United Civil Construction Limited v Hayfield Sha Limited (in liquidation)
[2023] NZCA 377
•22 August 2023 at 9.30 am
| IN THE COURT OF APPEAL OF NEW ZEALAND I TE KŌTI PĪRA O AOTEAROA |
| CA695/2022 [2023] NZCA 377 |
| BETWEEN | UNITED CIVIL CONSTRUCTION LIMITED |
| AND | HAYFIELD SHA LIMITED (IN LIQUIDATION) |
| Hearing: | 24 July 2023 |
Court: | Collins, Lang and Woolford JJ |
Counsel: | P F Dalkie and M Holland for Appellant |
Judgment: | 22 August 2023 at 9.30 am |
JUDGMENT OF THE COURT
AThe appeal is dismissed.
BThe appellant must pay the respondent costs on a Band A basis for a standard appeal together with usual disbursements. We certify for second counsel.
____________________________________________________________________
REASONS OF THE COURT
(Given by Lang J)
The appellant, United Civil Construction Ltd (United Civil), is the principal creditor in the liquidation of the respondent, Hayfield SHA Ltd (in liquidation) (Hayfield). The sum owing to United Civil currently amounts to approximately 80 per cent of Hayfield’s total indebtedness to creditors.
United Civil is dissatisfied with the actions, or lack of action, taken by the liquidators in several respects. It applied to the High Court for orders under the Companies Act 1993 (the Act) that it contended were necessary to resolve its concerns.
In a judgment delivered on 28 November 2022, Associate Judge Gardiner dismissed each of United Civil’s applications.[1] United Civil appeals against the Associate Judge’s decision.
Background
[1]United Civil Construction Ltd v Hayfield SHA Ltd (in liq) [2022] NZHC 3130 [High Court judgment].
Hayfield was incorporated to assist 14 landowners to obtain a change of zoning so as to permit the development of land situated in Karaka for residential housing. The landowners entered into contracts with Hayfield under which they agreed to fund the construction of water supply and wastewater reticulation systems that were necessary to enable the land to be developed for that purpose. Hayfield then entered into a contract with United Civil for the construction of the infrastructure.
The work was to be carried out in two stages. However, difficulties arose on several fronts. United Civil ceased work under the construction contract in December 2018 and formally suspended work in February 2019. Hayfield was then placed in receivership on 4 April 2019 and in liquidation the following day. The receivers subsequently retired after recovering the amount owing to the secured creditor by whom they were appointed. They paid the sum of approximately $277,000 to the liquidators.
The liquidators have endeavoured to continue with the work necessary to complete the installation of the infrastructure. This involved negotiating with stage one and stage two landowners to recover amounts owing under the funding agreements. The liquidators have now recovered those sums from all but one of the stage one landowners. However, they have found it difficult to recover sums owing by the stage two landowners.
United Civil contends the time has now come for the liquidators to cease negotiating with landowners in default. It wants the liquidators to issue proceedings in the High Court to recover any sums that remain owing. It sought an order under s 284(1)(b) of the Act reversing or modifying the liquidators’ decision to continue with their strategy of negotiating with the landowners.
The second application arose from the claims United Civil has filed in the liquidation. The liquidators have now accepted several of these. However, United Civil has also filed claims that the liquidators have not yet accepted. It sought leave from the High Court under s 248(1)(c)(i) of the Act to have these claims determined by an adjudicator in accordance with the Construction Contracts Act 2002.
Finally, United Civil sought an order under s 256(1)(a)(ii) of the Act requiring the liquidators to provide it with copies of the funding agreements Hayfield had entered into with the landowners.
The Associate Judge declined to make any of the orders United Civil sought.
The application under s 284(1)(b) for an order reversing or modifying the liquidators’ decision to continue with a strategy of negotiating with the landowners
Section 284 of the Act relevantly provides as follows:
284 Court supervision of liquidation
(1)On the application of the liquidator, a liquidation committee, or, with the leave of the court, a creditor, shareholder, other entitled person, or director of a company in liquidation, the court may—
(a)give directions in relation to any matter arising in connection with the liquidation:
(b)confirm, reverse, or modify an act or decision of the liquidator:
…
The fact that United Civil is a creditor of Hayfield meant it was required to obtain the leave of the High Court to challenge the liquidators’ decision to continue with their strategy of negotiation. The Associate Judge noted that an application for leave in this context is generally heard together with the substantive application.[2] The Associate Judge ultimately declined to review the liquidators’ decision but did not expressly deal with the issue of leave. We proceed on the basis that she granted United Civil leave to bring the application but then declined it.
The argument
[2]At [12], citing Arnerich v Vaco Investments (Lincoln Road) Ltd (in liq) [2018] NZHC 1974 at [47].
United Civil accepts that it was initially open to the liquidators to seek to achieve a negotiated outcome with the landowners. However, it contends that the delay that has now occurred means that the liquidators should be required to alter their strategy. As we have already noted, United Civil contends the liquidators should now be directed to issue proceedings against the landowners in the High Court to recover monies outstanding under the funding agreements.
The argument for United Civil is summarised in the following paragraph of the written submissions Mr Dalkie and Mr Holland filed on its behalf in support of the appeal:[3]
[15]We do not criticise the initial decision of the liquidators to try and negotiate with the landowners. That is in equal measure sensible and commercial. However, there comes a point where so much time has passed that whilst the initial strategy call was right, continuing with it was and is plainly wrong. It is a matter of fact and degree when that point is, but 3 years and 3 months, was, and is, on any common sense commercial view more than enough. That is especially so in the context of a winding up, having regard to the duties and obligations of a liquidator. Any decision to persist was, and is, clearly wrong.
…
[21]The decision by the liquidators to continue was to do no more than hope there is going to be a negotiated agreement after 3 years and 3 months. It must on any view be not just wrong, but hopelessly wrong. There was no evidence to suggest there would be any change. All [one of the liquidators of Hayfield] did in his evidence was to express statement of opinion of his “hope”. It never got any better than that.
The test
[3]Emphasis in original.
Mr Dalkie accepts, and we agree, that the Associate Judge correctly enunciated the test to be applied in the present context:
[13] The power to review a liquidator's actions will be exercised in cases of fraud, where the liquidator's discretion has not been exercised in good faith or where the liquidator has acted unreasonably. The actions of a liquidator can be unreasonable without being in breach of an express statutory provision. The question is whether in all the circumstances, including the absence of consultation, the liquidator's actions were unreasonable.[4]
[14] The Court will not interfere with matters of day-to-day administration or hold a liquidator accountable for an error of judgment.[5] Serious and obvious lapses of judgment on the part of liquidators must be shown before the Courts will interfere.[6] And, as Williams J has observed, the Courts are not well placed to perform the functions undertaken by liquidators in real time and in the real world.[7]
[15] The Courts have suggested that liquidators are more vulnerable to review if they have not taken proper advice when making decisions requiring consideration of matters outside their expertise.[8]
[16] The Court of Appeal has drawn a distinction between reviewing the exercise of a liquidator's judgment or discretion, and the mechanical performance by a liquidator of one or his or her statutory functions.[9] A “wrong or unreasonable” test as discussed above is appropriate in the former case, where the concern is about undue interference with the liquidator's functions. It is not necessary to show that the liquidator is at fault in the latter case.[10]
[4]Consolidated Technologies Development (NZ) Ltd v McCullagh (2006) 9 NZCLC 264,056 (HC) at [15].
[5]Trinity Foundation (Services No 1) Ltd v Downey (2005) 9 NZCLC 263,917 (HC) at [19].
[6]Young & Associates Ltd v Ruscoe [2012] NZHC 1438, [2012] NZCCLR 23 at [8].
[7]At [8].
[8]At [9].
[9]Registrar of Companies v Body Corporate 307730 [2013] NZCA 659, [2014] 2 NZLR 623 at [25].
[10]At [26], the example in that case being where the Court determined it to be necessary to reverse the liquidator’s final report to restore the company to the register.
The Associate Judge held that the appropriate test in the circumstances of the present case was whether the liquidators’ decision was “wrong or unreasonable”.[11]
The Associate Judge’s decision
[11]High Court judgment, above n 1, at [39] citing Registrar of Companies v Body Corporate 307730, above n 9.
The reasons for the Associate Judge’s decision are encapsulated in the following paragraphs of her judgment:[12]
[40] I do not consider that the liquidators’ strategy of negotiation over litigation is wrong or unreasonable. The liquidators have been dealing with a complicated situation involving staged works, interdependencies between paying landowners, a reluctance by some to pay without assurance that others will, and (legitimately or otherwise) concerns about the quality of workmanship [of] United Civil.
[41] A specific complication is the overlap between stage one and stage two landowners. The completion of the first stage relies in part on funding from the second stage as a contribution to stage one costs (on the basis that stage two landowners will receive some benefit from stage one works). However, [one of the liquidators of Hayfield] deposes that when the stage two landowners are expected to pay the $3.606 million was not documented and is an issue the liquidators have been trying to resolve.
[42] [One of the liquidators of Hayfield] says that consequently there was very little trust, if any, between the stage one landowners and the stage two landowners. He says that an issue the liquidators faced on their appointment was that, based on the plans and works in the ground for stage one, the stage two landowners could argue that they would not receive any benefit from those works and refuse to pay the expected contributions to those works. He says that none have done so yet and “everyone is working towards re‑establishing working relationships and trust so that funding can be finalised.”
[43] The liquidators have also had to deal with the complication that not all landowners had signed funding agreements and additionally, how to deal with new owners buying into the subdivision who would benefit from the water infrastructure but were not obliged to pay anything under funding agreements. It seems that this has been a cause for concern by funding landowners, which contributed to their reluctance to make any further payments. Separately, a group of six landowners proposed to fund completion of part of the infrastructure without paying anything towards the cost of the existing infrastructure. The liquidators refused and have insisted that the landowners pay their share towards the existing infrastructure.
[44] In these circumstances, a strategy of negotiation is not unreasonable. The bottom line is that all landowners need to connect to the newly constructed water and wastewater system, including the existing works in the ground owned by Hayfield and the to-be-constructed wastewater pump station E on land owned by Hayfield. Without doing so they cannot connect to the mains, obtain section 224 certificates from Auckland Council, obtain titles and build on or sell their sections. Therefore, the landowners are strongly incentivised to pay Hayfield for the existing work already in the ground, irrespective of any rights of action that Hayfield may have against them under the landowner agreements. I note that despite the complications described, no landowner has refused to pay.
Analysis
[12]High Court judgment, above n 1.
The issue to be determined on appeal is whether the Associate Judge was correct to determine that the liquidators’ decision could not be regarded as wrong or unreasonable.
As the Associate Judge pointed out, the decision to continue negotiating with landowners rather than resort to litigation involved the exercise of judgement and discretion.[13] The courts are generally not well equipped to evaluate decisions by liquidators that turn on the exercise of judgment and the weighing of commercial considerations. This is because the courts rarely have access to all the information that is necessary to reach a timely and informed decision on such issues.
[13]At [39].
We also consider it highly unlikely that any decision to resort to litigation could be made on a global basis as United Civil contends should be done. Any such decision would need to have regard to the strength of the claim against individual landowners, the stage that negotiations with those landowners had reached, and the complexity and likely cost of litigation. That is so regardless of whether the decision is made by the liquidators or the Court.
Before the Court could determine that continuation of the strategy of negotiation was wrong or unreasonable it would need to undertake a careful assessment, on a case by case basis, of the likely benefits and disadvantages of litigation and negotiation. This would be necessary because, although litigation may place pressure on an opposing party, it also inevitably involves considerable delay, expense and uncertainty. In the present case the cost of litigation would ultimately be borne by Hayfield’s creditors, including United Civil. The fact that litigation would involve multiple defendants is another factor to be weighed in the mix because this would inevitably increase the cost of litigation.
As will be evident from the passage from the Associate Judge’s decision set out above at [17], any decision to adopt a litigation strategy will not involve the collection of straightforward debts. It is likely to give rise to multiple issues, many of them complex. Some of these relate to the fact that the landowners have questioned the quality of the work carried out by United Civil. There are also disputes between individual landowners, and these could give rise to cross-claims or third party claims between them.
Another factor supporting the desirability of continued negotiation is the fact that the landowners need the infrastructure to be installed in order to be able to develop and sell their land. One of the liquidators, Mr Boris van Delden, deposes:
The negotiations with landowners have proved to be complex, but the landowners have a common goal to finish the infrastructure so that they can complete their individual developments, obtain titles and sell residential sections. They are highly motivated to complete the infrastructure and the liquidators are willing to work co-operatively with the landowners provided each landowner pays their fair share of the existing works.
The liquidators also explain that the complexity of the situation means there is no ready solution for many of the issues they are confronting. Further, the negotiation process is not necessarily restricted to recovering the amount presently owing under the funding agreements. It has also resulted in one landowner agreeing to provide more funding than was required under the original agreement. Negotiations of this type can be protracted.
Decision
United Civil’s argument largely relies on the issue of delay. It is firmly of the view that, despite that fact that more than three years have now passed, the liquidators have little to show for the strategy they have pursued to date. We accept that this is so in a financial sense, although the liquidators say they are close to resolution in many cases.
However, the factors identified by the liquidators confirm that there was never going to be a quick or easy method by which they could complete the installation of the infrastructure and recover the contributions to be made by both the stage one and stage two landowners. Like the Associate Judge, we do not consider the delay that has occurred to be unreasonable or that, without more, the delay now justifies resort to litigation.
We are satisfied there was insufficient evidence before the High Court to enable it to conclude that litigation, particularly on a global basis, is now the only viable and reasonable option. On the evidence as it currently stands we consider the determinative factors militating against litigation to be the likely complexity of the claims against the landowners, the incentive for landowners to resolve outstanding issues so they can develop and sell their land and the inevitable expense, uncertainty and delay that litigation would create. Viewed in combination, these factors mean that continuation of the current strategy of negotiation cannot be regarded as wrong or unreasonable.
We are therefore satisfied the Associate Judge was correct to decline the application for orders under s 284(1)(b) of the Act.
The application under s 248(1)(c): leave to bring adjudication proceedings against Hayfield
The test
Section 248(1)(c) of the Act provides as follows:
248 Effect of commencement of liquidation
(1)With effect from the commencement of the liquidation of a company,—
…
(c)unless the liquidator agrees or the court orders otherwise, a person must not—
(i)commence or continue legal proceedings against the company or in relation to its property; or
(ii)exercise or enforce, or continue to exercise or enforce, a right or remedy over or against property of the company:
We are again content to adopt the test applied by the Associate Judge:[14]
[18] When considering whether to permit litigation against a company in liquidation, the key question for the Court is whether there are circumstances that render legal proceedings necessary, or whether the plaintiff’s claim is one that can readily be dealt with in the liquidation.[15] The learned authors of Heath and Whale on Insolvency observe that while the purpose of s 248 has traditionally been thought to be to prevent particular creditors from obtaining an advantage by bringing proceedings, the more convincing explanation is that the prohibition on litigation is designed to prevent a company in liquidation from being subjected to a multiplicity of actions which would be expensive, time consuming and, in some cases, unnecessary.[16] They comment that the s 248 question comes down to a question of choosing alternative forms of procedure as between legal proceedings and submitting a proof of debt in the liquidation.
The proposed proceeding
[14]High Court judgment, above n 1.
[15]Paul Heath and Michael Whale (eds) Heath and Whale on Insolvency (looseleaf ed, LexisNexis) at [21.4(e)].
[16]At [21.4(a)], citing Commissioner of Inland Revenue v Robertson [2017] NZHC 31.
In order to understand the issues that this ground of appeal raises it is necessary to refer briefly to the evolution of United Civil’s claims against Hayfield.
The liquidators took issue with several aspects of the initial claim that Hayfield filed in the liquidation. These related to disputed claims that had been referred to adjudication before Hayfield was placed in liquidation. There was also a dispute about a payment claim known as Payment Claim 23. This had not been certified by the engineer under the contract before the company was placed in liquidation.
To resolve the first of these issues the liquidators engaged Mr John Green, a very experienced adjudicator, to advise them regarding the extent to which the claims that had been referred to adjudication should be accepted. This produced an outcome that proved acceptable to both parties.
The liquidators engaged Harrison Grierson, the engineers appointed under the construction contract, to evaluate Payment Claim 23. The issues relating to this claim were largely resolved at a meeting held on 22 July 2019. United Civil agreed to discuss outstanding questions relating to interest and costs with the liquidators.
United Civil has now filed a further claim in the liquidation for the following items:
(a)interest accruing before and after the date of liquidation;
(b)United Civil’s costs arising from the agreed process involving Mr Green;
(c)time-related costs and demobilisation costs as a result of the suspension of the contract works;
(d)disputed sums including, but not limited to, $645,949.52 (excluding GST) relating to other variations not previously referred to Mr Green;
(e)items under the original scope of works which were not subject to a final remeasure, as would have been the case had the contract run its normal course; and
(f)claims for loss of profit if the contract was terminated.
United Civil sought the leave of the High Court under s 248(1)(c) to commence adjudication proceedings against Hayfield in relation to these claims. This would involve the appointment of an adjudicator to determine the claims based on the information provided by both parties. However, the Associate Judge did not consider further litigation was necessary to resolve any of these issues. She considered they could be resolved through further negotiation between the parties and/or using processes similar to those which the parties had used in relation to the earlier claims.[17]
Analysis
[17]At [86]–[87].
It is not clear why United Civil sought to have these claims determined by adjudication given the success achieved by the processes the parties had utilised previously. Mr Dalkie suggested during argument that United Civil took this step because it believed the liquidators had rejected its claims outright. However, that is clearly not the case. The liquidators remain amenable to having the outstanding claims resolved through negotiation and, if necessary, referral to Mr Green or other persons with appropriate expertise.
The first three items were part of, but never finally resolved by, the process agreed to by the parties in relation to United Civil’s earlier claims. We agree with the Associate Judge that they are matters that could readily be resolved through further negotiation between the parties or by reference to Mr Green. They should therefore be determined in that way and not by an adjudicator.
The disputed claims relating to variations that were not referred to Mr Green under the agreed process obviously fall outside that process. However, there is no impediment to him providing advice to the liquidators about them in the same way as the earlier claims. He is now familiar with the contract between the parties and is well placed to undertake that exercise.
The final two items also fall outside the agreed process. However, the liquidators have been waiting for United Civil to quantify these claims and provide evidence in support of them. Once they receive this information the liquidators will either accept or reject the claims. In the event of any dispute, the claims can then be referred to Mr Green or some other appropriately qualified person for advice.
The only exception may be the claim for loss of profits. The Associate Judge noted that this may be more suited for legal proceedings.[18] However, that issue cannot be determined until United Civil has quantified and substantiated its claim. It would be premature for this claim to be referred to adjudication at this point.
[18]At [88].
These conclusions largely reflect those reached by the Associate Judge.[19] We are satisfied she was correct to conclude that it was not appropriate to grant United Civil leave to commence adjudication proceedings against Hayfield in relation to any of the items set out above.
The application under s 256(1)(a)(ii): disclosure of funding agreements with landowners
The test
[19]At [84]–[88].
Section 256(1)(a)(ii) provides:
256 Duties in relation to records
(1) The liquidator of a company must—
(a)keep accounting records and other documents of the liquidation and permit those records, and the records and other documents of the company, to be inspected by—
…
(ii) if the court so orders, a creditor or shareholder; and
United Civil says it requires access to the landowner funding agreements so it can make an informed decision whether to continue with the claims for which it seeks leave to commence adjudication proceedings.
As the Associate Judge noted, the test in this context is whether there is good reason for the Court to allow a creditor to inspect documents held by a liquidator.[20] The applicant must put forward a “persuasive, tangible or concrete” reason why inspection should be permitted.[21] Mr Dalkie contended that the Associate Judge erred by introducing the element of “good reason” but we are satisfied that her approach accords with the authorities.
Analysis
[20]At [21], citing Levin v Lawrence [2013] NZCA 394, (2013) 11 NZCLC 98-018 at [53].
[21]Levin v Lawrence, above n 20, at [53(c)].
We find it difficult to understand United Civil’s argument on this ground of appeal. It appears to be common ground that Hayfield’s liquidation may result in creditors being paid in full. It is therefore unclear why United Civil would wish to abandon any aspect of its claim at this point. We have also upheld the Associate Judge’s decision declining to allow the claims to be determined by adjudication. This means United Civil will not be required to fund participation in that process. To date Mr Green’s costs have been met by the liquidators.
We also consider it unlikely that access to the funding agreements on a stand‑alone basis would be of material assistance to United Civil. Any proper assessment of the sums likely to be recovered would require a much broader range of factual information than that disclosed by the landowner funding agreements. These include the stage that negotiations with individual landowners have reached, as well as an assessment of the likelihood of future recovery. This would require information about any impediments to settlement and factors that may enhance or diminish the liquidators’ chances of recovery. The estimated cost of future recovery action would also need to be taken into account.
In closing we note that during argument it became apparent that there appears to have been a lack of dialogue between the parties to date. Counsel for Hayfield referred us to an occasion on which the liquidators offered to meet with United Civil’s representatives to discuss the state of the negotiations with the landowners. United Civil declined the offer unless it was also given access to the funding agreements. Such an approach suggests that United Civil has attached disproportionate importance to the funding agreements. It may have been better served by accepting the liquidators’ offer to meet and discuss.
As matters currently stand we are satisfied there was no good reason for the liquidators to provide United Civil with copies of the funding agreements. The Associate Judge was therefore correct to decline United Civil’s application for orders under s 256(1)(a)(ii).
Result
The appeal is dismissed.
The appellant must pay the respondent costs on a Band A basis for a standard appeal together with usual disbursements. We certify for second counsel.
Solicitors:
Hazelton Law, Wellington for Appellant
Grant & Co, Auckland for Respondent