ANTONY IVO ARNERICH v DHC ASSETS LIMITED [2021] NZSC 121

ANTONY IVO ARNERICH v DHC ASSETS LIMITED [2021] NZSC 121 [20 September 2021]IN THE SUPREME COURT OF NEW ZEALANDI TE KŌTI MANA NUISC 76/2021[2021] NZSC 121BETWEEN ANTONY IVO ARNERICHApplicantAND DHC ASSETS LIMITEDRespondentCourt: William Young, O'Regan and Ellen France JJCounsel: J D McBride and A J Steel for ApplicantF J Thorp and L J Turner for RespondentJudgment: 20 September 2021JUDGMENT OF THE COURTA The application for leave to appeal is dismissed.B The applicant must pay the respondent costs of $2,500.____________________________________________________________________REASONSThe application[1] In the High Court, Paul Davison J found the applicant, Antony Arnerich, liableto DHC Assets Ltd (DHC) under ss 131 and 301 of the Companies Act 1993.1 Onappeal and cross-appeal to the Court of Appeal, Mr Arnerich was substantiallyunsuccessful.2 He now seeks leave to appeal to this Court against the judgment of theCourt of Appeal.1 DHC Assets Ltd v Arnerich [2019] NZHC 1695 [HC judgment].2 Arnerich v DHC Assets Ltd [2021] NZCA 225 (Goddard, Duffy and Nation JJ) [CA judgment].Background[2] Vaco Investments (Lincoln Road) Ltd (Vaco), as trustee for Vaco Investments(Lincoln Road) Trust, developed a property on Lincoln Road, Auckland. Thisinvolved the construction of a commercial building. Vaco Investments (Lincoln Road)Trust is a discretionary trust, the beneficiaries of which are (ultimately) Mr Arnerichand members of his family. Mr Arnerich was the only director of Vaco and controlledits sole shareholder. The respondent, DHC, was the builder. The development wasfunded by ANZ Bank.[3] The building was substantially completed in late 2012, with practicalcompletion as at 21 November 2012 later being certified on behalf of the engineer tothe contract. By this stage there were disputes between DHC and Vaco in respect of asignificant number of issues. As well, and unknown to DHC, Vaco had entered intoan agreement on 7 November 2012 to sell the building for $8.4 million with settlementin April 2013.[4] The sale was completed on 3 April 2013. Within days of the settlement, thebulk of the difference between the sale price and what was required to discharge theamount owing to ANZ Bank was paid out to Mr Arnerich, his family members orrelated family interests in two payments: one $1,175,000 (on 8 April) and the other$1,036,131 (on 9 April). And between May and October 2013, virtually all remainingfunds of Vaco were paid out; this to meet obligations or for the benefit of Mr Arnerich,his family or family interests.[5] On 1 July 2014, a shareholder's resolution of Vaco appointed a liquidator.[6] The procedural history of what followed is convoluted but the key elementsare as follows:(a) In adjudication proceedings under the Construction ContractsAct 2002, the adjudicator:(i) determined that Vaco was required to pay DHC $300,763.12together with interest at a daily rate until payment; but(ii) rejected claims for approximately $200,000 for time-related andP&G costs, and(iii) after all other allowances, including for costs, held that DHCwas entitled to a total of $367,768.12.(b) Judgment for this sum was entered in the District Court on 11 May2017.(c) DHC referred to arbitration those aspects of its claim (time-related andP&G costs) on which it had been unsuccessful before the adjudicator.(d) DHC sued Mr Arnerich under ss 131 and 301 of the Companies Act.(e) The arbitration claim did not proceed as it was seen as superseded bythe claim under ss 131 and 301.The High Court judgment[7] The High Court Judge found that he did not have jurisdiction to determineVaco's liability to DHC under the building contract given the dispute resolutionprocedures in it, but that DHC had established a debt owed to it by Vaco of$367,768.12 as determined by the adjudicator.3 He concluded that when Vaco wasdistributing the surplus funds generated by the sale, DHC was a contingent creditor.Mr Arnerich knew that DHC had not abandoned its claims. His duties as a directorrequired him to have regard to its interests when distributing Vaco's assets.4 TheHigh Court Judge concluded that when these distributions were made, Mr Arnerichdid not have sufficient regard to DHC's interests and that he was accordingly not actingin good faith.53 HC judgment, above n 1, at [259] and [268]–[269].4 At [314].5 At [345].[8] The High Court Judge held that Mr Arnerich should compensate DHC directlyby paying it $367,768.12 and that he was liable as well for interest on this sum at thecontractual rate of 12.4 per cent, compounding monthly.6The Court of Appeal judgment[9] The Court of Appeal broadly upheld the High Court decision but differed intwo respects. First, it held that DHC was not entitled to contractual penalty intereston the entire $367,768.12.7 Secondly, it found that the High Court Judge should haveassessed the full amount owed by Vaco to DHC; this because the claim by DHC againstMr Arnerich was not covered by the dispute resolution provisions in the buildingagreement.8 The Court of Appeal remitted the proceedings back to the High Court todetermine the award of interest and the value of DHC's unresolved time-related andP&G claims against Vaco under the construction contract.9[10] The key elements of the Court of Appeal's reasoning as to s 131 are as follows:(a) It had been open to the High Court Judge to conclude that Mr Arnerichdid not believe that DHC had abandoned its claims.10(b) The High Court Judge had not directly addressed the possibility thatMr Arnerich believed the claims were so lacking in merit that there wasno need to retain funds to cover them. On the assessment of the Courtof Appeal, Mr Arnerich believed that the risk of a successful claim wasvery low.11(c) Therefore, if the test under s 131 was purely subjective, Mr Arnerichwould have a "respectable argument" for the view that he could6 At [347]–[350] and [353].7 CA judgment, above n 2, at [186].8 At [145]–[151].9 At [190]–[191].10 At [162].11 At [163].disregard the risk of claims by Vaco in excess of a provision forretentions.12(d) But the four "riders" to the subjective approach to s 131 summarised inMadsen-Ries v Cooper (Debut Homes) were material.13 In particular:(i) There was no benefit to Vaco in distributing funds ahead ofdetermination of the claims by DHC,14 but there was a cleardisadvantage to Vaco in doing so.15(ii) There was no evidence that Mr Arnerich turned his mind toVaco's best interests.16(iii) A rational director who was considering whether payment wasin the best interests of Vaco would, at the very least, identify allpotential liabilities that Vaco might face in its capacity as trusteeof the Vaco trust, and ensure that Vaco retained access to fundssufficient to meet that maximum liability if it materialised.There was no evidence that Mr Arnerich did this.17(iv) "The irresistible inference is that Mr Arnerich was actingthroughout in the best interests of himself and his family, anddid not genuinely turn his mind to the interests of Vaco as aseparate entity, or seek to pursue those interests."1812 At [164]. ANZ initially advised Vaco's solicitors on 27 March 2013 that, in addition to the amountrequired to repay the principal and accrued interest of the project finance facility, it would retaina total sum of $641,674 to be held on term deposit to cover retentions and the outstanding costsof completion of the project. Of that amount, $515,076 was to be retained to cover the constructioncosts to complete and $80,559 would be retained as contractor retentions. Following settlement,ANZ only retained $561,115 to cover the costs to complete: $80,559 (the contractor retentions)was instead paid directly to Vaco's ANZ bank account. Then, in May 2013, ANZ agreed to releaseto Vaco the full balance of the costs to complete amount it was holding on term deposit.13 Madsen-Ries v Cooper [2020] NZSC 100, (2020) 29 NZTC ¶24-088.14 CA judgment, above n 2, at [168].15 At [169].16 At [171].17 At [170]–[171].18 At [172].(v) The effect of the distributions was that Vaco became insolventor near insolvent.19(vi) In those circumstances, three and probably all four of theDebut Homes riders applied, albeit that one had not beenpleaded.20[11] The key elements of the reasoning on s 301 and quantum were:(a) If Vaco had sued Mr Arnerich for breach of fiduciary duty it would haverecovered the lesser of the full amount of the liability to DHC or theamount that ought properly to have been retained.21(b) Mr Arnerich did not set out to show that some distributions could havebeen made consistently with his fiduciary duty and in particular theneed to protect Vaco as trustee.22(c) Accordingly, Vaco could have recovered against Mr Arnerich the fullamount of the liability to DHC and there is no reason why DHC shouldnot be able to do the same.23(d) Vaco took no steps to challenge the determination of the adjudicatoragainst it in respect of the $367,768.12.24(e) But for Mr Arnerich's breaches, Vaco could have met this liability.2519 At [174].20 At [173]–[174].21 At [175].22 At [175].23 At [176]–[178].24 At [179].25 At [179].The proposed appeal[12] The submissions in support of leave propose the following arguments:(a) The Court of Appeal applied (wrongly) an "entity primacy" model andimposed a duty to provide for "maximum conceivable liabilities".(b) The Court of Appeal wrongly applied the Debut Homes "riders"; asubmission premised on the contentions that:(i) Mr Arnerich was entitled to consider his own interests, thisgiven that he controlled the sole shareholder of Vaco; and(ii) applying the riders, the test should come down to whetherDHC's claims could objectively be regarded as being withoutmerit and whether the provision initially made was irrational.(c) The liability of Mr Arnerich should have been based on an assessmentby the Court of Appeal of how much should have been retained to coverthe claim.(d) The High Court should not have accepted the adjudication andDistrict Court judgment as establishing liability of Vaco to DHC.Discussion[13] The arguments that Mr Arnerich wishes to advance face a number of majordifficulties.[14] First, at the time it distributed its assets, Vaco was no longer in trade, balancingthe risks of its activities against likely rewards. Instead, it was a trustee holding assetsand the issue it had to address was whether to distribute them despite the claim byDHC. There would be no reason for an orthodox and solvent trustee in the position ofVaco to distribute all its funds without having first resolved (or at least capped) theclaim against it by DHC, or alternatively, obtained a bankable indemnity fromMr Arnerich.[15] Secondly, on the findings of fact in both Courts, the reason why Vaco diddistribute all its funds was because this was in the best interests of Mr Arnerich.Although Mr Arnerich may have believed that the prospects of a successful claim werelow, it is difficult to see how he could have believed that it was in the best interests ofVaco that it divest itself of its assets ahead of a determination or agreement as to howmuch was owed to DHC. On the same findings, the decisions made by Mr Arnerichdid not involve a balancing of risk and reward for Vaco. For Vaco, there was only risk.All the upside was for Mr Arnerich and his family. Given the insolvency of Vacoconsequent on this divestment, the wishes of Vaco's shareholder were not controlling.We see no error apparent in relation to these findings.[16] Thirdly, against these findings, the conclusions that Mr Arnerich did not makean honest attempt to consider the best interests of Vaco and that he was in breach ofs 131 are not susceptible to easy challenge.[17] Fourthly, and as to quantum, on the findings of fact a counter-factual based onwhat an honest and conscientious director might have retained by way of a provisionfor claims would not be easy to argue for. In large measure this is for the reason givenby the Court Appeal: Mr Arnerich did not set out to establish what such a provisionshould be. Indeed, given the way an orthodox trustee would have behaved, it isdifficult to see how, in the absence of an indemnity, provision for what was owed toDHC would not have included the full amount claimed.[18] Finally, and also in respect of quantum, the adjudication, to the extent to whichit was favourable to DHC, not having been challenged, and the District Court judgmentitself creating a debt, there are distinctly slim prospects of a successful challenge tothe conclusions reached by both Courts.Disposition[19] For the reasons just given, we do not see the proposed appeal as raising anyissue of general or public importance and there is no appearance of a miscarriage ofjustice.26 The application is accordingly dismissed. Mr Arnerich is to pay DHC costsof $2,500.Solicitors:Doug Cowan Barristers & Solicitors, Auckland for ApplicantDuthie Whyte, Auckland for Respondent26 Senior Courts Act 2016, s 74(2)(a) and (b); and Junior Farms Ltd v Hampton Securities Ltd (in liq)[2006] NZSC 60, (2006) 18 PRNZ 369 at [4]–[5].