Supreme Court clarifies meaning of ‘due debts’ in voidable transaction regime
John Green
In a judgment issued last month in David Browne Contractors Ltd v Petterson Ltd [2017] NZSC 116, the Supreme Court clarified the meaning of ‘due debts’ in s292 of the Companies Act and, in doing so, upheld the Court of Appeal’s decision setting aside two transactions made by a company to related companies. The case has significant implications for those working the construction sector.
In a judgment issued last month in David Browne Contractors Ltd v Petterson Ltd [2017] NZSC 116, the Supreme Court clarified the meaning of ‘due debts’ in s292 of the Companies Act and, in doing so, upheld the Court of Appeal’s decision setting aside two transactions made by a company to related companies. The case has significant implications for those working the construction sector. The claim involved three related companies controlled by David Browne. Polyethylene Pipe Systems Ltd (in liq) (Polyethylene) was part of that group of companies. In March 2007, Polyethylene entered into a subcontract with McConnell Dowell to weld pipes for a sewer outfall on the seabed of Lyttelton Harbour. In late 2007 and early 2008, two of the welds failed and there were further concerns about a third weld. Various experts were called in to investigate the failures and in June 2008 McConnell Dowell notified Polyethylene that its investigations indicated that the weld were at fault and gave notice of its intention to seek recovery of its costs because of the failures. Ten days after McConnell Dowell’s notification, the directors of Polyethylene put in place a scheme to restructure the company’s affairs and strip Polyethylene of its assets. Polyethylene repaid unsecured advances from three related parties, David Browne Contractors Ltd (DB Contractors), David Browne Mechanical Ltd (DB Mechanical), and Mr Browne totalling $1,253,537. Polyethylene then granted a General Security Agreement (GSA) to Mr Browne in return for $450,000 of new funding. The directors signed a certificate of solvency stating that the contingent liability to McConnell Dowell was disputed, would be offset by extras and variation claims, and, in any event, would be covered by McConnell Dowell’s contract works insurance policy. In late August 2008, McConnell Dowell wrote to Polyethylene with a detailed breakdown of the losses it claimed, which totalled $2,552,671. Three days later, Mr Browne transferred $700,000 to Polyethylene on the basis that it would be secured by the GSA. On 2 September 2008, Polyethylene paid the debts owed to Mr Browne ($340,600), DB Contractors ($565,303) and DB Mechanical ($347,634). In an adjudication by a BDT appointed adjudicator under the Construction Contracts Act 2002, McConnell Dowell’s losses were assessed as $2,965,334. Mr Browne responded to the adjudication by appointing receivers to Polyethylene, which was subsequently put into liquidation. The liquidator, David Petterson, sought to set aside the payments made on 2 September 2008 as insolvent transactions under s292 of the Companies Act 1993 (the Act). Mr Peterson was unsuccessful in the High Court. Associate Judge Mathews held that the transactions were part of a legitimate business restructure. The Court of Appeal and the Supreme Court held that their purpose was to safeguard Mr Browne and his interests from