DHC Assets Ltd v Arnerich
[2017] NZHC 1460
•7 July 2017
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2017-404-307 [2017] NZHC 1460
BETWEEN DHC ASSETS LIMITED
Applicant
AND
ANTONY IVO ARNERICH Respondent
Hearing: 7 June 2017 Appearances:
L J Turner for Applicant
J A McBride for RespondentJudgment:
7 July 2017
JUDGMENT OF ASSOCIATE JUDGE J P DOOGUE
This judgment was delivered by me on
07.07.17 at 10 a.m., pursuant to
Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
DHC ASSETS LIMITED v ARNERICH [2017] NZHC 1460 [7 July 2017]
Introduction
[1] The plaintiff is the construction company DHC Assets Limited (“DHC”). In October 2011, DHC entered into a construction contract with a company called Vaco Investments (Lincoln Road) Limited (“Vaco”). The defendant, Mr Arnerich, is Vaco’s sole director.
[2] The plaintiff has now brought proceedings against the defendant as the director of Vaco. Three causes of action were pleaded, but one was subsequently abandoned following the plaintiff’s receipt of the defendant’s affidavit. In broad terms, the two remaining causes of action essentially allege that the defendant breached his director’s duties by misapplying either company funds or retention monies in circumstances where (according to the plaintiff) the plaintiff remains an outstanding creditor.
[3] For the reasons that follow, I am not persuaded that summary judgment should be entered for the plaintiff on any of these causes of actions.
Background
[4] The statement of background in the following sub-paragraph taken from the submissions of the plaintiff is not the subject of substantial dispute:
The plaintiff DHC Assets Limited (“DHC”) is a construction company which during 2012 carried out significant building works for the developer of a property at Lincoln Road, namely [Vaco]. A related company of [Vaco] had purchased the property for $1.325 million in October 2011. Following the development works being completed, [Vaco] sold the property on 3 April 2013 for $8.4 million
Six days later, on 9 April 2013, the defendant Mr Arnerich, [Vaco’s] sole director, authorised [Vaco] to pay all of its then remaining assets (being over $2.3 million) to his family trust.
DHC had issued its final account for $553,095 plus GST just three weeks earlier, on 15 March 2013.
[5] It is common ground that the plaintiff received some payments towards the cost of construction, but it maintains that there were additional claims which have
not been met by the defendant. These additional claims relate to extension of time claims made by the plaintiff in August 2012, after delays which were largely caused by changes requested by a prospective tenant, ASB. When these claims were submitted for approval to the engineering firm to the contract, Davis Langdon, substantial amounts were disallowed. There were also disputes during the course of the contract about whether some aspects of the work carried out were authorised.
[6] The plaintiff’s statement of background requires further supplementing. The defendant asserts that on 4 November 2011 he settled a trust, Vaco Investments (Lincoln Road) Trust (“the trust”), of which Vaco was appointed sole trustee. The property on which the construction was to take place was purchased by Vaco on 17
November 2011. It was purchased from one of the Vaco group companies under the control of the defendant. The defendant also asserts that Vaco acquired the property in the capacity of trustee of the trust. For the purposes of this summary judgment application, there is no evidence contradicting these two assertions made by the defendant.
[7] As noted in the statement of background, Vaco sold the property on 3 April
2013, with settlement occurring the same day. On 9 April the defendant authorised the distribution of the proceeds of sale which Vaco had sold with the recipient being one of his family trusts. There is no dispute that the amount actually paid out by the plaintiff following the sale of the property was $2,312,761.14. The sale and disbursement of the proceeds in this way was not known to the plaintiff, and the plaintiff continued to make claims from Vaco under the building agreement.
[8] On 17 May certain retention monies which were held in an ANZ account pursuant to a tripartite agreement between Vaco, the plaintiff and the ANZ were released to the defendant. The plaintiff says this occurred notwithstanding that the conditions upon which such payments were to be released by the ANZ had not been met.
[9] The dispute over what amount was owed to the plaintiff continued right through to 2014. On 1 July 2014 the defendant caused Vaco to be placed in liquidation pursuant to a shareholders resolution passed on 1 July 2014.
Issues
[10] There is no dispute between the parties that Vaco entered into the construction contract and there can be no dispute that Vaco was also the trustee of the trust.
[11] The plaintiff’s claim, however, is that the defendant breached his director’s
duties in two respects:
(a) First, by missaplying company funds through 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;
(b)Second, by missaplying retention monies by procuring Vaco to pay out retention monies which Vaco had wrongfully received from the bank.
[12] The second cause of action is relatively straight forward. The defendant claims that he received payment from the ANZ bank of retention monies which were held in an account with that bank pursuant to the tripartite agreement between Vaco, the plaintiff and the ANZ. The plaintiff submits that the conditions precedent which the three parties had agreed to had not occurred at the time when the out-payment was made; and therefore, the defendant ought to repay the funds into the liquidation account of the company so that it is available for the creditors of the company. The plaintiff seeks summary judgment for the amount of the retention monies, totalling approximately $80,558.96, plus interest.
[13] The issues involved in the first cause of action are more complicated. The plaintiff claims that the defendant, as director of Vaco, breached his obligations in procuring the distribution of the sale to the beneficiaries of the trust. The claim relies on the defendant being subject to obligations set out in s131 of the Companies Act
1993. The plaintiff describes these obligations in the following terms:
(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 insolvency.
[14] Summary judgment is sought requiring the defendant to pay the plaintiff the amounts which Vaco says it is owed, plus interest. Specifically, these are amounts arising under the determination of an adjudicator under the Construction Contracts Act, which totalled $367,768.1); and also amounts yet to be the subject of arbitral proceedings in which the plaintiff is claiming $573,468.06. It also seeks the balance of the sum distributed by him with knowledge of DHC’s claim, that is, the
$80,558.96 less the sums the defendant is ordered to pay the plaintiff.
[15] The defendant says that he did not breach any obligations which he owed as director. He denies that the plaintiff is owed anything. At the heart of the disagreement between the parties is the issue of whether Vaco owned the property beneficially or whether it owned the property as trustee for the trust.
[16] Central to the plaintiff’s case is the contention that the trust was not only the proprietor of the land but also the owner of the business undertaking – including the building contract that Vaco entered into with the plaintiff. If this contention is correct, then Vaco’s out-payments amount to distributions of funds belonging beneficially to that company and are open to claims of the kind which the plaintiff now brings under s 301 of the Companies Act.
[17] If on the other hand, Vaco owned the property in its capacity as trustee for the trust, then that property was not part of the company’s estate which came under the control of the liquidator of that company upon her appointment by the shareholders. The proceeds of the sale of the land would accordingly not be available to Vaco’s creditors. This was the view taken by the liquidator and communicated to the company’s creditors at a meeting on 1 August 2014.
[18] The defendant takes the position that the liquidator’s analysis was correct and he opposes judgment being entered in the present case on the same basis. If the sale proceeds of the land were in fact owned beneficially by the trust, the defendant’s actions in mandating the payments out did not breach any obligation that he owed as a director of Vaco because he was not dealing with the company’s beneficially-held property. The defendant says that underlying the plaintiff’s claim is confusion over the differences between Vaco and the trust which the defendant caused to be settled in November 2011.
Law
[19] Both counsel agree that the correct approach to the summary judgment application in this case is adequately summarised by the Court of Appeal in Krukziener v Hanover Finance Ltd:1
The principles are well settled. The question on a summary judgment application is whether the defendant has no defence to the claim: that is, that there is no real question to be tried: Pemberton v Chappell [1987] 1 NZLR 1 (CA) at 3. The Court must be left without any real doubt or uncertainty. The onus is on the plaintiff, but where its evidence is sufficient to show there is no defence, the defendant will have to respond if the application is to be defeated: MacLean v Stewart (1997) 11 PRNZ 66 (CA). The Court will not normally resolve material conflicts of evidence or assess the credibility of deponents. But it need not accept uncritically evidence that is inherently lacking in credibility, as for example, where the evidence is inconsistent with undisputed contemporary documents or other statements by the same deponent, or is inherently improbable: Eng Mee Yong v Letchumanan [1980] AC 331 (PC) at 341. In the end the court’s assessment of the evidence is a matter of judgment. The court may take a robust and realistic approach where the facts warrant it: Bilbie Dymock Corp Ltd v Patel (1987) 1 PRNZ
84 (CA).
The claims under s 301 of the Companies Act
[20] The central contention which the plaintiff puts forward is that the plaintiff has a claim against Vaco as trustee for the trust. The case for the plaintiff was that the amounts of approximately $2.3 million paid out to the beneficiaries of the
defendant’s family trust represented property beneficially owned by Vaco.
1 Krukziener v Hanover Finance Ltd [2008] NZCA 187, [2010] NZAR 307 at [26].
[21] The question to be resolved on the evidence is whether the property that was the source of those payments was acquired by Vaco in its own right or as trustee for the trust?
The dispute concerning trust ownership of property
[22] In order to succeed on a summary judgment basis the plaintiff has to show that there is no defence to its contention that the property that was purchased was the beneficial property of the plaintiff.
[23] All that the defendant needs to demonstrate is that there is some doubt as to this contention based upon the evidence before the court. The defendant can establish such doubt by advancing a tenable argument that Vaco owned the property in its capacity as trustee for the trust.
[24] A key piece of evidence is the documentation of the circumstances in which the company acquired the property. Significantly, when the company acquired the property the parties were not yet in dispute. There is no basis to assume that the parties associated with Vaco were, at the time of the acquisition, positioning themselves in such a way that they would be protected from disputed claims brought by the plaintiff.
[25] The transaction occurred on or around 17 November 2011, approximately one week after the settlement of the trust. A settlement statement was produced by Martelli McKegg. This document is addressed to Vaco as the trustee of the trust. On its face, the statement shows that Vaco was agreeing to incur the liability for the purchase price in its capacity as trustee. There is apparently no dispute that thereafter the property was transferred to Vaco.
[26] The question, then, is this: can it be demonstrated that there is no argument as to whether the trust incurred liability under the construction contract? Answering this question in the affirmative would require evidence objectively establishing that it was the intention of the trustee of the trust that such a situation would come into being. If the trust did indeed incur liability under that contract, there would then be
the necessary congruence of contractual debt together with the ownership of the property from which that debt was to be satisfied.
[27] The plaintiff is apparently of the view that its case can be established from the facts that Vaco was both a party to the building contract and also the legal owner of the land upon which the construction was being carried out. Its case, in other words, rests upon an inference.
[28] If anything, however, the inference points in the defendant’s favour. As mentioned earlier, the trust was settled after the construction contract came into existence and for the purpose, inter-alia, of acquiring the land. There is therefore inferential support for the argument that Vaco occupied two separate and different positions in regard to the building contract and ownership of the land. That is to say, the circumstances in which these transactions occurred lend support to the view that the trust was to be the land-owning vehicle. It does not follow from this view that simply because the trust was going to own the land, it also thereby agreed to assume the liability under the building contract.
[29] It would have been possible for the company as trustee for the trust to acknowledge that the liability under the building contract was intended to affect the estate of the trust. But no outward expression of that intention has been established on the evidence so far.
[30] For summary judgment purposes, this evidence on its own provides the basis for the defence raised by the defendant. There is a tenable basis, in other words, for the claim that Vaco was free to distribute the proceeds of the sale of the property without regard to any claim by the plaintiff because the trust was never a debtor of the plaintiff.
[31] A major component of the plaintiff’s submissions is that the defendant knew about the unsatisfied claims owed by Vaco under the construction contract at the time when the sale proceeds were distributed. Even if true, however, that contention does not overcome the key problem with the plaintiff’s case, which is establishing that the trust was the debtor of the plaintiff.
[32] A couple of final comments are in order before turning to the second cause of action.
The defendant’s motivations
[33] I do not overlook that the fact that if liability rested solely with the company which had no funds, it would be difficult to understand why the defendant was at pains to contest liability, as he has been since the practical completion of the contract. He has done this notwithstanding that the company, which on his account of matters was the contracting party, has been placed in liquidation.
[34] It may be that the defendant has certain apprehensions arising out of the company incurring liabilities which it was unable to cover either through the capital resources of the company or through lines of credit available to it. I should not be understood as saying that there is any ground for such concerns, but it could provide an explanation for his opposition to the plaintiff’s claims. In any case, speculating on the reasons for the vigorous defence of the continuing claims by the plaintiff does not prove helpful in this application, given the limited evidence before the court.
General comments about commercial arrangements of this kind
[35] The use of trusts in commercial arrangements of this kind can constitute a trap for the unwary. In this case, had the trustee of the trust been a separate party from the principal under the construction contract the position would have been relatively clear. The builder, had it enquired, would have ascertained that the party with whom it was contracting to construct the premises did not own the land upon which they were to be built. A prudent builder in those circumstances would have seen the need for guarantees, perhaps from the owner of the land.
[36] Confusion is possible, however, in circumstances where the same party is acting in different capacities: as both the contracting party and the apparent owner of the land. This may have been a factor leading up to the dispute in the present case.
[37] In such cases, it is entirely possible that the party, in this case the company, figured in the narrative in two separate capacities. That is, it is possible that the company was a contractor who had the beneficial rights under the building contract (and the liabilities), but at the same time representing the trust which owned the property as trustee.
[38] In some circumstances the problem will not be present because it turns out that the party was also acting as the trustee when entering into the construction contract. In the present case, this last point has not been established and it is not possible to exclude the defence on the grounds that Vaco did not contract as the trustee of the trust when entering into the building agreement.
Summary
[39] I accept that the evidence is not all one way. There is evidence, for example, that the defendant appears to have told the liquidator that he relied upon an engineer’s second report issued in early 2014 before making the distribution. Of course, if the trust was not a party to the construction contract, the state of the accounts between the plaintiff and its client would not have been a relevant consideration for the defendant to take into account before he put the distribution of funds into motion.
[40] Overall, however, my view is that the claim based upon s 301 of the Companies Act 1993 is not amenable to the entry of summary judgment in favour of the plaintiff. The defendant has a reasonably arguable defence in relation to that claim for the reasons that I have set out above.
[41] The plaintiff may be able to adduce further evidence to establish on the balance of probabilities that the company as trustee agreed to assume the liabilities under the building contract. That would be a matter for the court to determine at trial.
The retentions
[42] The financier which provided funding for the development was the ANZ. On
11 November 2011, the ANZ wrote a letter to the plaintiff which contained the following statement:
(a) ANZ National Bank Limited (“the Bank”) has an approved Development Facility available to Vaco Investments (Lincoln Road) Limited that includes an allocation sufficient to meet the Construction Contract Sum of $2,129,838 (excluding GST). Upon receipt of QS certification of each progress claim and subject to there being no defaults under the Transaction Document, the Bank will pay the progress claim direct to the account nominated by Clearwater Construction Limited.
(b)The Bank will retain the monthly retention sums within the Development Facility until Practical Completion has been achieved. Upon Practical Completion being achieved and the initial release of retentions having being certified, the balance of the retentions will be paid to an account in the joint name of Vaco Investments (Lincoln Road) Limited and Clearwater Construction Limited for subsequent payment in accordance with the Construction Contract.
[43] In answer to a query from the plaintiff about the whereabouts of the retentions, in a letter dated 27 January 2017, the ANZ advised:
(a) I confirm that ANZ Bank New Zealand Limited (ANZ) no longer holds any retention sums in respect of the Construction Contract. Following confirmation of practical completion of the ASB Centre and receipt of a final certificate of payment from Scott Beagley, the Engineer to the Construction Contract, dated 29 April 2013 confirming no further amounts were owed to the contractor, ANZ paid all retention sums held under the Construction Contract to Vaco Investments (Lincoln Rd) Limited. Our records show payment was made on 17 May
2013 and the retentions bank account was subsequently closed.
[44] The contention of the plaintiffs is that while practical completion had in fact been achieved as at 17 May 2013, no certificate was issued by the engineer to that effect until 4 October 2013, with the certificate being dated 28 June 2013.
[45] It would seem that there was an agreement actually reached between the
ANZ, Vaco and the plaintiff pursuant to which the bank agreed to retain the
retentions and then pay them out to a joint bank account held by the plaintiff and Vaco. This pay-out would take place once practical completion had been achieved and release of the retentions had been certified (presumably by the engineer).
[46] The first issue that arises is whether there was, in fact, any breach of the agreement. The evidence of the plaintiff is that, according to the liquidator, Vaco accepted the full amount of the retentions which was $80,558.86; and further, that Vaco then distributed that money to which DHC was entitled to interests associated with the defendant, together with all of Vaco’s remaining assets.
[47] The defendant makes the point that it was the ANZ’s decision to pay out the retention money and if it was wrong in doing so that was no concern of the defendant.
[48] It is accepted by the defendant that the monies were paid out to him, rather than to Vaco. However, the defendant asserts that in or about April 2013, the engineer to the contract certified that no further amounts were owing to the plaintiff. Indeed, the defendant claims that the engineer told them that if anything, there had been an overpayment of approximately $100,000 to the plaintiff.
[49] It appears arguable that at the time when the payment out of the retention money occurred, the certification from the engineers that was required as a condition precedent had yet to be provided. Even so, I stress that the certification was provided thereafter. In those circumstances, it seems at least arguable that any claim against the defendant would be restricted to one of voluntarily accepting payment of the retentions refund prematurely.
[50] One of the other problems with assessing this claim is the changing picture of Vaco’s total indebtedness. Initially, there was a determination by the engineer that nothing was owed to the plaintiff. However since that time, the accounts taken between the parties following the exchange of payment / notices and payment schedules have been reviewed in an Adjudicator’s Determination which was issued on 5 October 2016 and in which it was determined that Vaco was liable to the plaintiff for a sum of $367,768. Leave was declined the plaintiff to arbitrate its other
claims valued at approximately $573,000; but arbitration proceedings have now been commenced in regard to those claims.
[51] The question arises as to whether the defendant, as director of Vaco, breached the obligations of good faith and to act in the best interests of the company when he permitted the company to receive payment of the money from the ANZ on 17 May
2013.
[52] The plaintiff has since obtained by way of an Adjudicator’s Determination a conclusion that it was not paid what it was owed under the contract. But this fact does not necessarily mean that there has been a breach by the defendant of his obligations.
[53] It cannot be over-emphasised that this was a case involving a building contract in which the usual mechanism for resolving disputes over what was owed was by way of engineer’s certificates. It is therefore significant that there is no express agreement that retentions were to be held for a certain period after the certification date against the possibility of a review of the engineer’s certificate. As such, it can sensibly be argued that the court should not contrive to bring about such a result by imputing to the director of the company an obligation to withhold the retentions in this way.
[54] For these reasons, I am not satisfied that it would be appropriate for summary judgment to be entered on this cause of action
Result
[55] The application for summary judgment is declined.
[56] Costs are reserved in accordance with the Court of Appeal judgment in NZI v
Philpott.2
2 NZI Bank Ltd v Philpott [1990] 2 NZLR 403, (1990) 3 PRNZ 695.
J.P. Doogue
Associate Judge
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