21.09.2023

Contractor’s Dilemma: Recovering debts from a Principal in liquidation

A party must meet a high bar before the High Court will modify or reverse a liquidator’s decision, or consent to a party commencing adjudication (or other legal proceedings) against a company in liquidation (ss 284(1)(b) and 248(1)(c) of the Companies Act 1993, respectively).

Both issues have been examined by the Court of Appeal in United Civil Construction Ltd v Hayfield SHA Ltd (In Liq) [2023] NZCA 377.  This case illustrates the limited avenues available for a contractor to resolve payment of outstanding debts after a principal goes into liquidation. 

Background 

The Principal (Hayfield), a special development company formed by a group of landowners, entered into a contract with United Civil Construction Ltd (United Civil) to construct civil infrastructure.  Difficulties arose, which resulted in United Civil suspending work and then terminating the contract. Hayfield was then placed in liquidation.

Nearly $3m was owed to United Civil.  The liquidators endeavoured to negotiate with the landowners to recover amounts owing under the funding agreements to pay United Civil.  United Civil then made further creditor claims in the liquidation for interest and costs arising from termination (the Termination Claims).  United Civil’s combined claims accounted for 80% of the debt owed by the Principal (i.e. it was by far the largest creditor).

After three years of non-payment, and no admission of its Termination Claims, United Civil applied to the Hight Court seeking recourse.  When the application was unsuccessful, United Civil appealed. 

Recovery Issues

Enforcement against debtors

The first issue was whether the liquidators’ decision to negotiate (rather than sue the landowners) for the recovery of funds met the threshold of being ‘wrong or unreasonable’ to justify the Court intervening.  The likely benefits and disadvantages of litigation compared to negotiation needed to be weighed up.  Although litigation may place pressure to pay, in the circumstances this did not outweigh the negative aspects that would arise from litigation (including delay, expense, and uncertainty).  The Court of Appeal therefore upheld the High Court’s decision not to interfere in the liquidator’s approach to negotiate and not sue.

Adjudication during liquidation

The second issue was whether the Court should permit United Civil to commence adjudication against Hayfield while it was in liquidation to resolve (or confirm) the Termination Claims. The Court of Appeal declined to grant permission.  All but one issue could be determined by agreed processes (expert opinion and negotiation) between the parties outside of litigation which had been used successfully to date.  The remaining issue (lost profits and irrecoverable expenditure) may have been more suited to adjudication, however, the basis of this claim had not been put to the liquidators and so leave to adjudicate could not be justified.   

Our comment 

The Court of Appeal’s judgment means contractors can be left in a difficult position trying to recover payment from principals in liquidations, even when the liquidator ought to come into funds. Despite three years of negotiation, United Civil could not compel the liquidator to enforce recovery from the landowners through the courts. At a practical level, at least, this is surprising. Further, it seems surprising that the Court did not impose a timeframe on the liquidator, thereby leaving United Civil in the unenviable position of having to simply wait for the negotiations to take their course.  

It appears United Civil have not yet sought leave to appeal this decision to the Supreme Court, and the period for doing so has now expired.

If you have any questions about recovery from an insolvent party, please get in touch with our Construction Team or your usual contact at Hesketh Henry.

 

Disclaimer:  The information contained in this article is current at the date of publishing and is of a general nature.  It should be used as a guide only and not as a substitute for obtaining legal advice.  Specific legal advice should be sought where required.

 

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Contact the expert team at Hesketh Henry.
Kerry
Media contact - Kerry Browne
Please contact Kerry with any media enquiries and with any questions related to marketing or sponsorships on +64 9 375 8747 or via email.

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