Fairway Holdings Ltd v McCullagh
[2018] NZCA 605
•18 December 2018 at 4.00 pm
| IN THE COURT OF APPEAL OF NEW ZEALAND I TE KŌTI PĪRA O AOTEAROA |
| CA443/2018 [2018] NZCA 605 |
| BETWEEN | FAIRWAY HOLDINGS LIMITED AND QUEST PROJECTS LIMITED |
| AND | CHRISTOPHER CAREY MCCULLAGH AND STEPHEN MARK LAWRENCE IN THEIR CAPACITIES AS LIQUIDATORS OF HAMILTON STREET INVESTMENTS LIMITED (IN LIQUIDATION) |
| Court: | Brown and Clifford JJ |
Counsel: | G Brittain QC for Applicants |
Judgment: | 18 December 2018 at 4.00 pm |
JUDGMENT OF THE COURT
AThe application for leave to appeal under s 56(5) of the Senior Courts Act 2016 is granted.
BThe respondents must pay the applicants costs for a standard application for leave to appeal on a band A basis together with usual disbursements.
____________________________________________________________________
REASONS OF THE COURT
(Given by Brown J)
Introduction
This application is for leave under s 56(5) of the Senior Courts Act 2016 (the Act) to appeal from a judgment of the High Court made on an interlocutory application.
The following three proceedings in the Tauranga Registry of the High Court are relevant to the present matter:
(a)An application by the liquidators of Hamilton Street Investments Ltd (Hamilton) against Fairway Holdings Ltd (Fairway) and Quest Projects Ltd (Quest) who were shareholders of Hamilton to set aside insolvent transactions (the voidable proceeding).[1]
(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 1993 (the dividend proceeding).[2]
(c)A proceeding by the body corporate and unit owners of the Cayman Apartments in Mount Maunganui, a building developed by Hamilton, against 21 entities alleging negligence and estoppel in relation to 50 pleaded defects in construction and design (the defective building proceeding).[3]
[1]CIV 2018-470-26.
[2]CIV 2018-470-33. This proceeding and CIV-2018-470-26 are together referred to as the Companies Act proceedings.
[3]CIV 2016-470-138.
Fairway and Quest made an application under r 10.12 of the High Court Rules 2016 for an order for consolidation of the three proceedings. That application was declined in a judgment of Associate Judge Andrew dated 17 May 2018 (Consolidation decision).[4]
[4]McCullagh v Fairway Holdings Ltd [2018] NZHC 1084 [Consolidation decision].
Fairway and Quest applied under s 56(3) of the Act for leave to appeal against that judgment. Their application was dismissed by Associate Judge Andrew in a judgment dated 27 July 2018 (Leave decision).[5] Fairway and Quest now seek the leave of this Court to appeal under s 56(5) of the Act.
Material facts
[5]McCullagh v Fairway Holdings Ltd [2018] NZHC 1883 [Leave decision].
The background to the application for consolidation is succinctly explained in the Consolidation decision as follows:
[10] Defects in the Cayman Apartments became apparent in 2008, shortly after the building was completed. Ongoing issues were then raised at Body Corporate meetings and with Hamilton and CBC.
[11] CBC, the builder, ceased to trade in 2010, changed its name to XMP & D Ltd in 2012 and was put into liquidation in 2014. CBC Construction (2010) Ltd was incorporated in April 2010.
[12] Hamilton, the developer, was put into liquidation by special resolution of Fairway and Quest in July 2014.
[13] Mr Peter Cooney was a director of Hamilton, XMP and CBC Construction (2010). Mr Matthew Lagerberg was a director of XMP and a director of CBC Construction (2010). Mr Drew Beekie, was likewise a director of XMP and CBC (2010).
[14] Mr Cooney, Mr Lagerberg and Mr Beekie are all defendants in the defective building proceeding. Hamilton and CBC have been named as defendants, but at no time has any party sought the liquidators’ consent or the leave of the Court, under s 248 of the Companies Act 1993, to commence or to continue proceedings against both companies.
[15] None of the parties in the voidable proceeding (Hamilton, the liquidators, Fairway or Quest) is currently a party to the defective building proceeding.
[16] The only parties to the dividend proceeding that are also parties to the defective building proceeding are Messrs Cooney and Turner. Mr Beekie, Mr Lagerberg and CBC Construction (2010) are not parties to the dividend proceeding.
The impugned transactions
[17] In March 2014, Hamilton by its directors, Mr Cooney and Mr Turner, declared a gross dividend to Fairway and Quest in the sum of $513,899 by crediting the current accounts of Fairway ($308,334.40) and Quest ($205,555.60).
[18] Mr Cooney and Mr Turner signed a solvency certificate declaring that Hamilton would satisfy the solvency test immediately after paying the dividend. Hamilton’s net assets after the dividend according to the solvency test work paper were $2,045. That figure did not take into account any liability in respect of the Cayman Apartments.
[19] On 24 March 2014, Hamilton then entered into a number of transactions with related entities, which the liquidator applicants allege had the effect of:
(a)transferring to a related entity, Pyes Pa Holdings Ltd, a unit in the Cayman Apartments (Unit 5A1) owned by Hamilton; and
(b)repaying the current account debts to Fairway and Quest so that Fairway and Quest exchanged the unsecured debt owed by Hamilton (a company said to have significant liabilities and no assets of any value) for debts owed by related companies without any apparent exposure to contingent creditor claims (Pyes Pa Holdings Ltd, Waitaha Ridge Trust and Duxbury Investments Ltd) and an asset (Unit 5A1 held by Pyes Pa).
The defective building proceeding
[20] In May 2014, one of the unit owners of the Cayman Apartments, Affordable Housing Ltd, brought proceedings against Hamilton, CBC and the Tauranga City Council (TCC) claiming $100,000. Hamilton and CBC did not file defences.
[21] The claim by Affordable Housing Ltd was settled in June 2016 and the liquidators have admitted a claim from TCC in Hamilton’s liquidation for $184,000, being a proportion of a settlement payment by TCC to Affordable Housing Ltd.
[22] In 2016, the Body Corporate and unit owners issued the defective building proceeding against TCC and various other parties, claiming estimated losses of at least $13 million. The Body Corporate is carrying out further investigations in order to resolve the remedial scope and costs of the repairs before filing an amended pleading by October 2018. The matter is not yet ready for trial.
The voidable proceeding and the dividend proceeding
[23] The applicant liquidators issued voidable transaction notices on 8 March 2017 in the sum of $2,177,935 against Fairway and Quest in respect of the payments of March 2014 and in relation to the partial repayment of their current accounts. Fairway and Quest served notices of objection. The liquidators commenced the Companies Act proceedings on 26 February 2018.
[24] Fairway and Quest have filed a notice of opposition to the voidable proceeding, but have not filed any affidavit evidence.
The application, which was filed in the voidable proceeding, sought orders consolidating the three proceedings on terms including that they be case-managed and tried together. The grounds for the application were:
(a)There are common questions of law and fact in the voidable proceeding and the dividend proceeding including:
(i)Was Hamilton solvent in March 2014?
(ii)Did Hamilton have contingent liabilities in March 2014 as a result of defects in the Cayman Apartments?
(b)The three proceedings give rise to common questions of fact, including:
(i)What defects were manifest in the Cayman Apartments from 2008 to 2014?
(ii)What remedial work was completed from 2008 to 2014, and by whom?
(iii)What contractual arrangements (if any) were in place in March 2014, between Hamilton, XMP, CBC (2010), Mr Cooney, Mr Turner, Tauranga City Council and Body Corporate 396511, to deal with defects and remedial work at the Cayman Apartments?
(c)The rights to relief contained in the three proceedings arise out of the same series of events, in particular:
(i)The construction of the Cayman Apartments.
(ii)The emergence of defects, and remedial work undertaken, at the Cayman Apartments from 2008 to 2015.
The High Court judgment
The Associate Judge acknowledged that there was some overlap or commonality between the relevant events and transactions at issue in the defective building proceeding and those the focus of the Companies Act proceedings but he considered that the degree of commonality and the risk of different or inconsistent findings of fact was overstated.[6] He viewed the issues in the Companies Act proceedings as being sufficiently distinct and separate from those in the defective building proceedings so that in terms of r 10.12(a) there were in substance no real common questions of law or fact arising.
[6]Consolidation decision, above n 4, at [30].
His reasons for rejecting the application included the following factors:[7]
(a)The parties to the Companies Act proceedings are substantially different to the parties in the defective building proceeding.
(b)Consolidation would likely lead to delay in resolution of all of the proceedings.
(c)The defective building proceeding is not yet ready for trial whereas the voidable transaction procedure in the Companies Act is intended to be an efficient and economical means of unwinding payments or benefits that have been improperly made or gained.
(d)If consolidation was granted there was a risk of prejudice to Hamilton and the liquidators in terms of additional cost and jeopardising their recovery prospects.
(e)The inconvenience or disadvantage for the applicants in terms of discovery and the subpoenaing of witnesses did not tip the balance of the overall interests of justice.
The application for leave to appeal
[7]At [36(a)]—[36(e)].
Mr Brittain QC for the applicants wishes to contend that the extent of the defects in the Cayman Apartments in 2014 and the arrangements between Hamilton and CBC (2010) to deal with those defects are intertwined. He submits that when applying the solvency test (which is required in the dividend proceeding and the voidable preference proceeding) the adequacy of the arrangements between Hamilton and CBC (2010) and the arrangements between Hamilton, the Body Corporate and the Tauranga City Council can only be measured against the state of the known defects at the relevant time, March 2014.
He acknowledges that in the present case there is no issue of general or public importance that requires determination. However he submits that the procedural rights in question directly impact on the rights of Mr Cooney, Mr Turner, Fairway and Quest to a fair hearing in the voidable preference proceeding and the dividend proceeding and the rights of CBC (2010), Mr Beekie and Mr Lagerberg to a fair hearing in the defective building proceeding.
Relevant principles
The requirement in s 56 of the Act that leave be required for appeals from decisions of the High Court made on interlocutory applications represents a significant change in procedure and procedural rights.[8] In Finewood Upholstery Ltd v Vaughan Fitzgerald J described the leave requirement as a “filtering mechanism” to ensure that unmeritorious appeals of interlocutory orders or appeals of interlocutory orders of no great significance to either of the parties or more generally do not unnecessarily delay the proceedings to which the orders were made.[9]
[8]Sutcliffe v Tarr [2017] NZCA 360, [2018] 2 NZLR 92 at [8].
[9]Finewood Upholstery Ltd v Vaughan [2017] NZHC 1679 at [13].
Similarly in Ngai Te Hapu Inc v Bay of Plenty Regional Council this Court observed that there was no doubt that s 56(3) was intended to reduce the volume of appeals to this Court from interlocutory decisions in the High Court.[10] The Court noted the comparison made with s 24G of the Judicature Act 1908 concerning commercial list appeals in the Explanatory Note to the Judicature Modernisation Bill 2013 and then referred to the statement of the s 24G principles in Meates v Taylor [Leave].[11]
[10]Ngai Te Hapu Inc v Bay of Plenty Regional Council [2018] NZCA 291 at [15].
[11]Meates v Taylor [Leave] (1992) 5 PRNZ 524 (CA) at 526 confirmed in Clear Communications Ltd v Attorney-General (1998) 12 PRNZ 287 (CA).
While this Court did not consider Ngai Te Hapu was an appropriate case to provide definitive guidance on the principles to be applied on applications for leave under s 56 of the Act, it stated:[12]
We agree that leave to appeal should only be granted where the significance or implications of an arguable error of fact or law, either for the particular case or for the applicant or as a matter of precedent, warrants the further delay which the appeal process would involve.
[12]Ngai Te Hapu Inc v Bay of Plenty Regional Council, above n 10, at [17].
However the understandable objective of regulating the volume of non‑substantive appeals does not preclude the grant of leave where it appears that the interests of justice warrant further consideration by this Court. In Western Joinery Ltd v Commissioner of Inland Revenue Associate Judge Bell suggested that guidance on the relevant principles might be found in decisions under the former s 71A of the District Courts Act 1947.[13] In particular he drew attention to the dictum of Somers J in Sandle v Stewart:[14]
The purpose of [leave] is to limit the cases which may go on appeal in the interests of finality of litigation and the workload of the High Court, while preserving the integrity of the law and the interests of justice.
Discussion
[13]Western Joinery Ltd v Commissioner of Inland Revenue [2017] NZHC 3297 at [9].
[14]Sandle v Stewart [1982] 1 NZLR 708 (CA) at 715.
In the Consolidation decision the Associate Judge carefully weighed the competing considerations and concluded that the overall interests of justice did not favour consolidation. In his leave decision he concluded that Fairway and Quest had not met the requisite threshold as formulated in Finewood.[15] He also appeared to place significant weight on the fact that the Consolidation decision involved the exercise of a discretion, referencing Kacem v Bashir.[16]
[15]Finewood Upholstery Ltd v Vaughan, above n 9.
[16]Leave decision, above n 5, at [5], citing Kacem v Bashir [2010] NZSC 112, [2011] 2 NZLR 1 at [32].
On an application under s 56(5) of the Act we are required to undertake our own assessment. It is fair to say that we see the competing cases as a little more finely balanced than did the Associate Judge. In addition there are two factors to which we draw attention.
First, in the Leave decision the Associate Judge appeared to substantially discount the significance of consolidation for the persons who supported it, stating:
[22] According to Fairway and Quest, the parties who will be prejudiced if leave to appeal is refused are Messrs Cooney, Turner, Lagerberg and Beekie and CBC 2010. However, none of those parties applied for the proceedings to be consolidated, none were formally represented at the hearing of the application for consolidation, and none have applied for leave to appeal, despite having the opportunity to do so. Accordingly, and as the liquidators submit, it is difficult to see how those parties have standing in relating to the proposed appeal.
However the materials provided to the Court in connection with the leave application included a memorandum on behalf of CBC (2010) and Messrs Lagerberg and Beekie which signalled their support for consolidation of the three proceedings. The memorandum foreshadowed anticipated instructions from CBC (2010) to apply for leave under s 248(1)(c) of the Companies Act to commence a cross-claim against Hamilton in the defective building proceeding. It asserted that the positions of CBC (2010) and Messrs Lagerberg and Beekie could be prejudiced if the Companies Act proceedings are heard and determined separately and before the defective building proceeding.
We further note that subsequent to the Leave decision a memorandum was filed in this Court on behalf of CBC (2010) and Messrs Lagerberg and Beekie which referred to their earlier memorandum in the High Court and recorded their support for the application for leave to appeal against the Consolidation judgment.
Secondly, a matter which is not mentioned in the Leave decision (although it is referred to in the Consolidation decision) is the nature of the interest of the Tauranga City Council which is the first defendant in the defective building proceeding. A memorandum filed by the liquidators in response to a request from the Judge at the hearing of the application stated:
3… The [liquidator’s] reports evidence that, in addition to the liquidators’ own fees and expenses, which rank first in the order of priority of payment to preferential creditors and are therefore immediately payable from any recovery:
3.1the liquidators have received a total, to 18 January 2018, of $105,533 in creditor funding from the Tauranga City Council (TCC), which is a preferential claim under clause 1(1)(e)(ii) of the Seventh Schedule to the Companies Act 1993 (the Seventh Schedule);
3.2the liquidators have admitted a claim from TCC for $184,000, being TCC’s claim for contribution in separate High Court proceedings that have been resolved. The claim attracts preferential status under clause 1(1)(e)(i) of the Seventh Schedule; and
3.3the liquidators have received a contingent claim from TCC for $13 million in respect of the claim against TCC in the Defective Building Proceeding. If admitted by the liquidators, this claim will also attract a preferential status under clause 1(1)(e)(i) of the Seventh Schedule.
4There being no preferential claims under clauses 1(1)(b), (c) or (d) of the Seventh Schedule, the preferential claims of the liquidators and TCC (to the extent they have been admitted) can be paid immediately from any recovery by the liquidators.
Mr Brittain submits that the Council stands to gain a significant tactical advantage if the three proceedings are not heard together. He emphasises that it is in the Council’s best interests for the claims against the other defendants in the defective building proceeding to succeed which, it is said, would reduce the Council’s exposure to the claim.
When addressing an application of this nature on the papers we are somewhat handicapped in evaluating the significance of the different hats which the Council may be wearing in this matter. Suffice to say it appears to us to add another layer of complexity to what is already a somewhat complicated case. As such it is a factor which contributes to the conclusion we have reached that it is in the interests of justice that the opportunity should be afforded for a second look at the issue of consolidation in the particular circumstances of this case.
Result
The application for leave to appeal under s 56(5) of the Senior Courts Act 2016 is granted.
The respondents must pay the applicants costs for a standard application for leave to appeal on a band A basis together with usual disbursements.
Solicitors:
JK Hamilton, Tauranga for Applicants
Stace Hammond, Auckland for Respondents
21
2
0