UNITED CIVIL CONSTRUCTION LTD v HAYFIELD SHA LTD (IN LIQ) [2023] NZCA 377

UNITED CIVIL CONSTRUCTION LTD v HAYFIELD SHA LTD (IN LIQ) [2023] NZCA 377 [22 August2023]IN THE COURT OF APPEAL OF NEW ZEALANDI TE KŌTI PĪRA O AOTEAROACA695/2022[2023] NZCA 377BETWEEN UNITED CIVIL CONSTRUCTIONLIMITEDAppellantAND HAYFIELD SHA LIMITED (INLIQUIDATION)RespondentHearing: 24 July 2023Court: Collins, Lang and Woolford JJCounsel: P F Dalkie and M Holland for AppellantG R Grant and M C Frogley for RespondentJudgment: 22 August 2023 at 9.30 amJUDGMENT OF THE COURTA The appeal is dismissed.B The appellant must pay the respondent costs on a Band A basis for astandard appeal together with usual disbursements. We certify forsecond counsel.____________________________________________________________________REASONS OF THE COURT(Given by Lang J)[1] The appellant, United Civil Construction Ltd (United Civil), is the principalcreditor in the liquidation of the respondent, Hayfield SHA Ltd (in liquidation)(Hayfield). The sum owing to United Civil currently amounts to approximately80 per cent of Hayfield's total indebtedness to creditors.[2] United Civil is dissatisfied with the actions, or lack of action, taken by theliquidators in several respects. It applied to the High Court for orders under theCompanies Act 1993 (the Act) that it contended were necessary to resolve its concerns.[3] In a judgment delivered on 28 November 2022, Associate Judge Gardinerdismissed each of United Civil's applications.1 United Civil appeals against theAssociate Judge's decision.Background[4] Hayfield was incorporated to assist 14 landowners to obtain a change of zoningso as to permit the development of land situated in Karaka for residential housing. Thelandowners entered into contracts with Hayfield under which they agreed to fund theconstruction of water supply and wastewater reticulation systems that were necessaryto enable the land to be developed for that purpose. Hayfield then entered into acontract with United Civil for the construction of the infrastructure.[5] The work was to be carried out in two stages. However, difficulties arose onseveral fronts. United Civil ceased work under the construction contract in December2018 and formally suspended work in February 2019. Hayfield was then placed inreceivership on 4 April 2019 and in liquidation the following day. The receiverssubsequently retired after recovering the amount owing to the secured creditor bywhom they were appointed. They paid the sum of approximately $277,000 to theliquidators.[6] The liquidators have endeavoured to continue with the work necessary tocomplete the installation of the infrastructure. This involved negotiating with stageone and stage two landowners to recover amounts owing under the fundingagreements. The liquidators have now recovered those sums from all but one of the1 United Civil Construction Ltd v Hayfield SHA Ltd (in liq) [2022] NZHC 3130 [High Courtjudgment].stage one landowners. However, they have found it difficult to recover sums owingby the stage two landowners.[7] United Civil contends the time has now come for the liquidators to ceasenegotiating with landowners in default. It wants the liquidators to issue proceedingsin the High Court to recover any sums that remain owing. It sought an order unders 284(1)(b) of the Act reversing or modifying the liquidators' decision to continue withtheir strategy of negotiating with the landowners.[8] The second application arose from the claims United Civil has filed in theliquidation. The liquidators have now accepted several of these. However, UnitedCivil has also filed claims that the liquidators have not yet accepted. It sought leavefrom the High Court under s 248(1)(c)(i) of the Act to have these claims determinedby an adjudicator in accordance with the Construction Contracts Act 2002.[9] Finally, United Civil sought an order under s 256(1)(a)(ii) of the Act requiringthe liquidators to provide it with copies of the funding agreements Hayfield hadentered into with the landowners.[10] The Associate Judge declined to make any of the orders United Civil sought.The application under s 284(1)(b) for an order reversing or modifying theliquidators' decision to continue with a strategy of negotiating with thelandowners[11] Section 284 of the Act relevantly provides as follows:284 Court supervision of liquidation(1) On the application of the liquidator, a liquidation committee, or, withthe leave of the court, a creditor, shareholder, other entitled person, ordirector of a company in liquidation, the court may—(a) give directions in relation to any matter arising in connectionwith the liquidation:(b) confirm, reverse, or modify an act or decision of theliquidator:[12] The fact that United Civil is a creditor of Hayfield meant it was required toobtain the leave of the High Court to challenge the liquidators' decision to continuewith their strategy of negotiation. The Associate Judge noted that an application forleave in this context is generally heard together with the substantive application.2 TheAssociate Judge ultimately declined to review the liquidators' decision but did notexpressly deal with the issue of leave. We proceed on the basis that she granted UnitedCivil leave to bring the application but then declined it.The argument[13] United Civil accepts that it was initially open to the liquidators to seek toachieve a negotiated outcome with the landowners. However, it contends that thedelay that has now occurred means that the liquidators should be required to alter theirstrategy. As we have already noted, United Civil contends the liquidators should nowbe directed to issue proceedings against the landowners in the High Court to recovermonies outstanding under the funding agreements.[14] The argument for United Civil is summarised in the following paragraph of thewritten submissions Mr Dalkie and Mr Holland filed on its behalf in support of theappeal:3[15] We do not criticise the initial decision of the liquidators to try andnegotiate with the landowners. That is in equal measure sensible andcommercial. However, there comes a point where so much time haspassed that whilst the initial strategy call was right, continuing with itwas and is plainly wrong. It is a matter of fact and degree when thatpoint is, but 3 years and 3 months, was, and is, on any common sensecommercial view more than enough. That is especially so in thecontext of a winding up, having regard to the duties and obligationsof a liquidator. Any decision to persist was, and is, clearly wrong.[21] The decision by the liquidators to continue was to do no more thanhope there is going to be a negotiated agreement after 3 years and3 months. It must on any view be not just wrong, but hopelesslywrong. There was no evidence to suggest there would be any change.All [one of the liquidators of Hayfield] did in his evidence was toexpress statement of opinion of his "hope". It never got any betterthan that.2 At [12], citing Arnerich v Vaco Investments (Lincoln Road) Ltd (in liq) [2018] NZHC 1974 at [47].3 Emphasis in original.The test[15] Mr Dalkie accepts, and we agree, that the Associate Judge correctly enunciatedthe test to be applied in the present context:[13] The power to review a liquidator's actions will be exercised in casesof fraud, where the liquidator's discretion has not been exercised in good faithor where the liquidator has acted unreasonably. The actions of a liquidatorcan be unreasonable without being in breach of an express statutory provision.The question is whether in all the circumstances, including the absence ofconsultation, the liquidator's actions were unreasonable.4[14] The Court will not interfere with matters of day-to-day administrationor hold a liquidator accountable for an error of judgment.5 Serious and obviouslapses of judgment on the part of liquidators must be shown before the Courtswill interfere.6 And, as Williams J has observed, the Courts are not well placedto perform the functions undertaken by liquidators in real time and in the realworld.7[15] The Courts have suggested that liquidators are more vulnerable toreview if they have not taken proper advice when making decisions requiringconsideration of matters outside their expertise.8[16] The Court of Appeal has drawn a distinction between reviewing theexercise of a liquidator's judgment or discretion, and the mechanicalperformance by a liquidator of one or his or her statutory functions.9 A "wrongor unreasonable" test as discussed above is appropriate in the former case,where the concern is about undue interference with the liquidator's functions.It is not necessary to show that the liquidator is at fault in the latter case.10[16] The Associate Judge held that the appropriate test in the circumstances of thepresent case was whether the liquidators' decision was "wrong or unreasonable".11The Associate Judge's decision[17] The reasons for the Associate Judge's decision are encapsulated in thefollowing paragraphs of her judgment:124 Consolidated Technologies Development (NZ) Ltd v McCullagh (2006) 9 NZCLC 264,056 (HC)at [15].5 Trinity Foundation (Services No 1) Ltd v Downey (2005) 9 NZCLC 263,917 (HC) at [19].6 Young & Associates Ltd v Ruscoe [2012] NZHC 1438, [2012] NZCCLR 23 at [8].7 At [8].8 At [9].9 Registrar of Companies v Body Corporate 307730 [2013] NZCA 659, [2014] 2 NZLR 623 at [25].10 At [26], the example in that case being where the Court determined it to be necessary to reversethe liquidator's final report to restore the company to the register.11 High Court judgment, above n 1, at [39] citing Registrar of Companies v Body Corporate 307730,above n 9.12 High Court judgment, above n 1.[40] I do not consider that the liquidators' strategy of negotiation overlitigation is wrong or unreasonable. The liquidators have been dealing with acomplicated situation involving staged works, interdependencies betweenpaying landowners, a reluctance by some to pay without assurance that otherswill, and (legitimately or otherwise) concerns about the quality ofworkmanship [of] United Civil.[41] A specific complication is the overlap between stage one and stagetwo landowners. The completion of the first stage relies in part on fundingfrom the second stage as a contribution to stage one costs (on the basis thatstage two landowners will receive some benefit from stage one works).However, [one of the liquidators of Hayfield] deposes that when the stage twolandowners are expected to pay the $3.606 million was not documented andis an issue the liquidators have been trying to resolve.[42] [One of the liquidators of Hayfield] says that consequently there wasvery little trust, if any, between the stage one landowners and the stage twolandowners. He says that an issue the liquidators faced on their appointmentwas that, based on the plans and works in the ground for stage one, the stagetwo landowners could argue that they would not receive any benefit fromthose works and refuse to pay the expected contributions to those works. Hesays that none have done so yet and "everyone is working towardsre-establishing working relationships and trust so that funding can befinalised."[43] The liquidators have also had to deal with the complication that notall landowners had signed funding agreements and additionally, how to dealwith new owners buying into the subdivision who would benefit from thewater infrastructure but were not obliged to pay anything under fundingagreements. It seems that this has been a cause for concern by fundinglandowners, which contributed to their reluctance to make any furtherpayments. Separately, a group of six landowners proposed to fund completionof part of the infrastructure without paying anything towards the cost of theexisting infrastructure. The liquidators refused and have insisted that thelandowners pay their share towards the existing infrastructure.[44] In these circumstances, a strategy of negotiation is not unreasonable.The bottom line is that all landowners need to connect to the newlyconstructed water and wastewater system, including the existing works in theground owned by Hayfield and the to-be-constructed wastewater pump stationE on land owned by Hayfield. Without doing so they cannot connect to themains, obtain section 224 certificates from Auckland Council, obtain titles andbuild on or sell their sections. Therefore, the landowners are stronglyincentivised to pay Hayfield for the existing work already in the ground,irrespective of any rights of action that Hayfield may have against them underthe landowner agreements. I note that despite the complications described, nolandowner has refused to pay.Analysis[18] The issue to be determined on appeal is whether the Associate Judge wascorrect to determine that the liquidators' decision could not be regarded as wrong orunreasonable.[19] As the Associate Judge pointed out, the decision to continue negotiating withlandowners rather than resort to litigation involved the exercise of judgement anddiscretion.13 The courts are generally not well equipped to evaluate decisions byliquidators that turn on the exercise of judgment and the weighing of commercialconsiderations. This is because the courts rarely have access to all the informationthat is necessary to reach a timely and informed decision on such issues.[20] We also consider it highly unlikely that any decision to resort to litigation couldbe made on a global basis as United Civil contends should be done. Any such decisionwould need to have regard to the strength of the claim against individual landowners,the stage that negotiations with those landowners had reached, and the complexity andlikely cost of litigation. That is so regardless of whether the decision is made by theliquidators or the Court.[21] Before the Court could determine that continuation of the strategy ofnegotiation was wrong or unreasonable it would need to undertake a carefulassessment, on a case by case basis, of the likely benefits and disadvantages oflitigation and negotiation. This would be necessary because, although litigation mayplace pressure on an opposing party, it also inevitably involves considerable delay,expense and uncertainty. In the present case the cost of litigation would ultimately beborne by Hayfield's creditors, including United Civil. The fact that litigation wouldinvolve multiple defendants is another factor to be weighed in the mix because thiswould inevitably increase the cost of litigation.[22] As will be evident from the passage from the Associate Judge's decision setout above at [17], any decision to adopt a litigation strategy will not involve thecollection of straightforward debts. It is likely to give rise to multiple issues, many ofthem complex. Some of these relate to the fact that the landowners have questionedthe quality of the work carried out by United Civil. There are also disputes betweenindividual landowners, and these could give rise to cross-claims or third party claimsbetween them.13 At [39].[23] Another factor supporting the desirability of continued negotiation is the factthat the landowners need the infrastructure to be installed in order to be able to developand sell their land. One of the liquidators, Mr Boris van Delden, deposes:The negotiations with landowners have proved to be complex, but thelandowners have a common goal to finish the infrastructure so that they cancomplete their individual developments, obtain titles and sell residentialsections. They are highly motivated to complete the infrastructure and theliquidators are willing to work co-operatively with the landowners providedeach landowner pays their fair share of the existing works.[24] The liquidators also explain that the complexity of the situation means there isno ready solution for many of the issues they are confronting. Further, the negotiationprocess is not necessarily restricted to recovering the amount presently owing underthe funding agreements. It has also resulted in one landowner agreeing to providemore funding than was required under the original agreement. Negotiations of thistype can be protracted.Decision[25] United Civil's argument largely relies on the issue of delay. It is firmly of theview that, despite that fact that more than three years have now passed, the liquidatorshave little to show for the strategy they have pursued to date. We accept that this is soin a financial sense, although the liquidators say they are close to resolution in manycases.[26] However, the factors identified by the liquidators confirm that there was nevergoing to be a quick or easy method by which they could complete the installation ofthe infrastructure and recover the contributions to be made by both the stage one andstage two landowners. Like the Associate Judge, we do not consider the delay that hasoccurred to be unreasonable or that, without more, the delay now justifies resort tolitigation.[27] We are satisfied there was insufficient evidence before the High Court to enableit to conclude that litigation, particularly on a global basis, is now the only viable andreasonable option. On the evidence as it currently stands we consider thedeterminative factors militating against litigation to be the likely complexity of theclaims against the landowners, the incentive for landowners to resolve outstandingissues so they can develop and sell their land and the inevitable expense, uncertaintyand delay that litigation would create. Viewed in combination, these factors mean thatcontinuation of the current strategy of negotiation cannot be regarded as wrong orunreasonable.[28] We are therefore satisfied the Associate Judge was correct to decline theapplication for orders under s 284(1)(b) of the Act.The application under s 248(1)(c): leave to bring adjudication proceedingsagainst HayfieldThe test[29] Section 248(1)(c) of the Act provides as follows: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:[30] We are again content to adopt the test applied by the Associate Judge:14[18] When considering whether to permit litigation against a company inliquidation, the key question for the Court is whether there are circumstancesthat render legal proceedings necessary, or whether the plaintiff's claim is onethat can readily be dealt with in the liquidation.15 The learned authors of Heathand Whale on Insolvency observe that while the purpose of s 248 hastraditionally been thought to be to prevent particular creditors from obtainingan advantage by bringing proceedings, the more convincing explanation is thatthe prohibition on litigation is designed to prevent a company in liquidation14 High Court judgment, above n 1.15 Paul Heath and Michael Whale (eds) Heath and Whale on Insolvency (looseleaf ed, LexisNexis)at [21.4(e)].from being subjected to a multiplicity of actions which would be expensive,time consuming and, in some cases, unnecessary.16 They comment that thes 248 question comes down to a question of choosing alternative forms ofprocedure as between legal proceedings and submitting a proof of debt in theliquidation.The proposed proceeding[31] In order to understand the issues that this ground of appeal raises it is necessaryto refer briefly to the evolution of United Civil's claims against Hayfield.[32] The liquidators took issue with several aspects of the initial claim that Hayfieldfiled in the liquidation. These related to disputed claims that had been referred toadjudication before Hayfield was placed in liquidation. There was also a dispute abouta payment claim known as Payment Claim 23. This had not been certified by theengineer under the contract before the company was placed in liquidation.[33] To resolve the first of these issues the liquidators engaged Mr John Green, avery experienced adjudicator, to advise them regarding the extent to which the claimsthat had been referred to adjudication should be accepted. This produced an outcomethat proved acceptable to both parties.[34] The liquidators engaged Harrison Grierson, the engineers appointed under theconstruction contract, to evaluate Payment Claim 23. The issues relating to this claimwere largely resolved at a meeting held on 22 July 2019. United Civil agreed todiscuss outstanding questions relating to interest and costs with the liquidators.[35] United Civil has now filed a further claim in the liquidation for the followingitems:(a) interest accruing before and after the date of liquidation;(b) United Civil's costs arising from the agreed process involvingMr Green;16 At [21.4(a)], citing Commissioner of Inland Revenue v Robertson [2017] NZHC 31.(c) time-related costs and demobilisation costs as a result of the suspensionof the contract works;(d) disputed sums including, but not limited to, $645,949.52(excluding GST) relating to other variations not previously referred toMr Green;(e) items under the original scope of works which were not subject to afinal remeasure, as would have been the case had the contract run itsnormal course; and(f) claims for loss of profit if the contract was terminated.[36] United Civil sought the leave of the High Court under s 248(1)(c) to commenceadjudication proceedings against Hayfield in relation to these claims. This wouldinvolve the appointment of an adjudicator to determine the claims based on theinformation provided by both parties. However, the Associate Judge did not considerfurther litigation was necessary to resolve any of these issues. She considered theycould be resolved through further negotiation between the parties and/or usingprocesses similar to those which the parties had used in relation to the earlier claims.17Analysis[37] It is not clear why United Civil sought to have these claims determined byadjudication given the success achieved by the processes the parties had utilisedpreviously. Mr Dalkie suggested during argument that United Civil took this stepbecause it believed the liquidators had rejected its claims outright. However, that isclearly not the case. The liquidators remain amenable to having the outstanding claimsresolved through negotiation and, if necessary, referral to Mr Green or other personswith appropriate expertise.[38] The first three items were part of, but never finally resolved by, the processagreed to by the parties in relation to United Civil's earlier claims. We agree with the17 At [86]–[87].Associate Judge that they are matters that could readily be resolved through furthernegotiation between the parties or by reference to Mr Green. They should thereforebe determined in that way and not by an adjudicator.[39] The disputed claims relating to variations that were not referred to Mr Greenunder the agreed process obviously fall outside that process. However, there is noimpediment to him providing advice to the liquidators about them in the same way asthe earlier claims. He is now familiar with the contract between the parties and is wellplaced to undertake that exercise.[40] The final two items also fall outside the agreed process. However, theliquidators have been waiting for United Civil to quantify these claims and provideevidence in support of them. Once they receive this information the liquidators willeither accept or reject the claims. In the event of any dispute, the claims can then bereferred to Mr Green or some other appropriately qualified person for advice.[41] The only exception may be the claim for loss of profits. The Associate Judgenoted that this may be more suited for legal proceedings.18 However, that issue cannotbe determined until United Civil has quantified and substantiated its claim. It wouldbe premature for this claim to be referred to adjudication at this point.[42] These conclusions largely reflect those reached by the Associate Judge.19 Weare satisfied she was correct to conclude that it was not appropriate to grantUnited Civil leave to commence adjudication proceedings against Hayfield in relationto any of the items set out above.18 At [88].19 At [84]–[88].The application under s 256(1)(a)(ii): disclosure of funding agreements withlandownersThe test[43] Section 256(1)(a)(ii) provides:256 Duties in relation to records(1) The liquidator of a company must—(a) keep accounting records and other documents of theliquidation and permit those records, and the records andother documents of the company, to be inspected by—(ii) if the court so orders, a creditor or shareholder; and[44] United Civil says it requires access to the landowner funding agreements so itcan make an informed decision whether to continue with the claims for which it seeksleave to commence adjudication proceedings.[45] As the Associate Judge noted, the test in this context is whether there is goodreason for the Court to allow a creditor to inspect documents held by a liquidator.20The applicant must put forward a "persuasive, tangible or concrete" reason whyinspection should be permitted.21 Mr Dalkie contended that the Associate Judge erredby introducing the element of "good reason" but we are satisfied that her approachaccords with the authorities.Analysis[46] We find it difficult to understand United Civil's argument on this ground ofappeal. It appears to be common ground that Hayfield's liquidation may result increditors being paid in full. It is therefore unclear why United Civil would wish toabandon any aspect of its claim at this point. We have also upheld the AssociateJudge's decision declining to allow the claims to be determined by adjudication. This20 At [21], citing Levin v Lawrence [2013] NZCA 394, (2013) 11 NZCLC 98-018 at [53].21 Levin v Lawrence, above n 20, at [53(c)].means United Civil will not be required to fund participation in that process. To dateMr Green's costs have been met by the liquidators.[47] We also consider it unlikely that access to the funding agreements on astand-alone basis would be of material assistance to United Civil. Any properassessment of the sums likely to be recovered would require a much broader range offactual information than that disclosed by the landowner funding agreements. Theseinclude the stage that negotiations with individual landowners have reached, as wellas an assessment of the likelihood of future recovery. This would require informationabout any impediments to settlement and factors that may enhance or diminish theliquidators' chances of recovery. The estimated cost of future recovery action wouldalso need to be taken into account.[48] In closing we note that during argument it became apparent that there appearsto have been a lack of dialogue between the parties to date. Counsel for Hayfieldreferred us to an occasion on which the liquidators offered to meet with United Civil'srepresentatives to discuss the state of the negotiations with the landowners. UnitedCivil declined the offer unless it was also given access to the funding agreements.Such an approach suggests that United Civil has attached disproportionate importanceto the funding agreements. It may have been better served by accepting the liquidators'offer to meet and discuss.[49] As matters currently stand we are satisfied there was no good reason for theliquidators to provide United Civil with copies of the funding agreements. TheAssociate Judge was therefore correct to decline United Civil's application for ordersunder s 256(1)(a)(ii).Result[50] The appeal is dismissed.[51] The appellant must pay the respondent costs on a Band A basis for a standardappeal together with usual disbursements. We certify for second counsel.Solicitors:Hazelton Law, Wellington for AppellantGrant & Co, Auckland for Respondent