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

JurisdictionNew Zealand
CourtCourt of Appeal
JudgeGilbert J
Judgment Date10 May 2016
Neutral Citation[2016] NZCA 189
Docket NumberCA291/2015

[2016] NZCA 189

IN THE COURT OF APPEAL OF NEW ZEALAND

Court:

Winkelmann, Dobson, Gilbert JJ

CA291/2015

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
Counsel:

B D Gustafson and D Duffield for Appellant

D J C Russ for Respondents

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.

The issues were: whether the HC's findings of fact in respect of the s296(3) defence should be set aside; and, 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.

Held: By the time the GSA was granted on 28 July 2008, two welds had failed and McConnell Dowell had written to PPS holding it liable for all losses as a result of those failures in reliance on the indemnity provision of the subcontract. B had been advised on 18 January 2008 that the provision opened up a potentially large liability for PPS. The directors had no advice from independent experts, or from PPS' solicitors, justifying a conclusion that PPS was not liable.

The evidence established that although B had reason to believe that PPS might be able to resist McConnell Dowell's claim by arguing that the weld failures were caused by the way McConnell Dowell handled and ballasted the pipes, he was also aware that there was a growing body of evidence to support McConnell Dowell's position that the welds had not complied with specification and failed because they were defective. PPS' directors and advisors had known at the time the GSA was granted that the company would face a substantial claim from McConnell Dowell, exceeding PPS' net worth, and there was a real risk that PPS might be found liable.

There were no reasonable grounds for believing that PPS would be covered by McConnell Dowell's policy for the loss it. At the time the GSA was entered into, B had not seen a copy of McConnell Dowell's contract works policy and he had received no advice from PPS' lawyers on whether this would cover its' liability. The only suggestion that PPS might be insured for the claim was in the brief report from a loss adjuster stating that PPS could argue that it was covered under McConnell Dowell's contract works policy. B was clearly uncertain about whether PPS would be covered under McConnell Dowell's insurance at the time the GSA was granted.

No documents had been produced indicating that the transactions undertaken by PPS in mid-2008 had been contemplated as part of any restructure prior to the McConnell Dowell claim surfacing. More significantly, the transactions were contrary to the stated objective of the intended restructuring, which was to reduce B's financial involvement in PPS, because they resulted in B increasing his lending to PPS from $90,600 to $450,000. The transactions, including the GSA, had been entered into to safeguard B and his related interests from the McConnell Dowell claim.

The Associate Judge's conclusion that PPS was “in sound financial heart” at the time the GSA was granted was overstated. Its current liabilities exceeded its current assets by over $300,000 taking into account the amounts due to B, DBC and DBM. B had made his advance secured under the GSA on 29 August 2008 and the unsecured loans were repaid on 2 September 2008. By that time, three welds had failed due to faulty welding, McConnell Dowell had suffered substantial losses and PPS was liable for those losses under the indemnity in the subcontract McConnell Dowell had quantified the losses it had suffered from the first of the weld failures at over $2.5 million.

Therefore, at the time the payments were made, PPS was unable to meet all of its obligations, including under the indemnity in favour of McConnell Dowell. PPS' liabilities, including the contingent liability to McConnell Dowell, far exceeded its assets. By that time, the directors ought to have appreciated that PPS had not satisfied the balance sheet test for solvency under s4(1)(b) CA (meaning of solvency test) taking into account the contingent liability to McConnell Dowell.

The Associate Judge's key factual findings — that the failure of the welds was not caused by faulty workmanship undertaken by PPS, B was entitled to rely on advice that PPS was insured for the claim, and PPS was in sound financial heart at the relevant time — could not withstand close scrutiny of the documentary record and the chronology of events.

While B might have believed at that time that the GSA was granted that PPS might be able to successfully defend McConnell Dowell's claim or prove that McConnell Dowell's insurers were obliged to cover it, this was somewhat beside the point. It did not change the fact that the transactions were clearly designed by B's advisors to protect him and his related interests from the risk of liquidation if the claim succeeded and no insurance was available to cover it. It was just and equitable to make an order pursuant to s299 CA setting aside the GSA as against the liquidator.

A defence under s296(3) CA was not available. The first requirement of the defence required B to show good faith and he could not on the evidence prove that he honestly believed that the transaction would not involve any element of undue preference over other creditors.

The second element of the defence had two limbs. It had to be proved that a reasonable person in B's position would not have suspected at the time the transaction was entered into that PPS was or would become insolvent. Further, it had to be shown that at that time B himself did not have reasonable grounds for suspecting that PPS was or would become insolvent. Neither of these limbs was proved. B had suspected that PPS would become insolvent, and that was why the GSA was granted and the repayments made.

The liquidator only sought to recover monies paid in May 2013 from the realisation of assets after the commencement of the liquidation. It was appropriate to make an order under s299(3) CA requiring B to repay PPS $201,316.

If the liquidators pursued an action for recovery of the amount paid as a debt or as monies had and received at common law (as they could do) they would be entitled to judgment for the amount claimed. It would be anomalous if the result were different if the liquidator instead pursued recovery under s295 CA. That analysis supported the view that there was no general discretion under this section to decline to make any order. There was a discretion under s295 CA as to the nature and extent of the appropriate remedy. Further, the Court could order recovery in whole or in part. However, there was no general discretion based on just and equitable considerations for the Court to decline to make one or other of the orders specified in s295 CA if a disposition was set aside and no defence under s296(3) CA or at law or in equity was made out (cf: West City Construction Ltd v Levin which was decided under the predecessor to s296(3)).

B was a director of these companies and his knowledge had to be attributed to DBC and DBM in this context. For the reasons given in respect of B, DBC and DBM had not raised s296(3) defence to the liquidator's claim for repayment.

The appeal was allowed in part. Pursuant to s299(1) CA an order was given setting aside as against the liquidator the GSA made between PPS and B. Under s299(3) B was to pay PPS $200,000. Pursuant to s295(a) CA, DBC and DBM were to pay PPS the sums of $565,000 and $347,600 respectively.

JUDGMENT OF THE COURT
  • 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...

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1 cases
  • Cooper v Debut Homes Ltd ((in Liquidation))
    • New Zealand
    • Court of Appeal
    • 8 Marzo 2019
    ...at [75]. 49 At [62]. 50 At [65]. 51 At [125]. 52 Debut Homes Ltd (in liq) v Cooper, above n 1, at [121]–[124], citing Petterson v Browne [2016] NZCA 189 and Harris v Bank of New Zealand [2017] NZHC 2374. 53 Debut Homes Ltd (in liq) v Cooper, above n 1, at [132]. 54 Petterson v Browne, above......