DEMPSEY WOOD CIVIL LTD v GAPES [2021] NZHC 2362

DEMPSEY WOOD CIVIL LTD v GAPES [2021] NZHC 2362 [10 September 2021]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV-2016-404-1839[2021] NZHC 2362UNDER the Companies Act 1993 and theFair Trading Act 1986BETWEEN DEMPSEY WOOD CIVIL LIMITEDPlaintiffAND ANTHONY JOHN GAPESDefendantHearing: 8 to 17 March 2021; further submissions 24 April 2021Appearances: E St John and SP Maloney for the PlaintiffJWA Johnson and WL Porter for the DefendantJudgment: 10 September 2021JUDGMENT OF FITZGERALD JThis judgment was delivered by me on 10 September 2021 at 12.00pm,pursuant to Rule 11.5 of the High Court Rules.Registrar/Deputy RegistrarDate..Solicitors: Wynn Williams, AucklandAlan Jones Law Ltd, AucklandTo: E St John, AucklandS Maloney, AucklandIntroduction [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 anda majority shareholder of the property development company Redwood Group Ltd(Redwood). Mr Gapes was also the sole director of a related company named PanamaRoad Development Ltd (PRDL). PRDL was incorporated as a special purposecompany to carry out the development which is the subject of these proceedings.[2] The development, which commenced in 2013, was located in Mt Wellingtonand branded the "Springpark development" (the Development). The Developmentwas initially funded by Crown Financial Limited (Crown). Crown put PRDL intoreceivership early on in the life of the Development, though Crown's funding wasfairly quickly replaced with a $30 million development facility provided by KoiStructured Credit Pty Ltd (Koi), a Singapore based lender (the Koi Facility).[3] By the end of November 2013, PRDL had secured agreements for sale andpurchase of the completed lots within the Development "off the plan", with a totalvalue of approximately $60 million (the pre-sales). The pre-sales contained "sunset"clauses, which provided for their termination in certain circumstances if titles had notissued by 20 December 2015 (the Sunset Date).[4] Physical works on the Development commenced in late September 2014. Theplaintiff, Dempsey Wood, was contracted by PRDL to carry out the civil works. Bymid-2015, however, the Development had run into serious trouble. There weresignificant cost overruns and associated delays. It was clear that the Developmentwould not achieve practical completion and that titles would not issue by the SunsetDate.[5] The Koi Facility expired on 15 October 2015. By that time, Mr Gapes and hisadvisers had been looking for an alternative funder for some months. Also on15 October 2015, PRDL entered into a conditional agreement to refinance theDevelopment with Webber Capital Ltd (Webber Capital). But that agreement wascancelled by Webber Capital a few weeks later, after carrying out due diligence. Akey problem was that given the significant cost overruns and delays, the Developmentwas no longer profitable so long as the pre-sales remained in place. Valuation adviceat the time suggested that the Development would yield an additional $20 million inrevenue if the pre-sales could be cancelled and sold at (then) market prices (the markethaving 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 theFacility while Mr Gapes continued to search for a new funder. That changed, however,in early December 2015 when Koi appointed receivers to PRDL. The receiverscancelled the pre-sales upon the passing of the Sunset Date, and sold the Developmentin 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 onthe Development (for works carried out in November 2015), plus its (approved) claimfor an extension of time (EOT).[7] Dempsey Wood sues Mr Gapes in his capacity as a director of PRDL, allegingthat he breached a number of his director's duties under the Companies Act 1993 (theAct), including reckless trading (s 135) and agreeing to PRDL incurring obligationswhen 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 tos 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 (theFTA). 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 Facilityfor 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 misledDempsey Wood in breach of the FTA.1 Dempsey Wood also alleges Mr Gapes breached s 131 of the Act, namely his duty to act in thebest interests of PRDL. A claim was also brought pursuant to s 137 of the Act (negligence), butwas not pursued.[10] The balance of this judgment is structured as follows:(a) First, a summary of Dempsey Wood's pleaded case (including mydecision on a pleading matter raised on behalf of Mr Gapes).(b) Second, a summary of the factual background. Given the highlycontextual nature of many of the issues to be determined, it is necessaryto traverse the factual background in some detail.(c) Third, a summary of the expert evidence and my overall assessment ofit.(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 assessedaccording to the pleaded case.2 This is particularly relevant in this case, given aspectsof Dempsey Wood's case at trial expanded beyond its pleadings. Before summarisingthe 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 bedisregarded. He also confirmed that Dempsey Wood's FTA claim was its "primaryclaim", 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 Gapesformulated "a plan" to:(a) avoid the pre-sales;(b) allow PRDL to default on its obligations under the Koi Facility;(c) liquidate PRDL; and2 Yan v Mainzeal Property and Construction Ltd (in liq) [2021] NZCA 99 at [493]-[494].(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 Johnconfirmed that the existence of such a "plan" was not necessary to Dempsey Wood'sclaim, 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 costoverruns 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 theDevelopment'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 ofthe 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 carriedon in a manner likely to create a substantial risk of serious lossesto PRDL's creditors.(ii) By instructing and/or allowing Dempsey Wood to continue withthe civil works in September, October and November 2015,Mr Gapes agreed to the carrying on of the business of PRDL ina way likely to create a substantial risk of serious loss to PRDL'screditors, as he knew that PRDL would not be able to meet itsincreased obligations to Dempsey Wood, and thus was in breachof s 135 of the Act.(iii) As a result of Mr Gapes' breach of s 135, Dempsey Woodsuffered loss of $729,664, being its unpaid November 2015invoice and its EOT claim.(iv) That pursuant to s 301 of the Act, the Court ought to orderMr Gapes to contribute to the assets of PRDL a sum not lessthan the outstanding creditor claims in PRDL's liquidation ofapproximately $1.4 million, plus the costs and disbursements ofliquidation.(b) In relation to the alleged breach of s 136 of the Act:(i) When instructing and/or allowing Dempsey Wood to continuewith the civil works in September, October and November2015, Mr Gapes did not at the time have reasonable grounds tobelieve PRDL was or would be able to meet its increasingobligations under Dempsey Wood's contract when required todo so. This is particularised on the basis that:1. a reasonably prudent director would have realised PRDLwas insolvent, or nearing insolvency, by September 2015;and2. by September 2015 it was clear PRDL could not completethe Development as budgeted, meet the pre-sale SunsetDates or meet its obligations under the Koi Facility, suchthat default and receivership were inevitable.(ii) As a result of Mr Gapes' breach of s 136, Dempsey Woodsuffered loss of $729,664, being its unpaid November 2015invoice and its EOT claim.(iii) That pursuant to s 301 of the Act, the Court ought to order MrGapes to contribute to the assets of PRDL a sum not less thanthe outstanding creditor claims in PRDL's liquidation ofapproximately $1.4 million, plus the costs and disbursements ofliquidation.(c) In relation to the alleged breach of s 131 of the Act:(i) By instructing and/or allowing Dempsey Wood to continue withthe civil works where he knew PRDL was insolvent or nearinginsolvency, Mr Gapes breached his duty to act in good faith andin the best interests of PRDL. This is particularised as follows:1. From September 2015 (and possibly earlier) PRDL wasinsolvent, nearing insolvency, and/or of doubtful solvency.2. Mr Gapes (in his capacity as director) was required to takeinto account the best interests of PRDL's creditors duringthis period.3. Mr Gapes failed to consider whether PRDL would be ableto meet its increasing liabilities to Dempsey Wood as thecivil works progressed through September to December2015.4. Mr Gapes ought to have known, or at least should haveappreciated, that allowing Dempsey Wood to continue thecivil works while PRDL was insolvent or nearinginsolvency was likely to cause loss to Dempsey Wood.(ii) By causing or allowing PRDL to default on its obligations underthe pre-sales and Koi Facility such that it was put intoreceivership, Mr Gapes breached his duty to act in good faithand in the best interests of PRDL. This is particularised asfollows:1. Due to rising house prices, Mr Gapes formulated a plan toensure the cancellation of the pre-sales and re-sell them athigher prevailing prices.2. Mr Gapes allowed the Sunset Dates to pass and encouragedthe pre-sale purchasers to cancel the agreements.3. Mr Gapes knew that cancelling the pre-sales and return ofthe deposits would cause PRDL to default on its obligationsand be unable to obtain further financing.4. Mr Gapes wrongfully pursued this course of action with theobjective of benefitting other entities (such as Redwood andthe successor entity which would inherit the Development)and himself through his personal interest of those entities.5. Mr Gapes' actions caused receivers to be appointed overPRDL by Koi and caused approximately $1.4 milliondollars of loss to PRDL's creditors.(iii) By prioritising the interests of his related companies in theRedwood group over the interests of PRDL and, by extension,its creditors when PRDL neared or entered insolvency,Mr Gapes breached his duty to act in good faith and in breachof the best interests of PRDL. This is particularised as follows:1. Mr Gapes charged PRDL exorbitant management fees forservices rendered by the "Redwood Group", a group ofcompanies and trusts in which Mr Gapes has a personalinterest.2. Mr Gapes prioritised the payment of the Redwood fees overthe financial health of PRDL.(iv) As a result of Mr Gapes' breach of s 131, Dempsey Woodsuffered loss of $729,664, being its unpaid November 2015invoice and its EOT claim.(v) That pursuant to s 301 of the Act, the Court ought to orderMr Gapes to contribute a sum not less than the outstandingcreditor claims in PRDL's liquidation of approximately $1.4million, plus the costs and disbursements of liquidation, to theassets of PRDL.[15] During the course of the hearing, and by the time of Dempsey Wood's closingsubmissions, the pleaded claims summarised above had narrowed to a focus oninsolvency, or near insolvency, as at 15 October 2015. Accordingly, while thepleadings suggest a possible "breach date" of some point in September 2015, I proceedon the basis of a suggested breach date of no later than 15 October 2015.[16] Turning to the FTA cause of action, Dempsey Wood alleges the following:(a) During September, October and November 2015, Mr Gapes made falseand/or misleading representations to Dempsey Wood to the effect thatPRDL would be able to meet its increasing obligations to it. Other than,however, the particularised matters set out below (the essence of whichis alleged misrepresentation by omission), no particularisation of thealleged positive representations is given.(b) Mr Gapes did not indicate at any of the regular site meetings held up toand including 2 December 2015, or in the parties' ongoingcorrespondence, that "[PRDL] was in financial trouble and was unableto meet its current liabilities".(c) Mr Gapes "failure to disclose [PRDL]'s financial troubles, combinedwith his instructions to continue works, amounted to a representationthat [PRDL] had the means to continue to pay for the works".(d) That on 12 November 2015, Mr Gapes emailed Dempsey Woodconfirming the amount held in a dedicated project account, and that this"was earmarked for civils and consultants", but that that advice wasmisleading because PRDL was in default under the Koi Facility andMr Gapes knew that the money in the account "would soon be used byKoi to repay its secured debt".[17] Dempsey Wood pleads that it relied on these representations in agreeing tocontinue with the civil works. It alleges that as a result, it suffered loss in an amountof $729,664, again being its last, unpaid invoice, together with its approved EOTclaim.[18] For completeness, in his statement of defence to the FTA cause of action,Mr Gapes pleaded that "at all relevant times he was acting for or on behalf of [PRDL]and not in his personal capacity". The capacity in which Mr Gapes made anyrepresentations was not, however, listed by Mr Gapes' counsel as an issue fordetermination, or addressed in counsel's (comprehensive) opening or closingsubmissions. I accordingly proceed on the basis that the point was not pursued onMr Gapes' behalf.[19] Finally, an issue arose during the hearing in relation to the pleadings which itis convenient to address now. In his statement of defence, Mr Gapes pleaded that "atall material times he reasonably expected that [PRDL] would be able to meet itsobligations by relying on the Koi Facility Agreement and/or through refinancing theProject". Dempsey Wood did not reply to that pleading, on the basis of whichMr Gapes says this aspect of his pleading must be deemed as having been accepted.3[20] In this context, Mr Johnson, counsel for Mr Gapes, submits that this pleadinggoes to both Mr Gapes' subjective belief and also whether, objectively, he hadreasonable grounds for that belief. He says that following discovery, it was open toDempsey Wood to deny both Mr Gapes' subjective and objective belief, includingthrough putting Mr Gapes to proof on those matters. Mr Johnson acknowledges thatwhile pleadings arguments are "unattractively technical", the rules serve a purpose,3 High Court Rules 2016, rr 5.62 and 5.63.including shaping the evidence adduced to prove the pleaded allegations. Mr Johnsonsuggests that Mr Gapes could have adduced evidence from an independent expert ondevelopment finance but did not do so, and this ought not to prejudice Mr Gapes.Mr Johnson accordingly submits it is not open to the Court to find other than thatMr Gapes believed, on reasonable grounds, that he could continue to rely on the KoiFacility and/or refinance of that Facility.[21] I do not accept the submissions made on Mr Gapes' behalf.[22] First, and as raised with Mr Johnson at the hearing, if the pleading point werevalid, it would have been a "knock out" point on most if not all of the claims underthe Act. On this basis, and after the close of pleadings date had passed, it would havebeen open to Mr Gapes to apply to strike out those causes of action. He did not do so,and instead the point was first raised in Mr Gapes' opening submissions part waythrough the substantive trial.[23] Second, no detail was provided about what additional expert evidence wouldhave been called on this topic, and thus whether it would have passed the threshold ofbeing substantially helpful to the Court.[24] Third, counsel for Mr Gapes, in his opening submissions, listed as one of theissues to be determined on the pleaded claims as whether "at the relevant point in time,Mr Gapes subjectively believed, on reasonable grounds, that [PRDL] would be ableto meet its obligations when they fell due". Aspects of the expert evidence called byMr Gapes was specifically tailored to the reasonableness of continuing to trade after15 October 2015, as well as the reasonableness of continuing to incur liabilities afterthat date. That evidence was presumably advanced in recognition of the issues arisingfor determination (otherwise it would have been irrelevant). A substantial part ofMr Gapes' evidence was also directed to this issue. It is accordingly difficult toconclude that Mr Gapes has been prejudiced, either at all or in any substantive way,by any pleading point.[25] Finally, but perhaps most importantly, the purpose of pleadings is to define theissues for determination and to ensure parties are aware of the case they must meet.Dempsey Wood's pleading expressly alleges in a number of places that in September,October and November 2015, Mr Gapes did not have reasonable grounds to believethat PRDL would be able to meet its ongoing obligations. The pleading in thestatement of defence to which Mr Johnson refers was in fact pleaded in response tothese allegations. Accordingly, the reasonableness of Mr Gapes' belief was put in issueon Dempsey Wood's pleaded case. I do not consider rr 5.62 and 5.63 have the effectof deeming to be accepted a proposition which is contrary to a pleaded allegation onthe plaintiff's own case. Rather, and as commentary to r 5.62 suggests, the need for areply is when a pleaded defence makes "positive allegations which are unrelated to orgo beyond mere responses to allegations by the plaintiff."4[26] I turn now to the factual background.Factual backgroundIntroduction and early events[27] Redwood purchased the land to be used for the Development in April 2012.The original plan was to develop the land in four stages (which was later amalgamatedinto three stages), with different settlement dates for each stage. Stage 1 was tocomprise 107 townhouses, 44 terraced houses, 4 apartments and 150m2 of retail. Asnoted above, the Development was initially funded by Crown.[28] PRDL was incorporated on 24 May 2012. As noted, it was a special purposecompany to undertake Stage 1 of the Development. It was beneficially owned byinterests associated with Mr Gapes. Redwood, of which Mr Gapes is the sole director,and which at any given time had several employees, provided management services toPRDL in relation to the Development (and charged management fees for doing so).[29] The Development was taken to market in 2013 as an affordable housingdevelopment. 149 sale and purchase agreements were entered into for sales "off the4 Robert Osborne and others McGechan on Procedure (online loose-leaf ed, Thomson Reuters) at[HR 5.62.01].plan" (that is, the pre-sales). The revenue to be earned from the pre-sales (once theysettled) was expected to be approximately $60 million. For the large majority of thepre-sales, the date for practical completion was 15 September 2015, with the SunsetDate for the issue of title being 20 December 2015. These dates, and the relatedprovisions concerning termination of the pre-sales, were addressed in cl 30.1 of thepre-sales in the following terms:Sunset date: This Agreement may be cancelled by either party serving writtennotice on the other if:(a) Practical Completion has not been achieved;(b) a Code of Compliance Certificate has not issued in respect of theDwelling; or(c) a separate Title has not yet issued for the Property,by 20 December 2015 ("Sunset Date"), subject to the occurrence of any eventof delay referred to in cl 23.2 [essentially delays outside of PRDL's reasonablecontrol], in which case the Sunset Date shall be extended for such reasonableperiod as determined by the Engineer to allow for the delay.Crown is replaced by Koi[30] On 30 April 2014, Crown appointed receivers to PRDL. The background toand reasons for this were not explored in any real detail in the evidence, but it was notlong before the Development was refinanced, with PRDL entering into the Koi Facilityin June 2014. Mr Gapes personally guaranteed PRDL's obligations under the Facility.[31] Koi agreed to provide $30 million in funding for the Development, split intotwo $15 million tranches. The first tranche was to repay the Crown debt, with thesecond tranche to be paid into trust accounts held by PRDL's solicitors RussellMcVeagh, to be drawn down from time to time to fund the Development works. Therewere two such trust accounts: one to pay construction costs to the Development'sbuilder, KN Construction (the Construction Account), with the other (the ProjectAccount) to meet other development costs, including those of Dempsey Wood.[32] Importantly, payments from the Construction and Project Accounts could onlybe made with Koi's prior approval, and no more frequently than once per month. TheKoi Facility agreement provided that Koi would only be obliged to direct a paymentfrom the Project Account if Koi had received a consultant's certification on mattersincluding:(a) certification of the cost of the works to be carried during Stage 1 of theDevelopment, together with certification of the "Cost to Complete"(being, at any given point in time, the estimated cost to complete thoseworks); and(b) that all previous contractors' and subcontractors' claims had been paid.[33] Koi's consultant for the certification process was Kingstons. Kingstonsprovided monthly drawdown reports to both Koi and PRDL, a number of which wereproduced in evidence. I say more about what these reports showed over the course of2015 later in this judgment.[34] In September 2014, PRDL entered into the civil works contract with DempseyWood. The original contract sum was $5.384 million (excluding GST), later increasedby some $2 million in approved variations.The Development is in trouble[35] It was common ground that as the Development progressed, there were seriousdelays and cost overruns.5 By at least June 2015, the issues were attracting negativepublicity. Mr Gapes accepted that by July 2015, it was clear to him that theDevelopment was going to cost more than initially budgeted.[36] The Koi Facility was due to expire on 15 October 2015. Although Mr Gapes'evidence was that there was no clear point at which he was told by Koi that it wouldnot be extending the Facility, from around June 2015, he and his advisers were lookingat potential replacement funders. For example, from June 2015, Mr Gapes receivedadvice and a number of refinance proposals from Reesby & Company Limited5 PRDL's position was that significant aspects of these delays were caused by Harrison Grierson,who were the design consultants and engineers to the Development. In August 2015, PRDLterminated Harrison Grierson role as engineer, and replaced it with Dodd Civil.(Reesby & Co), who Mr Gapes described as one of New Zealand's leading propertyfinance brokers.[37] In July 2015, a consultant with whom Mr Gapes was working, a Mr Larry Ede,reported that without an "injection" of additional funds into the Stage 1 development,the Koi Facility would be exceeded during the August 2015 drawdown from theProject Account.[38] On 21 August 2015, PRDL sold what was known as the "Superlot" (being theland that had been intended to be used for Stages 2 and 3 of the Development) toHappyland Development Ltd (Happyland). PRDL and Koi had agreed that the netproceeds of sale, being approximately $14.78 million, would be paid into the ProjectAccount – thus serving as a fresh injection of capital into the Stage 1 Development.[39] Kingstons' drawdown report no. 11, released on 27 August 2015, confirmedthe issues then being experienced on the Development. It noted that the projectcontingency was forecast to be overrun by some $4.3 million (with an actual overrunto that point in time of $2.147 million). Kingstons observed that they were not privyto the "overall development cashflow", and were therefore unable to confirm that the$30 Koi Facility "will be sufficient to cashflow the development until individual housesettlements are received". Kingstons also reported that:Given the delays incurred to date, in our opinion there is no ability for theworks to be completed prior to the defined Practical Completion date of 15September 2015.[40] Kingstons also advised that the majority of the Sunset Dates were"unachievable".[41] The report concluded that due to the forecast overruns, "there is insufficientfunds remaining within the Cost to Complete to complete the Project Works".Kingstons certified for a drawdown of $1.107 million from the Project Account at theend of August, to pay contractors' most recent monthly invoices.[42] Around the same time, Dempsey Wood was becoming frustrated at delays inpaying its invoices. On 29 August 2015, it issued a notice of intention to suspendworks. Mr Conal Dempsey, the sole director of Dempsey Wood, described such stepsas Dempsey Wood "conditioning" its clients. In response to the notice of intention tosuspend works, Mr Gapes advised that the August 2015 drawdown had been processedand he would follow up on payment. In the event, Dempsey Wood's invoice was paidon 31 August 2015 (following Kingstons' certification discussed at [41] above).[43] I interpolate to note that much attention at the hearing was devoted to delaysin paying some of Dempsey Wood's invoices, and what the parties had agreed, ifanything, about when Dempsey Wood was to submit its invoices. I do not, however,consider these matters material to the issues I must determine. In effect, PRDL itselfnever had any funds to pay Dempsey Wood's (or other contractors') invoices, all fundscoming from the Construction or Project Account, and all payments subject to Koi'sapproval. Accordingly, some relatively short delay in payment of some of DempseyWood's invoices in 2015 does not itself reflect on PRDL's solvency at any point intime. Rather, I am satisfied it reflected the timing of Dempsey Wood submitting itsinvoices (and thus their due date for payment), versus the timing of Kingston'smonthly certification process. In other words, the terms of payment for DempseyWood's invoices were not fully "aligned" to the quite detailed and formal drawdownapproval process for payments to be made from the Project Account. And in the event,and other than its last invoice, all of Dempsey Wood's 2015 invoices were paid, albeitsome of them a few days after their due date.The search for a new funder[44] Turning back to the chronology, Mr Gapes said that "following the sale of theSuperlot", PRDL worked hard to refinance the Koi Facility before its expiry on15 October 2015. Mr Gapes said that "we knew all the players" and "basically talkedto everyone". He continued to receive advice from Reesby & Co. Some interest wasshown by some parties,6 but by early October 2015, nothing had come to fruition.Mr Gapes also said that he was working closely with Koi during this time, and spokewith his contact at Koi most days. The overall thrust of Mr Gapes' evidence was thatthere was no suggestion to him from Koi that the "tap would be turned off"6 For example, Spinnaker Capital, a non-bank lender for property developments, and associatedwith Reesby & Co, as well as New Zealand Mortgages and Securities (associated with the Mansonfamily).immediately upon the Koi Facility expiring, and that like many development facilities,Koi would permit the Facility to run on while a new funder was found.[45] In September 2015, PRDL received a claim from Crown, relating to an "exitfee" of $10 million it said was payable as a result of the sale of the Superlot toHappyland. While Crown did later issue formal court proceedings in relation to itsclaim, Mr Gapes did not consider the claim genuine, noting that in the event, it wassettled for $40,000.[46] On 4 September 2015, Koi advised that the amount required to repay theFacility was approximately $37.568 million, less the net sales proceeds from the saleof the Superlot, less whatever was the cash balance of the Construction and ProjectAccounts at the time of refinance. Thus it was clear that as at the date of Koi's Facilitybeing refinanced, whatever was "left" in the Construction and Project Accounts wouldbe returned to Koi in reduction of the amount owed to it. On the basis of theinformation received from Koi, Reesby & Co advised Mr Gapes on 4 September that"the draft cashflow forecast indicates the Koi debt to refinance will be approx$22.5 million".Cancelling the pre-sales[47] As well as looking for a new funder, PRDL was also exploring ways tomaximise the value from the Development – which in turn would obviously enhancethe prospect of securing new funding. This included:(a) using some of the land within the Development (which was to havebeen purchased by Auckland Council) to build 20 additional houses;7and(b) exiting the pre-sales and re-selling the properties at current marketvalue.7 This was expected to generate a further $11.286 million in revenue, with associated costs of some$4.3 million.[48] In relation to (b) above, a Jones Lang LaSalle valuation commissioned byPRDL in early September 2015 assessed the difference in gross realisation betweenseeking an extension to the Sunset Date in the pre-sales and cancelling the pre-salesand selling the lots at market value to be around $20 million. Similarly, a "cashflowfeasibility" based on these two scenarios and dated 25 September 2015 estimated thatthe "re-set" Development would result in a profit of $16.073 million, or a return oncapital of 18.9 percent.[49] The Jones Lang LaSalle valuation also valued the Development as at earlySeptember 2015, namely:(a) $13.3 million, on the basis the pre-sales remained in place; and(b) $21.8 million, on the basis the pre-sales were cancelled and resold atmarket rates.[50] Both scenarios included large "profit and risk" discounts. Mr Gapes explainedthat he did not agree with the valuations, because of the size of those discounts. No-one from Jones Lang LaSalle was called to give evidence on this topic, nor was thereevidence of PRDL commissioning any further valuation advice from Jones LangLaSalle (or any other valuer).[51] Much attention was devoted at the hearing to the strategy of exiting the pre-sales, described by Dempsey Wood as "burning off" the pre-sale purchasers.Mr Gapes did not shy away from the fact that PRDL intended to exit the pre-sales, orthat from the purchasers' perspective, this was not an attractive outcome. Heexplained, however, that securing the additional value from (re)selling the lots atincreased market values was a necessary and vital step to ensure the Development wasfinancially viable. Mr Gapes explained that without doing so, it would have beenextremely difficult, if not impossible, to secure new finance, and without new finance,the pre-sales could not be completed in any event.[52] As noted earlier, the pre-sales gave both the purchaser and PRDL the option toterminate the agreement in the event title did not issue by the Sunset Date. But as canbe seen from the sunset clause set out at [29] above, the agreement envisaged theSunset Date could be extended in certain circumstances. Mr Gapes explained thatsome parties were more cautious than PRDL about the ability to unilaterally terminatethe pre-sales.8 Nevertheless, Mr Gapes said that he was confident at the time thatPRDL could legally exit the pre-sales at the Sunset Date, but that in any event, he wasconfident from a commercial perspective that once purchasers understood that it wassimply impossible for the Development to be completed at the original pre-salesprices, many (if not all) of them would elect to take their deposits and walk away,rather than engage in litigation. In cross-examination, Mr Gapes highlighted theimportance of being able to cancel the pre-sales and re-sell at higher market prices,observing that "[y]ou can either cancel them or you can't. If you can't cancel themthen the land probably isn't worth anything and if you can, then it's worth plenty".The "hive down" structure[53] Another aspect of the proposed refinancing that attracted significant attentionat the hearing was that it was to be structured as a sale by PRDL of the Developmentto a third party (referred to as Newco), with the sales proceeds (plus whateverremained in the Construction and Project Accounts) used to repay Koi; that is, ratherthan a straight refinancing of the Koi Facility. The proposed structure was describedat the hearing as a "hive down".9[54] Dempsey Wood put significant emphasis on this being a strategy and structurethat took no account of the interests of PRDL's unsecured creditors, which would be"left behind" with their claims against an empty PRDL. However, I consider thissomewhat of a red-herring. A "hive down" structure would not necessarilydemonstrate that Mr Gapes breached his director's duties. What was important in anyscenario was the position of PRDL's unsecured creditors, rather than the particularstructure deployed to effect the refinance. Mr Gapes' evidence was that it waspreferable to transfer the development into a "clean entity" which would be moreattractive to a new funder, given the "taint" of the Development to that point. This8 For example, he noted that Spinnaker Capital was "cautious" on this topic.9 A "hive down" is generally used to describe a transaction whereby the valuable parts of a companyare transferred to a subsidiary that is then sold. This has the effect of keeping the valuable partsof a going concern together and freed of the company's debts.would also enable the lots to be taken to market again but under a different brand.Mr Gapes also explained that from his perspective, any sale of the Development to athird party would incorporate creditors' existing invoices being met, and existingcontractors, including Dempsey Wood, being retained to continue the Development –given it would make no commercial sense for the purchaser to spend the time and costof getting new contractors set up on site.Events leading up to 15 October 2015[55] At the end of September 2015, Dempsey Wood issued another notice ofintention to suspend works, not having received payment of its most recent invoice(which had been due for payment on 18 September 2015). At the same time, Mr Gapessigned off on an approximately $2 million increase to the value of Dempsey Wood'scontract, reflecting approved variations to that point.[56] Also at the end of September 2015, PRDL requested that Crown defercommencing legal proceedings in relation to the exit fee, stating that they could affectPRDL's ability to refinance the Koi Facility. Crown (unsurprisingly) did not agree todo so, and commenced legal proceedings at the end of that month.[57] Kingstons' drawdown report for the end of September 2015 painted a similarpicture to that issued at the end of August 2015. Again, Kingstons advised that therewas insufficient "Cost to Complete" to complete the project works, and that thePractical Completion and Sunset Dates were unachievable. Kingstons certified furtherinvoices totalling $1.523 million (including Dempsey Wood's invoice due for paymenton 18 September 2015) as properly payable under the Facility. Payments were dulymade from the Construction and Project Accounts.[58] By at least early October 2015, Mr Gapes was in discussions with WebberCapital about a possible refinance of the Development. While the precise relationshipswere not clear from the evidence, Webber Capital broadly represented the interests ofa Mr Clint Webber and the Chow brothers. Clearly alternative financing arrangementswere not, at that time at least, thick on the ground, Mr Gapes himself acknowledgingthat Webber Capital and the Chow brothers were "tier 4" (or lower) lenders. Heexplained that until the pre-sales were cancelled, "we were dealing with moreexpensive, less reputable funders", and that "the fact the pre-sales were not cancelledwas what was holding people back".[59] On 1 October 2015, Reesby & Co provided Mr Gapes with a Finance Proposalto present to Webber Capital. The document recorded that Koi had "advised that [theKoi Facility] will not be extended". It also recorded that:PRDL had decided to sell the Stage 1 site to repay the Koi loan. All consentsand material contracts will be novated to [Newco] to allow the civil &construction works to continue on site."[60] The proposal stated that after the sale to Newco, Newco would "complete allcivil works via Dempsey Wood". The proposal also stated that "the existing presaleswill not be novated from PRD[L] to [Newco] and the units will be marketed and re-sold at current market values."[61] On 7 October 2015, Kingstons completed a draft "Refinance Report". Thereport stated that Kingstons had been advised by Reesby & Co that PRDL intended torefinance the development with Spinnaker Capital and in that context, required arefinance report setting out the current Cost to Complete. Kingstons estimated that inaddition to the $27.982 million costs incurred to that point in time, a further $54.396million would be required complete the project works (hence a total "DevelopmentBudget of $82.379 million). Discussions with Spinnaker did not, however, progressto a concluded transaction.[62] At some point prior to 12 October 2015, Mr Dempsey became aware that theDevelopment was to be refinanced. Mr Gapes emailed him on 12 October 2015,stating "as you know we are replacing our Singaporean funders – can you meet withthe new funder on Wednesday this week"? The "new funder" was Webber Capital. Idiscuss the meeting proposed by Mr Gapes later in this chronology.The Koi Facility expires/the Webber Capital transaction is executed[63] The Koi Facility expired on 15 October 2015. On the same day, PRDL enteredinto an agreement for sale and purchase of the Development to Webber Capital for$22.5 million (the Webber Capital agreement). As will be apparent, the $22.5 millionpurchase price amount matched that amount advised by Reesby & Co in September2015 as the projected amount to repay Koi (after taking into account the balancesremaining in the Construction and Project Accounts). The Webber Capital agreementwas accompanied by an agreement pursuant to which PRDL would providemanagement services to Webber Capital (to essentially carry out the Development), aswell as a put and call agreement, which gave an entity associated with Mr Gapes theright to repurchase the Development at a later date.[64] The Webber Capital agreement was conditional, among other things, onWebber Capital's due diligence of the transaction. The agreement also provided forthe purchase price to increase by an amount equal to the costs incurred by PRDL inrelation to the Development between 16 October 2015 and the sale settling (effectivelyreflecting contractors' costs over that period).10 The agreement also required PRDLto continue the Development pending settlement, a point Reesby & Co raised withMr Gapes the day before the agreement was executed. Reesby & Co advised that thatobligation "means the October drawdown needs to be funded somehow" and "this willlikely need to come from Koi", such that the actual refinance amount would need tobe $22.5 million plus the October 2015 drawdown.[65] It is also apparent from the contemporaneous documents that $1 million fromthe sales proceeds from the Webber Capital agreement was to be provided to Mr Gapesto repay a debt to Westpac on a separate project. Mr Gapes explained that "Westpacwere giving me some grief around repaying that loan, so that would've been a paymentto Westpac to keep them from pursuing me further".[66] On 16 October 2015, Koi served PRDL with notice pursuant to s 119 of theProperty Law Act 2007 (the PLA), which recorded that in the absence of repaymenton or before 17 November 2015, enforcement rights under the Facility would becomeexercisable. Mr Gapes said that he was not particularly troubled or surprised by thenotice being issued, and through his ongoing discussions with Koi, was aware that itwould be. He described this as an expected step for a financier to take when a facility10 Excluding amounts paid out of the Construction Account, and capped at $750,000.has expired, and not confirmation or a suggestion to him that Koi would takeenforcement action immediately upon expiry of the notice.[67] It is not in dispute that Mr Gapes did not inform PRDL's creditors that the PLAnotice had been issued.[68] The precise date is not clear, but in or around mid-October 2015, Mr Gapesand Mr Dempsey met with the Chow brothers and Mr Webber. This was presumablyin the context of Webber Capital's ongoing due diligence. Mr Dempsey described itas a not very pleasant meeting. Mr Gapes generally agreed with Mr Dempsey'sdescription of the meeting, including that the meeting got quite heated at times(emanating mainly from the Chows) and that there were a lot of "egos" in the room.[69] Mr Dempsey said that in the context of this meeting, and his expressedconcerns about the Development's financial viability (and Dempsey Wood gettingpaid as a result), Mr Gapes had threatened that he could simply allow PRDL to defaulton its obligations to Koi and go into receivership. Mr Gapes denied he said this, butwas quite candid that one of the Chow brothers had made such a "threat" at themeeting. He described this as "posturing", and that he was uncomfortable about whatwas being said.[70] On 21 October 2015, Dempsey Wood issued another notice of intention tosuspend works, as its most recent invoice, due for payment that day, had not been paid.Kingstons replied to Dempsey Wood the same day, advising that they had "receivedthe Springpark drawdown information yesterday and [were] currently processing".[71] On 22 October 2015, Kingstons distributed its October 2015 drawdown report.The report noted that Kingstons had been advised by Koi that there was no need toupdate the anticipated Cost to Complete given "this is to be [Koi's] last drawdownbefore funding of the project will transfer to a new funder." I interpolate to note thatalthough Kingstons' report stated that the October drawdown was to be the last, Koidid authorise a further payment out of the Project Account which occurred on25 November 2015. There was no specific evidence of what discussions Mr Gapeshad had with Koi about payments beyond the October 2015 drawdown.[72] Also on 22 October 2015, Kingstons forwarded to Dempsey Wood emailcommunications between Koi and Kingstons confirming that Koi had approvedDempsey Wood's most recent invoice for payment.[73] The same day, Koi gave formal consent to PRDL proceeding with thetransaction with Webber Capital on certain conditions (largely aimed at reservingKoi's rights under its Facility). A tripartite agreement between Koi, Webber Capitaland PRDL was also executed that day, which addressed, among other matters,arrangements between the parties prior to settlement under the agreement with WebberCapital. It also recorded an agreement that $8,000,000 would be paid out of the ProjectAccount to Koi the day following entry into the tripartite agreement (which dulyoccurred).[74] The following day, on 23 October 2015, Dempsey Wood submitted its invoicefor the period ending 31 October 2015, in an amount of approximately $998,000.[75] On 29 October 2015, Dempsey Wood's solicitor, Mr Alan Jones, sent a letterto PRDL/Mr Gapes setting out Dempsey Wood's concerns at recent events, includingthe meeting with the Chows and Mr Webber. It is helpful to set the contents of theletter out in full. It is broadly consistent with each of Mr Gapes' and Mr Dempsey'sevidence about the meeting with the Chows and Mr Webber, and provides context forlater representations made by Mr Gapes which are the basis of Dempsey Wood's FTAclaim. Mr Jones said the following in his letter:1. We act for Dempsey & Wood Civil Limited which is party to aconstruction contract with Panama Road Developments Limited(PRDL).2. Further to your recent meeting with our client (and the Chow interests),and recent telephone discussions, we confirm that:(a) You have advised that PRDL intends to sell the development;(b) PRDL's purpose in selling the development is two-fold;(i) it does not have the resources to complete the developmentand;(ii) it cannot afford to honour the existing sale and purchaseagreements which are now considered to have been soldtoo low compared to the current market of the properties;At the meeting, our client was told that the Chow interestswanted to move quickly and take over the contract withcontractors. But since that meeting more than a week ago,there has no update from PRDL;(c) Our client was told that one of PRDL's options was to go intoreceivership and thus repudiate its obligations to our client. Ourclient has serious concerns about PRDL's financial position andits ability to meeting the ongoing obligations under the contract.3. Our client requires, and will continue to require, PRDL to meet its fullpayment obligations under the construction contract. This will includean EOT claim expected to be in the vicinity of $1 million.4. Given further works are required to complete the contract, my clientrequests that you provide the following directly to me by 5pm Friday,30 October 2015;(a) Confirmation that PRDL intends to meet all its paymentobligations under the construction contract; and(b) Evidence of the funding available to PRDL to meets its paymentobligations including the EOT claim foreshadowed above. Thiswould include the monies said to be in the trust account of RussellMcVeagh.5. In the event PRDL does not and cannot meet its payment obligations,my client will look for recourse against Mr Gapes personally as directorof PRDL and the person who has represented the company.(emphasis added)[76] PRDL did not formally respond to the letter by the requested 30 Octoberdeadline.[77] At the end of October 2015, and in the context of Webber Capital's ongoingdue diligence, there was an exchange of correspondence between the solicitors foreach of PRDL and Webber Capital on PRDL's ability to lawfully terminate the pre-sales upon the Sunset Date being missed. Webber Capital's solicitor stated that "[m]yclient advises me that unless the pre-sale agreements can be successfully terminatedthere is no development margin left in this project and the land is worthless".Mr Gapes responded to the email, suggesting the parties and their respective lawyersmeet to discuss the issue.Webber Capital cancels its agreement[78] On 5 November 2015, Webber Capital gave notice that it was not satisfied withthe results of its due diligence and terminated the Webber Capital agreement.[79] Negotiations between PRDL and Webber Capital nevertheless continued for ashort time. On 8 November 2015, Mr Gapes wrote to Webber Capital setting out arange of options as he saw it. The letter included a proposal to correspond withpurchasers under the pre-sales, including informing them that:The development has taken too long and we have had too many issues likecontamination, a receivership etc and there is now no profit in thedevelopment and we cannot get new development funding although we havebeen trying hard in the last few months.[80] Unsurprisingly, the contents of this letter were put to Mr Gapes in cross-examination. He stated, however, that the contents were somewhat self-serving, as theproposed letter to the purchasers would be designed to highlight the difficulties in theDevelopment, as a means of discouraging them from taking legal action in the eventof cancellation of the pre-sales at the Sunset Date.[81] Webber Capital made a further offer to purchase the Development on8 November 2015. It said that it valued the risk around the cancellation of the pre-sales at around $5 million and proposed that that risk be "shared" 50/50 between Koiand Webber Capital. On this basis, it offered to purchase the Development for $20.75million (which also reflected Koi's payment of the October 2015 drawdown). Theproposal was unacceptable to both PRDL and Koi. Mr Gapes said he viewed it as acynical attempt by a "bottom feeder funder to chip the debt".[82] Mr Gapes said that after the deal with Webber Capital did not progress, he"began discussions with Nomura, a large Japanese lender, who I was advised onmultiple occasions was 'keen on doing a deal'". No particular details of this wereadduced in evidence, though it appears from correspondence on 3 December 2015 thatdiscussions had not progressed to any material extent.Dempsey Wood remains concerned about payment[83] In the meantime, Mr Dempsey remained concerned about PRDL's financialposition and emailed Mr Gapes about this on 11 November 2015. Again, given itsrelevance to Dempsey Wood's FTA claim, it is helpful to set out the email's contentsin full:Hi Tony it was good to talk today re subject of the Chow Bros./Webber Capitalre financing deal falling over for the Panama Road contract.This makes it even more imperative that all of our concerns outlined in ourletter sent by AJLP dated 29 October are addressed.The lack of communication recently has also not helped matters and isdecreasing our level of confidence in the ability for PRDL Ltd to continue tofund this project.In our discussion today you again re-affirmed that there was $3.9 milliondeposit in a Russell McVeigh (sic) Trust account with the specific purpose ofassuring payment for the civil works for this project.You agreed today to organise a written statement from Russell McVeigh tothis effect. Can you please forward this to us by close of business today.[84] Mr Gapes responded "Hi Conal I have asked RMcV for this – will chasetoday."[85] At the same time, Koi was also taking steps itself in relation to the Facility,though Mr Gapes was not advised by Koi at the time about what it was doing. Koihad retained Whillans Realty Group Ltd (Whillans Group) to assist it in selling its loanposition. In an email from Whillans Group to NZMS, Whillans advised that the loanoutstanding was $27.5 million, and was secured by assets estimated to be valued at$41 million, which included the amounts in the Construction and Project Accounts,and also the Stage 1 land and improvements. This email was forwarded to Reesby &Co on 11 November 2015, who in turn forwarded it to Mr Gapes the same day.Mr Gapes accepted in cross-examination that the money which had been set aside "forthe civils, was part of what was on the market to another lender".1111 For completeness, I note that no party sought to rely on the assessment of value suggested in thisemail, which if correct, meant that PRDL's assets exceeded its liabilities by some margin. No onefrom Koi or Whillens were called to give evidence, such that the email would be inadmissiblehearsay evidence in any event, to the extent it was relied on for the truth of its contents.[86] The following day, 12 November 2015, Russell McVeagh sent Mr Gapes anemail confirming the Project Account balance was $4,172,351.07. This was inresponse to an email from Mr Gapes to Russell McVeagh seeking confirmation of theamount remaining in the Project Account and stating "Conal Dempsey would likesome comfort we have the money still available to pay him". In an email which is thefocus of Dempsey Wood's FTA claim, Mr Gapes forwarded the full email chain toMr Dempsey, stating "Hi Email below from Dan Williams at RMcV. The $4.172 isfor civils and consultants etc". Mr Dempsey said that on the basis of this email,Dempsey Wood continued to work at site, observing "it was a nervous few weeks".[87] On 13 November 2015, Mr Dempsey approached Russell McVeagh directlywith some further queries about the funds in the Project Account.12 He said as follows:Hi Daniel, thanks for the confirmation of the Project Account balance. It isgreat to see there seems to be an allowance for funding of works at PanamaRoad. What DW require from yourselves is verification of what the ProjectAccount funds are for. It would be very helpful to know the answers to thefollowing questions.*Is the fund specifically for the payment of the Civil contract works?*Is the fund able to pay out upon the producing of a monthly paymentcertificate or are their other requirements needed to gain access to the fund?*Is the purpose of the fund to allow for any shortfall in the financing of theproject from Olympus Capital?Thanks and look forward to hearing from you.[88] Jumping forward in the chronology for a moment, just under two weeks later,Russell McVeagh responded on 24 November 2015 (copied to Mr Gapes) stating:Hi ConalWe respond to your queries as follows:• The funds held in the project account are to fund the project works(excluding the costs incurred by KN Construction, for which there is aseparate account). The project works are those works relating to Stage1 to be designed and constructed in accordance with the relevant designdocuments.• We are unable to pay out of the account unless PRDL's lender hasapproved the payment. PRDL's lender will only approve the payment12 Mr Gapes said he was not concerned about this, and was happy for Dempsey Wood to approachPRDL's solicitors directly.if it has received certification from a quantity surveyor acceptable toPRDL's lender.• We understand that the purpose of the funds in the project account is tofinance all costs associated with the project works (excluding the costsincurred by KN Construction).Please advise if you have any further queries.[89] Mr Dempsey circulated this response to his colleagues at Dempsey Woodstating "Finally. It looks positive".[90] Mr Dempsey said in his evidence in chief that what was communicated to himby Russell McVeagh satisfied him that "what Mr Gapes had told me was correct". Healso described his follow up queries of Russell McVeagh as a "tick the box and doublecheck exercise", given as far as he was concerned, the project still had many monthsto run, and it was "really good to see [Russell McVeagh] backing up what Mr Gapeshad said". He also said that "based on these assurances, Dempsey Wood continued towork on the Development until 3 December 2015".[91] On 19 November 2015, Dempsey Wood gave PRDL further notice of intentionto suspend works for failure to pay its most recent invoice (relating to its work inOctober 2015). The notice stated that the invoice was due for payment that day.Mr Gapes replied:This is getting silly because we get one of these every month because you keeplodging your invoice earlier than everyone else. We do one drawdown permonth and we need to get all the invoices in together to enable them to beprocessed by Kingstons and Russell McVeagh. We need to get you alignedwith KN and the others.The lead-up to receivership[92] Kingstons issued a further drawdown report on 23 November 2015. Itcontained much of the same information as earlier reports and certified for paymentcosts for the prior month totalling $1,126,904. This included Dempsey Wood's mostrecent invoice, referred to in the preceding paragraph.[93] On 25 November 2015, Koi confirmed that payments could be made out of theProject Account for the most recent round of consultants' costs. The email (copied toMr Gapes) noted that "this instruction should not be construed as waiver of Koi'srights or the borrower's defaults and Koi continues to reserve all of our rights underthe facility documents". In the event, on Koi's instructions, on 25 November 2015,approximately $1.27 million was paid out of the Construction and Project Accounts(including in payment of Dempsey Woods' invoice for October 2015 work).[94] On 26 November 2015, Dempsey Wood submitted its claim for an EOT in anamount of $200,279.40. This was later approved by Dodd Civil as engineer to thecontract, though shortly after PRDL had gone into receivership.[95] A PRDL balance sheet as at 30 November 2016 was produced in evidence. Itrecorded total assets of $28.687 million and total liabilities of $27.641 million, andthus net shareholder equity of $1.046 million. There was considerable expert evidencegiven in relation to this balance sheet, including its accuracy and whether itdemonstrated that PRDL was balance sheet solvent (or insolvent) as at the end ofNovember 2015. I return to this topic later in this judgment.Koi appoints receivers[96] On 1 December 2015, Koi gave PRDL formal notice that it intended to appointreceivers as of midday the following day, 2 December 2015. Mr Gapes said that hereceived a telephone call from Koi shortly before the written notice was issued, whenhe was in a carpark in Queenstown. He said it came as a "complete and utter shock"in the context of his ongoing discussions with Koi. The notice as originally issuedreferred to the amount outstanding under the Koi Facility as $35.279 million. Thatdid not, however, take into account the $8 million payment referred to at [73] above,and a revised notice was issued showing an updated amount outstanding of$26.752 million.1313 This error is relevant, given the expert evidence for Dempsey Wood proceeded on an assumptionthat the liability to Koi shown in the 30 November 2015 balance sheet was understated by $8million, the experts working off the amount outstanding shown in the original – but incorrect –notice to appoint receivers.[97] On 2 December 2015, a regular fortnightly project meeting was held on sitebetween various contractors, consultants and PRDL. Nothing about Koi'sappointment of receivers was raised at that meeting (which Mr Gapes did not attend;presumably his attention was focused elsewhere at the time). Mr Gapes said the factthat Koi's recent steps were not discussed at the meeting was understandable, given itwas a site focused "business as usual" type meeting. The following day, Mr Gapessent an email to Mr Dempsey informing him that PRDL had been put into receivership.Dempsey Wood ceased work on site at that point.[98] On 7 December 2015, Dodd Civil certified payment for Dempsey Wood's workup to 3 December 2015 in an amount of $503,373.85 (GST inclusive).[99] On 23 December 2015, Dodd Civil approved Dempsey Wood's EOT claim inthe amount of $200,279.40. These additional costs claimed and approved did notsolely relate to the October/November 2015 period, however, but spanned the wholeproject.[100] Dempsey Wood formally cancelled its contract with PRDL the same day.[101] A schedule of aged creditors as at 30 November 2015 was produced inevidence, which showed the following:(a) Dempsey Wood being owed $503,373.(b) The other large creditor with "current" amounts due being HarrisonGrierson, though a number of the underlying invoices related to periodsof time prior to October/December 2015 (dating back as far asMarch/April 2015).14(c) A number of (much) smaller current and 1-30 day creditors.(d) No creditors aged 31-90 days.14 These claims were disputed by PRDL, which also claimed against Harrison Grierson for what itsaid was Harrison Grierson's failings in its earlier role as engineer to the project. PRDL's receiverslater settled these claims.(e) $414,088.41 of creditors with aged balances of 90 days or greater, thelarge majority of this relating to three creditors (Auckland Council,Murray Capital and Studio of Pacific Architecture Ltd).15[102] From the above, therefore, and excluding Auckland Council and a smallnumber of disputed debts, the large majority of PRDL's aged creditors were "current".[103] On 20 December 2015, being the Sunset Date in the pre-sales, the receiverstook steps to cancel the agreements. As at 21 March 2016, the receivers confirmedthat 149 of the 151 pre-sales had been cancelled.Later events[104] Mr Gapes and Mr Dempsey kept in touch during the early part of 2016, in thecontext of Mr Gapes continuing to seek a refinance of the Koi Facility. On17 February, Mr Gapes sought information on Dempsey Wood's expected costs tocomplete the civil works, which contemplated Dempsey Wood being paid for itsoutstanding invoice if it agreed to continue with the project. Also in February 2016,Mr Gapes asked Mr Dempsey to accompany him to a meeting with a potential newfinancier (Qualitas, an Australia property financier), which Mr Dempsey agreed to do.[105] Qualitas signed an indicative term sheet on 12 March 2016. The accompanyingmandate letter stated that Qualitas was willing to seek its Investment Committee (IC)approval to "assist with the refinance of the project and subsequently to (sic) theSPV to acquire the Land from [PRDL] and undertake development works to[complete the Development]". The mandate letter stated that provision of the relatedfacilities was "subject to satisfactory due diligence, documentation as well as thesatisfaction of any conditions contained within the indicative term sheet". The15 Mr Gapes said that he believed the Auckland Council amount related to the new consents for theadditional 20 units (but had been unable to confirm this); the Murray Capital amount was in factpayable by Redwood "in the first instance" as it related to the balance of Murray Capital's fee forbrokering the Koi Facility, and that it had been agreed that it would not be paid until later in theDevelopment and thus he did not consider it payable at that time (the documentation indicates thatthis view was not shared by Murray Capital); and that Studio of Pacific Architecture was theprevious architect to the Development, and had been replaced following a dispute. Mr Gapes saidthat he was not aware of Pacific Architecture ever pursuing this amount.mandate noted that any commitment to provide the facilities was subject to the samematters, as well as IC approval.[106] The indicative term sheet related to two proposed facilities – Senior DebtFacility A and Senior Debt Facility B. The purpose of Facility A was to pay out theKoi Facility,16 discharge the receiver and "pay other costs agreed to by Qualitas (in itsabsolute discretion)". The Facility was to accrue interest at 25 per cent, capitalisedmonthly, and was to be repaid out of the sales proceeds received from the sale of theDevelopment to the Qualitas SPV. While the term sheet did not expressly addresspayment of contractors' past invoices, one of the conditions precedent was a signedcontract "with Dempsey Wood or another civil contractor acceptable to Qualitas and[PRDL], to complete the civil works.". Facility B was to enable the Qualitas SPVto purchase the Development and to fund the development costs of the project. Itcontained similar interest provisions to Facility A. The interest provisions were put toMr Gapes in cross-examination, on the basis that they were extremely onerous and tosuggest that viable refinance offers were few and far between. Mr Gapes said that thearrangement was more akin to a profit sharing arrangement, hence the higher interestrates.[107] In the event, however, on 22 March 2016, Koi confirmed that it had enteredinto an unconditional sale of the Development to a third party (the details of whichwere confidential at that stage). It later became known that the third party wasHappyland (by then known as the Wilshire Group), and the purchase price was$25 million.17[108] Mr Gapes emphasised that when he notified Qualitas on 22 March 2015 of thesale, his contact responded "can we discuss – we can get an approval by COB todaywhich sees Koi get fully repaid". No further evidence was given about this, however.Mr Gapes said that at the time, he had thought he had more time to complete theQualitas transaction, given the receivers were yet to openly market the Development.16 Stated in the term sheet to be "indicatively $25.5 million", with Facility A stated to be for anamount "up to $26 million".17 Mr Gapes' view at the time was that the sale was at an undervalue, though neither he nor PRDL'sliquidators took any formal steps in this regard.[109] On 6 April 2016, PRDL was put into voluntary liquidation upon the resolutionof its shareholders. Mr Gapes explained that he did this so the liquidators couldscrutinise the receivers' sale of the Development. Iain Shephard and Heather Gairwere appointed as liquidators. Mr Shephard gave evidence for Dempsey Wood at thehearing. I discuss Mr Shephard's evidence later in this judgment.[110] The receivers' final report (dated 8 November 2017) recorded that $2.575million remained owing to Koi, and that unsecured creditors in the receivershiptotalled $1.41 million. Proofs of debt totalling only $433,000 were made in PRDL'sliquidation. Mr Dempsey explained that Dempsey Wood did not submit a proof ofdebt given it was clear there were no funds available for its claims to be met.[111] I turn now to the experts' evidence.The experts' evidence[112] Expert evidence was given by three insolvency practitioners: Mr Shephard andMr Hoole for Dempsey Wood, and Mr Vance for Mr Gapes.Mr Shephard's evidence[113] Mr Shephard's initial opinion was that PRDL was both balance sheet andcashflow insolvent as of 16 October 2015 (thus immediately after the expiry of theKoi Facility). However, as his evidence progressed at the hearing, and while heremained firmly of the view that PRDL was cashflow insolvent as of 16 October 2015,he was a little less "firm" that the company was also balance sheet insolvent as of thatdate. In this context, and through cross-examination, he accepted that some of thematters upon which he had based his assessment of balance sheet insolvency requiredfurther analysis or clarification.[114] On balance sheet insolvency, Mr Shephard said that PRDL's financial positionhad been precarious from around July 2015. This was because there was increasingevidence (and by August 2015, confirmation) that there had been such a significantcost overrun that the Development could not be completed within its original budget.Mr Shephard then focussed on the PRDL balance sheet of 30 November 2015 which,as noted at [95] above, recorded total assets of $28.687 million and total liabilities of$27.641 million, resulting in equity or shareholder funds of $1.046 million.[115] Mr Shephard's initial view was that the amount due to Koi as shown in thatbalance sheet was understated by some $8 million (Mr Shephard working off the initialletter appointing receivers, which incorrectly set out an amount outstanding ofapproximately $35 million). This would have of course immediately led to negativeshareholder funds of some $7 million. Mr Shephard accepted in cross-examinationhowever, that the amount due to Koi was correctly stated in the 30 November 2015balance sheet, given the $8 million repayment to Koi by that time.[116] Nevertheless, in the context of the $1 million shareholder funds, Mr Shephardstated that the figure included in the balance sheet for "Work in Progress" of $23.923million, being PRD's only real asset, was "effectively worthless" given the significantcost overruns to that point. Mr Shephard accordingly suggested that the amount forWork in Progress was overstated by between $5 million and $10 million, thoughaccepted he had not conducted any detailed assessment to arrive at this range, andrather it was based on his experience as an insolvency practitioner.[117] In terms of factors leading Mr Shephard to that assessment, he confirmed thathe took into account an inevitable discount to the value of the Development being soldin an insolvency scenario. He also explained that part of his assessment was based onthe then stated development margin of $6 million being completely overwhelmed byadditional costs of the Development to that date of some $14 million. Mr Shephardaccepted, however, that given the $14 million costs including the cost to build theadditional 20 houses, the analysis would need to take into account the revenue to beearned from those 20 additional houses (estimated to be $11 million). On this basis,Mr Shephard accepted the analysis would return to a slightly positive margin.Mr Shephard emphasised, however, that the overall profitability of the Developmentwas highly uncertain, and depended significantly on the ability to cancel the pre-saleswithout resulting loss or claims.[118] Mr Shephard agreed that his assessment of balance sheet solvency turnedsignificantly on the valuation of a development asset. Taking into account theproposed sale of the Development to Webber Capital for $22.5 million, Mr Shephardnoted that that could act as a proxy for the Work in Progress in the balance sheet. Hewas also concerned, however, that the 30 November 2015 balance sheet did notsufficiently record contingent liabilities, which he estimated to be between $2 millionto $4 million. Mr Shephard again noted, however, that he had not conducted anyparticular calculations in this regard, and this was also an estimate based on his ownexperience.[119] Ultimately, Mr Shephard's evidence-in-chief was that it was "impossible tosay for certain what PRDL's financial position was at 15 October 2015, due toconfusion in the financial records at this time". Mr Shephard's overall conclusion wasthat at the very least, PRDL was "nearing insolvency" by 15 October 2015, and "likelybalance sheet insolvent by $1 million to $2 million".[120] Mr Shephard considered the expiry of the Koi Facility to be a significanttrigger event for PRDL, and while he did not suggest the company ought to have beenput into immediate liquidation, his evidence was that this was the time when Mr Gapesought to have been taking formal insolvency advice and actively considering steps toprotect unsecured creditors. Mr Shephard stated that once the Webber Capital offerhad been withdrawn on 5 November 2015, this was the point in time at which he wouldhave expected a director of a troubled company to begin formal insolvency processes.[121] As to what insight could be drawn from Koi's willingness to continue tofinance payment of the unsecured creditors after its Facility had expired, Mr Shephardstated that Koi would have only been interested in protecting its own secured debt, andthus was willing to give Mr Gapes some time to pursue alternative financiers so longas it was comfortable PRDL's assets were sufficient to meet that secured debt.Mr Shephard noted that the "tipping point" for Koi had plainly come by the time whenits secured debt had reached $26.752 million, and reflecting that it would recover anyremaining amounts in the Construction and Project Accounts.[122] Mr Shephard was adamant that Mr Gapes (and Mr Vance) were"extraordinarily optimistic" about the prospects of refinancing. Mr Shephard said thiswas in the context of refinancing having been explored for some months prior to theexpiry of the Koi Facility. He said that the Webber Capital transaction did not alterhis view, given it was a conditional arrangement, and that the "number of conditionalfinance deals I have seen that don't come to fruition doesn't bear counting".Mr Shephard accepted that it was appropriate for Mr Gapes to continue to explorerefinancing options after the Koi Facility had expired, but that was in the context of acompany that "is or is about to become insolvent", and thus Mr Gapes ought to havehad an eye to the "counter factual", and taken appropriate steps to ensure unsecuredcreditors were protected.Mr Hoole's evidence[123] Mr Hoole's initial position (in his primary brief of evidence) was that PRDLwas balance sheet insolvent by 7 October 2015 and cashflow insolvent by 16 October2015. The former was based on Kingstons' advice on 6 October 2015 that theadditional costs of the Development had grown by $14 million, which effectivelywiped out the projected margin. However, and like Mr Shephard, Mr Hoole acceptedthat this did not take into account the revenue to be earned from the additional20 houses, and agreed that this aspect of his brief would therefore require "furtheranalysis."[124] Mr Hoole had also opined that the Koi debt was understated in the 30November 2015 balance sheet by $8 million, but for the same reasons discussed inrelation to Mr Shephard, accepted that the figure shown in the balance sheet was likelyto be correct. But his evidence was that PRDL was nevertheless balance sheetinsolvent by around $1 million to $2 million in October 2015, given his assessmentthat the amount included in the balance sheet for Work in Progress was overstated (likeMr Shephard, by around $5 million to $10 million), and that the balance sheet failedto include a number of contingent liabilities (which, again, like Mr Shephard, he hadassessed at $2 million to $4 million).[125] Much of the cross-examination of Mr Hoole focussed on his evidence that theWork in Progress was overstated in the balance sheet. Mr Hoole disagreed that thesale of the Superlot land for $28 million suggested that the Development land alonewas worth in that region, given it was 50 percent smaller and only part developed,which would have made it difficult to market. Mr Hoole originally accepted in cross-examination that the subsequent price paid by Happyland of $25 million couldrepresent an approximate value of the Development in October/November 2015, giventhere had not been significant work carried out after October 2015. However, in re-examination, Mr Hoole adjusted his position, saying that "dropping" the $25 millioninto the 30 November 2015 balance sheet was too simplistic, and a more realisticapproximation was the revised offer made by Webber Capital of $20.750 million inmid-November 2015.[126] In relation to contingent liabilities (which, as noted, Mr Hoole also estimatedto be $2 million to $4 million), his view was that the balance sheet liabilities did notinclude amounts due to KN Construction, Murray Capital, Harrison Grierson andCrown. However, he accepted that upon reviewing the aged creditors schedule as of30 November 2015, which totalled $1.420 million,18 at least Harrison Grierson andMurray Capital were included. He also accepted that the claim by KN Constructionhad been dismissed by the engineer earlier in November 2015.[127] Mr Hoole said that Mr Gapes should have stood down the contractors on thesite as of 15 October 2015 given:(a) PRDL could not pay existing debts;(b) it was in default of the Koi Facility and Koi could therefore appointreceivers at any time;(c) a PLA notice had been issued;(d) the Development in its existing form was on any view unprofitable;(e) Mr Hoole's view that receivership and liquidation were "inevitable";and18 A slightly different number to that shown in the balance sheet for 30 November 2015 of $1.372million.(f) default interest on the Koi Facility would continue to accrue (estimatedto be around $500,000 per month, although accepted to be a little lessthan that per month once the $8 million repayment to Koi was takeninto account).[128] Mr Hoole was also critical of Mr Gapes for not making full disclosure to hisunsecured creditors, particularly after the Koi Facility had gone into default.[129] In terms of the prospects of refinancing, Mr Hoole's view was that negotiatinga new transaction could take weeks if not months. Mr Hoole accepted in cross-examination, however, that if the effect of the arrangements between Koi, WebberCapital and PRDL accommodated payment of unsecured creditors, then that mighthave altered his analysis of the appropriateness of continuing to negotiate that dealafter the Koi Facility had expired. Mr Hoole's opinion was, however, that Koi musthave decided by at least 1 December 2015 that a refinance was unlikely, given itappointed receivers as at that date. He agreed, however, that Koi would be relativelyrelaxed so as long as it was of the view that PRDL's assets were sufficient to meet itssecured debt, but that had obviously not been its view by 1 December 2015.Mr Vance's evidence[130] Mr Vance's opinion was that, principally due to the continued availability ofthe Koi Facility after 15 October 2015, PRDL was not cashflow insolvent as of thatdate, and that:[w]hile negotiations continued with likely financiers and the prospect of thesunset clauses in the pre-sales agreements becoming operative, it is not clearto me that [PRDL] was balance sheet insolvent as of 15 October 2015.[131] Mr Vance was accordingly of the view that it was reasonable for Mr Gapes tocontinue to trade after 15 October 2015 "while likely refinancing was sought"(emphasis added).[132] On balance sheet insolvency, Mr Vance explained that balance sheetinsolvency is more complex than cashflow insolvency, and involves exercises ofjudgment as to the present day value of both known assets and liabilities, as well asprospective and contingent assets and liabilities.[133] As to the appropriate value for Work in Progress, Mr Vance was of the viewthat if it was known that the Development was going to be sold by PRDL, it wasappropriate to consider the value on the basis of its net realisable value.19[134] Mr Vance took issue with Mr Shephard and Mr Hoole's view that the value forthe Work in Progress was significantly overstated in the 30 November 2015 balancesheet, and that given the approaching Sunset Dates (and the resulting ability to re-sellthe lots at a much higher market value), it was quite possible there was additionalvalue in the Work in Progress. Mr Vance accepted, however, that his assessmentproceeded on the basis PRDL could legally cancel the pre-sales. That the Work inProgress was not substantially overstated in the November 2015 balance sheet wasnevertheless supported, in Mr Vance's view, by the sale price of $25 million toHappyland in March 2016 (when not much, if any, further work had been carried outon the Development after December 2015), and that Qualitas was willing to offer upto $26 million in early 2016 to take out the Koi debt. Mr Vance also said that givenKoi had approved two significant payments at the end of October and November 2015respectively, it must have considered the value of PRDL's assets "comfortablyexceeded" its secured debt, otherwise those decisions would have been commerciallyirrational.[135] Mr Vance also disagreed with the suggestion of building a discount into anyconsideration of asset values, anticipating an insolvency scenario.[136] Mr Vance was adamant that it was not appropriate to simply substitute into thebalance sheet the valuation contained in the Jones Lang LaSalle valuation of $13.3million (based on the existing pre-sale contracts being in place). This was because thevaluation included a reduction of $11.9 million for "profit and risk", which, likeMr Gapes, Mr Vance considered inappropriate given the property was already owned19 This is broadly consistent with Mr Shephard and Mr Hoole's view that the Work in Progess shouldbe valued at the lower of cost and net realisable value.by PRDL. Mr Vance nevertheless accepted that the sale price of $22.5 million toWebber Capital could be a good indicator of what at least PRDL thought theDevelopment was worth at that time.[137] Mr Vance also accepted that he had approached his evidence on the basis of astraight refinance of the Koi debt, rather than the Development being sold by PRDLto a third party and the sales proceeds used to repay Koi. Nevertheless, he was notparticularly concerned about the concept of a "hive down", with the key issue in hisview being whether appropriate value was received on the sale and the position ofunsecured creditors, irrespective of how any refinancing was to be structured.[138] In terms of contingent liabilities, Mr Vance's view was that for balance sheetinsolvency purposes, if a debt is "fairly disputed", it ought not to be included as acurrent liability at that stage. He accepted that having aged creditors of 90 days plus,which made up about a quarter to a third of PRDL's overall aged creditors in the latterhalf of 2015, was "potentially" an indicator of insolvency, but it would need to beascertained if arrangements had been made with any particular creditors (such asdeferred payments or the like). Mr Vance accepted that Dempsey Wood's EOT claim,submitted on 26 November 2015, should have been treated as a contingent liability atthat date.[139] Turning to cashflow insolvency, Mr Vance noted while the inability to rely onthe Koi Facility would, if not replaced by a similar facility, result in cashflowinsolvency in the future if PRDL continued to incur short term liabilities at the samerate, this did not mean that PRDL was necessarily cashflow insolvent in the months ofOctober and November 2015. Indeed, Mr Vance noted that PRDL was able to meetits ordinary trading debts as they fell due, up until it was put into receivership.Mr Vance noted that Dempsey Wood's invoice which was not paid in the PRDLreceivership/liquidation was not in fact due until mid-December 2015.[140] Mr Vance rejected the suggestion that PRDL was cashflow insolvent simply onthe basis that the Koi Facility had expired and it was unable to pay that debt. He notedthat for some time after the Facility had expired, and despite having served a PLAnotice, Koi was clearly not demanding immediate repayment. Mr Vance observed thata financier issuing a PLA notice in such circumstances was not unusual, and financierssuch as Koi would want to take all steps legally necessary to put them in a position tomake immediate demand for repayment, if and when required.[141] In terms of the reasonableness or otherwise to continue to trade after15 October 2015, Mr Vance said it would be quite normal for a lender in Koi's positionto give a borrower such as PRDL some time to secure alternative financing, given itwould ultimately be preferable for refinancing to occur while the project was ongoing,rather than shutting down and selling the assets, which was more likely to depress theirvalue. Mr Vance also highlighted that Koi was intimately involved in assessing theongoing value and profitability of the Development, as well as the ongoingnegotiations with Webber Capital. Mr Vance accordingly stated that the expiry of theFacility "is definitely not a moment in time", but rather is the time to "work moreclosely with the financier." Mr Vance said that only once it becomes clear that theviable alternatives have "moved on to an unlikely position" is it time to act and ceaseto trade.Overall assessment of the expert evidence[142] I accept each expert's expertise in relation to the matters in issue in this case,and in particular, PRDL's balance sheet solvency at the relevant points in time. Eachof the experts have long and deep experience in working with and for troubledfinancial companies (including appointments as liquidator), and accordingly steps thatsuch companies can or ought to take when they enter troubled financial waters.[143] As the evidence progressed, however, it became apparent that each of theexperts had conducted a relatively high level assessment of PRDL's financial positionand solvency, though it is fair to say this was particularly so with Mr Shephard andMr Hoole (and no doubt reflected the instructions they were given). Nevertheless, anumber of important aspects of their evidence were based on assumptions that wereincorrect, or broad assessments without underlying and careful assessment.Hampering all experts, it was also clear that the evidence adduced in the presentproceeding was insufficient for there to be any certainty as to PRDL's financialposition at specific points in time, including 15 October 2015.[144] Having carefully considered the experts' evidence, I record that in very broadterms at least, I prefer Mr Vance's evidence. It struck me that at least on some of thematters in issue, he had taken a more nuanced and detailed approach. An additionalfactor in my assessment was also my real concern that significant and important partsof Mr Shephard and Mr Hoole's primary briefs of evidence were written in preciselythe same terms. This included the same phraseology and even in some parts, the sametypographical errors. I should emphasise that I do not suggest that Mr Shephard andMr Hoole collaborated or otherwise communicated in relation to their evidence. Bothwere clear when questioned that they had not spoken to each other about theirevidence. I fully accept their evidence in that regard. But I am troubled that importantaspects of their briefs had obviously been written by Dempsey Wood's legal advisers,rather than emanating from the witness himself. Accordingly, while each ofMr Shephard and Mr Hoole no doubt accepted and agreed with the formulation of theevidence that had been put before them, the process by which this evidence evidentlycame to be in written form undermines its reliability.[145] These matters emphasise the very real importance of the High Court Rules2016 concerning briefs of evidence, and in particular, r 9.7, which requires that everybrief of evidence "must be in the words of the witness and not in the words of thelawyer involved in drafting the brief".20 Each of Mr Shephard and Mr Hoole notedthat following discussions with Dempsey Wood's legal advisers, described byMr Hoole as including "robust" discussions, the briefs had then been put in " a courtformat" or "legal form." There is no "court format" or "legal form" for briefs ofevidence, other than the requirements of the High Court Rules and in particular, r 9.7.A brief of evidence which is plainly written in the witness's own words is ultimatelyfar more persuasive to the Court than a brief that has obviously been writtensubstantially, if not wholly, by a lawyer. I accept that for some witnesses, it will benecessary for a lawyer to "tidy up" and present the witness's evidence in a more clearand logical order and format. This will be particularly so with some civilian witnesses.But this will be less so with expert witnesses. I also accept that in the case of expertwitnesses, lawyers may need to work with the expert to ensure that their opinions areexpressed in clear and understandable terms, given many experts will not be familiar20 High Court Rules 2016, r 9.7(4)(b).with writing expert opinion pieces for digestion by a court or other fact finder, ratherthan their peers or clients. But it is unattractive and ultimately unpersuasive for anexpert's brief to have clear indications of having been "wordsmithed" by a lawyer.[146] I turn now to address each of Dempsey Wood's claims.Section 135 of the ActLegal principles[147] The legal principles concerning s135 of the Act have recently been consideredin some detail by the Supreme Court in Madsen-Ries v Cooper (Debut Homes)21 andMainzeal.22 Given some of the issues arising in Mainzeal are not dissimilar to anumber of those arising in this case, I have primarily drawn from the Court of Appeal'sjudgment in that case (which of course also reflects the principles articulated by theSupreme Court in Debut Homes).[148] In considering s 135 of the Act, the Court of Appeal highlighted the significantinformation asymmetries between a company and its creditors. The Court noted thatonce shareholder funds are depleted, the downside business risk is born by creditorsand not by shareholders, but the converse is not true: the benefits will be enjoyedsolely by shareholders.23 The Court described this as a "perverse incentive" in relationto risk taking, and observed that the "worse the position of the company, the greaterthe incentive for directors and shareholders to 'gamble on the doorstep ofinsolvency'".24 The Court considered a second perverse incentive to trade on to bewhere directors are personally liable for some of the company's obligations, forexample where they have guaranteed advances to the company.2521 Madsen-Ries v Cooper [2020] NZSC 100, (2020) 29 NZTC 24-088.22 The Court of Appeal's judgment in Mainzeal was in fact delivered after the conclusion of thehearing in this matter. I accordingly sought further submissions from the parties on the applicationof the principles discussed in Mainzeal to the facts in this case.23 At [231].24 At [231], citing John C Coffee, Court Has a New Idea on Directors' Duty 1992 NAT'S LJ 18 (2March 1992).25 At [232].[149] The Court of Appeal identified two resulting forms of harm to creditors:26(a) First, harm to new creditors. Where a company trades on butshareholder funds are exhausted, the company is trading on capitalprovided by the company's existing creditors. If the companysubsequently makes losses, those losses will be borne by the existingcreditors who would otherwise have received a higher dividend in thecompany's liquidation, had it stopped trading earlier.(b) Second, harm to new creditors. Such creditors would not have beenexposed to the company if the company had gone into liquidation orotherwise ceased trading at an earlier date, and thus would not havebeen exposed to credit risk. In this context, the Court noted thatexisting creditors may also extend further credit, increasing theirexposure to the company. This is particularly relevant in this casegiven, other than what appear to be some longer term disputed debts(on which there was limited evidence), upon each monthly drawdownapproval by Koi, the unsecured creditor base was effectively "re-set",with contractors being paid in full and then advancing further creditover the following month.[150] In relation to this second type of risk, and of some relevance to this case, theCourt of Appeal stated:[236] The concern in relation to the second form of harm to creditors isthat the directors have permitted the company to obtain credit from newcreditors in circumstances where dealing with the (insolvent) companyinvolved a significant risk for those creditors. If the company is alreadyinsolvent, and the directors know this but the creditors do not, extending creditto the company falls outside the normal range of risks that creditors acceptwhen they deal with limited liability companies. In effect, the directorsmislead the new creditors by failing to disclose to them that dealing with thecompany involves a substantial – and abnormal –level of risk.[237] Speaking generally, there is no policy reason for concern about theposition of a creditor who has adequate information about the company'sfinancial position and the risks they are taking on by extending credit to thecompany. They can bargain for terms that reflect this risk. A policy concernarises in relation to new creditors if, and only if, the risk that those creditors26 At [232].face in dealing with the company is outside the normal and acceptable range,and the relevant creditors are not aware of this.[238] The way in which the law has responded to the perverse incentives fordirectors and shareholders to trade on while a company is insolvent or nearinsolvent, and to the policy concerns identified above in relation to the risk tocreditors in that scenario, has evolved over time. Sections 135 and 136 of theAct are the latest iteration of those developments.(citations omitted)[151] Continuing this theme, the Court later observed that:27the immediate purpose of s 135 is to deter directors from responding to theperverse incentives identified above and to protect creditors from the risksdescribed above . It draws the boundary between legitimate risk taking andabuse of management powers at the expense of creditors. That line is drawnat the point where the way in which the company's business is being carriedon is more likely than not to create a substantial risk of serious loss tocreditors.[152] In response to a submission made on behalf of the Mainzeal directors that anassessment of whether a company is balance sheet solvent, and whether it is likely tobe able to meet its debts as they fall due, is itself a matter of business judgement, theCourt stated:28That submission is difficult to reconcile with the objective nature of the s 135test. Adopting that approach would create a risk that directors would beexcused under s 135 because they had failed to adequately inform themselvesabout the state of the company's affairs and likely future trading results. Weconsider that s 135 sets an objective boundary, beyond which the scope fordirectors to take business risks is significantly curtailed. Whether thatboundary has been crossed should be addressed by reference to theinformation that was available or should have been available to the director,acting reasonably. A failure to make enquiries that a reasonable director wouldhave made, or seek advice that a reasonable director would have sought, willnot protect a director from liability for breach of s 135.[153] Turning to the constituent parts of s 135, the Court stated that:29(a) the loss to which creditors are exposed must be a serious one, and therisk of "minor losses" is not sufficient;27 At [261].28 At [262].29 At [259].(b) the risk must be substantial, or in other words, there must be a "large"or "significant" risk of serious loss to creditors; and(c) the way in which the business of the company is being carried on mustbe "likely" to create that large risk of serious loss, likely meaning "morelikely than not", rather than some lesser degree of probability.[154] The Court accordingly endorsed the requirement for a "sober assessment of thecompany's likely future income and prospects when a company enters troubledfinancial waters".30 While the various elements of s 135, as explained by the Court ofAppeal in Mainzeal, mean that the test is a reasonably high one, the Court endorsedO'Regan J's observations in Fatupaito v Bates, in which his Honour described s 135as imposing a "stringent duty on directors to avoid substantial risks of serious loss tocreditors and does not appear to allow for such risks to be incurred, even incircumstances where the potential for greater reward exists".31[155] The Court of Appeal nevertheless endorsed the concept that once a companyhas entered such troubled waters, it need not "leap" straight to liquidation or someother arrangement by which it ceases trading. The Court accepted that the decision onwhether to trade on may be a difficult one, and a decision to cease trading will oftenhave a serious impact on creditors, employees and other stakeholders.32 The Courtobserved, however, that it is not acceptable for directors to continue to trade with thecreditors' money "unless they have put in place carefully thought through strategies,with a good prospect of success, to restore the company's solvency".33 In a similarvein, the Court observed that it is reasonable for directors to take some time to exploreall "reasonable alternative courses of action" and endeavour to avoid an insolventliquidation.3430 At [263] with reference to Mason v Lewis [2006] 3 NZLR 225 (CA) at [51].31 At [265] with reference to Fatupaito v Bates [2001] 3 NZLR 386 (HC) at [67].32 At [266]-[267] citing with approval William Young J's observations in Re South Pacific ShippingLtd (in liq) (2004) 9 NZCLC 263,570 (HC) at [125].33 At [268] with reference to Re South Pacific Shipping Ltd (in liq) (2004) 9 NZCLC 263,570 (HC)at [151] and [152].34 At [452].[156] The Court accordingly summarised the position as follows:[269] Drawing these threads together, it seems to us that where a companyis in a precarious financial position:(a) The directors must squarely face up to that financial situation andassess the risk of a serious loss to creditors.(b) If continuing to trade in a "business as usual" manner is likely tocreate a significant risk of serious loss to creditors, trading on in thatmanner is not permitted.(c) A decision to trade on should be made only after undertaking a soberassessment of the likely consequences of doing so. Unfoundedoptimism is not enough.(d) A decision to trade on, rather than take immediate steps to ceasetrading, is likely to breach s 135 unless the manner in which thedirectors choose to trade on has realistic prospects of enabling thecompany both to serve pre-existing debt and to meet the newcommitments which such trading will inevitably attract. It is notenough that there is a realistic prospect that existing creditors will bepaid by substituting new creditors, who in turn face a substantial riskof serious loss. Section 135 does not condone a policy of robbingPeter to pay Paul, on condition that Peter's losses are exceeded byPaul's gains.Analysis[157] Balance sheet solvency is particularly relevant to s 135, as is clear fromWilliam Young J's decision in Re South Pacific Shipping Limited (in liq) and the Courtof Appeal's decision in Mainzeal. If a director permits a company to continue to tradewhen it is plainly balance sheet insolvent, then (putting aside prospects of interveningrecovery), there is clearly a substantial risk of serious loss to creditors, given upon thecompany's failure, its assets will be insufficient to meet its liabilities. Indeed, this riskis not simply "likely" for the purposes of s 135 but (as in Debut Homes) is certain.Conversely, no matter how risky a business venture is, if there are sufficient companyassets to meet all liabilities in the event of failure, there is unlikely to be a substantialrisk of serious harm.[158] As the leading authorities make clear, substantial risk of serious loss can alsoarise in "near insolvency" scenarios, namely a company in troubled financial watersheading towards impending insolvency. But such a risk must still be "likely" forliability to arise; in other words, it being more likely than not that insolvency willeventuate. In both scenarios, where there are realistic prospects of either returning tosolvency or avoiding impending insolvency, a director ought not to be liable forcontinue to trade while those prospects remain. And of course, hindsight is to beavoided in all cases.[159] As the evidence and submissions in the present case unfolded, and as notedearlier, it became clear that Dempsey Wood's case for insolvency was focused on theposition as of 15 October 2015, when the Koi Facility expired.[160] Mr Gapes' position is that the evidence did not establish that PRDL wasbalance sheet insolvent (or even near insolvent) as at 15 October 2015. I disagree.While the accounting records and evidence adduced at trial do not permit certaintyaround the company's financial position, I am satisfied on the balance of probabilitiesthat by 15 October 2015, PRDL was at least near insolvent. I say this for the followingreasons.[161] First, PRDL's only real asset was the Development. The net realisable valueof that asset is accordingly key to whether PRDL was balance sheet solvent at anypoint in time. Given this, and that all scenarios being explored at the time involvedPRDL selling the Development to a third-party funder, it is unfortunate that valuationevidence was not called. I must nevertheless proceed on the basis of the evidence thatwas adduced.[162] As at 15 October 2015, PRDL owed $35.279 million to Koi and approximately$1.55 million to unsecured creditors.35 It had $12.854 million in the Project Account,with an additional $1.5 million in the Construction Account. It also had cash on handof around $391,000. On the basis the Development was worth at least $22.1 millionat that time, Dempsey Wood accepted in its closing submissions that PRDL wouldlikely be balance sheet solvent. Given it is not in dispute that the Development in its(then) current state was not financially viable, key to its value was the ability to accessthe significantly greater revenues from re-selling the lots at higher market prices, andthus PRDL being able to cancel the pre-sales without significant loss or litigation.35 Total aged creditors as at 31 September 2015 of $1.431 million and total aged creditors as of 31October 2015 of $1.638 million.[163] The only valuation of the Development at or around October 2015 was theJones Lang LaSalle valuation (which valued the Development as at early September2015). But as noted, no one from Jones Lang LaSalle was called to give evidence. Ido not consider it safe to effectively translate that valuation into the value of theDevelopment in mid-October 2015 for balance sheet solvency purposes. Mr Vancewas adamant that it would be wrong to do so. And neither Mr Shephard nor Mr Hoolerelied directly on the Jones Lang LaSalle valuation. Further, the valuation figures aresome way from other values suggested in the evidence: the $22.5 million offered byWebber Capital on 15 October 2015 (albeit on a conditional basis); the $20.750 millionoffered by Webber Capital on 8 November 2015; the value suggested by Qualitas'swillingness to lend up to $26 million in February 2016; and the eventual sale toHappyland for $25 million. Nevertheless, having commissioned that valuation, butdisagreeing with it, there is no evidence Mr Gapes engaged with Jones Lang LaSalleon their valuation, or sought further expert valuation advice to "shore up" the likely(objective) value of PRDL's only real asset.[164] The Webber Capital purchase price of $22.5 million infers that Webber Capitalconsidered the Development to be worth at least that amount, prior to conducting theirdue diligence. That value was, however, in the context of a conditional sale which didnot proceed. A key sticking point for Webber Capital, at least at that value point, wasthe ability to cleanly cancel the pre-sales without the risk of significant loss orlitigation, as the correspondence from their solicitors at the time suggested. WhileMr Gapes himself may have been confident of the position from both a legal andcommercial perspective, Mr Gapes also confirmed that other potential funders weremore cautious about the ability to cancel the pre-sales, and that the fact the pre-saleswere not cancelled was "what was holding people back". The evidence thereforesuggests that others did not subscribe to his optimism.[165] I do not ignore the evidence of the potential Qualitas transaction, or the saleprice of $25 million paid by Happyland in March 2016. But by that time, the pre-saleshad been cancelled (by the receivers), and the intervening receivership of PRDL madeclaims by disgruntled purchasers less likely. Effectively, and as Mr Gapes explained,cancelling the pre-sales was like "flicking the switch" from a funding perspective.This further suggests that absent the "switch being flicked", the Development's valuewas less than that paid by Happyland. Certainly no-one was willing to pay more than$20.750 million prior to the pre-sales being cancelled.[166] Accordingly, while not as stark as the position in Mainzeal (where the Courtof Appeal effectively ascribed no value to significant inter-party loan balances sittingon Mainzeal's balance sheet),36 there was, objectively, significant uncertainty inOctober and November 2015 about the realisable value of the Development – at leastto a level that would enable all creditors' claims to be met, not only Koi's secured debt.As noted, the only transaction at that time priced the Development, with the attendantrisk around the pre-sales, at $20.750 million. While that may well have reflected alower tier lender "chipping the debt", Webber Capital was only in a position to do sobecause it was the only potential purchaser/funder at that time.[167] I also acknowledge Mr Vance's evidence that there may have been additionalvalue in the Work in Progress than as ascribed in the 30 November 2015 balance sheet.But his analysis was predicated on PRDL being legally entitled to unilaterally cancelthe pre-sales. Further, I also take into account his (somewhat carefully worded)evidence that it was "not clear to [him] that [PRDL] was balance sheet insolvent at15 October 2015." Notably, on the basis of the evidence reviewed by him, he was notable to state that in his expert opinion PRDL was balance sheet solvent at the time.[168] For completeness, I cannot accept Mr Shephard and Mr Hoole's evidence thatcontingent liabilities were understated (in the 30 November 2015 balance sheet – andby extension, by a similar amount at or around mid-October 2015) by some $2 millionto $4 million. Those are very large numbers (with a large range between them), andfurther detail and analysis would have been required to ascribe any real weight to thatevidence. In addition, and as became clear through Mr Hoole's evidence, many of thesuggested "missing" contingent liabilities had in fact already been included in the agedcreditors schedules (and thus incorporated into the 30 November 2015 balance sheet).While I accept that Crown had made a substantial claim for $10 million and there isno evidence that Mr Gapes took formal advice at the time of how that claim ought tobe treated from a balance sheet perspective, that it was later settled (personally by36 At [444].Mr Gapes) for $40,000 indicates that if an amount should have been included for it, itwould have been unlikely to have materially altered the position. Dempsey Wood andits experts also referred to potential claims or costs arising from contaminated fill fromthe Development being put on neighbouring land. But the issue of contamination wasonly confirmed following the receivership, and there was no admissible evidence asto the likely costs associated with removal of the fill in any event. Accordingly, it isimpossible on the evidence to say what impact, if any, that matter would have had onPRDL's balance sheet solvency.[169] Despite finding that PRDL was at least near insolvent as of 15 October 2015,the question remains whether it was permissible for Mr Gapes to allow PRDL tocontinue to trade beyond that point. I consider it was.[170] First, there was in a practical sense no substantial risk of serious loss tounsecured creditors so long as Koi was willing to continue to fund monthlydrawdowns. And it can be inferred that Koi would be willing to continue to fundmonthly drawdowns so long as it was comfortable that its own secured debt could bemet from PRDL's assets.[171] After 15 October 2015, Mr Gapes could not of course proceed on the basis thatKoi would continue to fund PRDL's continued trading. The Facility was in defaultand Koi had issued a PLA notice. Nevertheless, I accept Mr Vance's evidence that theexpiry of the Koi Facility itself was not a "moment in time," in the sense of requiringPRDL to immediately cease trading or Mr Gapes to put in place formal insolvencymechanisms. At least while the Webber Capital deal was a realistic possibility, Iconsider it was permissible for PRDL to continue to trade. Mr Vance was firmly ofthis view, and in the event, Mr Hoole also accepted that the presence of that transactionmeant refinance was a possibility.[172] The Webber Capital transaction was legally documented and executed, andmade provision for the purchase price to increase by amounts paid to unsecuredcreditors prior to settlement. PRDL also had some (albeit limited) cash reservesavailable to it, over and above the amounts in the Construction and Project Accounts.The fact Koi approved a further drawdown in late October 2015 suggests that it alsoconsidered the prospects of refinance at that time to be realistic, and in an amountwhich would enable its secured debt to be met (when taken together with the amountsremaining in the Project and Construction Accounts). Conversely, ceasing to trade ator around that time could have resulted in more serious losses to creditors; forexample, it may have hastened Koi taking enforcement steps.37[173] I am of the view, however, that the position changed when it became clear theWebber Capital transaction was "off the table", which was the case by mid-November2015, after Webber Capital made its offer of $20.750 million which was not acceptableto either PRDL or Koi. PRDL was at that time in a very vulnerable position:(a) the Koi Facility was in default, with substantial default interestcontinuing to accrue, and a PLA notice had been issued;(b) the Development in its current form was clearly not viable, anddepended entirely on validly cancelling at least some of the pre-salesand then re-selling the lots at higher market prices;(c) to enable that to proceed in turn depended on quickly refinancing theDevelopment, and the only realistic refinancing transaction in play hadjust fallen over; there was no evidence of any other firm prospects atthat time;(d) if Koi approved a drawdown at the end of November 2015, that wouldpay the invoices for October 2015 work on the site, but a furtherdrawdown in December 2015 would be required to pay for Novemberwork; and(e) Mr Gapes did not have any written, binding or "reliable" assurancesfrom Koi as to how long it would be willing to continue to fund theDevelopment.3837 Noting that Dempsey Wood's claims as at the end of October 2015 (due for payment at the end ofNovember 2015), were almost double its claims for the end of November 2015 (and due forpayment at the end of December 2015).38 CD Owens and SD Vance as liquidators of Aluminium Plus Wellington Ltd (in liq) v Shaw [2016]NZHC 1400 at [37].[174] On this last point, the Court of Appeal in Mainzeal noted that in some cases, itwill be reasonable for directors to rely on informal assurances of support, though thatwill be very much fact specific and context dependant.39 In this case, PRDL had noother means (other than a very modest amount of cash in bank accounts) to fund itsday-to-day trading. It was completely reliant on Koi's continuing support until areplacement funder was found. Months of work on that front had not come to fruition.There was nothing produced in evidence to corroborate Mr Gapes' evidence that Koihad given him clear comfort that it would continue to support the Development whilehe continued to seek refinance. There was nothing in writing to this effect, even byway of email. Nor was anyone from Koi called to give evidence, which might havebeen expected had Koi been as overtly supportive of PRDL during this time asMr Gapes suggested. Further, the "assurance" was coming not from a shareholder orrelated entity, but rather an independent and off-shore financier who had already issueda PLA notice. Koi had clearly reserved to itself the right and ability to change its mindat any time.40[175] I accept that Koi approved a further drawdown at the end of November 2015(which paid for the October 2015 work). There was no evidence of any particulardiscussions between Mr Gapes and his contacts at Koi which led to this. Once theWebber Capital transaction fell over, Mr Gapes must or ought to have realised that Koiwould be looking even more closely at its own position, particularly given thecontinuing accrual of significant default interest over what could be weeks or evenmonths while refinance was pursued. Mr Gapes was also aware as of 11 November2015 that Koi was, without informing him, taking its own steps to try to sell its loanposition (which included the remaining amounts in the Project and ConstructionAccounts). And the benefit of hindsight cuts both ways: there is no evidence thatearlier in November 2015, Mr Gapes had reasonable grounds to believe that Koi wouldapprove a further drawdown at the end of that month, let alone at the end of December2015.39 Mainzeal at [445], with reference to Morgenstern v Jeffreys [2014] NZCA 449 at [121]. In bothcases, the assurances were from shareholders/related entities, rather than an independent financier.40 Like Mr Löwer's position as described by William Young J in Re South Pacific Shipping Ltd (inliq)). (2004) 9 NZCLC 263,570 (HC) at [153].[176] I am accordingly of the view that by mid-November 2015, the position hadbeen reached where PRDL's continued trading in an essentially "business as usual"mode was likely to give rise to a substantial risk of serious loss. I do not accept thesubmission made on Mr Gapes' behalf that given PRDL's unsecured creditors were(largely) paid in arrears on a monthly basis, the losses actually incurred were simplythe manifestation of the risk inherent in contracting with a limited liability companyon this basis. There is of course a risk in effectively providing "credit" for around amonth to a limited liability company, including that the company will becomeinsolvent and be unable to make the monthly payment in arrears. But that inherentrisk is premised on the company's directors fulfilling their statutory duties. A directordoes not have a statutory duty to avoid insolvency per se.41 But he or she does have aduty not to permit a company to trade in a manner likely to give rise to a substantialrisk of serious loss. Extending credit to a company in those circumstances falls outsidethe normal range of risks that creditors accept when they deal with limited liabilitycompanies.42[177] I also reject the submission made on Mr Gapes' behalf that the risk which aroseat this point was in relation to losses which could not be categorised as "serious".Section 135 is forward looking. As of mid-November 2015, there was a risk that noneof the claims for work carried out in October 2015 would be paid, nor any work carriedout in November 2015. Payment of monthly invoices across a significant project suchas this would not, in my view, be considered "minor". And while the evidence did notdemonstrate the proportion of unsecured creditors' claims that went unpaid versuseach creditors' total revenue earned on the project, the amount Dempsey Wood wasunpaid (some $750,000) reflected around 10 per cent of its contract value (after takinginto account the significant approved variations). I do not consider this to be"minor".4341 Mainzeal, at [257].42 At [236].43 In Debut Homes at [70], the Supreme Court considered loss to one creditor only, when all otherswere repaid, to give rise to "serious loss." That loss was to the Inland Revenue Department. Giventhis, commentators suggest that in that case, the Court was judging seriousness by reference to thepercentage of loss relative to the face value of the debt that the creditor had suffered; Paul Heathand Michael Whale (eds) Heath and Whale on Insolvency (online ed, LexisNexis) at [32.3.3(a)].[178] There is no evidence to suggest Mr Gapes carried out a "sober assessment" ofPRDL's financial position in mid-November 2015, and what options might beavailable rather than trading on as normal. It was admittedly a very difficult position:it was no doubt preferable to seek refinance while the Development continued on agoing concern basis. The Sunset Date was also not too far away. But while Mr Gapeswas clearly taking advice on how to secure new finance, there is no suggestion orevidence he sought specific insolvency related advice.44[179] For example, there was no evidence of consideration being given to whatrealisable value was being added to the Development from the contractors' ongoingwork (noting that so long as the pre-sales remained on foot, any additional value wasunlikely to make a material difference to the Development's profitability), versus theaccrual of significant default interest (which only exacerbated PRDL's financialposition). Nor is there evidence that Mr Gapes sought more definite assurances fromKoi as to how long it would continue to support PRDL, which he could have thenassessed for their adequacy in the relevant circumstances. Nor did Mr Gapes bring hismain contractors fully "into the tent" and consider with them, and Koi, what sort ofholding position and/or formal suspension of the works might be possible orappropriate pending consideration of further financing options in the coming weeksand/or months. This might have involved, for example, seeking from Koi an assuranceas to the payment of unsecured creditors' claims to that point, and then no or minimalwork being carried out on site; in the latter case, to preserve the Development andperhaps utilising PRDL's own, but reasonably limited, cash reserves. And while it wasno doubt preferable for refinancing purposes for work to continue on theDevelopment, refinance options were at least possible without that being the case, asthe Qualitas negotiations demonstrate.[180] The difficulty was that securing alternative finance, cancelling the pre-salesand it being clear that no significant risks or losses arose as a result, would all takesome time. Mr Gapes, it seems, intended to take that time in a "business as usual"mode despite PRDL's precarious financial position. He had also personallyguaranteed the Koi Facility, and was also being actively pursued by Westpac on an44 A pleaded defence pursuant to s 138 of the Act was not pursued.unrelated matter, such that he was planning to use at least $1 million from the WebberCapital transaction to meet that liability. Mr Gapes was therefore susceptible to those"perverse incentives" discussed in Mainzeal.[181] I accordingly conclude that as of approximately mid-November 2015,Mr Gapes breached s 135 of the Act.Section 136 of the ActLegal principles[182] Again, the purpose and scope of s 136 was recently examined in some detailby the Court of Appeal in Mainzeal.[183] The Court confirmed the following steps to be taken in assessing a claimpursuant to s 136:45(a) first, identification of the obligations that are the subject of the claim;(b) second, consideration of whether the director (subjectively) believedthat the company would be able to perform the relevant obligationswhen they fell due; and(c) third, and if so, whether from an objective perspective the director hadreasonable grounds for that belief.[184] The Court emphasised that the third step requires the identification of:(a) when the relevant obligations were incurred;(b) importantly, when those obligations would fall due;45 Mainzeal at [284]-[285].(c) what the director believed, at the time the obligations were incurred,about the ability of the company to meet the obligations at the futuretime when they would fall due; and(d) the grounds for the director's beliefs.[185] The point in time at which the obligations would fall due was relevant inMainzeal given, as would be expected of a company such as Mainzeal, there weredifferent obligations incurred with different time periods before they fell due.Accordingly, while as at 31 January 2011, there might have been reasonable groundsfor Mainzeal's directors to believe obligations falling due in the short term would bemet, the Court of Appeal held that there were not reasonable grounds for believingother longer term contractual obligations would be met. The Court of Appeal alsoobserved that in some cases, the position of a company will be so dire that there willnot be reasonable grounds for thinking that any obligations would be met when theyfell due, even in the short term, in circumstances where:46 failure could occur at any time, and it would be a matter of luck rather thanreasonable expectation if the company survived long enough to meet any newobligations.[186] The obligations that are the subject of the pleaded claim are PRDL'sobligations to Dempsey Wood incurred from September 2015. Like the s 135 claim,however, the s 136 claim narrowed to that period following 15 October 2015. Butwhile the time period narrowed, the scope of obligations said to be the subject of theclaim widened. Dempsey Wood submitted in its closing submissions that by agreeingto PRDL continuing to trade beyond 15 October 2015, Mr Gapes agreed to PRDLincurring all the obligations that arose from continued trading, without a reasonablebelief that they would be met when due. But as counsel for Mr Gapes submit (and theCourt of Appeal emphasised in Mainzeal), the scope of Dempsey Wood's claim mustbe framed by its pleading. Dempsey Wood's pleading, once combined with its46 At [287].evidence and submissions, is limited to an allegation that as of 15 October 2015,Mr Gapes did not have reasonable grounds to believe that PRDL's obligations toDempsey Wood would be met when due.[187] Given all of Dempsey Wood's work carried out in October 2015 was paid foras a result of the Koi drawdown on 25 November 2015, its s 136 claim can also onlyrelate to work in November 2015 and up to 3 December 2015.[188] An issue addressed in Mainzeal and which was an issue on the s 136 claim inthis case, is earlier authorities and/or commentary which suggest that s 136 is onlyconcerned with specific transactions, or transactions on capital rather than revenueaccount. Relying on such earlier authorities, including Rodney Harrison J's judgmentin Jefferys v Morgenstern (No 2),47 counsel for Mr Gapes submit that the time forassessing whether Mr Gapes had reasonable grounds to believe that PRDL'sobligations to Dempsey Wood would be met when due was September 2014, when thecontract between PRDL and Dempsey Wood was entered into.[189] In Mainzeal, the Court of Appeal concluded that the earlier authorities did notstand for the proposition that s 136 is limited to capital account transactions.48 TheCourt observed that the approach adopted by the Supreme Court in Debut Homes didnot support drawing such a distinction, including that the Supreme Court had statedthat:49although Mr Cooper may have had reasonable grounds at the end of October2012 to consider that all trade creditors would be paid, directors' duties arecontinuous. This means that, if any of the trade debts left outstanding atliquidation had been incurred at a time when it was clear that those debtswould not be paid, Mr Cooper breached the duty under s 136 in that regardalso.[190] The Court of Appeal in Mainzeal also rejected the suggestion that s 136 isconcerned with specific transactions, and not trading generally. Noting that pursuantto s 33 of the Interpretation Act 1999, words in the singular include the plural, theCourt stated that where the directors of a company agree to a company undertaking a47 Jefferys v Morgenstern (No 2) [2014] NZHC 308 at [28].48 Mainzeal at [276].49 At [277], referring to Debut Homes at [96].particular project, they agree to the company undertaking all the obligations that wouldordinarily be expected to form an integral part of that project.50 The Court also statedthat where the directors "agreed to continue trading, they agreed to the companyincurring all the obligations that would normally result from such trading".51 For thatreason, the Court confirmed that s 136 will encompass a scenario in which a directorhas decided to trade on, and in doing so, has agreed to incur "the trade debts that thedirector knew would result from such trading".52[191] The Court noted this broader approach was consistent with the underlyingpurpose of s 136:53The purpose of the provision is to discourage directors from agreeing to thecompany incurring obligations where they do not believe the company will beable to perform the obligations when required to do so, or where there are noreasonable grounds for such a belief. In those circumstances, the risk to thecreditor(s) in question falls outside the normal and acceptable range of risksthat creditors expect to face when dealing with a company. That concern mayarise in relation to a specific obligation, or it may arise in relation to a specificclass of transactions, or transactions generally.[192] The parties' post-hearing submissions on Mainzeal addressed these aspects ofthat decision. Counsel for Mr Gapes maintained the position that the approach adoptedin Mainzeal meant the appropriate time at which to consider whether Mr Gapes hadreasonable grounds to believe PRDL's obligations to Dempsey Wood would be metwhen due was September 2014. Counsel submit that the relevant aspects of Mainzealreferred to earlier reflect a discussion of the type of obligations captured by s 136, andnot the time at which compliance with the s 136 duty is to be assessed. Counsel submitthat the Court's factual assessment in Mainzeal supports that in the context of longerterm contracts, the time for assessment is the time the contract was entered into.[193] I am not persuaded that is a correct application of the Court's judgment inMainzeal.50 At [279].51 At [279].52 At [282]. Paul Heath and Michael Whale note in Heath and Whale on Insolvency (online ed,LexisNexis) at [32.3.5(a)] that this approach has the effect of permitting s 136 to operate muchlike s 135.53 At [280].[194] The amounts unpaid to Dempsey Wood (excluding its EOT claim) relate towork carried out from November 2015 onwards. The key issue is whether Mr Gapesagreed to PRDL incurring the obligation to pay for that work in September 2014, orwhen the work was carried out.[195] Prior to Mainzeal, the answer may have been September 2014, the authoritiesarguably taking a narrower approach to the concept of "agreeing" to a companyincurring an obligation, such as a decision to enter into a specific transaction. But theCourt of Appeal rejected the submission that s 136 is so confined.54 As noted, it alsoheld that where directors "agreed to continue trading, they agreed to the companyincurring all the obligations that would normally result from such trading".55[196] In this case, Mr Gapes, as sole director of PRDL, agreed to PRDL continuingto trade beyond November 2015. In doing so, he agreed to PRDL incurring all theobligations that would normally result from such trading. In my view, it would beartificial in the context of s 136, and in light of the broad approach to the type ofobligations captured by it as explained in Mainzeal, to say that PRDL's obligation topay for work carried out by Dempsey Wood in November 2015 was "incurred" inSeptember 2014. While there was no analysis of the Dempsey Wood contract by eitherparty in this case, entry into the contract itself did not give rise to any specific, or"incurred" obligation by PRDL to pay Dempsey Wood. Rather, in such a contract forongoing works over a period of time (rather than, say, a contract relating to a one offtransaction, such as the purchase of piece of equipment), it was only as and when workwas carried out by Dempsey Wood that PRDL's corresponding payment obligationwas incurred.56 The September 2014 contract, and its payment terms, specified whenthat obligation would become due (namely 17 working days after submission ofDempsey Wood's payment claim). I note that in a similar way, the Court of Appealobserved in Mainzeal that certain of Mainzeal's "payment obligations" to key sub-contractors were incurred after July 2012, despite two of the contracts in issue beingentered into at an earlier point in time.5754 At [280].55 At [279].56 The general contract terms, being NZS 3910: 2003, provided that Dempsey Wood could submitpayment claims for contract works that had been carried out over a monthly period.57 At [468].[197] This approach is consistent with the purpose of s 136.58 The circumstancesexisting at the time of entry into the contract might bear no resemblance to thecircumstances existing when work is requested, carried out, invoiced and to be paidfor, which could be many years after contract formation. At the time the work isrequested or carried out, the director will know from the contractual framework whenthe obligation to pay for that work will fall due. It is consistent with the purpose ofs 136 that that is the point at which the director's knowledge is to be assessed.[198] For completeness, I do not consider Rodney Harrison J's approach in Jeffreysv Morgenstern (No. 2) to support the approach proposed by counsel for Mr Gapes. Inthat case, the Judge stated that:59I consider Mr Morgenstern's conduct must be judged at the time the sale andpurchase agreement was entered into, that is 23 August 2005. From that pointKDL was under a legal obligation to provide the underwrite and would havebeen liable had it refused to enter the deed. I do not see how Mr Morgensterncould be in breach of his obligations under the Act for procuring KDL andMSE to do something they were contractually bound to do.(emphasis added)[199] The relevant obligation was therefore incurred at the point of entry into theoriginal contract. In this case, and as noted above, PRDL's obligation to pay for workcarried out by Dempsey Wood was incurred when the work was carried out (thecontract terms stipulating when and how that obligation would become due). AndPRDL was not contractually obliged to permit Dempsey Wood to continue to carry outthe contract works; for example, PRDL could have instructed the engineer to thecontract to suspend the contract works at any time.Analysis[200] In the context of the above principles, when agreeing to PRDL continuing totrade beyond November 2015, did Mr Gapes have reasonable grounds to believe thatPRDL would be able to pay for Dempsey Wood's work from that point in time, whenpayment became due? Despite there being some controversy in the evidence as towhen Dempsey Wood's invoices were to be submitted (and thus when they would be58 See [191] above.59 Jefferys v Morgenstern (No 2) [2014] NZHC 308) at [28].due), it is clear that work for November 2015 would have been invoiced towards theend of that month and would have been due 17 working days later, thus towards theend of December 2015.[201] Given PRDL did not have any (substantial) cash funds of its own, Mr Gapes'belief that the November 2015 works would be paid for when due depended on Koi'scontinuing support through to the end of December 2015.[202] For much the same reasons given for my findings on the s 135 claim, I acceptthat Mr Gapes had reasonable grounds to believe that Koi would continue to supportPRDL while refinancing in the short term appeared a realistic prospect. That was thecase, in my view, up until the Webber Capital transaction was no longer a viableoption, that is, until mid-November 2015. Until that point in time, PRDL had a bindingconditional agreement with a prospective purchaser of the Development (or was innegotiations with the purchaser once the conditional agreement had been cancelled),and Koi had demonstrated its support in such circumstances when agreeing to theOctober 2015 drawdown.[203] However, and as discussed earlier, this position changed once the WebberCapital transaction was off the table. At that time, Mr Gapes would have needed tohave reasonable grounds that Koi would continue to support to PRDL through to afurther drawdown in December 2015. I do not consider he did, and repeat what I havealready said at [173] to [174] above. The fact Koi approved a drawdown in November2015 does not alter the position. Again, I refer to my earlier observations at [175]above.[204] Finally, Dempsey Wood includes in this aspect of its claim its approximately$203,000 approved EOT claim. But Mr Veviorka, Dempsey Wood's Project Managerfor the Development, confirmed that the EOT claim related to work that had beencarried out over the entire project. And while he initially accepted that the proportionof the claim which related to work in November 2015 could be determined bymultiplying the number of working days in that month by the daily rate used forapproving the claim,60 he later said this was probably a too broad brush approach.60 $725 per day.[205] In the event, I exclude the EOT claim from this aspect of Dempsey Wood'sclaim. Dempsey Wood has not satisfied me what aspect, if any, of that claim relatedto work carried out in November 2015. I also observe that the portion relating to workcarried out after mid-November 2015 is likely to be small in any event.Section 131 of the ActLegal principles[206] Section 131 of the Act provides as follows:131 Duty of directors to act in good faith and in best interests ofcompany(1) Subject to this section, a director of a company, when exercisingpowers or performing duties, must act in good faith and in what thedirector believes to be the best interests of the company.[207] Once a company is of doubtful solvency, the duty is also owed to its creditors.61[208] The duty is subjective. The Supreme Court in Debut Homes observed thecourts are not well equipped, even with the benefit of expert evidence, to second-guessthe business decisions made by directors in what they honestly believed to be the bestinterests of the company.62 It reiterated the dangers of hindsight.63 The Courtnevertheless also observed that:64It does not detract from the subjective nature of the test that directors willprobably have a hard task persuading the court that they honestly believed thatan act or omission that resulted in substantial and foreseeable detriment to thecompany was in the company's best interests.[209] The Supreme Court also stated that there are a number of "exceptions andqualifications" to the subjective test, being:6561 Nicholson v Permakraft (NZ) Ltd (in liq) [1985] 1 NZLR 242 (CA) at 249 per Cooke J.62 Debut Homes at [112].63 At [112].64 At [109], citing Regentcrest plc (in liq) v Cohen [2001] 2 BCLC 80 (Ch) at [120].65 At [113]. The Court clarified (at [114]) that (a) and (b) are not truly exceptions, given directorscannot subjectively believe they are acting in the best interests of a company if they have failed toconsider the interests of the company or, where required, the interests of all of the creditors,including prospective creditors.(a) where there is no evidence of actual consideration of the best interestsof the company;(b) where, in an insolvency or near-insolvency situation, there is a failureto consider the interests of creditors;(c) where there is a conflict of interest, or where the action was one nodirector with any understanding of fiduciary duties could have taken;and(d) where a director's decisions are irrational.Analysis[210] To recap, there are three broad aspects to Dempsey Wood's s 131 claim:(a) First, Mr Gapes failed to consider whether PRDL would be able to meetits increasing liabilities to Dempsey Wood as the civil works progressedthrough September to December 2015.(b) Second, Mr Gapes caused or allowed PRDL to default on its obligationsunder the pre-sales and Koi Facility such that it was put intoreceivership. Dempsey Wood alleges that Mr Gapes:(i) formulated a plan to ensure the cancellation of the pre-sales andre-sell them at higher prevailing prices;(ii) allowed the Sunset Dates to pass and encouraged the pre-salepurchasers to cancel the agreements;(iii) knew that the cancellation of the pre-sales would cause PRDLto default on its obligations and be unable to obtain furtherfinancing;(iv) wrongfully pursued this course of action with the objective ofbenefitting other entities (such as Redwood and the successorentity which would inherit the Development) and himself,through his personal interest of those entities; and(v) caused receivers to be appointed over PRDL by Koi and causedapproximately $1.4 million of loss to PRDL's creditors.(c) Third, Mr Gapes charged PRDL exorbitant management fees forservices rendered by Redwood, and prioritised the payment of theRedwood fees over PRDL's financial health.[211] I am not persuaded that these aspects of Dempsey Wood's claims are made out.[212] Turning to [210](a) above, I am satisfied that Mr Gapes did subjectivelybelieve that creditors would be paid through his continued pursuit of refinancefollowing the expiry of the Koi Facility, and did seek to enter into arrangements whichhad that outcome. As noted, the Webber Capital agreement included provision for anincrease in the purchase price to reflect amounts paid to contractors (excludingKN Construction) pending settlement of the transaction. The financial proposalsprepared by Reesby & Co also proceeded on the basis of a continuation of DempseyWood's contract, rather than leaving it effectively "high and dry" in the re-set of theDevelopment. Mr Gapes' intentions in this context are reinforced by his engagementwith Mr Dempsey in early 2016, which proceeded from Mr Gapes' perspective on thebasis that Dempsey Wood's outstanding claims would be paid. In effect, Mr Gapesmisjudged matters in the last few weeks of November 2015, and in particular, thelikelihood of Koi's continued support. I do not consider this mis-judgment over a briefperiod of time means Mr Gapes did not, subjectively at least, believe he was acting inPRDL's best interests.[213] As to [210](b), as I have observed earlier in this judgment, I do not considerthe evidence establishes a deliberate and thought out plan by Mr Gapes to effectivelyput PRDL into receivership and then liquidation, for the benefit of a newly establishedcompany to take forward the Development. In particular, and dealing with theparticular aspects of Dempsey Wood's pleaded case:(a) Mr Gapes did not cause PRDL's receivership; that was a result of theKoi Facility having expired and no refinance being secured prior to Koideciding to appoint receivers. These actions did not result fromMr Gapes' own acts or omissions, or any breaches of duty by him.(b) I disagree that Mr Gapes knew that the cancellation of the pre-saleswould cause PRDL to default on its obligations and be unable to obtainfurther financing. In fact, quite the opposite emerges from theevidence. As noted, the only way the Development could continue, andfurther financing secured, was on the basis of the pre-sales beingcancelled. Further, PRDL's default of the Koi Facility occurred quiteindependently of the cancellation of the pre-sales, which did not occuruntil late December 2015.[214] Finally, as to [210](c) above (the Redwood fees), there was little evidence ortime devoted to this aspect of Dempsey Wood's claim. Mr Hoole did not provide anydetail or basis for his opinion that the management fees were "exceptionally high",and I accept counsel for Mr Gapes' submission that Mr Hoole is not, clearly at least,qualified to offer expert evidence in relation to such matters. Mr Gapes said that thelevel of fees were market standard. Mr Gapes would have a natural incentive toexpress that view, but the fees were approved by and funded by Koi, a sophisticatedand independent financier. Kingstons has also reported to PRDL in an early reportthat "we are generally satisfied [the fees] are reasonable". The fact Kingstonsexpressed this view tends to support Mr Gapes' evidence that the fees were not out ofline with market rates.[215] Dempsey Wood's claim pursuant to s 131 of the Act accordingly fails.[216] Having found breaches of both ss 135 and 136 of the Act, I now turn to whatrelief, if any, ought to be granted.Section 301 of the ActLegal principles[217] The broad principles to be applied to relief pursuant to s 301 of the Act wereaddressed by the Supreme Court in Debut Homes. The Court emphasised that theappropriate relief must respond to the duty or duties actually breached, and thatrestitutionary remedies are available in ss 135 and 136 claims.66 Further, while s 301is not punitive, within the limits of awarding no more than is required to providecompensation or make restitution, the Court confirmed it can take into account generaldeterrence.67[218] The Supreme Court also stated that:68(a) in most cases, the starting point for relief in response to a breach of s135 will be an amount equal to the deterioration in the company'sfinancial position between the date when trading should have ceasedand the date of actual liquidation (the "net deficiency approach"); and(b) the net deficiency approach does not appropriately respond to a breachof s 136. Relief of a restitutionary nature is likely to be moreappropriate, and the Court upheld the High Court's award based on thenew debts incurred by the company at a time when the director did nothave reasonable grounds to believe they would be paid (the "new debtapproach").[219] In summarising the overall approach, the Supreme Court stated:69Where there have been breaches of duties, any relief ordered under s 301 mustrespond to and provide redress for the particular duty or combination of duties66 Debut Homes at [160].67 At [162].68 At [164]-[163] and [168].69 At [182].breached. Relief can be compensatory or restitutionary in nature and musttake account of all of the circumstances, including the nature of the breach orbreaches, the level of culpability of the director, causation, duration of thebreach, holding the director to account and reversing the harm to the company.(emphasis added)[220] The nature and scope of relief that can and ought to be granted pursuant to s301 was also considered in some detail by the Court of Appeal in Mainzeal. Itreaffirmed that the net deficiency approach will generally be the appropriate remedyin response to a breach of s 135, at least where "the complaint is that the companycontinued to trade after a liquidation should have occurred, and the company is worseoff than it would have been if trading had ceased at an earlier date."70 The Court noted,however, that where the breach of s 135 actually brings about the insolvent liquidationof an otherwise solvent company, "the loss to the company may well include the entiredeficiency on liquidation and the costs of the (otherwise avoidable) liquidation."71[221] The Court reiterated the Supreme Court's observations in Debut Homes that adifferent approach will generally be needed in assessing compensation for breaches ofs 136, namely the new debt approach. It stated:72[295] On this approach no allowance would normally be appropriate forbenefits to the company as a result of undertaking the relevant obligations: forexample, the value of goods or services provided to the company on credit. Ifthe focus was on the loss to the company caused by entry into the newobligations as a matter of fact, such an adjustment would be needed. But thena typical breach of s 136 – where a company trades on while insolvent andobtains goods or services on credit that the company is unable to pay for –would not generally result in any claim on the part of the company, which willhave received value for the debt it incurs. On that approach most breaches ofs 136 would not give the company any right of recovery for the benefit ofcreditors, or expose directors to any liability. If on the other hand incurringthe obligations is treated as a form of "deemed harm" to the company in andof itself, as the Supreme Court evidently contemplated in the passage set outabove, such an adjustment would not be appropriate.70 Mainzeal, at [291].71 At [292]. An award on the "entire deficiency" approach had been made by the High Court inMainzeal, though the Court of Appeal allowed the directors' appeal in that respect, finding thatsuch an approach was not open on either the pleadings or the evidence.72 Some commentators are critical of the approach taken in Debut Homes to relief for breach of s 136,and note that the Court of Appeal in Mainzeal has described that approach as involving "deemedharm" to the company; see Paul Heath and Michael Whale (eds) Heath and Whale on Insolvency(online ed, LexisNexis) at [32.3.6]. The Court of Appeal in Mainzeal noted (at [12]) that "thelegislation governing insolvent trading in New Zealand is unsatisfactory in a number of respects"and recommended review and reform.[296] In our view, it follows from the Supreme Court's approach in DebutHomes that compensation for breach of s 136 will generally be assessed byadopting a "new debt" measure that focuses on the gross amounts of theunsatisfied obligations undertaken in breach of s 136. (citations omitted)[222] The Court concluded that this approach reflects the policy rationaleunderpinning s 136, and ensures that the provision is practically relevant in typicalinsolvent trading scenarios.73[223] The Court of Appeal also referred to several earlier decisions of that Courtwhich confirm that an award against a director under s 301 may be less than whatmight have been awarded for a claim of breach of duty brought in the name of acompany, given the statutory language which permits a court to order suchcompensation as it thinks just.74 The Court expressed doubts, however, as to whethera broad discretion, exercised by reference to factors such as causation, culpability andduration of breach, reconciles with the approach to relief had the claims been taken inthe company's name, or aspects of the legislative reform which led to s 301. In theevent, two members of the Court (Kós P and Miller J) provisionally considered thatthey were bound by Debut Homes to proceed on the basis that the discretion is a broadone; whereas Goddard J provisionally considered that the issue over the scope of thediscretion was not foreclosed by Debut Homes.[224] This Court is of course bound by the earlier decisions of the Court of Appeal,which articulate a broad discretion under s 301, to be informed by those factorsreferred to in the extract from Debut Homes set out at [220] above. I accordinglyproceed on that basis.Analysis[225] As a preliminary point, while Dempsey Wood's supplementary submissionsstate that "the 'entire deficiency' approach is not relevant as Dempsey Wood does notallege that the liquidation could have been avoided", the relief sought in its statementof claim is predicated on an entire deficiency approach. On its pleaded case, Dempsey73 Mainzeal, at [296].74 At [303].Wood seeks an order (under both the ss 135 and 136 claims) that Mr Gapes "contributea sum not less than the outstanding creditor claims of $1,398,096 plus the costs anddisbursements of liquidation to the assets of PRDL." In a sense, therefore, the lossclaimed on Dempsey Wood's pleading is neither made out on the evidence nor pursuedin any event.[226] Nevertheless, as the evidence and argument developed at trial, it became clearthat Dempsey Wood sought compensation on the basis of either the net deficiencyapproach (in the event of a breach of s 135) or the new debt approach (in the event ofa breach of s 136). No objection was taken on behalf of Mr Gapes to this narrowerapproach to relief than that pleaded, and the expert evidence was directed to thesemeasures of loss (particularly the latter).[227] In the event, I have concluded that the appropriate form of relief in this case isthe new debt approach, from the breach date of mid-November 2015, when it wasclear that any Webber Capital deal was permanently off the table.75 Like in DebutHomes, continued trading in this case involved, at least in part, satisfying current debts(the claims for work carried out in October 2015) by incurring new obligations –namely further amounts becoming due to Koi (the November 2015 drawdown – whichwas used to pay for the October 2015 work – and additional accrued interest).Dempsey Wood's submissions were primarily directed to this approach (referenced tonew liabilities to unsecured creditors incurred after 15 October 2015, plus penaltyinterest accruing on the Koi Facility between 15 October and 3 December 2015). Andas the Supreme Court held in Debut Homes, an award based on the net deficiencyapproach would not adequately respond to a breach of s 136.76 I have concluded thatMr Gapes did breach his s 136 duty.[228] Further, and importantly, the evidence now available is not sufficient to arriveat a realistic and reasonable estimate of the net deterioration of PRDL's financialposition between mid-November 2015 and 3 December 2015. I also accept counsel75 The second Webber Capital proposal, to purchase the Development for $20.750 million, was putto PRDL on Sunday 8 November 2015 and was open for acceptance until 4pm the following day,9 November 2015. I consider it would have been appropriate for Mr Gapes to have a few days toconsider this further proposal, engage with Koi on it and then assess PRDL's position overallbefore he breached ss 135 and 136. I accordingly adopt a breach date of 13 November 2015.76 Debut Homes, at [166].for Mr Gapes' submission that aspects of Dempsey Wood's expert evidence on losswas unreliable, for example making incorrect assumptions as to the time at whichvarious unsecured creditors' claims had been incurred,77 and not taking into account(or at least assessing) potential increases in PRDL's assets, primarily value added tothe Development through the work which continued to be carried out after 15 October2015. In addition, none of the evidence was directed to a breach each date of shortlyafter the Webber Capital transaction fell over. Assessing the net deterioration inPRDL's position would therefore involve significant assumptions and ultimatelyguesswork by the Court. In the context of this case, I do not consider it proportionateto invite further submissions (or what is more likely required, evidence) on this point,including because the time period between the breach date and receivership is veryshort, and thus the change in financial position is not likely to be significant in anyevent.78[229] In terms of new debt incurred following the breach date and which remainsunpaid, as noted earlier, Dempsey Wood's pleading is confined to payment obligationsincurred in relation to Dempsey Wood only. In any event, of the $938,000 creditorsshown in the aged accounts payable report as at 30 November 2015 as "current" (andthus prima facie the only obligations incurred after the breach date), Dempsey Wood'sclaim of $503,373 is by far and away the largest. The next largest is HarrisonGrierson's claim of $249,808, which Dempsey Wood accepted needs to be excludedfrom the assessment, given it was "paid" through a later settlement reached betweenthe receivers and Harrison Grierson.79 The balance of the current unsecured creditorsas at 30 November 2015 are a collection of much smaller amounts, the next largestbeing Russell McVeagh (in an amount of $48,957) which Mr Gapes confirmed he laterpaid. There was no evidence about the remaining amounts (totalling approximately$136,000), for example, whether they were incurred before or after the breach date.77 The aged accounts payable summaries showing that of the approximately $1.473 million inunsecured creditors' claims as at 31 December 2015, approximately $767,000 had been incurredprior to November 2015, or were later paid.78 At least in relation to unsecured creditors, the aged accounts payable summaries suggest that theposition had not materially changed or deteriorated between mid-November 2015 and the end ofDecember 2015.79 That claim also related to invoices for services provided over a broader time period in any event,dating back to March/April 2015.[230] It is necessary to assess PRDL's obligations to Dempsey Wood which wereincurred after the breach date of 13 November 2015. A broad-brush approach is allthat is now possible. If apportionment were required, counsel for Dempsey Woodsuggested a "working day" approach. There were 24 working days in November 2015and up to and including 3 December 2015.80 On a per day basis, the approved claimfor that period ($503,373) reflects $20,974 per day. There are 14 working days from14 November to 3 December 2015 inclusive. This reflects $293,636 in paymentobligations to Dempsey Wood which ought not to have been incurred by PRDL after13 November 2015.[231] The parties did not canvass in any real detail how the discretion under s 301ought to be exercised in this case, other than:(a) Dempsey Wood acknowledged that the duration of breach (even on itsown case of a breach date of 15 October 2015) is relatively short,though it argued that Mr Gapes' breach was "reckless and inexcusable"and that substantial sums were at risk from his actions. Counsel alsoreferred to and relied on the "plan" to sell the Development to Newco,to the detriment of PRDL's creditors. Counsel also made the(somewhat "jury point") submission that Mr Gapes is not remorsefuland "robbed over 150 purchasers of their promised houses". On thisbasis, Dempsey Wood seeks an award reflecting the full loss outlinedabove.(b) Mr Gapes argued that the period between any breach and PRDL ceasingtrading is very short, and that Mr Gapes' conduct, if found to be inbreach, cannot be categorised as anything approaching dishonesty, witheven Dempsey Wood's own allegation at its core being that he pursuedthe refinancing "with blind faith". On this basis, counsel submit that a100 per cent award would not be appropriate, and refer to GoatlandsLtd (in liq) v Borrell, in which Lang J assessed the quantum of risk as80 Mr Gapes notified Mr Dempsey of the receivership by email at 5.03pm on 3 December 2015.being approximately 25 per cent, which was then used to determine thes 301 award. Counsel submit a similar approach is warranted here.81[232] I am not persuaded that a 100 per cent award is appropriate in this case, andindeed, am of the view that a reasonably significant allowance ought to be made. Thisis because:(a) On any view, the period of breach was extremely short. In the event, Ihave found that Mr Gapes breached his statutory duties over a periodof just under three weeks. This is not a case of a director breaching hisduties for many months or even years, as is seen in many other cases.(b) I do not consider Mr Gapes to be significantly at fault, from aculpability perspective. I accept that he subjectively believed that at allrelevant times, the value of the Development exceeded the value ofPRDL's liabilities, based on the valuation advice that cancelling the pre-sales and reselling at higher market rates would attract additional valueof some $20 million, coupled with his personal view that the risksinvolved in cancelling the pre-sales was low. In that context, Mr Gapestried to keep the Development afloat until refinance was secured, andproceeded on the (mistaken) basis that Koi would continue to supportPRDL until that was so.(c) As can be seen from the contents of this judgment, the picture aroundPRDL's insolvency, or near insolvency, in October/November 2015was not particularly stark or obvious. In other words, this is not a caselike some where it is obvious that a company has been hopelesslyinsolvent for some time, yet the director permits it to continue to traderegardless.(d) That the breach by Mr Gapes was neither lengthy or particularlyegregious is reinforced by the fact that PRDL's liquidators did not take81 Goatlands Ltd (in liq) v Borrell (2006) 3 NZCCLR 726 (HC) at [134].any action against him, which might have been expected if the positionwas as stark as Dempsey Wood suggests.(e) The jury points made on behalf of Dempsey Wood do not assist.Mr Gapes was entitled to defend Dempsey Wood's claims, and broadnotions of "remorse" are not relevant in my view to the s 301 inquiry.Further, Mr Gapes' breach did not "rob" purchasers of their first homes;that resulted from the very significant cost overruns and delays in theDevelopment. And in the event, it was the receivers, not Mr Gapes,who cancelled the pre-sales.(f) Finally, the unpaid amounts to unsecured creditors largely – and in thecase of Dempsey Wood (the largest of those creditors) wholly – relateto work carried out in the last month of the Development, before PRDLceased trading. While those amounts were not minor for the purposesof s 135, the position is nevertheless that the manner in which Mr Gapespermitted PRDL to carry on business largely resulted in all but the lastfour to six weeks of creditors' claims being met.[233] As the Court of Appeal observed in Mason v Lewis, the question of reliefnecessarily has to be approached in a relatively broad-brush way, and the jurisdictionto order recompense is of an "equitable" character.82 I must stand back and ask, in thecircumstances summarised at [232] above, what proportion of the deficiency toDempsey Wood is it fair for Mr Gapes to meet personally? Given those factors above,I consider an appropriate award is one-third of the amount of loss, and in roundedterms, $100,000. There will be an award in that amount.[234] There is one final point for determination, namely whether it would beappropriate for this amount to be paid by Mr Gapes to PRDL or directly to DempseyWood. Dempsey Wood's pleading is somewhat muddled in this context, in that itlimits the obligations the subject of the s 136 claim to Dempsey Wood, but then seeksa contribution by Mr Gapes in an amount reflecting unpaid obligations to all unsecuredcreditors. Further, the s 135 claim only encompasses all unsecured creditors' losses82 Mason v Lewis [2006] 3 NZLR 225 (CA) at [118].insofar as it relates to Mr Gapes' alleged "plan" to cancel the pre-sales and liquidatePRDL. I have found such a plan is not made out on the evidence. Like the s 136claim, that aspect of the s 135 claim which relates to Mr Gapes causing or allowingPRDL to continue trading in a manner likely to give rise to a substantial risk of seriousloss is limited to Dempsey Wood.83[235] When an application pursuant to s 301 is made by a creditor, as in this case,s 301(1)(c) expressly permits the Court to order that the director pay the relevantamount, or any part of it, to the creditor. My preliminary view is that such an ordermay be appropriate in this case, given:(a) The pleading points noted above, which in relevant respects, limit theclaims to Dempsey Wood's losses.(b) Dempsey Wood has brought this proceeding at its own expense.(c) Despite the passage of time since PRDL's liquidation, the liquidatorshave not taken any steps.(d) If the amount is paid to PRDL, it will presumably be allocated tosecured creditors, i.e. Koi, with no distribution to Dempsey Wood orother unsecured creditors.(e) Conversely, payment to Dempsey Wood would be compensatory innature. In this way, the basis for the award would "match" thestakeholder to benefit from the award.84(f) Finally, the unpaid obligations to unsecured creditors which wereincurred after the breach date are largely limited to Dempsey Wood inany event.83 Amended statement of claim at [40].84 See the discussion in Mainzeal, at [297], of the "mis-match" when the award is paid to thecompany.[236] The parties did not make any submissions on this issue. I do not consider theform of Dempsey Wood's pleading forecloses the Court exercising its jurisdictionunder s 301 to make an order that the award is paid to Dempsey Wood rather than toPRDL. There appears to be limited authorities (in this jurisdiction at least) in whichthis issue has been considered (most applications pursuant to s 301 being brought byliquidators).85 Before reaching a concluded view, it is appropriate that the parties havean opportunity to comment on whether the award ought to be paid to PRDL orDempsey Wood. The parties also ought to submit on what interest, if any, should beawarded on that sum, and how a payment to Dempsey Wood ought to interact withany award made pursuant to the FTA claim (for example, whether it should be paid inaddition to any award on the FTA claim).86[237] The parties may file supplementary submissions on this issue on or before1 October 2021.[238] I turn now to Dempsey Wood's claim under the FTA.FTA claimLegal principles[239] The broad principles are not in dispute. The issues for consideration are:(a) first, whether there has been a breach of s 9 of the FTA;(b) second, in the event of breach, and moving to s 43 of the FTA,87 whetherthe claimant was actually misled by the respondent's breach;(c) third, whether the respondent's breach of s 9 was an operative cause ofthe claimant's loss;85 See, for example, Marshall Futures Ltd v Marshall [1992] 1 NZLR 316 (HC) and Sanders v Flay(2005) 9 NZCLC 96-989 (HC).86 My preliminary view being it should not. Given the coincidence of timing, in terms of the breachdate and the point from which I have concluded Dempsey Wood suffered loss as a result ofMr Gapes' breach of s 9 of the FTA, it is arguable that Dempsey Wood would be "doublecompensated" for its loss.87 Pursuant to which a court may grant relief where the claimant has suffered, or is likely to suffer,loss or damage "by" the respondent's breach of s 9.(d) fourth, the relevance, if any, of the claimant's own conduct, and anysuggested failure to take reasonable care; and(e) finally, the overall discretion to be exercised pursuant to s 43.[240] The leading authority is the Supreme Court's decision in Red Eagle Corp Ltdv Ellis (Red Eagle).88 As to the first question of breach, the Court stated the following:[28] It is, to begin with, necessary to decide whether the claimant hasproved a breach of s 9. That section is directed to promoting fair dealing intrade by proscribing conduct which, examined objectively, is deceptive ormisleading in the particular circumstances. Naturally that will depend uponthe context, including the characteristics of the person or persons said to beaffected. Conduct towards a sophisticated businessman may, for instance, beless likely to be objectively regarded as capable of misleading or deceivingsuch a person than similar conduct directed towards a consumer or, to take anextreme case, towards an individual known by the defendant to haveintellectual difficulties. Richardson J in Goldsbro v Walker said that theremust be an assessment of the circumstances in which the conduct occurredand the person or persons likely to be affected by it. The question to beanswered in relation to s 9 in a case of this kind is accordingly whether areasonable person in the claimant's situation – that is, with the characteristicsknown to the defendant or of which the defendant ought to have been aware –would likely have been misled or deceived. If so, a breach of s 9 has beenestablished. It is not necessary under s 9 to prove that the defendant's conductactually misled or deceived the particular plaintiff or anyone else. If theconduct objectively had the capacity to mislead or deceive the hypotheticalreasonable person, there has been a breach of s 9. If it is likely to do so, it hasthe capacity to do so. Of course the fact that someone was actually misled ordeceived may well be enough to show that the requisite capacity existed.(citations omitted)[241] As to reliance, the Supreme Court observed that it does not follow from thefact that a reasonable person would have been misled that the particular claimant wasactually misled or deceived. That is a factual question, usually to be answered bydrawing an inference from the evidence as a whole.89[242] If reliance is established, the court must then be satisfied that the respondent'sbreach was an "operative cause" of the claimant's loss. The breach need not be the88 Red Eagle Corp Ltd v Ellis [2010] NZSC 20, [2010] 2 NZLR 492.89 At [29].only effective cause, so long as it is an effective cause.90 The breach will not be aneffective cause if it was, in the end, "immaterial" to the suffering of loss or damage.91[243] An, or the, operative cause of the claimant's loss may also be its own conductin failing to take reasonable care to look after its own interests.92 The fact a claimantmay have contributed to its own loss does not disqualify the claim. In the event, andgiven the discretion to be exercised, the exercise of the power to make an order forpayment under s 43 is "a matter of doing justice to the parties in the circumstances ofthe particular case and in terms of the policy of the Act".93Analysis[244] Dempsey Wood's pleading of its FTA claim is summarised at [16] above. Thefocus of the claim became Mr Gapes' communication with Mr Dempsey on12 November 2015, confirming the amount held in the Project Account and that this"was earmarked for civils and consultants". To recap, Dempsey Wood says thisrepresentation was misleading because at the time it was made, PRDL was in defaultof the Koi Facility and Mr Gapes knew that the Project Account "would soon be usedby Koi to repay its secured debt".[245] Whether Mr Gapes' representation was misleading must be considered in thecontext it was made. That context includes Dempsey Wood's solicitor's letter of29 October 2015, which included a request for evidence of the funding available toPRDL to meet its ongoing payment obligations to Dempsey Wood. Additional contextis the evident telephone discussion between Mr Gapes and Mr Dempsey on11 November 2015, in which Mr Gapes had made Mr Dempsey aware that the WebberCapital agreement had fallen over. Mr Dempsey noted in his follow up email that thatdevelopment made it "even more imperative" that the concerns outlined in DempseyWood's solicitor's letter of 29 October 2015 were addressed. Mr Dempsey alsorecorded that in his telephone discussion with Mr Gapes, Mr Gapes had "re-affirmedthat there was $3.9 million deposit in a Russell McVeigh (sic) Trust account with the90 At [29].91 At [29].92 At [30].93 At [31].specific purpose of assuring payment for the civil works for this project" (emphasisadded). In his reply email, Mr Gapes did not dispute Mr Dempsey's summary of theirearlier discussion.94[246] That Mr Gapes knew that Dempsey Wood was seeking assurance that it wouldbe paid for ongoing works, rather than simply a request for what was then remainingin the Project Account, is also evident from Mr Gapes' instructions to RussellMcVeagh when asking for the (then) current balance of that account. In his email toRussell McVeagh on 11 November 2015, Mr Gapes' stated "Conal Dempsey wouldlike some comfort we have the money still available to pay him". As noted at [86]above, that full email chain, including Russell McVeagh's confirmation of the dollaramount remaining in the Project Account, was then forwarded to Mr Dempsey withthe confirmation that "the $4.172 is for civils and consultants etc".[247] Counsel for Mr Gapes argue that given what Mr Dempsey knew at the time,Mr Gapes' email was not capable of being misleading, particularly given it was arepresentation made to a sophisticated businessman. Counsel refer to the fact thatMr Dempsey knew of the general concept of a secured lender and that they wouldhave priority over unsecured lenders; how property funding worked at a basic level;that Koi's quantity surveyor was required to sign-off any payments; that Koi'sapproval was also required to any payments; that refinance was needed to continue theDevelopment; and that receivership of PRDL was a possibility (given the threat madeat the meeting with Webber Capital and the Chows).[248] I am not persuaded these matters affect whether, in an objective sense,Mr Gapes' email was capable of being misleading. The state of knowledge of thehypothetical reasonable person in Mr Dempsey's position will of course be relevant.But it was no doubt because of that knowledge, even accepting for present purposesthat Mr Dempsey was aware of all those matters referred to at [247] above, that led toDempsey Wood seeking assurance from Mr Gapes on PRDL's ability to pay. Forexample, had PRDL not been in a difficult financial position, if refinance was notbeing sought, and if receivership had not been threatened, Dempsey Wood would no94 See [84] above.doubt not have perceived there to be any real risk that it would no longer get paid.And even if Mr Dempsey was aware that Koi had to approve payments, he was seekingassurance from Mr Gapes, PRDL's sole director, who had the relationship and dealingswith Koi. To reiterate: given what Mr Dempsey did and arguably knew, his requestwas not one of academic interest as to what amounts remained in the Project Account.Rather, and in a "real world" and commercial sense, he was pressing Mr Gapes for anassurance that Dempsey Wood would be paid if it continued to work.[249] In this context I consider Mr Gapes' email was capable of misleading ordeceiving the hypothetical reasonable person in Mr Dempsey's position. In thecontext described above, his email conveyed that the funds in the Project Accountwould be available to meet Dempsey Wood's ongoing claims. Mr Gape's assurancewas not qualified in any sense. Mr Dempsey could reasonably have understood theemail to suggest that given Mr Gapes' current knowledge and arrangements with Koi,the funds would be available to pay Dempsey Wood.[250] But at that time, the funding position was in fact quite different to thatconveyed by Mr Gapes' email. The Koi Facility had expired and Koi had issued aPLA notice. Mr Gapes was aware that the amounts remaining in both the Constructionand Project Accounts were already earmarked to be repaid to Koi in part repayment ofthe Facility. At the time of Mr Gapes' email, there were no other arrangements on thetable which would have seen contractors get paid if Koi did "hoover up" the amountsremaining in the Construction and Project Accounts. Mr Gapes had also been put onnotice the previous day, 11 November 2015, that Koi was trying to sell its Facility,including the amounts remaining in the Project Account.[251] I accept that Mr Gapes subjectively thought Koi would continue to supportPRDL until refinance was secured. But he had no clear, written or reliable assurancesfrom Koi to this effect. In any event, Mr Gapes' subjective belief is not relevant towhether his 12 November 2015 email breached s 9 of the FTA.[252] I accordingly find that breach of s 9 is made out.[253] The next question, and what I see as the real issue on the FTA claim, is whetherDempsey Wood relied on Mr Gapes' email, given on 13 November 2015, Mr Dempseyfollowed up with further and more specific queries of Russell McVeagh.95 Counselfor Mr Gapes' submit that the very fact these follow up questions were asked confirmsthat Dempsey Wood did not believe what Mr Gapes said in his 12 November 2015email and thus did not rely on it.[254] I disagree. It is easy in hindsight to focus on particular words and conduct atany one point in time (and on specific questions asked and answers given byMr Dempsey on this topic in cross-examination). What is required, however, is anappraisal of the whole of the evidence, looking at the matter in a practical and commonsense way.96 In the context of Mr Dempsey's inquiry of Mr Gapes, and his reply, I amsatisfied that Dempsey Wood relied on that assurance in continuing to work on theDevelopment over the short term. Mr Dempsey's follow up request of RussellMcVeagh was to seek further assurance and detail around what was a fairly short andbenign response from Mr Gapes, and when Mr Dempsey understood the Developmentstill had several months to run. The catalyst for Dempsey Wood's request had beenconfirmation that the Webber Capital agreement had fallen over, thus "ratcheting up"Dempsey Wood's concern about PRDL's ability to continue to pay it. ThatMr Dempsey wanted that further detail and assurance does not in my view meanDempsey Wood did not rely on what Mr Gapes told it, in quite clear and unqualifiedterms. Dempsey Wood did, after all, continue to work for a number of weeks beforeRussell McVeagh responded to Mr Dempsey's 13 November email.[255] I accept Mr Dempsey's evidence that, in the context of what he did know aboutthe difficulties in the Development, the threat of receivership and Mr Gapes' ongoingsearch for finance, in the absence of Mr Gapes' assurance, Dempsey Wood would have"downed tools" in some shape or form. In this way, Dempsey Wood continuing towork in the short term in response to Mr Gapes' email is similar to the "provisionalcommitment" to the loan in issue in Red Eagle. In that case, the claimant was foundto have relied on the respondent's statement as to security for the loan, despite almostimmediately thereafter stating he would need further detail of the security and95 See [87] above.96 Red Eagle at [34].recording in the loan agreement that it was the later, more detailed information reliedon.97[256] I accordingly conclude that Dempsey Wood did rely on Mr Gapes' email, andthat it was an operative cause of Dempsey Wood's loss, namely the cost of the workcarried out by it after 12 November 2015 and for which it was never paid. Other thanRussell McVeagh's later email (and Dempsey Wood's own conduct, which I addressbelow), no other operative causes are suggested. As to Russell McVeagh's later email,I am satisfied the assurance provided by Mr Gapes continued to be an operative causeof Dempsey Wood's loss after 24 November 2015. In effect, the two emailcommunications complemented each other, with the latter giving further detail to"flesh out" the earlier assurance.[257] I do not accept counsel for Mr Gapes' submission that Dempsey Wood cannothave relied on the representation given it was already contractually obliged to continuethe civil works. While that might be so from a strict legal perspective, from a factualand commercial perspective, I accept Mr Dempsey's evidence that he would havestopped work and "worried about the legals later". In a sense, and given Mr Gapes'evident desire to keep work on the Development going while he searched for newfinance, Dempsey Wood threatening to or actually downing tools would have no doubtresulted in some frank discussions between the two men, and enabled Dempsey Woodto engage with Mr Gapes on preserving Dempsey Wood's position.[258] I also reject counsel for Mr Gapes' submission that Dempsey Wood did notlook after its own interests and this was an operative, or even the operative, cause ofits loss. Counsel for Mr Gapes submit that Dempsey Wood did not insist on the moneybeing held separately on trust, or did not ask questions directly of Kingstons or Koi.Counsel submit that such a failure to take due care serves to break the causalconnection. I disagree. Again, Dempsey Wood was approaching the sole director ofPRDL seeking assurance on payment. Mr Gapes gave that assurance. In that context,it was not necessary for Dempsey Wood to insist on the money being held separatelyon trust or ask to ask questions directly of Kingstons or Koi. The proper and first port97 At [36].of call was PRDL's director. In light of Mr Gapes' response on 12 November 2015,Mr Gapes would have no doubt have taken umbrage had Dempsey Wood made directcontact with Koi at that time. I acknowledge that Mr Gapes directed Dempsey Woodto Russell McVeagh, but they were PRDL's solicitors, and thus subject to PRDL'sinstructions as to what was said, and when, to Dempsey Wood in response.[259] In terms of the quantum of loss flowing from Mr Gapes' breach of s 9, forreasons already discussed earlier in this judgment, I exclude the EOT claim from thesuggested loss. Further, only a portion of the certified amount for Dempsey Wood'sNovember 2015 work of some $503,000 could have flowed from themisrepresentation, together with the first three days in December. Using the dailyapportionment discussed at [230] above, 15 working days following 12 November2015 and up to and inclusive of 3 December 2015, at $20,974 per day, results in aprima facie loss of $314,610.[260] I accept, however, counsel for Mr Gapes' submission that the loss would notextend to the full amount of the unpaid invoices corresponding to the relevant periodof time, given that measure of damages would include an amount of profit whichwould not have been earned on Dempsey Wood's "drop tools" counterfactual. Theusual approach to damages under the FTA is that they are assessed on the tort measureof loss,98 rather than the contractual (expectation) measure. On this basis, the loss toDempsey Wood is the costs incurred by it in providing services to PRDL after12 November 2015.[261] Again, a relatively broad-brush approach is all that is possible on the evidence.The starting point is the $314,610 calculated above. Mr Dempsey gave evidence thata common margin for civil works (though not specifically relating to theDevelopment) would be between 7 and 11 percent. I infer that Dempsey Wood madea similar margin on this project, there being nothing to suggest otherwise. Adopting ahalfway point of a 9 percent margin, I ascribe a value of $286,295 to the cost ofDempsey Wood's continuing work on site following 12 November 2015 and for whichit was never paid.98 Cox & Coxon Ltd v Leipst [1999] 2 NZLR 15 (CA).[262] I do not consider there to be any other factors influencing the discretion to beexercised pursuant to s 43 and which would operate to reduce the award. Ultimately,at the time of Mr Gapes' email, PRDL was in a very vulnerable position, with the riskof PRDL's failure falling entirely on its creditors rather than PRDL or its shareholders.And as the aged creditors summaries produced in evidence demonstrate, as atNovember 2015, Dempsey Wood was the unsecured creditor at most risk, and by somemargin.Result and next steps[263] For the reasons set out in this judgment, I have concluded as follows:(a) Mr Gapes breached s 135 of the Act, with a breach date of 13 November2015.(b) Mr Gapes breached s 136 of the Act, with a breach date of 13 November2015.(c) Mr Gapes did not breach s 131 of the Act.(d) It is not possible on the evidence to conclude that there was a netdeterioration in PRDL's financial position between the breach date andthe date of receivership (or even if there was, to reliably assess what thenet deterioration was).(e) The appropriate remedy for the breaches of the Act is the new debtapproach, confined to PRDL's payment obligations to Dempsey Woodincurred after 13 November 2015.(f) PRDL's payment obligations to Dempsey Wood incurred after 13November 2013 are assessed at $293,636.(g) I make an order pursuant to s 301 of the Act that Mr Gapes is tocontribute one-third of that amount, rounded to $100,000.(h) Mr Gapes' email to Dempsey Wood on 12 November 2015 breached s9 of the FTA.(i) I make an order pursuant to s 43 of the FTA that Mr Gapes is to payDempsey Wood the sum of $286,295.(j) The parties are invited to make further submissions, on or before1 October 2021, on:(i) whether the amount to be paid pursuant to (g) above ought to bepaid to Dempsey Wood or to PRDL;(ii) the question of interest; and(iii) the interaction of the s 301 award and that made pursuant to theFTA.99[264] I invite the parties to confer and seek to agree costs. My preliminary and non-binding view is that Dempsey Wood is the successful party overall, though a costsaward in its favour ought to be reduced somewhat given it has not succeeded on allaspects of its claims, particularly those under the Act. Costs ought to be assessed ona 2B basis.[265] If the parties cannot agree costs, Dempsey Wood may file a memorandum asto costs on or before 1 October 2021. Mr Gapes may file a memorandum in responseon or before 8 October 2021. No memorandum is to be longer than five pages inlength._______________________________Fitzgerald J99 See [236] above.