Dempsey Wood Civil LTD V Gapes (2021) NZHC 2362

IN THE HIGH COURT OF NEW ZEALAND
AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA

TĀMAKI MAKAURAU ROHE
CIV-2016-404-1839
[2021] NZHC 2362
UNDER the Companies Act 1993 and the

Fair Trading Act 1986
BETWEEN DEMPSEY WOOD CIVIL LIMITED

Plaintiff
AND ANTHONY JOHN GAPES

Defendant
Hearing: 8 to 17 March 2021; further submissions 24 April 2021
Appearances: E St John and SP Maloney for the Plaintiff

JWA Johnson and WL Porter for the Defendant
Judgment: 10 September 2021
JUDGMENT OF FITZGERALD J
This judgment was delivered by me on 10 September 2021 at 12.00pm,

pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date…………………..
Solicitors: Wynn Williams, Auckland

Alan Jones Law Ltd, Auckland
To: E St John, Auckland

S Maloney, Auckland
DEMPSEY WOOD CIVIL LTD v GAPES [2021] NZHC 2362 [10 September 2021]
Introduction [1]
The pleaded claims [11]
Factual background [27]

Introduction and early events [27]
Crown is replaced by Koi [30]
The Development is in trouble [35]
The search for a new funder [44]
Cancelling the pre-sales [47]
The “hive down” structure [53]
Events leading up to 15 October 2015 [55]
The Koi Facility expires/the Webber Capital transaction is executed [63]
Webber Capital cancels its agreement [78]
Dempsey Wood remains concerned about payment [83]
The lead-up to receivership [92]
Koi appoints receivers [96]
Later events [104]
The experts’ evidence [112]

Mr Shephard’s evidence [113]
Mr Hoole’s evidence [123]
Mr Vance’s evidence [130]
Overall assessment of the expert evidence [142]
Section 135 of the Act [147]

Legal principles [147]
Analysis [157]

Analysis [200]

Analysis [210]

Analysis [225]
FTA claim [239]

Analysis [244]
Result and next steps [263]

Introduction
[1] Mr Gapes is an Auckland based property developer. He is the sole director and
a majority shareholder of the property development company Redwood Group Ltd
(Redwood). Mr Gapes was also the sole director of a related company named Panama
Road Development Ltd (PRDL). PRDL was incorporated as a special purpose
company to carry out the development which is the subject of these proceedings.
[2] The development, which commenced in 2013, was located in Mt Wellington

and branded the “Springpark development” (the Development). The Development
was initially funded by Crown Financial Limited (Crown). Crown put PRDL into
receivership early on in the life of the Development, though Crown’s funding was
fairly quickly replaced with a $30 million development facility provided by Koi
Structured Credit Pty Ltd (Koi), a Singapore based lender (the Koi Facility).
[3] By the end of November 2013, PRDL had secured agreements for sale and
purchase of the completed lots within the Development “off the plan”, with a total
value of approximately $60 million (the pre-sales). The pre-sales contained “sunset”
clauses, which provided for their termination in certain circumstances if titles had not
issued by 20 December 2015 (the Sunset Date).
[4] Physical works on the Development commenced in late September 2014. The
plaintiff, Dempsey Wood, was contracted by PRDL to carry out the civil works. By
mid-2015, however, the Development had run into serious trouble. There were
significant cost overruns and associated delays. It was clear that the Development
would not achieve practical completion and that titles would not issue by the Sunset
Date.
[5] The Koi Facility expired on 15 October 2015. By that time, Mr Gapes and his
advisers had been looking for an alternative funder for some months. Also on
15 October 2015, PRDL entered into a conditional agreement to refinance the
Development with Webber Capital Ltd (Webber Capital). But that agreement was
cancelled by Webber Capital a few weeks later, after carrying out due diligence. A
key problem was that given the significant cost overruns and delays, the Development
was no longer profitable so long as the pre-sales remained in place. Valuation advice
at the time suggested that the Development would yield an additional $20 million in
revenue if the pre-sales could be cancelled and sold at (then) market prices (the market
having shifted significantly since the pre-sales had been entered into). Funders were,
however, evidently cautious about PRDL’s ability to unilaterally cancel the pre-sales,
at least without associated cost and litigation risk.
[6] Koi was willing, for a time at least, to continue to permit drawdowns from the
Facility while Mr Gapes continued to search for a new funder. That changed, however,
in early December 2015 when Koi appointed receivers to PRDL. The receivers
cancelled the pre-sales upon the passing of the Sunset Date, and sold the Development
in March 2016 for $25 million. This resulted in a shortfall of some $2 million to Koi,
as well as unsecured creditors being left unpaid in a total amount of around
$1.6 million. Approximately half of that related to Dempsey Wood’s last invoice on
the Development (for works carried out in November 2015), plus its (approved) claim
for an extension of time (EOT).
[7] Dempsey Wood sues Mr Gapes in his capacity as a director of PRDL, alleging
that he breached a number of his director’s duties under the Companies Act 1993 (the
Act), including reckless trading (s 135) and agreeing to PRDL incurring obligations
when he did not have reasonable grounds to believe they could be met when due
(s 136).1 Dempsey Wood seeks an order that Mr Gapes pay compensation pursuant to
s 301 of the Act in an amount no less than the total outstanding unsecured creditors’
claims, plus the costs of the liquidation.
[8] Dempsey Wood also sues Mr Gapes pursuant to the Fair Trading Act 1986 (the
FTA). Dempsey Wood says it was misled by Mr Gapes when in mid-November 2015,
he gave it an assurance that there were sufficient funds remaining in the Koi Facility
for Dempsey Wood to be paid for work carried out by it after that time.
[9] Mr Gapes denies that he breached his duties as a director, or that he misled
Dempsey Wood in breach of the FTA.
1
Dempsey Wood also alleges Mr Gapes breached s 131 of the Act, namely his duty to act in the
best interests of PRDL. A claim was also brought pursuant to s 137 of the Act (negligence), but
was not pursued.
[10] The balance of this judgment is structured as follows:
(a) First, a summary of Dempsey Wood’s pleaded case (including my

decision on a pleading matter raised on behalf of Mr Gapes).
(b) Second, a summary of the factual background. Given the highly

contextual nature of many of the issues to be determined, it is necessary
to traverse the factual background in some detail.
(c) Third, a summary of the expert evidence and my overall assessment of

it.
(d) Finally, my assessment of each of Dempsey Wood’s claims.
The pleaded claims
[11] The Court of Appeal in Yan v Mainzeal Property and Construction Ltd (in liq)
(Mainzeal) emphasised the importance of pleadings, and that claims are to be assessed
according to the pleaded case.2 This is particularly relevant in this case, given aspects
of Dempsey Wood’s case at trial expanded beyond its pleadings. Before summarising
the pleaded claims, however, I note that Mr St John, Dempsey Wood’s counsel,
confirmed that Dempsey Wood’s claim pursuant to s 137 of the Act could be
disregarded. He also confirmed that Dempsey Wood’s FTA claim was its “primary
claim”, with its claims pursuant to ss 135, 136 and 131 of the Act each being of
“approximately equal merit.”
[12] As a preliminary point, Dempsey Wood’s pleading alleges that Mr Gapes

formulated “a plan” to:
(a) avoid the pre-sales;
(b) allow PRDL to default on its obligations under the Koi Facility;
(c) liquidate PRDL; and
2
Yan v Mainzeal Property and Construction Ltd (in liq) [2021] NZCA 99 at [493]-[494].
(d) create a new entity to take over and rebrand the Development, and re-
sell the lots for inflated prices in the (then) prevailing market.
[13] In response to a question from me during his opening submissions, Mr St John

confirmed that the existence of such a “plan” was not necessary to Dempsey Wood’s
claim, but bolstered it. I observe at this point that I do not consider any such “plan,”
at least in the active sense, to be made out on the evidence. Rather, the significant cost
overruns and delays meant the Development was not financially viable with the pre-
sales remaining in place at their existing prices. As a result, it was necessary for the
Development’s survival that they be cancelled, rather than this being an active “plan”
pursued by Mr Gapes. Further, the evidence does not suggest there was an active
“plan” to liquidate PRDL and create a new entity to take the Development to market;
rather the sale of the Development to a third party was ultimately how a refinance of
the Koi Facility was to be structured.
[14] Turning then to Dempsey Wood’s claims under the Act, it pleads the following:
(a) In relation to the alleged breach of s 135 of the Act:
(i) By pursuing his plan to cancel the pre-sales and liquidate PRDL,
Mr Gapes caused and/or allowed PRDL’s business to be carried
on in a manner likely to create a substantial risk of serious losses
to PRDL’s creditors.
(ii) By instructing and/or allowing Dempsey Wood to continue with

the civil works in September, October and November 2015,
Mr Gapes agreed to the carrying on of the business of PRDL in
a way likely to create a substantial risk of serious loss to PRDL’s
creditors, as he knew that PRDL would not be able to meet its
increased obligations to Dempsey Wood, and thus was in breach
of s 135 of the Act.
(iii) As a result of Mr Gapes’ breach of s 135, Dempsey Wood
suffered loss of $729,664, being its unpaid November 2015
invoice and its EOT claim.
(iv) That pursuant to s 301 of the Act, the Court ought to order
Mr Gapes to contribute to the assets of PRDL a sum not less
than the outstanding creditor claims in PRDL’s liquidation of
approximately $1.4 million, plus the costs and disbursements of
liquidation.
(b) In relation to the alleged breach of s 136 of the Act:
(i) When instructing and/or allowing Dempsey Wood to continue

with the civil works in September, October and November
2015, Mr Gapes did not at the time have reasonable grounds to
believe PRDL was or would be able to meet its increasing
obligations under Dempsey Wood’s contract when required to
do so. This is particularised on the basis that:
1. a reasonably prudent director would have realised PRDL

was insolvent, or nearing insolvency, by September 2015;
and
2. by September 2015 it was clear PRDL could not complete

the Development as budgeted, meet the pre-sale Sunset
Dates or meet its obligations under the Koi Facility, such
that default and receivership were inevitable.
(ii) As a result of Mr Gapes’ breach of s 136, Dempsey Wood

(iii) That pursuant to s 301 of the Act, the Court ought to order Mr
Gapes to contribute to the assets of PRDL a sum not less than
the outstanding creditor claims in PRDL’s liquidation of
approximately $1.4 million, plus the costs and disbursements of
liquidation.
(c) In relation to the alleged breach of s 131 of the Act:
(i) By instructing and/or allowing Dempsey Wood to continue with

the civil works where he knew PRDL was insolvent or nearing
insolvency, Mr Gapes breached his duty to act in good faith and
in the best interests of PRDL. This is particularised as follows:
1. From September 2015 (and possibly earlier) PRDL was

insolvent, nearing insolvency, and/or of doubtful solvency.
2. Mr Gapes (in his capacity as director) was required to take

into account the best interests of PRDL’s creditors during
this period.
3. Mr Gapes failed to consider whether PRDL would be able

to meet its increasing liabilities to Dempsey Wood as the
civil works progressed through September to December
2015.
4. Mr Gapes ought to have known, or at least should have

appreciated, that allowing Dempsey Wood to continue the
civil works while PRDL was insolvent or nearing
insolvency was likely to cause loss to Dempsey Wood.
(ii) By causing or allowing PRDL to default on its obligations under

the pre-sales and Koi Facility such that it was put into
receivership, Mr Gapes breached his duty to act in good faith
and in the best interests of PRDL. This is particularised as
follows:
1. Due to rising house prices, Mr Gapes formulated a plan to
ensure the cancellation of the pre-sales and re-sell them at
higher prevailing prices.
2. Mr Gapes allowed the Sunset Dates to pass and encouraged

the pre-sale purchasers to cancel the agreements.
3. Mr Gapes knew that cancelling the pre-sales and return of

the deposits would cause PRDL to default on its obligations
and be unable to obtain further financing.
4. Mr Gapes wrongfully pursued this course of action with the

objective of benefitting other entities (such as Redwood and
the successor entity which would inherit the Development)
and himself through his personal interest of those entities.
5. Mr Gapes’ actions caused receivers to be appointed over

PRDL by Koi and caused approximately $1.4 million
dollars of loss to PRDL’s creditors.
(iii) By prioritising the interests of his related companies in the

Redwood group over the interests of PRDL and, by extension,
its creditors when PRDL neared or entered insolvency,
Mr Gapes breached his duty to act in good faith and in breach
of the best interests of PRDL. This is particularised as follows:
1. Mr Gapes charged PRDL exorbitant management fees for

services rendered by the “Redwood Group”, a group of
companies and trusts in which Mr Gapes has a personal
interest.
2. Mr Gapes prioritised the payment of the Redwood fees over

the financial health of PRDL.
(iv) As a result of Mr Gapes’ breach of s 131, Dempsey Wood
(v) That pursuant to s 301 of the Act, the Court ought to order
Mr Gapes to contribute a sum not less than the outstanding
creditor claims in PRDL’s liquidation of approximately $1.4
million, plus the costs and disbursements of liquidation, to the
assets of PRDL.
[15] During the course of the hearing, and by the time of Dempsey Wood’s closing
submissions, the pleaded claims summarised above had narrowed to a focus on
insolvency, or near insolvency, as at 15 October 2015. Accordingly, while the
pleadings suggest a possible “breach date” of some point in September 2015, I proceed
on the basis of a suggested breach date of no later than 15 October 2015.
[16] Turning to the FTA cause of action, Dempsey Wood alleges the following:
(a) During September, October and November 2015, Mr Gapes made false
and/or misleading representations to Dempsey Wood to the effect that
PRDL would be able to meet its increasing obligations to it. Other than,
however, the particularised matters set out below (the essence of which
is alleged misrepresentation by omission), no particularisation of the
alleged positive representations is given.
(b) Mr Gapes did not indicate at any of the regular site meetings held up to
and including 2 December 2015, or in the parties’ ongoing
correspondence, that “[PRDL] was in financial trouble and was unable
to meet its current liabilities”.
(c) Mr Gapes “failure to disclose [PRDL]’s financial troubles, combined

with his instructions to continue works, amounted to a representation
that [PRDL] had the means to continue to pay for the works”.
(d) That on 12 November 2015, Mr Gapes emailed Dempsey Wood
confirming the amount held in a dedicated project account, and that this
“was earmarked for civils and consultants”, but that that advice was
misleading because PRDL was in default under the Koi Facility and
Mr Gapes knew that the money in the account “would soon be used by
Koi to repay its secured debt”.
[17] Dempsey Wood pleads that it relied on these representations in agreeing to

continue with the civil works. It alleges that as a result, it suffered loss in an amount
of $729,664, again being its last, unpaid invoice, together with its approved EOT
claim.
[18] For completeness, in his statement of defence to the FTA cause of action,
Mr Gapes pleaded that “at all relevant times he was acting for or on behalf of [PRDL]
and not in his personal capacity”. The capacity in which Mr Gapes made any
representations was not, however, listed by Mr Gapes’ counsel as an issue for
determination, or addressed in counsel’s (comprehensive) opening or closing
submissions. I accordingly proceed on the basis that the point was not pursued on
Mr Gapes’ behalf.
[19] Finally, an issue arose during the hearing in relation to the pleadings which it
is convenient to address now. In his statement of defence, Mr Gapes pleaded that “at
all material times he reasonably expected that [PRDL] would be able to meet its
obligations by relying on the Koi Facility Agreement and/or through refinancing the
Project”. Dempsey Wood did not reply to that pleading, on the basis of which
Mr Gapes says this aspect of his pleading must be deemed as having been accepted.3
[20] In this context, Mr Johnson, counsel for Mr Gapes, submits that this pleading
goes to both Mr Gapes’ subjective belief and also whether, objectively, he had
reasonable grounds for that belief. He says that following discovery, it was open to
Dempsey Wood to deny both Mr Gapes’ subjective and objective belief, including
through putting Mr Gapes to proof on those matters. Mr Johnson acknowledges that
while pleadings arguments are “unattractively technical”, the rules serve a purpose,
3
High Court Rules 2016, rr 5.62 and 5.63.
including shaping the evidence adduced to prove the pleaded allegations. Mr Johnson
suggests that Mr Gapes could have adduced evidence from an independent expert on
development finance but did not do so, and this ought not to prejudice Mr Gapes.
Mr Johnson accordingly submits it is not open to the Court to find other than that
Mr Gapes believed, on reasonable grounds, that he could continue to rely on the Koi
Facility and/or refinance of that Facility.
[21] I do not accept the submissions made on Mr Gapes’ behalf.
[22] First, and as raised with Mr Johnson at the hearing, if the pleading point were
valid, it would have been a “knock out” point on most if not all of the claims under
the Act. On this basis, and after the close of pleadings date had passed, it would have
been open to Mr Gapes to apply to strike out those causes of action. He did not do so,
and instead the point was first raised in Mr Gapes’ opening submissions part way
through the substantive trial.
[23] Second, no detail was provided about what additional expert evidence would
have been called on this topic, and thus whether it would have passed the threshold of
being substantially helpful to the Court.
[24] Third, counsel for Mr Gapes, in his opening submissions, listed as one of the
issues to be determined on the pleaded claims as whether “at the relevant point in time,
Mr Gapes subjectively believed, on reasonable grounds, that [PRDL] would be able
to meet its obligations when they fell due”. Aspects of the expert evidence called by
Mr Gapes was specifically tailored to the reasonableness of continuing to trade after
15 October 2015, as well as the reasonableness of continuing to incur liabilities after
that date. That evidence was presumably advanced in recognition of the issues arising
for determination (otherwise it would have been irrelevant). A substantial part of
Mr Gapes’ evidence was also directed to this issue. It is accordingly difficult to
conclude that Mr Gapes has been prejudiced, either at all or in any substantive way,
by any pleading point.
[25] Finally, but perhaps most importantly, the purpose of pleadings is to define the
issues for determination and to ensure parties are aware of the case they must meet.
Dempsey Wood’s pleading expressly alleges in a number of places that in September,
October and November 2015, Mr Gapes did not have reasonable grounds to believe
that PRDL would be able to meet its ongoing obligations. The pleading in the
statement of defence to which Mr Johnson refers was in fact pleaded in response to
these allegations. Accordingly, the reasonableness of Mr Gapes’ belief was put in issue
on Dempsey Wood’s pleaded case. I do not consider rr 5.62 and 5.63 have the effect
of deeming to be accepted a proposition which is contrary to a pleaded allegation on
the plaintiff’s own case. Rather, and as commentary to r 5.62 suggests, the need for a
reply is when a pleaded defence makes “positive allegations which are unrelated to or
go beyond mere responses to allegations by the plaintiff.”4
[26] I turn now to the factual background.
Factual background
Introduction and early events
[27] Redwood purchased the land to be used for the Development in April 2012.
The original plan was to develop the land in four stages (which was later amalgamated
into three stages), with different settlement dates for each stage. Stage 1 was to
comprise 107 townhouses, 44 terraced houses, 4 apartments and 150m2 of retail. As
noted above, the Development was initially funded by Crown.
[28] PRDL was incorporated on 24 May 2012. As noted, it was a special purpose
company to undertake Stage 1 of the Development. It was beneficially owned by
interests associated with Mr Gapes. Redwood, of which Mr Gapes is the sole director,
and which at any given time had several employees, provided management services to
PRDL in relation to the Development (and charged management fees for doing so).
[29] The Development was taken to market in 2013 as an affordable housing

development. 149 sale and purchase agreements were entered into for sales “off the
4
Robert Osborne and others McGechan on Procedure (online loose-leaf ed, Thomson Reuters) at
[HR 5.62.01].
plan” (that is, the pre-sales). The revenue to be earned from the pre-sales (once they
settled) was expected to be approximately $60 million. For the large majority of the
pre-sales, the date for practical completion was 15 September 2015, with the Sunset
Date for the issue of title being 20 December 2015. These dates, and the related
provisions concerning termination of the pre-sales, were addressed in cl 30.1 of the
pre-sales in the following terms:
Sunset date: This Agreement may be cancelled by either party serving written
notice on the other if:
(a) Practical Completion has not been achieved;
(b) a Code of Compliance Certificate has not issued in respect of the

Dwelling; or
(c) a separate Title has not yet issued for the Property,
by 20 December 2015 (“Sunset Date”), subject to the occurrence of any event

of delay referred to in cl 23.2 [essentially delays outside of PRDL’s reasonable
control], in which case the Sunset Date shall be extended for such reasonable
period as determined by the Engineer to allow for the delay.
Crown is replaced by Koi
[30] On 30 April 2014, Crown appointed receivers to PRDL. The background to

and reasons for this were not explored in any real detail in the evidence, but it was not
long before the Development was refinanced, with PRDL entering into the Koi Facility
in June 2014. Mr Gapes personally guaranteed PRDL’s obligations under the Facility.
[31] Koi agreed to provide $30 million in funding for the Development, split into
two $15 million tranches. The first tranche was to repay the Crown debt, with the
second tranche to be paid into trust accounts held by PRDL’s solicitors Russell
McVeagh, to be drawn down from time to time to fund the Development works. There
were two such trust accounts: one to pay construction costs to the Development’s
builder, KN Construction (the Construction Account), with the other (the Project
Account) to meet other development costs, including those of Dempsey Wood.
[32] Importantly, payments from the Construction and Project Accounts could only
be made with Koi’s prior approval, and no more frequently than once per month. The
Koi Facility agreement provided that Koi would only be obliged to direct a payment
from the Project Account if Koi had received a consultant’s certification on matters
including:
(a) certification of the cost of the works to be carried during Stage 1 of the
Development, together with certification of the “Cost to Complete”
(being, at any given point in time, the estimated cost to complete those
works); and
(b) that all previous contractors’ and subcontractors’ claims had been paid.
[33] Koi’s consultant for the certification process was Kingstons. Kingstons
provided monthly drawdown reports to both Koi and PRDL, a number of which were
produced in evidence. I say more about what these reports showed over the course of
2015 later in this judgment.
[34] In September 2014, PRDL entered into the civil works contract with Dempsey
Wood. The original contract sum was $5.384 million (excluding GST), later increased
by some $2 million in approved variations.
The Development is in trouble
[35] It was common ground that as the Development progressed, there were serious
delays and cost overruns.5 By at least June 2015, the issues were attracting negative
publicity. Mr Gapes accepted that by July 2015, it was clear to him that the
Development was going to cost more than initially budgeted.
[36] The Koi Facility was due to expire on 15 October 2015. Although Mr Gapes’
evidence was that there was no clear point at which he was told by Koi that it would
not be extending the Facility, from around June 2015, he and his advisers were looking
at potential replacement funders. For example, from June 2015, Mr Gapes received
advice and a number of refinance proposals from Reesby & Company Limited
5
PRDL’s position was that significant aspects of these delays were caused by Harrison Grierson,
who were the design consultants and engineers to the Development. In August 2015, PRDL
terminated Harrison Grierson role as engineer, and replaced it with Dodd Civil.
(Reesby & Co), who Mr Gapes described as one of New Zealand’s leading property
finance brokers.
[37] In July 2015, a consultant with whom Mr Gapes was working, a Mr Larry Ede,
reported that without an “injection” of additional funds into the Stage 1 development,
the Koi Facility would be exceeded during the August 2015 drawdown from the
Project Account.
[38] On 21 August 2015, PRDL sold what was known as the “Superlot” (being the
land that had been intended to be used for Stages 2 and 3 of the Development) to
Happyland Development Ltd (Happyland). PRDL and Koi had agreed that the net
proceeds of sale, being approximately $14.78 million, would be paid into the Project
Account – thus serving as a fresh injection of capital into the Stage 1 Development.
[39] Kingstons’ drawdown report no. 11, released on 27 August 2015, confirmed
the issues then being experienced on the Development. It noted that the project
contingency was forecast to be overrun by some $4.3 million (with an actual overrun
to that point in time of $2.147 million). Kingstons observed that they were not privy
to the “overall development cashflow”, and were therefore unable to confirm that the
$30 Koi Facility “will be sufficient to cashflow the development until individual house
settlements are received”. Kingstons also reported that:
Given the delays incurred to date, in our opinion there is no ability for the
works to be completed prior to the defined Practical Completion date of 15
September 2015.
[40] Kingstons also advised that the majority of the Sunset Dates were
“unachievable”.
[41] The report concluded that due to the forecast overruns, “there is insufficient
funds remaining within the Cost to Complete to complete the Project Works”.
Kingstons certified for a drawdown of $1.107 million from the Project Account at the
end of August, to pay contractors’ most recent monthly invoices.
[42] Around the same time, Dempsey Wood was becoming frustrated at delays in
paying its invoices. On 29 August 2015, it issued a notice of intention to suspend
works. Mr Conal Dempsey, the sole director of Dempsey Wood, described such steps
as Dempsey Wood “conditioning” its clients. In response to the notice of intention to
suspend works, Mr Gapes advised that the August 2015 drawdown had been processed
and he would follow up on payment. In the event, Dempsey Wood’s invoice was paid
on 31 August 2015 (following Kingstons’ certification discussed at [41] above).
[43] I interpolate to note that much attention at the hearing was devoted to delays
in paying some of Dempsey Wood’s invoices, and what the parties had agreed, if
anything, about when Dempsey Wood was to submit its invoices. I do not, however,
consider these matters material to the issues I must determine. In effect, PRDL itself
never had any funds to pay Dempsey Wood’s (or other contractors’) invoices, all funds
coming from the Construction or Project Account, and all payments subject to Koi’s
approval. Accordingly, some relatively short delay in payment of some of Dempsey
Wood’s invoices in 2015 does not itself reflect on PRDL’s solvency at any point in
time. Rather, I am satisfied it reflected the timing of Dempsey Wood submitting its
invoices (and thus their due date for payment), versus the timing of Kingston’s
monthly certification process. In other words, the terms of payment for Dempsey
Wood’s invoices were not fully “aligned” to the quite detailed and formal drawdown
approval process for payments to be made from the Project Account. And in the event,
and other than its last invoice, all of Dempsey Wood’s 2015 invoices were paid, albeit
some of them a few days after their due date.
The search for a new funder
[44] Turning back to the chronology, Mr Gapes said that “following the sale of the
Superlot”, PRDL worked hard to refinance the Koi Facility before its expiry on
15 October 2015. Mr Gapes said that “we knew all the players” and “basically talked
to everyone”. He continued to receive advice from Reesby & Co. Some interest was
shown by some parties,6 but by early October 2015, nothing had come to fruition.
Mr Gapes also said that he was working closely with Koi during this time, and spoke
with his contact at Koi most days. The overall thrust of Mr Gapes’ evidence was that
there was no suggestion to him from Koi that the “tap would be turned off”
6
For example, Spinnaker Capital, a non-bank lender for property developments, and associated
with Reesby & Co, as well as New Zealand Mortgages and Securities (associated with the Manson
family).
immediately upon the Koi Facility expiring, and that like many development facilities,
Koi would permit the Facility to run on while a new funder was found.
[45] In September 2015, PRDL received a claim from Crown, relating to an “exit
fee” of $10 million it said was payable as a result of the sale of the Superlot to
Happyland. While Crown did later issue formal court proceedings in relation to its
claim, Mr Gapes did not consider the claim genuine, noting that in the event, it was
settled for $40,000.
[46] On 4 September 2015, Koi advised that the amount required to repay the
Facility was approximately $37.568 million, less the net sales proceeds from the sale
of the Superlot, less whatever was the cash balance of the Construction and Project
Accounts at the time of refinance. Thus it was clear that as at the date of Koi’s Facility
being refinanced, whatever was “left” in the Construction and Project Accounts would
be returned to Koi in reduction of the amount owed to it. On the basis of the
information received from Koi, Reesby & Co advised Mr Gapes on 4 September that
“the draft cashflow forecast indicates the Koi debt to refinance will be approx
$22.5 million”.
Cancelling the pre-sales
[47] As well as looking for a new funder, PRDL was also exploring ways to
maximise the value from the Development – which in turn would obviously enhance
the prospect of securing new funding. This included:
(a) using some of the land within the Development (which was to have
been purchased by Auckland Council) to build 20 additional houses;7
and
(b) exiting the pre-sales and re-selling the properties at current market
value.
7
This was expected to generate a further $11.286 million in revenue, with associated costs of some
$4.3 million.
[48] In relation to (b) above, a Jones Lang LaSalle valuation commissioned by
PRDL in early September 2015 assessed the difference in gross realisation between
seeking an extension to the Sunset Date in the pre-sales and cancelling the pre-sales
and selling the lots at market value to be around $20 million. Similarly, a “cashflow
feasibility” based on these two scenarios and dated 25 September 2015 estimated that
the “re-set” Development would result in a profit of $16.073 million, or a return on
capital of 18.9 percent.
[49] The Jones Lang LaSalle valuation also valued the Development as at early
September 2015, namely:
(a) $13.3 million, on the basis the pre-sales remained in place; and
(b) $21.8 million, on the basis the pre-sales were cancelled and resold at
market rates.
[50] Both scenarios included large “profit and risk” discounts. Mr Gapes explained
that he did not agree with the valuations, because of the size of those discounts. No-
one from Jones Lang LaSalle was called to give evidence on this topic, nor was there
evidence of PRDL commissioning any further valuation advice from Jones Lang
LaSalle (or any other valuer).
[51] Much attention was devoted at the hearing to the strategy of exiting the pre-
sales, described by Dempsey Wood as “burning off” the pre-sale purchasers.
Mr Gapes did not shy away from the fact that PRDL intended to exit the pre-sales, or
that from the purchasers’ perspective, this was not an attractive outcome. He
explained, however, that securing the additional value from (re)selling the lots at
increased market values was a necessary and vital step to ensure the Development was
financially viable. Mr Gapes explained that without doing so, it would have been
extremely difficult, if not impossible, to secure new finance, and without new finance,
the pre-sales could not be completed in any event.
[52] As noted earlier, the pre-sales gave both the purchaser and PRDL the option to
terminate the agreement in the event title did not issue by the Sunset Date. But as can
be seen from the sunset clause set out at [29] above, the agreement envisaged the
Sunset Date could be extended in certain circumstances. Mr Gapes explained that
some parties were more cautious than PRDL about the ability to unilaterally terminate
the pre-sales.8 Nevertheless, Mr Gapes said that he was confident at the time that
PRDL could legally exit the pre-sales at the Sunset Date, but that in any event, he was
confident from a commercial perspective that once purchasers understood that it was
simply impossible for the Development to be completed at the original pre-sales
prices, many (if not all) of them would elect to take their deposits and walk away,
rather than engage in litigation. In cross-examination, Mr Gapes highlighted the
importance of being able to cancel the pre-sales and re-sell at higher market prices,
observing that “[y]ou can either cancel them or you can’t. If you can’t cancel them
then the land probably isn’t worth anything and if you can, then it’s worth plenty”.
The “hive down” structure
[53] Another aspect of the proposed refinancing that attracted significant attention
at the hearing was that it was to be structured as a sale by PRDL of the Development
to a third party (referred to as Newco), with the sales proceeds (plus whatever
remained in the Construction and Project Accounts) used to repay Koi; that is, rather
than a straight refinancing of the Koi Facility. The proposed structure was described
at the hearing as a “hive down”.9
[54] Dempsey Wood put significant emphasis on this being a strategy and structure
that took no account of the interests of PRDL’s unsecured creditors, which would be
“left behind” with their claims against an empty PRDL. However, I consider this
somewhat of a red-herring. A “hive down” structure would not necessarily
demonstrate that Mr Gapes breached his director’s duties. What was important in any
scenario was the position of PRDL’s unsecured creditors, rather than the particular
structure deployed to effect the refinance. Mr Gapes’ evidence was that it was
preferable to transfer the development into a “clean entity” which would be more
attractive to a new funder, given the “taint” of the Development to that point. This
8
For example, he noted that Spinnaker Capital was “cautious” on this topic.
9
A “hive down” is generally used to describe a transaction whereby the valuable parts of a company
are transferred to a subsidiary that is then sold. This has the effect of keeping the valuable parts
of a going concern together and freed of the company’s debts.
would also enable the lots to be taken to market again but under a different brand.
Mr Gapes also explained that from his perspective, any sale of the Development to a
third party would incorporate creditors’ existing invoices being met, and existing
contractors, including Dempsey Wood, being retained to continue the Development –
given it would make no commercial sense for the purchaser to spend the time and cost
of getting new contractors set up on site.
Events leading up to 15 October 2015
[55] At the end of September 2015, Dempsey Wood issued another notice of
intention to suspend works, not having received payment of its most recent invoice
(which had been due for payment on 18 September 2015). At the same time, Mr Gapes
signed off on an approximately $2 million increase to the value of Dempsey Wood’s
contract, reflecting approved variations to that point.
[56] Also at the end of September 2015, PRDL requested that Crown defer
commencing legal proceedings in relation to the exit fee, stating that they could affect
PRDL’s ability to refinance the Koi Facility. Crown (unsurprisingly) did not agree to
do so, and commenced legal proceedings at the end of that month.
[57] Kingstons’ drawdown report for the end of September 2015 painted a similar
picture to that issued at the end of August 2015. Again, Kingstons advised that there
was insufficient “Cost to Complete” to complete the project works, and that the
Practical Completion and Sunset Dates were unachievable. Kingstons certified further
invoices totalling $1.523 million (including Dempsey Wood’s invoice due for payment
on 18 September 2015) as properly payable under the Facility. Payments were duly
made from the Construction and Project Accounts.
[58] By at least early October 2015, Mr Gapes was in discussions with Webber
Capital about a possible refinance of the Development. While the precise relationships
were not clear from the evidence, Webber Capital broadly represented the interests of
a Mr Clint Webber and the Chow brothers. Clearly alternative financing arrangements
were not, at that time at least, thick on the ground, Mr Gapes himself acknowledging
that Webber Capital and the Chow brothers were “tier 4” (or lower) lenders. He
explained that until the pre-sales were cancelled, “we were dealing with more
expensive, less reputable funders”, and that “the fact the pre-sales were not cancelled
was what was holding people back”.
[59] On 1 October 2015, Reesby & Co provided Mr Gapes with a Finance Proposal
to present to Webber Capital. The document recorded that Koi had “advised that [the
Koi Facility] will not be extended”. It also recorded that:
PRDL had decided to sell the Stage 1 site to repay the Koi loan. All consents
and material contracts will be novated to [Newco] to allow the civil &
construction works to continue on site.”
[60] The proposal stated that after the sale to Newco, Newco would “complete all
civil works via Dempsey Wood”. The proposal also stated that “the existing presales
will not be novated from PRD[L] to [Newco] and the units will be marketed and re-
sold at current market values.”
[61] On 7 October 2015, Kingstons completed a draft “Refinance Report”. The

report stated that Kingstons had been advised by Reesby & Co that PRDL intended to
refinance the development with Spinnaker Capital and in that context, required a
refinance report setting out the current Cost to Complete. Kingstons estimated that in
addition to the $27.982 million costs incurred to that point in time, a further $54.396
million would be required complete the project works (hence a total “Development
Budget of $82.379 million). Discussions with Spinnaker did not, however, progress
to a concluded transaction.
[62] At some point prior to 12 October 2015, Mr Dempsey became aware that the
Development was to be refinanced. Mr Gapes emailed him on 12 October 2015,
stating “as you know we are replacing our Singaporean funders – can you meet with
the new funder on Wednesday this week”? The “new funder” was Webber Capital. I
discuss the meeting proposed by Mr Gapes later in this chronology.
The Koi Facility expires/the Webber Capital transaction is executed
[63] The Koi Facility expired on 15 October 2015. On the same day, PRDL entered
into an agreement for sale and purchase of the Development to Webber Capital for
$22.5 million (the Webber Capital agreement). As will be apparent, the $22.5 million
purchase price amount matched that amount advised by Reesby & Co in September
2015 as the projected amount to repay Koi (after taking into account the balances
remaining in the Construction and Project Accounts). The Webber Capital agreement
was accompanied by an agreement pursuant to which PRDL would provide
management services to Webber Capital (to essentially carry out the Development), as
well as a put and call agreement, which gave an entity associated with Mr Gapes the
right to repurchase the Development at a later date.
[64] The Webber Capital agreement was conditional, among other things, on
Webber Capital’s due diligence of the transaction. The agreement also provided for
the purchase price to increase by an amount equal to the costs incurred by PRDL in
relation to the Development between 16 October 2015 and the sale settling (effectively
reflecting contractors’ costs over that period).10 The agreement also required PRDL
to continue the Development pending settlement, a point Reesby & Co raised with
Mr Gapes the day before the agreement was executed. Reesby & Co advised that that
obligation “means the October drawdown needs to be funded somehow” and “this will
likely need to come from Koi”, such that the actual refinance amount would need to
be $22.5 million plus the October 2015 drawdown.
[65] It is also apparent from the contemporaneous documents that $1 million from
the sales proceeds from the Webber Capital agreement was to be provided to Mr Gapes
to repay a debt to Westpac on a separate project. Mr Gapes explained that “Westpac
were giving me some grief around repaying that loan, so that would’ve been a payment
to Westpac to keep them from pursuing me further”.
[66] On 16 October 2015, Koi served PRDL with notice pursuant to s 119 of the
Property Law Act 2007 (the PLA), which recorded that in the absence of repayment
on or before 17 November 2015, enforcement rights under the Facility would become
exercisable. Mr Gapes said that he was not particularly troubled or surprised by the
notice being issued, and through his ongoing discussions with Koi, was aware that it
would be. He described this as an expected step for a financier to take when a facility
10
Excluding amounts paid out of the Construction Account, and capped at $750,000.
has expired, and not confirmation or a suggestion to him that Koi would take
enforcement action immediately upon expiry of the notice.
[67] It is not in dispute that Mr Gapes did not inform PRDL’s creditors that the PLA
notice had been issued.
[68] The precise date is not clear, but in or around mid-October 2015, Mr Gapes
and Mr Dempsey met with the Chow brothers and Mr Webber. This was presumably
in the context of Webber Capital’s ongoing due diligence. Mr Dempsey described it
as a not very pleasant meeting. Mr Gapes generally agreed with Mr Dempsey’s
description of the meeting, including that the meeting got quite heated at times
(emanating mainly from the Chows) and that there were a lot of “egos” in the room.
[69] Mr Dempsey said that in the context of this meeting, and his expressed
concerns about the Development’s financial viability (and Dempsey Wood getting
paid as a result), Mr Gapes had threatened that he could simply allow PRDL to default
on its obligations to Koi and go into receivership. Mr Gapes denied he said this, but
was quite candid that one of the Chow brothers had made such a “threat” at the
meeting. He described this as “posturing”, and that he was uncomfortable about what
was being said.
[70] On 21 October 2015, Dempsey Wood issued another notice of intention to

suspend works, as its most recent invoice, due for payment that day, had not been paid.
Kingstons replied to Dempsey Wood the same day, advising that they had “received
the Springpark drawdown information yesterday and [were] currently processing”.
[71] On 22 October 2015, Kingstons distributed its October 2015 drawdown report.
The report noted that Kingstons had been advised by Koi that there was no need to
update the anticipated Cost to Complete given “this is to be [Koi’s] last drawdown
before funding of the project will transfer to a new funder.” I interpolate to note that
although Kingstons’ report stated that the October drawdown was to be the last, Koi
did authorise a further payment out of the Project Account which occurred on
25 November 2015. There was no specific evidence of what discussions Mr Gapes
had had with Koi about payments beyond the October 2015 drawdown.
[72] Also on 22 October 2015, Kingstons forwarded to Dempsey Wood email
communications between Koi and Kingstons confirming that Koi had approved
Dempsey Wood’s most recent invoice for payment.
[73] The same day, Koi gave formal consent to PRDL proceeding with the
transaction with Webber Capital on certain conditions (largely aimed at reserving
Koi’s rights under its Facility). A tripartite agreement between Koi, Webber Capital
and PRDL was also executed that day, which addressed, among other matters,
arrangements between the parties prior to settlement under the agreement with Webber
Capital. It also recorded an agreement that $8,000,000 would be paid out of the Project
Account to Koi the day following entry into the tripartite agreement (which duly
occurred).
[74] The following day, on 23 October 2015, Dempsey Wood submitted its invoice
for the period ending 31 October 2015, in an amount of approximately $998,000.
[75] On 29 October 2015, Dempsey Wood’s solicitor, Mr Alan Jones, sent a letter
to PRDL/Mr Gapes setting out Dempsey Wood’s concerns at recent events, including
the meeting with the Chows and Mr Webber. It is helpful to set the contents of the
letter out in full. It is broadly consistent with each of Mr Gapes’ and Mr Dempsey’s
evidence about the meeting with the Chows and Mr Webber, and provides context for
later representations made by Mr Gapes which are the basis of Dempsey Wood’s FTA
claim. Mr Jones said the following in his letter:
1. We act for Dempsey & Wood Civil Limited which is party to a

construction contract with Panama Road Developments Limited
(PRDL).
2. Further to your recent meeting with our client (and the Chow interests),
and recent telephone discussions, we confirm that:
(a) You have advised that PRDL intends to sell the development;
(b) PRDL’s purpose in selling the development is two-fold;
(i) it does not have the resources to complete the development

and;
(ii) it cannot afford to honour the existing sale and purchase

agreements which are now considered to have been sold
too low compared to the current market of the properties;
At the meeting, our client was told that the Chow interests
wanted to move quickly and take over the contract with
contractors. But since that meeting more than a week ago,
there has no update from PRDL;
(c) Our client was told that one of PRDL’s options was to go into
receivership and thus repudiate its obligations to our client. Our
client has serious concerns about PRDL’s financial position and
its ability to meeting the ongoing obligations under the contract.
3. Our client requires, and will continue to require, PRDL to meet its full
payment obligations under the construction contract. This will include
an EOT claim expected to be in the vicinity of $1 million.
4. Given further works are required to complete the contract, my client

requests that you provide the following directly to me by 5pm Friday,
30 October 2015;
(a) Confirmation that PRDL intends to meet all its payment

obligations under the construction contract; and
(b) Evidence of the funding available to PRDL to meets its payment

obligations including the EOT claim foreshadowed above. This
would include the monies said to be in the trust account of Russell
McVeagh.
5. In the event PRDL does not and cannot meet its payment obligations,
my client will look for recourse against Mr Gapes personally as director
of PRDL and the person who has represented the company.
(emphasis added)
[76] PRDL did not formally respond to the letter by the requested 30 October
deadline.
[77] At the end of October 2015, and in the context of Webber Capital’s ongoing
due diligence, there was an exchange of correspondence between the solicitors for
each of PRDL and Webber Capital on PRDL’s ability to lawfully terminate the pre-
sales upon the Sunset Date being missed. Webber Capital’s solicitor stated that “[m]y
client advises me that unless the pre-sale agreements can be successfully terminated
there is no development margin left in this project and the land is worthless”.
Mr Gapes responded to the email, suggesting the parties and their respective lawyers
meet to discuss the issue.
Webber Capital cancels its agreement
[78] On 5 November 2015, Webber Capital gave notice that it was not satisfied with
the results of its due diligence and terminated the Webber Capital agreement.
[79] Negotiations between PRDL and Webber Capital nevertheless continued for a
short time. On 8 November 2015, Mr Gapes wrote to Webber Capital setting out a
range of options as he saw it. The letter included a proposal to correspond with
purchasers under the pre-sales, including informing them that:
The development has taken too long and we have had too many issues like
contamination, a receivership etc and there is now no profit in the
development and we cannot get new development funding although we have
been trying hard in the last few months.
[80] Unsurprisingly, the contents of this letter were put to Mr Gapes in cross-
examination. He stated, however, that the contents were somewhat self-serving, as the
proposed letter to the purchasers would be designed to highlight the difficulties in the
Development, as a means of discouraging them from taking legal action in the event
of cancellation of the pre-sales at the Sunset Date.
[81] Webber Capital made a further offer to purchase the Development on

8 November 2015. It said that it valued the risk around the cancellation of the pre-
sales at around $5 million and proposed that that risk be “shared” 50/50 between Koi
and Webber Capital. On this basis, it offered to purchase the Development for $20.75
million (which also reflected Koi’s payment of the October 2015 drawdown). The
proposal was unacceptable to both PRDL and Koi. Mr Gapes said he viewed it as a
cynical attempt by a “bottom feeder funder to chip the debt”.
[82] Mr Gapes said that after the deal with Webber Capital did not progress, he
“began discussions with Nomura, a large Japanese lender, who I was advised on
multiple occasions was ‘keen on doing a deal’”. No particular details of this were
adduced in evidence, though it appears from correspondence on 3 December 2015 that
discussions had not progressed to any material extent.
Dempsey Wood remains concerned about payment
[83] In the meantime, Mr Dempsey remained concerned about PRDL’s financial

position and emailed Mr Gapes about this on 11 November 2015. Again, given its
relevance to Dempsey Wood’s FTA claim, it is helpful to set out the email’s contents
in full:
Hi Tony it was good to talk today re subject of the Chow Bros./Webber Capital
re financing deal falling over for the Panama Road contract.
This makes it even more imperative that all of our concerns outlined in our
letter sent by AJLP dated 29 October are addressed.
The lack of communication recently has also not helped matters and is
decreasing our level of confidence in the ability for PRDL Ltd to continue to
fund this project.
In our discussion today you again re-affirmed that there was $3.9 million
deposit in a Russell McVeigh (sic) Trust account with the specific purpose of
assuring payment for the civil works for this project.
You agreed today to organise a written statement from Russell McVeigh to

this effect. Can you please forward this to us by close of business today.
[84] Mr Gapes responded “Hi Conal I have asked RMcV for this – will chase
today.”
[85] At the same time, Koi was also taking steps itself in relation to the Facility,
though Mr Gapes was not advised by Koi at the time about what it was doing. Koi
had retained Whillans Realty Group Ltd (Whillans Group) to assist it in selling its loan
position. In an email from Whillans Group to NZMS, Whillans advised that the loan
outstanding was $27.5 million, and was secured by assets estimated to be valued at
$41 million, which included the amounts in the Construction and Project Accounts,
and also the Stage 1 land and improvements. This email was forwarded to Reesby &
Co on 11 November 2015, who in turn forwarded it to Mr Gapes the same day.
Mr Gapes accepted in cross-examination that the money which had been set aside “for
the civils, was part of what was on the market to another lender”.11
11
For completeness, I note that no party sought to rely on the assessment of value suggested in this
email, which if correct, meant that PRDL’s assets exceeded its liabilities by some margin. No one
from Koi or Whillens were called to give evidence, such that the email would be inadmissible
hearsay evidence in any event, to the extent it was relied on for the truth of its contents.
[86] The following day, 12 November 2015, Russell McVeagh sent Mr Gapes an
email confirming the Project Account balance was $4,172,351.07. This was in
response to an email from Mr Gapes to Russell McVeagh seeking confirmation of the
amount remaining in the Project Account and stating “Conal Dempsey would like
some comfort we have the money still available to pay him”. In an email which is the
focus of Dempsey Wood’s FTA claim, Mr Gapes forwarded the full email chain to
Mr Dempsey, stating “Hi Email below from Dan Williams at RMcV. The $4.172 is
for civils and consultants etc”. Mr Dempsey said that on the basis of this email,
Dempsey Wood continued to work at site, observing “it was a nervous few weeks”.
[87] On 13 November 2015, Mr Dempsey approached Russell McVeagh directly

with some further queries about the funds in the Project Account.12 He said as follows:
Hi Daniel, thanks for the confirmation of the Project Account balance. It is

great to see there seems to be an allowance for funding of works at Panama
Road. What DW require from yourselves is verification of what the Project
Account funds are for. It would be very helpful to know the answers to the
following questions.
*Is the fund specifically for the payment of the Civil contract works?
*Is the fund able to pay out upon the producing of a monthly payment
certificate or are their other requirements needed to gain access to the fund?
*Is the purpose of the fund to allow for any shortfall in the financing of the
project from Olympus Capital?
Thanks and look forward to hearing from you.
[88] Jumping forward in the chronology for a moment, just under two weeks later,
Russell McVeagh responded on 24 November 2015 (copied to Mr Gapes) stating:
Hi Conal
We respond to your queries as follows:
• The funds held in the project account are to fund the project works
(excluding the costs incurred by KN Construction, for which there is a
separate account). The project works are those works relating to Stage
1 to be designed and constructed in accordance with the relevant design
documents.
• We are unable to pay out of the account unless PRDL’s lender has
approved the payment. PRDL’s lender will only approve the payment
12
Mr Gapes said he was not concerned about this, and was happy for Dempsey Wood to approach
PRDL’s solicitors directly.
if it has received certification from a quantity surveyor acceptable to
PRDL’s lender.
• We understand that the purpose of the funds in the project account is to

finance all costs associated with the project works (excluding the costs
incurred by KN Construction).
Please advise if you have any further queries.
[89] Mr Dempsey circulated this response to his colleagues at Dempsey Wood

stating “Finally. It looks positive”.
[90] Mr Dempsey said in his evidence in chief that what was communicated to him
by Russell McVeagh satisfied him that “what Mr Gapes had told me was correct”. He
also described his follow up queries of Russell McVeagh as a “tick the box and double
check exercise”, given as far as he was concerned, the project still had many months
to run, and it was “really good to see [Russell McVeagh] backing up what Mr Gapes
had said”. He also said that “based on these assurances, Dempsey Wood continued to
work on the Development until 3 December 2015”.
[91] On 19 November 2015, Dempsey Wood gave PRDL further notice of intention
to suspend works for failure to pay its most recent invoice (relating to its work in
October 2015). The notice stated that the invoice was due for payment that day.
Mr Gapes replied:
This is getting silly because we get one of these every month because you keep
lodging your invoice earlier than everyone else. We do one drawdown per
month and we need to get all the invoices in together to enable them to be
processed by Kingstons and Russell McVeagh. We need to get you aligned
with KN and the others.
The lead-up to receivership
[92] Kingstons issued a further drawdown report on 23 November 2015. It

contained much of the same information as earlier reports and certified for payment
costs for the prior month totalling $1,126,904. This included Dempsey Wood’s most
recent invoice, referred to in the preceding paragraph.
[93] On 25 November 2015, Koi confirmed that payments could be made out of the
Project Account for the most recent round of consultants’ costs. The email (copied to
Mr Gapes) noted that “this instruction should not be construed as waiver of Koi’s
rights or the borrower’s defaults and Koi continues to reserve all of our rights under
the facility documents”. In the event, on Koi’s instructions, on 25 November 2015,
approximately $1.27 million was paid out of the Construction and Project Accounts
(including in payment of Dempsey Woods’ invoice for October 2015 work).
[94] On 26 November 2015, Dempsey Wood submitted its claim for an EOT in an
amount of $200,279.40. This was later approved by Dodd Civil as engineer to the
contract, though shortly after PRDL had gone into receivership.
[95] A PRDL balance sheet as at 30 November 2016 was produced in evidence. It

recorded total assets of $28.687 million and total liabilities of $27.641 million, and
thus net shareholder equity of $1.046 million. There was considerable expert evidence
given in relation to this balance sheet, including its accuracy and whether it
demonstrated that PRDL was balance sheet solvent (or insolvent) as at the end of
November 2015. I return to this topic later in this judgment.
Koi appoints receivers
[96] On 1 December 2015, Koi gave PRDL formal notice that it intended to appoint
receivers as of midday the following day, 2 December 2015. Mr Gapes said that he
received a telephone call from Koi shortly before the written notice was issued, when
he was in a carpark in Queenstown. He said it came as a “complete and utter shock”
in the context of his ongoing discussions with Koi. The notice as originally issued
referred to the amount outstanding under the Koi Facility as $35.279 million. That
did not, however, take into account the $8 million payment referred to at [73] above,
and a revised notice was issued showing an updated amount outstanding of
$26.752 million.13
13
This error is relevant, given the expert evidence for Dempsey Wood proceeded on an assumption
that the liability to Koi shown in the 30 November 2015 balance sheet was understated by $8
million, the experts working off the amount outstanding shown in the original – but incorrect –
notice to appoint receivers.
[97] On 2 December 2015, a regular fortnightly project meeting was held on site
between various contractors, consultants and PRDL. Nothing about Koi’s
appointment of receivers was raised at that meeting (which Mr Gapes did not attend;
presumably his attention was focused elsewhere at the time). Mr Gapes said the fact
that Koi’s recent steps were not discussed at the meeting was understandable, given it
was a site focused “business as usual” type meeting. The following day, Mr Gapes
sent an email to Mr Dempsey informing him that PRDL had been put into receivership.
Dempsey Wood ceased work on site at that point.
[98] On 7 December 2015, Dodd Civil certified payment for Dempsey Wood’s work
up to 3 December 2015 in an amount of $503,373.85 (GST inclusive).
[99] On 23 December 2015, Dodd Civil approved Dempsey Wood’s EOT claim in
the amount of $200,279.40. These additional costs claimed and approved did not
solely relate to the October/November 2015 period, however, but spanned the whole
project.
[100] Dempsey Wood formally cancelled its contract with PRDL the same day.
[101] A schedule of aged creditors as at 30 November 2015 was produced in

evidence, which showed the following:
(a) Dempsey Wood being owed $503,373.
(b) The other large creditor with “current” amounts due being Harrison
Grierson, though a number of the underlying invoices related to periods
of time prior to October/December 2015 (dating back as far as
March/April 2015).14
(c) A number of (much) smaller current and 1-30 day creditors.
(d) No creditors aged 31-90 days.
14
These claims were disputed by PRDL, which also claimed against Harrison Grierson for what it
said was Harrison Grierson’s failings in its earlier role as engineer to the project. PRDL’s receivers
later settled these claims.
(e) $414,088.41 of creditors with aged balances of 90 days or greater, the
large majority of this relating to three creditors (Auckland Council,
Murray Capital and Studio of Pacific Architecture Ltd).15
[102] From the above, therefore, and excluding Auckland Council and a small
number of disputed debts, the large majority of PRDL’s aged creditors were “current”.
[103] On 20 December 2015, being the Sunset Date in the pre-sales, the receivers
took steps to cancel the agreements. As at 21 March 2016, the receivers confirmed
that 149 of the 151 pre-sales had been cancelled.
Later events
[104] Mr Gapes and Mr Dempsey kept in touch during the early part of 2016, in the
context of Mr Gapes continuing to seek a refinance of the Koi Facility. On
17 February, Mr Gapes sought information on Dempsey Wood’s expected costs to
complete the civil works, which contemplated Dempsey Wood being paid for its
outstanding invoice if it agreed to continue with the project. Also in February 2016,
Mr Gapes asked Mr Dempsey to accompany him to a meeting with a potential new
financier (Qualitas, an Australia property financier), which Mr Dempsey agreed to do.
[105] Qualitas signed an indicative term sheet on 12 March 2016. The accompanying
mandate letter stated that Qualitas was willing to seek its Investment Committee (IC)
approval to “assist with the refinance of the project … and subsequently to (sic) the
SPV … to acquire the Land from [PRDL] and undertake development works to
[complete the Development]”. The mandate letter stated that provision of the related
facilities was “subject to satisfactory due diligence, documentation as well as the
satisfaction of any conditions contained within the indicative term sheet”. The
15
Mr Gapes said that he believed the Auckland Council amount related to the new consents for the
additional 20 units (but had been unable to confirm this); the Murray Capital amount was in fact
payable by Redwood “in the first instance” as it related to the balance of Murray Capital’s fee for
brokering the Koi Facility, and that it had been agreed that it would not be paid until later in the
Development and thus he did not consider it payable at that time (the documentation indicates that
this view was not shared by Murray Capital); and that Studio of Pacific Architecture was the
previous architect to the Development, and had been replaced following a dispute. Mr Gapes said
that he was not aware of Pacific Architecture ever pursuing this amount.
mandate noted that any commitment to provide the facilities was subject to the same
matters, as well as IC approval.
[106] The indicative term sheet related to two proposed facilities – Senior Debt
Facility A and Senior Debt Facility B. The purpose of Facility A was to pay out the
Koi Facility,16 discharge the receiver and “pay other costs agreed to by Qualitas (in its
absolute discretion)”. The Facility was to accrue interest at 25 per cent, capitalised
monthly, and was to be repaid out of the sales proceeds received from the sale of the
Development to the Qualitas SPV. While the term sheet did not expressly address
payment of contractors’ past invoices, one of the conditions precedent was a signed
contract “with Dempsey Wood or another civil contractor acceptable to Qualitas and
[PRDL], to complete the civil works….”. Facility B was to enable the Qualitas SPV
to purchase the Development and to fund the development costs of the project. It
contained similar interest provisions to Facility A. The interest provisions were put to
Mr Gapes in cross-examination, on the basis that they were extremely onerous and to
suggest that viable refinance offers were few and far between. Mr Gapes said that the
arrangement was more akin to a profit sharing arrangement, hence the higher interest
rates.
[107] In the event, however, on 22 March 2016, Koi confirmed that it had entered
into an unconditional sale of the Development to a third party (the details of which
were confidential at that stage). It later became known that the third party was
Happyland (by then known as the Wilshire Group), and the purchase price was
$25 million.17
[108] Mr Gapes emphasised that when he notified Qualitas on 22 March 2015 of the
sale, his contact responded “can we discuss – we can get an approval by COB today
which sees Koi get fully repaid”. No further evidence was given about this, however.
Mr Gapes said that at the time, he had thought he had more time to complete the
Qualitas transaction, given the receivers were yet to openly market the Development.
16
Stated in the term sheet to be “indicatively $25.5 million”, with Facility A stated to be for an
amount “up to $26 million”.
17
Mr Gapes’ view at the time was that the sale was at an undervalue, though neither he nor PRDL’s
liquidators took any formal steps in this regard.
[109] On 6 April 2016, PRDL was put into voluntary liquidation upon the resolution
of its shareholders. Mr Gapes explained that he did this so the liquidators could
scrutinise the receivers’ sale of the Development. Iain Shephard and Heather Gair
were appointed as liquidators. Mr Shephard gave evidence for Dempsey Wood at the
hearing. I discuss Mr Shephard’s evidence later in this judgment.
[110] The receivers’ final report (dated 8 November 2017) recorded that $2.575
million remained owing to Koi, and that unsecured creditors in the receivership
totalled $1.41 million. Proofs of debt totalling only $433,000 were made in PRDL’s
liquidation. Mr Dempsey explained that Dempsey Wood did not submit a proof of
debt given it was clear there were no funds available for its claims to be met.
[111] I turn now to the experts’ evidence.
The experts’ evidence
[112] Expert evidence was given by three insolvency practitioners: Mr Shephard and
Mr Hoole for Dempsey Wood, and Mr Vance for Mr Gapes.
Mr Shephard’s evidence
[113] Mr Shephard’s initial opinion was that PRDL was both balance sheet and
cashflow insolvent as of 16 October 2015 (thus immediately after the expiry of the
Koi Facility). However, as his evidence progressed at the hearing, and while he
remained firmly of the view that PRDL was cashflow insolvent as of 16 October 2015,
he was a little less “firm” that the company was also balance sheet insolvent as of that
date. In this context, and through cross-examination, he accepted that some of the
matters upon which he had based his assessment of balance sheet insolvency required
further analysis or clarification.
[114] On balance sheet insolvency, Mr Shephard said that PRDL’s financial position
had been precarious from around July 2015. This was because there was increasing
evidence (and by August 2015, confirmation) that there had been such a significant
cost overrun that the Development could not be completed within its original budget.
Mr Shephard then focussed on the PRDL balance sheet of 30 November 2015 which,
as noted at [95] above, recorded total assets of $28.687 million and total liabilities of
$27.641 million, resulting in equity or shareholder funds of $1.046 million.
[115] Mr Shephard’s initial view was that the amount due to Koi as shown in that
balance sheet was understated by some $8 million (Mr Shephard working off the initial
letter appointing receivers, which incorrectly set out an amount outstanding of
approximately $35 million). This would have of course immediately led to negative
shareholder funds of some $7 million. Mr Shephard accepted in cross-examination
however, that the amount due to Koi was correctly stated in the 30 November 2015
balance sheet, given the $8 million repayment to Koi by that time.
[116] Nevertheless, in the context of the $1 million shareholder funds, Mr Shephard

stated that the figure included in the balance sheet for “Work in Progress” of $23.923
million, being PRD’s only real asset, was “effectively worthless” given the significant
cost overruns to that point. Mr Shephard accordingly suggested that the amount for
Work in Progress was overstated by between $5 million and $10 million, though
accepted he had not conducted any detailed assessment to arrive at this range, and
rather it was based on his experience as an insolvency practitioner.
[117] In terms of factors leading Mr Shephard to that assessment, he confirmed that

he took into account an inevitable discount to the value of the Development being sold
in an insolvency scenario. He also explained that part of his assessment was based on
the then stated development margin of $6 million being completely overwhelmed by
additional costs of the Development to that date of some $14 million. Mr Shephard
accepted, however, that given the $14 million costs including the cost to build the
additional 20 houses, the analysis would need to take into account the revenue to be
earned from those 20 additional houses (estimated to be $11 million). On this basis,
Mr Shephard accepted the analysis would return to a slightly positive margin.
Mr Shephard emphasised, however, that the overall profitability of the Development
was highly uncertain, and depended significantly on the ability to cancel the pre-sales
without resulting loss or claims.
[118] Mr Shephard agreed that his assessment of balance sheet solvency turned
significantly on the valuation of a development asset. Taking into account the
proposed sale of the Development to Webber Capital for $22.5 million, Mr Shephard
noted that that could act as a proxy for the Work in Progress in the balance sheet. He
was also concerned, however, that the 30 November 2015 balance sheet did not
sufficiently record contingent liabilities, which he estimated to be between $2 million
to $4 million. Mr Shephard again noted, however, that he had not conducted any
particular calculations in this regard, and this was also an estimate based on his own
experience.
[119] Ultimately, Mr Shephard’s evidence-in-chief was that it was “impossible to

say for certain what PRDL’s financial position was at 15 October 2015, due to
confusion in the financial records at this time”. Mr Shephard’s overall conclusion was
that at the very least, PRDL was “nearing insolvency” by 15 October 2015, and “likely
balance sheet insolvent by $1 million to $2 million”.
[120] Mr Shephard considered the expiry of the Koi Facility to be a significant

trigger event for PRDL, and while he did not suggest the company ought to have been
put into immediate liquidation, his evidence was that this was the time when Mr Gapes
ought to have been taking formal insolvency advice and actively considering steps to
protect unsecured creditors. Mr Shephard stated that once the Webber Capital offer
had been withdrawn on 5 November 2015, this was the point in time at which he would
have expected a director of a troubled company to begin formal insolvency processes.
[121] As to what insight could be drawn from Koi’s willingness to continue to

finance payment of the unsecured creditors after its Facility had expired, Mr Shephard
stated that Koi would have only been interested in protecting its own secured debt, and
thus was willing to give Mr Gapes some time to pursue alternative financiers so long
as it was comfortable PRDL’s assets were sufficient to meet that secured debt.
Mr Shephard noted that the “tipping point” for Koi had plainly come by the time when
its secured debt had reached $26.752 million, and reflecting that it would recover any
remaining amounts in the Construction and Project Accounts.
[122] Mr Shephard was adamant that Mr Gapes (and Mr Vance) were

“extraordinarily optimistic” about the prospects of refinancing. Mr Shephard said this
was in the context of refinancing having been explored for some months prior to the
expiry of the Koi Facility. He said that the Webber Capital transaction did not alter
his view, given it was a conditional arrangement, and that the “number of conditional
finance deals I have seen that don’t come to fruition doesn’t bear counting”.
Mr Shephard accepted that it was appropriate for Mr Gapes to continue to explore
refinancing options after the Koi Facility had expired, but that was in the context of a
company that “is or is about to become insolvent”, and thus Mr Gapes ought to have
had an eye to the “counter factual”, and taken appropriate steps to ensure unsecured
creditors were protected.
Mr Hoole’s evidence
[123] Mr Hoole’s initial position (in his primary brief of evidence) was that PRDL
was balance sheet insolvent by 7 October 2015 and cashflow insolvent by 16 October
2015. The former was based on Kingstons’ advice on 6 October 2015 that the
additional costs of the Development had grown by $14 million, which effectively
wiped out the projected margin. However, and like Mr Shephard, Mr Hoole accepted
that this did not take into account the revenue to be earned from the additional
20 houses, and agreed that this aspect of his brief would therefore require “further
analysis.”
[124] Mr Hoole had also opined that the Koi debt was understated in the 30
November 2015 balance sheet by $8 million, but for the same reasons discussed in
relation to Mr Shephard, accepted that the figure shown in the balance sheet was likely
to be correct. But his evidence was that PRDL was nevertheless balance sheet
insolvent by around $1 million to $2 million in October 2015, given his assessment
that the amount included in the balance sheet for Work in Progress was overstated (like
Mr Shephard, by around $5 million to $10 million), and that the balance sheet failed
to include a number of contingent liabilities (which, again, like Mr Shephard, he had
assessed at $2 million to $4 million).
[125] Much of the cross-examination of Mr Hoole focussed on his evidence that the
Work in Progress was overstated in the balance sheet. Mr Hoole disagreed that the
sale of the Superlot land for $28 million suggested that the Development land alone
was worth in that region, given it was 50 percent smaller and only part developed,
which would have made it difficult to market. Mr Hoole originally accepted in cross-
examination that the subsequent price paid by Happyland of $25 million could
represent an approximate value of the Development in October/November 2015, given
there had not been significant work carried out after October 2015. However, in re-
examination, Mr Hoole adjusted his position, saying that “dropping” the $25 million
into the 30 November 2015 balance sheet was too simplistic, and a more realistic
approximation was the revised offer made by Webber Capital of $20.750 million in
mid-November 2015.
[126] In relation to contingent liabilities (which, as noted, Mr Hoole also estimated

to be $2 million to $4 million), his view was that the balance sheet liabilities did not
include amounts due to KN Construction, Murray Capital, Harrison Grierson and
Crown. However, he accepted that upon reviewing the aged creditors schedule as of
30 November 2015, which totalled $1.420 million,18 at least Harrison Grierson and
Murray Capital were included. He also accepted that the claim by KN Construction
had been dismissed by the engineer earlier in November 2015.
[127] Mr Hoole said that Mr Gapes should have stood down the contractors on the
site as of 15 October 2015 given:
(a) PRDL could not pay existing debts;
(b) it was in default of the Koi Facility and Koi could therefore appoint
receivers at any time;
(c) a PLA notice had been issued;
(d) the Development in its existing form was on any view unprofitable;
(e) Mr Hoole’s view that receivership and liquidation were “inevitable”;

and
18
A slightly different number to that shown in the balance sheet for 30 November 2015 of $1.372
million.
(f) default interest on the Koi Facility would continue to accrue (estimated
to be around $500,000 per month, although accepted to be a little less
than that per month once the $8 million repayment to Koi was taken
into account).
[128] Mr Hoole was also critical of Mr Gapes for not making full disclosure to his
unsecured creditors, particularly after the Koi Facility had gone into default.
[129] In terms of the prospects of refinancing, Mr Hoole’s view was that negotiating
a new transaction could take weeks if not months. Mr Hoole accepted in cross-
examination, however, that if the effect of the arrangements between Koi, Webber
Capital and PRDL accommodated payment of unsecured creditors, then that might
have altered his analysis of the appropriateness of continuing to negotiate that deal
after the Koi Facility had expired. Mr Hoole’s opinion was, however, that Koi must
have decided by at least 1 December 2015 that a refinance was unlikely, given it
appointed receivers as at that date. He agreed, however, that Koi would be relatively
relaxed so as long as it was of the view that PRDL’s assets were sufficient to meet its
secured debt, but that had obviously not been its view by 1 December 2015.
Mr Vance’s evidence
[130] Mr Vance’s opinion was that, principally due to the continued availability of
the Koi Facility after 15 October 2015, PRDL was not cashflow insolvent as of that
date, and that:
[w]hile negotiations continued with likely financiers and the prospect of the
sunset clauses in the pre-sales agreements becoming operative, it is not clear
to me that [PRDL] was balance sheet insolvent as of 15 October 2015.
[131] Mr Vance was accordingly of the view that it was reasonable for Mr Gapes to
continue to trade after 15 October 2015 “while likely refinancing was sought”
(emphasis added).
[132] On balance sheet insolvency, Mr Vance explained that balance sheet

insolvency is more complex than cashflow insolvency, and involves exercises of
judgment as to the present day value of both known assets and liabilities, as well as
prospective and contingent assets and liabilities.
[133] As to the appropriate value for Work in Progress, Mr Vance was of the view
that if it was known that the Development was going to be sold by PRDL, it was
appropriate to consider the value on the basis of its net realisable value.19
[134] Mr Vance took issue with Mr Shephard and Mr Hoole’s view that the value for
the Work in Progress was significantly overstated in the 30 November 2015 balance
sheet, and that given the approaching Sunset Dates (and the resulting ability to re-sell
the lots at a much higher market value), it was quite possible there was additional
value in the Work in Progress. Mr Vance accepted, however, that his assessment
proceeded on the basis PRDL could legally cancel the pre-sales. That the Work in
Progress was not substantially overstated in the November 2015 balance sheet was
nevertheless supported, in Mr Vance’s view, by the sale price of $25 million to
Happyland in March 2016 (when not much, if any, further work had been carried out
on the Development after December 2015), and that Qualitas was willing to offer up
to $26 million in early 2016 to take out the Koi debt. Mr Vance also said that given
Koi had approved two significant payments at the end of October and November 2015
respectively, it must have considered the value of PRDL’s assets “comfortably
exceeded” its secured debt, otherwise those decisions would have been commercially
irrational.
[135] Mr Vance also disagreed with the suggestion of building a discount into any
consideration of asset values, anticipating an insolvency scenario.
[136] Mr Vance was adamant that it was not appropriate to simply substitute into the
balance sheet the valuation contained in the Jones Lang LaSalle valuation of $13.3
million (based on the existing pre-sale contracts being in place). This was because the
valuation included a reduction of $11.9 million for “profit and risk”, which, like
Mr Gapes, Mr Vance considered inappropriate given the property was already owned
19
This is broadly consistent with Mr Shephard and Mr Hoole’s view that the Work in Progess should
be valued at the lower of cost and net realisable value.
by PRDL. Mr Vance nevertheless accepted that the sale price of $22.5 million to
Webber Capital could be a good indicator of what at least PRDL thought the
Development was worth at that time.
[137] Mr Vance also accepted that he had approached his evidence on the basis of a
straight refinance of the Koi debt, rather than the Development being sold by PRDL
to a third party and the sales proceeds used to repay Koi. Nevertheless, he was not
particularly concerned about the concept of a “hive down”, with the key issue in his
view being whether appropriate value was received on the sale and the position of
unsecured creditors, irrespective of how any refinancing was to be structured.
[138] In terms of contingent liabilities, Mr Vance’s view was that for balance sheet
insolvency purposes, if a debt is “fairly disputed”, it ought not to be included as a
current liability at that stage. He accepted that having aged creditors of 90 days plus,
which made up about a quarter to a third of PRDL’s overall aged creditors in the latter
half of 2015, was “potentially” an indicator of insolvency, but it would need to be
ascertained if arrangements had been made with any particular creditors (such as
deferred payments or the like). Mr Vance accepted that Dempsey Wood’s EOT claim,
submitted on 26 November 2015, should have been treated as a contingent liability at
that date.
[139] Turning to cashflow insolvency, Mr Vance noted while the inability to rely on
the Koi Facility would, if not replaced by a similar facility, result in cashflow
insolvency in the future if PRDL continued to incur short term liabilities at the same
rate, this did not mean that PRDL was necessarily cashflow insolvent in the months of
October and November 2015. Indeed, Mr Vance noted that PRDL was able to meet
its ordinary trading debts as they fell due, up until it was put into receivership.
Mr Vance noted that Dempsey Wood’s invoice which was not paid in the PRDL
receivership/liquidation was not in fact due until mid-December 2015.
[140] Mr Vance rejected the suggestion that PRDL was cashflow insolvent simply on
the basis that the Koi Facility had expired and it was unable to pay that debt. He noted
that for some time after the Facility had expired, and despite having served a PLA
notice, Koi was clearly not demanding immediate repayment. Mr Vance observed that
a financier issuing a PLA notice in such circumstances was not unusual, and financiers
such as Koi would want to take all steps legally necessary to put them in a position to
make immediate demand for repayment, if and when required.
[141] In terms of the reasonableness or otherwise to continue to trade after

15 October 2015, Mr Vance said it would be quite normal for a lender in Koi’s position
to give a borrower such as PRDL some time to secure alternative financing, given it
would ultimately be preferable for refinancing to occur while the project was ongoing,
rather than shutting down and selling the assets, which was more likely to depress their
value. Mr Vance also highlighted that Koi was intimately involved in assessing the
ongoing value and profitability of the Development, as well as the ongoing
negotiations with Webber Capital. Mr Vance accordingly stated that the expiry of the
Facility “is definitely not a moment in time”, but rather is the time to “work more
closely with the financier.” Mr Vance said that only once it becomes clear that the
viable alternatives have “moved on to an unlikely position” is it time to act and cease
to trade.
Overall assessment of the expert evidence
[142] I accept each expert’s expertise in relation to the matters in issue in this case,
and in particular, PRDL’s balance sheet solvency at the relevant points in time. Each
of the experts have long and deep experience in working with and for troubled
financial companies (including appointments as liquidator), and accordingly steps that
such companies can or ought to take when they enter troubled financial waters.
[143] As the evidence progressed, however, it became apparent that each of the
experts had conducted a relatively high level assessment of PRDL’s financial position
and solvency, though it is fair to say this was particularly so with Mr Shephard and
Mr Hoole (and no doubt reflected the instructions they were given). Nevertheless, a
number of important aspects of their evidence were based on assumptions that were
incorrect, or broad assessments without underlying and careful assessment.
Hampering all experts, it was also clear that the evidence adduced in the present
proceeding was insufficient for there to be any certainty as to PRDL’s financial
position at specific points in time, including 15 October 2015.
[144] Having carefully considered the experts’ evidence, I record that in very broad
terms at least, I prefer Mr Vance’s evidence. It struck me that at least on some of the
matters in issue, he had taken a more nuanced and detailed approach. An additional
factor in my assessment was also my real concern that significant and important parts
of Mr Shephard and Mr Hoole’s primary briefs of evidence were written in precisely
the same terms. This included the same phraseology and even in some parts, the same
typographical errors. I should emphasise that I do not suggest that Mr Shephard and
Mr Hoole collaborated or otherwise communicated in relation to their evidence. Both
were clear when questioned that they had not spoken to each other about their
evidence. I fully accept their evidence in that regard. But I am troubled that important
aspects of their briefs had obviously been written by Dempsey Wood’s legal advisers,
rather than emanating from the witness himself. Accordingly, while each of
Mr Shephard and Mr Hoole no doubt accepted and agreed with the formulation of the
evidence that had been put before them, the process by which this evidence evidently
came to be in written form undermines its reliability.
[145] These matters emphasise the very real importance of the High Court Rules
2016 concerning briefs of evidence, and in particular, r 9.7, which requires that every
brief of evidence “must be in the words of the witness and not in the words of the
lawyer involved in drafting the brief”.20 Each of Mr Shephard and Mr Hoole noted
that following discussions with Dempsey Wood’s legal advisers, described by
Mr Hoole as including “robust” discussions, the briefs had then been put in “ a court
format” or “legal form.” There is no “court format” or “legal form” for briefs of
evidence, other than the requirements of the High Court Rules and in particular, r 9.7.
A brief of evidence which is plainly written in the witness’s own words is ultimately
far more persuasive to the Court than a brief that has obviously been written
substantially, if not wholly, by a lawyer. I accept that for some witnesses, it will be
necessary for a lawyer to “tidy up” and present the witness’s evidence in a more clear
and logical order and format. This will be particularly so with some civilian witnesses.
But this will be less so with expert witnesses. I also accept that in the case of expert
witnesses, lawyers may need to work with the expert to ensure that their opinions are
expressed in clear and understandable terms, given many experts will not be familiar
20
High Court Rules 2016, r 9.7(4)(b).
with writing expert opinion pieces for digestion by a court or other fact finder, rather
than their peers or clients. But it is unattractive and ultimately unpersuasive for an
expert’s brief to have clear indications of having been “wordsmithed” by a lawyer.
[146] I turn now to address each of Dempsey Wood’s claims.
Section 135 of the Act
Legal principles
[147] The legal principles concerning s135 of the Act have recently been considered
in some detail by the Supreme Court in Madsen-Ries v Cooper (Debut Homes)21 and
Mainzeal.22 Given some of the issues arising in Mainzeal are not dissimilar to a
number of those arising in this case, I have primarily drawn from the Court of Appeal’s
judgment in that case (which of course also reflects the principles articulated by the
Supreme Court in Debut Homes).
[148] In considering s 135 of the Act, the Court of Appeal highlighted the significant
information asymmetries between a company and its creditors. The Court noted that
once shareholder funds are depleted, the downside business risk is born by creditors
and not by shareholders, but the converse is not true: the benefits will be enjoyed
solely by shareholders.23 The Court described this as a “perverse incentive” in relation
to risk taking, and observed that the “worse the position of the company, the greater
the incentive for directors and shareholders to ‘gamble on the doorstep of
insolvency’”.24 The Court considered a second perverse incentive to trade on to be
where directors are personally liable for some of the company’s obligations, for
example where they have guaranteed advances to the company.25
21
Madsen-Ries v Cooper [2020] NZSC 100, (2020) 29 NZTC 24-088.
22
The Court of Appeal’s judgment in Mainzeal was in fact delivered after the conclusion of the
hearing in this matter. I accordingly sought further submissions from the parties on the application
of the principles discussed in Mainzeal to the facts in this case.
23
At [231].
24
At [231], citing John C Coffee, Court Has a New Idea on Directors’ Duty 1992 NAT’S LJ 18 (2
March 1992).
25
At [232].
[149] The Court of Appeal identified two resulting forms of harm to creditors:26
(a) First, harm to new creditors. Where a company trades on but

shareholder funds are exhausted, the company is trading on capital
provided by the company’s existing creditors. If the company
subsequently makes losses, those losses will be borne by the existing
creditors who would otherwise have received a higher dividend in the
company’s liquidation, had it stopped trading earlier.
(b) Second, harm to new creditors. Such creditors would not have been
exposed to the company if the company had gone into liquidation or
otherwise ceased trading at an earlier date, and thus would not have
been exposed to credit risk. In this context, the Court noted that
existing creditors may also extend further credit, increasing their
exposure to the company. This is particularly relevant in this case
given, other than what appear to be some longer term disputed debts
(on which there was limited evidence), upon each monthly drawdown
approval by Koi, the unsecured creditor base was effectively “re-set”,
with contractors being paid in full and then advancing further credit
over the following month.
[150] In relation to this second type of risk, and of some relevance to this case, the
Court of Appeal stated:
[236] … The concern in relation to the second form of harm to creditors is

that the directors have permitted the company to obtain credit from new
creditors in circumstances where dealing with the (insolvent) company
involved a significant risk for those creditors. If the company is already
insolvent, and the directors know this but the creditors do not, extending credit
to the company falls outside the normal range of risks that creditors accept
when they deal with limited liability companies. In effect, the directors
mislead the new creditors by failing to disclose to them that dealing with the
company involves a substantial – and abnormal –level of risk.
[237] Speaking generally, there is no policy reason for concern about the
position of a creditor who has adequate information about the company’s
financial position and the risks they are taking on by extending credit to the
company. They can bargain for terms that reflect this risk. A policy concern
arises in relation to new creditors if, and only if, the risk that those creditors
26
At [232].
face in dealing with the company is outside the normal and acceptable range,
and the relevant creditors are not aware of this.
[238] The way in which the law has responded to the perverse incentives for
directors and shareholders to trade on while a company is insolvent or near
insolvent, and to the policy concerns identified above in relation to the risk to
creditors in that scenario, has evolved over time. Sections 135 and 136 of the
Act are the latest iteration of those developments.
(citations omitted)
[151] Continuing this theme, the Court later observed that:27
the immediate purpose of s 135 is to deter directors from responding to the

perverse incentives identified above … and to protect creditors from the risks
described above …. It draws the boundary between legitimate risk taking and
abuse of management powers at the expense of creditors. That line is drawn
at the point where the way in which the company’s business is being carried
on is more likely than not to create a substantial risk of serious loss to
creditors.
[152] In response to a submission made on behalf of the Mainzeal directors that an

assessment of whether a company is balance sheet solvent, and whether it is likely to
be able to meet its debts as they fall due, is itself a matter of business judgement, the
Court stated:28
That submission is difficult to reconcile with the objective nature of the s 135
test. Adopting that approach would create a risk that directors would be
excused under s 135 because they had failed to adequately inform themselves
about the state of the company’s affairs and likely future trading results. We
consider that s 135 sets an objective boundary, beyond which the scope for
directors to take business risks is significantly curtailed. Whether that
boundary has been crossed should be addressed by reference to the
information that was available or should have been available to the director,
acting reasonably. A failure to make enquiries that a reasonable director would
have made, or seek advice that a reasonable director would have sought, will
not protect a director from liability for breach of s 135.
[153] Turning to the constituent parts of s 135, the Court stated that:29
(a) the loss to which creditors are exposed must be a serious one, and the
risk of “minor losses” is not sufficient;
27
At [261].
28
At [262].
29
At [259].
(b) the risk must be substantial, or in other words, there must be a “large”
or “significant” risk of serious loss to creditors; and
(c) the way in which the business of the company is being carried on must
be “likely” to create that large risk of serious loss, likely meaning “more
likely than not”, rather than some lesser degree of probability.
[154] The Court accordingly endorsed the requirement for a “sober assessment of the
company’s likely future income and prospects when a company enters troubled
financial waters”.30 While the various elements of s 135, as explained by the Court of
Appeal in Mainzeal, mean that the test is a reasonably high one, the Court endorsed
O’Regan J’s observations in Fatupaito v Bates, in which his Honour described s 135
as imposing a “stringent duty on directors to avoid substantial risks of serious loss to
creditors and does not appear to allow for such risks to be incurred, even in
circumstances where the potential for greater reward exists”.31
[155] The Court of Appeal nevertheless endorsed the concept that once a company
has entered such troubled waters, it need not “leap” straight to liquidation or some
other arrangement by which it ceases trading. The Court accepted that the decision on
whether to trade on may be a difficult one, and a decision to cease trading will often
have a serious impact on creditors, employees and other stakeholders.32 The Court
observed, however, that it is not acceptable for directors to continue to trade with the
creditors’ money “unless they have put in place carefully thought through strategies,
with a good prospect of success, to restore the company’s solvency”.33 In a similar
vein, the Court observed that it is reasonable for directors to take some time to explore
all “reasonable alternative courses of action” and endeavour to avoid an insolvent
liquidation.34
30
At [263] with reference to Mason v Lewis [2006] 3 NZLR 225 (CA) at [51].
31
At [265] with reference to Fatupaito v Bates [2001] 3 NZLR 386 (HC) at [67].
32
At [266]-[267] citing with approval William Young J’s observations in Re South Pacific Shipping
Ltd (in liq) (2004) 9 NZCLC 263,570 (HC) at [125].
33
At [268] with reference to Re South Pacific Shipping Ltd (in liq) (2004) 9 NZCLC 263,570 (HC)
at [151] and [152].
34
At [452].
[156] The Court accordingly summarised the position as follows:
[269] Drawing these threads together, it seems to us that where a company

is in a precarious financial position:
(a) The directors must squarely face up to that financial situation and
assess the risk of a serious loss to creditors.
(b) If continuing to trade in a “business as usual” manner is likely to

create a significant risk of serious loss to creditors, trading on in that
manner is not permitted.
(c) A decision to trade on should be made only after undertaking a sober

assessment of the likely consequences of doing so. Unfounded
optimism is not enough.
(d) A decision to trade on, rather than take immediate steps to cease
trading, is likely to breach s 135 unless the manner in which the
directors choose to trade on has realistic prospects of enabling the
company both to serve pre-existing debt and to meet the new
commitments which such trading will inevitably attract. It is not
enough that there is a realistic prospect that existing creditors will be
paid by substituting new creditors, who in turn face a substantial risk
of serious loss. Section 135 does not condone a policy of robbing
Peter to pay Paul, on condition that Peter’s losses are exceeded by
Paul’s gains.
Analysis
[157] Balance sheet solvency is particularly relevant to s 135, as is clear from

William Young J’s decision in Re South Pacific Shipping Limited (in liq) and the Court
of Appeal’s decision in Mainzeal. If a director permits a company to continue to trade
when it is plainly balance sheet insolvent, then (putting aside prospects of intervening
recovery), there is clearly a substantial risk of serious loss to creditors, given upon the
company’s failure, its assets will be insufficient to meet its liabilities. Indeed, this risk
is not simply “likely” for the purposes of s 135 but (as in Debut Homes) is certain.
Conversely, no matter how risky a business venture is, if there are sufficient company
assets to meet all liabilities in the event of failure, there is unlikely to be a substantial
risk of serious harm.
[158] As the leading authorities make clear, substantial risk of serious loss can also
arise in “near insolvency” scenarios, namely a company in troubled financial waters
heading towards impending insolvency. But such a risk must still be “likely” for
liability to arise; in other words, it being more likely than not that insolvency will
eventuate. In both scenarios, where there are realistic prospects of either returning to
solvency or avoiding impending insolvency, a director ought not to be liable for
continue to trade while those prospects remain. And of course, hindsight is to be
avoided in all cases.
[159] As the evidence and submissions in the present case unfolded, and as noted
earlier, it became clear that Dempsey Wood’s case for insolvency was focused on the
position as of 15 October 2015, when the Koi Facility expired.
[160] Mr Gapes’ position is that the evidence did not establish that PRDL was
balance sheet insolvent (or even near insolvent) as at 15 October 2015. I disagree.
While the accounting records and evidence adduced at trial do not permit certainty
around the company’s financial position, I am satisfied on the balance of probabilities
that by 15 October 2015, PRDL was at least near insolvent. I say this for the following
reasons.
[161] First, PRDL’s only real asset was the Development. The net realisable value
of that asset is accordingly key to whether PRDL was balance sheet solvent at any
point in time. Given this, and that all scenarios being explored at the time involved
PRDL selling the Development to a third-party funder, it is unfortunate that valuation
evidence was not called. I must nevertheless proceed on the basis of the evidence that
was adduced.
[162] As at 15 October 2015, PRDL owed $35.279 million to Koi and approximately
$1.55 million to unsecured creditors.35 It had $12.854 million in the Project Account,
with an additional $1.5 million in the Construction Account. It also had cash on hand
of around $391,000. On the basis the Development was worth at least $22.1 million
at that time, Dempsey Wood accepted in its closing submissions that PRDL would
likely be balance sheet solvent. Given it is not in dispute that the Development in its
(then) current state was not financially viable, key to its value was the ability to access
the significantly greater revenues from re-selling the lots at higher market prices, and
thus PRDL being able to cancel the pre-sales without significant loss or litigation.
35
Total aged creditors as at 31 September 2015 of $1.431 million and total aged creditors as of 31
October 2015 of $1.638 million.
[163] The only valuation of the Development at or around October 2015 was the
Jones Lang LaSalle valuation (which valued the Development as at early September
2015). But as noted, no one from Jones Lang LaSalle was called to give evidence. I
do not consider it safe to effectively translate that valuation into the value of the
Development in mid-October 2015 for balance sheet solvency purposes. Mr Vance
was adamant that it would be wrong to do so. And neither Mr Shephard nor Mr Hoole
relied directly on the Jones Lang LaSalle valuation. Further, the valuation figures are
some way from other values suggested in the evidence: the $22.5 million offered by
Webber Capital on 15 October 2015 (albeit on a conditional basis); the $20.750 million
offered by Webber Capital on 8 November 2015; the value suggested by Qualitas’s
willingness to lend up to $26 million in February 2016; and the eventual sale to
Happyland for $25 million. Nevertheless, having commissioned that valuation, but
disagreeing with it, there is no evidence Mr Gapes engaged with Jones Lang LaSalle
on their valuation, or sought further expert valuation advice to “shore up” the likely
(objective) value of PRDL’s only real asset.
[164] The Webber Capital purchase price of $22.5 million infers that Webber Capital
considered the Development to be worth at least that amount, prior to conducting their
due diligence. That value was, however, in the context of a conditional sale which did
not proceed. A key sticking point for Webber Capital, at least at that value point, was
the ability to cleanly cancel the pre-sales without the risk of significant loss or
litigation, as the correspondence from their solicitors at the time suggested. While
Mr Gapes himself may have been confident of the position from both a legal and
commercial perspective, Mr Gapes also confirmed that other potential funders were
more cautious about the ability to cancel the pre-sales, and that the fact the pre-sales
were not cancelled was “what was holding people back”. The evidence therefore
suggests that others did not subscribe to his optimism.
[165] I do not ignore the evidence of the potential Qualitas transaction, or the sale
price of $25 million paid by Happyland in March 2016. But by that time, the pre-sales
had been cancelled (by the receivers), and the intervening receivership of PRDL made
claims by disgruntled purchasers less likely. Effectively, and as Mr Gapes explained,
cancelling the pre-sales was like “flicking the switch” from a funding perspective.
This further suggests that absent the “switch being flicked”, the Development’s value
was less than that paid by Happyland. Certainly no-one was willing to pay more than
$20.750 million prior to the pre-sales being cancelled.
[166] Accordingly, while not as stark as the position in Mainzeal (where the Court
of Appeal effectively ascribed no value to significant inter-party loan balances sitting
on Mainzeal’s balance sheet),36 there was, objectively, significant uncertainty in
October and November 2015 about the realisable value of the Development – at least
to a level that would enable all creditors’ claims to be met, not only Koi’s secured debt.
As noted, the only transaction at that time priced the Development, with the attendant
risk around the pre-sales, at $20.750 million. While that may well have reflected a
lower tier lender “chipping the debt”, Webber Capital was only in a position to do so
because it was the only potential purchaser/funder at that time.
[167] I also acknowledge Mr Vance’s evidence that there may have been additional
value in the Work in Progress than as ascribed in the 30 November 2015 balance sheet.
But his analysis was predicated on PRDL being legally entitled to unilaterally cancel
the pre-sales. Further, I also take into account his (somewhat carefully worded)
evidence that it was “not clear to [him] that [PRDL] was balance sheet insolvent at
15 October 2015.” Notably, on the basis of the evidence reviewed by him, he was not
able to state that in his expert opinion PRDL was balance sheet solvent at the time.
[168] For completeness, I cannot accept Mr Shephard and Mr Hoole’s evidence that
contingent liabilities were understated (in the 30 November 2015 balance sheet – and
by extension, by a similar amount at or around mid-October 2015) by some $2 million
to $4 million. Those are very large numbers (with a large range between them), and
further detail and analysis would have been required to ascribe any real weight to that
evidence. In addition, and as became clear through Mr Hoole’s evidence, many of the
suggested “missing” contingent liabilities had in fact already been included in the aged
creditors schedules (and thus incorporated into the 30 November 2015 balance sheet).
While I accept that Crown had made a substantial claim for $10 million and there is
no evidence that Mr Gapes took formal advice at the time of how that claim ought to
be treated from a balance sheet perspective, that it was later settled (personally by
36
At [444].
Mr Gapes) for $40,000 indicates that if an amount should have been included for it, it
would have been unlikely to have materially altered the position. Dempsey Wood and
its experts also referred to potential claims or costs arising from contaminated fill from
the Development being put on neighbouring land. But the issue of contamination was
only confirmed following the receivership, and there was no admissible evidence as
to the likely costs associated with removal of the fill in any event. Accordingly, it is
impossible on the evidence to say what impact, if any, that matter would have had on
PRDL’s balance sheet solvency.
[169] Despite finding that PRDL was at least near insolvent as of 15 October 2015,
the question remains whether it was permissible for Mr Gapes to allow PRDL to
continue to trade beyond that point. I consider it was.
[170] First, there was in a practical sense no substantial risk of serious loss to
unsecured creditors so long as Koi was willing to continue to fund monthly
drawdowns. And it can be inferred that Koi would be willing to continue to fund
monthly drawdowns so long as it was comfortable that its own secured debt could be
met from PRDL’s assets.
[171] After 15 October 2015, Mr Gapes could not of course proceed on the basis that
Koi would continue to fund PRDL’s continued trading. The Facility was in default
and Koi had issued a PLA notice. Nevertheless, I accept Mr Vance’s evidence that the
expiry of the Koi Facility itself was not a “moment in time,” in the sense of requiring
PRDL to immediately cease trading or Mr Gapes to put in place formal insolvency
mechanisms. At least while the Webber Capital deal was a realistic possibility, I
consider it was permissible for PRDL to continue to trade. Mr Vance was firmly of
this view, and in the event, Mr Hoole also accepted that the presence of that transaction
meant refinance was a possibility.
[172] The Webber Capital transaction was legally documented and executed, and
made provision for the purchase price to increase by amounts paid to unsecured
creditors prior to settlement. PRDL also had some (albeit limited) cash reserves
available to it, over and above the amounts in the Construction and Project Accounts.
The fact Koi approved a further drawdown in late October 2015 suggests that it also
considered the prospects of refinance at that time to be realistic, and in an amount
which would enable its secured debt to be met (when taken together with the amounts
remaining in the Project and Construction Accounts). Conversely, ceasing to trade at
or around that time could have resulted in more serious losses to creditors; for
example, it may have hastened Koi taking enforcement steps.37
[173] I am of the view, however, that the position changed when it became clear the
Webber Capital transaction was “off the table”, which was the case by mid-November
2015, after Webber Capital made its offer of $20.750 million which was not acceptable
to either PRDL or Koi. PRDL was at that time in a very vulnerable position:
(a) the Koi Facility was in default, with substantial default interest
continuing to accrue, and a PLA notice had been issued;
(b) the Development in its current form was clearly not viable, and
depended entirely on validly cancelling at least some of the pre-sales
and then re-selling the lots at higher market prices;
(c) to enable that to proceed in turn depended on quickly refinancing the

Development, and the only realistic refinancing transaction in play had
just fallen over; there was no evidence of any other firm prospects at
that time;
(d) if Koi approved a drawdown at the end of November 2015, that would
pay the invoices for October 2015 work on the site, but a further
drawdown in December 2015 would be required to pay for November
work; and
(e) Mr Gapes did not have any written, binding or “reliable” assurances
from Koi as to how long it would be willing to continue to fund the
Development.38
37
Noting that Dempsey Wood’s claims as at the end of October 2015 (due for payment at the end of
November 2015), were almost double its claims for the end of November 2015 (and due for
payment at the end of December 2015).
38
CD Owens and SD Vance as liquidators of Aluminium Plus Wellington Ltd (in liq) v Shaw [2016]
NZHC 1400 at [37].
[174] On this last point, the Court of Appeal in Mainzeal noted that in some cases, it
will be reasonable for directors to rely on informal assurances of support, though that
will be very much fact specific and context dependant.39 In this case, PRDL had no
other means (other than a very modest amount of cash in bank accounts) to fund its
day-to-day trading. It was completely reliant on Koi’s continuing support until a
replacement funder was found. Months of work on that front had not come to fruition.
There was nothing produced in evidence to corroborate Mr Gapes’ evidence that Koi
had given him clear comfort that it would continue to support the Development while
he continued to seek refinance. There was nothing in writing to this effect, even by
way of email. Nor was anyone from Koi called to give evidence, which might have
been expected had Koi been as overtly supportive of PRDL during this time as
Mr Gapes suggested. Further, the “assurance” was coming not from a shareholder or
related entity, but rather an independent and off-shore financier who had already issued
a PLA notice. Koi had clearly reserved to itself the right and ability to change its mind
at any time.40
[175] I accept that Koi approved a further drawdown at the end of November 2015
(which paid for the October 2015 work). There was no evidence of any particular
discussions between Mr Gapes and his contacts at Koi which led to this. Once the
Webber Capital transaction fell over, Mr Gapes must or ought to have realised that Koi
would be looking even more closely at its own position, particularly given the
continuing accrual of significant default interest over what could be weeks or even
months while refinance was pursued. Mr Gapes was also aware as of 11 November
2015 that Koi was, without informing him, taking its own steps to try to sell its loan
position (which included the remaining amounts in the Project and Construction
Accounts). And the benefit of hindsight cuts both ways: there is no evidence that
earlier in November 2015, Mr Gapes had reasonable grounds to believe that Koi would
approve a further drawdown at the end of that month, let alone at the end of December
2015.
39
Mainzeal at [445], with reference to Morgenstern v Jeffreys [2014] NZCA 449 at [121]. In both
cases, the assurances were from shareholders/related entities, rather than an independent financier.
40
Like Mr Löwer’s position as described by William Young J in Re South Pacific Shipping Ltd (in
liq)). (2004) 9 NZCLC 263,570 (HC) at [153].
[176] I am accordingly of the view that by mid-November 2015, the position had
been reached where PRDL’s continued trading in an essentially “business as usual”
mode was likely to give rise to a substantial risk of serious loss. I do not accept the
submission made on Mr Gapes’ behalf that given PRDL’s unsecured creditors were
(largely) paid in arrears on a monthly basis, the losses actually incurred were simply
the manifestation of the risk inherent in contracting with a limited liability company
on this basis. There is of course a risk in effectively providing “credit” for around a
month to a limited liability company, including that the company will become
insolvent and be unable to make the monthly payment in arrears. But that inherent
risk is premised on the company’s directors fulfilling their statutory duties. A director
does not have a statutory duty to avoid insolvency per se.41 But he or she does have a
duty not to permit a company to trade in a manner likely to give rise to a substantial
risk of serious loss. Extending credit to a company in those circumstances falls outside
the normal range of risks that creditors accept when they deal with limited liability
companies.42
[177] I also reject the submission made on Mr Gapes’ behalf that the risk which arose
at this point was in relation to losses which could not be categorised as “serious”.
Section 135 is forward looking. As of mid-November 2015, there was a risk that none
of the claims for work carried out in October 2015 would be paid, nor any work carried
out in November 2015. Payment of monthly invoices across a significant project such
as this would not, in my view, be considered “minor”. And while the evidence did not
demonstrate the proportion of unsecured creditors’ claims that went unpaid versus
each creditors’ total revenue earned on the project, the amount Dempsey Wood was
unpaid (some $750,000) reflected around 10 per cent of its contract value (after taking
into account the significant approved variations). I do not consider this to be
“minor”.43
41
Mainzeal, at [257].
42
At [236].
43
In Debut Homes at [70], the Supreme Court considered loss to one creditor only, when all others
were repaid, to give rise to “serious loss.” That loss was to the Inland Revenue Department. Given
this, commentators suggest that in that case, the Court was judging seriousness by reference to the
percentage of loss relative to the face value of the debt that the creditor had suffered; Paul Heath
and Michael Whale (eds) Heath and Whale on Insolvency (online ed, LexisNexis) at [32.3.3(a)].
[178] There is no evidence to suggest Mr Gapes carried out a “sober assessment” of
PRDL’s financial position in mid-November 2015, and what options might be
available rather than trading on as normal. It was admittedly a very difficult position:
it was no doubt preferable to seek refinance while the Development continued on a
going concern basis. The Sunset Date was also not too far away. But while Mr Gapes
was clearly taking advice on how to secure new finance, there is no suggestion or
evidence he sought specific insolvency related advice.44
[179] For example, there was no evidence of consideration being given to what
realisable value was being added to the Development from the contractors’ ongoing
work (noting that so long as the pre-sales remained on foot, any additional value was
unlikely to make a material difference to the Development’s profitability), versus the
accrual of significant default interest (which only exacerbated PRDL’s financial
position). Nor is there evidence that Mr Gapes sought more definite assurances from
Koi as to how long it would continue to support PRDL, which he could have then
assessed for their adequacy in the relevant circumstances. Nor did Mr Gapes bring his
main contractors fully “into the tent” and consider with them, and Koi, what sort of
holding position and/or formal suspension of the works might be possible or
appropriate pending consideration of further financing options in the coming weeks
and/or months. This might have involved, for example, seeking from Koi an assurance
as to the payment of unsecured creditors’ claims to that point, and then no or minimal
work being carried out on site; in the latter case, to preserve the Development and
perhaps utilising PRDL’s own, but reasonably limited, cash reserves. And while it was
no doubt preferable for refinancing purposes for work to continue on the
Development, refinance options were at least possible without that being the case, as
the Qualitas negotiations demonstrate.
[180] The difficulty was that securing alternative finance, cancelling the pre-sales
and it being clear that no significant risks or losses arose as a result, would all take
some time. Mr Gapes, it seems, intended to take that time in a “business as usual”
mode despite PRDL’s precarious financial position. He had also personally
guaranteed the Koi Facility, and was also being actively pursued by Westpac on an
44
A pleaded defence pursuant to s 138 of the Act was not pursued.
unrelated matter, such that he was planning to use at least $1 million from the Webber
Capital transaction to meet that liability. Mr Gapes was therefore susceptible to those
“perverse incentives” discussed in Mainzeal.
[181] I accordingly conclude that as of approximately mid-November 2015,

Mr Gapes breached s 135 of the Act.
Legal principles
[182] Again, the purpose and scope of s 136 was recently examined in some detail
by the Court of Appeal in Mainzeal.
[183] The Court confirmed the following steps to be taken in assessing a claim
pursuant to s 136:45
(a) first, identification of the obligations that are the subject of the claim;
(b) second, consideration of whether the director (subjectively) believed

that the company would be able to perform the relevant obligations
when they fell due; and
(c) third, and if so, whether from an objective perspective the director had
reasonable grounds for that belief.
[184] The Court emphasised that the third step requires the identification of:
(a) when the relevant obligations were incurred;
(b) importantly, when those obligations would fall due;
45
Mainzeal at [284]-[285].
(c) what the director believed, at the time the obligations were incurred,
about the ability of the company to meet the obligations at the future
time when they would fall due; and
(d) the grounds for the director’s beliefs.
[185] The point in time at which the obligations would fall due was relevant in
Mainzeal given, as would be expected of a company such as Mainzeal, there were
different obligations incurred with different time periods before they fell due.
Accordingly, while as at 31 January 2011, there might have been reasonable grounds
for Mainzeal’s directors to believe obligations falling due in the short term would be
met, the Court of Appeal held that there were not reasonable grounds for believing
other longer term contractual obligations would be met. The Court of Appeal also
observed that in some cases, the position of a company will be so dire that there will
not be reasonable grounds for thinking that any obligations would be met when they
fell due, even in the short term, in circumstances where:46
… failure could occur at any time, and it would be a matter of luck rather than
reasonable expectation if the company survived long enough to meet any new
obligations.
[186] The obligations that are the subject of the pleaded claim are PRDL’s
obligations to Dempsey Wood incurred from September 2015. Like the s 135 claim,
however, the s 136 claim narrowed to that period following 15 October 2015. But
while the time period narrowed, the scope of obligations said to be the subject of the
claim widened. Dempsey Wood submitted in its closing submissions that by agreeing
to PRDL continuing to trade beyond 15 October 2015, Mr Gapes agreed to PRDL
incurring all the obligations that arose from continued trading, without a reasonable
belief that they would be met when due. But as counsel for Mr Gapes submit (and the
Court of Appeal emphasised in Mainzeal), the scope of Dempsey Wood’s claim must
be framed by its pleading. Dempsey Wood’s pleading, once combined with its
46
At [287].
evidence and submissions, is limited to an allegation that as of 15 October 2015,
Mr Gapes did not have reasonable grounds to believe that PRDL’s obligations to
Dempsey Wood would be met when due.
[187] Given all of Dempsey Wood’s work carried out in October 2015 was paid for
as a result of the Koi drawdown on 25 November 2015, its s 136 claim can also only
relate to work in November 2015 and up to 3 December 2015.
[188] An issue addressed in Mainzeal and which was an issue on the s 136 claim in
this case, is earlier authorities and/or commentary which suggest that s 136 is only
concerned with specific transactions, or transactions on capital rather than revenue
account. Relying on such earlier authorities, including Rodney Harrison J’s judgment
in Jefferys v Morgenstern (No 2),47 counsel for Mr Gapes submit that the time for
assessing whether Mr Gapes had reasonable grounds to believe that PRDL’s
obligations to Dempsey Wood would be met when due was September 2014, when the
contract between PRDL and Dempsey Wood was entered into.
[189] In Mainzeal, the Court of Appeal concluded that the earlier authorities did not
stand for the proposition that s 136 is limited to capital account transactions.48 The
Court observed that the approach adopted by the Supreme Court in Debut Homes did
not support drawing such a distinction, including that the Supreme Court had stated
that:49
…although Mr Cooper may have had reasonable grounds at the end of October
2012 to consider that all trade creditors would be paid, directors’ duties are
continuous. This means that, if any of the trade debts left outstanding at
liquidation had been incurred at a time when it was clear that those debts
would not be paid, Mr Cooper breached the duty under s 136 in that regard
also.
[190] The Court of Appeal in Mainzeal also rejected the suggestion that s 136 is
concerned with specific transactions, and not trading generally. Noting that pursuant
to s 33 of the Interpretation Act 1999, words in the singular include the plural, the
Court stated that where the directors of a company agree to a company undertaking a
47
Jefferys v Morgenstern (No 2) [2014] NZHC 308 at [28].
48
Mainzeal at [276].
49
At [277], referring to Debut Homes at [96].
particular project, they agree to the company undertaking all the obligations that would
ordinarily be expected to form an integral part of that project.50 The Court also stated
that where the directors “agreed to continue trading, they agreed to the company
incurring all the obligations that would normally result from such trading”.51 For that
reason, the Court confirmed that s 136 will encompass a scenario in which a director
has decided to trade on, and in doing so, has agreed to incur “the trade debts that the
director knew would result from such trading”.52
[191] The Court noted this broader approach was consistent with the underlying
purpose of s 136:53
The purpose of the provision is to discourage directors from agreeing to the

company incurring obligations where they do not believe the company will be
able to perform the obligations when required to do so, or where there are no
reasonable grounds for such a belief. In those circumstances, the risk to the
creditor(s) in question falls outside the normal and acceptable range of risks
that creditors expect to face when dealing with a company. That concern may
arise in relation to a specific obligation, or it may arise in relation to a specific
class of transactions, or transactions generally.
[192] The parties’ post-hearing submissions on Mainzeal addressed these aspects of

that decision. Counsel for Mr Gapes maintained the position that the approach adopted
in Mainzeal meant the appropriate time at which to consider whether Mr Gapes had
reasonable grounds to believe PRDL’s obligations to Dempsey Wood would be met
when due was September 2014. Counsel submit that the relevant aspects of Mainzeal
referred to earlier reflect a discussion of the type of obligations captured by s 136, and
not the time at which compliance with the s 136 duty is to be assessed. Counsel submit
that the Court’s factual assessment in Mainzeal supports that in the context of longer
term contracts, the time for assessment is the time the contract was entered into.
[193] I am not persuaded that is a correct application of the Court’s judgment in

Mainzeal.
50
At [279].
51
At [279].
52
At [282]. Paul Heath and Michael Whale note in Heath and Whale on Insolvency (online ed,
LexisNexis) at [32.3.5(a)] that this approach has the effect of permitting s 136 to operate much
like s 135.
53
At [280].
[194] The amounts unpaid to Dempsey Wood (excluding its EOT claim) relate to
work carried out from November 2015 onwards. The key issue is whether Mr Gapes
agreed to PRDL incurring the obligation to pay for that work in September 2014, or
when the work was carried out.
[195] Prior to Mainzeal, the answer may have been September 2014, the authorities
arguably taking a narrower approach to the concept of “agreeing” to a company
incurring an obligation, such as a decision to enter into a specific transaction. But the
Court of Appeal rejected the submission that s 136 is so confined.54 As noted, it also
held that where directors “agreed to continue trading, they agreed to the company
incurring all the obligations that would normally result from such trading”.55
[196] In this case, Mr Gapes, as sole director of PRDL, agreed to PRDL continuing
to trade beyond November 2015. In doing so, he agreed to PRDL incurring all the
obligations that would normally result from such trading. In my view, it would be
artificial in the context of s 136, and in light of the broad approach to the type of
obligations captured by it as explained in Mainzeal, to say that PRDL’s obligation to
pay for work carried out by Dempsey Wood in November 2015 was “incurred” in
September 2014. While there was no analysis of the Dempsey Wood contract by either
party in this case, entry into the contract itself did not give rise to any specific, or
“incurred” obligation by PRDL to pay Dempsey Wood. Rather, in such a contract for
ongoing works over a period of time (rather than, say, a contract relating to a one off
transaction, such as the purchase of piece of equipment), it was only as and when work
was carried out by Dempsey Wood that PRDL’s corresponding payment obligation
was incurred.56 The September 2014 contract, and its payment terms, specified when
that obligation would become due (namely 17 working days after submission of
Dempsey Wood’s payment claim). I note that in a similar way, the Court of Appeal
observed in Mainzeal that certain of Mainzeal’s “payment obligations” to key sub-
contractors were incurred after July 2012, despite two of the contracts in issue being
entered into at an earlier point in time.57
54
At [280].
55
At [279].
56
The general contract terms, being NZS 3910: 2003, provided that Dempsey Wood could submit
payment claims for contract works that had been carried out over a monthly period.
57
At [468].
[197] This approach is consistent with the purpose of s 136.58 The circumstances
existing at the time of entry into the contract might bear no resemblance to the
circumstances existing when work is requested, carried out, invoiced and to be paid
for, which could be many years after contract formation. At the time the work is
requested or carried out, the director will know from the contractual framework when
the obligation to pay for that work will fall due. It is consistent with the purpose of
s 136 that that is the point at which the director’s knowledge is to be assessed.
[198] For completeness, I do not consider Rodney Harrison J’s approach in Jeffreys
v Morgenstern (No. 2) to support the approach proposed by counsel for Mr Gapes. In
that case, the Judge stated that:59
I consider Mr Morgenstern’s conduct must be judged at the time the sale and
purchase agreement was entered into, that is 23 August 2005. From that point
KDL was under a legal obligation to provide the underwrite and would have
been liable had it refused to enter the deed. I do not see how Mr Morgenstern
could be in breach of his obligations under the Act for procuring KDL and
MSE to do something they were contractually bound to do.
(emphasis added)
[199] The relevant obligation was therefore incurred at the point of entry into the
original contract. In this case, and as noted above, PRDL’s obligation to pay for work
carried out by Dempsey Wood was incurred when the work was carried out (the
contract terms stipulating when and how that obligation would become due). And
PRDL was not contractually obliged to permit Dempsey Wood to continue to carry out
the contract works; for example, PRDL could have instructed the engineer to the
contract to suspend the contract works at any time.
Analysis
[200] In the context of the above principles, when agreeing to PRDL continuing to
trade beyond November 2015, did Mr Gapes have reasonable grounds to believe that
PRDL would be able to pay for Dempsey Wood’s work from that point in time, when
payment became due? Despite there being some controversy in the evidence as to
when Dempsey Wood’s invoices were to be submitted (and thus when they would be
58
See [191] above.
59
Jefferys v Morgenstern (No 2) [2014] NZHC 308) at [28].
due), it is clear that work for November 2015 would have been invoiced towards the
end of that month and would have been due 17 working days later, thus towards the
end of December 2015.
[201] Given PRDL did not have any (substantial) cash funds of its own, Mr Gapes’
belief that the November 2015 works would be paid for when due depended on Koi’s
continuing support through to the end of December 2015.
[202] For much the same reasons given for my findings on the s 135 claim, I accept
that Mr Gapes had reasonable grounds to believe that Koi would continue to support
PRDL while refinancing in the short term appeared a realistic prospect. That was the
case, in my view, up until the Webber Capital transaction was no longer a viable
option, that is, until mid-November 2015. Until that point in time, PRDL had a binding
conditional agreement with a prospective purchaser of the Development (or was in
negotiations with the purchaser once the conditional agreement had been cancelled),
and Koi had demonstrated its support in such circumstances when agreeing to the
October 2015 drawdown.
[203] However, and as discussed earlier, this position changed once the Webber
Capital transaction was off the table. At that time, Mr Gapes would have needed to
have reasonable grounds that Koi would continue to support to PRDL through to a
further drawdown in December 2015. I do not consider he did, and repeat what I have
already said at [173] to [174] above. The fact Koi approved a drawdown in November
2015 does not alter the position. Again, I refer to my earlier observations at [175]
above.
[204] Finally, Dempsey Wood includes in this aspect of its claim its approximately
$203,000 approved EOT claim. But Mr Veviorka, Dempsey Wood’s Project Manager
for the Development, confirmed that the EOT claim related to work that had been
carried out over the entire project. And while he initially accepted that the proportion
of the claim which related to work in November 2015 could be determined by
multiplying the number of working days in that month by the daily rate used for
approving the claim,60 he later said this was probably a too broad brush approach.
60
$725 per day.
[205] In the event, I exclude the EOT claim from this aspect of Dempsey Wood’s
claim. Dempsey Wood has not satisfied me what aspect, if any, of that claim related
to work carried out in November 2015. I also observe that the portion relating to work
carried out after mid-November 2015 is likely to be small in any event.
Legal principles
[206] Section 131 of the Act provides as follows:
131 Duty of directors to act in good faith and in best interests of

company
(1) Subject to this section, a director of a company, when exercising

powers or performing duties, must act in good faith and in what the
director believes to be the best interests of the company.
[207] Once a company is of doubtful solvency, the duty is also owed to its creditors.61
[208] The duty is subjective. The Supreme Court in Debut Homes observed the
courts are not well equipped, even with the benefit of expert evidence, to second-guess
the business decisions made by directors in what they honestly believed to be the best
interests of the company.62 It reiterated the dangers of hindsight.63 The Court
nevertheless also observed that:64
It does not detract from the subjective nature of the test that directors will
probably have a hard task persuading the court that they honestly believed that
an act or omission that resulted in substantial and foreseeable detriment to the
company was in the company’s best interests.
[209] The Supreme Court also stated that there are a number of “exceptions and
qualifications” to the subjective test, being:65
61
Nicholson v Permakraft (NZ) Ltd (in liq) [1985] 1 NZLR 242 (CA) at 249 per Cooke J.
62
Debut Homes at [112].
63
At [112].
64
At [109], citing Regentcrest plc (in liq) v Cohen [2001] 2 BCLC 80 (Ch) at [120].
65
At [113]. The Court clarified (at [114]) that (a) and (b) are not truly exceptions, given directors
cannot subjectively believe they are acting in the best interests of a company if they have failed to
consider the interests of the company or, where required, the interests of all of the creditors,
including prospective creditors.
(a) where there is no evidence of actual consideration of the best interests
of the company;
(b) where, in an insolvency or near-insolvency situation, there is a failure

to consider the interests of creditors;
(c) where there is a conflict of interest, or where the action was one no
director with any understanding of fiduciary duties could have taken;
and
(d) where a director’s decisions are irrational.
Analysis
[210] To recap, there are three broad aspects to Dempsey Wood’s s 131 claim:
(a) First, Mr Gapes failed to consider whether PRDL would be able to meet
its increasing liabilities to Dempsey Wood as the civil works progressed
through September to December 2015.
(b) Second, Mr Gapes caused or allowed PRDL to default on its obligations

under the pre-sales and Koi Facility such that it was put into
receivership. Dempsey Wood alleges that Mr Gapes:
(i) formulated a plan to ensure the cancellation of the pre-sales and

re-sell them at higher prevailing prices;
(ii) allowed the Sunset Dates to pass and encouraged the pre-sale
purchasers to cancel the agreements;
(iii) knew that the cancellation of the pre-sales would cause PRDL
to default on its obligations and be unable to obtain further
financing;
(iv) wrongfully pursued this course of action with the objective of
benefitting other entities (such as Redwood and the successor
entity which would inherit the Development) and himself,
through his personal interest of those entities; and
(v) caused receivers to be appointed over PRDL by Koi and caused

approximately $1.4 million of loss to PRDL’s creditors.
(c) Third, Mr Gapes charged PRDL exorbitant management fees for

services rendered by Redwood, and prioritised the payment of the
Redwood fees over PRDL’s financial health.
[211] I am not persuaded that these aspects of Dempsey Wood’s claims are made out.
[212] Turning to [210](a) above, I am satisfied that Mr Gapes did subjectively

believe that creditors would be paid through his continued pursuit of refinance
following the expiry of the Koi Facility, and did seek to enter into arrangements which
had that outcome. As noted, the Webber Capital agreement included provision for an
increase in the purchase price to reflect amounts paid to contractors (excluding
KN Construction) pending settlement of the transaction. The financial proposals
prepared by Reesby & Co also proceeded on the basis of a continuation of Dempsey
Wood’s contract, rather than leaving it effectively “high and dry” in the re-set of the
Development. Mr Gapes’ intentions in this context are reinforced by his engagement
with Mr Dempsey in early 2016, which proceeded from Mr Gapes’ perspective on the
basis that Dempsey Wood’s outstanding claims would be paid. In effect, Mr Gapes
misjudged matters in the last few weeks of November 2015, and in particular, the
likelihood of Koi’s continued support. I do not consider this mis-judgment over a brief
period of time means Mr Gapes did not, subjectively at least, believe he was acting in
PRDL’s best interests.
[213] As to [210](b), as I have observed earlier in this judgment, I do not consider

the evidence establishes a deliberate and thought out plan by Mr Gapes to effectively
put PRDL into receivership and then liquidation, for the benefit of a newly established
company to take forward the Development. In particular, and dealing with the
particular aspects of Dempsey Wood’s pleaded case:
(a) Mr Gapes did not cause PRDL’s receivership; that was a result of the
Koi Facility having expired and no refinance being secured prior to Koi
deciding to appoint receivers. These actions did not result from
Mr Gapes’ own acts or omissions, or any breaches of duty by him.
(b) I disagree that Mr Gapes knew that the cancellation of the pre-sales
would cause PRDL to default on its obligations and be unable to obtain
further financing. In fact, quite the opposite emerges from the
evidence. As noted, the only way the Development could continue, and
further financing secured, was on the basis of the pre-sales being
cancelled. Further, PRDL’s default of the Koi Facility occurred quite
independently of the cancellation of the pre-sales, which did not occur
until late December 2015.
[214] Finally, as to [210](c) above (the Redwood fees), there was little evidence or
time devoted to this aspect of Dempsey Wood’s claim. Mr Hoole did not provide any
detail or basis for his opinion that the management fees were “exceptionally high”,
and I accept counsel for Mr Gapes’ submission that Mr Hoole is not, clearly at least,
qualified to offer expert evidence in relation to such matters. Mr Gapes said that the
level of fees were market standard. Mr Gapes would have a natural incentive to
express that view, but the fees were approved by and funded by Koi, a sophisticated
and independent financier. Kingstons has also reported to PRDL in an early report
that “we are generally satisfied [the fees] are reasonable”. The fact Kingstons
expressed this view tends to support Mr Gapes’ evidence that the fees were not out of
line with market rates.
[215] Dempsey Wood’s claim pursuant to s 131 of the Act accordingly fails.
[216] Having found breaches of both ss 135 and 136 of the Act, I now turn to what
relief, if any, ought to be granted.
Legal principles
[217] The broad principles to be applied to relief pursuant to s 301 of the Act were
addressed by the Supreme Court in Debut Homes. The Court emphasised that the
appropriate relief must respond to the duty or duties actually breached, and that
restitutionary remedies are available in ss 135 and 136 claims.66 Further, while s 301
is not punitive, within the limits of awarding no more than is required to provide
compensation or make restitution, the Court confirmed it can take into account general
deterrence.67
[218] The Supreme Court also stated that:68
(a) in most cases, the starting point for relief in response to a breach of s
135 will be an amount equal to the deterioration in the company’s
financial position between the date when trading should have ceased
and the date of actual liquidation (the “net deficiency approach”); and
(b) the net deficiency approach does not appropriately respond to a breach
of s 136. Relief of a restitutionary nature is likely to be more
appropriate, and the Court upheld the High Court’s award based on the
new debts incurred by the company at a time when the director did not
have reasonable grounds to believe they would be paid (the “new debt
approach”).
[219] In summarising the overall approach, the Supreme Court stated:69
Where there have been breaches of duties, any relief ordered under s 301 must
respond to and provide redress for the particular duty or combination of duties
66
Debut Homes at [160].
67
At [162].
68
At [164]-[163] and [168].
69
At [182].
breached. Relief can be compensatory or restitutionary in nature and must
take account of all of the circumstances, including the nature of the breach or
breaches, the level of culpability of the director, causation, duration of the
breach, holding the director to account and reversing the harm to the company.
(emphasis added)
[220] The nature and scope of relief that can and ought to be granted pursuant to s
301 was also considered in some detail by the Court of Appeal in Mainzeal. It
reaffirmed that the net deficiency approach will generally be the appropriate remedy
in response to a breach of s 135, at least where “the complaint is that the company
continued to trade after a liquidation should have occurred, and the company is worse
off than it would have been if trading had ceased at an earlier date.”70 The Court noted,
however, that where the breach of s 135 actually brings about the insolvent liquidation
of an otherwise solvent company, “the loss to the company may well include the entire
deficiency on liquidation and the costs of the (otherwise avoidable) liquidation.”71
[221] The Court reiterated the Supreme Court’s observations in Debut Homes that a
different approach will generally be needed in assessing compensation for breaches of
s 136, namely the new debt approach. It stated:72
[295] On this approach no allowance would normally be appropriate for

benefits to the company as a result of undertaking the relevant obligations: for
example, the value of goods or services provided to the company on credit. If
the focus was on the loss to the company caused by entry into the new
obligations as a matter of fact, such an adjustment would be needed. But then
a typical breach of s 136 – where a company trades on while insolvent and
obtains goods or services on credit that the company is unable to pay for –
would not generally result in any claim on the part of the company, which will
have received value for the debt it incurs. On that approach most breaches of
s 136 would not give the company any right of recovery for the benefit of
creditors, or expose directors to any liability. If on the other hand incurring
the obligations is treated as a form of “deemed harm” to the company in and
of itself, as the Supreme Court evidently contemplated in the passage set out
above, such an adjustment would not be appropriate.
70
Mainzeal, at [291].
71
At [292]. An award on the “entire deficiency” approach had been made by the High Court in
Mainzeal, though the Court of Appeal allowed the directors’ appeal in that respect, finding that
such an approach was not open on either the pleadings or the evidence.
72
Some commentators are critical of the approach taken in Debut Homes to relief for breach of s 136,
and note that the Court of Appeal in Mainzeal has described that approach as involving “deemed
harm” to the company; see Paul Heath and Michael Whale (eds) Heath and Whale on Insolvency
(online ed, LexisNexis) at [32.3.6]. The Court of Appeal in Mainzeal noted (at [12]) that “the
legislation governing insolvent trading in New Zealand is unsatisfactory in a number of respects”
and recommended review and reform.
[296] In our view, it follows from the Supreme Court’s approach in Debut
Homes that compensation for breach of s 136 will generally be assessed by
adopting a “new debt” measure that focuses on the gross amounts of the
unsatisfied obligations undertaken in breach of s 136. …
(citations omitted)
[222] The Court concluded that this approach reflects the policy rationale
underpinning s 136, and ensures that the provision is practically relevant in typical
insolvent trading scenarios.73
[223] The Court of Appeal also referred to several earlier decisions of that Court
which confirm that an award against a director under s 301 may be less than what
might have been awarded for a claim of breach of duty brought in the name of a
company, given the statutory language which permits a court to order such
compensation as it thinks just.74 The Court expressed doubts, however, as to whether
a broad discretion, exercised by reference to factors such as causation, culpability and
duration of breach, reconciles with the approach to relief had the claims been taken in
the company’s name, or aspects of the legislative reform which led to s 301. In the
event, two members of the Court (Kós P and Miller J) provisionally considered that
they were bound by Debut Homes to proceed on the basis that the discretion is a broad
one; whereas Goddard J provisionally considered that the issue over the scope of the
discretion was not foreclosed by Debut Homes.
[224] This Court is of course bound by the earlier decisions of the Court of Appeal,
which articulate a broad discretion under s 301, to be informed by those factors
referred to in the extract from Debut Homes set out at [220] above. I accordingly
proceed on that basis.
Analysis
[225] As a preliminary point, while Dempsey Wood’s supplementary submissions

state that “the ‘entire deficiency’ approach is not relevant as Dempsey Wood does not
allege that the liquidation could have been avoided”, the relief sought in its statement
of claim is predicated on an entire deficiency approach. On its pleaded case, Dempsey
73
Mainzeal, at [296].
74
At [303].
Wood seeks an order (under both the ss 135 and 136 claims) that Mr Gapes “contribute
a sum not less than the outstanding creditor claims of $1,398,096 plus the costs and
disbursements of liquidation to the assets of PRDL.” In a sense, therefore, the loss
claimed on Dempsey Wood’s pleading is neither made out on the evidence nor pursued
in any event.
[226] Nevertheless, as the evidence and argument developed at trial, it became clear
that Dempsey Wood sought compensation on the basis of either the net deficiency
approach (in the event of a breach of s 135) or the new debt approach (in the event of
a breach of s 136). No objection was taken on behalf of Mr Gapes to this narrower
approach to relief than that pleaded, and the expert evidence was directed to these
measures of loss (particularly the latter).
[227] In the event, I have concluded that the appropriate form of relief in this case is
the new debt approach, from the breach date of mid-November 2015, when it was
clear that any Webber Capital deal was permanently off the table. 75 Like in Debut
Homes, continued trading in this case involved, at least in part, satisfying current debts
(the claims for work carried out in October 2015) by incurring new obligations –
namely further amounts becoming due to Koi (the November 2015 drawdown – which
was used to pay for the October 2015 work – and additional accrued interest).
Dempsey Wood’s submissions were primarily directed to this approach (referenced to
new liabilities to unsecured creditors incurred after 15 October 2015, plus penalty
interest accruing on the Koi Facility between 15 October and 3 December 2015). And
as the Supreme Court held in Debut Homes, an award based on the net deficiency
approach would not adequately respond to a breach of s 136.76 I have concluded that
Mr Gapes did breach his s 136 duty.
[228] Further, and importantly, the evidence now available is not sufficient to arrive
at a realistic and reasonable estimate of the net deterioration of PRDL’s financial
position between mid-November 2015 and 3 December 2015. I also accept counsel
75
The second Webber Capital proposal, to purchase the Development for $20.750 million, was put
to PRDL on Sunday 8 November 2015 and was open for acceptance until 4pm the following day,
9 November 2015. I consider it would have been appropriate for Mr Gapes to have a few days to
consider this further proposal, engage with Koi on it and then assess PRDL’s position overall
before he breached ss 135 and 136. I accordingly adopt a breach date of 13 November 2015.
76
Debut Homes, at [166].
for Mr Gapes’ submission that aspects of Dempsey Wood’s expert evidence on loss
was unreliable, for example making incorrect assumptions as to the time at which
various unsecured creditors’ claims had been incurred,77 and not taking into account
(or at least assessing) potential increases in PRDL’s assets, primarily value added to
the Development through the work which continued to be carried out after 15 October
2015. In addition, none of the evidence was directed to a breach each date of shortly
after the Webber Capital transaction fell over. Assessing the net deterioration in
PRDL’s position would therefore involve significant assumptions and ultimately
guesswork by the Court. In the context of this case, I do not consider it proportionate
to invite further submissions (or what is more likely required, evidence) on this point,
including because the time period between the breach date and receivership is very
short, and thus the change in financial position is not likely to be significant in any
event.78
[229] In terms of new debt incurred following the breach date and which remains
unpaid, as noted earlier, Dempsey Wood’s pleading is confined to payment obligations
incurred in relation to Dempsey Wood only. In any event, of the $938,000 creditors
shown in the aged accounts payable report as at 30 November 2015 as “current” (and
thus prima facie the only obligations incurred after the breach date), Dempsey Wood’s
claim of $503,373 is by far and away the largest. The next largest is Harrison
Grierson’s claim of $249,808, which Dempsey Wood accepted needs to be excluded
from the assessment, given it was “paid” through a later settlement reached between
the receivers and Harrison Grierson.79 The balance of the current unsecured creditors
as at 30 November 2015 are a collection of much smaller amounts, the next largest
being Russell McVeagh (in an amount of $48,957) which Mr Gapes confirmed he later
paid. There was no evidence about the remaining amounts (totalling approximately
$136,000), for example, whether they were incurred before or after the breach date.
77
The aged accounts payable summaries showing that of the approximately $1.473 million in
unsecured creditors’ claims as at 31 December 2015, approximately $767,000 had been incurred
prior to November 2015, or were later paid.
78
At least in relation to unsecured creditors, the aged accounts payable summaries suggest that the
position had not materially changed or deteriorated between mid-November 2015 and the end of
December 2015.
79
That claim also related to invoices for services provided over a broader time period in any event,
dating back to March/April 2015.
[230] It is necessary to assess PRDL’s obligations to Dempsey Wood which were
incurred after the breach date of 13 November 2015. A broad-brush approach is all
that is now possible. If apportionment were required, counsel for Dempsey Wood
suggested a “working day” approach. There were 24 working days in November 2015
and up to and including 3 December 2015.80 On a per day basis, the approved claim
for that period ($503,373) reflects $20,974 per day. There are 14 working days from
14 November to 3 December 2015 inclusive. This reflects $293,636 in payment
obligations to Dempsey Wood which ought not to have been incurred by PRDL after
13 November 2015.
[231] The parties did not canvass in any real detail how the discretion under s 301
ought to be exercised in this case, other than:
(a) Dempsey Wood acknowledged that the duration of breach (even on its
own case of a breach date of 15 October 2015) is relatively short,
though it argued that Mr Gapes’ breach was “reckless and inexcusable”
and that substantial sums were at risk from his actions. Counsel also
referred to and relied on the “plan” to sell the Development to Newco,
to the detriment of PRDL’s creditors. Counsel also made the
(somewhat “jury point”) submission that Mr Gapes is not remorseful
and “robbed over 150 purchasers … of their promised houses”. On this
basis, Dempsey Wood seeks an award reflecting the full loss outlined
above.
(b) Mr Gapes argued that the period between any breach and PRDL ceasing
trading is very short, and that Mr Gapes’ conduct, if found to be in
breach, cannot be categorised as anything approaching dishonesty, with
even Dempsey Wood’s own allegation at its core being that he pursued
the refinancing “with blind faith”. On this basis, counsel submit that a
100 per cent award would not be appropriate, and refer to Goatlands
Ltd (in liq) v Borrell, in which Lang J assessed the quantum of risk as
80
Mr Gapes notified Mr Dempsey of the receivership by email at 5.03pm on 3 December 2015.
being approximately 25 per cent, which was then used to determine the
s 301 award. Counsel submit a similar approach is warranted here.81
[232] I am not persuaded that a 100 per cent award is appropriate in this case, and
indeed, am of the view that a reasonably significant allowance ought to be made. This
is because:
(a) On any view, the period of breach was extremely short. In the event, I
have found that Mr Gapes breached his statutory duties over a period
of just under three weeks. This is not a case of a director breaching his
duties for many months or even years, as is seen in many other cases.
(b) I do not consider Mr Gapes to be significantly at fault, from a

culpability perspective. I accept that he subjectively believed that at all
relevant times, the value of the Development exceeded the value of
PRDL’s liabilities, based on the valuation advice that cancelling the pre-
sales and reselling at higher market rates would attract additional value
of some $20 million, coupled with his personal view that the risks
involved in cancelling the pre-sales was low. In that context, Mr Gapes
tried to keep the Development afloat until refinance was secured, and
proceeded on the (mistaken) basis that Koi would continue to support
PRDL until that was so.
(c) As can be seen from the contents of this judgment, the picture around
PRDL’s insolvency, or near insolvency, in October/November 2015
was not particularly stark or obvious. In other words, this is not a case
like some where it is obvious that a company has been hopelessly
insolvent for some time, yet the director permits it to continue to trade
regardless.
(d) That the breach by Mr Gapes was neither lengthy or particularly

egregious is reinforced by the fact that PRDL’s liquidators did not take
81
Goatlands Ltd (in liq) v Borrell (2006) 3 NZCCLR 726 (HC) at [134].
any action against him, which might have been expected if the position
was as stark as Dempsey Wood suggests.
(e) The jury points made on behalf of Dempsey Wood do not assist.
Mr Gapes was entitled to defend Dempsey Wood’s claims, and broad
notions of “remorse” are not relevant in my view to the s 301 inquiry.
Further, Mr Gapes’ breach did not “rob” purchasers of their first homes;
that resulted from the very significant cost overruns and delays in the
Development. And in the event, it was the receivers, not Mr Gapes,
who cancelled the pre-sales.
(f) Finally, the unpaid amounts to unsecured creditors largely – and in the
case of Dempsey Wood (the largest of those creditors) wholly – relate
to work carried out in the last month of the Development, before PRDL
ceased trading. While those amounts were not minor for the purposes
of s 135, the position is nevertheless that the manner in which Mr Gapes
permitted PRDL to carry on business largely resulted in all but the last
four to six weeks of creditors’ claims being met.
[233] As the Court of Appeal observed in Mason v Lewis, the question of relief
necessarily has to be approached in a relatively broad-brush way, and the jurisdiction
to order recompense is of an “equitable” character.82 I must stand back and ask, in the
circumstances summarised at [232] above, what proportion of the deficiency to
Dempsey Wood is it fair for Mr Gapes to meet personally? Given those factors above,
I consider an appropriate award is one-third of the amount of loss, and in rounded
terms, $100,000. There will be an award in that amount.
[234] There is one final point for determination, namely whether it would be
appropriate for this amount to be paid by Mr Gapes to PRDL or directly to Dempsey
Wood. Dempsey Wood’s pleading is somewhat muddled in this context, in that it
limits the obligations the subject of the s 136 claim to Dempsey Wood, but then seeks
a contribution by Mr Gapes in an amount reflecting unpaid obligations to all unsecured
creditors. Further, the s 135 claim only encompasses all unsecured creditors’ losses
82
Mason v Lewis [2006] 3 NZLR 225 (CA) at [118].
insofar as it relates to Mr Gapes’ alleged “plan” to cancel the pre-sales and liquidate
PRDL. I have found such a plan is not made out on the evidence. Like the s 136
claim, that aspect of the s 135 claim which relates to Mr Gapes causing or allowing
PRDL to continue trading in a manner likely to give rise to a substantial risk of serious
loss is limited to Dempsey Wood.83
[235] When an application pursuant to s 301 is made by a creditor, as in this case,

s 301(1)(c) expressly permits the Court to order that the director pay the relevant
amount, or any part of it, to the creditor. My preliminary view is that such an order
may be appropriate in this case, given:
(a) The pleading points noted above, which in relevant respects, limit the
claims to Dempsey Wood’s losses.
(b) Dempsey Wood has brought this proceeding at its own expense.
(c) Despite the passage of time since PRDL’s liquidation, the liquidators
have not taken any steps.
(d) If the amount is paid to PRDL, it will presumably be allocated to

secured creditors, i.e. Koi, with no distribution to Dempsey Wood or
other unsecured creditors.
(e) Conversely, payment to Dempsey Wood would be compensatory in

nature. In this way, the basis for the award would “match” the
stakeholder to benefit from the award.84
(f) Finally, the unpaid obligations to unsecured creditors which were

incurred after the breach date are largely limited to Dempsey Wood in
any event.
83
Amended statement of claim at [40].
84
See the discussion in Mainzeal, at [297], of the “mis-match” when the award is paid to the
company.
[236] The parties did not make any submissions on this issue. I do not consider the
form of Dempsey Wood’s pleading forecloses the Court exercising its jurisdiction
under s 301 to make an order that the award is paid to Dempsey Wood rather than to
PRDL. There appears to be limited authorities (in this jurisdiction at least) in which
this issue has been considered (most applications pursuant to s 301 being brought by
liquidators).85 Before reaching a concluded view, it is appropriate that the parties have
an opportunity to comment on whether the award ought to be paid to PRDL or
Dempsey Wood. The parties also ought to submit on what interest, if any, should be
awarded on that sum, and how a payment to Dempsey Wood ought to interact with
any award made pursuant to the FTA claim (for example, whether it should be paid in
addition to any award on the FTA claim).86
[237] The parties may file supplementary submissions on this issue on or before
1 October 2021.
[238] I turn now to Dempsey Wood’s claim under the FTA.
FTA claim
Legal principles
[239] The broad principles are not in dispute. The issues for consideration are:
(a) first, whether there has been a breach of s 9 of the FTA;
(b) second, in the event of breach, and moving to s 43 of the FTA,87 whether
the claimant was actually misled by the respondent’s breach;
(c) third, whether the respondent’s breach of s 9 was an operative cause of

the claimant’s loss;
85
See, for example, Marshall Futures Ltd v Marshall [1992] 1 NZLR 316 (HC) and Sanders v Flay
(2005) 9 NZCLC 96-989 (HC).
86
My preliminary view being it should not. Given the coincidence of timing, in terms of the breach
date and the point from which I have concluded Dempsey Wood suffered loss as a result of
Mr Gapes’ breach of s 9 of the FTA, it is arguable that Dempsey Wood would be “double
compensated” for its loss.
87
Pursuant to which a court may grant relief where the claimant has suffered, or is likely to suffer,
loss or damage “by” the respondent’s breach of s 9.
(d) fourth, the relevance, if any, of the claimant’s own conduct, and any
suggested failure to take reasonable care; and
(e) finally, the overall discretion to be exercised pursuant to s 43.
[240] The leading authority is the Supreme Court’s decision in Red Eagle Corp Ltd
v Ellis (Red Eagle).88 As to the first question of breach, the Court stated the following:
[28] It is, to begin with, necessary to decide whether the claimant has
proved a breach of s 9. That section is directed to promoting fair dealing in
trade by proscribing conduct which, examined objectively, is deceptive or
misleading in the particular circumstances. Naturally that will depend upon
the context, including the characteristics of the person or persons said to be
affected. Conduct towards a sophisticated businessman may, for instance, be
less likely to be objectively regarded as capable of misleading or deceiving
such a person than similar conduct directed towards a consumer or, to take an
extreme case, towards an individual known by the defendant to have
intellectual difficulties. Richardson J in Goldsbro v Walker said that there
must be an assessment of the circumstances in which the conduct occurred
and the person or persons likely to be affected by it. The question to be
answered in relation to s 9 in a case of this kind is accordingly whether a
reasonable person in the claimant’s situation – that is, with the characteristics
known to the defendant or of which the defendant ought to have been aware –
would likely have been misled or deceived. If so, a breach of s 9 has been
established. It is not necessary under s 9 to prove that the defendant’s conduct
actually misled or deceived the particular plaintiff or anyone else. If the
conduct objectively had the capacity to mislead or deceive the hypothetical
reasonable person, there has been a breach of s 9. If it is likely to do so, it has
the capacity to do so. Of course the fact that someone was actually misled or
deceived may well be enough to show that the requisite capacity existed.
(citations omitted)
[241] As to reliance, the Supreme Court observed that it does not follow from the
fact that a reasonable person would have been misled that the particular claimant was
actually misled or deceived. That is a factual question, usually to be answered by
drawing an inference from the evidence as a whole.89
[242] If reliance is established, the court must then be satisfied that the respondent’s
breach was an “operative cause” of the claimant’s loss. The breach need not be the
88
Red Eagle Corp Ltd v Ellis [2010] NZSC 20, [2010] 2 NZLR 492.
89
At [29].
only effective cause, so long as it is an effective cause.90 The breach will not be an
effective cause if it was, in the end, “immaterial” to the suffering of loss or damage.91
[243] An, or the, operative cause of the claimant’s loss may also be its own conduct
in failing to take reasonable care to look after its own interests.92 The fact a claimant
may have contributed to its own loss does not disqualify the claim. In the event, and
given the discretion to be exercised, the exercise of the power to make an order for
payment under s 43 is “a matter of doing justice to the parties in the circumstances of
the particular case and in terms of the policy of the Act”.93
Analysis
[244] Dempsey Wood’s pleading of its FTA claim is summarised at [16] above. The
focus of the claim became Mr Gapes’ communication with Mr Dempsey on
12 November 2015, confirming the amount held in the Project Account and that this
“was earmarked for civils and consultants”. To recap, Dempsey Wood says this
representation was misleading because at the time it was made, PRDL was in default
of the Koi Facility and Mr Gapes knew that the Project Account “would soon be used
by Koi to repay its secured debt”.
[245] Whether Mr Gapes’ representation was misleading must be considered in the

context it was made. That context includes Dempsey Wood’s solicitor’s letter of
29 October 2015, which included a request for evidence of the funding available to
PRDL to meet its ongoing payment obligations to Dempsey Wood. Additional context
is the evident telephone discussion between Mr Gapes and Mr Dempsey on
11 November 2015, in which Mr Gapes had made Mr Dempsey aware that the Webber
Capital agreement had fallen over. Mr Dempsey noted in his follow up email that that
development made it “even more imperative” that the concerns outlined in Dempsey
Wood’s solicitor’s letter of 29 October 2015 were addressed. Mr Dempsey also
recorded that in his telephone discussion with Mr Gapes, Mr Gapes had “re-affirmed
that there was $3.9 million deposit in a Russell McVeigh (sic) Trust account with the
90
At [29].
91
At [29].
92
At [30].
93
At [31].
specific purpose of assuring payment for the civil works for this project” (emphasis
added). In his reply email, Mr Gapes did not dispute Mr Dempsey’s summary of their
earlier discussion.94
[246] That Mr Gapes knew that Dempsey Wood was seeking assurance that it would
be paid for ongoing works, rather than simply a request for what was then remaining
in the Project Account, is also evident from Mr Gapes’ instructions to Russell
McVeagh when asking for the (then) current balance of that account. In his email to
Russell McVeagh on 11 November 2015, Mr Gapes’ stated “Conal Dempsey would
like some comfort we have the money still available to pay him”. As noted at [86]
above, that full email chain, including Russell McVeagh’s confirmation of the dollar
amount remaining in the Project Account, was then forwarded to Mr Dempsey with
the confirmation that “the $4.172 is for civils and consultants etc”.
[247] Counsel for Mr Gapes argue that given what Mr Dempsey knew at the time,
Mr Gapes’ email was not capable of being misleading, particularly given it was a
representation made to a sophisticated businessman. Counsel refer to the fact that
Mr Dempsey knew of the general concept of a secured lender and that they would
have priority over unsecured lenders; how property funding worked at a basic level;
that Koi’s quantity surveyor was required to sign-off any payments; that Koi’s
approval was also required to any payments; that refinance was needed to continue the
Development; and that receivership of PRDL was a possibility (given the threat made
at the meeting with Webber Capital and the Chows).
[248] I am not persuaded these matters affect whether, in an objective sense,

Mr Gapes’ email was capable of being misleading. The state of knowledge of the
hypothetical reasonable person in Mr Dempsey’s position will of course be relevant.
But it was no doubt because of that knowledge, even accepting for present purposes
that Mr Dempsey was aware of all those matters referred to at [247] above, that led to
Dempsey Wood seeking assurance from Mr Gapes on PRDL’s ability to pay. For
example, had PRDL not been in a difficult financial position, if refinance was not
being sought, and if receivership had not been threatened, Dempsey Wood would no
94
See [84] above.
doubt not have perceived there to be any real risk that it would no longer get paid.
And even if Mr Dempsey was aware that Koi had to approve payments, he was seeking
assurance from Mr Gapes, PRDL’s sole director, who had the relationship and dealings
with Koi. To reiterate: given what Mr Dempsey did and arguably knew, his request
was not one of academic interest as to what amounts remained in the Project Account.
Rather, and in a “real world” and commercial sense, he was pressing Mr Gapes for an
assurance that Dempsey Wood would be paid if it continued to work.
[249] In this context I consider Mr Gapes’ email was capable of misleading or

deceiving the hypothetical reasonable person in Mr Dempsey’s position. In the
context described above, his email conveyed that the funds in the Project Account
would be available to meet Dempsey Wood’s ongoing claims. Mr Gape’s assurance
was not qualified in any sense. Mr Dempsey could reasonably have understood the
email to suggest that given Mr Gapes’ current knowledge and arrangements with Koi,
the funds would be available to pay Dempsey Wood.
[250] But at that time, the funding position was in fact quite different to that
conveyed by Mr Gapes’ email. The Koi Facility had expired and Koi had issued a
PLA notice. Mr Gapes was aware that the amounts remaining in both the Construction
and Project Accounts were already earmarked to be repaid to Koi in part repayment of
the Facility. At the time of Mr Gapes’ email, there were no other arrangements on the
table which would have seen contractors get paid if Koi did “hoover up” the amounts
remaining in the Construction and Project Accounts. Mr Gapes had also been put on
notice the previous day, 11 November 2015, that Koi was trying to sell its Facility,
including the amounts remaining in the Project Account.
[251] I accept that Mr Gapes subjectively thought Koi would continue to support
PRDL until refinance was secured. But he had no clear, written or reliable assurances
from Koi to this effect. In any event, Mr Gapes’ subjective belief is not relevant to
whether his 12 November 2015 email breached s 9 of the FTA.
[252] I accordingly find that breach of s 9 is made out.

[253] The next question, and what I see as the real issue on the FTA claim, is whether
Dempsey Wood relied on Mr Gapes’ email, given on 13 November 2015, Mr Dempsey
followed up with further and more specific queries of Russell McVeagh.95 Counsel
for Mr Gapes’ submit that the very fact these follow up questions were asked confirms
that Dempsey Wood did not believe what Mr Gapes said in his 12 November 2015
email and thus did not rely on it.
[254] I disagree. It is easy in hindsight to focus on particular words and conduct at

any one point in time (and on specific questions asked and answers given by
Mr Dempsey on this topic in cross-examination). What is required, however, is an
appraisal of the whole of the evidence, looking at the matter in a practical and common
sense way.96 In the context of Mr Dempsey’s inquiry of Mr Gapes, and his reply, I am
satisfied that Dempsey Wood relied on that assurance in continuing to work on the
Development over the short term. Mr Dempsey’s follow up request of Russell
McVeagh was to seek further assurance and detail around what was a fairly short and
benign response from Mr Gapes, and when Mr Dempsey understood the Development
still had several months to run. The catalyst for Dempsey Wood’s request had been
confirmation that the Webber Capital agreement had fallen over, thus “ratcheting up”
Dempsey Wood’s concern about PRDL’s ability to continue to pay it. That
Mr Dempsey wanted that further detail and assurance does not in my view mean
Dempsey Wood did not rely on what Mr Gapes told it, in quite clear and unqualified
terms. Dempsey Wood did, after all, continue to work for a number of weeks before
Russell McVeagh responded to Mr Dempsey’s 13 November email.
[255] I accept Mr Dempsey’s evidence that, in the context of what he did know about
the difficulties in the Development, the threat of receivership and Mr Gapes’ ongoing
search for finance, in the absence of Mr Gapes’ assurance, Dempsey Wood would have
“downed tools” in some shape or form. In this way, Dempsey Wood continuing to
work in the short term in response to Mr Gapes’ email is similar to the “provisional
commitment” to the loan in issue in Red Eagle. In that case, the claimant was found
to have relied on the respondent’s statement as to security for the loan, despite almost
immediately thereafter stating he would need further detail of the security and
95
See [87] above.
96
Red Eagle at [34].
recording in the loan agreement that it was the later, more detailed information relied
on.97
[256] I accordingly conclude that Dempsey Wood did rely on Mr Gapes’ email, and
that it was an operative cause of Dempsey Wood’s loss, namely the cost of the work
carried out by it after 12 November 2015 and for which it was never paid. Other than
Russell McVeagh’s later email (and Dempsey Wood’s own conduct, which I address
below), no other operative causes are suggested. As to Russell McVeagh’s later email,
I am satisfied the assurance provided by Mr Gapes continued to be an operative cause
of Dempsey Wood’s loss after 24 November 2015. In effect, the two email
communications complemented each other, with the latter giving further detail to
“flesh out” the earlier assurance.
[257] I do not accept counsel for Mr Gapes’ submission that Dempsey Wood cannot
have relied on the representation given it was already contractually obliged to continue
the civil works. While that might be so from a strict legal perspective, from a factual
and commercial perspective, I accept Mr Dempsey’s evidence that he would have
stopped work and “worried about the legals later”. In a sense, and given Mr Gapes’
evident desire to keep work on the Development going while he searched for new
finance, Dempsey Wood threatening to or actually downing tools would have no doubt
resulted in some frank discussions between the two men, and enabled Dempsey Wood
to engage with Mr Gapes on preserving Dempsey Wood’s position.
[258] I also reject counsel for Mr Gapes’ submission that Dempsey Wood did not
look after its own interests and this was an operative, or even the operative, cause of
its loss. Counsel for Mr Gapes submit that Dempsey Wood did not insist on the money
being held separately on trust, or did not ask questions directly of Kingstons or Koi.
Counsel submit that such a failure to take due care serves to break the causal
connection. I disagree. Again, Dempsey Wood was approaching the sole director of
PRDL seeking assurance on payment. Mr Gapes gave that assurance. In that context,
it was not necessary for Dempsey Wood to insist on the money being held separately
on trust or ask to ask questions directly of Kingstons or Koi. The proper and first port
97
At [36].
of call was PRDL’s director. In light of Mr Gapes’ response on 12 November 2015,
Mr Gapes would have no doubt have taken umbrage had Dempsey Wood made direct
contact with Koi at that time. I acknowledge that Mr Gapes directed Dempsey Wood
to Russell McVeagh, but they were PRDL’s solicitors, and thus subject to PRDL’s
instructions as to what was said, and when, to Dempsey Wood in response.
[259] In terms of the quantum of loss flowing from Mr Gapes’ breach of s 9, for
reasons already discussed earlier in this judgment, I exclude the EOT claim from the
suggested loss. Further, only a portion of the certified amount for Dempsey Wood’s
November 2015 work of some $503,000 could have flowed from the
misrepresentation, together with the first three days in December. Using the daily
apportionment discussed at [230] above, 15 working days following 12 November
2015 and up to and inclusive of 3 December 2015, at $20,974 per day, results in a
prima facie loss of $314,610.
[260] I accept, however, counsel for Mr Gapes’ submission that the loss would not
extend to the full amount of the unpaid invoices corresponding to the relevant period
of time, given that measure of damages would include an amount of profit which
would not have been earned on Dempsey Wood’s “drop tools” counterfactual. The
usual approach to damages under the FTA is that they are assessed on the tort measure
of loss,98 rather than the contractual (expectation) measure. On this basis, the loss to
Dempsey Wood is the costs incurred by it in providing services to PRDL after
12 November 2015.
[261] Again, a relatively broad-brush approach is all that is possible on the evidence.
The starting point is the $314,610 calculated above. Mr Dempsey gave evidence that
a common margin for civil works (though not specifically relating to the
Development) would be between 7 and 11 percent. I infer that Dempsey Wood made
a similar margin on this project, there being nothing to suggest otherwise. Adopting a
halfway point of a 9 percent margin, I ascribe a value of $286,295 to the cost of
Dempsey Wood’s continuing work on site following 12 November 2015 and for which
it was never paid.
98
Cox & Coxon Ltd v Leipst [1999] 2 NZLR 15 (CA).
[262] I do not consider there to be any other factors influencing the discretion to be
exercised pursuant to s 43 and which would operate to reduce the award. Ultimately,
at the time of Mr Gapes’ email, PRDL was in a very vulnerable position, with the risk
of PRDL’s failure falling entirely on its creditors rather than PRDL or its shareholders.
And as the aged creditors summaries produced in evidence demonstrate, as at
November 2015, Dempsey Wood was the unsecured creditor at most risk, and by some
margin.
Result and next steps
[263] For the reasons set out in this judgment, I have concluded as follows:
(a) Mr Gapes breached s 135 of the Act, with a breach date of 13 November
2015.
(b) Mr Gapes breached s 136 of the Act, with a breach date of 13 November
2015.
(c) Mr Gapes did not breach s 131 of the Act.
(d) It is not possible on the evidence to conclude that there was a net
deterioration in PRDL’s financial position between the breach date and
the date of receivership (or even if there was, to reliably assess what the
net deterioration was).
(e) The appropriate remedy for the breaches of the Act is the new debt
approach, confined to PRDL’s payment obligations to Dempsey Wood
incurred after 13 November 2015.
(f) PRDL’s payment obligations to Dempsey Wood incurred after 13

November 2013 are assessed at $293,636.
(g) I make an order pursuant to s 301 of the Act that Mr Gapes is to

contribute one-third of that amount, rounded to $100,000.
(h) Mr Gapes’ email to Dempsey Wood on 12 November 2015 breached s
9 of the FTA.
(i) I make an order pursuant to s 43 of the FTA that Mr Gapes is to pay

Dempsey Wood the sum of $286,295.
(j) The parties are invited to make further submissions, on or before

1 October 2021, on:
(i) whether the amount to be paid pursuant to (g) above ought to be

paid to Dempsey Wood or to PRDL;
(ii) the question of interest; and
(iii) the interaction of the s 301 award and that made pursuant to the
FTA.99
[264] I invite the parties to confer and seek to agree costs. My preliminary and non-
binding view is that Dempsey Wood is the successful party overall, though a costs
award in its favour ought to be reduced somewhat given it has not succeeded on all
aspects of its claims, particularly those under the Act. Costs ought to be assessed on
a 2B basis.
[265] If the parties cannot agree costs, Dempsey Wood may file a memorandum as
to costs on or before 1 October 2021. Mr Gapes may file a memorandum in response
on or before 8 October 2021. No memorandum is to be longer than five pages in
length.
_______________________________
Fitzgerald J
99
See [236] above.

Dempsey Wood Civil LTD V Gapes (2021) NZHC 2362

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Dempsey Wood Civil LTD V Gapes (2021) NZHC 2362

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IN THE HIGH COURT OF NEW ZEALAND

I TE KŌTI MATUA O AOTEAROA

UNDER the Companies Act 1993 and the

BETWEEN DEMPSEY WOOD CIVIL LIMITED

AND ANTHONY JOHN GAPES

Hearing: 8 to 17 March 2021; further submissions 24 April 2021

Appearances: E St John and SP Maloney for the Plaintiff

Judgment: 10 September 2021

This judgment was delivered by me on 10 September 2021 at 12.00pm,

Solicitors: Wynn Williams, Auckland

To: E St John, Auckland

The pleaded claims [11]

Factual background [27]

The experts’ evidence [112]

Section 135 of the Act [147]

Section 136 of the Act [182]

Section 131 of the Act [206]

Section 301 of the Act [217]

FTA claim [239]

Result and next steps [263]

[2] The development, which commenced in 2013, was located in Mt Wellington

(a) First, a summary of Dempsey Wood’s pleaded case (including my

(b) Second, a summary of the factual background. Given the highly

(c) Third, a summary of the expert evidence and my overall assessment of

(d) Finally, my assessment of each of Dempsey Wood’s claims.

The pleaded claims

[12] As a preliminary point, Dempsey Wood’s pleading alleges that Mr Gapes

(a) avoid the pre-sales;

(c) liquidate PRDL; and

[13] In response to a question from me during his opening submissions, Mr St John

(a) In relation to the alleged breach of s 135 of the Act:

(ii) By instructing and/or allowing Dempsey Wood to continue with

(b) In relation to the alleged breach of s 136 of the Act:

(i) When instructing and/or allowing Dempsey Wood to continue

1. a reasonably prudent director would have realised PRDL

2. by September 2015 it was clear PRDL could not complete

(ii) As a result of Mr Gapes’ breach of s 136, Dempsey Wood

(c) In relation to the alleged breach of s 131 of the Act:

(i) By instructing and/or allowing Dempsey Wood to continue with

1. From September 2015 (and possibly earlier) PRDL was

2. Mr Gapes (in his capacity as director) was required to take

3. Mr Gapes failed to consider whether PRDL would be able

4. Mr Gapes ought to have known, or at least should have

(ii) By causing or allowing PRDL to default on its obligations under

2. Mr Gapes allowed the Sunset Dates to pass and encouraged

3. Mr Gapes knew that cancelling the pre-sales and return of

4. Mr Gapes wrongfully pursued this course of action with the

5. Mr Gapes’ actions caused receivers to be appointed over

(iii) By prioritising the interests of his related companies in the

1. Mr Gapes charged PRDL exorbitant management fees for

2. Mr Gapes prioritised the payment of the Redwood fees over

(c) Mr Gapes “failure to disclose [PRDL]’s financial troubles, combined

[17] Dempsey Wood pleads that it relied on these representations in agreeing to

[21] I do not accept the submissions made on Mr Gapes’ behalf.

[26] I turn now to the factual background.

Introduction and early events

[29] The Development was taken to market in 2013 as an affordable housing

(a) Practical Completion has not been achieved;

(b) a Code of Compliance Certificate has not issued in respect of the

by 20 December 2015 (“Sunset Date”), subject to the occurrence of any event

Crown is replaced by Koi

[30] On 30 April 2014, Crown appointed receivers to PRDL. The background to