Thompson v Thomas

[2018] NZHC 1495

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2015-404-001319 [2018] NZHC 1495

BETWEEN

IAN ALLEN THOMPSON

Applicant

AND

DAVID THOMAS as liquidator of DD Construction Ltd (in liq)

Respondent

Hearing:	13 June 2018
Appearances:	W A McCartney for Applicant J K Grimmer for Respondent
Judgment:	21 June 2018

JUDGMENT OF ASSOCIATE JUDGE OSBORNE

on application to reverse decision of liquidator

This judgment was delivered by me on …….. at …….

Pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar Date:…………………………

THOMPSON v THOMAS [2018] NZHC 1495

Introduction

[1]    A sum of $20,041.62 (plus interest) (“the fund”) is held on trust pending resolution of a dispute between the applicant and a company now in liquidation. The dispute has not been settled some three years after it arose. The liquidator of the company has refused to agree to the release of the fund back to the applicant.

[2]    The applicant seeks an order under s 284(1)(b) Companies Act 1993 reversing the decision of the liquidator.

Background

[3]    The applicant, Ian Thompson, owns two of eight townhouses in a Ponsonby complex. The complex was a leaky building and required repair. The body corporate engaged DD Construction Ltd (DDC) to undertake the repairs.

[4]    Mr Thomas raised disputes as to some payment claims (totalling $20,014.62) (the disputed sum) made by DDC and did not pay the disputed sum. Around the same time, he issued proceedings against DDC and others for damages in relation to alleged overrun on the repair costs.

[5]    DDC, in purported exercise of its rights under the repair contract, registered mortgages against the titles to Mr Thompson’s units. Mr Thompson applied to this Court for orders that the mortgages be removed.

[6]    Mr Thompson arranged to pay the disputed sum into his solicitor’s trust account to be held pending resolution of the dispute. His solicitor undertook to this Court on 26 June 2015 to hold the fund for the benefit of Mr Thompson and DDC pending determination of the dispute by agreement, order of the Court or determination pursuant to the Construction Contracts Act 2002.

[7]    The parties agreed to refer the dispute to mediation on the earliest possible date after exchange of relevant documents and repleading of Mr Thompson’s claim, with

any proceedings for a determination under the Construction Contracts Act not to occur before 30 September 2015.

[8]    The Court made a consent order requiring DDC to cause the registration of the mortgages to be removed from Mr Thompson’s titles.

[9]    Under the parties’ arrangements, the relevant documents were to have been provided not less than four weeks prior to a mediation. The documentary record establishes that, between July and September 2015, Mr Thompson’s solicitors unsuccessfully sought the relevant records from DDC. The mediation did not occur.

[10]   DDC was subsequently liquidated by special resolution of its shareholders on 25 May 2017. The respondent in this proceeding, David Thomas, was appointed liquidator.

[11]   It was only six months later, in early December 2017, that Mr Thompson and his solicitors became aware that DDC was in liquidation.

The liquidator’s position explained

[12]   In December 2017, Mr Thompson (now aware of DDC’s liquidation) informally sought an order for release back to him of the fund. The Court instead gave the liquidator the opportunity to respond to the request for release.

[13]   On 7 February 2018, counsel instructed by the liquidator recorded in a memorandum to the Court that the liquidator’s position was that:

(a)he strongly opposed the release of the funds. After investigation, he considered the funds to be the rightful property of DDC, as they represent unpaid invoices for work and materials supplied to Mr Thompson in respect of his leaky unit. The liquidator was of the opinion that the funds belong to DDC and should be paid to the liquidator for the benefit of DDC’s creditors; and

(b)as the funds were paid into trust as security pursuant to consent orders pending determination of the rightful ownership of the funds, the agreement could not be unilaterally overridden by Mr Thompson.

[14]   The liquidator’s position led Mr Thompson to pursue this application to reverse the liquidator’s decision to not consent to the release of the fund. Mr Thompson sought leave under s 284(1) of the Act to make the application and to pursue his proceeding for damages.

[15]   In his affidavit filed in opposition, the liquidator asserts that his refusal to agree to the release of the funds was reasonable because:

(a)the continuation of Mr Thompson’s proceeding is not in the best interests of DDC or of its creditors;

(b)the prospects of recovery by Mr Thompson are negligible given the limited assets available in DDC’s liquidation; and

(c)the liquidator has investigated the facts in relation to the disputed funds and considers that it is at least arguable that DDC is the owner of the funds paid into escrow. In fact, he considers that there is a relatively strong claim to that effect, and that it is in the best interests of the creditors to pursue recovery of the funds in escrow.

[16]   In his affidavit, the liquidator then continued (in relation to Mr Thompson’s leave application):

I oppose the  granting  of  leave  to  continue  these  proceedings  because  Mr Thompson’s claim can either be dealt with in the liquidation (it has not yet made a claim in the liquidation) or in the Disputes Tribunal. I have offered through counsel the option of having the Disputes Tribunal determine the rightful owner of the funds held in escrow, but Mr Thompson has refused to accept this offer.

As the amount at stake is only $20,041.62, I do not consider High Court proceedings to be an efficient method of determining the dispute.

[17]   The liquidator continued that he opposes the application to reverse his decision because:

(a)the funds paid into escrow were paid as part of an agreement to settle a dispute over whether a mandatory injunction should be issued for discharge of mortgages by DDC over Mr Thompson’s units. DDC agreed to discharge the mortgages in exchange for Mr Thompson’s payment of the funds into escrow pending resolution of the dispute as to who was entitled to them. Mr Thompson’s solicitor gave an undertaking to retain the fund in escrow pending determination of the dispute;

(b)the dispute has not been determined by any of the agreed methods;

(c)the mortgages had been registered pursuant to a term in the building contract to secure payment for part of the cost of building works by DDC to Mr Thompson’s formerly leaky residential units;

(d)it was a term of the building contract relating to the units that if there was a dispute about DDC’s costs it had to be raised within a strict timeframe. Mr Thompson did not raise a dispute within the timeframe so was and is obliged to pay the full amount invoiced to DDC; and

(e)any disputed amounts were, in any event, required under the building contract to be paid into escrow pending determination of the dispute, so that is how the fund should be treated until the dispute over who is entitled to the fund is determined.

Mr Thompson’s position

[18]By his notice of application, Mr Thompson asserts:

(a)The funds held in trust are his property.

(b)Neither DDC nor the liquidator has filed a counterclaim for the fund.

(c)The liquidator has:

(i)wrongly claimed that the fund is the property of DDC; and

(ii)refused to consent:

·     to release of the fund back to Mr Thompson; and

·     to Mr Thompson’s continuing the proceeding.

(d)The result of the liquidator’s decisions, if allowed to stand, would be that the fund remain forever held in trust, unable to be disbursed to anyone.

(e)The liquidator’s position is vexatious and in breach of the liquidator’s duties to act in good faith and in a fair and principled way.

[19]   In his written synopsis filed before the hearing, Mr McCartney in effect added to the grounds of Mr Thompson’s application.

[20]   First, he submitted that the dispute which existed at the time of his solicitor’s undertaking has in effect been determined by agreement (with both sides giving up on the pursuit of claims), thereby bringing to an end the obligation of Mr Thompson’s solicitors to hold the fund in trust.

[21]   Mr McCartney secondly submitted that the liquidator’s proposal to have the matter determined in the Disputes Tribunal does not deal with the application before the Court, namely for an order reversing the liquidator’s decision. The Disputes Tribunal would be dealing with a hearing of the entire issues between the parties, which would be impractical and uneconomic. The Tribunal would not have jurisdiction under s 284 of the Act to reverse the decision here attacked.

The jurisdiction invoked

The statutory provisions

[22]The relevant provisions of s 284(1) of the Act are remarkably succinct:

284 Court supervision of liquidation

(1)On the application of … with the leave of the court, a creditor … the Court may —

(a)…

(b)confirm, reverse, or modify an act or decision of the liquidator:

…

[23]   On 22 March 2018, the Court granted Mr Thompson leave to make this application.

The applicable principles

[24]   The role of the Court in relation to the supervision of liquidations was articulated by Toogood J in Levin v Lawrence:1

The Court is required to exercise a supervisory jurisdiction over liquidations and to intervene when it is appropriate to do so. But the statutory regime under the Companies Act favours allowing liquidators to make business decisions which they, as the persons appointed to exercise statutory responsibilities, are better qualified than the Courts to make. Without abrogating its supervisory obligations, the Court should be slow to intervene where matters of judgment and assessment on commercial matters are concerned. That includes assessing how far to investigate possible avenues of recovery of funds for distribution. Weighing the likely cost of pursuing such avenues against the prospects of success and the amount which may be recovered are matters for judgement which are squarely within a liquidator's domain.

[25]   In Callis v Pardington (“Re Callis”),2 the Court of Appeal reviewed authorities in relation to the Court’s power to confirm, reverse or modify the acts or decisions of the Assignee in bankruptcy. The power equivalent to s 284(1) Companies Act 1993 (in relation to liquidations) is found in s 226 Insolvency Act 2006, being the successor provision to s 86 Insolvency Act 1967 which was discussed in Re Callis.

1      Levin v Lawrence [2012] NZHC 1452, at [54].

2      Callis v Pardington (1996) 7 NZCLC 261,211 (CA) (“Re Callis”).

[26]   In Re Callis the Court of Appeal noted the parallel legislative statutory requirements in relation to both liquidations and bankruptcies that the assignees/liquidators use their own discretion in the management of the estate.3 The Court then referred to English authority emphasising limitations on the Court’s entitlement to interfere. In particular, the Court noted the observation of Sir George Jessell MR (delivering the judgment of the Court of Appeal) in Re Peters ex parte Lloyd that the court will not interfere unless the trustee is doing that which is so utterly unreasonable and absurd that no reasonable man would so act.4

[27]   The Court referred to the observation of Harman J in Re A Debtor (No 400 of 1940); Ex parte The Debtor v Dodwell (The Trustee), where Harman J said of the circumstances where the Court could interfere at the instance of a bankrupt:5

They cannot, I think (in the absence of fraud) justify interference in the day to day administration of the estate, nor entitle the bankrupt to question the exercise by the Trustee in good faith of his discretion, nor to hold him accountable for an error of judgment.

[28]   The Court noted the adoption of a similar approach in Australia in relation to the (Commonwealth) Bankruptcy Act. The Court then continued:6

The legislation has since been changed in Australia to give a wider discretion to the Court: In re Tyndall (1977) 17 ALR 182. Mrs Hinde, who conducted this part of the appeal for the appellant, accepted the English authorities as applicable in New Zealand, so that the Court would only interfere in the case of fraud, lack of bona fide exercise of the Assignee’s discretion, or unreasonableness. In the present case, the relevant test is whether the Official Assignee has acted in a way in which no reasonable assignee or liquidator could have acted.

Discussion

[29]   The fund established by Mr Thompson in his solicitor’s trust account represents Mr Thompson’s money. DDC was claiming an entitlement to payment of the $20,014.62 which had been billed. It purported to take security in the form of

3      Re Callis, above n 2, at 6, citing s 84(3) Insolvency Act 1967 and s 241(4) Companies Act 1955; the present statutory provisions being contained in s 224 Insolvency Act 2006 and s 285 Companies Act 1993.

4      Ex parte Lloyd (1882) 47 LT 64 at 65.

5      Re A Debtor (No 400 of 1940); Ex parte The Debtor v Dodwell (The Trustee) [1949] 1 All ER 510 at 512.

6      Re Callis, above n 2, at p 8.

mortgages over Mr Thompson’s units. That security was replaced by the fund established by Mr Thompson. That the $20,014.62 was paid as “security” was expressly recognised in the memorandum of counsel for the liquidator in February 2018 (as recorded at [13] above).

[30]   For the liquidator, Mr Grimmer, both in his written and oral submissions, repeatedly referred to the fund as being held “in escrow”. “Escrow” is a concept specified under the building contract to deal with situations of dispute. In this case, DDC purported to take different security (in the form of the mortgages). When Mr Thompson subsequently made his payment into his solicitor’s trust account, the payment was not made pursuant to the provisions of the building contract but was made in the context of Mr Thompson’s proceeding to have the mortgages removed. It was paid simply as an alternative form of security. The liquidator’s adoption of the term “escrow” does not affect the ownership of the fund – it is Mr Thompson’s money provided as security.

[31]   The liquidator’s position is that the fund should not be released to Mr Thompson – instead the liquidator asserts that entitlement to the fund should be established through the Disputes Tribunal or as funds belonging to the liquidation.

[32]   Both of the courses proposed by the liquidator have difficulties associated with them which would not have arisen had the dispute between the parties been resolved by mediation as envisaged at the time the fund was established:

·     First, the Disputes Tribunal has a jurisdiction limited below the amount of the fund.7 Furthermore, the Tribunal if seized of the dispute would not be bound to give effect to strict legal rights or obligations.8

·     Secondly, the liquidator’s first report on the liquidation of DDC (the only report available) did not identify the availability of funds in the liquidation to pay secured creditors let alone unsecured creditors. In the event the fund

7      The Disputes Tribunals Act 1988 provides a jurisdiction of up to $15,000 (s 10(3)(3)); or up to

$20,000 by agreement between the parties (s 13(2)).

8      Disputes Tribunals Act 1988, s 18(6).

was to be released to the liquidator (pursuant to one of his two alternatives), Mr Thompson as an unsecured claimant would have no prospect of recovering any part of the fund even if it became a fully admitted debt.

[33]   An alternative course would be to have the fund released to its owner, Mr Thompson. The liquidator would then have the right to pursue the disputed sum. If he chose to pursue the disputed sum to the extent of $15,000 (abandoning the balance under s 14 Disputes Tribunals Act 1988) he could do so without incurring costs of legal representation.

[34]   In the light of those matters, I next consider the dispute resolution process which the parties agreed upon in counsels’ consent memorandum of June 2015. The commitment of the parties then was to refer their dispute to mediation on the earliest possible date in accordance with an agreed timetable. The first timetable step was for DDC to provide documents which Mr Thompson requested. DDC did not do so in the remaining months that year (2015) or subsequently, before DDC was placed in liquidation by shareholder resolution on 23 May 2017. The liquidator has not taken steps to have the entitlement to the disputed sum determined. With DDC in an insolvent liquidation, it would be clearly uneconomic to have a High Court proceeding used as the means of determining entitlement to the disputed sum. In any event, the liquidator has not consented to Mr Thompson proceeding against the company in liquidation. For Mr Thompson to add the additional legal costs of seeking leave on an opposed basis would render any claim even more grossly uneconomic.

[35] Ultimately, this case concerns a resolution process to which the parties committed in 2015 but which failed. It failed at the outset through the default of DDC in not providing the requested documents necessary to proceed to mediation. In the circumstances, I am satisfied that the liquidator’s decision not to consent to the release of the fund back to Mr Thompson was unreasonable. It did not take into account the failure of the company itself (when not in liquidation) to honour the dispute resolution process upon which the parties had agreed. It was in that context that Mr Thompson’s solicitors gave their undertaking in relation to the fund. As noted at [32] above, the liquidator also based his decision on the proposition that there were two reasonable

solutions which provided alternatives to releasing the fund back to Mr Thompson. Neither was in fact satisfactory.

[36]   In considering the reasonableness of a liquidator’s decision, the Court will have regard to the extent to which the subject-matter has been evaluated.

[37]   The Court’s judgment in Bruns v Wadsworth North illustrates this.9 There, Randerson J referred to the test of reasonableness as described by the Court of Appeal in Re Callis. His Honour observed:

In Callis it was held that a decision of the Official Assignee to assign rights of action to a bankrupt was unreasonable in that no attempt had been made by the Assignee to evaluate the claim and he had not consulted with the creditors or receivers of the companies of which the bankrupt was the majority shareholder.

[38]   His Honour then distinguished Re Callis from the situation in the case before him:

The circumstances of that case are very different from the present. Here, the Official Assignee had sought and obtained the opinion of experienced counsel whose opinion was that the claim had little or no merit. The opinion was expressed after a detailed consideration of the documentary evidence, material provided by Wadsworth Norton and consideration of the legal position.

[39]   In this case, DDC’s entitlement to payment of the billed amounts is fundamentally an issue of contractual entitlement. Inasmuch as a building contract is involved, it is an area in which an accurate assessment is likely to be best informed by someone with an understanding of the application of construction law. The liquidator has not deposed that he took any advice as to the justification of DDC’s unpaid claims (or the set-offs which Mr Thompson has asserted in his High Court claim). The liquidator’s evidence (as reflected at [15](c) above) is that it is he, the liquidator, who has investigated the facts and has reached the conclusion that DDC has a “relatively strong claim” to being the “owner of the funds”. Quite what legal principles are involved in the conclusion that DDC may be the “owner of the funds” is unclear. Had there been a legal opinion obtained to similar effect, the Court would have expected it to be identified (as occurred in Re Callis).

9      Bruns v Wadsworth North HC Auckland CP 582,292, 10 November 1998 at 13.

[40]   I do not overlook the fact that $20,041.62 (plus interest) might be considered a relatively small sum, in relation to which a liquidator might reasonably take care to avoid incurring unnecessary investigation cost. On the other hand, the fund represents Mr Thompson’s money. The Court should not lightly entertain an assertion that the modest sum involved should allow the liquidator in the present circumstances to effectively rely upon his own conclusion as to the legal merits of DDC’s claim in lieu of the opinion of counsel suitably experienced.

[41]   The only reasonable solution in these circumstances, the agreed resolution mechanism having failed, was to permit the release of the fund back to Mr Thompson. The liquidator has not pointed to any evidence to suggest that Mr Thompson would not be good for payment of the disputed sum if it is established to be owing to DDC. If the liquidator chose to establish the entitlement of DDC through the Disputes Tribunal, effectively as a reverse of the process which he suggested be pursued by Mr Thompson, he will have the right to do so, at least to the extent of $15,000.00. Otherwise he has the right to pursue a claim in the District Court.

[42]   I am satisfied that the decision of the liquidator not to consent to the release of the fund should be reversed.

Costs

[43]   Counsel agreed that it would be appropriate that costs follow the event on a 2B10 basis.

Orders

[44]I order:

(a)The decision of David Thomas as liquidator of DD Construction Ltd (in liq), whereby he decided not to agree to the release to Ian Allen Thompson of funds of the said Ian Allen Thompson held in trust by Pidgeon Law, is reversed and Pidgeon Law is hereby released from its undertaking dated 25 June 2015.

10     High Court Rules, Category 2 under r 14.3(1) and band B under r 14.5(2).

(b)The respondent is to pay to the applicant the costs of the application on a 2B basis together with disbursements to be fixed by the Registrar.

Associate Judge Osborne

Solicitors:

Pidgeon Law, Auckland

Counsel: W McCartney, Barrister, Auckland Harris Tate Lawyers, Tauranga

Counsel: J K Grimmer Barrister, Auckland