BETHELL v PAPANUI PROPERTIES LIMITED [2019] NZHC 3169

BETHELL v PAPANUI PROPERTIES LIMITED [2019] NZHC 3169 [4 December 2019]IN THE HIGH COURT OF NEW ZEALANDCHRISTCHURCH REGISTRYI TE KŌTI MATUA O AOTEAROAŌTAUTAHI ROHECIV-2019-409-336[2019] NZHC 3169BETWEEN ANDREW JAMES BETHELL, ANDREWJOHN McKAY and COLIN ANTHONYGOWER as liquidators of ArrowInternational (NZ) Limited (in liquidation)ApplicantsAND PAPANUI PROPERTIES LIMITEDFirst RespondentAND HAREWOOD INVESTMENTS LIMITEDSecond RespondentAND NEW ZEALAND SKI LIMITEDThird RespondentHearing: 6 and 7 November 2019Appearances: K M Paterson and B R McKinnon for ApplicantsJ V Ormsby and S C Cowan for First and Second RespondentsM H O Maling and J R C Addington for Third RespondentJudgment: 4 December 2019JUDGMENT OF ASSOCIATE JUDGE LESTERThis judgment was delivered by me on 4 December 2019 at 3.00pmpursuant to Rule 11.5 of the High Court RulesRegistrar/Deputy Registrar4 December 2019Background[1] This proceeding concerns applications for directions by the liquidators ofArrow International (NZ) Ltd (in liquidation) ("Arrow").[2] The application is made pursuant to s 284(1)(a) Companies Act 1993 ("theAct") which provides:284 Court supervision of liquidation(1) On the application of the liquidator, a liquidation committee, or, withthe leave of the court, a creditor, shareholder, other entitled person, ordirector of a company in liquidation, the court may—(a) give directions in relation to any matter arising in connectionwith the liquidation: [3] The directions relate to the status of funds paid to Arrow by six of its clientsshortly before Arrow was placed into voluntary administration.[4] Separate questions arise concerning the status of retentions deducted by Arrowfrom payments to contractors/suppliers both pre-and post-1 April 2017.General background[5] Mr Bethell, Mr McKay and Mr Gower were appointed administrators of Arrowon 28 February 2019 and two related companies (Arrow International Group Ltd (inliq) and Construction Labour and Resources Ltd (in liq)). At that time the companieshad approximately:(a) 17 – 20 construction projects in progress;(b) 205 employees;(c) over 700 unsecured creditors; and(d) 85 secured creditors.When Arrow was placed in liquidation, Messrs Bethell, McKay and Gower wereappointed liquidators.[6] Arrow acted as agent for the six clients referred to above, under a form ofcontract known as the "PMCM Contract" standing for Project Management andConstruction Management Contract.[7] Under the PMCM Contract, Arrow acted as agent for its clients to entercontracts with Trade Contractors on behalf of the client for the provision of goods andservices for the relevant building project. These were "Construction Management"contracts as opposed to traditional contracts where there is a "head contractor" whothen directly engages various subcontractors. The PMCM Contract states that Arrowhas no liability to Trade Contractors for amounts due from the Clients under contractsmade between Clients and Trade Contractors by Arrow.[8] The PMCM Contract that Arrow entered into with Trade Contractors reflectedthat Arrow's role was as agent only.[9] While the charging paperwork tendered by Trade Contractors was not alwaysuniform or consistent with what was required by the PMCM Contracts, the intentionwas that Arrow would receive Payment Claims from Trade Contractors which Arrowwould review and collate and then issue a Payment Schedule sent back to the TradeContractors. Arrow then issued monthly tax invoices to its client which claimedamounts to be paid to Trade Contractors, Arrow's margin and project managementfees.[10] Also included in this system of invoicing were contracts made by Arrow withConsultants on behalf of clients, albeit such contracts adopted a different form ofcontract.[11] In a separate category called "Purchase Order Suppliers" related to suppliersof consumables and some building materials where Arrow contracted with the supplierin its own name. Monthly invoices issued by Arrow to its clients also included amountsArrow sought to recover for these orders.[12] The client made payment in one lump sum to Arrow. Arrow then paid TradeContractors and Consultants and retained its margin, fees and what it had paid orwould have to pay to Purchase Order Suppliers who were in a debtor/creditorrelationship with Arrow. In paying Trade Contractors and Consultants, Arrow wasacting as agent of its client as it was meeting the liability of the client.[13] Directions are sought, as in January 2019 Arrow had issued its monthlyinvoices to its clients. The six clients covered by this application had paid theirinvoices prior to Arrow being placed into administration. At that time, Arrow retainedapproximately $1.358m that it had received for payment to Trade Contractors. Thosefunds are held on trust pending the outcome of this application. Annexed to thisjudgment is a Schedule prepared by the applicants detailing the amounts invoiced byArrow to its clients, of the amounts received how much had been paid to TradeContractors before administration, how much of the amount represents Arrow's feesand margin, the amount the applicants consider is unpaid by Arrow to TradeContractors and the amount owed by Arrow to Purchase Order Suppliers but not paidout together with retentions.[14] Because the clients have a direct contractual liability to Trade Contractors inmany cases the amounts the applicants record as unpaid to Trade Contractors havenow been paid by the clients to clear their contractual obligation in that regard.[15] The above is only a basic summary of the background. The terms of thePMCM Contracts are essentially the same in regard to those clients for whom thelargest amounts are in issue and so I will only refer to Papanui Properties Ltd's contractas an example.[16] Under the PMCM Contract the "Client" is Arrow's client. "Contractor" means"a party engaged by Arrow on behalf of the Client to perform part of the Contractworks" and "Consultant" has a similar meaning. "Supplier" means the services to beperformed by Arrow in accordance with the agreement.[17] Clause 2.4 of the PMCM Contract provides:2.4 Arrow's AuthorityBy this Agreement the Client appoints and gives Arrow the authority to act asits agent for the Project for:(a) Engagement of Consultants to undertake investigation, design,advisory, and similar services for the Project;(b) Consent and other regulatory matters;(c) Engagement of Contractors and Suppliers;(d) Administration and monitoring of Consultants, Contractors andSuppliers referred to above;(e) The verification of Payment Claims submitted by Contractors underthe Construction Contracts Act 2002;(f) The issuing of Payment Schedules to Contractors under theConstruction Contracts Act 2002;(g) Financial transactions associated with the above.Where Arrow has engaged such Consultants, Contractors or Suppliers or anyother party for the provision of goods or services in relation to the Project theClient acknowledges that Arrow has made such engagements as agent for theClient and the Client shall be liable for any amount payable pursuant to suchengagements.[18] The amounts the Client was required to pay to Arrow is set out in Appendix Cto the agreement as follows:1. The value of construction works and services (permanent andtemporary) undertaken, and goods and services supplied, undercontracts and orders entered into for the Project by Arrow on behalfof the Client.2. The value of preliminary and general costs (project related costs notdirectly attributable to the contracts and orders referred to in 1 above)including but not limited to site supervision, plant, site facilities, siteservices, consumables, overheads, contract administration, and offsite time and disbursement charges related to the construction andtendering functions.3. The value of Consultant services provided under engagements enteredinto for the project plus disbursements and the cost of managing thoseengagements.4. The value of any statutory or territorial charges incurred plusdisbursements and the cost of managing any statutory process for theproject.5. Any costs incurred by Arrow arising from services provided inrelation to Client contracts (third party contracts) for direct supply ofsystems, process plant, office equipment or similar items (where theClient makes contract payments directly to the supplier).6. A demolition works only margin of 2% (two percent) this relates todemolition only period of works.17. A construction management margin of 4.5% (four and a half percent)on the sum of construction works and services, preliminary andgeneral costs, consultant services, statutory and or territorial chargesand direct supply items (the sum of 1 through 5 inclusive above).28. The value of GST as an additional charge where applicable.9. Any costs incurred by Arrow arising from preparing responses toadjudication claims on the part of the Client.[19] Appendix C of the agreement also provides the basis upon which the amountof each monthly invoice is to be calculated, with cl 3 providing as follows:3. Progress InvoicesThe amount due on each monthly invoice shall be calculated on a basis ofpercent of work undertaken up to the invoice date plus the value of materialon site and any off site payments, together with any fees, disbursements orother project costs incurred, and Arrow's margin and fee. GST will be addedto each invoice as an additional charge.[20] The terms of the Contract in respect of one Client (Massey University) weredifferent. Arrow was not appointed Massey University's agent to engage Contractorsor Suppliers. Arrow's role was to assist Massey University to engage Contractors,Suppliers and Consultants directly. The applicants were content to have MasseyUniversity treated in the same way as the PMCM Clients as despite the difference intheir contracts, as the Massey University projects were run as if they were PMCMClients. That is an appropriate approach as it gives the benefit of any doubt to MasseyUniversity.Trade Contract Agreement[21] When contracting with Trade Contractors on behalf of PMCM Clients, Arrowused a standard form trade contract agreement. The Contract recorded that Arrow wasacting as agent and recorded the following in respect of payment:1 Only the Papanui Properties Ltd PMCM Contract has this provision for demolition works.2 Note that the other PMCM Contracts provided for a construction management margin of 5per cent.(a) Clause 18.7 provides that payment claims from the Trade Contractorshall not be in the form of tax invoices, but rather the paymentschedules issued on behalf of the PMCM client shall constitute buyergenerated tax invoices.(b) Clause 18.16 provided that Arrow was to provide a payment scheduleto the Trade Contractor in respect of each payment claim no later than20 working days after the end of the claim month.(c) Clause 18.17 recorded that "The Principal shall pay the TradeContractor the scheduled amount in any payment schedule no later than22 Working Days after the end of the claim month."[22] There are also standard form Consultant Agreements, which consistent withArrow's role as agent, contained the following:Arrow has been engaged as agent and project manager and this Agreementwill be between "the Client" and the Consultant with Arrow acting as theClient's agent. For the avoidance of doubt, where Arrow is engaged as agentfor the Client, Arrow is not liable for any obligation of the Client under theAgreement.[23] It is not suggested that amounts collected by Arrow for payment to Consultantsshould be treated differently from Trade Contractor payments and so I will refer onlyto Trade Contractors in this Judgment. Accordingly, it is common ground that Arrowwas agent on behalf of the PMCM Clients in relation to funds collected to pay thePMCM Clients' creditors. The real controversy is whether Arrow was a trustee inrespect of those funds.The central issue and legal principles[24] I adopt Fogarty J's summary of the issue before him in Bambury v Jensen, asan accurate statement of the question to be determined in this application:3As Millet LJ noted in Paragon Finance Plc v DB Thakerar & Co, there isa distinction between an agent having fiduciary duties and an agent havinga trust obligation to keep the trust assets separate.4 It is commonly accepted3 Bambury v Jensen [2015] NZHC 2384 at [67].4 Paragon Finance Plc v DB Thakerar & Co [1999] 1 All ER 400 (CA).that agents in the position of [Arrow] have fiduciary obligations. The issue isalways on the facts, the extent of them.[25] Both counsel referred to Bowstead & Reynolds on Agency, which says whetheran agent is a trustee for his principal turns on the particular circumstances of the case.The authors note:5Often the answer turns on the contract between principal and agent. It is clearin this context and in general that the existence of a contractual relationship ofdebtor and creditor between the parties does not prevent the existenceof a simultaneous trust relationship, or a fiduciary relationship of a lessonerous nature, involving nevertheless that certain money or property is heldon trust. Thus it may be provided expressly between principal and agent thatmoney received is so held. At other times the intention to create a trust maybe inferred; the matter turns on the objective interpretation, according togeneral principles, of the intentions of the parties.[26] Later in the paragraph the authors state:The present trend seems to be to approach the matter more functionally and toask whether the trust relationship is appropriate to the commercial relationshipin which the parties find themselves; whether it was appropriate that moneyor property should be, and whether it was, held separately, or whether it wascontemplated that the agent should use the money, property or proceeds of theproperty as part of his normal cash flow in such a way that the relationship ofdebtor and creditor is more appropriate. At the same time, there is noabsolute rule that the absence of a duty to keep the principal's propertyseparate is fatal to there being a trust.[27] The relationship between Arrow and its PMCM Clients was not a trustrelationship in the purest sense of the word as it was intended that Arrow would profitfrom the Contracts.6 As set out in Bambury v Jenson:7The critical criterion, consistent with Millet LJ's [analysis] in Paragon, oncethe facts of Nelson v Rye are kept in mind, is that an agent is a trustee onlywhere the contractual terms of the agency forbid the agent to obtain any useor benefit from the proceeds of sale, net of the commission.[28] Paragon Finance Plc, referred to by Fogarty J in Bambury, discussesNelson v Rye and contains helpful statements of principle.8 I set out Fogarty J's5 Peter Watts and F M B Reynolds (eds) Bowstead and Reynolds on Agency (21st ed, Sweet &Maxwell, London, 2017) at [6-041].6 Bambury v Jensen, above n 3, at [71].7 At [126].8 Paragon Finance Plc v DB Thakeror & Co, above n 4; Nelson v Rye [1996] 1 WLR 1378.summary of Nelson v Rye and the passages from Paragon Finance Plc that Fogarty Jtook into his judgment:9[113] In Nelson v Rye the plaintiff was a solo musician who appointed hismanager on terms that he would collect the fees and royalties which were dueto the plaintiff, pay the plaintiff's expenses and account to him annually forhis net income after deducting his own commission. The Judge in that casehad held that the defendant manager's failure to account was either a breachof fiduciary duty which fell outside the Limitation Act or a breach ofconstructive trust which fell within s 21 of the Act (the same number as ourAct).[114] Millet LJ said:The law on this subject has been settled for more than a hundred years.An action for an account brought by a principal against his agent isbarred by statutes of limitation unless the agent is more than a mereagent but is a trustee of the money which he has received.He also said:Accordingly, the [manager's] liability to account for more than sixyears before the issue of the writ in Nelson v Rye depended on whetherhe was, not merely a fiduciary (for every agent owes fiduciary dutiesto his principal), but a trustee, that is to say, on whether he owedfiduciary duties in relation to the money. (Emphasis in the original.)Whether he was in fact a trustee of the money may be open to doubt.Unless I have misunderstood the facts or they were very unusual itwould appear that the defendant was entitled to pay receipts into hisown account, mix them with his own money, use them for his owncash flow, deduct his own commission, and account for the balance tothe plaintiff only at the end of the year. It is fundamental to theexistence of a trust that the trustee is bound to keep the trust propertyseparate from his own and apply it exclusively for the benefit of hisbeneficiary. Any right on the part of the defendant to mix the moneywhich he received with his own and use it for his own cash flow wouldbe inconsistent with the existence of a trust. So would a liability toaccount annually, for a trustee is obliged to account to his beneficiaryand pay over the trust property on demand. The fact that the defendantwas a fiduciary was irrelevant if he had no fiduciary or trustobligations in regard to the money. If this was the position, then thedefendant was a fiduciary and subject to an equitable duty to account,but he was not a constructive trustee. His liability arose from hisfailure to account, not from his retention and use of the money for hisown benefit, for this was something which he was entitled to do.(Emphasis added)(footnotes omitted)9 Bambury v Jensen, abvove n 3.[29] Both counsel referred to Neste Oy v Lloyds Bank Plc.10 One passage from thatcase sums up the approach that I need to adopt in this case:11I have been very greatly assisted by the legal submissions made to me, andthere is very little in the submissions of either party on the questions ofprinciple with which I disagree. The problem is not, I think, to ascertain therelevant principles but to apply them to the case in hand. The decided casesprovide valuable illustrations of the application of these principles to thediffering facts with which they were concerned, but in many of them theoutcome appears almost inevitable once the facts are fully understood. How,then, should the principles apply to the facts of this case?[30] The extent of the fiduciary duties owed by Arrow to PMCM Clients isdetermined by the terms of their Contract both express and implied, by the context andby the nature of the tasks Arrow committed to undertake. Context is important as itplays a role in interpretation of the meaning of the Contract. The importance of contextis highlighted by the following passage from Hospital Products Ltd v United StatesSurgical Corporation:12That contractual and fiduciary relationships may co-exist between the sameparties has never been doubted. Indeed, the existence of a basic contractualrelationship has in many situations provided a foundation for the erection ofa fiduciary relationship. In these situations it is the contractual foundationwhich is all important because it is the contract that regulates the basic rightsand liabilities of the parties. The fiduciary relationship, if it is to exist at all,must accommodate itself to the terms of the contract so that it is consistentwith, and conforms to, them. The fiduciary relationship cannot besuperimposed upon the contract in such a way as to alter the operation whichthe contract was intended to have according to its true construction.Discussion[31] The following factors are relied on by the respondents as indicating that Arrowowed fiduciary obligations in relation to the money, that is, it was intended that Arrowwould hold the money on trust.[32] The respondents' primary submission is that Arrow held all funds it was paidby the PMCM Clients, other than money intended to pay Arrow's fees, margin and10 Neste Oy v Lloyds Bank Plc [1983] 2 Lloyd's Rep 658.11 At 664.12 Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64, (1984) 156 CLR 41at 97.Purchase Order Suppliers on trust for the respondents until the remaining money waspaid to Trade Contractors the respondents were indebted to.[33] Mr Ormsby for Papanui Properties Ltd and Harewood Investments Ltdsubmitted that express trusts are founded on the express or inferred intention of thesettlor.13 The respondents submitted there was an express trust in their favour andplaced primary weight on cl 2.4(g) set out at [17] above.[34] The respondents also argued for the existence of a constructive trust and I willaddress that submission once I have addressed what, in my opinion, was the intentionof the parties as that may well be determinative of the matter.Indicators of trust relationship[35] The respondents say that reading the Contract between the PMCM Clients andArrow and the Contract between Arrow and Trade Contractors together shows thatArrow was intended to simply pass through the Trade Contractors Payment Claims(once vetted/approved by Arrow). Just as Arrow was to pass through the PaymentClaim, it was to pass through, that is be a conduit only, for the payment due from thePMCM Contractor to the Contract Supplier.[36] Trade Suppliers were obliged to raise their Payment Claim on a "Total to Date"basis. That charging basis is the same as between Arrow and a PMCM Client – seecl 3 of Appendix C of the PMCM Contract set out at [19].[37] I interpose here that Mr Gower, one of the liquidators, has in his researchdiscovered that there was not always an exact correlation between the amount chargedby Trade Contractors and the amount on-charged by Arrow to PMCM Clients. Therewere "unders and overs" so that at times it seems PMCM Clients were in credit withArrow, that is, they had paid more than was owed to Trade Contractors but that creditwas "absorbed" in later Arrow invoices so that on the final wash up the PMCM Clientsonly paid what was due to the Trade Contractors. This was a factor relied on byMs Paterson for the liquidators to indicate that the relationship between Arrow and its13 Lynton Tucker, Nicholas Le Poidevin and James Brightwell Lewin on Trusts (19th ed, Sweet &Maxwell, London, 2015) at [7-002].PMCM Clients was that of debtor/creditor in relation to all payments received. I donot accept that argument.[38] The contractual obligations are clear. Arrow had an obligation to charge on thebasis set out in its own contract. There is no suggestion that it made it expressly knownto the PMCM Clients that Arrow was deviating from the terms of its own contract inadopting the "unders and overs" approach. Ms Paterson correctly pointed out thatbecause the invoices raised by Arrow to the PMCM Clients were accompanied by theinvoices/Payment Claims from the Trade Contractors, that it was open to PMCMClients to discover what was occurring. It is for the party wishing to depart from theircontractual obligations to make that desire clear to the other contracting party and seektheir consent. Arrow cannot assert that had PMCM Clients checked Arrow'sdocumentation thoroughly, they would have picked up Arrow's breach of contract.There is some analogy with it being no defence to a misrepresentation claim that theinnocent party could with diligence have discovered the misrepresentation.14 I do notconsider this unilateral departure by Arrow from what was required by the PMCMContract is capable of changing the character relationship between the parties.[39] The next point in my view is a compelling, commercial and practical one. Forwhat purpose was the money paid to Arrow? It was the PMCM Clients that had theliability to the Trade Contractors. Arrow agreed to collect the amount required to clearthat liability from the PMCM Clients and to pay it on their behalf to the TradeContractors. I here note that the contract between Arrow and the Trade Contractorsrefers to payment being made by the principal (see [21](c) above). However, therewas undoubtedly a course of conduct agreed to by all parties that it was Arrow thatmade the payments to the Trade Contractors as "paying agent" for the PMCM Clients.[40] In my opinion, the purpose of the PMCM Clients paying the amount they owedto third parties to Arrow was for Arrow to fulfil its role as paying agent to those thirdparties. Rhetorically, what other purpose could there be?14 Dodds v Southern Response [2019] NZHC 2016 at [78(c)]: " it is no defence tomisrepresentation to assert that the Dodds could have discovered the truth with reasonable duediligence".[41] Could it have been intended that the PMCM Clients would be making whatwould amount to an interest free loan of the funds to Arrow for it to use as it saw fit?The liquidators' position would require it to be accepted that it was the mutualintention of the parties that the PMCM Clients were prepared to risk their funds on anunsecured no return basis.[42] The respondents' proposition is that the idea of a debtor/creditor relationshipcannot be reconciled with the general nature of the contractual relationships or thePMCM Contract's specific terms. In a traditional building contract where the buildingcompany engages the sub-trades and suppliers directly there is no question that oncethe client pays its invoice that the money becomes the property of the buildingcompany to do with as it wishes.[43] In this case, Arrow provides no additional value for the receipt of the funds tobe paid to the debtor of the PMCM Clients. Arrow is paid a fee for a number of tasks,including to pay the money it receives to the PMCM Clients' creditors. The PMCMClients did not pay Arrow a fee for the pleasure of allowing Arrow to use money paidfor the purpose of paying PMCM Clients' creditors.15[44] Ms Paterson argued that the fact that the Contract provides that Arrow wouldissue invoices with many components, some of which were accepted as beingdebtor/creditor payments (for example, Arrow's margin and fee and Purchase OrderSuppliers), was some indicator that all components in the invoice were paid ona debtor/creditor basis. I do not accept that submission.[45] That invoices could contain a mix of the components set out at [18] above waspresumably for administrative convenience. As already indicated, Arrow's chargeswere accompanied with details of the Payment Claim/Invoices from each TradeContractor for whom payment was being collected and the Payment Schedules issuedby Arrow. That, in my view, reinforces that the payment being sought by Arrow wasin respect of each Trade Contractor's charge on a pass-through basis. Arrow did not15 I accept that in Angove's Pty Ltd v Bailey [2016] UKSC 47, WLR 3179 at [24] that the paymentto the agent was gratuitous was not considered material but in my opinion the absence of benefitto the PMCM Clients is relevant to determining what was intended.charge an unparticularised lump sum, rather it detailed the amounts it would be payingeach Trade Contractor.[46] In support of the contrary argument, Ms Paterson emphasised that the PMCMContract did not require Arrow to keep separate funds to be paid to PMCM Client'screditors, nor does the Contract expressly refer to there being a trust in respect of thosepayments. I have already noted the submission that the charges were all included inone invoice and Mr Gower's evidence, that at times there was not a direct correlationbetween creditors' claims and Arrow's claim to the PMCM Clients as indicating anabsence of a direct pass-through of funds.[47] In Westpac Banking Corporation v Savin, the Court of Appeal accepted thatthe sale proceeds of a boat being sold on behalf of its owners would have to be paidinto the selling agent's account in order for the agent to deduct commission beforepaying the balance to the seller:16It is necessarily implicit in the contracts . that Aqua Marine would have topay the purchase moneys into a bank account in order to deduct itscommission before paying over what was due to the seller. It does not followthat the owner agreed that Aqua Marine could blend its principal's money withits own and apply the balance for its private or trading purposes. Less stillthat it could pay it into a bank account which was overdrawn, with the resultthat the property in those moneys would cease to exist. There is nothing intheir contracts or for that matter in their evidence to suggest that had it beendrawn to his attention [the owners] would have agreed to something sopotentially adverse and in the result so actually disadvantageous. On thecontrary there is every reason for concluding that each would have refused todo so and would have insisted as a term of the contract that moneys receivedon his behalf by Aqua Marine should be kept separate from Aqua Marine'sown funds whether placed in a single account for that owner or in an accountlimited to "on behalf of" transactions. In short, it could not be implied eitheras a matter of construction from the express provisions of the agreement or asbeing necessary to give business efficacy to the transaction that Aqua Marinewas authorised to pay the moneys received on behalf of [the owners] into thetrading account, at least in its overdrawn state.[48] In my opinion, adopting the above passage: "it could not be implied either asa matter of construction from the express provisions of the agreement or as beingnecessary to give business efficacy to the transaction", that Arrow was entitled to useas part of its cash flow, funds it received for the purposes of paying Trade Contractors.16 Westpac Banking Corporation v Savin [1985] 2 NZLR 41 at 45.[49] Fogarty J's judgment in Bambury v Jensen is authority that the existence ofa trust does not depend on an express contractual term to maintain a separate bankaccount: "Whether an agent holds proceeds on trust does not depend on a positive dutyto bank the proceeds into a trust account.17[50] Also, in Bambury, his Honour said:18It is trite law that a trust obligation in respect of funds is not lost if the fundsare mixed. See Re Hallett's Estate and also Lord Millett inFoskett v McKeown.19 I note this reasoning is also consistent with a caserecently brought to my attention, Re Lehman Brothers International(Europe).20[51] In this case, the funds were intact in the account at the date of administration.[52] Ms Paterson referred to the fact that in the past, the account into which thefunds were paid by PMCM Clients sometimes went into overdraft. There is, however,no evidence as to the timing of when the account went into overdraft compared towhen payments were made by PMCM Clients. I do not consider that this point carriesany weight. If the true nature of the relationship between PMCM Clients and Arrowmeant the funds were trust funds, then if they were used for purposes other than payingthe creditors of PMCM Clients, then that was a breach of trust by Arrow, albeit onethat in the past came to nothing because Arrow was able to meet the creditors fromother funds.[53] In the absence of knowledge on the part of PMCM Clients that their funds werebeing paid into an account that may at the time have been overdrawn, in my view, thatfact does not advance the task of determining what the parties' intention was. ThePMCM Contract does not expressly permit Arrow to use for its own purposes fundsintended for Trade Contractors. There is in fact no evidence that the PMCM Clientswere aware that the account into which they were paying funds was a standard currentaccount used for Arrow's normal trading operations. The Arrow invoices designated17 Bambury v Jensen, above n 3, at [119]. See also [128].18 At [119].19 Re Hallett's Estate (1879) 13 ChD 696 (CA) and Foskett v McKeown [2011] 1 AC 102 (HL).20 Re Lehman Brothers International (Europe) [2010] EWHC 2914 (Ch) at [250]-[260], on appealRe Lehman Brothers International (Europe) (in administration) (No 6) [2011] EWHC Civ 1554,[2012] 2 BCLC 151 at [68].an account. It is true that the account is not styled as a trust account, but neither is itlabelled as a current account. I consider this last point neutral.[54] A further point made by Ms Paterson is that the PMCM Contract at cl 4.2 hasa provision for interest on late payment of invoices. Ms Paterson said this is anindicator that the invoices intended to create a debtor/creditor relationship.[55] However, I accept Mr Ormsby's submission that Arrow could not claiminterest on something it had not supplied and in which it had no interest. Had, forexample, a PMCM Client paid a Trade Contractor direct and deducted that paymentfrom the amount to be paid to Arrow, could Arrow have claimed interest on thatpayment? In my view, the answer is obvious. Arrow was never entitled to enjoy themoney it was to pay on to creditors. Arrow suffers no loss in not receiving that money.[56] If a PMCM Client had paid a Trade Contractor direct could Arrow have suedthe PMCM Client for the unpaid part of Arrow's invoice? Whether a PMCM Clientdoing so would be a breach of its contract with Arrow is not the point – Arrow wouldsuffer no loss as it was not entitled to the funds.[57] In respect of New Zealand Ski Ltd, there is an additional factor it relies on, notpresent in relation to Papanui Properties Ltd or Harewood Investments Ltd.Documents it received from Arrow in respect of the payments to Trade Contractorswere labelled "Client paid direct recommendations". It seems that title was generatedon the documents sent to New Zealand Ski Ltd. On copies of the documents printedby the Administrators (as confirmed by "Voluntary Administration" appearing in thename of the company), the document is labelled "Payment Schedule".[58] Ms Paterson did not question that New Zealand Ski Ltd had receiveddocuments with the "Client paid direct recommendations" label. Sending to a PMCMClient such a document is some reinforcement that the purpose of the payment beingsought by Arrow was for a payment being made direct by the PMCM Client via Arrow.[59] In my view, it was not the intention of the parties that funds sought by Arrowfor the purpose of meeting PMCM Clients' indebtedness to third parties would becomethe property of Arrow. There is no commercial sense in, as I have said, PMCM Clientspaying Arrow for the privilege of Arrow using their funds at their risk.[60] Ms Paterson analysed the inter-relationship of the obligations in respect of thetiming of payments under the PMCM Contracts and the Trade Contractor Agreement.One Contract uses working days and the other calendar days. At best, under theContracts the funds for Trade Contractors may have been in Arrow's hands for a littleunder two weeks. In practice, the evidence is that Arrow's invoice was paid by PMCMClients around the 20th of the month and Arrow then paid Trade Contractors by theend of the same month. Given the risk that a PMCM Client may be a little late inpaying and the need to be sure the payment had cleared, the timing of paymentsin practice does not suggest that Arrow intended there to be any meaningful period oftime during which it could use the funds as part of its cash flow. I consider this factormore consistent than not with the money being paid on a pass-through basis.[61] My focus on the purpose for which the payments for Trade Contractors weremade by PMCM Clients is similar to the enquiry that takes place in consideringwhether there is a Quistclose trust. Lewin on Trusts says that if the money is intendedto be at the free disposal of the recipient and may be used as part of his cash flow thenthere is no trust:21The question in every case is whether the parties intended the money to be atthe free disposal of the recipient, and his freedom to dispose of the money isnecessarily excluded by an arrangement that the money should be usedexclusively for the stated purpose.[62] It is not necessary in order to find an implied express trust that the word "trust"is used. The commercial context, the purpose for which the money was sought andthe purpose for which the money was paid, makes it clear that the funds were only tobe used to pay the Trade Contractors.[63] Accordingly, I conclude that there was an implied express trust in favour of thePMCM Clients in respect of all funds paid to Arrow by PMCM Clients for paymentto Trade Contractors under contracts made by Arrow on behalf of Clients.21 Tucker, Le Poidevin and Brightwell, above n 13, at [8-048]. (emphasis added).[64] In the terms used in Bowstead and Reynolds on Agency at [25] above,I consider a trust relationship was appropriate to the commercial relationship betweenthe PMCM Clients and Arrow and reconciles to the obligations on Arrow undercl 2.4(g) set out at [17] above, the method of invoicing and payments by Arrow andthe commercial context, by which I mean that in an arms-length commercial contractit is inherently unlikely that PMCM Clients would inherit funds paid for the purposeof paying Trade Contractors to become part of Arrow's cash flow.22[65] Arrow was the agent of the PMCM Clients for the financial transactionsassociated with assessing claims by Trade Contractors. Arrow accepts that it waspaying agent for the Clients in relation to the Trade Contractors. Arrow accepts thatit owed fiduciary duties as agent in respect of those roles.[66] However, Arrow seeks to draw a bright line when it comes to one of the mostimportant subjects of those duties being the money. Where the line cutting offArrow's fiduciary duties end in respect of those roles was not fully explained byMs Paterson. In my view, attempting that task highlights that it is artificial to say thatArrow's fiduciary duties in respect of those roles did not extend to dealing with thefunds which were central to Arrow's roles.[67] There are some issues between the parties in respect of the exact quantum ofclaims and leave is reserved to apply if counsel are unable to resolve those issues.Leave is also reserved to apply if the manner in which I have formulated the terms ofthe trust requires some attention.[68] Where a respondent has paid the Trade Contractors amounts they have alreadypaid Arrow, the funds paid by the respondents to Arrow in respect of such TradeContractors are to be repaid to them.Institutional constructive trust[69] I comment only briefly on the alternative claim for an institutional constructivetrust. The respondents submit that Arrow breached fiduciary duties it owed to the22 Bowstead and Reynolds on Agency, above n 5.respondents (assuming there was no fiduciary duty in relation to the cash), and equitywill not permit Arrow to retain any benefit it received as a result of such breaches.The fiduciary duties said to have been breached are in general terms:(a) that an agent must not place himself in a position where his duty andhis interests may conflict; and(b) that an agent has a duty to keep his principal informed of mattersmaterial to their relationship.[70] On 15 February 2019, a construction adjudication determined that Arrow hada liability for $4.5m in respect of a claim made against it. It seems this adjudicationwas the catalyst for voluntary administration on 28 February 2019.[71] The respondents say that if there was a debtor/creditor relationship then onceArrow was aware of the adjudication outcome and its impact on its viability, as agentit should have either:(a) informed its PMCM Clients of that fact; or(b) placed payments from PMCM Clients into a trust account for theirbenefit.[72] Ms Paterson said that had Arrow taken the first option then it would haveinevitably spelt the end of Arrow as it would have signalled to the market that it wasinsolvent, or sent such a negative commercial signal that doing so would haveprejudiced other clients and creditors. The commercial reality of that submission ishard to rebut but the submission is not an answer for option (b).23 If there wasa debtor/creditor relationship at the point that Arrow's ability to trade on was in doubt,then Arrow stood to benefit at its principal's cost by receiving funds that became partof Arrow's property. Having got to that position, the submission is that there wasa conflict between Arrow's interest in getting in the funds which on the liquidators'23 As was the course adopted in Re Kayford Ltd (in liq) [1975] 1 WLR 279.case could be used for Arrow's cash flow and Arrow's obligations to fulfil its dutiesas agent to pay the funds collected to Trade Contractors.[73] The respondents submit that in the circumstances an institutional constructivetrust will arise to prevent Arrow benefitting from its breach of fiduciary duty.[74] Immediately prior to the commencement of the hearing, there was a request bythe respondents for further discovery as to the impact of the adjudication decision onArrow and the view the directors took of its effect on Arrow's solvency and ability totrade on. On the one hand, that approximately two weeks passed between theadjudication and the voluntary administration may suggest that the adjudication didnot signal immediate insolvency. Indeed, the fact that voluntary administration ratherthan voluntary liquidation was adopted may suggest otherwise. The exact impact ofthe adjudication decision on 15 February 2019 and whether reasonable directorswould have recognised that they were entering a position where there was a conflictbetween the interests of Arrow and the PMCM Clients before the payments were madeby the respondents on 20 February 2019, cannot be determined on the presentevidence.[75] The only comment I make is that there is a reasonable argument for aninstitutional constructive trust, but it would require a more detailed analysis of Arrow'sposition.[76] I make no comments about a remedial constructive trust.Retentions[77] The position with retentions was less controversial.[78] Arrow had deducted retentions from funds it received from PMCM Clients forthe purposes of paying Trade Contractors.[79] The submissions presented by the liquidators addressed retentionspre-31 March 2017 which totalled $469,408.00. The liquidators advise:Retentions "held" for pre-31 March 2017 contracts were paid into Arrow'smain trading account and are not held on any express trust. Furthermore,Arrow's main account was in and out of overdraft between 2016 and 2018.Any funds "held" in that account do not have any separate identity capable ofsustaining a tracing remedy.[80] The status of a retention pre-1 April 2017 which has been paid to a currentaccount which has gone into overdraft, was the subject of comment by Churchman Jin Bennett v Ebert Construction Ltd (in rec and liq):24[24] The significance of 1 April 2017 is that is the date on which the provisionsof the [Construction Contracts] Act came into effect that required therespondent to hold retentions on trust. Retentions in relation to contractsentered into prior to that date had been deducted by the respondent but it hadnot been obliged to hold them on trust and they had been held in the firm'sgeneral account and therefore had ceased to exist given the absence of fundsin that account as at the date of the receivership.[81] It will be recalled that in this case, Arrow's trading account from time to timedid go into overdraft. Retentions "held" in that account were therefore spent/lost. Itfollows pre-31 March 2017 retentions are not held on trust as such no longer exist.Given my earlier finding that funds paid by PMCM Clients to Arrow for TradeContractors were subject to an implied express trust, the implications in respect of thatfinding for the pre-31 March 2017 retentions utilised by Arrow as part of its tradingare a separate issue.[82] The post-31 March 2017 retentions are in an entirely different category:25[4] The Construction Contracts Act 2002 ("the Act") provided that, inrelation to commercial construction contracts (CCC's) entered into after31 March 2017, the head contractor (such as [Ebert Construction])withholding sums which would otherwise be required to be paid to asubcontractor (retentions, must hold those funds on trust for the subcontractor.[83] While at least one of the Contracts in this case (Harewood Investments Ltd)was entered into on 16 March 2015, the liquidators advise that retentions relating tothe January 2019 Payment Claims in issue in this application were transferred toArrow's separate retentions bank account. Accordingly, whether the HarewoodInvestments Ltd's contract was caught by the Construction Contracts Act 200224 Bennett v Ebert Construction Ltd (in rec and liq), [2018] NZHC 2934.25 Bennett v Ebert Construction Ltd (in rec and liq), above n 23.("CCA") or not, Arrow treated its retentions as being trust property and paid them intoa retentions bank account.[84] Ms Paterson submitted that notwithstanding the banking provisions in the CCAthat departed from conventional trust principles, Churchman J in Bennett was satisfiedthat the retentions held in that case satisfied the three certainties for a trust.Churchman J commented that:26While it is clear that the purpose of the Act relating to retentions was toprovide a greater security for subcontracts than existed previously, there weregaps in the legislation and the language used was imprecise.[85] With respect, I agree with his Honour. Section 18C(1) of the CCA providesthat "All retention money must be held on trust by party A, as trustee, for the benefitof party B", party B here being the Trade Contractors.[86] It is common ground that New Zealand Ski Ltd, one of the two PMCM Clientsaffected, has now paid Trade Contractors in full including retentions. The trust createdby s 18C of the CCA has come to an end and it is agreed that there is a resulting trustback for the benefit of New Zealand Ski Ltd.[87] The position in relation to Harewood Investments Ltd is that the TradeContractor with the benefit of the retention has not yet been paid. Accordingly, theretention funds are held for the benefit of that Trade Contractor. Should HarewoodInvestments Ltd pay that Trade Contractor directly, there would then arise a resultingtrust in favour of Harewood Investments Ltd.Summary of Directions[88] A summary of directions are as follows:(a) Funds paid to Arrow by PMCM Clients for the purpose of paying TradeContractors are held on trust for the respective PMCM Clients.26 Bennett v Ebert Construction Ltd (in rec and liq), above n 23 at [63].(b) Funds paid to Arrow by PMCM Clients, for the purpose of paying theirindebtedness to Arrow in respect of Arrow's fees, margin and PurchaseOrder Suppliers are not held on trust for the PMCM Clients and areArrow's funds, subject to the liquidation.(c) Pre-1 April 2017 retentions paid into Arrow's main trading account,where that account went into overdraft after 1 April 2017, lost theirstatus as trust funds as the retentions ceased to exist as separate trustproperty.(d) Post-1 April 2017 retentions paid into a separate retention account areheld on trust for the Trade Contractor entitled to the retention or wherethe Trade Contractor has been paid direct by the PMCM Client on trustfor that Client.[89] Costs of the application are reserved.[90] Leave is reserved generally. I do not consider an application for directions bythe liquidators is the correct forum to consider the claim made by the first and secondrespondents for additional financing costs or the claim for interest by the thirdrespondent. Given I have determined that the funds held on trust are trust moneys,I consider that the beneficial owner of those funds is entitled to the interest those fundshave generated. Whether there are other claims over and above the interest earnt, willrequire the respondents to properly formulate the basis of that claim and put it to theliquidators for their consideration._______________________________Associate Judge LesterSolicitors:Buddle Findlay, Christchurch (Applicants)Cavell Leitch, Christchurch (First and Second Respondent)Lane Neave, Auckland (Third Respondent)SCHEDULEClient InvoicenumbersAmountinvoiced toclientPaid to TradeContractorsArrow PMfee/marginUnpaid toTradeContractorsUnpaid toPurchase OrderSuppliersVariance RetentionwithheldVariance (afterretention)PapanuiPropertiesLimited2118212118202118191,296,241.62 (196,621.96) (71,969.62) (967,352.13) (27,961.00) 32,336.91 - 32,336.91HarewoodInvestmentsLimited211864 137,281.25 (80,341.59) (31,136.25) (25,499.46) (4,987.06) (4,683.11) (5,285.69) (9,968.80)ResoluteInvestments 2016Limited211835 59,243.92 - (16,775.45) (35,602.29) (1,380.00) 5,486.18 - 5,486.18NZ Ski Ltd 211815 386,390.93 (13,731.00) (41,824.61) (309,404.65) (7,700.85) 13,729.82 (16,230.74) (2,500.92)Du VellePropertiesLimited211863211802 78,462.20 (40,135.00) (9,717.50) (18,759.38) (32,782.72) (22,932.40) - (22,932.40)Massey University- Marae 211845 11,749.46 - (3,063.60) (2,052.51) (1,395.73) 5,237.62 - 5,237.62Massey UniSchool of Music 211846 3,063.60 - (6,440.00) - (2,364.63) (5,741.03) - (5,741.03)Totals 1,972,432.98 (330,829.55) (180,927.03) (1,358,670.42) (78,571.99) 23,433.99 (21,516.43) 1,917.56