The
Supreme Court confirmed liquidator of insolvent Christchurch contractor
Polyethylene Pipe Ltd could recover some $913,000 stripped out before
liquidation. Directors signing off on
company solvency as part of supposed capital restructuring could not ignore a
multi-million dollar damages claim looming after persistent problems with a
contract for a new sewer outfall in Lyttelton Harbour.
The High Court was told
Polyethylene Piping ran into problems in late 2007 on a job for McConnell Dowell
welding pipes prior to installation as part of a new sewer outfall. A number of welds failed, requiring
remediation. McConnell Dowell put
Polyethylene Pipes on notice that as subcontractor it would be liable for
claims in excess of at least two million dollars for project delays.
Polyethylene liquidator
David Petterson challenged steps taken subsequently by directors which resulted
in $912,937 used to clear unsecured loans owed related companies, leaving
Polyethylene insolvent in the face of McConnell Dowell’s subsequent damages
claim of $3.39 million.
Polyethylene is
controlled by Christchurch businessman David Browne. Polyethylene directors said their company was
solvent when assets were stripped out. Not
so, ruled the Supreme Court. When
determining solvency, directors must take into account future debts that are
“reasonably temporally proximate”. The
cash flow effect of claims likely to crystallize must be taken into
account. Directors knew of McConnell
Dowell’s right to claim for project delays.
Directors were aware there was considerable doubt whether McConnell
Dowell’s own insurance cover would extend to Polyethylene Pipes’ faulty welding. In any event, Polyethylene was contractually
required to cover the loss. Polyethylene
directors knew at the time of restructuring there was expected to be a
substantial claim from McConnell Dowell, the Supreme Court said. There were no valid grounds for signing off
on Polyethylene’s solvency.
David
Browne Contractors Ltd v. Petterson – Supreme Court (7.08.17)
17.096