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Cases of note

15 May 2023

As part of our restructuring and insolvency market update, Rescue & Recovery, we summarise recent cases covering: review of liquidators’ actions; receivers’ rights to funds for litigation; receivers’ and liquidators’ rights to documents; injunction of sale by liquidator; sale of mortgaged property; rights of Court-appointed receivers; shareholders’ ability to appoint liquidator and Interplay of PPSA and equitable property rights.

Review of liquidators’ actions

Boult v Cain [2022] NZHC 2402

A Court will not lightly interfere with a liquidator’s decision to permit disclosure of liquidator and company records to a creditors’ committee.

The documents at issue were Court documents relating to a claim for breach of duty against two of the company’s directors. The liquidator agreed to allow the liquidation committee to inspect them. The directors challenged that decision. They objected on the basis that the documents may allow one of the committee members to pursue a claim against them. They alleged that was a misuse of the liquidation committee’s powers and prejudicial to the liquidation.

The Court dismissed the directors’ challenge. Section 256 of the Companies Act does not give a liquidation committee power to access liquidator and company records. Rather it gives a liquidation committee a qualified right to inspect company documents. The qualifier is that the liquidator may refuse to grant access if they believe on reasonable grounds that it would be prejudicial to the liquidation. The purpose of the committee’s inspection right under s 256(1)(a)(i) was to increase the supervisory role of liquidation committees and reduce the role of the Court in liquidations. In order to facilitate the supervisory function, a liquidation committee must have complete and accurate information of the liquidator and company available to it.

The Court agreed with the liquidator that inspection of the documents would not result in prejudice to the liquidation: the terms of settlement did not address payment of creditors, the committee had a strong justification to request inspection of the settlement documents, and that there was no improper purpose in requesting the documents. Once a liquidator has concluded that disclosure would not prejudice the liquidation, the Court cannot easily interfere with that decision, given the liquidator is “undoubtedly” in the best position to determine the risk of prejudice.

Baker v Baker [2022] NZHC 1253

There is no statutory timebar on applications for review of a liquidator’s decision to reject a creditor’s claim, under s 284(1)(b) of the Companies Act 1993.

The two applicants sought a review of the liquidators’ decisions to reject an employment-related claim by one of the directors, and to set off a Court costs award against fees owing to the directors.

The Court rejected the liquidators’ argument that reg 15(2) of the Companies Act 1993 Liquidation Regulations 1994 provided such a time bar, contrary to some prior case law. Reg 15(2) only provides that a liquidator shall exclude from participation in a dividend all claims which have been rejected and for which no application for reversal was made in the specified time, before that dividend was paid. The Court can theoretically order that a dividend be reversed, so a late challenge to a liquidator’s decision to reject a claim would not be futile. And there may be further dividends that would be paid in which the late-challenging creditor could participate.

On the subsidiary issue of whether the directors ought to be granted leave for their application, the Court confirmed that the test is that the creditor must demonstrate an arguable case on its claim: that there was a credible factual basis for the claim, and that there was a reasonable likelihood that the Court would disturb the liquidators’ decision if the claims were established.

Receivers’ rights to funds for litigation

Fistonich v Gibson [2022] NZHC 1422

The High Court has provided welcome clarification that receivers are entitled to retain funds to defend proceedings brought against them for allegations of neglect, default or breach of duty.

The receivers in this case sought to retain $5.16m to meet their fees and legal costs in dealing with proceedings brought by the owner of the company in receivership. The plaintiff owner opposed that. At the heart of the claim are alleged various breaches of duty in conducting the receivership and selling the company’s assets. A further claim for sale of assets at undervalue has been threatened.

The Court found that receivers are ordinarily entitled to an indemnity and lien in respect of their costs incurred in carrying out their duties (whether appointed privately or by the Court). Sections 19(b) and 20(b) of the Receiverships Act 1993 do not preclude this ordinary entitlement. Until a receiver’s liability for breach of duty is established, the receiver will have the benefit of the indemnity and lien over the company’s assets. He or she will be entitled retain funds to defend proceedings brought against them. Earlier case law to the contrary was wrong.1

The Court confirmed that the receivers were not obliged to hold on to the funds pending the outcome of the litigation. They were entitled to use the funds to defend the proceedings in the usual way. If the receivers were later found to have breached their duties, however, they would be obliged to account for the costs incurred.

The Court declined to assess whether the sum the receivers proposed to retain was reasonable, in the absence of a formal application and evidence on that point.

1. See Taylor v Bank of New Zealand [2011] 2 NZLR 628 (HC).

Receivers’ and liquidators’ rights to documents

Grant v Montgomerie [2022] NZCA 483

A receiver is entitled to all books, records and documents in a former director’s possession or control, even after the director has been bankrupted and therefore no longer holds office.

Under section 12 of the Receiverships Act, a receiver has the right to receive all books, records and documents in a director’s possession or control.

The High Court initially held that an order under s 12 can only be made where the director was, at the time the order was made, a director of the company. As he had been adjudicated bankrupt, the director had ceased to hold office as a director.

The Court of Appeal disagreed, finding that in the context of section 12, the term “director” includes both current and former directors. The purpose of sections 12 and 14 of the Receiverships Act is to ensure that receivers can obtain the information that they require to carry out their functions. As independent insolvency practitioners who have little to no understanding of the business of the company over which they have been appointed, it is critical that receivers can access company documents, including those required to be held by the company under the Companies Act 1993. Such documents are often in the possession of directors, both current and former. A restrictive interpretation of “director” would, in the Court of Appeal’s view, undermine the purpose of the section and the Receiverships Act more generally.

Whitley v Meredith Connell [2022] NZHC 2994

Files held by a solicitor instructed by a former liquidator of a company as its agent must be disclosed to a new liquidator under s 261. Advice sought by the liquidator to protect the liquidator’s private interests would not be disclosable.

The law firm instructed by the former liquidator had resisted attempts to disclose various files, prompting an application under ss 261 and 266 by the new liquidator. The Court rejected numerous grounds advanced by the law firm for resisting disclosure, finding that:

  • Even though the liquidator is appointed to act in the interests of the creditors, they are fundamentally an agent of the company. To determine whether the files were company property, it was necessary to answer whether the documents came into existence in the course of and for the purposes of the former liquidator’s agency as liquidator of the company.
  • Files relating to advice sought by the liquidator to protect their private interests were not company property and are not disclosable under s 261.
  • Matters of privilege did not prevent disclosure. Section 261(3) prevents a solicitor from asserting privilege in relation to company information sought by a liquidator, as the liquidator stands in the position of the company. In any event, the law firm had not conducted a review of the files to determine whether privilege could be claimed in respect of any of them.
  • The law firm could not claim a lien over the files. Section 263(1) prevents such a lien from being claimed, but the law firm argued that did not apply to fees incurred after a company goes into a liquidation. The Court did not accept that distinction, and said that such an approach would frustrate the section’s purpose of ensuring that liquidators have ready access to company documents.

Injunction of sale by liquidator

Tellen Systems Ltd v Fibre Investments [2022] NZHC 19

The High Court has reaffirmed the importance of secured creditors complying with the procedures required by the Personal Property Securities Act (PPSA). Failing to do exposes secured creditors seeking to sell secured assets to an injunction stopping the sale.

The liquidators of a company sought an interim injunction to stop the receiver of the same company from selling company assets due to several failures to comply with the PPSA in carrying out the sale. The Court allowed the injunction.

Applying the well settled test for interim injunctions, the High Court found that there was a serious question to be tried because:

  • There were valid concerns that the appointing secured creditor may not be owed the alleged debt, or that the quantum of the debt was overstated. In addition, the secured creditor had not taken possession of the collateral, (as required under section 109 of the PPSA).
  • The secured creditor had failed to give at least 10 working days’ notice of the sale of the collateral (a mandatory requirement under section 114 of the PPSA).
  • The secured creditor had likely failed to obtain the best price reasonably obtainable. There were significant deficiencies in the sale process. There was a failure to obtain an independent valuation. There was a hurried sale process with limited marketing, conducted over the summer holiday period. And the proposed sale was to a related party (in breach of section 110 of the PPSA).
  • The secured party had not exercised their rights under their security agreement and the PPSA in good faith (as required under section 25 of the PPSA).

The High Court also found that the balance of convenience favoured the liquidators. Damages would not have been an adequate remedy if the sale went ahead as the liquidators would not have funds to pursue proceedings. Any prejudice to the secured party was brought about by their own failure to comply with the procedure required by the PPSA. Preservation of the status quo was therefore preferable.

Sale of mortgaged property

Fisk v Vey Group [2022] NZHC 2462

The High Court can exercise its power to order a sale of mortgaged property under ss 107-108 of the Property Law Act 2007 even where a mortgagee opposes the sale, but only in exceptional circumstances. Key factors will include whether the order is necessary to avoid the property deteriorating in value and to avoid mounting costs, in order to ensure creditors are paid.

Receivers and liquidators had been appointed to a company which owned an apartment building. It was the company’s sole readily realisable asset. The building had weathertightness issues and without remediation work (which was not anticipated), the value of the property would significantly deteriorate, with no ability to enter into new leases. There were two mortgages over the building, one of which was held (indirectly) by a shareholder and sole director of the company. Various disputes existed between the shareholders that had prompted the appointment of receivers.

Liquidators sought orders for a sale of the building on an “as is” basis after shareholders could not reach agreement on remediation steps. The shareholder mortgagee opposed the sale order.

The Court confirmed that its discretion to order a sale under ss 107-108 of the Property Law Act 2007 is broad and unfettered. Such an order can be made at any time, without allowing for redemption, and even if a person with an interest in the property opposes it. The fact that the exercise of such a discretion might cut across a mortgagee’s contractual rights meant that exceptional circumstances were required for such an order to be made. The discretion must be exercised having regard to the fairness to both sides, but in some cases that would be impossible, and one party might be preferred having regard to what is just in all the circumstances.

The High Court ultimately exercised its discretion to sell the property. It found that the opposing shareholder had taken actions that meant that the liquidators had been unable to fulfil their statutory duties to protect, realise, and distribute the assets of the company since it had been placed into liquidation. The property had to be sold to repay the company’s creditors. Absent a sale, the value of the property would only continue to deteriorate, and costs (including receiver and liquidator fees and legal fees) would only continue to mount. The potential harm to the opposing shareholder mortgagee would also be mitigated by their ability to purchase the building from a court-directed sale.

Rights of Court-appointed receivers

Body Corp 81012 v Memelink [2022] NZHC 3307

The High Court has shown a willingness to use its broad power under s 34 of the Receiverships Act 1993 to assist Court-appointed receivers with the efficient realisation of assets. That includes releasing receivers from personal liability to and staying existing litigation to enable them to sell the assets.

Court-appointed receivers of a family trust in an uncertain financial position sought a range of orders varying the terms of their appointment. The principal trustee was known to be highly litigious. He had a long history of disputing body corporate levies in a number of proceedings over many years. The receivers were concerned he might take issue with their approach to resolving disputed levies and costs.

In the circumstances, the Court made a range of orders to assist the receivers with realising the trust’s property for the benefit of its creditors, including:

  • Orders that the receivers be released from personal liability for contracts for sale and lease entered into to dispose of the trust’s property. Unlike a private receiver who can contract out of personal liability, a Court-appointed receiver would usually be personally liable on all contracts into which they entered. The Court considered the Court-appointed receivers should not face a higher risk in realising the trust’s property than they would were they private receivers, and
  • That s 248(1)(c) of the Companies Act 1993 applied to the receivership so that all proceedings by and against the trust would be stayed. A stay of proceedings involving the trust would increase the likelihood of its assets being realised for its creditors’ benefit. The rationale for s 248(1)(c) of the Companies Act was to prevent wasteful expenditure of assets through litigation in a liquidation. The same rationale applied to the trust, which was to be managed as if it were a company in liquidation.

Shareholders’ ability to appoint liquidator

Francis v Innes [2022] NZHC 3354

The High Court has confirmed that its supervisory powers over liquidators (under s 284) should not be used to sanction a clear contravention of another part of the Companies Act.

A 95% shareholder of the company sought to appoint a liquidator and asked the sole director (and 5% shareholder) to call a meeting of shareholders to pass the necessary resolution. The director refused to do so. Instead, the 95% shareholder attempted to appoint liquidators by way of a resolution in lieu of a meeting under s 122. As the 5% shareholder did not sign it, the resolution was not signed by at least 75% of the shareholders of the company in number and was therefore not compliant (despite it being approved by the 95% shareholder).

Shareholders in such a position are left having to apply to the Court for orders appointing liquidators under s 241(2)(c)(iii), as the Court ultimately did in this case, rather than attempting to remedy an invalid appointment.

Interplay of PPSA and equitable property rights

Maginness v Tiny Town Projects Ltd [2023] NZHC 494

A liquidation of a tiny homes manufacturer resulted in a dispute between the liquidators (on behalf of the general body of creditors) and purchasers over who had the best rights to six tiny homes. Some of the homes were fully paid for and 95% complete. Others were part-paid and 40-50% complete. If the company and the liquidators had the best rights, the tiny homes could be realised to meet claims of creditors (preferential, then secured and then unsecured).

The Court found against the purchasers on their first argument that property in the tiny homes had passed to them by the date of liquidation. The default rules under the Contract and Commercial Law Act 2017 applied. The tiny homes had been unconditionally appropriated to the contract, but were not in a deliverable state as CCC had not been issued (as the contract had anticipated).

For the same reason, the purchasers could not get the benefit of s 53 of the PPSA, under which a purchaser in the ordinary course of business takes free of security interests. Section 53 requires completion of the sale to apply. As had previously been well-established in NZ case law, CCLA principles were relevant in applying s 53. In this case, the agreements for sale of the tiny homes only became sales when a condition for transfer of the property (CCC being issued) had been met.

But the purchasers were successful in arguing that they each had an equitable lien attaching to the relevant tiny home, to the extent of the money paid by them. The Court acknowledged that the issue was “a difficult one”, but “on balance” found the lien existed as a result of applying “developing principles of equity and a liberal approach to the application” of the relevant CCLA provisions. The critical fact was that the tiny homes were readily identifiable as attributable to a particular contract.

The Court went on to find that equitable liens are equivalent to property rights in the goods (with the lienholder regarded by equity as a secured creditor) and therefore have priority over security interests. An equitable lienholder’s interest is excluded from the operation of the PPSA by s 23(b), despite meeting the definition of a security interest.

The result was that the tiny homes were not available to be realised by the liquidators to meet creditors’ claims. It brings into stark relief the argument of counsel for the liquidators recorded (but not expressly addressed) in the judgment that “imposition of equitable lien would introduce unnecessary complexity into the ascertainment of rights of parties that would be destructive of the certainty which is the basis of sound commercial practice”. It remains to be seen exactly how commercial parties (at the outset of entering into agreements), liquidators and Courts deal with equitable liens in other scenarios.

Our thanks to Nathan Whittle, Emma Littlewood, Samuel Yang and Louis Norton for preparing this article.

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

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