DEPARTMENT OF CORRECTIONS v DECMIL CONSTRUCTION NZ LTD (IN LIQ) [2020] NZHC 2976 [11 November 2020]

DEPARTMENT OF CORRECTIONS v DECMIL CONSTRUCTION NZ LTD (IN LIQ) [2020] NZHC 2976[11 November 2020]IN THE HIGH COURT OF NEW ZEALANDWELLINGTON REGISTRYI TE KŌTI MATUA O AOTEAROATE WHANGANUI-A-TARA ROHECIV-2020-485-392[2020] NZHC 2976UNDER the Companies Act 1993BETWEEN HER MAJESTY THE QUEEN IN RIGHTOF NEW ZEALAND ACTING BY ANDTHROUGH THE CHIEF EXECUTIVE OFTHE DEPARTMENT OF CORRECTIONSApplicantAND DECMIL CONSTRUCTION NZ LIMITED(IN LIQUIDATION)First RespondentDERMOTT JOSEPH McVEIGHSecond RespondentHearing: 5 November 2020Counsel: S M Bisley and M R Evans for applicantNo appearance for respondentsJ E M Lethbridge for Decmil Group Limited (via VMR)Judgment: 11 November 2020RESERVED JUDGMENT OF DOBSON JIntroduction and procedural background[1] In October 2017, the applicant (Corrections) contracted with the firstrespondent (Decmil NZ) for the construction of nine modular units at variousNew Zealand prisons. On any view, it was a major undertaking with the contract sumbeing approximately $196 million.[2] The contract has not gone well. During February 2020, Decmil NZ purportedto terminate the contract, claiming that performance had become impossible or thatthe contract was otherwise frustrated. Corrections' response was to give notice oftermination of the contract on grounds that Decmil NZ had not remedied failures tocomply with certain milestones that applied under the contract and that Decmil NZhad failed to proceed regularly and diligently with the contract works.[3] The contract committed the parties to a dispute resolution process thatultimately led to arbitration. In early March 2020, the parties agreed the variousdisputes would be referred to arbitration and on 17 March 2020 they agreed to theappointment of the Hon Raynor Asher QC as arbitrator. Exchanges occurred aboutprocedural arrangements, some of which reflected the terms of engagement proposedby the arbitrator.[4] On 16 April 2020, Decmil NZ was placed into liquidation by a shareholders'resolution at the instigation of its effective parent company, Decmil Group Limited(Decmil Group), and Mr McVeigh was appointed as the liquidator.[5] Early exchanges between advisers for the liquidator and for Correctionsindicated that the liquidator would not consent to the claims Corrections seeks topursue being determined by the arbitrator. Accordingly, in this proceeding,Corrections seeks the Court's leave to continue the arbitral proceeding againstDecmil NZ in liquidation, and the liquidator was joined as the second respondent.[6] The Court's consent is required under s 248(1) of the Companies Act 1993 (theAct), which relevantly provides:248 Effect of commencement of liquidation(1) With effect from the commencement of the liquidation of acompany,—(c) unless the liquidator agrees or the court orders otherwise, aperson must not—(i) commence or continue legal proceedings against thecompany or in relation to its property; or(ii) exercise or enforce, or continue to exercise orenforce, a right or remedy over or against property ofthe company:[7] A notice of opposition to the application was filed on behalf of the liquidatorand certain initiatives taken to defer progress with this proceeding. It was scheduledfor hearing on 5 November 2020 and requests for adjournment of that hearing weredeclined.[8] In light of a more recent indication from counsel retained by the liquidator thatthe liquidator considered himself unable to retain counsel to appear on this application,I convened a telephone conference with counsel on 28 October 2020. During thatconference, I recognised the desirability of some mechanism that would enable DecmilGroup, as guarantor of Decmil NZ's liabilities to Corrections under the contract, toparticipate in some way. My minute after that conference dated 30 October 2020recognised that prospect.1[9] On 3 November 2020, solicitors for Decmil Group filed a memorandumindicating that it intended to seek involvement in the proceeding but requesting anadjournment. On 4 November 2020, I declined the request for adjournment butindicated that I would facilitate participation of counsel on behalf of Decmil Group,either as a passive observer or on a Pickwick basis.2[10] Arrangements were made for Ms Lethbridge to appear by VMR on a limitedbasis and the hearing proceeded on what Mr Bisley accurately suggested waseffectively a formal proof basis.Factual assumptions[11] The relevant contract between Corrections and Decmil NZ included anobligation for Decmil NZ to procure a guarantee of its performance and liabilitiesunder the contract from its parent company. Also in evidence were the terms of thatguarantee as executed by Group in favour of Corrections. Without making a definitive1 Department of Corrections v Decmil Construction NZ Ltd (in liq) HC Wellington CIV-2020-485-392, minute of 30 October 2020.2 Minute of 4 November 2020.ruling on the scope of the guarantee, it is appropriate to assess the present applicationon the assumption that the guarantee is likely to be enforceable against Decmil Groupfor the extent of any award made in Corrections' favour.[12] The potential liability of Decmil Group gives it a meaningful interest inparticipating in the arbitration. Its interest is likely to extend to defence of all aspectsof the claims brought against Decmil NZ, drawing on all arguments that would havebeen available to its contracting subsidiary. Decmil Group will have an interest inreducing the quantum claimed as much as it can from the present projection of some$60 million. Further, Decmil Group will be interested to advance all counterclaimsavailable to Decmil NZ against Corrections. Decmil Group is the party that has acompelling interest in advancing such claims, again on all grounds that would beavailable to Decmil NZ. It can reasonably be assumed that the liquidator and thoseinvolved for Decmil Group will agree appropriate arrangements for the liquidator tomake available to those acting for Decmil Group records and other resources nowunder the liquidator's control, and for Decmil Group to confirm a financialcommitment to running the defence of claims brought by Corrections and to advancecounterclaims on behalf of Decmil NZ.[13] Directions on that aspect of any arbitration are beyond the scope of the presentapplication, but I assess the application on the premise that there are, at the very least,realistic prospects of such arrangements being settled. At the end of the hearing, Iheard briefly from Ms Lethbridge. Although she has limited instructions at this stage,her sketch of the present position adopted by Decmil Group did not cause me anyconcerns that this assumption in unrealistic.The legal test[14] The learned authors of Heath and Whale on Insolvency characterise thequestion under s 248 of the Act (as to whether a claimant should be permitted to pursuea claim by means of proceedings rather than submitting a proof of debt) as ultimatelyone of choosing alternative forms of procedure.3 There is an emphasis in recent cases3 Paul Heath and Michael Whale (eds) Heath and Whale on Insolvency (online ed, LexisNexis) at[21.4].that the key question is whether the claim is more appropriately dealt with in theliquidation or by proceedings. That text cites other factors going to the Court'sdiscretion, including, in summary form, the following:4• There must be equality amongst various creditors. Proceedingsshould not produce an advantage to a particular creditor over othercreditors. • The assets of a company should not be dissipated in wastefullitigation, particularly if there is a more convenient method fordetermining the claim;• The onus is on the party seeking leave to satisfy the court that leaveshould be given;• The question to be considered is whether there are anycircumstances which render it necessary that the action be continuedor whether the claim could as easily be dealt with in the liquidation.The likely attitude of the liquidator is therefore a relevant factor. Ifthe liquidator is likely to require the claim to be proved (because, forexample, of the complexity of the proceedings), would not find it easyto determine and be likely to reject it, the most appropriate way ofdealing with the matter is in an action with the leave of the court;• Leave under s 248(1)(c) will usually be declined if the proceedingssought to be commenced, even if successful, are likely to be fruitless.The discretionary considerationsComplexity[15] Corrections' claim has every appearance of being a many-headed dragon. Adraft of its points of claim is included among the documents, running to 47 pages. Thenine causes of action include claims for misrepresentation and breach of the FairTrading Act 1986. Inarguably, pursuit of the claims will involve a highly complexdispute as to alleged breaches of a very substantial design and construction contract,likely to give rise to difficult issues of both fact and law. The contract had been intrain for some two and a half years.4 At [21.4](e) (footnotes omitted). See also the factors set out in Fisher v Isbey (1993) 13 PRNZ182 (HC) at [19].[16] The liquidator is a Perth-based insolvency and restructuring specialist,qualified as a chartered accountant. He is also registered as a liquidator with theAustralian Securities and Investment Commission. An assessment of the moreappropriate forum as between the nominated arbitrator, whose career includes manyyears as a High Court and Court of Appeal Judge following a period practising as acommercial silk based in Auckland, and the liquidator presents an easy choice.Without intending any disrespect to the liquidator, in these circumstances he is clearlynot as equipped as the nominated arbitrator is to conduct an adequate analysis of theclaims and counterclaims, and produce a credible and accurate result. At least in theshort-term, restrictions on travel from Perth to New Zealand are likely to inhibit theliquidator's capability to deal with the issues that will arise.[17] In cases where disputes appear to have been various degrees morestraightforward than will be involved here, courts have resolved that arbitration is themore appropriate forum. In DHC Assets Ltd v Vaco Investments (Lincoln Road) Ltd(in liq), Lang J observed:5[9] Many disputes are more readily dealt with within the context of aliquidation rather than through continued litigation. The liquidator has thepower to admit or reject claims in whole or in part. The Court then has thepower to modify or reverse the liquidator's decision. This provides aconvenient means of dealing with many disputed claims by creditors.[10] The present case does not fall within that category because thedisputed claims are complex and cannot be readily determined by theliquidator or by the Court. Rather, they are more appropriately dealt with bya suitably qualified arbitrator. For that reason alone it is appropriate that leavebe given.[18] Similarly, in Downer Construction (New Zealand) Ltd v One Hobson StreetLtd (in liq), Associate Judge Abbott recognised that "arbitration has long beenaccepted as the best method of determining large and complex construction disputes"in circumstances where one party to the dispute is a company in liquidation.65 DHC Assets Ltd v Vaco Investments (Lincoln Road) Ltd (in liq) [2017] NZHC 454 (footnotesomitted).6 Downer Construction (New Zealand) Ltd v One Hobson Street Ltd (in liq) HC Auckland CIV-2007-404-2374, 3 August 2007 at [22].Not fruitless[19] The prospect of a solvent party that is liable to meet any award in Corrections'favour means that pursuit of the arbitral proceeding would not be fruitless, to the extentthat is a consideration in whether leave should be granted.Liquidator potentially conflicted?[20] Mr Bisley also argued that the circumstances of the liquidation would in anyevent render it inappropriate for a determination of Corrections' various claims to beleft to the liquidator. Mr Bisley cited various statements and observations by theliquidator since his appointment in which he has placed emphasis on his belief thatDecmil NZ's most promising asset is the claims it has against Corrections. Mr Bisleyinstanced a statement by the liquidator's solicitors on 6 May 2020 to the effect that hecould not see how Corrections could claim to be a creditor. Mr Bisley suggested onthe basis of a summary of costs incurred that the liquidator has expended some$940,000 in examining the prospects of claims against Corrections. Mr Bisleyreferred to statements in which the liquidator has expressed confidence in the strengthof such claims.[21] Mr Bisley also referred to the circumstances of the liquidator's appointment.He had been retained pre-liquidation by Decmil Group to advise it, and raised at anearly stage the prospects of Decmil NZ having a claim against Corrections for breachof contract and possible bases for co-operation between the liquidator and DecmilGroup in advancing such claims.[22] In assessing unsecured creditors' claims lodged with the liquidator for thepurposes of calculating voting rights on a motion for his possible removal, theliquidator disallowed Corrections' claims within the categories it now seeks to pursueby way of arbitration, quantified at $64 million (plus GST), except to the amount of$1. However, the liquidator did admit claims under another head where Correctionshas made payments due to subcontractors that were otherwise to have been paid byDecmil NZ in the amount of $4,376,109.29.[23] At a previous telephone conference where Mr Tingey was seeking anadjournment on behalf of the liquidator, he emphasised that the valuation at $1 wasonly a quantification of Corrections' claims for the very limited purpose of calculatingvoting rights.[24] Ms Lethbridge cautioned against drawing any inference of a lack ofimpartiality on the part of the liquidator as a ground for preferring arbitration. Shesubmitted that, in the absence of representation for the liquidator, it was inappropriateto infer that anything in the circumstances of his appointment, or conduct since then,justified a finding that he would lack adequate impartiality in determining claimsbrought by Corrections.[25] I accept Ms Lethbridge's point that it would be unfair to make any finding ofa lack of impartiality on the part of the liquidator as a ground for granting leave forarbitral proceedings, without hearing from him on the criticism. However, putting thatconsideration to one side, there is still a fundamental conflict between the liquidatorreceiving and objectively considering on their merits all claims brought by all creditorsseeking to prove in the liquidation, and the liquidator's commitment to the generalbody of creditors that he would pursue claims against Corrections as the most likelysource of any payments to all other creditors. Pursuit of such claims will not producea return to creditors unless they substantially exceed the amount of Corrections' claimsagainst Decmil NZ. This inevitable conflict supports the conclusion that the arbitralproceeding should be permitted to continue.Not a cause of inequality among creditors[26] Another consideration is whether, if granted leave to pursue an arbitration,Corrections could thereby obtain some advantage over other creditors. There is nosuggestion that would be the case here. Indeed, it is positively in the interests of allcreditors that there be an authoritative determination of the competing claims betweenCorrections and Decmil NZ, a resolution of which will be needed for the liquidationto be progressed.Liquidator's earlier concerns[27] The liquidator earlier opposed this application on a number of grounds.Appreciating that they have not been advanced in argument, they can be dealt withquite shortly.[28] First, the liquidator argued that because Corrections has submitted a claim inthe liquidation, that claim is thereby required to be determined by the liquidator. Thatis not a valid argument. Creditors file claims in liquidations in a range ofcircumstances, including as a means of preserving their position, and it cannot alterthe evaluation of whether the dispute is more appropriately determined in arbitration.[29] Secondly, the liquidator argued that granting leave is premature because he isstill investigating the claim brought by Corrections, as well as the claims thatDecmil NZ could bring against Corrections. Given the passage of time and theabsence of any articulated bases for claims against Corrections, as well as the absenceof any indication the liquidator has revisited his provisional determination thatCorrections' claim ought to be valued at $1, this concern by the liquidator cannot carryany weight.[30] Finally, the liquidator raised his earlier determination of Corrections' claim asrequiring Corrections to go through the process of challenging it, under s 284 of theAct. However, the opportunity to pursue that course, whilst an option open to creditorswhose proofs of debt have not been accepted in full, it is not a mandatory requirement.In the present circumstances, the failure to take that step cannot have any bearing onwhether leave is appropriately given under s 248 of the Act.[31] In an earlier telephone conference with counsel on 1 September 2020,Mr Tingey flagged an argument he contended was available to the liquidator, to theeffect that Corrections and Decmil NZ had not in fact agreed to arbitrate their disputes.He did not elaborate on the respects in which he considered the arrangements betweenthem were insufficient to be treated as an agreement to submit their differences toarbitration.[32] Mr Bisley submitted that this contention was untenable because the parties'commitment to arbitrate was in the contract and any lack of agreement on proceduraldetails could not alter the existing commitment to arbitrate. He cited the decision ofthen Associate Judge Gendall in Miro Property Holdings Ltd v Fletcher ConstructionCompany Ltd where a construction contract contained a commitment to arbitrate invery similar terms.7 The Judge recognised that such an arbitration clause in a contractbinds the parties to pursue the arbitral process provided for when disputes arise underthe contract.8[33] I accept that reasoning applies in the present circumstances. Even if it did not,and for some reason the commitment in their original contract was no more than anagreement to agree, from a review of the correspondence during March 2020, I wouldincline to the view that the parties had agreed to arbitrate their differences before theHon Raynor Asher QC. The details still to be agreed were within those that could beresolved by the arbitrator applying the provisions in sch 2 of the Arbitration Act 1996.Outcome[34] I am satisfied that the leave sought is appropriately granted. I accordinglyorder under s 248 of the Act that Corrections be given leave to continue the arbitralproceeding that was in the course of being arranged at the time of liquidation.Costs[35] At the time of written submissions being filed on behalf of Corrections, costsorders were sought personally against the liquidator on the basis that he hadunreasonably maintained opposition to the application and ought properly to haveconsented to the arbitral proceeding continuing, which would have obviated the needfor this proceeding.[36] Given the developments in the week before the hearing, Mr Bisley concededthat the application for a costs order personally against the liquidator would not be7 Miro Property Holdings Ltd v Fletcher Construction Company Ltd HC Wellington CIV-2010-485-2540, 31 May 2011.8 At [34].pursued. The opposition had not been maintained, and the prospects were forco-operation between the liquidator and those advising Decmil Group to facilitateprogress with the arbitration.[37] Nonetheless, Corrections did seek an order for costs against the company inliquidation. In the circumstances as they have developed, I am satisfied that such anaward is warranted. Had the merits of the situation been addressed earlier, theproceeding may have not been required.[38] I accordingly order costs in favour of Corrections and against the firstrespondent on a 2B basis, together with disbursements as approved by the Registrar.I certify for a two hour hearing for one counsel.Dobson JSolicitors:Buddle Findlay, Wellington for applicantAnthony Harper, Auckland for respondentsMartelli McKegg, Auckland for Decmil Group Limited