United Civil Construction Limited v Hayfield Sha Limited (in liquidation)
[2022] NZHC 3130
•28 November 2022
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2021-404-001018
[2022] NZHC 3130
IN THE MATTER of an application for directions pursuant to sections 284 and 286 of the Companies Act 1993 BETWEEN
UNITED CIVIL CONSTRUCTION LIMITED
Plaintiff
AND
HAYFIELD SHA LIMITED (IN LIQUIDATION)
Defendant
Hearing: 5 July 2022 Appearances:
P F Dalkie for the Plaintiff
G R Grant and M C Frogley for the Defendant
Judgment:
28 November 2022
JUDGMENT OF ASSOCIATE JUDGE GARDINER
This judgment was delivered by me on 28 November 2022 at 4.00 p.m. pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar Date.......................................
Solicitors:
Grant & Co, Auckland P F Dalkie, Auckland
UNITED CIVIL CONSTRUCTION LTD v HAYFIELD SHA LTD (IN LIQUIDATION) [2022] NZHC 3130
[28 November 2022]
Introduction
[1] The applicant asks the Court to review the decision of the liquidators of the respondent not to bring proceedings to recover debts due under contracts between the respondent and certain landowners. The applicant also applies for leave to bring proceedings against the respondent to have the debt owing under the construction contract between them determined by civil proceedings under the Construction Contracts Act 2002. Additionally, the applicant applies to be permitted to inspect certain documents held by the liquidator, including the contracts between the respondent and the landowners.
[2]The respondent, through the liquidators, opposes the applications.
[3]The applications raise three main issues:
(a)Have the liquidators acted wrongly or unreasonably by not bringing legal proceedings against the landowners?
(b)Should the applicant be permitted to bring adjudication proceedings against the respondent in liquidation?
(c)Does the applicant have a good reason for inspecting the identified documents?
Background facts
[4] Hayfield SHA Limited (Hayfield) is a special purpose vehicle incorporated to assist landowners in obtaining a zone change to permit residential development in the Hayfield Special Housing Precinct in Karaka. To develop their land into residential sections, the landowners are required to fund and construct water supply and wastewater reticulation systems. Once built, the new infrastructure will be connected to Watercare’s water supply and wastewater networks.
[5] Veolia Water Services (ANZ) Pty Ltd (Veolia) manages and operates the water and wastewater network in Karaka owned by Watercare. On 12 May 2017, Veolia, Hayfield and 14 landowners entered into an agreement setting out the terms for connection by Veolia of the new water and wastewater infrastructure to Watercare’s network. The Veolia agreement reserves sufficient capacity in Watercare’s existing water supply and wastewater networks to service the land covered by the agreement, up to an agreed capacity for each piece of land. This capacity is expressed in Household Equivalent Units (HUEs). There are 1,188 HUEs in total allocated across the 14 landowners depending on the size of their landholdings.
[6] Hayfield was responsible for the construction of the water supply and wastewater infrastructure for the landowners. It entered into individual funding agreements with 13 of the 14 landowners. One landowner, who had been allocated 204 HUEs, refused to sign a landowner agreement. As a result, the planned works were redesigned to ensure the non-paying landowner could not benefit from the infrastructure without contributing their share of the cost. The work was split into two stages. The first stage was completing the work for paying landowners and the second stage was postponed. This redesign caused a delay and an increase in the budget for the works.
[7] Although not all landowners had signed funding agreements, Hayfield entered into a construction contract with United Civil Construction Limited (United Civil) to construct the works. Problems arose during construction, with landowners complaining about poor workmanship and contract management. United Civil in turn complained about delayed design drawings, changes to plans, and site access issues due to actions taken by landowners. Construction costs increased and further delays arose.
[8] The ‘stage one landowners’ were invoiced for the first stage of works. Some of these landowners did not pay their agreed contributions on time. Internal disputes developed between landowners. Hayfield was forced to look for alternative funding and two landowners agreed to provide secured lending on an interim basis. However, Hayfield was not able to resolve the issues with non-paying owners and could not pay
the escalating costs of construction. As a result, construction work stopped in December 2018 and United Civil formally halted work in February 2019.
[9] On 4 April 2019, receivers and managers were appointed to Hayfield. On 5 April, Hayfield was placed into liquidation. By this stage, around 75% of the first stage of works had been completed.
Legal principles
Court supervision of liquidators
[10]Section 284 of the Companies Act 1993 (the Act) relevantly provides:
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:
…
(emphasis added)
[11] In deciding whether to grant leave, the Court acts as gatekeeper, to ensure that only appropriate challenges proceed to a full hearing.1 The Court attempts to strike a balance between protecting the rights of meritorious claimants, while also ensuring that a liquidated company's assets are not “frittered away as a result of claims that are unlikely to succeed”.2
[12] The application for leave is heard together with the substantive application in the ordinary course.3
1 Manifest Capital Management Pty Ltd v Lawrence HC Auckland CIV 2010-404-7741, 20 December 2011 at [7].
2 Adaptable Solutions Ltd v Toon [2017] NZHC 753 at [17].
3 Arnerich v Vaco Investments (Lincoln Road) Ltd (in liq) [2018] NZHC 1974 at [47].
[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
Litigation against a company in liquidation
[17]Section 248 of the Act provides:
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.
248 Effect of commencement of liquidation
(1) With effect from the commencement of the liquidation of a company, —
(a) the liquidator has custody and control of the company’s assets:
(b) the directors remain in office but cease to have powers, functions, or duties other than those required or permitted to be exercised by this Part:
(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:
…
[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.11 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.12 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.
11 Paul Heath and Michael Whale (eds) Heath and Whale on Insolvency (looseleaf ed, LexisNexis) at [21.4(e)].
12 At [21.4(a)]; citing Commissioner of Inland Revenue v Robertson [2017] NZHC 31.
[19]Other factors that go to the Court’s discretion are:13
(a)that there must be equality amongst creditors, so proceedings should not produce an advantage to one particular creditor over another;
(b)the assets of the company should not be dissipated in wasteful litigation, particularly if there is a more convenient method for determining the claim;
(c)the onus is on the party seeking leave to satisfy the Court that leave should be given;
(d)while the Court is not required to enquire into the merits of the proposed claim, leave should be declined for a proceeding which is clearly not tenable.
Inspection of documents by a creditor
[20]Section 256 relevantly 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—
(i) any liquidation committee appointed under section 314, unless the liquidator believes on reasonable grounds that inspection would be prejudicial to the liquidation; and
(ii) if the court so orders, a creditor or shareholder;
…
13 At [21.4(e)]; citing Satara Co-operative Group Ltd v Fus Ltd HC Napier CIV-2008-441-856, 28 January 2010; Birchall v Project Works Construction Ltd (in liq) (2004) 9 NZCLC 263,547 (HC) at [23]–[24]; Fisher v Isbey (1999) 13 PRNZ 182 (HC) at [19]; Body Corporate 81381 v Trebe New Zealand Ltd (in liq) HC Wellington CIV-2003-485-332, 13 May 2003; Sieradzki v Kahikatea Manufacturing Ltd (in liq) (2000) 8 NZCLC 262,241 (HC) at [6].
[21] The basis upon which the Court will allow a creditor or shareholder to inspect accounts and records under s 256(1)(a)(ii) was discussed by the Court of Appeal in Levin v Lawrence.14 The Court endorsed the “good reason” test adopted by Toogood J in the High Court: 15
[T]here must be some good reason for the Court to order inspection in circumstances where the statutory scheme does not ordinarily permit it. The test of “good reason” does not require any further elaboration; whether the Court will exercise its discretion to order access to the records will depend on the particular circumstances of each case.
[22] The Court of Appeal commented that while no inflexible rules can or should be laid down, the “good reason” test may be elaborated to the following extent:16
(a)Mere suspicion or assertion by a creditor that a liquidator has not undertaken – or is not undertaking – the liquidator’s statutory task properly is not sufficient.
(b)It is not permissible for a creditor or shareholder to apply merely in order to embark on a fishing expedition – in order to sift through the accounts and records of the liquidation to see if that might turn something up.
(c)At a minimum, the applicant must put forward some persuasive, tangible or concrete reasons why inspection should be granted. An example might be where the creditor, from its own dealings with the company in liquidation, has a genuine concern about a particular aspect of the company’s affairs.
Has the liquidator acted wrongly or unreasonably by not bringing legal proceedings against the landowners?
[23] As a creditor, United Civil requires leave to apply to review the liquidators’ decisions under s 284(1).
14 Levin v Lawrence [2013] NZCA 394, (2013) 11 NZCLC 98-018.
15 At [53]; see Levin v Lawrence [2012] NZHC 1452 at [56].
16 At [53].
[24] As noted, the purpose of the leave requirement is to act as a filtering mechanism, to ensure that only appropriate applications for review proceed to a full hearing.17 The Courts have consistently held that liquidators should remain free to undertake their duties in a cost effective and efficient manner.18 If creditors were free to challenge every act or decision of a liquidator, this objective would be undermined.19
[25] A creditor seeking leave under s 284 needs to do more than merely demonstrate that its claim is sustainable.20 The creditor will need to show that it has an arguable case. That is, it must have a credible factual basis and there must be a reasonable likelihood that, if the claim is established, the Court will disturb the act or decision in question. The Court is only likely to take this step if the act or decision is unreasonable.21
[26] In this case, the issue of leave was reserved to be determined with the application for review of the liquidators’ decision. As the leave issue and the substantive application both involve considering whether the liquidators’ decision is wrong or unreasonable, and reflecting the parties’ approach to their submissions, I move directly to that issue. I observe however that the liquidators’ decision under challenge (to negotiate rather than bring legal proceedings) is highly discretionary and of the kind that the Court is unlikely to disturb.
United Civil’s concerns
[27] United Civil complains that in the three years and three months since their appointment, the liquidators have charged $337,000 and have only collected $96,000 for the unsecured creditors. It emphasises that there is a shortfall of nearly $400,000 in terms of claims by unsecured creditors in the liquidation, with United Civil representing around 80% of that sum.
17 Trinity Foundation (Services No 1) Ltd v Downey, above n 5, at [21].
18 At [18].
19 At [18]; upheld on appeal in Trinity Foundation (Services No 1) Ltd v Downey (2006) 3 NZCCLR 401 (CA). See also Manifest Capital Management Pty Ltd v Lawrence, above n 1, at [7].
20 Trinity Foundation (Services No 1) Ltd v Downey, above n 5, at [21].
21 At [21].
[28] United Civil is critical of the liquidators’ reports, saying that they do not disclose the assets owned by the company, being the contracts with the landowners, the existing infrastructure in the ground, and the land on which wastewater pump station E is situated. United Civil submits that the liquidators’ failure to inform creditors of the assets of the company in their reports is a dereliction of their duty. Further, it submits that those reports conflate the receivership with the liquidation, when the receivership ended nearly three years ago, paying a surplus of $270,000 to the liquidators.
[29] United Civil’s main complaint is that the liquidators should have taken legal action against the landowners under the funding agreements to recover their agreed contributions to pay the company’s debts to unsecured creditors. United Civil says that the liquidators’ strategy of negotiation is misconceived. It maintains that the only way for the liquidators to get the landowners to pay is to sue them under the contracts. It asks the Court to review the liquidators’ decision not to sue the landowners, after reviewing the landowner agreements if necessary.
[30] United Civil says it is especially concerned that the liquidators may be prevented from taking legal action against individual landowners due to statutory limitation periods expiring. There is evidence that at least two of the funding agreements date back to June 2016. United Civil says that it is unknown whether the liquidators have made demands on landowners under the funding agreements; or whether those agreements contain sunset clauses.
[31] Additionally, United Civil considers that by entering into new arrangements with landowners for completion of the infrastructure, the liquidators are diverting landowner funds away from creditors such as United Civil, to pay for new work.
The liquidators’ response
[32] The lead liquidator, Boris van Delden, has sworn an affidavit. He describes the liquidators’ overall strategy since their appointment and their approach to getting the non-paying landowners to pay.
[33] Mr van Delden explains that the Veolia agreement provides that the existing infrastructure in the ground is owned by Hayfield until the works are completed, when it will ultimately vest in Watercare. He goes on to say:
28. The liquidators regard the existing works in the ground to be a valuable asset of the company and the liquidators have adopted a deliberate strategy to realise the value of the existing infrastructure works for the benefit of the company creditors.
29. The lands covered by the Veolia agreement have almost certainly increased in value due to demand for residential sections, but that value can only be fully realised once the water supply and wastewater infrastructure works are complete.
30. The liquidators consider realisation of the existing works to be possible because all landowners who signed the Veolia agreement want to connect their residential developments to the water supply and wastewater networks via the existing works.
[34] Mr van Delden confirms that all but one of the stage one landowners have paid the per HUE amount they were invoiced by Hayfield for stage one. Some landowners have paid more because they have benefited more from a variation to the planned works. Mr van Delden confirms that the landowner who did not sign a landowner agreement will need to “catch up” with the other landowners before connecting to the infrastructure. Non-paying stage two landowners will also need to “catch up” with the other landowners, but stage two owners are not required to pay until stage one of the work is finished. He records that to signify its commitment, one of the non-paying stage two landowners has deposited $1,555,000 into its lawyer’s trust account to confirm that it is willing to contribute to the completion of the infrastructure.
[35] Further, Mr van Delden describes some of the proposals that have been discussed with landowners, including the liquidators’ proposal that Hayfield take security over their residential developments so that payment for the existing works could be delayed until the landowners had obtained section 224 certificates, with payment to Hayfield shortly after titles issue. That proposal was rejected by landowners.
[36]Mr van Delden concludes:
The negotiations with the 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.
There are other advantages to the landowners completing the infrastructure project under the Veolia agreement. There is an existing resource consent for the infrastructure works, and Veolia has already approved the engineering design and detailed plans necessary to complete the works. Also, the constraints on water supply in the Watercare network means that reservation capacity and the Veolia agreement may not otherwise be available to the landowners.
[37] Mr van Delden concludes that the liquidators’ view, based on legal advice, is that proceedings against the landowners are not the best way to collect money to pay the debts of the company. His view is that any proceedings taken against the landowners will not be straightforward, with landowners having potential defences under the contracts, and will be expensive and long-running. He states that balanced against that litigation risk is the knowledge that the water supply and wastewater infrastructure must be completed for the landowners to complete their land developments and to sell residential sections. Mr van Delden states that while one or two landowners may have difficulty in contributing their share of the cost, most landowners are able to fund completion of the works and to pay contributions towards the cost of the existing works to pay the unsecured creditors in the liquidation.
[38] David Petterson, an experienced insolvency practitioner, gives expert evidence for the liquidators. Having reviewed the approach taken by the liquidators, he concludes:
In my opinion, the liquidators have chosen the right course of action. I also believe it will prove to be the most cost effective as well. In taking this route, the liquidators have not gone down an irrevocable path, rather they have chosen the cost and time effective option. Litigation still remains an option should they need to take that course, but if that should happen, they will be better informed than if they had not undertaken the negotiated settlement approach they have adopted.
Discussion
[39] The liquidators’ decision as to whether to negotiate with landowners or to commence legal proceedings involves them exercising their judgment and discretion.
Therefore, the relevant question is whether the liquidators’ decision is “wrong or unreasonable”.22
[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 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, Mr van Delden 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] Mr van Delden 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.
22 Registrar of Companies v Body Corporate 307730, above n 9.
[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.
[45] It is also clear that the liquidators are exploring alternative pathways to securing the funding outside the original funding agreements, with some success. The liquidators have entered into a new infrastructure agreement with two landowners that effectively bypasses the original landowners’ agreements.23 Under this agreement the landowners complete part of the water supply infrastructure known as the dual supply water main along Hingaia Road South. All landowners require completion of, and will benefit from, the dual supply water main. This agreement involves the two landowners paying money upfront towards toward the cost of the existing works (the
$96,000 collected in the liquidation to date). The liquidators state that they are open to negotiating similar agreements with other landowners.
[46] As to the time it has taken to reach this point, Mr van Delden explains that in addition to the issues with non-paying landowners, there has been a considerable delay in getting the necessary approvals for the landowners to connect to pump station E. There have also been issues with the water main connection. The liquidators have been negotiating with Veolia, Watercare and Auckland Council on these issues for many months.
[47] Mr van Delden’s evidence is that the liquidators are very close to reaching a resolution. He says that only the week prior, the liquidators finalised the cost to complete the whole works, and a schedule of what each landowner would need to
23 Infrastructure Funding Agreement dated 28 April 2021.
contribute for the works to be completed and unsecured creditors paid. He says that the liquidators are considering an approach involving all landowners paying their entire share of the construction cost upfront, with the funds being held in a solicitors’ trust account to be released on receipt of engineer certified invoices.
[48] While I accept that three years is a long time for the unsecured creditors to wait to be paid, the liquidators have explained the reasons for the delay. It is not inconceivable that, despite all reasonable efforts being taken by the liquidators, it could take three years to reach the current position given the complexities described.
[49] I record that even without the expert evidence of Mr Petterson, I would have concluded that the liquidators’ strategy is reasonable.
[50] As to United Civil’s concern about statutory limitation periods for taking legal action against the landowners expiring, the liquidators are seeking legal advice. It is to be assumed that this advice will address any limitation issues. I do not consider that this concern warrants the Court interfering with the liquidators’ strategy.
[51] As for United Civil’s complaints about the liquidators’ reports, while I accept that they could have been more specific about the company’s assets, and clearer that the $261,901 they received was collected by the receivers, these defects do not justify the Court reviewing their decision not to commence proceedings.
Should the applicant be permitted to bring adjudication proceedings against the respondent?
[52] United Civil seeks leave to proceed against Hayfield under s 248(1)(c) of the Act to have the balance of its claim (being the difference between the total amount of its claim and the now interim amount of its debt admitted by the liquidator) determined in accordance with the provisions of the construction contract under the Construction Contracts Act 2002.
[53] United Civil submits that this dispute is of the kind that it should be permitted to pursue against the company in liquidation because the dispute concerns matters under a construction contract which are not readily resolved by a liquidator, the claim
is tenable and the liquidators’ evidence is that the liquidation will probably be a solvent liquidation, so there is good reason for United Civil to establish its full entitlement.
[54] The liquidators oppose leave being given, contending that they reached a process agreement with United Civil to determine the company’s final claim under the construction contract. They argue that this process agreement gives rise to promissory estoppel and that the parties should complete the process before resorting to any form of litigation.
[55] Further, they submit that in exercising its discretion the key issue for the Court is balancing the interests of United Civil and the interests of the general body of creditors. They say that fairness is to be construed in the context of the liquidation in its entirety and involves a consideration of the interests of all creditors, and of the capacity of the liquidators to deal with the burden of the proposed litigation. They argue that a separate adjudication proceeding at this late stage is not necessary, is expensive and prejudicial to other creditors.
[56] To determine whether United Civil should be given leave to proceed against the company, it is necessary to look more closely at the agreement reached between United Civil and the liquidators to determine United Civil’s claim.
The agreed process
[57] At the commencement of the liquidation, the liquidators engaged with United Civil to try to determine its claim amount. Prior to the liquidation, United Civil had commenced adjudication proceedings against Hayfield. Additionally, on 2 May 2019, United Civil lodged a proof of debt for $4,239,860.77, which included
$3.3 million for Payment Claim 23. According to the liquidators, Payment Claim 23 was served after the company was placed into liquidation and had not been certified by the engineer to the construction contract.
[58] United Civil sought to continue the adjudication proceedings. The liquidators refused. On approximately 16 May 2019, the liquidators engaged John Green as an independent construction expert to advise them on the claims made by United Civil in the adjudication proceeding. Mr Green received and considered 13 Eastlight folders
of materials concerning around 26 items. The liquidators engaged Harrison Grierson (the engineers to the contract) to evaluate Payment Claim 23.
[59] On 22 July 2019, the liquidators, representatives of United Civil, Harrison Grierson and John Green met to discuss United Civil’s claim. On the eve of the meeting, United Civil provided an updated claim amount of $4,725,621, which included new amounts for interest and costs.
[60] Following the meeting, United Civil’s lawyer Mr Hazleton sent an email to Mr van Delden to record the agreement reached at the meeting. The following was recorded in Mr van Delden’s affidavit dated 11 November 2021:
75. On 22 July 2019, the liquidators met with representatives of UCCL, HG (the engineers to the construction contract) and John Green (the independent expert) to agree on a cost-effective process to determine the amount due to UCCL under the construction contract without the parties having to resort to litigation. It was agreed:
(a)That the certified sums would be admitted as a debt.
(b)That the retentions would be admitted as a debt (subject to the terms of the contract).
(c)That Mr Green would advise the liquidator on the claims that were taken to adjudication as to sums that he considers are due to United Civil as a debt.
(d)There is no issue as to liability for the variations claimed in Payment Claim 23 but Harrison Grierson need to evaluate PC23 as to quantum (being the final sum certified for any particular claim) on the basis that it was a final claim of United Civil as at the date of the liquidation. The liquidator is to discuss with HG payment for this task, and the parties are agreed that it is in everyone's interests to pursue this as soon as possible. United Civil will make its personnel available to HG to discuss matters on reasonable notice. HG will not reconsider the claims at adjudication which Mr Green is considering.
(e)HG and United Civil will report back to the liquidator on whether they are agreed on any or all items of PC23 that are for discussion, or if not agreed, where the disagreement lies.
(f)United Civil will discuss issues of interest and costs with the liquidator separately.
[61]Mr van Delden replied to Mr Hazleton by email: “points confirmed”.
[62] On 16 August 2019, United Civil submitted Payment Claim 24, and advised the liquidators that its claim had increased to $4,813,597 including GST.
[63] On 10 October 2019, Harrison Grierson’s assessment of Payment Claim 23 and final certificates were received by the liquidators. The liquidators provided these to United Civil on 14 October 2019.
[64] On 5 December 2019, the liquidators admitted an interim debt of $943,855.48 (for Engineer-certified payment claims) less $57,032 for the cost of remedial works owed by United Civil.
[65] John Green held two meetings with United Civil and Harrison Grierson, and on 5 March 2020 published his independent expert evaluation of United Civil’s adjudication claim. Mr Green concluded that United Civil was entitled to a further payment of $2,409,001 (as against United Civil’s claim of $2,719,381.99). Mr Campbell says that United Civil does not have any issue with Mr Green’s evaluation of the adjudication claims.24
[66] On 13 March 2020, Mr Campbell wrote to the liquidators requesting that an interim amount of $3,218,577.22 including GST and retentions be admitted as a debt in the liquidation on an interim basis. The sum comprised:
(a)$943,855.48, certified by Harrison Grierson under the contract but unpaid (relating to payment schedules 12, 13, 20, 21 and 22);
(b)$554,909.29, assessed by Harrison Grierson as payable under Payment Claim 24;
(c)the additional amount of $1,492,228.02, assessed by John Green; and
(d)$227,584.33 for retentions.
24 Second Affidavit of Andrew Campbell, affirmed 10 December 2021, at [18].
[67]Mr Campbell recorded that this sum did not allow for:
(a)interest accruing before and after the date of liquidation;
(b)United Civil’s costs arising from the agreed process;
(c)time-related costs and demobilisation costs as a result of the suspension of the contract works;
(d)further disputed sums including, but not limited to, $645,949.52 (excluding GST) from other variations not referred to John 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;
(f)claims for loss of profit if the contract is terminated.
[68] On 10 June 2020, Mr van Delden wrote to Mr Campbell expressing displeasure that United Civil was “moving the goalposts” at this stage in the process. In particular, the liquidators protested United Civil introducing “new claims” that were not part of the process agreement, namely a claim for time-related costs and demobilisation costs arising from suspension of the contract works, costs arising from a final remeasure and a claim for loss of profits in the event that the contract is terminated.
[69] Mr van Delden recorded that the question of interest after the date of liquidation and legal costs associated with the agreed process were reserved pending the outcome of the final remeasure and John Green’s analysis. He stated that as far as the liquidators were concerned, interest after liquidation would only be payable for all creditors if there were sufficient funds from assets realised such that after all costs and claims were paid there was a surplus. He suggested that costs associated with the process lie where they fall.
[70] Mr van Delden deposes that United Civil never replied to this letter, and as a result the agreed process “has not been completed”.
[71] On 13 May 2021, United Civil, through its counsel, wrote to the liquidators through their counsel demanding, amongst other things, that the liquidators admit United Civil’s debt in the liquidation.
[72] In response, the liquidators’ counsel recorded that the liquidators were awaiting a reply from United Civil to their 10 June 2020 letter so they could advance United Civil’s claim beyond the amount admitted in December 2019. They refused to release the retention money, stating that it was being held against any defects in United Civil’s work, as Hayfield and the liquidators were entitled to do. They stated that the liquidators had always been available to meet with United Civil to provide a detailed update on the liquidation and negotiations with landowners that was not possible in a formal report. They reiterated that the invitation remained open.
[73] On 25 June 2021, after United Civil filed the present application, the liquidators admitted an “interim debt” to “narrow the issues before the Court”. The liquidators admitted the further sum of $2,123,028.60, to bring the total admitted in respect of United Civil’s claim to $3,009,852.08 inclusive of GST.
[74] On 1 November 2021, the liquidators agreed with United Civil to increase the amount admitted to $3,044,213.22, to resolve the retentions issue.
The remaining areas of dispute
[75] In his second affidavit, Mr Campbell sets out his view on the remaining unresolved issues. The first is Harrison Grierson’s assessment of Payment Claim 23. There is a difference of approximately $650,000 excluding GST between United Civil’s claimed amount for Payment Claim 23, and Harrison Grierson’s assessment.
[76] The liquidators’ position is that United Civil has still not provided any detailed explanation to the liquidators for the claimed differences or explained why Harrison Grierson’s calculations are incorrect. This is despite Harrison Grierson’s evaluation of Payment Claim 23 being provided to United Civil on 14 October 2019. Instead, Mr Campbell argues that because United Civil was “successful” with regard to 66% of the matters referred to Mr Green, the liquidators should increase all the claimed
amounts assessed by Harrison Grierson and admit most of the disputed sum of approximately $650,000.
[77] The liquidators maintain that they need proper details to process United Civil’s claim, because to date its claim has been assessed at approximately $1.2 million less than the original proof of debt. They say that if necessary, they can engage expert assistance to analyse the claim differences once they receive sufficient detail from United Civil.
[78] They emphasise that there will be a substantial impact on landowners of any changes in the amount of admitted debt, which the liquidators need to be able to justify to other creditors and the funding landowners. They say that by not providing the liquidators with a detailed response on Harrison Grierson’s assessment, United Civil is preventing the liquidators from completing their statutory functions.
[79] Mr Campbell states that the second outstanding point is the calculation of contractual interest. Mr Campbell says that there have been discussions with the liquidators on interest, but the issue has not been resolved. He maintains that the issue of interest cannot be determined finally until the first unresolved issue (the disputed
$650,000) is settled, as the value of the interest is dependent on the principal sum due.
[80] The liquidators say that by May 2020, they had provided United Civil with a draft calculation of the interest due up to the date of liquidation ($146,123.05). They say that the amount has not been finalised or admitted, but to the extent that the interest issue is a straightforward calculation, it does not require the intervention of an adjudicator.
[81] The liquidators say that the issue of costs, with respect to the agreed process, is a matter still to be resolved by the parties. They record that the liquidators have spent $89,975 with Harrison Grierson, and $107,450 with John Green, plus GST. United Civil has not paid anything towards the process.
[82] In relation to United Civil’s foreshadowed claim as to a loss of profits following disclaimer of the construction contract, the liquidators say that no
information has been presented to them by United Civil to prove such a claim. They say that it is axiomatic that such a claim cannot be advanced without the details being supplied to the liquidators.
[83] The liquidators submit that if, at the end of the agreed process, United Civil is unhappy with the final amount admitted by the liquidators, then the appropriate remedy is to seek review of the decision under s 284, not leave to commence an adjudication proceeding.
Discussion
[84] United Civil has not persuaded me that there is good reason to grant it leave to commence an adjudication claim against Hayfield in liquidation. United Civil and the liquidators agreed on a process to fairly and cost-effectively determine United Civil’s claims. At a minimum, that process was intended to cover claims that had already been referred to adjudication prior to liquidation, as well as Payment Claim 23. The question of costs and interest was reserved for later discussion.
[85] In relation to Payment Claim 23, the agreed process was that once Harrison Grierson had completed its evaluation of Payment Claim 23, Harrison Grierson and United Civil would report back to the liquidators on whether they were agreed, or if not agreed, where the disagreement lay. There is no evidence that United Civil has informed the liquidators of the specific areas of disagreement with Harrison Grierson. The agreed process did not specify what was to happen in the event of disagreement, but at the very least, United Civil must be required to set out specifically how it says Harrison Grierson’s assessment is wrong.
[86] The critical question for the Court in deciding whether to grant leave to bring proceedings against the company in liquidation is not so much whether United Civil is estopped, but rather whether there is a good reason for permitting litigation. I do not agree that the remaining areas of dispute are unsuited to alternative dispute resolution through a process of the very kind the parties agreed to in June 2019. To the contrary, a process that involves an assessment of United Civil’s claim by an independent engineer, followed by negotiation between the liquidators and United
Civil based on that assessment, is eminently appropriate. Litigation is not necessary to resolve the dispute about Payment Claim 23.
[87] Similarly, quantification of interest can be readily determined by the liquidators. The question of costs associated with the agreed process can be readily negotiated. These matters do not require legal proceedings.
[88] I accept that a claim to lost profits and irrecoverable expenditure arising out of the termination of the contract may be more suited to legal proceedings. I also accept United Civil’s submission that such a claim cannot have been part of the agreed process because the liquidators did not disclaim the contract until after the process was agreed, in 2021. However, I do not consider leave to proceed against the company for this foreshadowed claim is justified at this stage, when United Civil has not yet put the basis for the claim to the liquidators.
Does the applicant have a good reason for inspecting the identified documents?
Landowner agreements
[89] Mr Campbell says that United Civil has expended substantial time, money, and resources to prove its claim in the liquidation. He seeks access to the landowner agreements to do “due diligence” before his board of directors commits further resources to prove the outstanding matters concerning United Civil’s claim. He states that he will be better placed to do that if he has a copy of the landowner agreements, can read them for himself and seek independent legal advice on their contents.
[90] Elaborating on this point, Mr Dalkie submits that United Civil is at a crossroads and needs to decide whether to expend further funds establishing its full entitlement or settle for the approximately $3.1 million currently admitted in the liquidation. He submits that until recently, United Civil has been led to believe that the landowner contracts were open-ended and enforceable, but the liquidators’ evidence suggests that enforcement of the landowner contracts will not be straightforward. He submits that in these circumstances, it is reasonable for United Civil to want to make its own assessment of the enforceability of the landowner contracts.
[91] The liquidators have refused to provide copies of the landowner agreements to United Civil. They consider that disclosing the landowner agreements would be prejudicial to the conduct of the liquidation, because it will disrupt the commercial strategy adopted by the liquidators. They say that by letter dated 3 June 2021 they offered to meet with Mr Campbell of United Civil to verbally explain the strategy adopted by the liquidators and why they would not release copies of the landowner agreements. They say that he refused to meet unless the liquidators handed over copies of the landowner agreements.
[92] I am not persuaded that United Civil has good cause to access the landowner agreements. There is no link between the provable amount United Civil is owed and the landowner agreements. The unresolved aspects of United Civil’s claim will be assessed by the liquidators and either admitted or rejected in the usual manner, entirely separate from and independent to the funding agreements.
[93] Further, the liquidators have explained that the funding agreements are not the only mechanism for procuring payment by the landowners. In fact, Mr van Delden has made clear in his affidavit that he considers the landowners’ need to connect into the infrastructure owned by Hayfield is a more compelling reason for the landowners to pay their contributions towards the past and future work.
[94] Fundamentally, it seems unlikely that United Civil would walk away from the remaining amounts it claims to be owed, irrespective of what the landowner agreements provide. As noted above, Mr Campbell deposes that the sum in dispute in relation to Payment Claim 23 is some $650,000 excluding GST. The company claims to be entitled to interest of at least $146,123.05. It also signals a claim for loss of profit of around $190,000 excluding GST.
[95] It is difficult to avoid the conclusion that United Civil wants to see the landowner agreements so it can decide whether to seek orders under s 286 for the liquidators to commence a proceeding against the landowners; or orders requiring assignment of the liquidators’ right to sue to it under s 260A. This strategy was earlier outlined in a letter from United Civil’s counsel to the liquidators:
It is critical to the outcome of the winding up the landowners either be made to pay up or, if not, then sued. As the application says, to make an informed business decision about either funding litigation against the landowners, or taking an assignment under s 260A from the liquidators, United Civil must first be able to see all the contracts and assess them.
[96] If that is the strategy, I consider that giving access to the landowner agreements is likely to lead to an intervention that will prejudice the liquidators’ ongoing commercial negotiations with the landowners to secure payment for the benefit of all creditors. For that reason, I am not satisfied that United Civil has a good reason to see the landowner agreements.
Other agreements between the landowners and the liquidators
[97] Mr van Delden deposes that the only document in this category is the Infrastructure Funding Agreement between the liquidators and two landowners to complete the dual supply water main. A redacted copy of that agreement is annexed to Mr Van Delden’s affidavit. This redacted version of the agreement is sufficient to inform United Civil of the nature of the arrangement reached between the liquidators and these two landowners.
Proofs of debt lodged by landowners
[98] Mr van Delden deposes that five landowners have submitted claims in the liquidation purporting to claim interest on loans which they have incurred after Hayfield was placed in liquidation. He explains that the landowners are arguing that the liquidation of Hayfield is a breach of the landowner agreements. They contend that Hayfield’s failure to complete the water and wastewater infrastructure has caused them loss because they are unable to complete their residential subdivisions and repay loans which continue to incur interest.
[99] The liquidators have recorded the landowner claims in their six-monthly reporting, but they do not consider them to be legitimate claims in the liquidation. This was made clear in the liquidators’ fourth report which states:
The significant increase arises from five landowners lodging claims for amounts that are not due contractually, or at the date of the liquidation.
[100] Mr van Delden confirms that the liquidators have not admitted the unsecured creditor claims lodged by these landowners.
[101] I cannot see any good reason for United Civil being permitted to view or take copies of these proofs of debt.
Correspondence concerning set-off of claims by landowners
[102] United Civil has requested copies of any written communications between the landowners and the liquidators that show any agreement where amounts due under the landowner contracts have been set off against claims made by the owners.
[103] Mr van Delden has deposed that there are no documents of this nature held by the liquidators.
[104] Furthermore, the liquidators have explained to United Civil (via lawyers) that there has not been any set-off under the landowner agreements against claims made by owners, and that this is unlikely as the liquidators do not accept that the owners’ claims are valid.
Decision
[105] The liquidators’ strategy of negotiating with non-paying landowners, rather than taking legal action, is not wrong or unreasonable. I therefore decline to review this decision under s 284(1).
[106] At this point the circumstances do not render legal proceedings necessary to resolve the outstanding aspects of United Civil’s claim in the liquidation. United Civil should complete the agreed process and put any additional claim for lost profits arising out of termination of the contract to the liquidator before seeking leave to bring legal proceedings. I decline United Civil leave to proceed against the company in liquidation under s 248(1)(c)(i).
[107] United Civil has not established that it has a good reason to inspect the landowner funding agreements, nor any other document. Leave to inspect the documents under s 256(1)(a)(ii) is declined.
Result
[108]United Civil’s application is dismissed.
[109] Hayfield has been the successful party and would ordinarily be entitled to an award of costs on a category 2B basis together with disbursements, as fixed by the Registrar. If the parties cannot reach agreement on costs they have leave to file and serve memoranda of up to five pages in length on that issue. I will then determine costs on the papers.
Associate Judge Gardiner
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