FAIRWAY HOLDINGS LIMITED AND QUEST PROJECTS LIMITED v CHRISTOPHER CAREY MCCULLAGH AND STEPHEN MARK LAWRENCE IN THEIR CAPACITIES AS LIQUIDATORS OF HAMILTON STREET INVESTMENTS LIMITED (IN LIQUIDATION) [2018] NZCA 605

FAIRWAY HOLDINGS LIMITED AND QUEST PROJECTS LIMITED v CHRISTOPHER CAREYMCCULLAGH AND STEPHEN MARK LAWRENCE IN THEIR CAPACITIES AS LIQUIDATORS OFHAMILTON STREET INVESTMENTS LIMITED (IN LIQUIDATION) [2018] NZCA 605 [18 December 2018]IN THE COURT OF APPEAL OF NEW ZEALANDI TE KŌTI PĪRA O AOTEAROACA443/2018[2018] NZCA 605BETWEEN FAIRWAY HOLDINGS LIMITED ANDQUEST PROJECTS LIMITEDApplicantsAND CHRISTOPHER CAREY MCCULLAGHAND STEPHEN MARK LAWRENCE INTHEIR CAPACITIES AS LIQUIDATORSOF HAMILTON STREET INVESTMENTSLIMITED (IN LIQUIDATION)RespondentsCourt: Brown and Clifford JJCounsel: G Brittain QC for ApplicantsJ Burt and J R F Cochrane for RespondentsJudgment:(On the papers)18 December 2018 at 4.00 pmJUDGMENT OF THE COURTA The application for leave to appeal under s 56(5) of the Senior Courts Act2016 is granted.B The respondents must pay the applicants costs for a standard applicationfor leave to appeal on a band A basis together with usual disbursements.____________________________________________________________________REASONS OF THE COURT(Given by Brown J)Introduction[1] This application is for leave under s 56(5) of the Senior Courts Act 2016(the Act) to appeal from a judgment of the High Court made on an interlocutoryapplication.[2] The following three proceedings in the Tauranga Registry of the High Courtare relevant to the present matter:(a) An application by the liquidators of Hamilton Street Investments Ltd(Hamilton) against Fairway Holdings Ltd (Fairway) and Quest ProjectsLtd (Quest) who were shareholders of Hamilton to set aside insolventtransactions (the voidable proceeding).1(b) A proceeding by Hamilton and its liquidators against Fairway, Questand Hamilton's directors (Mr Peter Cooney and Mr Robert Turner)seeking to recover distributions under s 56 of the Companies Act 1993(the dividend proceeding).2(c) A proceeding by the body corporate and unit owners of the CaymanApartments in Mount Maunganui, a building developed by Hamilton,against 21 entities alleging negligence and estoppel in relation to 50pleaded defects in construction and design (the defective buildingproceeding).3[3] Fairway and Quest made an application under r 10.12 of the High Court Rules2016 for an order for consolidation of the three proceedings. That application wasdeclined in a judgment of Associate Judge Andrew dated 17 May 2018 (Consolidationdecision).41 CIV 2018-470-26.2 CIV 2018-470-33. This proceeding and CIV-2018-470-26 are together referred to asthe Companies Act proceedings.3 CIV 2016-470-138.4 McCullagh v Fairway Holdings Ltd [2018] NZHC 1084 [Consolidation decision].[4] Fairway and Quest applied under s 56(3) of the Act for leave to appeal againstthat judgment. Their application was dismissed by Associate Judge Andrew in ajudgment dated 27 July 2018 (Leave decision).5 Fairway and Quest now seek theleave of this Court to appeal under s 56(5) of the Act.Material facts[5] The background to the application for consolidation is succinctly explained inthe Consolidation decision as follows:[10] Defects in the Cayman Apartments became apparent in 2008, shortlyafter the building was completed. Ongoing issues were then raised atBody Corporate meetings and with Hamilton and CBC.[11] CBC, the builder, ceased to trade in 2010, changed its name toXMP & D Ltd in 2012 and was put into liquidation in 2014.CBC Construction (2010) Ltd was incorporated in April 2010.[12] Hamilton, the developer, was put into liquidation by special resolutionof Fairway and Quest in July 2014.[13] Mr Peter Cooney was a director of Hamilton, XMP andCBC Construction (2010). Mr Matthew Lagerberg was a director of XMP anda director of CBC Construction (2010). Mr Drew Beekie, was likewise adirector of XMP and CBC (2010).[14] Mr Cooney, Mr Lagerberg and Mr Beekie are all defendants inthe defective building proceeding. Hamilton and CBC have been named asdefendants, but at no time has any party sought the liquidators' consent or theleave of the Court, under s 248 of the Companies Act 1993, to commence orto continue proceedings against both companies.[15] None of the parties in the voidable proceeding (Hamilton,the liquidators, Fairway or Quest) is currently a party to the defective buildingproceeding.[16] The only parties to the dividend proceeding that are also parties tothe defective building proceeding are Messrs Cooney and Turner. Mr Beekie,Mr Lagerberg and CBC Construction (2010) are not parties to the dividendproceeding.The impugned transactions[17] In March 2014, Hamilton by its directors, Mr Cooney and Mr Turner,declared a gross dividend to Fairway and Quest in the sum of $513,899 bycrediting the current accounts of Fairway ($308,334.40) and Quest($205,555.60).5 McCullagh v Fairway Holdings Ltd [2018] NZHC 1883 [Leave decision].[18] Mr Cooney and Mr Turner signed a solvency certificate declaring thatHamilton would satisfy the solvency test immediately after paying thedividend. Hamilton's net assets after the dividend according to the solvencytest work paper were $2,045. That figure did not take into account any liabilityin respect of the Cayman Apartments.[19] On 24 March 2014, Hamilton then entered into a number oftransactions with related entities, which the liquidator applicants allege hadthe effect of:(a) transferring to a related entity, Pyes Pa Holdings Ltd, a unit inthe Cayman Apartments (Unit 5A1) owned by Hamilton; and(b) repaying the current account debts to Fairway and Quest so thatFairway and Quest exchanged the unsecured debt owed by Hamilton(a company said to have significant liabilities and no assets of anyvalue) for debts owed by related companies without any apparentexposure to contingent creditor claims (Pyes Pa Holdings Ltd,Waitaha Ridge Trust and Duxbury Investments Ltd) and an asset(Unit 5A1 held by Pyes Pa).The defective building proceeding[20] In May 2014, one of the unit owners of the Cayman Apartments,Affordable Housing Ltd, brought proceedings against Hamilton, CBC andthe Tauranga City Council (TCC) claiming $100,000. Hamilton and CBC didnot file defences.[21] The claim by Affordable Housing Ltd was settled in June 2016 andthe liquidators have admitted a claim from TCC in Hamilton's liquidation for$184,000, being a proportion of a settlement payment by TCC toAffordable Housing Ltd.[22] In 2016, the Body Corporate and unit owners issued the defectivebuilding proceeding against TCC and various other parties, claiming estimatedlosses of at least $13 million. The Body Corporate is carrying out furtherinvestigations in order to resolve the remedial scope and costs of the repairsbefore filing an amended pleading by October 2018. The matter is not yetready for trial.The voidable proceeding and the dividend proceeding[23] The applicant liquidators issued voidable transaction notices on8 March 2017 in the sum of $2,177,935 against Fairway and Quest in respectof the payments of March 2014 and in relation to the partial repayment of theircurrent accounts. Fairway and Quest served notices of objection.The liquidators commenced the Companies Act proceedings on 26 February2018.[24] Fairway and Quest have filed a notice of opposition to the voidableproceeding, but have not filed any affidavit evidence.[6] The application, which was filed in the voidable proceeding, sought ordersconsolidating the three proceedings on terms including that they be case-managed andtried together. The grounds for the application were:(a) There are common questions of law and fact in the voidable proceedingand the dividend proceeding including:(i) Was Hamilton solvent in March 2014?(ii) Did Hamilton have contingent liabilities in March 2014 as aresult of defects in the Cayman Apartments?(b) The three proceedings give rise to common questions of fact, including:(i) What defects were manifest in the Cayman Apartments from2008 to 2014?(ii) What remedial work was completed from 2008 to 2014, and bywhom?(iii) What contractual arrangements (if any) were in place inMarch 2014, between Hamilton, XMP, CBC (2010),Mr Cooney, Mr Turner, Tauranga City Council and BodyCorporate 396511, to deal with defects and remedial work at theCayman Apartments?(c) The rights to relief contained in the three proceedings arise out of thesame series of events, in particular:(i) The construction of the Cayman Apartments.(ii) The emergence of defects, and remedial work undertaken, atthe Cayman Apartments from 2008 to 2015.The High Court judgment[7] The Associate Judge acknowledged that there was some overlap orcommonality between the relevant events and transactions at issue in the defectivebuilding proceeding and those the focus of the Companies Act proceedings but heconsidered that the degree of commonality and the risk of different or inconsistentfindings of fact was overstated.6 He viewed the issues in the Companies Actproceedings as being sufficiently distinct and separate from those in the defectivebuilding proceedings so that in terms of r 10.12(a) there were in substance no realcommon questions of law or fact arising.[8] His reasons for rejecting the application included the following factors:7(a) The parties to the Companies Act proceedings are substantiallydifferent to the parties in the defective building proceeding.(b) Consolidation would likely lead to delay in resolution of all ofthe proceedings.(c) The defective building proceeding is not yet ready for trial whereasthe voidable transaction procedure in the Companies Act is intended tobe an efficient and economical means of unwinding payments orbenefits that have been improperly made or gained.(d) If consolidation was granted there was a risk of prejudice to Hamiltonand the liquidators in terms of additional cost and jeopardising theirrecovery prospects.(e) The inconvenience or disadvantage for the applicants in terms ofdiscovery and the subpoenaing of witnesses did not tip the balance ofthe overall interests of justice.6 Consolidation decision, above n 4, at [30].7 At [36(a)]—[36(e)].The application for leave to appeal[9] Mr Brittain QC for the applicants wishes to contend that the extent of thedefects in the Cayman Apartments in 2014 and the arrangements between Hamiltonand CBC (2010) to deal with those defects are intertwined. He submits that whenapplying the solvency test (which is required in the dividend proceeding andthe voidable preference proceeding) the adequacy of the arrangements betweenHamilton and CBC (2010) and the arrangements between Hamilton, the BodyCorporate and the Tauranga City Council can only be measured against the state of theknown defects at the relevant time, March 2014.[10] He acknowledges that in the present case there is no issue of general or publicimportance that requires determination. However he submits that the procedural rightsin question directly impact on the rights of Mr Cooney, Mr Turner, Fairway and Questto a fair hearing in the voidable preference proceeding and the dividend proceedingand the rights of CBC (2010), Mr Beekie and Mr Lagerberg to a fair hearing inthe defective building proceeding.Relevant principles[11] The requirement in s 56 of the Act that leave be required for appeals fromdecisions of the High Court made on interlocutory applications represents a significantchange in procedure and procedural rights.8 In Finewood Upholstery Ltd v VaughanFitzgerald J described the leave requirement as a "filtering mechanism" to ensure thatunmeritorious appeals of interlocutory orders or appeals of interlocutory orders of nogreat significance to either of the parties or more generally do not unnecessarily delaythe proceedings to which the orders were made.9[12] Similarly in Ngai Te Hapu Inc v Bay of Plenty Regional Council this Courtobserved that there was no doubt that s 56(3) was intended to reduce the volume ofappeals to this Court from interlocutory decisions in the High Court.10 The Courtnoted the comparison made with s 24G of the Judicature Act 1908 concerning8 Sutcliffe v Tarr [2017] NZCA 360, [2018] 2 NZLR 92 at [8].9 Finewood Upholstery Ltd v Vaughan [2017] NZHC 1679 at [13].10 Ngai Te Hapu Inc v Bay of Plenty Regional Council [2018] NZCA 291 at [15].commercial list appeals in the Explanatory Note to the Judicature Modernisation Bill2013 and then referred to the statement of the s 24G principles in Meates v Taylor[Leave].11[13] While this Court did not consider Ngai Te Hapu was an appropriate case toprovide definitive guidance on the principles to be applied on applications for leaveunder s 56 of the Act, it stated:12We agree that leave to appeal should only be granted where the significanceor implications of an arguable error of fact or law, either for the particular caseor for the applicant or as a matter of precedent, warrants the further delaywhich the appeal process would involve.[14] However the understandable objective of regulating the volume ofnon-substantive appeals does not preclude the grant of leave where it appears that theinterests of justice warrant further consideration by this Court. In Western Joinery Ltdv Commissioner of Inland Revenue Associate Judge Bell suggested that guidance onthe relevant principles might be found in decisions under the former s 71A of theDistrict Courts Act 1947.13 In particular he drew attention to the dictum of Somers Jin Sandle v Stewart:14The purpose of [leave] is to limit the cases which may go on appeal in theinterests of finality of litigation and the workload of the High Court, whilepreserving the integrity of the law and the interests of justice.Discussion[15] In the Consolidation decision the Associate Judge carefully weighed thecompeting considerations and concluded that the overall interests of justice did notfavour consolidation. In his leave decision he concluded that Fairway and Quest hadnot met the requisite threshold as formulated in Finewood.15 He also appeared to placesignificant weight on the fact that the Consolidation decision involved the exercise ofa discretion, referencing Kacem v Bashir.1611 Meates v Taylor [Leave] (1992) 5 PRNZ 524 (CA) at 526 confirmed in Clear CommunicationsLtd v Attorney-General (1998) 12 PRNZ 287 (CA).12 Ngai Te Hapu Inc v Bay of Plenty Regional Council, above n 10, at [17].13 Western Joinery Ltd v Commissioner of Inland Revenue [2017] NZHC 3297 at [9].14 Sandle v Stewart [1982] 1 NZLR 708 (CA) at 715.15 Finewood Upholstery Ltd v Vaughan, above n 9.16 Leave decision, above n 5, at [5], citing Kacem v Bashir [2010] NZSC 112, [2011] 2 NZLR 1at [32].[16] On an application under s 56(5) of the Act we are required to undertake ourown assessment. It is fair to say that we see the competing cases as a little more finelybalanced than did the Associate Judge. In addition there are two factors to which wedraw attention.[17] First, in the Leave decision the Associate Judge appeared to substantiallydiscount the significance of consolidation for the persons who supported it, stating:[22] According to Fairway and Quest, the parties who will be prejudiced ifleave to appeal is refused are Messrs Cooney, Turner, Lagerberg and Beekieand CBC 2010. However, none of those parties applied for the proceedingsto be consolidated, none were formally represented at the hearing ofthe application for consolidation, and none have applied for leave to appeal,despite having the opportunity to do so. Accordingly, and as the liquidatorssubmit, it is difficult to see how those parties have standing in relating to theproposed appeal.[18] However the materials provided to the Court in connection with the leaveapplication included a memorandum on behalf of CBC (2010) and Messrs Lagerbergand Beekie which signalled their support for consolidation of the three proceedings.The memorandum foreshadowed anticipated instructions from CBC (2010) to applyfor leave under s 248(1)(c) of the Companies Act to commence a cross-claim againstHamilton in the defective building proceeding. It asserted that the positions ofCBC (2010) and Messrs Lagerberg and Beekie could be prejudiced ifthe Companies Act proceedings are heard and determined separately and before thedefective building proceeding.[19] We further note that subsequent to the Leave decision a memorandum was filedin this Court on behalf of CBC (2010) and Messrs Lagerberg and Beekie whichreferred to their earlier memorandum in the High Court and recorded their support forthe application for leave to appeal against the Consolidation judgment.[20] Secondly, a matter which is not mentioned in the Leave decision (although itis referred to in the Consolidation decision) is the nature of the interest of the TaurangaCity Council which is the first defendant in the defective building proceeding. Amemorandum filed by the liquidators in response to a request from the Judge at thehearing of the application stated:3 The [liquidator's] reports evidence that, in addition tothe liquidators' own fees and expenses, which rank first in the orderof priority of payment to preferential creditors and are thereforeimmediately payable from any recovery:3.1 the liquidators have received a total, to 18 January 2018, of$105,533 in creditor funding from the Tauranga City Council(TCC), which is a preferential claim under clause 1(1)(e)(ii)of the Seventh Schedule to the Companies Act 1993(the Seventh Schedule);3.2 the liquidators have admitted a claim from TCC for $184,000,being TCC's claim for contribution in separate High Courtproceedings that have been resolved. The claim attractspreferential status under clause 1(1)(e)(i) of the SeventhSchedule; and3.3 the liquidators have received a contingent claim from TCC for$13 million in respect of the claim against TCC inthe Defective Building Proceeding. If admitted bythe liquidators, this claim will also attract a preferential statusunder clause 1(1)(e)(i) of the Seventh Schedule.4 There being no preferential claims under clauses 1(1)(b), (c) or (d) ofthe Seventh Schedule, the preferential claims of the liquidators andTCC (to the extent they have been admitted) can be paid immediatelyfrom any recovery by the liquidators.[21] Mr Brittain submits that the Council stands to gain a significant tacticaladvantage if the three proceedings are not heard together. He emphasises that it is inthe Council's best interests for the claims against the other defendants in the defectivebuilding proceeding to succeed which, it is said, would reduce the Council's exposureto the claim.[22] When addressing an application of this nature on the papers we are somewhathandicapped in evaluating the significance of the different hats which the Council maybe wearing in this matter. Suffice to say it appears to us to add another layer ofcomplexity to what is already a somewhat complicated case. As such it is a factorwhich contributes to the conclusion we have reached that it is in the interests of justicethat the opportunity should be afforded for a second look at the issue of consolidationin the particular circumstances of this case.Result[23] The application for leave to appeal under s 56(5) of the Senior Courts Act 2016is granted.[24] The respondents must pay the applicants costs for a standard application forleave to appeal on a band A basis together with usual disbursements.Solicitors:JK Hamilton, Tauranga for ApplicantsStace Hammond, Auckland for Respondents