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Cases of note

22 June 2022

As part of our restructuring and insolvency market update, Rescue & Recovery, we summarise recent cases covering: Liquidators’ entitlement to rely on advice; liquidators’ liability for costs; review of liquidators’ actions; liquidators’ examination powers; and shareholders’ standing to challenge statutory demand. 

Liquidators’ entitlement to rely on advice

Toon v Quinn [2021] NZCA 696

The Court of Appeal has confirmed that a liquidator is entitled to rely on legal advice in how the liquidator conducts the liquidation and what steps the liquidator takes. 

The case concerned an application for remuneration approval. A substantial portion of the remuneration related to an investigation into director and management fees charged by some of the shareholding interests to the company. 

Other shareholding interests considered those charges as excessive. The parties had a history of infighting and litigation. Given this background, the Court of Appeal considered that any reasonably competent liquidator would have sought a legal opinion, and then acted on the advice received. 

It also expressly recognised the need to avoid applying hindsight to contemporaneous decisions, made in an uncertain situation with imperfect information. And it unwound a more than two thirds cut to the liquidator’s remuneration ordered by the High Court.

The High Court had found that the liquidator had taken a “wrong turn” in investigating the claim. A consideration in the decision was that, having looked into the complaint, the liquidator had decided that it would not be cost-effective to pursue it. But the Court of Appeal found that this was irrelevant. It allowed the appeal and approved the remuneration sought, together awarding the liquidator costs for both courts.

The Supreme Court has recently declined to give leave for a further appeal of this decision.

Liquidators’ liability for costs

Rahman Investments Limited (in liq) v Bailey [2021] NZHC 3249

The High Court has confirmed that a costs order may be made against a liquidator personally when the liquidator has, or should have, filed the relevant proceeding in their own name, rather than the company’s name.

The application in question was for production of documents under s 266 of the Companies Act, which only a liquidator may bring. (An application to set aside an insolvent transaction can similarly only be brought by a liquidator.)

In this case, there was no benefit to the company in liquidation as it no longer owned the property for which the document – a producer statement – was sought. Instead the liquidator had struck an agreement with the new owners to obtain the producer statement in exchange for payment of $40,000 to the liquidator’s company (not the company in liquidation).

While it is well-established that a liquidator will be liable for costs only in “exceptional circumstances”,1 the High Court found that bar was met and ordered costs against the liquidator.

1 Mana Property Trustee Ltd v James Developments Ltd (No 2) [2010] NZSC 124.

Review of liquidators’ actions

Vance v Vey Group Ltd (in rec and in liq) [2022] NZHC 75

The Court reaffirmed the longstanding principle that it will exercise its power under section 284 of the Companies Act to review the actions of a liquidator only in circumstances of fraud, a failure to act in good faith, or where the liquidator has acted unreasonably.

The decision under challenge was the liquidators’ assessment of an unsecured creditor’s claim from a minority shareholder of the company as “likely” to be admitted. Disputes between the claimant and the company’s sole director relating to the debt (among other things) had already been found oppressive and prejudicial under section 174 of the Companies Act. And it was after it became evident that the dispute between the parties could not be resolved that the company was put into receivership and then into liquidation.

The Court agreed with the liquidators’ findings that none of the debt in question was statute barred and found that they had acted appropriately.

The Court is not required to undertake a meticulous examination of the facts and law to determine whether the liquidators’ decision can ultimately be determined to be right. Instead the test is simply whether the decision was unreasonable.

Examples of unreasonableness include where a liquidator has not requested or considered relevant evidence before arriving at a decision, or where a statutorily barred debt has been accepted and included in the liquidation process.

The Court also rejected the opposing director’s assertion that there was insufficient documentation.  

Bank records, signed minutes, general ledgers and bank statements were “reasonably reliable” documents that supported the validity of the debt. And to require liquidators to conduct “mini trials” into the documentary evidence when it was sufficient to establish the nature and purpose of the relevant transactions would be inconsistent with the requirement that liquidators undertake their duties in a cost-effective and efficient manner.

Liquidators’ examination powers

Stewart v Fatupaito [2022] NZCA 21

The Court of Appeal has confirmed that the Courts may make examination and production orders under section 266 of the Companies Act, even if a liquidator has started other legal processes against the examinee. 

Before bringing the action, the liquidators had brought a claim against the sole shareholder and director of the company in liquidation for payment of his current account and had subsequently issued a section 261 notice seeking company records, including details of the company’s assets. 

The Court of Appeal upheld the High Court decision that the 266 orders were appropriate as the documents and information sought related directly to the company, and were necessary for the liquidators to understand what assets existed and whether they could be recovered. 

The Court drew a distinction with the decision in Finnigan v Ellis, in which the personal financial information of a potential director defendant was not deemed to be part of the affairs of the company.      

The Supreme Court has recently declined to give leave for a further appeal of this decision. 

pillars in court room

Shareholders’ standing to challenge statutory demand

Bo Si Ltd (in liq) v Crusaders Building Development Ltd [2022] NZHC 788

The High Court has confirmed that a shareholder in a company facing liquidation can apply for a stay of the liquidation proceedings on the basis of a challenge to the underlying statutory demand. 

Rule 31.16(2) of the High Court Rules allows a shareholder to defend liquidation proceedings. However, under section 290 of the Companies Act, only the company can apply to set aside a statutory demand. 

The Court concluded that a shareholder’s right to defend liquidation proceedings would be “toothless” if denied the ability to challenge the statutory demand at the first opportunity – which for the shareholders was the liquidation proceeding stage.

This article is part of our regular publication Restructuring & Insolvency: Rescue & Recovery. Read the other articles in this series below.  

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