding could be considered an abuse of process because the arbitration still has not been completed, remains paused with no timeline, and therefore the total indebtedness of Vaco remains unknown. In response to my questioning about this concern, Mr Thorp for DHC explained that DHC has no intention of taking the 975 proceeding to trial before the arbitration is finished. He submits that if DHC loses in the arbitration, then the 975 proceeding will be discontinued; only if the arbitrator upholds the debt, will DHC advance the proceeding to obtain the order that the balance of the debt be paid to DHC. On that basis I do not consider it is an abuse of process for DHC to have filed the 975 proceeding in circumstances where if it did not do so, and the Court of Appeal finds against it, its claim to compensation will be time-barred.
Limitation Act 2010
[46] Mr Arnerich claims that DHC’s pleading is barred by the Limitation Act 2010 because it was filed six years after the acts upon which it was based; namely the payments set out in paragraph 41 of the statement of claim. DHC says that it is not time-barred because the start date for the “primary period” is the date on which the liquidator of Vaco was appointed. Alternatively, and without prejudice to that position, DHC says that it filed the proceeding within the “late knowledge period”, which began on or about 3 May 2018 or 18 June 2018.
The law
[47] Section 11 of the Limitation Act 2010 provides that it is a defence to a money claim if the defendant proves that either:
(a)the date on which the claim is filed is at least six years after the date of the act or omission on which the claim is based (the claim’s primary period); or
(b)the date on which the claim is filed is at least three years after the “late knowledge date” (the claim’s late knowledge period).
[48]Section 16(1)(i) of the Limitation Act 2010 stipulates:
16 Special start dates for various money claims
(1)For the purposes of section 11(1) and (3)(b), the primary and longstop periods of a claim specified in one of the following paragraphs have the start date specified in that paragraph:
…
(i)a claim under section 301 of the Companies Act 1993—the date on which the liquidator of the company or overseas company was appointed.
Mr Arnerich’s submissions
[49] The breaches of s 131 alleged by DHC concern a series of payments made by Vaco to its creditors and Mr Arnerich’s interests between 17 December 2012 and 6 June 2014. This proceeding was filed on 29 June 2020. Mr Arnerich maintains that as all the acts upon which DHC’s claim is based occurred over six years prior to the date upon which its claim was filed, the proceeding is time-barred.
[50] Mr McBride relies heavily on the Court of Appeal decision of Arataki Properties Ltd v Craig.25 In that case the Official Liquidator of Arataki had applied under s 321 of the Companies Act 1955, the equivalent to s 301 of the 1993 Act, for orders against a former director to pay to the liquidator compensation for a sum of money the director had allegedly disposed of in breach of his fiduciary duty to the company. The director moved that the application be dismissed as frivolous, vexatious and an abuse of process as it was barred by the Limitation Act 1950, s 4(1) and s 21. The Official Liquidator contended in response that the cause of action accrued at the date of winding up and not the date on which the cause of action arose. At the liquidator’s instigation the case was removed to the Court of Appeal because the judgment of the Court of Appeal in Re J E Hurdley & Son Ltd (in liq)26 constituted an apparent obstacle to the view that the proceeding was not statute-barred.
[51] Cooke P observed that the Court had heard argument of quality from counsel for the Official Liquidator, which as well as contentions of principle, had stressed the difficulties confronting Official Assignees with the dramatic growth in the number of company liquidations ordered by the Court. It was accepted that “Official Liquidators would experience some easement in carrying out their investigations of the affairs of failed companies if under s 321 of the 1955 Act a cause of action for limitation purposes were treated as running from the date of commencement of the winding up rather than that of any possible breach of duty to the company.” However, the Court concluded that this consideration was insufficient to justify a departure from the view
25 Arataki Properties Ltd v Craig [1986] 2 NZLR 294 (CA).
26 Re J E Hurdley & Son Ltd (in liq) [1941] NZLR 686 (CA).
acted on in Hurdley and other cases that time runs from the date the cause of action accrued to the company. Cooke P cited Myers CJ’s observation that:27
It is well settled by authority that a person against whom proceedings are taken under the general misfeasance section is entitled to plead the Statutes of Limitation by way of defence, and that the period of limitation commences not from the commencement of the winding-up but from the date when the cause of action arose. The reason for this is plain. The general misfeasance section does not create any new cause of action. It is merely procedural and does no more than provide a summary method of procedure with the object of simplifying litigation and minimizing expense. What it contemplates is merely a new method of procedure for the determination of existing causes of action: it does not create new liabilities or new rights.
[52] Cooke P referred to decisions of the English Court of Appeal,28 which supported the proposition stated by Myers CJ, and said:29
That is a strong current of authority and I am not persuaded the differ from the reasoning running through it. Section 321 gives a summary discretionary remedy to a range of persons much wider than the company itself, namely the Official Assignee, the liquidator, or any creditor or contributory. The discretion vested in the Court extends to the amount of any relief. It may be that no set off is permitted, as counsel says. But as against a director the section postulates misapplication or retention of, or liability or accountability for, money or property of the company. Or negligence, default, or breach of duty or trust in relation to the company. I cannot think that it was ever meant to create a wholly new cause of action as at the date of commencement of a winding up, which, subject only to the discretion of the Court, could expose non-fraudulent directors to examination into their conduct in years long past.
The settled interpretation that the section provides a new way of examining into and enforcing an existing liability to the company should not be disturbed by judicial decision. Perhaps there are arguments of policy for extending the time scope of the section; but to say the least they are not overwhelming. If there is to be any change it is best left to the legislature.
…
In my opinion therefore the relevant period in the present case is to be found in s 21 and on the facts is six years from each of the three alleged breaches of fiduciary duty previously quoted. On that view it is common ground that the Official Liquidator’s motion under s 321 is statute-barred.
[53] The other members of the Court concurred with the judgment of Cooke P. Of note, McMullin J observed at 299:
27 Re J E Hurdley & Son Ltd (in liq) [1941] NZLR 686 (CA) at 723, as cited in Arataki Properties Ltd v Craig [1986] 2 NZLR 294 (CA) at 297.
28 Re Lands Allotment Company [1894] 1 Ch 616; Re National Bank of Wales Ltd [1899] 2 Ch 629, 663.
29 At 298.
It may be that a case can be made for some statutory amendment extending the limitation period or postponing its operation for a specific period to enable a liquidator to make reasonable inquiry, after his appointment, into the activities of directors and those other persons at whose activities s 321 is directed. But, as s 321 now stands, I am not persuaded that the earlier decisions of this Court should not be followed.
[54] Mr McBride also relied on the decision of this Court in Benton v Priore.30 Heath J, following Arataki, concluded that there is nothing in the way in which s 301 has been expressed to suggest that Parliament intended that its character be changed from a procedural provision of the type discussed in Arataki to a substantive remedy.
[55] As to 16(1)(i) of the Limitation Act 2010, Mr McBride submits that it does not change the position established by these authorities. That is because a claim of this nature is not brought “under” s 301 of the Companies Act 1993 for the purposes of s 16(1)(i). Rather, it is brought “under” s 131 of the Companies Act 1993, the statutory provision that gives rise to the substantive cause of action. As such, the limitation period does not commence on the date the liquidator of Vaco was appointed, but on the dates of the acts which gave rise to the cause of action under s 131. Mr McBride submits that it would be an absurdity if s 301 of the Companies Act 1993 provided a procedural pathway to depart from the confines of the Limitation Act 2010 by decades. Notwithstanding the clear words of s 16(1)(i), he interprets ss 131, 301 and 16(1)(i) together as starting the clock for a claim under s 301 on the date of the breach of s 131. He underscores that the option remains open for a claimant to assert “late knowledge”.
Analysis
[56] The authorities to which Mr McBride refers pre-date the Limitation Act 2010 and, in my view, the statements concerning the commencement of the limitation period for claims under s 301 plainly do not survive the addition of s 16(1)(i). Parliament decided, possibly in response to Arataki, that the limitation period for applications under s 301 of the Companies Act should start on the date on which the liquidator of the company is appointed, as opposed to the date on which the liability arises. The words of s 16(1)(i) are clear and unambiguous. There are sound policy reasons for such an approach, as noted by McMullin J in Arataki, including to allow liquidators a
30 Benton v Priore [2003] 1 NZLR 564 (HC).
reasonable opportunity following their appointment to investigate the company’s affairs and to apply to the Court for relief under s 301 of the Companies Act 1993.
[57]The terms of s 301 support this interpretation:
If, in the course of the liquidation of a company, it appears to the Court…the Court may, on the application of the liquidator or a creditor or shareholder…
[58] Section 301 is a unique procedure which enables the Court to make an inquiry and orders for repayment, restitution or compensation when a company has been placed in liquidation. The section envisages that facts may come to light during the liquidation that provide grounds for an application under s 301 for the available forms of relief. There is a logic therefore to the limitation period for an application for that form of relief commencing at the start of the liquidation.
[59] Further, if Mr McBride’s submission were correct, s 16(1)(i) would have no meaning or effect.
[60] The limitation period for a claim by DHC under s 301 began to run on the date of appointment of the liquidator, namely 1 July 2014. As this proceeding was issued on 29 June 2020 it is within the six-year primary period and is not time-barred.
Late knowledge
[61] Having concluded that the proceeding was filed within the primary period, it is not necessary for me to reach a finding on DHC’s alternate defence, that it is within the late knowledge period. However, for completeness, s 14 relevantly provides:
(1)A claim’s late knowledge date is the date (after the close of the start date of the claim’s primary period) on which the claimant gained knowledge (or, if earlier, the date on which the claimant ought reasonably to have gained knowledge) or all of the following facts:
(a) the fact that the act or omission on which the claim is based had occurred:
(b) the fact the act or omission on which the claim is based was attributable (wholly or in part) to, or involved, by the defendant:
(c) if the defendant’s liability or alleged liability is dependent on the claimant suffering damage or loss, the fact that the claimant had suffered damage or loss.
…
[62] Mr McBride, for Mr Arnerich, pleads that DHC’s late knowledge date was 1 March 2017 at the latest, which was more than three years before DHC filed the 975 proceeding on 29 June 2020. Mr McBride points to the fact that on 1 March 2017, DHC commenced the 307 proceeding, and by way of accompanying affidavit for DHC, Mr McClatchy deposed that:31
9.The liquidator…advised there were no assets in [Vaco’s] liquidation…
…
b.VACO sold the developed [Lincoln Road] property in April 2013 for $8.4 million, having paid a total of $2,223, 387.70 to DHC under the Contract; and
c.Mr Arnerich had distributed the remaining profits made on the development at some point prior to placing the company in liquidation, with full knowledge of DHC’s outstanding creditor claim.
[63] DHC pleads that it only had late knowledge of its claims in mid-2018, part-way through the 307 proceeding. It says that at 1 March 2017, it did not know when Mr Arnerich had caused the relevant 2013 payments to be made to his interests, nor in what sums.
[64] The flaw in DHC’s submission is that it plainly had knowledge of sufficient facts to bring a claim against Mr Arnerich for breach of his s 131 duty to act in good faith and in the best interests of the company by 1 March 2017, because it did so. DHC’s statement of claim in the 307 proceeding dated 1 March 2017 includes as the second cause of action:
SECOND CAUSE OF ACTION: MISAPPLICATION OF COMPANY FUNDS – BREACH OF DUTY – PROCURING VACO TO DISTRIBUTE OR PAY OUT FUNDS TO THE DEFENDANT OR INTERESTS ASSOCIATED WITH HIM DESPITE KNOWLEDGE OF DHC’S CLAIMS AS A CREDITOR, AND TO THE DETRIMENT OF DHC
31 Affidavit of Stuart Martin McClatchy, in support of application for summary judgment, sworn 1 March 2017.
51. At all material times the defendant, in his capacity as sole director of Vaco, owed a duty under s 131 of the Companies Act 1993 to act in good faith and in what he believes to be Vaco’s best interests including:
a. a duty not to give away assets of Vaco for the benefit of third parties to the detriment of a person known to be a creditor; and
b. a duty not to prefer his interests and those of entities associated with him over the interests of creditors of Vaco when the action in question jeopardises Vaco’s solvency.
52. By distributing or paying out, or procuring the distribution or payment out by Vaco of, funds totalling no less than approximately $800,000 to himself or interests associated with him despite his knowledge of DHC’s claims as a creditor, as pleaded in paragraphs 31 – 34 above, the defendant:
a. breached the duty pleaded in paragraph 51 above; and
b. misapplied, retained, and became liable and accountable for, money of the company, namely the funds totalling no less than approximately $800,000.
53. DHC is a creditor of Vaco and claims orders pursuant to s 301 of the Companies Act 1993 that …
[65] Earlier, at paragraph 30 of the statement of claim DHC says: “The defendant distributes or pays out, or procures the distribution or payment out by Vaco of the remaining assets of Vaco to himself or interests associated with him, notwithstanding his knowledge of DHC’s outstanding claims”.
[66] It does not matter that DHC did not know the specific details of each payment and distribution: the amount and the date. The “act” by Mr Arnerich on which the claim of breach of s 131 is based, is his act of distributing and paying out all Vaco’s funds to himself or associated interests, to the detriment of DHC, a known creditor. DHC was aware of that “act” by 1 March 2017, as evidenced by its statement of claim of that date. It follows that, if I am incorrect in concluding that DHC issued this proceeding within the primary limitation period, because of the effect of s 16(1)(i) of the Limitation Act 2010, in my opinion DHC is unable to rely on “late knowledge” to save it.
Conclusion and result
[67]I have reached the decision that:
(a)DHC’s proceeding is not an abuse of process. Its application for relief under s 301 in respect of the TRC claims is not res judicata.
(b)The statement of claim is not barred by the Limitation Act 2010.
[68] Mr Arnerich’s application to strike out the statement of claim and dismiss the proceeding is dismissed.
[69] However, I am concerned that it is not an efficient use of the parties’ or the Court’s resources to have a proceeding continuing which will be entirely redundant if the Court of Appeal finds in DHC’s favour; or to have the arbitration revived unnecessarily. Prior to the hearing of the present strike-out application, DHC requested that the proceeding be stayed for that reason. That request was declined by His Honour Lang J and Mr Arnerich’s application to strike out was set down to be heard.
[70] Now that Mr Arnerich’s application to strike out has been determined, there is merit in considering afresh whether the 975 proceeding should be stayed until the Court of Appeal delivers its judgment. I invite the parties’ submissions on this proposal:
(a)DHC’s submissions are to be filed and served by 12 March 2021;
(b)Mr Arnerich’s submissions are to be filed and served by 26 March 2021.
Costs
[71] I can see no reason why Mr Arnerich should not be liable for DHC’s costs on a 2B basis, and its disbursements. If counsel cannot agree on quantum they may file memoranda of no more than five pages:
(a)DHC by 12 March 2021;
(b)Mr Arnerich by 26 March 2021.
Associate Judge Gardiner
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