Creditors funding liquidators’ legal actions to recover assets in an insolvent liquidation get a reward; they have first claim on funds recovered. The High Court ruled McConnell Dowell had priority ahead of other creditors over the $1.1 million clawed back from interests associated with David Browne, owner of Polyethylene Pipe Systems Ltd, after his company was pushed into liquidation following pipe-weld failures on a Christchurch sewer outfall project.
Polyethylene Pipe went into liquidation in 2009. McConnell Dowell, head contractor for the sewer outfall project, is a major creditor having been awarded $2.9 million damages following a claim for faulty pipe-welds. McConnell put up $297,750 of its own cash for the liquidator to chase down funds extracted from Polyethylene Pipes by interests associated with Mr Browne after the magnitude of McConnell’s claim became apparent. This recovery was fought through the High Court, Court of Appeal and Supreme Court.
To be eligible for the bounty, creditors must have a legally enforceable claim against an insolvent company. The support provided must be cash or an indemnity against legal costs, not supply of goods or services. The funding commitment must arise after liquidation commences. The Companies Act then allows funding creditors to claim against recoveries for their debt plus legal costs advanced to the liquidator. Associate judge Bell ruled McConnell Dowell had priority for $1.4 million: the $1.1 million clawed back plus $297,750 paid for liquidator’s legal fees. The purpose of this rule is to encourage assistance by offering a reward, he said.
Mr Browne’s similar claim failed. As a supposed secured creditor of Polyethylene Pipe he took legal action against Bosch Irrigation resulting in a $201,250 out-of-court settlement. This money was handed over to Polyethylene’s liquidator after his supposed security was invalidated by the courts in the legal action funded by McConnell Dowell. The claim against Bosch was not brought for the benefit of creditors generally, Judge Bell said. It was solely for the benefit of Mr Browne who at the time presumed he was a secured creditor.
Petterson v. McConnell Dowell – High Court (11.09.18)
18.180