Arnerich v DHC Assets Ltd

• Jurisdiction: New Zealand
• Judge: Goddard J
• Judgment Date: 03 June 2021
• Neutral Citation: [2021] NZCA 225
• Court: Court of Appeal
• Docket Number: CA555/2019
• Date: 03 June 2021

Between

Antony Ivo Arnerich

Appellant

and

DHC Assets Limited

Respondent

[2021] NZCA 225

Court:

Goddard, Duffy and Nation JJ

CA555/2019

CA276/2020

IN THE COURT OF APPEAL OF NEW ZEALAND

I TE KŌTI PĪRA O AOTEAROA

Companies — appeal against a High Court decision which held that had breached his director's duty to act in the best interests of his company and required the appellant to make a payment to the respondent which had been awarded in arbitration — the respondent was an unpaid creditor — the company had no assets to settle any claim — whether the High Court should have determine the entire amount the respondent was owed — Companies Act 1993

Counsel:

J D McBride, and A J Steel for Appellant

F J Thorp and L J Turner for Respondent

• A Mr Arnerich's appeal is allowed in so far as it relates to the award of interest on the sum of $367,768.12. The award of interest in the High Court is set aside, and remitted back to that Court to be determined in accordance with this judgment.

• B DHC's cross-appeal is allowed. The proceedings are remitted back to the High Court to determine the amount of any further claim DHC may have against Vaco under the construction contract, and, in light of that determination, to make such further orders against Mr Arnerich under s 301 of the Companies Act 1993 as may be appropriate.

• C Mr Arnerich must pay costs to DHC on the appeal and cross-appeal, in each case for a standard appeal on a band A basis, with usual disbursements. We certify for second counsel.

JUDGMENT OF THE COURT

Table of contents

	Para No
Introduction and summary	[1]
Background	[11]
Establishment of Vaco and Vaco Trust and purchase of Lincoln Road property	[12]
Vaco enters into construction contract with DHC	[17]
Financing arrangements with ANZ	[19]
DHC carries out the construction work — disputes develop	[22]
Further payment claims and disputes	[35]
DHCs letter to Mr Beagley (6 March 2013) enclosing extension of time related materials and submissions	[44]
DHC Final Payment Claim — Payment Claim 17	[46]
Vaco sale of Lincoln Road property	[52]
Payments made by Vaco following sale of Lincoln Road property	[55]
Vaco tax liability paid by other Arnerich entities	[61]
Final Payment Schedule No 17	[62]
DHC's follow-up email on 8 August 2013	[68]
Further correspondence in relation to DHC's claims	[77]
Liquidation of Vaco	[78]
Adjudication proceedings	[85]
DHC refers its claims to arbitration	[96]
DHC's proceedings against Mr Arnerich	[101]
DHC's allegations against Mr Arnerich	[104]
Mr Arnerich's defence	[107]
High Court judgment	[109]
Legal framework for the claim	[110]
Ability of the High Court to determine Vaco's liability to DHC	[115]
Findings in relation to Mr Arnerich's knowledge about DHC's claims	[119]
Breach of s 131 of the Companies Act	[123]
Relief under s 301 of the Companies Act	[126]
Issues on appeal	[129]
Principles governing DHC's s 301 claim	[133]
Liability under s 131 of the Companies Act	[133]
The implications of the trading trust structure	[137]
Relief under s 301	[141]
Should the High Court have determined the amount of DHC's claim against Vaco?	[145]
Did Mr Arnerich breach s 131 of the Companies Act?	[152]
Mr Arnerich's submissions on appeal in relation to s 131	[152]
DHC's submissions in relation to s 131 breach	[158]
Discussion	[162]
Liability under s 301 of the Companies Act	[175]
Potential liability to Vaco under s 131	[175]
Liability under s 301	[177]
Treatment of GST	[181]
Interest	[182]
Remittance back to High Court	[187]
DHC's retention claims	[189]
Result	[190]

REASONS OF THE COURT

(Given by Goddard J)

Introduction and summary

1 The respondent, DHC Assets Ltd (DHC), is a construction company. It is an unpaid creditor of Vaco Investments (Lincoln Road) Ltd (Vaco). Vaco was put into voluntary liquidation on 1 July 2014. Mr Arnerich, an experienced property developer, was the sole director of Vaco. Vaco was the vehicle through which Mr Arnerich carried out a property development at a site on Lincoln Road in Auckland.

2 The structure Mr Arnerich put in place for the Lincoln Road development project also involved a trading trust: the Vaco Investments (Lincoln Road) Trust (Vaco Trust). Vaco was the sole trustee of the Vaco Trust. The discretionary beneficiaries of the Vaco Trust were (ultimately) Mr Arnerich and members of his family. Vaco acquired the property at Lincoln Road as trustee for the Vaco Trust, and carried out the development project in that capacity.

3 DHC claims it is owed some $1,088,156 plus interest by Vaco under the construction contract it entered into with Vaco to design and build a commercial building on the Lincoln Road property. DHC was awarded $367,768 in an adjudication under the Construction Contracts Act 2002. DHC has pursued claims against Vaco for the further amounts to which it says it is entitled. Vaco cannot pay DHC any part of the sum awarded in the adjudication, or the further sums DHC has claimed: Vaco has no assets of its own, and there are no remaining assets of the Vaco Trust out of which the payment could be made by Vaco as trustee.

4 DHC brought proceedings under s 301 of the Companies Act 1993 alleging that Mr Arnerich had breached his duty to act in the best interests of Vaco (as required by s 131 of the Companies Act) by causing Vaco to make substantial distributions to the beneficiaries of the Vaco Trust before DHC's contractual claims had been ascertained and paid by Vaco. DHC sought an order under s 301 that Mr Arnerich pay the amount DHC is owed by Vaco direct to DHC.

5 DHC's claim succeeded in part in the High Court. 1 Davison J found that Mr Arnerich had breached his duty to act in the best interests of Vaco. 2 He made orders requiring Mr Arnerich to pay DHC the sum of $367,768 awarded in the adjudication. 3 But he declined to determine whether DHC was owed further amounts by Vaco, and declined to make any further orders against Mr Arnerich, on the basis that the construction contract required DHC's claims against Vaco to be determined by other mechanisms, and those claims had previously been referred to arbitration. 4

6 Mr Arnerich appeals to this Court. He says that he acted throughout in good faith and in what he believed to be the best interests of Vaco: he did not breach s 131 of the Companies Act. He genuinely believed that DHC had ceased to pursue its claims, and that those claims lacked any merit. He made provision for the further claims that he believed might be made against Vaco by DHC and other creditors, then distributed the balance of the Vaco Trust's assets to the beneficiaries of the Vaco Trust.

7 DHC cross appeals, seeking orders that the High Court determine the amount it is owed by Vaco, and that Mr Arnerich be required to pay the whole of that amount direct to DHC under s 301 of the Companies Act.

8 We have concluded that Mr Arnerich breached s 131 of the Companies Act by causing Vaco to distribute its remaining funds to his family and associated interests as beneficiaries of the Vaco Trust, without ensuring that Vaco retained sufficient funds to meet contingent claims by DHC. Mr Arnerich had an obvious conflict of interest in making these decisions, which directly benefited him and his family while depriving Vaco of access to trust funds to meet any successful claims by DHC. We doubt Mr Arnerich turned his mind to the interests of Vaco as a separate entity. But in any event, no rational director could have considered that it was in Vaco's best interests to

make those distributions, and risk having insufficient trust funds in hand to meet DHC's claims if successful

9 We therefore uphold the High Court's order under s 301 of the Companies Act that Mr Arnerich must pay DHC $367,768.12 plus interest, though we modify the interest award.

10 We have also concluded that the High Court should have determined the total amount that Vaco owed to DHC, and awarded DHC compensation from Mr Arnerich for the full amount of Vaco's unpaid debt to DHC — a debt which Vaco would have been able to meet but for Mr Arnerich's breaches of s 131. We therefore refer the proceeding back to the High Court to determine the amount that DHC was owed by Vaco, and to make such further orders for compensation as may be required in light of that finding.

Background

11 The history of the dealings between DHC and Vaco is set out in considerable detail in the High Court judgment. 5 For the purposes of this appeal, a summary of those dealings is sufficient.

Establishment of Vaco and Vaco Trust and purchase of Lincoln Road property

12 On 5 November 2010, Vaco Investments Ltd (VIL) entered into a conditional agreement to purchase a property at Lincoln Road for the sum of $1.4 million. Mr Arnerich is the sole director and shareholder of VIL. The parties subsequently agreed to reduce the purchase price to $1.325 million.

13 On 15 April 2011, Mr Arnerich incorporated Vaco as his vehicle to carry out a proposed development at the Lincoln Road property. The company's initial name was Rawhiti Property Holdings Ltd. On 16 August 2011, the name of the company was changed to Vaco Investments (Lincoln Road) Ltd. VIL was the sole shareholder of Vaco, and Mr Arnerich was Vaco's sole director.

14 On 4 November 2011, Mr Arnerich executed a deed establishing the Vaco Trust. The deed appointed Vaco as the sole trustee of the Vaco Trust. The discretionary beneficiaries of the Vaco Trust were (ultimately, via other trusts) Mr Arnerich and members of his family.

15 The purchase of the Lincoln...