Petterson as Liquidator of Polyethylene Pipe Systems Ltd (in Liquidation) v Browne

• Jurisdiction: New Zealand
• Judge: Gilbert J
• Judgment Date: 10 May 2016
• Neutral Citation: [2016] NZCA 189
• Docket Number: CA291/2015
• Court: Court of Appeal
• Date: 10 May 2016

BETWEEN

David Ross Petterson as Liquidator of Polyethylene Pipe Systems Limited (In Liquidation)

Appellant

and

David Charles Browne

First Respondent

And

David Browne Contractors Limitedl and David Browne Mechanical Limited

Second Respondents

[2016] NZCA 189

Court:

Winkelmann, Dobson, Gilbert JJ

CA291/2015

IN THE COURT OF APPEAL OF NEW ZEALAND

Appeal by the liquidator against the High Court's (HC) refusal of an order under s299 Companies Act 1993 (CA) (Court may set aside certain securities and charges) for setting aside a General Security Agreement (“GSA”) granted by the company in liquidation to the respondent (its director), and requiring him to repay monies paid to the respondent pursuant to the GSA — the liquidator also appealed against the HC's refusal to make an order under s295 CA (other orders) requiring the second and third respondents to repay the monies they received from the company in liquidation — those transactions had been set aside after the companies failed to respond to notices served pursuant to s294 CA (procedure for setting aside transactions and charges) — the Associate Judge had determined that the transactions had been made for restructuring purposes and not to avoid potential liability for a major claim — whether the HC had applied the wrong test when determining findings of fact in respect of the respondent's defences under s296(3) CA (additional provisions relating to setting aside transactions and charge) — whether there was a discretion under s295 CA for the Court had to decline to make an order for recovery, notwithstanding the statutory defence under s296(3) CA had not been made out.

Counsel:

B D Gustafson and D Duffield for Appellant

D J C Russ for Respondents

• A The appeal is allowed in part.

• B We make an order pursuant to s 299(1) of the Companies Act 1993 setting aside as against the liquidator the general security agreement made between Polyethylene Pipe Systems Ltd (PPS) and Mr Browne dated 28 July 2008.

• C We make an order pursuant to s 299(3) of the Companies Act requiring Mr Browne to pay PPS the sum of $201,316. Mr Browne is entitled to claim as a creditor in the liquidation of PPS for the amount paid by him pursuant to this order.

• D We make an order pursuant to s 295(a) of the Act requiring David Browne Contractors Ltd (DBC) and David Browne Mechanical Ltd (DBM) to pay PPS the sums of &565,303 and &347,634 respectively. We make an order pursuant to s 295(g) of the Companies Act that DBC and DBM are entitled to claim as creditors in the liquidation of PPS to the extent of the amounts refunded by each of them as a result of this order.

• E The order for costs in the High Court is quashed. The respondents must pay the appellant costs in the High Court, to be fixed in that Court.

• F The respondents must pay the appellant costs in this Court for a standard appeal on a band A basis, together with usual disbursements.

JUDGMENT OF THE COURT

Table of Contents

Introduction	[1]
Chronology
PPS	[7]
DBC and DBM	[9]
McConnell Dowell Contract	[13]
First weld failure	[16]
Second weld failure	[27]
PPS directors resolve to repay advances to Mr Browne, DBC and
DBM and grant security for a further advance from Mr Browne	0
Transfer of PPS' shares in PPS-Frank NZ Ltd to Browne Family Trust	[34]
Directors of PPS approve new borrowings from Mr Browne securedby a GSA	[37]
Third weld failure	[39]
Quantification of loss from first failure	[40]
Mr Browne advances &450,000 to PPS secured by the GSA1	[42]
PPS repays unsecured advances from DBC, DBM and Mr Browne	[43]
Quantification of loss from second failure	[44]
Duncan Cotterill advises that PPS is not covered under McConnell Dowell's policy	[44]
Quantification of loss from third failure	[47]
McConnell Dowell issues notice of adjudication	[48]

Mr Browne demands repayment of amount secured by the GSA	[49]
Adjudication	[50]
Mr Browne appoints a receiver	[52]
PPS liquidated	[55]
Payments to Mr Browne by the receiver	[58]
Liquidator's notices to set aside payments and GSA	[60]
First ground of appeal -was the Associate Judge wrong not to set aside the GSA pursuant to s 299?
Proceedings against Mr Browne in the High Court	[62]
Relevant statutory provisions	[64]
High Court judgment	[66]
Submissions	[7]
Approach on appeal	[75]
Did Mr Browne have sound reasons to believe that the failure of the welds was not caused by PPS' faulty workmanship?	[76]
Were there reasonable grounds to believe that PPS would be insured for losses caused by its faulty workmanship under McConnell Dowell's insurance?	[83]
Were the related party unsecured loans repaid and replaced by secured borrowing from Mr Browne because of concerns about the McConnell Dowell claim and not as part of a group restructure that had commenced much earlier?	[87]
Did PPS satisfy the solvency test at the time the GSA was granted, taking into account its contingent liability to McConnell Dowell?	[93]
Is it just and equitable that the GSA be set aside?	[97]
Does Mr Browne have a defence under s 296(3)?	[101]
Relief	[105]
Second ground of appeal — was the Associate Judge wrong not to order DBC and DBM to repay PPS?
Proceedings against DBC and DBM in the High Court	[110]
High Court judgment	[113]
Submissions	[115]
Is there a residual discretion to decline to make any order under s 295, even where a transaction has been set aside and no defence to a claim
for repayment has been made out under s 296(3), or at law or in equity?	[118]
Does DBC or DBM have a tenable defence under s 296(3)?	[139]
Result	[141]

REASONS OF THE COURT

(Given by Gilbert J)

Introduction

1 The first respondent, David Browne, is a director and shareholder of Polyethylene Pipe Systems Ltd (PPS). He is also a director and shareholder of the second respondents, David Browne Contractors Ltd (DBC) and David Browne Mechanical Ltd (DBM). After a significant claim against PPS was notified by McConnell Dowell Constructors Ltd (McConnell Dowell), Mr Browne arranged for PPS to repay unsecured loans that he, DBC and DBM had made to the company, together totalling over &1.25 million. These unsecured loans were replaced by a fresh advance from Mr Browne to PPS of &450,000 secured by a general security agreement (GSA).

2 The appellant, David Petterson, is the liquidator of PPS. He appeals against a decision of Associate Judge Matthews declining his application under s 299 of the Companies Act 1993 (the Act) for orders setting aside the GSA granted by PPS to Mr Browne and requiring him to repay monies paid pursuant to it. 1 Mr Petterson also appeals against the Court's refusal to make an order under s 295 of the Act requiring DBC and DBM to repay the monies they received from PPS, 2 these transactions having been set aside after the companies failed to respond to notices served pursuant to s 294.

3 Mr Petterson contends that Mr Browne arranged for the GSA to be granted and the payments to be made in order to protect these parties from significant losses that they would suffer if McConnell Dowell succeeded with its claim and PPS was liquidated, as subsequently occurred. The Associate Judge found that the transactions were not a response to the McConnell Dowell claim but, rather, were part of an ongoing restructure of the companies owned by the Browne family that had commenced long before. 3 He found that Mr Browne had reasonable grounds to believe that PPS was not liable for McConnell Dowell's claim and would be covered by McConnell Dowell's insurance in any event. 4 He considered that PPS was in a sound financial position at the time the transactions were entered into. 5

4 Mr Petterson argues that the Associate Judge:

• (a) Failed to apply the correct legal test and erred in the above findings of fact when determining whether the GSA granted to Mr Browne should be set aside.

• (b) Erred in declining to make an order under s 295 for recovery of the payments made to DBC and DBM despite these transactions having been automatically set aside as a result of the failure by DBC and DBM to object to notices served by Mr Petterson under s 294 of the Act.

5 If his substantive appeal fails, Mr Petterson appeals against the Associate Judge's decision to order costs calculated in accordance with band C for both sets of proceedings, one against Mr Browne and the other against DBC and DBM. 6 Mr Petterson argues that costs should have between awarded for one set of proceedings only because the issues and evidence were common to both. Mr Petterson also appeals against the Associate Judge's decision to award increased costs, arguing that this was not justified. 7

6 Because Mr Petterson contends that the Associate Judge erred in fact as well as law, it is necessary to examine the circumstances in which the transactions were undertaken in some detail before addressing the specific grounds of appeal. It is also helpful to summarise the subsequent events which led to the proceedings in the High Court. Except where stated otherwise, the following chronology has been taken from the judgment under appeal or the documentary evidence.

Chronology

PPS

7 PPS was incorporated in 1992. It supplied polyethylene pipes and fittings for use in wastewater, stormwater and irrigation projects. PPS also welded polyethylene pipes.

8 Mr Browne and his wife, Sylvia, are the directors of PPS and hold one share each in the company. The remaining 998 shares are held by the Browne Family Trust, the trustees of which are Mr and Mrs Browne; their solicitor, Paul Dorrance of Duncan Cotterill; and their accountant, Dennis...