Fairway Holdings Ltd v McCullagh
[2019] NZCA 353
•9 August 2019 at 3.30 pm
| IN THE COURT OF APPEAL OF NEW ZEALAND I TE KŌTI PĪRA O AOTEAROA |
| CA443/2018 [2019] NZCA 353 |
| BETWEEN | FAIRWAY HOLDINGS LIMITED AND QUEST PROJECTS LIMITED |
| AND | CHRISTOPHER CAREY McCULLAGH AND STEPHEN MARK LAWRENCE, INSOLVENCY PRACTITIONERS IN THEIR CAPACITIES AS LIQUIDATORS OF HAMILTON STREET INVESTMENTS LIMITED (IN LIQUIDATION) |
| Hearing: | 12 June 2019 |
Court: | Brown, Venning and Whata JJ |
Counsel: | G Brittain QC for Appellants |
Judgment: | 9 August 2019 at 3.30 pm |
JUDGMENT OF THE COURT
AThe appeal is dismissed.
BThe respondents are entitled to costs against the appellants for a standard appeal on a band A basis and usual disbursements.
____________________________________________________________________
REASONS OF THE COURT
(Given by Whata J)
Hamilton Street Investments Ltd (Hamilton) oversaw the construction of the Cayman Apartments in Mount Maunganui in 2006 by CBC Construction Ltd (now known as XMP & D Ltd). From 2008 to 2014 defects emerged in the Cayman Apartments (the Apartments). Hamilton and another company, CBC Construction Ltd 2010 (CBC 2010) attempted to remedy them without apparent success. Mr Peter Cooney, a then-director of Hamilton, CBC 2010 and XMP & D Ltd, met with a subcommittee of the Apartments’ Body Corporate in January 2014 following which verbal agreements were reached, he says, between Hamilton, CBC 2010 and XMP & D Ltd to repair the defects. The Apartments’ owners have since sued, among others, Mr Cooney, CBC 2010 and the directors of CBC 2010 (Messrs Beekie and Lagerberg) for their losses on the defects.
In March 2014 Hamilton declared a gross dividend of $513,899 to its shareholders Fairway Holdings Ltd (Fairway) and Quest Projects Ltd (Quest) by crediting their current accounts. It also entered into transactions that resulted in the reduction of $2,177,935 in shareholder debt owed to Fairway and Quest. We refer to these as the March dividend and transactions. Following payment of the dividend, Hamlton’s net assets according to the insolvency test were $2,045. That figure did not take into account any liability in respect of the defects in the Apartments. Hamilton was then liquidated in July 2014. The March dividend and transactions are now impugned by the liquidators of Hamilton as, among other things, voidable.
This is an appeal against the decision of Associate Judge Andrew[1] to decline to consolidate proceedings about:
(a)Liability for the claimed defects; and
(b)Whether Hamilton could meet the solvency test when it made the March dividend; and
(c)Whether the March transactions were impugnable under the Companies Act 1993 because no provision had been made for the contingent defects liability.
[1]McCullagh v Fairway Holdings Ltd [2018] NZHC 1084. Leave to appeal under s 56(3) of the Senior Courts Act 2016 was refused in the High Court: McCullagh v Fairway Holdings Ltd [2018] NZHC 1883. Leave to appeal was granted by this Court under s 56(5): Fairway Holdings Ltd v McCullagh and Lawrence [2018] NZCA 605. It was common ground that the Senior Courts Act applied because the application for consolidation was made in the voidable proceeding filed in 2018.
For reasons we can explain briefly, we do not consider Associate Judge Andrew erred.
The power to consolidate
Before making an order to consolidate proceedings, the court must be satisfied:[2]
[2]High Court Rules 2016, r 10.12.
(a)that some common question of law or fact arises in all the proceedings; or
(b)that the rights to relief claimed in the proceedings to be consolidated are in respect of or arise out of:
(i)the same event; or
(ii)the same transaction; or
(iii)the same event and the same transaction; or
(iv)the same series of events; or
(v)the same series of transactions; or
(vi)the same series of events and the same series of transactions; or
(c)that for some other reason it is desirable to make an order.
As Chambers J noted in Regan v Gill:[3]
It is difficult to conceive of a wider procedural discretion. As Rodney Hansen J observed in Medlab Hamilton Ltd v Waikato District Health Board, “the discretion to make orders under r 382 [now r 10.12] is a wide one, to be exercised broadly in the interests of justice.”
The proceedings
[3]Regan v Gill [2011] NZCA 607 at [10] (footnotes omitted).
The three proceedings are:
(a)An application by the liquidators of Hamilton against Fairway and Quest who were shareholders of Hamilton, to set aside insolvent transactions (the voidable proceeding).[4]
(b)A proceeding by Hamilton and its liquidators against Fairway, Quest and Hamilton’s directors, Mr Peter Cooney and Mr Robert Turner, seeking to recover distributions under s 56 of the Companies Act (the dividend proceeding).[5]
(c)A proceeding by the Body Corporate and unit owners of the Apartments, against 21 entities alleging negligence and estoppel in relation to 50 pleaded defects in construction and design (the defective building proceeding).[6]
[4]CIV-2018-470-26.
[5]CIV-2018-470-33.
[6]CIV-2016-470-138.
Fairway and Quest’s defence in the Companies Act proceedings (the voidable proceeding and the dividend proceeding) which are to be heard together by consent is that, by the time of the March dividend and transactions, any alleged defective building liability had been resolved by Hamilton through verbal agreements reached with CBC 2010 and XMP & D Ltd.[7]
[7]As per their notice of opposition.
The Apartments’ owners allege $40,040,033 in losses.[8] They are not pursuing a claim against Hamilton.[9] They are, however, pursing claims against 15 defendants, including Messrs Cooney, Beekie and Lagerberg and CBC 2010. Mr Cooney admits that Hamilton and/or CBC 2010 retained the architects and engineers who worked on the Apartments’ design, including drainage design, stormwater disposal and proprietary systems. He also admits that producer statements were obtained in respect of the design. He admits that consents were obtained based on this design. He denies that material changes were made to the design prior to construction that breached building code requirements. He admits problems with stormwater surfaced in 2011 and steps were taken to address them by CBC 2010, but accepts these problems were ongoing in early 2014. He admits that further remedial measures were undertaken by Hamilton and CBC 2010 and that the Council developed a remedial solution and entered into a cost sharing agreement with Hamilton. He also admits other minor issues arose and CBC 2010 carried out remedial works between 2008–2010. He admits other specified issues were also raised between 2008-2014.
[8]Comprising $36,145,533 in repair costs, $2,429,500 in consequential losses, and $1,465,000 in distress and other non-pecuniary harm.
[9]The fourth amended statement of claim is inconsistent as to whether the owners are pursuing a claim against Hamilton. We conclude however from [20] of the fourth amended statement of claim that the claim is not pursued against Hamilton.
The fourth amended statement of claim states that agreements were reached by July 2014 with CBC 2010 that certain repairs would be undertaken. Relevantly, Mr Cooney responds to this pleading by stating, in summary, that prior to attending an AGM (in May 2014), Hamilton and CBC 2010, by their directors, had verbally agreed on the following arrangements:
(a)The directors of Hamilton would be responsible for arranging a solution for the stormwater issues causing flooding to the ground floor units;
(b)CBC 2010 would assume responsibility for resolving the other identified issues;
(c)Mr Cooney represented Hamilton;
(d)Messrs Beekie and Lagerberg represented CBC 2010.
Mr Cooney also pleads that:
(a)Discussions took place informally between Messrs Cooney, Lagerberg and Beekie from about January 2010 to in or about May 2014.
(b)Prior to its liquidation, Mr Cooney and Hamilton’s other director, Mr Turner, agreed to assume Hamilton’s responsibility for the stormwater issues noted above.
(c)They agreed with the Body Corporate that CBC 2010 would attend to outstanding issues.
Mr Cooney denies that the alleged defects have resulted in the damage claimed by the Apartments’ owners and does not plead to the allegation about repairs undertaken. Mr Cooney also denies liability, noting that he was not responsible for the construction supervision and did not assume a duty of care to the plaintiffs.
Grounds of Appeal
The agreed issues on appeal were:
(a)Did the High Court fail to consider relevant matters when exercising the Court’s discretion, which led to a decision that was plainly wrong?
(b)Are there common questions of fact in all proceedings?
(c)Did the same events and transactions give rise to rights of relief claimed in all three proceedings?
(d)Is it in the interests of justice that the three proceedings be heard together?
However, in argument before us, Mr Brittain QC focused his challenge on the Judge’s findings that:
(a)There are no real common issues of law and fact;[10]
(b)There is minimal risk of inconsistent findings;[11]
(c)Consolidation is not required in the interests of justice.[12]
[10]McCullagh v Fairway Holdings Ltd, above n 1, at [31].
[11]At [36(a)] and [38].
[12]At [35] and [38].
He said the Judge was wrong about these matters. We will address each of these findings, before assessing whether, overall, the Judge was plainly wrong.
Common issues
Mr Brittain submits that the three proceedings will necessarily involve resolving the following issues:
(a)What defects were manifest from 2008–2014?
(b)What remedial work was completed from 2008–2014, and by whom?
(c)Was the remedial work successful?
(d)What contractual arrangements or other obligations were in place by March 2014, between Hamilton, CBC 2010, the Body Corporate and the Council (and any other parties) to deal with defects and remedial work?
We agree with Associate Judge Andrews that:[13]
… there is some degree of overlap or commonality between the relevant events and transactions at issue in the defective building proceeding and those that will be the focus of the Companies Act proceedings. However, I find Mr Brittain QC has overstated the degree of commonality ...
[13]At [30].
The Companies Act proceedings are primarily concerned with Hamilton’s contingent liability for the building defects and whether Hamilton’s directors knew about this contingent liability when it made the dividend payment and entered into the March transactions. But, as the Judge noted at [33] of his judgment, a finding that Hamilton reached verbal agreements with the building companies will not resolve the claims by the Apartments’ owners who, on the current pleadings, were never party to those agreements. The existence of the verbal agreements is at most ancillary only to the resolution of the plaintiffs’ claims in the defective building case, especially given the broad denials pleaded by Mr Cooney.
Risk of inconsistent findings
As to inconsistent findings, Mr Brittain submits:
(a)The other directors of CBC 2010 (Messrs Beekie and Lagerberg) are defendants in the defective building proceedings and CBC 2010 deny any final agreement to repair was reached;
(b)A cross-claim will be made by Hamilton (or Mr Cooney) against CBC 2010 and XMP & D Limited in the defective building proceeding;
(c)The Liquidators are likely to dispute the existence and/or terms of any alleged verbal agreements;
(d)Substantial contextual narrative about what the known defects were, what was done about them, and the existence and terms of the agreements will be required in all three proceedings;
(e)There is major scope for inconsistent findings about these matters; and
(f)The importance of avoiding inconsistent findings is particularly acute where credibility is in issue.
He says the Associate Judge was therefore wrong to find that “it is far from clear, however, that the issue of the arrangements will be a significant issue in the defective building proceedings.”[14]
[14]At [38].
We accept, like the Judge, that there is a potential for conflicting findings about the existence and/or terms of any agreement reached between Hamilton and the building companies. But, again like the Judge, we think the existence of the alleged agreements will not be a significant issue in the defective building proceedings as currently pleaded. Even assuming it becomes a pleaded issue, as already noted it will be a relatively small one in that proceeding.
Moreover, the threshold assessments in the different proceedings require markedly different evaluations of the evidence about the defects and the alleged agreements reached. The focal point of the Companies Act proceedings will be the existence of contingent liability and the directors’ awareness of it at the time of the March dividend and transactions. The focal point of the defective building proceedings will be liability for the defects per se. The prospect of “inconsistent” findings out of these markedly different evaluations is not a sufficient basis for consolidation of otherwise disparate proceedings.
Interests of justice
Mr Brittain submitted that Fairway and Quest may find themselves in the invidious position of having to subpoena the building company witnesses in the Companies Act proceedings, without scope for cross-examination. Consolidation, he says, is therefore warranted in the interests of justice.
We doubt this invidious scenario will arise. Fairway and Quest will need to provide evidence to sustain their defence in the Companies Act proceedings. As noted, the focal point will be on what the directors knew at the time of the March dividend payment and transactions. Evidence about this will likely come from Mr Cooney who was a director of Hamilton, CBC 2010 and XMP & D Ltd. This will likely comprise his account of what happened combined with supporting corroborative evidence, likely to be in the form of records or correspondence dealing with the defects and the agreements. It is not obvious to us that Fairway and Quest will need to call evidence from the other directors of CBC 2010 and XMP & D Ltd. If necessary, non-party discovery should be sufficient to obtain any documentation in their possession that might be relevant to the proceeding. More likely the liquidators will call those directors, in which case they will be available for cross examination.
Plainly wrong
Does the combined prospect of overlapping issues, conflicting findings and restraints on cross examination of the other directors of CBC 2010 and XMP & D Ltd mean that the Associate Judge was plainly wrong? We do not think so. His evaluation of the weight to be afforded to these factors individually and in combination was a reasonable one. Ultimately, the Companies Act proceedings and the defective building proceeding are so disparate in terms of their threshold assessments, demands on the parties and on judicial resource that it was always going to be difficult to justify consolidation. The decision of the Associate Judge was therefore available to him.
Tauranga City Council
It is necessary to address one issue that concerned the Court hearing the leave application.[15] Tauranga City Council is funding the Companies Act proceedings and is a defendant in the defective building case. It appears common ground that it is first in line in respect of payment out on the liquidation of Hamilton. It therefore stands to benefit from the Companies Act proceedings if the March dividend and transactions are impugned. The leave Court said this added another level of complexity.[16]
[15]Fairways Holdings Ltd v McCullagh [2018] NZCA 605.
[16] At [22].
Unlike that Court, we have had the benefit of hearing full argument on the merits. While the permeating presence of the Tauranga City Council brings an added complexity, we are satisfied it is not such as to bear on the exercise of the discretion not to consolidate in this case.
Outcome
The appeal is dismissed.
The respondents are entitled to costs against the appellants for a standard appeal on a band A basis and usual disbursements.
Solicitors:
JK Hamilton, Tauranga, for Appellants
Stace Hammond, Auckland, for Respondents
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