Dempsey Wood Civil Ltd v Gapes

• Jurisdiction: New Zealand
• Judge: Fitzgerald J
• Judgment Date: 10 September 2021
• Neutral Citation: [2021] NZHC 2362
• Docket Number: CIV-2016-404-1839
• Year: 2021
• Court: High Court

UNDER the Companies Act 1993 and the Fair Trading Act 1986

Between

Dempsey Wood Civil Limited

Plaintiff

and

Anthony John Gapes

Defendant

[2021] NZHC 2362

Fitzgerald J

CIV-2016-404-1839

IN THE HIGH COURT OF NEW ZEALAND

AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA

TĀMAKI MAKAURAU ROHE

Companies, Fair Trading — claim for compensation for breach of directors duties and misleading conduct — directors duties in an insolvency context — unpaid creditors and insolvent trading — objective standard of a reasonable director — Fair Trading Act 1986 — Companies Act 1993

Appearances:

E St John and SP Maloney for the Plaintiff

JWA Johnson and WL Porter for the Defendant

JUDGMENT OF Fitzgerald J

This judgment was delivered by me on 10 September 2021 at 12.00pm, pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date

Introduction	[1]
The pleaded claims	[11]
Factual background	[27]
Introduction and early events	[27]
Crown is replaced by Koi	[30]
The Development is in trouble	[35]
The search for a new funder	[44]
Cancelling the pre-sales	[47]
The “hive down” structure	[53]
Events leading up to 15 October 2015	[55]
The Koi Facility expires/the Webber Capital transaction is executed	[63]
Webber Capital cancels its agreement	[78]
Dempsey Wood remains concerned about payment	[83]
The lead-up to receivership	[92]
Koi appoints receivers	[96]
Later events	[104]
The experts' evidence	[112]
Mr Shephard's evidence	[113]
Mr Hoole's evidence	[123]
Mr Vance's evidence	[130]
Overall assessment of the expert evidence	[142]
Section 135 of the Act	[147]
Legal principles	[147]
Analysis	[157]
Section 136 of the Act	[182]
Legal principles	[182]
Analysis	[200]
Section 131 of the Act	[206]
Legal principles	[206]
Analysis	[210]
Section 301 of the Act	[217]
Legal principles	[217]
Analysis	[225]
FTA claim	[239]
Legal principles	[239]
Analysis	[244]
Result and next steps	[263]

Introduction

1 Mr Gapes is an Auckland based property developer. He is the sole director and a majority shareholder of the property development company Redwood Group Ltd (Redwood). Mr Gapes was also the sole director of a related company named Panama Road Development Ltd (PRDL). PRDL was incorporated as a special purpose company to carry out the development which is the subject of these proceedings.

2 The development, which commenced in 2013, was located in Mt Wellington and branded the “Springpark development” (the Development). The Development was initially funded by Crown Financial Limited (Crown). Crown put PRDL into receivership early on in the life of the Development, though Crown's funding was fairly quickly replaced with a $30 million development facility provided by Koi Structured Credit Pty Ltd (Koi), a Singapore based lender (the Koi Facility).

3 By the end of November 2013, PRDL had secured agreements for sale and purchase of the completed lots within the Development “off the plan”, with a total value of approximately $60 million (the pre-sales). The pre-sales contained “sunset” clauses, which provided for their termination in certain circumstances if titles had not issued by 20 December 2015 (the Sunset Date).

4 Physical works on the Development commenced in late September 2014. The plaintiff, Dempsey Wood, was contracted by PRDL to carry out the civil works. By mid-2015, however, the Development had run into serious trouble. There were significant cost overruns and associated delays. It was clear that the Development would not achieve practical completion and that titles would not issue by the Sunset Date.

5 The Koi Facility expired on 15 October 2015. By that time, Mr Gapes and his advisers had been looking for an alternative funder for some months. Also on 15 October 2015, PRDL entered into a conditional agreement to refinance the Development with Webber Capital Ltd (Webber Capital). But that agreement was cancelled by Webber Capital a few weeks later, after carrying out due diligence. A key problem was that given the significant cost overruns and delays, the Development was no longer profitable so long as the pre-sales remained in place. Valuation advice at the time suggested that the Development would yield an additional $20 million in revenue if the pre-sales could be cancelled and sold at (then) market prices (the market having shifted significantly since the pre-sales had been entered into). Funders were, however, evidently cautious about PRDL's ability to unilaterally cancel the pre-sales, at least without associated cost and litigation risk.

6 Koi was willing, for a time at least, to continue to permit drawdowns from the Facility while Mr Gapes continued to search for a new funder. That changed, however, in early December 2015 when Koi appointed receivers to PRDL. The receivers cancelled the pre-sales upon the passing of the Sunset Date, and sold the Development in March 2016 for $25 million. This resulted in a shortfall of some $2 million to Koi, as well as unsecured creditors being left unpaid in a total amount of around $1.6 million. Approximately half of that related to Dempsey Wood's last invoice on the Development (for works carried out in November 2015), plus its (approved) claim for an extension of time (EOT).

7 Dempsey Wood sues Mr Gapes in his capacity as a director of PRDL, alleging that he breached a number of his director's duties under the Companies Act 1993 (the Act), including reckless trading (s 135) and agreeing to PRDL incurring obligations when he did not have reasonable grounds to believe they could be met when due (s 136). 1 Dempsey Wood seeks an order that Mr Gapes pay compensation pursuant to s 301 of the Act in an amount no less than the total outstanding unsecured creditors' claims, plus the costs of the liquidation.

8 Dempsey Wood also sues Mr Gapes pursuant to the Fair Trading Act 1986 (the FTA). Dempsey Wood says it was misled by Mr Gapes when in mid-November 2015, he gave it an assurance that there were sufficient funds remaining in the Koi Facility for Dempsey Wood to be paid for work carried out by it after that time.

9 Mr Gapes denies that he breached his duties as a director, or that he misled Dempsey Wood in breach of the FTA.

10 The balance of this judgment is structured as follows:

• (a) First, a summary of Dempsey Wood's pleaded case (including my decision on a pleading matter raised on behalf of Mr Gapes).

• (b) Second, a summary of the factual background. Given the highly contextual nature of many of the issues to be determined, it is necessary to traverse the factual background in some detail.

• (c) Third, a summary of the expert evidence and my overall assessment of it.

• (d) Finally, my assessment of each of Dempsey Wood's claims.

The pleaded claims

11 The Court of Appeal in Yan v Mainzeal Property and Construction Ltd (in liq) (Mainzeal) emphasised the importance of pleadings, and that claims are to be assessed according to the pleaded case. 2 This is particularly relevant in this case, given aspects of Dempsey Wood's case at trial expanded beyond its pleadings. Before summarising the pleaded claims, however, I note that Mr St John, Dempsey Wood's counsel, confirmed that Dempsey Wood's claim pursuant to s 137 of the Act could be disregarded. He also confirmed that Dempsey Wood's FTA claim was its “primary claim”, with its claims pursuant to ss 135, 136 and 131 of the Act each being of “approximately equal merit.”

12 As a preliminary point, Dempsey Wood's pleading alleges that Mr Gapes formulated “a plan” to:

• (a) avoid the pre-sales;

• (b) allow PRDL to default on its obligations under the Koi Facility;

• (c) liquidate PRDL; and

• (d) create a new entity to take over and rebrand the Development, and re-sell the lots for inflated prices in the (then) prevailing market.

13 In response to a question from me during his opening submissions, Mr St John confirmed that the existence of such a “plan” was not necessary to Dempsey Wood's claim, but bolstered it. I observe at this point that I do not consider any such “plan,” at least in the active sense, to be made out on the evidence. Rather, the significant cost overruns and delays meant the Development was not financially viable with the pre-sales remaining in place at their existing prices. As a result, it was necessary for the Development's survival that they be cancelled, rather than this being an active “plan” pursued by Mr Gapes. Further, the evidence does not suggest there was an active “plan” to liquidate PRDL and create a new entity to take the Development to market; rather the sale of the Development to a third party was ultimately how a refinance of the Koi Facility was to be structured.

14 Turning then to Dempsey Wood's claims under the Act, it pleads the following:

• (a) In relation to the alleged breach of s 135 of the Act:

  • (i) By pursuing his plan to cancel the pre-sales and liquidate PRDL, Mr Gapes caused and/or allowed PRDL's business to be carried on in a manner likely to create a substantial risk of serious losses to PRDL's creditors.

  • (ii) By instructing and/or allowing Dempsey Wood to continue with the civil works in September, October and November 2015, Mr Gapes agreed to the carrying on of the business of PRDL in a way likely to create a substantial risk of serious loss to PRDL's creditors, as he knew that PRDL would not be able to meet its increased obligations to Dempsey Wood, and thus was in breach of s 135 of the Act.

  • (iii) As a result of Mr Gapes' breach of s 135, Dempsey Wood suffered loss of $729,664, being its unpaid November 2015 invoice and its EOT claim.

  • (iv) That pursuant to s 301 of the Act, the Court ought to order...