The
Court of Appeal reversed financial restructuring by owners of Christchurch
contractor Polyethylene Pipe Systems Ltd attempting to convert unsecured
advances into a secured loan with the business facing likely liquidation
following a potential multi-million dollar damages claim for faulty welding on
sewer outfall piping. Motives for the
financial restructuring were laid bare when supposedly confidential legal
advice later came into the liquidator’s possession.
Levin-based David Petterson was appointed
liquidator of Polyethylene Pipe after the company was put into liquidation by
McConnell Dowell, owed $3.39 million for working days lost after pipe-weld
failures on a Christchurch sewer outfall project. Polyethylene Pipe was responsible for welding
together 1.8 metre diameter pipes before they were laid on the seabed in a 2.5
kilometre sewage outfall. Weld joint
failures first became apparent in December 2007, with further failures detected
in May and August of 2008. Insurance
cover for welding failure is difficult to obtain. Polyethylene Pipe was not covered by the head
contractor’s project insurance.
Evidence was given of a summit meeting in
June 2008 between Mr David Browne, owner of Polyethylene Pipe, and the
company’s legal and accounting advisers.
By then they had correspondence from McConnell Dowell stating a claim
was being formulated. Polyethylene was
flush with cash, but was at risk of going under given the expected magnitude of
McConnell Dowell’s claim. In short
order, unsecured loans to Polyethylene from Mr Browne and related companies
were repaid. Mr Browne then readvanced
funds to the company, taking security over company assets for the new loan. When challenged by the liquidator, Mr Browne
said the restructuring was merely a re-ordering of family finances and
succession planning which had been in the wind for some time. The Court of Appeal said the evidence
indicated otherwise. The net financial
effect of the financial restructuring was that Mr Browne personally had lent
more to the company as a secured creditor than it previously owed him as an
unsecured creditor; hardly evidence of a father planning to withdraw from a
business and hand the reins over to his sons.
Legal advice through 2008 on the potential risk of the transactions
being overturned by a liquidator was tagged as privileged advice not able to be
used in court. This advice was sent to
Mr Browne personally but the client was Polyethylene Pipe. The liquidator eventually got access to this incriminating
evidence after Polyethylene Pipe went into liquidation.
The Court of Appeal invalidated Mr
Browne’s security. He is left to prove
as an unsecured creditor for $201,316.
Related companies were ordered to repay as voidable preferences $912,937
received in the June 2008 financial restructuring.
Petterson
v. Browne – Court of Appeal (10.05.16)
16.080