IAG NEW ZEALAND LIMITED AND H CONSTRUCTION NORTH ISLAND LIMITED (formerly HAWKINS CONSTRUCTION LIMITED) ORANGE H MANAGEMENT LIMITED (formerly HAWKINS MANAGEMENT LIMITED) ORANGE H GROUP LIMITED (formerly HAWKINS...
[2018] NZHC 620
•18 April 2018
THIS IS A REDACTED VERSION OF THE JUDGMENT FOR
PUBLICATION. AN UNREDACTED VERSION HAS BEEN DELIVERED TO THE PARTIES
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2017-404-002922
[2018] NZHC 620
BETWEEN IAG NEW ZEALAND LIMITED
Applicant
AND
H CONSTRUCTION NORTH ISLAND
LIMITED (formerly HAWKINS CONSTRUCTION LIMITED)
First RespondentORANGE H MANAGEMENT LIMITED
(formerly HAWKINS MANAGEMENT LIMITED)
Second RespondentORANGE H GROUP LIMITED (formerly HAWKINS GROUP LIMITED)
Third Respondent
Hearing: 13 March 2018 Appearances:
N Gedye QC and O Collette-Moxon for Applicants J McKay and Z Fookes for Respondents
Judgment:
18 April 2018
JUDGMENT OF VENNING J
This judgment was delivered by me on 18 April 2018 at 11.30 am, pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
Solicitors: Chapman Tripp, Auckland
Duncan Cotterill, Auckland
Counsel: N Gedye QC, Auckland
IAG NEW ZEALAND LIMITED v H CONSTRUCTION NORTH ISLAND LIMITED (formerly HAWKINS CONSTRUCTION LIMITED) [2018] NZHC 620 [18 April 2018]
Introduction
[1] Following the Canterbury earthquakes of September 2010 and February 2011 insurance companies faced an unprecedented number of claims in relation to damage to residential properties. A number of the insurers entered arrangements with building companies to manage the repair claims.
[2] In 2010 IAG New Zealand Limited (IAG) engaged Hawkins Construction Limited (Construction Ltd) to provide project management services in relation to the claim for repairs to the damaged properties insured by IAG. IAG subsequently contracted with other companies within the Hawkins Group of companies to take over the project management services from Construction Ltd.
Background to application
[3] The arrangements with the Hawkins Group of companies were pursuant to a series of Rebuild Solution Master Agreements (RSMAs). The first in 2010 was with Construction Ltd. Then in August 2012 IAG entered a RSMA with Hawkins Management Limited (Management Ltd) and with Hawkins Group Limited (Group Ltd) as Covenantor. The 2012 RSMA was replaced in November 2014. The 2014 agreement was again between IAG and Management Ltd with Group Ltd as Covenantor. The final RSMA was entered in June 2016 between IAG and Management Ltd with Group Ltd as Covenantor.1
[4] From about 2013 and early 2014 IAG began receiving complaints from its insured customers about the repair/reinstatement work. A number of IAG’s customers have issued proceedings against it. Other proceedings are threatened.
[5] Mr Donegan, Deputy General Counsel (Enterprise) for IAG says there are now at least [redacted] instances where IAG faces unresolved defective work allegations, at least 11 of which are either at or near the stage of court proceedings. His best current estimate is that IAG will face claims and expenses in excess of [redacted] in relation
1 The companies within the Hawkins Group have changed their names as recorded in the intituling. For ease of reference this judgment refers to them as Construction Ltd, Management Ltd and Group Ltd respectively.
to the present claims. Taking account of likely future claims his best indicative figure is that IAG could face claims of up to [redacted].
[6] IAG considers that if it is liable to its customers then the Hawkins companies are liable to it for breach of their obligations under the RSMAs. Although IAG has not yet issued a claim against the Hawkins companies it has issued third party notices in several proceedings.
[7] On 31 March 2017 Group Ltd sold its general construction and infrastructure project delivery business in New Zealand and its associated assets to Downer New Zealand Limited for $80 million.
[8] IAG has brought this application for a freezing order and related ancillary orders. At present IAG only pursues the ancillary orders.
[9] In response to the application Mr McConnell, Managing Director and Director of each of the three respondent companies, swore an affidavit in which he disclosed in general terms the disposition of the proceeds of the sale to Downer. He also provided copies of the public liability policies held by the companies in the Hawkins Group. IAG does not accept the disclosure is sufficient.
The terms of the order sought
[10] In light of the information provided in response to the application IAG now seeks an ancillary order requiring the respondents to disclose:
(a)a copy of the most recent annual financial statements of each of the respondents;
(b)all monthly or other management accounts and reports relating to each respondent in the period since their last annual financial statements;
(c)any other documents which contain information about the respondents’ total assets and liabilities as at 28 February 2018 including, but not limited to, their cash holdings and debts and liabilities and receivables;
(d)any business plan or board report or similar document which records the expected business activities of the respondents over the 24 month period commencing 1 March 2018;
(e)particulars of the forecast cash flow requirements of the respondents in relation to their ordinary course of business over the 12 month period commencing 1 March 2018;
(f)particulars of all income or receivables expected by the respondents over the 12 month period commencing 1 March 2018;
(g)particulars of all contractual or other liabilities (including contingent or actual) in excess of $500,000 which any of the respondents believes it may have to meet over the 12 month period commencing 1 March 2018;
(h)particulars of all claims or possible claims in excess of $50,000 which have been made against or notified to any of the respondents;
(i)particulars of all dispositions or loan advances or dividends or other forms of payment in excess of $500,000 made by any of the respondents from the proceeds of sale to Downer between 31 March 2017 and the present time;
(j)copies of the underlying policies referred to in the Professional Advice Write-Back Endorsement for all applicable years in which such policies were in place;
(k)copies of all communications to any underwriters or brokers by which any of the respondents or their agents notified claims made or notified by IAG against them;
(l)copies of all communications received from brokers or underwriters or their representatives in response to, or relating to, the communications; and
(m)particulars of all claims against any of the respondents by any entity or person other than IAG which have been notified to underwriters by any of the respondents in the period commencing 30 June 2012 to date including (at a minimum) the amount of the claim and the identity of the claimant and the nature of the claim.
Part 32 High Court Rules
[11] The application for the ancillary orders is made under Part 32 of the High Court Rules. Rules 32.3 and 32.5 (as relevant) provide:
32.3Ancillary order
(1)The court may make an order (an ancillary order) ancillary to a freezing order or prospective freezing order if the court considers it just.
(2)Without limiting the generality of subclause (1), an ancillary order may be made for any of the following purposes:
(a)eliciting information relating to assets relevant to the freezing order or prospective freezing order:
(b)determining whether the freezing order should be made:
(c)appointing a receiver of the assets that are the subject of the freezing order.
…
32.5Order against judgment debtor or prospective judgment debtor or third party
(1)This rule applies if—
…
(b)an applicant has a good arguable case on an accrued or prospective cause of action that is justiciable in—
(i) the court; or …
…
(4) The court may make … an ancillary order … against a … prospective judgment debtor if the court is satisfied, having regard to all the circumstances, that there is a danger that a … prospective judgment will be wholly or partly unsatisfied because—
…
(b)the assets of the … prospective judgment debtor, … might be—
…
(ii)disposed of, dealt with, or diminished in value (whether the assets are in or outside New Zealand).
[12] While ancillary orders are often made at the same time as a freezing order, there is jurisdiction to make an ancillary order before a freezing order. An ancillary order may be made before a freezing order if there is a prospect that a freezing order will ultimately be made by the Court.2
Applicant’s submissions
[13] Mr Gedye QC submitted that IAG sought the ancillary orders to elicit information which would inform whether there was a danger that any judgment it might obtain might not be satisfied. He submitted the Court should make a broad assessment of the matters relied on by IAG, the nature and extent of disclosure made by the respondents in response, the likelihood of further documents which would clarify the asset and liability picture and the inferences which could be drawn from the existing material. The information ultimately obtained would be relevant both as to whether a freezing order should be made and also as to its terms.
[14] Mr Gedye also submitted the information would inform what might be regarded as the “ordinary course of business” in the case of the respondents, having reference to r 32.6(3)(c). Rule 32.6(3)(c) provides:
(3)The freezing order must not prohibit the respondent from dealing with the assets covered by the order for the purpose of—
…
(c)disposing of assets, or making payments, in the ordinary course of the respondent's business, including business expenses incurred in good faith.
2 Dotcom v Twentieth Century Fox Film Corp [2014] NZCA 509 at [15].
[15] While accepting that a risk of disposal should not be inferred merely because the defendant plays its financial cards close to its chest, Mr Gedye submitted it was sufficient if the applicant could point to circumstances from which a prudent, sensible, commercial person could properly infer a danger of default.3
[16] Mr Gedye submitted that the concepts of “disposed of, dealt with, or diminished in value” referred to in r 32.5(4)(b)(ii) were broader than the common law concept of dissipation used in mareva injunction cases. IAG did not need to show any impropriety or wrongdoing. He submitted diminution in value is a concept particularly relevant in the current circumstances. Mr Gedye emphasised the following. The respondents have sold the major part of their business and assets. Neither Management Ltd nor Construction Ltd have been trading for some considerable time. Next, shortly after IAG wrote to the defendants’ directors in March 2017, five of the eight directors of the Hawkins Group resigned.
[17] The proposed defendants did not respond in detail to the request for further information. Mr Gedye noted that it appears from Mr McConnell’s response that the Hawkins Group has entered into substantial loan transactions with its shareholder McConnell Ltd.
[18] Mr Gedye also submitted the undertaking offered by Mr McConnell, that there would be no dividend paid to shareholders without providing IAG with 30 working days’ prior notice, provided no constraint against a disposal or diminution of the funds for Group Ltd’s needs. Mr Gedye submitted that there was a danger of intermingling of assets between Group Ltd and McConnell Ltd.
Respondents’ evidence
[19] In his affidavit Mr McConnell has provided information about Construction Ltd and Management Ltd and has provided some detail of the disposition of the funds from Group Ltd’s sale of the business and assets to Downer.
3 Raukura Moana Fisheries Ltd v The Ship “Irina Zharkikh” [2001] 2 NZLR 801.
[20] Mr McConnell says that Construction Ltd ceased entering new construction contracts in 2012. Management Ltd was a special purpose company incorporated originally for the purposes of the 2012 RSMA. It was also a party to the 2014 and 2016 RSMAs. The 2016 RSMA terminated on 31 December 2016. No further work has been carried out under it. As a result both Construction Ltd and Management Ltd have not been trading for some time. They have some historical related party receivables but also have secured creditors with rights over those receivables. As a result neither Construction Ltd nor Management Ltd have any assets which would be of any material value to an unsecured creditor such as IAG. On that evidence those entities have no assets which could be applied to meet a judgment. A freezing order against them could not improve the situation and would not be made in respect of those entities.
[21] The position is then, that the only entity that might be in a position to satisfy any judgment IAG might obtain for the [redacted] claim referred to by Mr Donegan is Group Ltd.
[22] Mr McConnell confirmed that Group Ltd and certain of its subsidiaries (not Construction Ltd or Management Ltd ) sold its general construction and infrastructure project delivery business and associated assets to Downer New Zealand Ltd for $80 million on 31 March 2017.
[23] Of the purchase price $57,465,000 was payable on completion of the sale with any subsequent balance due to be paid later. All sale proceeds due to the vendor group have been received by Group Ltd as parent company. From the $57,465,000, an amount of [redacted] was paid to Grant Samuel in fees. The balance was reduced by a dividend of [redacted] paid by Group Ltd to a shareholder McConnell Ltd to provide collateral for bonding [redacted]. The balance of [redacted] has been applied:
(a)[redacted] placed on deposit [redacted];
(b)[redacted] to McConnell Ltd to assist it further with collateral for bonding. [Redacted].
(c)The balance of the moneys are held for Group Ltd to meet its needs.
[24] Following working capital adjustments a further and final [redacted] was received from Downer [redacted].
Discussion
[25] I do not accept Mr Gedye’s submission that, because the Court may make an ancillary order prior to a freezing order and need only consider a freezing order to be in prospect, there is a relatively low threshold in relation to whether the freezing order might be made.
[26] On an application such as this for an ancillary order against a prospective judgment debtor the applicant must still satisfy the requirements of r 32.5, in particular in this case that:
(a)IAG has a good arguable case on an accrued or prospective cause of action that is justiciable in this Court; and
(b)having regard to all the circumstances there is a danger that any prospective judgment will be wholly or partly unsatisfied because the assets of the Hawkins’ companies might be disposed of, dealt with, or diminished in value.
[27] Rule 32.3 provides the Court may make an ancillary order if it considers it just to do so, and sets out the purposes of such an order. However, the Court must still be satisfied the requirements of r 32.5 are met before it may make the order.
[28] In the present case the respondents concede, solely for the purpose of this application, a justiciable good arguable case. The issue for the Court is whether the other criteria are satisfied.
[29] On the evidence, Group Ltd currently has assets which could satisfy any judgment(s) IAG might obtain. [Redacted]. The purpose of a freezing order is not to give an applicant a preference over other unsecured creditors. There must be evidence,
either direct or inferential, of a danger that any judgment IAG might obtain will be wholly or partly unsatisfied because Group’s assets might be disposed of, dealt with or diminished in value, otherwise than in the ordinary course of business.
[30] The disposal of assets or making payments in the ordinary course of the respondents’ business, including business expenses incurred in good faith, does not satisfy the requirement of r 32.5(4)(b)(ii), as confirmed by r 32.6(3)(c). Indeed that rule provides the Court “must not” prohibit such a disposal. There must be a risk which warrants the extraordinary step of a Court acting to protect an unsecured creditor in advance of judgment and which prevents a party against whom there is no judgment from the free use of its assets.4
[31] There is no direct evidence of a danger of disposition or diminishment in value of Group Ltd’s assets or that Group Ltd intends to deal with the balance of the sale proceeds otherwise than in the ordinary course of its business. Mr McConnell’s evidence is to the contrary.
[32] Mr Gedye sought to respond to that evidence by inviting the Court to draw inferences from a number of factors:
(a)The respondents have sold the major part of their business and assets; and Management Ltd and Construction Ltd have not traded for some considerable time.
[33] The respondents accept that Group Ltd (and other subsidiaries) have sold their business assets. Mr McConnell has provided evidence of the disposition of the proceeds. Next, while IAG complains that no detail has been provided of Management Ltd or Construction Ltd’s asset and liability position Mr McConnell has deposed that apart from some receivables which are subject to secured loans, the companies are not trading. There are no assets available to unsecured creditors from those companies. A freezing order would not be made against the assets of those companies. There is no reason not to accept Mr McConnell’s uncontested evidence about the position of those companies. It is a frank admission that they will not have any assets available to unsecured creditors. The focus must be on the position of Group Ltd.
4 Fortune Mile International Ltd v Judge [2014] NZHC 3146 at [26].
(b)The resignation of directors
[34] Given that Group Ltd had sold aspects of its business and that Management Ltd and Construction Ltd are not trading it is unsurprising that a number of directors might have resigned on the basis that they were no longer required. It does not suggest any intention to dissipate assets. On the evidence, the directors who remain appear to be experienced and responsible directors.
(c)Failure to respond to inquiries
[35] Mr Williams, general counsel and head of property on behalf of IAG wrote to the directors of the Hawkins companies, putting them on notice of their contingent liabilities to IAG under the RSMAs and seeking assurance the sale to Downer would not reduce Management Ltd and Group Ltd’s ability to meet IAG’s claims. IAG complain there was no response to that letter.
[36] However, as noted, Mr McConnell has now provided information under oath concerning the sale and the disposition of the proceeds of sale. On the information provided by Mr McConnell, Group Ltd has [redacted] available to it at present. There is no evidence of any attempt to dispose of that to avoid any liability for judgment.
[37] Next, IAG relies on a further letter seeking information dated 23 November 2017. That seeks insurance details, a matter to which I will return shortly.
(d)The criticism of Mr McConnell’s affidavit
[38] IAG criticises the information provided by Mr McConnell and notes that a substantial part of the balance [redacted], was lent or was advanced to McConnell Ltd. However that overlooks Mr McConnell’s further evidence that a substantial part, almost 87 per cent [redacted] has been repaid. Mr Gedye acknowledged in submission that “it seems” McConnell Ltd had repaid “much of the borrowing”.
[39] Importantly, there is no suggestion that the money will be used otherwise than for the purpose of the ordinary business of Group Ltd. Group Ltd has remaining assets and run-off projects.
(e)Inter Company loans
[40] The fact Group Ltd has made loans to McConnell Ltd does not support an inference that Group Ltd is seeking to diminish or dispose of its assets. In the course of its business a company such as Group Ltd will make loans. In doing so it is not disposing of its assets. An asset is simply converted from one form to another. In the absence of any reasonable inference that McConnell Ltd is not in a position to repay any loan there is no reason to suggest that the assets are being diminished in any particular way by such advances. It is not for IAG to interrogate Group Ltd about that.
[41] There are further features of this case which are of relevance. In the absence of a breach by the directors of Group Ltd of their duties there is no basis to suggest that Group Ltd’s assets will be disposed otherwise than in the course of business. There is no basis put before the Court to support such a suggestion. Mr McConnell deposes that he and his fellow directors are aware of their duties as directors. The remaining directors are his brother, John McConnell, and Arthur Young, a senior partner at Chapman Tripp, Auckland. Mr McConnell is aware of the need to have reasonable grounds for believing the company satisfies the solvency test particularly at the time of any distribution to shareholders.
[42] A principal way to reduce the assets held by Group Ltd would be for the company to make a distribution to shareholders. In that regard an undertaking has been offered.
[43] The financial information sought by way of the ancillary orders is extensive and intrusive. It might be appropriate in the interrogation of a judgment debtor. It is not appropriate at this stage of the proposed claim against Group Ltd. The respondents are entitled to the protection of their commercial information. The information sought is the type of information that would generally only be available to senior executives and board members of the respondents.
[44] On the information before the Court I am not satisfied that the requirements of r 32.5 are made out or that a freezing order would be made in this case.
The insurance policies
[45] IAG also seeks information regarding the insurance policies held by the Hawkins companies. Under the RSMAs they were required to hold public liability policies for not less than $5 million for each and every event or series of related events under the relevant RSMAs:
18.6 Evidence of insurance:
Hawkins must deliver to IAG NZ written evidence of compliance with clause 18.5 (including the provision of copies of the policies and any certificates of currency), whenever reasonably required by IAG NZ.
[46] The respondents have made the public liability policies and information relating to those policies available.5 IAG consider that disclosure is insufficient. Although the policy contains an exclusion for professional advice there is a professional write-back endorsement specifically directed at Group Ltd and its subsidiary companies. The endorsement provides cover for accidental, physical loss or damage to property arising from professional advice provided that the cover only operates in excess of and following the exhaustion of the underlying policy(s). The underlying policies are a professional indemnity policy and excess professional indemnity policy in the name of Group Ltd.
[47] IAG seeks the information relating to the professional indemnity policies and in relation to claims made. Group Ltd’s response is that the reference to professional indemnity write-back does not convert a public liability policy into a professional indemnity policy and it is not required to provide that information.
[48] IAG argues the information is relevant as it may impact on Group Ltd’s ability to meet the claims. Ultimately however the issue only arises if Group Ltd’s other financial resources are not sufficient to meet the claims. In light of the information presented to the Court at present there is no reason to suggest they will not be. Further,
5 30 June 2010 – 30 June 2011 Placing slip (Marsh); 30 June 2011 – 30 June 2012 P000042531PUL Policy Schedule, GL Policy; 30 June 2012- 30 June 2013 P000042531PUL Policy Schedule, GL Policy; 30 June 2013 – 30 June 2014 P000042531PUL Policy Schedule; 30 June 2014 – 1 July
2015 P000042531PUL Policy Schedule; 1 July 2015 – 1 October 2015 P000042531PUL Policy
Schedule; 1 October 2015 – 1 October 2016 P000042531PUL Policy Schedule, GL Policy; 1 October 2016 – 1 October 2017 P000042531PUL Policy Schedule, GL Policy, Certificate of Insurance; 1 October 2017 – 1 April 2018 P000042531PUL Policy Endorsement.
the additional insurance information sought does not appear referable to the issues raised by the pleadings.6
[49] For those reasons and on the basis of the information before the Court I do not consider it just to make the ancillary order in the terms sought by IAG.
[50] Finally I note that in IAG’s submissions it raised the prospect of an order for examination of Mr McConnell. While there may be jurisdiction for such an order, it will only be rarely made. There is no basis for such an order at present particularly as no other orders have been made and no issue of compliance arises.
Result
[51] The application for ancillary order is dismissed. The application for freezing order was not argued before the Court but counsel may wish to reflect on the status of it given the above findings.
[52] The Registrar is to refer the file back to Katz J as the assigned Judge for future management.
Costs
[53] Costs should follow the outcome. Costs to the respondents on a 2B basis. I do not certify for second counsel.
Venning J
6 Body Corporation 187242 v Auckland City Council HC Auckland CIV-2005-404-1597, 20 July 2006 at [20]; and Walker v Forbes [2017] NZHC 2694 at [16]–[18].
3
0