Guide to company liquidation [1 ed.] 9781927183441, 1927183448

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GUIDE TO COMPANY LIQUIDATION LIESLE THERON BARRISTER BA (LAW), (UNIVERSITY OF STELLENBOSCH, SOUTH AFRICA) LLB (VICTORIA UNIVERSITY OF WELLINGTON) LLM (NEW YORK UNIVERSITY SCHOOL OF LAW) LexisNexis NZ Limited Wellington 2013

LexisNexis NEW ZEALAND AUSTRALIA ARGENTINA AUSTRIA BRAZIL CANADA CHILE CZECH REPUBLIC FRANCE GERMANY HONG KONG GREATER CHINA HUNGARY INDIA IRELAND ITALY JAPAN KOREA MALAYSIA POLAND SINGAPORE SOUTH AFRICA SWITZERLAND

LexisNexis NZ Limited, PO Box 472, WELLINGTON LexisNexis Butterworths, SYDNEY LexisNexis Juris Prudencia, BUENOS AIRES LexisNexis ARD Orac GmbH & Co KG, VIENNA LexisNexis, SAO PAULO LexisNexis Butterworths, LexisNexis Quick Law, MARKHAM, ONTARIO LexisNexis Ltd, SANTIAGO Nakladatelství Orac sro, PRAGUE Juris-Classeur Groupe LexisNexis, PARIS LexisNexis, FRANKFURT LexisNexis Butterworths, HONG KONG HVG-Orac, Publishing Ltd, BUDAPEST LexisNexis, NEW DELHI LexisNexis, DUBLIN Dott Giuffrè Editore SpA, MILAN LexisNexis, TOKYO LexisNexis, SEOUL Malayan Law Journal Sdn Bhd, KUALA LUMPUR Wydawnictwo Prawnicze LexisNexis, WARSAW LexisNexis Butterworths, SINGAPORE Butterworths Publishers (Pty) Ltd, DURBAN Staempfli Verlag AG, BERNE

TAIWAN LexisNexis, TAIWAN LexisNexis Butterworths Tolley, LONDON, UNITED KINGDOM EDINBURGH LexisNexis Group, NEW YORK USA NEW YORK LEXISNEXIS, MIAMISBURG, OHIO National Library of New Zealand Cataloguing-in-Publication Data Theron, Liesle. Guide to company liquidation. Includes index. ISBN 978-1-927183-44-1. eISBN 978-1-927183-97-7. 1. Liquidation — New Zealand. 346.930662—dc 23 Copyright © 2012 LexisNexis NZ Limited. All rights reserved. This work is entitled to the full protection given by the Copyright Act 1994 to the holders of the copyright, and reproduction of any substantial passage from the book except for the educational purposes specified in that Act is a breach of the copyright of the author and/or publisher. This copyright extends to all forms of photocopying and any storing of material in any kind of information retrieval system. All applications for reproduction in any form should be made to the publishers. Disclaimer Guide to Company Liquidation has been written, edited and published and is sold on the basis that all parties involved in the publication exclude any liability, including negligence or defamation, for all or any damages or liability in respect of or arising out of use, reliance or otherwise of this book. The book should not be resorted to as a substitute for professional research or advice for any purpose.

PREFACE The recent activity in the area of company liquidation has provided a good opportunity for a comprehensive up-to-date New Zealand commentary. I hope that it will provide a helpful tool of quick and easy reference for all those that work in the area and at least a starting point for more in-depth research on particular topics. The material in this book was originally developed for Morison’s Company Law and Heath & Whale on Insolvency. Mark Russell’s original chapters of Morison’s Company Law therefore provided a point of departure. To the extent that my material covers the same territory as that covered by Mark Russell, it has been completely or substantially rewritten. However, I wish to acknowledge that there will be some parts which are still based on his text. I am grateful to the Honourable Justice Paul Heath for his comments on an early draft, and the staff at LexisNexis for their work in bringing this book to publication. Any errors of course remain my own. Liesle Theron Wellington July 2012

INTRODUCTION General Themes The purpose of the Companies Act 1993 (“the Act”) in creating a legal entity distinct from its directors and shareholders is to allow it to engage in business activities entailing risk without exposing shareholders to greater liability than the amount of their investment. The condition of the privilege is that the company be able to pay its debts. A company’s inability to pay debts triggers certain consequences. Up to that point, the company may lawfully expose its capital and assets to the risks of trade. After that point, the emphasis shifts to the position of creditors.1 The primary object of liquidation proceedings has therefore been described as the collection and distribution of the assets among unsecured creditors after payment of preferential debts.2 The Long Title to the Act includes a reference to providing “straightforward and fair procedures for realising and distributing the assets of insolvent companies”. The objectives of the law in this area have also been identified as:3 to maximise returns to creditors; to provide a fair and equitable regime for making claims (at the heart of which is the pari passu principle); to identify causes of the company’s failure and impose sanctions for culpable management by its directors and officers. These objectives are reflected in the following themes, which can be observed as a common thread running through New Zealand case law: equal sharing amongst creditors (the pari passu principle); ensuring an efficient, speedy and low cost process, so as to ensure maximum assets are available to creditors; promptness in dealing with liquidation applications to ensure that insolvent entities do not continue trading if that can be avoided.

Legislative History The Companies Acts of 1908, 1955 and 1993 were substantially based on earlier United Kingdom legislation. Part 6 (ss 210–341) of the Companies Act 1955 dealt with winding up of companies registered under the Act, and Part 11 (ss 387–394) dealt with winding up of unregistered companies. There were three types of liquidation regime under the 1955 Act. They were a winding up by the court, a members’ voluntary winding up and a creditor’s voluntary winding up. Part 16 of the Companies Act 1993 replaced Parts 6 and 11 of the 1955 Act. The Law Commission considered that the existing rules on winding up companies, as set out in the 1955 Act, were unnecessarily complicated. The new rules in Part 16 were intended to:4 require independence and experience from liquidators; provide one set of rules for both voluntary and court-ordered liquidations; and require minimal court involvement in liquidations. The Law Commission drew heavily on the Australian Law Reform Commission’s review of insolvency law for much of the new Part 165 and abandoned the terms “winding up”, “voluntary winding up”, “dissolution”, “members’ voluntary”, and “creditors’ voluntary”, which were replaced by two options: liquidation and direct removal from the register.6 At the time the 1993 Act was enacted, the 1955 Act was amended by the Companies Amendment Act 1993 to align the provisions relating to liquidations with those in the 1993 Act. ____________________ 1.

Commissioner of Inland Revenue v Chester Trustee Services Ltd [2003] 1 NZLR 395 (CA) at [41]– [42]; Commissioner of Inland Revenue v Property Ventures Ltd (in rec) (2010) 24 NZTC 24,403 at [45].

2.

Silverpoint International Ltd v Wedding Earthmovers Ltd HC Auckland CIV-2007-404-104, 30 May 2007 at [79] citing Re Commercial Bank Corp of India and the East, Smith and Fleming and Co’s case (1866) 1 Ch App 538 at 545.

3.

Goode Principles of Corporate Insolvency Law (3rd ed, Sweet & Maxwell, London, 2005) at [2.19]– [2.21].

4.

Law Commission Company Law Reform and Restatement (NZLC R9, 1989) at [115].

5.

Law Commission Company Law Reform and Restatement (NZLC R9, 1989) at [309].

6.

Law Commission Company Law Reform and Restatement (NZLC R9, 1989) at [641].

CONTENTS Preface Introduction PART 1 PRELIMINARY STEPS IN A LIQUIDATION Chapter 1

Statutory Demands

1.1

Statutory Demand — Procedural Requirements

1.2

Purpose of a Statutory Demand

1.3

Jurisdiction to Set Aside a Statutory Demand: s 290

1.4

Timeframes Under s 290

1.5

Setting Aside a Demand Under s 290(4)(a): Disputed Debts

1.6

Setting Aside a Demand Under s 290(4)(B): Amount Specified in Demand Less than Counterclaim or Set-Off

1.7

Demand Ought to be Set Aside on Other Grounds: s 290(4)(C)

1.8

Residual Discretion to Refuse an Application to Set Aside a Statutory Demand

Chapter 2

Interim Liquidators

2.1

Appointment of Interim Liquidator

2.2

Powers of Interim Liquidator

2.3

Costs of Interim Liquidator

PART 2 COMMENCEMENT OF A LIQUIDATION Chapter 3 3.1

Appointment of a Liquidator

Procedure for Appointment of Liquidator 3.1.1

Means by which a liquidator may be appointed

3.1.2

Applications to the court

3.1.3

Restrictions on appointment of liquidator by shareholders or board

3.1.4

Commencement of liquidation to be recorded

3.2

Criteria for Appointment as Liquidator

3.3

Replacement of a Liquidator

Chapter 4 4.1

4.2

Appointment of Liquidator by Court

Persons Who May Apply to Appoint a Liquidator 4.1.1

Applications by creditors

4.1.2

Applications by contingent and prospective creditors

4.1.3

Applications by shareholders

Grounds for Court-Ordered Liquidation 4.2.1

General

4.2.2

Company’s inability to pay debts: s 241(4)(a)

4.2.3

Persistent or serious failure to comply with the Act: s 241(4)(b)

4.2.4

“Just and equitable” to place company in liquidation: s 241(4) (d) 4.2.4.1

History

4.2.4.2

Westbourne Galleries principles

4.2.4.3

Other considerations

4.2.4.4

Illustrations of liquidations on just and equitable ground

4.2.4.5

Time at which court must determine just and equitable ground

4.3

Discretion of Court

4.4

Powers of Court on Application

Chapter 5

Liquidation of Other Entities

5.1

General

5.2

Societies Incorporated Under Incorporated Societies Act

5.3

Bodies Corporate Under Unit Titles Act

5.4

Board Registered Under Charitable Trusts Act

5.5

Licensed Insurer Under Insurance (Prudential Supervision) Act 2010

PART 3 SUBSEQUENT STAGES OF A LIQUIDATION Chapter 6

Meetings of Creditors and Shareholders

6.1

Initial Meeting of Creditors

6.2

Further Meetings of Creditors and Shareholders

6.3

Meetings of Creditors or Shareholders to Appoint a Liquidation Committee

Chapter 7

Distribution of Assets

7.1

General Order of Distribution

7.2

The Rules of Bankruptcy Apply

7.3

Options Available to Secured Creditors

7.4

7.3.1

What is a secured creditor?

7.3.2

Status of proprietary rights

7.3.3

Secured creditors’ options

Preferential Claims Under Schedule 7 7.4.1

Costs of administering the liquidation

7.4.2

Employees’ claims

7.4.3

Other statutory preferences

7.4.4

Crown priority

7.4.5

Provisions relating to security interests over all or part of company’s accounts receivable and/or inventory

7.4.6

Other Schedule 7 provisions

7.5

Pari Passu Principle

7.6

Procedure for Unsecured Claims

7.7

Review of Liquidator’s Decision on Claim

7.8

Admissible Claims 7.8.1

Future claims

7.8.2

Contingent claims

7.8.3

Claims in contract

7.8.4

Sureties

7.8.5

Bills of exchange

7.8.6

Lessor’s position

7.8.7

Claims which are not legally enforceable

7.9

Limitation Act

7.10

Liquidation Set-Off 7.10.1

General

7.10.2

Policy reasons for set-off

7.10.3

Requirement of mutuality

7.10.4

Requirement of commensurability

7.10.5

No reason to suspect company unable to pay debts

7.11

Quantification of Claims

7.12

Interest on Claims

7.13

Distribution of Surplus to Shareholders

7.14

7.13.1

General rule

7.13.2

Effect of preferential rights

7.13.3

Effect of provision for dividends

Liquidation Surplus Account

Chapter 8 8.1

Circumstances in which a Liquidation is Stayed or Comes to an End

Court’s Jurisdiction to Stay Liquidation Proceedings Under High Court Rule 31.11

8.2

Termination of Liquidation by Court

8.3

Completion of Liquidation

PART 4 THE CONSEQUENCES OF LIQUIDATION Chapter 9

Effect of Commencement of Liquidation Under s 248

9.1

Overview

9.2

Liquidator has Custody and Control of the Company’s Assets

9.3

Directors Remain in Office but Cease to have Powers, Functions or Duties

9.4

Prohibition Against Legal Proceedings Against Company or its Property 9.4.1

Purpose of s 248(1)(c)

9.4.2

What does the term “legal proceedings” encompass?

9.4.3

Proceedings not covered by s 248(1)(c)

9.4.4

Ability to bring derivative actions

9.4.5

Circumstances in which court will grant leave

9.5

Stay of Proceeding While Application Pending

9.6

Restriction on Exercise or Enforcement of a Right or Remedy Over or Against Property of the Company

9.7

Effect on Uncompleted Executions, Distraints and Attachments

9.8

Shares in the Company Must Not be Transferred Unless Court Orders Otherwise

9.9

Alterations Must Not be Made to the Rights or Liabilities of Shareholders

9.10

A Shareholder Must Not Exercise a Power Under the Constitution of the Company or the Act Except for the Purposes of Liquidation

9.11

Constitution of the Company Must Not be Altered

9.12

Effect on Secured Creditors

9.13

Interface with Voluntary Administration

9.14

Offences

Chapter 10

The Liquidator’s Duties, Rights and Powers

10.1

Introduction

10.2

Principal Duty of the Liquidator: Realisation and Distribution of Assets

10.3

Application of Agency and Fiduciary Principles

10.4

Duty of Good Faith, to Act Impartially and for Proper Purposes

10.5

Duty to Report to Creditors, Shareholders and the Public 10.5.1

Notice of appointment

10.5.2

Reporting requirements

10.5.3

Duties in relation to accounts

10.5.4

Procedural requirements as to documents

10.5.5

Duty to summon meetings and have regard to views of shareholders and creditors

10.5.6

Service on shareholders and creditors

10.5.7

Duty to notify suspected offences

10.6

Duty to Allow Creditors to Choose Another Liquidator

10.7

Liquidator’s Duties of Skill and Care

10.8

Court Supervision of Liquidation

10.9

10.8.1

Overview

10.8.2

Court’s power to confirm, reverse or modify acts or decisions of liquidators

10.8.3

Requirement for creditor, shareholder, entitled persons and directors to obtain leave to apply under s 284(1)

10.8.4

Directions as to distribution

10.8.5

Funding arrangements

10.8.6

Limits on directions that may be sought by liquidators as to conduct of liquidation

10.8.7

Role as officer of the court

Orders to Enforce the Liquidator’s Duties Under s 286

10.10 Overview: The Liquidator’s Powers and Rights 10.11 Power to Enable Administration: Schedule 6 10.12 Power to Obtain Documents and Information 10.12.1 Access to documents 10.12.2 Power to obtain information 10.12.3 Power in relation to company property 10.12.4 Power in relationship to receivers 10.13 Examination by the Court 10.14 Purpose of Provisions Enabling Liquidator to Obtain Documents and Information 10.15 Circumstances in which a Court will Prevent or Limit Examinations 10.16 Practical Considerations Relating to Examination of Persons by the Liquidator 10.17 Power to Enforce Liability of Shareholders and Former Shareholders 10.18 Power to Disclaim Onerous Property 10.18.1 Overview 10.18.2 Policy 10.18.3 Unprofitable contract 10.18.4 Property 10.18.5 Other limitations on power to disclaim 10.18.6 Effect of disclaimer 10.18.7 Ability to seek vesting order or claim for loss or damage 10.19 Supply of Essential Services to Liquidator or Company in Liquidation 10.20 Power in Relation to Rights to Sue 10.21 Voidable Transactions Regime 10.21.1 Overview 10.21.2 Insolvent transaction voidable 10.21.3 Transaction

10.21.4 Unable to pay due debts 10.21.5 Preferential effect 10.21.6 Specified period 10.21.7 Transactions as part of continuing business relationship 10.21.8 Voidable charges 10.21.9 Procedure for setting aside transactions and charges 10.21.10 Orders available to the court 10.21.11 Position of third parties 10.22 Recovery in Other Cases 10.22.1 Transactions at undervalue 10.22.2 Transactions for inadequate or excessive consideration with directors and certain other persons 10.22.3 Court may set aside certain securities and charges in favour of directors and certain other persons 10.23 Recovery from Promoter, Director, Manager, Administrator and/or Receiver 10.24 Remuneration of Liquidator 10.24.1 Introduction 10.24.2 Method by which remuneration is fixed 10.24.3 Assessment of remuneration: general principles 10.24.4 Prospective applications 10.24.5 Retrospective applications 10.24.6 Applications by third parties 10.24.7 Remuneration for trust administration 10.25 Legal Costs Chapter 11 11.1

Liability of Related Companies, Shareholders and Directors in a Liquidation

Recovery by Liquidator from Related Companies and Pooling of Assets

of Related Companies

11.2

11.3

11.1.1

Order under s 271 (1) (a) and (b)

11.1.2

Applicable principles: “just and equitable”

11.1.3

Cases where orders have been made

Shareholders’ Liability 11.2.1

General

11.2.2

Liability of present and former shareholders

11.2.3

Liability incurred prior to cancellation or reduction of shareholder’s liability

11.2.4

Effect of incorrect entry or failure to enter on register

11.2.5

When is a liability for unpaid shares satisfied?

11.2.6

Shareholder’s ability to set-off calls due

11.2.7

No ability to agree that shareholder not liable for uncalled capital

11.2.8

Liability of deceased shareholder’s personal representatives

11.2.9

Liability in case of bankruptcy

11.2.10

Contract for subscription can no longer be rescinded on commencement of liquidation

Liability of Directors in a Liquidation 11.3.1

Power of court to require directors to repay money or return property 11.3.1.1 Nature of liability 11.3.1.2 Parties who can bring a s 301 action 11.3.1.3 Remedies under s 301

Index

11.3.2

Liability of directors to creditors

11.3.3

Liability if proper accounting records not kept

[page 1]

PART 1 PRELIMINARY STEPS IN A LIQUIDATION

[page 3]

CHAPTER 1 Statutory Demands 1.1

Statutory Demand — Procedural Requirements

One of the grounds on which the court can appoint a liquidator is that the company is unable to pay its debts. These grounds are discussed generally at paras 4.2.1–4.2.4. Failure to comply with an effective statutory demand gives rise to a rebuttable presumption that the company is unable to pay its debts. As discussed at para 1.2, statutory demands are also often used to obtain payment of debts. The statutory demand process is therefore a commonly-used tool in the early stages of the liquidation process. Section 289 of the Act requires that a “statutory demand” must: be made by a creditor;1 be in respect of a debt that is due; not be less than the “prescribed amount” which is currently $1,000 as set out in cl 5 of the Companies Act 1993 Liquidation Regulations 1994; be in writing; be served on the company; and require the company to pay the debt, or enter into a compromise under Part 14, or otherwise compound with the creditor, or give a charge over its property to secure payment of the debt (to the reasonable satisfaction of the creditor) within 15 working days of the date of service, or such longer period as the court may order. The requirement that the debt must be “due” requires that the debt has fallen due for payment at the date of the demand.2 If a payment is received in circumstances where the recipient is obliged to repay it, whether because of a contractual or statutory provision to that effect or because the circumstances give rise to an obligation to repay on the basis of money had and received,

[page 4] the amount can be treated as a “debt due” for the purposes of s 289(2)(a).3A “debt due” is, however, not a contingent or prospective debt.4 There is a difference of view as to whether a statutory demand must be served on the company in accordance with s 387, or whether service under s 388 will suffice.5 The court may set aside the appointment of a liquidator if the statutory demand was not properly served on the company, although service not effected in the prescribed manner may not be sufficient if it could be shown that the document had in some other way been brought to the notice of the company, or of those responsible for the management of its affairs.6 There have also been decisions requiring more of the party serving the documents, on the basis that, although service may comply with s 387, there remains an issue as to whether that service is effective (that is, has achieved the underlying aim of the section to ensure that the company being served is, in fact, aware of the particular matter which requires service on it). Ineffective service has been an issue where the service details are inadequate, or where it is known or suspected that the service address has been abandoned.7 [page 5] Section 290(5) relates to defects or irregularities, whether in the statutory demand itself, or in the process by which it is served.8 Section 290(5) provides that a demand will not be set aside by reason only of some defect or irregularity, unless the court considers that substantial injustice would be caused if the demand were not set aside. For this purpose, “defect” includes a material misstatement of the amount due to the creditor, and a material misdescription of the debt referred to in the demand.9 Defects or irregularities that mean that the failure to set aside the demand will cause substantial injustice to the company, or other persons, may justify the setting aside of a statutory demand only if they come within s 290(4)(c).10 In Pioneer Insurance Co Ltd v White Heron Motor Lodge Ltd the Court of Appeal was satisfied that a 25 per cent differential between the amount owed and the amount stated in the statutory demand warranted the Court setting aside the statutory demand under s 290(4)(c) on the basis that there had been such a

material misstatement of the amount due, that a substantial injustice would be caused were no order to be made.11 Where the statutory demand is made by one creditor, another creditor may rely on it if it has not been complied with.12

1.2

Purpose of a Statutory Demand

There has been some confusion as to the purpose of a statutory demand and whether it should only be used as a precursor to an application for liquidation, or whether it can also be used as a mechanism for a creditor to obtain payment of a debt. In Pioneer Insurance Co Ltd v White Heron Motor Lodge Ltd,13 the Court of Appeal treated the purpose of a statutory demand as to obtain payment for a debt, with the secondary purpose being to provide a basis on which the debtor’s inability to pay its debts as they fall due may be proved in liquidation proceedings. Similarly, the approach of the Court of Appeal in Link Electrosystems Ltd v GPC Electronics (New Zealand) Ltd,14 suggests that creditors should not be criticised for using a statutory demand to require [page 6] payment unless to do so is “oppressive”. In this respect the Court stated that “the provision is not to be used oppressively as a debt collection device. The legislation is not to be utilised more widely than its clear purpose, which is to require the payment of a sum certain — or largely certain — in a context where there is no substantial dispute”.15 The Court of Appeal’s endorsement of the use of a statutory demand to obtain payment of a debt is also reflected in its approach in the following two contexts: It appears that different views as to the purpose of a statutory demand underlie the conflicting approaches taken by the High Court in recent case law. In Silverpoint International Ltd v Wedding Earthmovers Ltd the High Court held that, while liquidation proceedings are used to pressure companies to pay debts, they are not proceedings for the recovery of a debt (the Court saw the function of statutory demands as to assist a party in establishing that a company is insolvent for the purpose of liquidation proceedings).16 By contrast, in Volcanic Investments Ltd v Dempsey & Wood Civil Contractors

Ltd,17 the High Court held that a statutory demand was a proceeding for the recovery of a debt.18 The Court of Appeal in Laywood & Rees v Holmes Construction Wellington Ltd considered these cases, preferring the approach in Volcanic, and held that statutory demands are, in a practical sense, important enforcement mechanisms. But at the same time they have an additional dimension to them, in the sense that they ultimately lead to a process which focuses on liquidity and asset worth, and liquidation proceedings have a broader objective than simply ensuring that a particular creditor is paid.19 The view that a statutory demand should not be used to recover commercial debts, but is only a means to establish a presumption of insolvency, has also underpinned the reasoning in cases which have accepted that a statutory demand should be set aside if a company can [page 7] establish it is solvent.20 The Court of Appeal has, however, recently stated that such cases are likely to be extremely rare, taking the view that if the debt is indisputably owing, then it should be paid. According to the Court, if the company simply refuses to pay a debt, without good reason, it should not be able to avoid the statutory demand process by proving, at the statutory demand stage, that it is solvent. The demand should be allowed to proceed. If it is not met, and an application for liquidation is filed, in reliance on the presumption in s 287(a) that the company is unable to pay its debts, then the company will have an opportunity on the liquidation application to rebut that presumption.21

1.3

Jurisdiction to Set Aside a Statutory Demand: s 290

Section 290 provides for the court’s jurisdiction, on the application of the company, to set aside a statutory demand on the following grounds: there is a substantial dispute as to whether or not the debt is owing or due; the company appears to have a counterclaim, set-off or cross-demand, and the amount specified in the demand (less the amount of the counterclaim, set-

off or cross-demand) is less than the prescribed amount; or the demand ought to be set aside on other grounds. An application to set aside a statutory demand must be served in accordance with s 387 of the Act, which does not permit service by facsimile or service by post to a solicitor acting for a company.22 The courts have held that any defect in service of an application to set aside a statutory demand cannot be corrected by High Court Rule 1.9, on the basis that the issue is not one of compliance with the High Court Rules, but one that relates specifically to compliance with a requirement of the Companies Act 1993.23 The omission from the application that is served on the respondent of the date when the application will be heard does not mean that s 290 is not [page 8] met.24 Late failure to notify of the hearing date, the fact that the application (by a barrister) was made without knowledge of a solicitor, and the failure to make formal application to remedy defects, were not considered on their own to be sufficient factors to warrant declining the exercise of the discretion. But the totality of these factors, combined with the failure to respond to the respondent’s inquiry until the day before hearing, the fact that the application as served was not exhibited to the affidavit of service filed on hearing day, and the lack of merit in the applicant’s substantive challenge to the demand led the court to refuse to exercise its discretion to cure defective service.25 Section 290(7) provides that the court may impose conditions in setting aside a statutory demand. Under s 291(1), if the court is satisfied that there is a debt due that is not the subject of a substantial dispute, or is not subject to a counterclaim, set-off or cross-demand, the court may either order the company to pay the debt within a specified period, stipulating that in default of payment the creditor may make an application to put the company into liquidation; or it may dismiss the application and make an order for liquidation on the grounds that the company is unable to pay its debts. If the court imposes a requirement to pay the debt within a specified period and that requirement is not complied with, resulting in an application to put the company into liquidation, the company will be presumed

to be unable to pay its debts at the hearing.26 A hearing of an application to set aside a statutory demand should not be turned into a de facto application for stay of a judgment.27 If an appeal is pending, the appellant’s options are to apply for a stay of judgment, or for an extension of time to comply with the demand under s 290(3).

1.4

Timeframes Under s 290

An application to set aside a statutory demand must be made and served on the creditor within 10 working days28 of the date of service of the demand.29 The subsequent dishonouring of a cheque tendered as the filing fee does not mean that an application to set aside a statutory demand was made out of time.30 An application to set aside a statutory demand which is not served within the required 10 working-day period from the date of service of the demand is [page 9] a nullity.31 Section 290(3) provides that the court has no jurisdiction to extend time for making or serving the application, but the court is empowered to extend time for compliance with the statutory demand.32 The fact that the time limits under s 290 are set at 10 days reflects the policy that where a defendant is of doubtful solvency, promptness is required in disposing of applications to liquidate. It is undesirable for an arguably insolvent entity to be allowed to continue trading, if that can be avoided. A further policy factor that underlies s 290 is that the creditor should be advised as soon as an application has been made to the court to set aside a statutory demand. It would be undesirable for an application to appoint a liquidator to be filed while there was outstanding an application to set aside a statutory demand. It is possible that an application to appoint a liquidator could be made with the creditor relying on other evidence to prove insolvency, and not relying on the statutory presumption of insolvency which arises following the expiry of an unsatisfied statutory demand. However, if the order setting aside the statutory demand were to be made, then instead of relying upon a presumption of insolvency the creditor would face the more challenging evidential task of proving actual insolvency at

the hearing of the substantive application to appoint liquidators. A creditor, who may be able to succeed by reliance on a presumption of insolvency, may be defeated by the evidential burden that it would have to assume if it could not rely upon the presumption. Further, the fact that an application to set aside a statutory demand has been made may cause the plaintiff to stay its hand. If it does not, then an application for stay of liquidation proceedings, or even to restrain the issue of liquidation proceedings, may be made. A creditor therefore needs to know promptly that an application to set aside the statutory demand has been made.33

1.5

Setting Aside a Demand Under s 290(4)(a): Disputed Debts

When considering an application to set aside a statutory demand pursuant to s 290(4)(a) of the Companies Act 1993, the court is required to determine if the applicant can show a fairly arguable basis upon which it is not liable for the amount claimed.34 Mere assertion will not be enough. Some sort of material short of proof which backs up the claim that the amount is in [page 10] dispute is required.35 The principles developed in fields such as applications to remove caveats and opposition to summary judgment apply by analogy.36 So, for example, in determining whether there is a genuine and substantial dispute as to the existence of a debt, it is not usually appropriate to resolve disputed questions of fact on affidavit evidence alone, particularly when issues of credibility arise.37 Where there is a disputed debt, an application can also be made under High Court Rule 31.11 for a stay of the liquidation proceedings.38

1.6

Setting Aside a Demand Under s 290(4)(b): Amount Specified in Demand Less than Counterclaim or Set-Off

Where a company which is the subject of a liquidation application is

indisputably in debt to the applicant creditor, it may nonetheless be able to show that it has a claim against the applicant which reduces the net balance owing to the applicant, or even offsets it altogether. Where there are liquidated sums due each way, that is simply an arithmetical exercise. It is more difficult if, on the applicant’s side, there is an indisputable liquidated sum, but the other party’s claim is for an unliquidated sum with liability and/or quantum in dispute.39 It is not possible to set off or claim in respect of contingent indebtedness.40 While at common law a claim for unliquidated damages is not available as a set-off or counterclaim against a claim on a bill of exchange, such a claim might be sufficient to warrant the setting aside of a statutory demand.41 It is sufficient for the purposes of s 290(4) that the applicant for an order setting aside a statutory demand be able to establish an arguable case of the [page 11] existence of a “cross-demand”. That expression is wider than the expression “counterclaim”.42 It would be unusual for the High Court to engage in detailed analysis of the merit of any counterclaim, set-off or cross-demand. The section calls for a prompt judgment as to whether there is a genuine and substantial dispute. The approach required by the “appearance” test in s 290 is a review with a low threshold.43 However, in order to impeach the statutory demand and overcome the presumption in s 287(a) that the company is unable to pay its debts when it has failed to comply with the demand, the applicant must be able to do more than merely assert that there is an available set-off. It must be able to point to evidence before the court showing that it has a real basis for the claimed set-off and that accordingly, the applicant’s claim to be a creditor is, to the extent of the set-off, seriously in doubt. It must show that there are clear and persuasive grounds for the set-off claim. Where this can be done, the dispute should then be resolved in the ordinary way — except as to any undisputed balance — rather than upon the hearing of a liquidation application.44 An applicant seeking to rely on s 290(4)(b) is not required to establish any link between the amount claimed in the statutory demand and the subject matter of the cross-claim or counterclaim relied upon, although the absence of such a link may be relevant to the exercise of the court’s residual discretion.45

The extent to which a set-off or counterclaim can be raised under s 290(4)(b) to resist a statutory demand for a debt owed under the Construction Contracts Act 2002 was the subject of a difference of opinion in the High Court46 which has now been resolved by the Court of Appeal in [page 12] Laywood & Rees v Holmes Construction Wellington Ltd.47 According to the Court of Appeal, a statutory demand for a debt under the Construction Contracts Act cannot be set aside on the basis of a set-off or counterclaim. The Court emphasised that it was addressing the issue in the context of an application to set aside a bankruptcy notice or a statutory demand, not an adjudication of bankruptcy or order to liquidate a company.48 The Court considered that bankruptcy notices and statutory demands are, in a practical sense, important enforcement mechanisms. Parties to construction contracts could refuse to pay an amount ordered by an adjudicator, and resist bankruptcy notices or statutory demands in relation to the debt, on the basis that they had a counterclaim, set-off or cross-demand. The effect of this would simply be to frustrate the purpose of the Construction Contracts Act by keeping the party in whose favour the adjudicator had ruled from its entitlement under the Construction Contracts Act. Similarly, in Browns Real Estate Ltd v Grand Lakes Properties Ltd the Court of Appeal held that “no set-off” provisions in contracts can be applied in applications under s 290(4) of the Act to prevent a company raising a counterclaim, set-off or cross-demand as a ground for setting aside a statutory demand. Just as in the Construction Contracts Act context, the efficacy of a no set-off contractual provision would be undermined if statutory demands could be set aside on the basis of a set-off, counterclaim or cross-demand that a commercial party had by contract expressly agreed could not be raised. The Court of Appeal observed that in such a situation, there seems no reason in principle why statutory demands and bankruptcy notices should not be available as debt enforcement measures when other enforcement measures would be (including summary judgment). An inability to meet the statutory demand, without recourse to the set-off or counterclaim which it is prevented from raising, would mean that the company is insolvent: that is, it would be unable to pay its debts as they become due in the normal course of business. A contractual no set-off provision would normally result in the court’s discretion being

exercised against an applicant if the sole ground for an application to set aside a statutory demand was the existence of a set-off, counterclaim or cross-demand which a party had expressly agreed could not be raised. The Court considered that commercial parties should be required to honour the bargain they have made, absent other grounds that tell against [page 13] the recognition of a statutory demand.49 When there is a no set-off provision, the party applying to set aside the demand has the onus of persuading the court that it should depart from the general approach set by the Court of Appeal.50

1.7

Demand Ought to be Set Aside on Other Grounds: s 290(4)(c)

The Court of Appeal examined the power to set aside a statutory demand under s 290(4)(c) in Commissioner of Inland Revenue v Chester Trustee Services Ltd.51 The Court of Appeal accepted that s 290(4)(c) gives the court jurisdiction to set aside a statutory demand even though a company is unable to pay its debts, and is therefore insolvent. But like any statutory discretion, the s 290(4)(c) discretion must be exercised in conformity with the purposes of the measure by which it is conferred. Use of the exceptional power must be confined to cases which clearly justify departure from the fundamental principle that insolvency should bring the end of a company’s existence.52 Tipping J said, at 397: If the focus is on the justice of the particular case the discretion must always be exercised on a principled basis and not on some ad hoc perception of what individual justice might require. All cases involving s 290(4)(c) must in the end come down to a judgment by the court as to whether the creditor’s prima facie entitlement is outweighed by some factor or factors making it plainly unjust for liquidation to ensue. The ground advanced by the insolvent company must be sufficiently compelling to overcome the general policy of the Act with regard to insolvent companies.

Guidance as to how the s 290(4)(c) discretion is to be exercised is given by the structure of s 290. Section 290(5) provides that a statutory demand is not to be set aside on the grounds of a defect or irregularity unless the court considers substantial injustice would be caused by the failure to set aside the demand. Because s 290(4)(a) arises where the debt is disputed, and s 290(4)(b) justifies the setting aside of a statutory demand when by reason of a counterclaim or set-

off the amount that is truly owed is less than the statutory minimum, defects or irregularities which mean that the failure to set aside the demand will cause substantial injustice to the company or other persons, may justify the setting aside of a statutory demand only if they come within s 290(4)(c). It is a necessary implication from the enactment of s 290(5) that such serious defects must come within the broad language of s 290(4)(c).53 [page 14] An exercise of discretion under s 290(4)(c) must take account of the wishes of any outstanding creditor.54 The wishes of the majority of creditors may require a statutory demand to be set aside.55 It will also be legitimate for the court to use s 290(4)(c) to prevent an abuse of the statutory demand process, so that the court may set aside the demand where a statutory demand is being used for a purpose that is not contemplated by the Companies Act, notwithstanding the company’s insolvency.56 The Court of Appeal in Chester Trustee Services overturned the High Court decision to set aside the demand. The Court considered that the combination of the presumptive desirability of liquidation of a company that had incurred debt through trading, and of the position of the beneficiaries under the continuing trusts (who were infants who the Court saw itself as having a responsibility to protect), outweighed the cost of the conveyancing necessary to remove those trusts from Chester’s hands.57 Another circumstance in which the courts have applied s 290(4)(c) is where the dispute has arisen in the employment context. The courts have held that a concern about solvency should not circumvent the normal process for resolving employment disputes and the demand ought to be set aside on other grounds to enable the full issues relating to the employment contract between the parties to be determined in the appropriate venue.58 There is also a line of cases that have accepted that if the recipient of a statutory demand satisfies the court that it is arguably solvent, the demand should be set aside.59 However, the Court of Appeal has expressed the view in AMC Construction Ltd v Frews Construction Ltd that such cases are likely to be extremely rare. According to the Court, if there is no dispute as to the company’s liability, so that paras (a) or (b) cannot be invoked, it is difficult to imagine

circumstances in which the company should be able to avoid [page 15] paying a debt, merely by proving that it is able to pay that debt. If the debt is indisputably owing, then it should be paid. If the company simply refuses to pay, without good reason, it should not be able to avoid the statutory demand process by proving, at the statutory demand stage, that it is solvent. The demand should be allowed to proceed. If it is not met, and an application for liquidation is filed, in reliance on the presumption in s 287(a) that the company is unable to pay its debts, then the company will have an opportunity on the liquidation application to rebut that presumption.60

1.8

Residual Discretion to Refuse an Application to Set Aside a Statutory Demand

The court has a discretion whether to grant an application to set aside a statutory demand, even if it is satisfied as to the existence of one of the grounds for the exercise of the court’s power under s 290(4) of the Act. This has occurred, for example, where although there was an arguable counterclaim, the respondent was found to have embarked on a course of trading with the deliberate intention of creating the situation before the court.61 The courts have also found that even if a substantial dispute or set-off is found to exist so as to justify setting aside the statutory demand, the court may still order the appointment of a liquidator if it has evidence before it suggesting that the relevant company is unable to pay its debts.62 The Court of Appeal has, however, indicated that it will be a rare case where, once the grounds for setting aside under s 290 are made out, the Court will refuse the application in the exercise of its residual discretion.63 ____________________ 1.

For this purpose (as opposed to applying for the appointment of a liquidator) it appears that “creditor” may not include an assignee of only part of a debt: Re Steel Wing Co Ltd [1921] 1 Ch 349. The term does not include a contingent or prospective creditor, who must prove insolvency by other means.

2.

Re Bryant Investments Co Ltd [1974] 2 All ER 683, [1974] 1 WLR 826.

3.

If the defence provided for in s 94B or the equitable defence of change of position may be available

to the recipient, that may mean that there is a substantial dispute which would justify the setting aside of the statutory demand, but it would not disentitle the payer from using the statutory demand procedure on the basis that the recipient’s obligation to repay is a “debt due”: OPC Managed Rehab Ltd v Accident Compensation Corporation [2006] 1 NZLR 778, (2005) 17 PRNZ 883 (CA) at [49] and [54]. 4.

Re Prime Link Removals Ltd [1987] 1 NZLR 510, (1987) 3 NZCLC 100,218 (involving a claim for damages for breach of contract which had not been converted to a judgment debt); Warren Reid Wholesale Ltd v Custom Fleet (New Zealand) Ltd HC Auckland M2089-IM00, 23 August 2001; IBS Group Ltd v Nichibo Japan Trading Co Ltd HC Auckland M1322-IM02, 26 June 2003 at [39].

5.

The following cases have held that a statutory demand must be served in accordance with s 387: Delta Installations Ltd v Hamilton Joinery Ltd (2003) 16 PRNZ 814; Rakino Publishing Ltd v L E Chisholm Ltd HC Auckland CIV2007-404-6244, 15 April 2008; Apparel By Design Ltd v Team Kiwi Racing Ltd HC Auckland CIV-2007-404-5790, 21 December 2007. Contrast Arzan Investments Ltd v Beresford Apartments Ltd (2003) 16 PRNZ 825 which held that service under s 388 will suffice. McGechan on Procedure (looseleaf ed, Brookers) identifies the latter as the preferable view because a statutory demand does not have to be filed in the court: HR31.11.05.

6.

Re Samoana Press Co Ltd (1988) 4 NZCLC 64,119 (no service of notice under s 218 of the Companies Act 1955 and petition). See Bridon NZ Ltd v Tent World Ltd [1992] 3 NZLR 725 and Charter Financial Services Ltd v STL Linehaul Ltd HC Wellington M433/98, 25 February 1999 (where documents not brought to company’s attention). See also Re Young Development & Construction Ltd (1983) 1 NZCLC 98,671: lack of proof of proper service (of petition to wind up company) is able to be remedied subsequently.

7.

ASB Bank Ltd v Info-Touch Technologies Ltd (2000) 8 NZCLC 262,332; Apparel By Design Ltd v Team Kiwi Racing Ltd HC Auckland CIV-2007-404-5790, 21 December 2007 at [25]–[28]. See also WSI (NZ) Ltd (in rec & liq), Bond Cargo Ltd v Chilcott (1999) 8 NZCLC 262,065.

8.

Commissioner of Inland Revenue v Chester Trustee Services Ltd [2003] 1 NZLR 395 at [57].

9.

Companies Act 1993, s 290(6).

10.

Commissioner of Inland Revenue v Chester Trustee Services Ltd [2003] 1 NZLR 395 at [57].

11.

Pioneer Insurance Co Ltd v White Heron Motor Lodge Ltd [2009] NZCCLR 14, (2008) 19 PRNZ 286 (CA) at [54].

12.

Efs One Ltd v Merlot Homes Ltd HC Auckland CIV-2008-404-1440, 25 July 2008.

13.

Pioneer Insurance Co Ltd v White Heron Motor Lodge Ltd [2009] NZCCLR 14, (2008) 19 PRNZ 286 (CA) at [24].

14.

Link Electrosystems Ltd v GPC Electronics (New Zealand) Ltd (2007) 18 PRNZ 946 (CA). See also Roma Properties Ltd v Commissioner of Inland Revenue [2003] 1 NZLR 9 at [35]. A similar approach was taken in Commissioner of Inland Revenue v Central Equipment Co Ltd (2006) 22 NZTC 19,891 at [29] where the Court stated that “it cannot be improper for a creditor to make a statutory demand on a debtor in order to apply pressure to realise assets to pay a due debt. It will only be improper if some ulterior purpose that is improper and which might amount to an abuse of the court’s processes that the court would be justified in setting a statutory demand aside”.

15.

See discussion by A Beck in “Editorial: Statutory demands and debt-collecting” [2008] CSLB 11. See also McWilliam Consulting Group Ltd v Keith Ussher Architecture Services Ltd [2012] NZHC 33, where increased costs were awarded on the basis that a statutory demand was improperly issued.

16.

Silverpoint International Ltd v Wedding Earthmovers Ltd HC Auckland CIV2007-404-104, 30 May 2007 at [76], followed in Patents Act 1953 context in Blossom Wool Ltd v J W Piper HC Auckland CIV-2008-404-162, 30 June 2008.

17.

Volcanic Investments Ltd v Dempsey & Wood Civil Contractors Ltd (2004) 11 TCLR 256, followed by Freemont Design & Construction Ltd v Natures View Joinery Ltd HC Hamilton CIV-2006-419269, 26 July 2006.

18.

See discussion and criticism by H Thomas “Transactions” [2007] NZLJ 339 at 340–343; S Robertson “Is Volcanic extinct or merely dormant?” NZ Lawyer (New Zealand, 3 August 2007) at 18.

19.

Laywood & Rees v Holmes Construction Wellington Ltd [2009] 2 NZLR 243 (CA) at [62]. See also Browns Real Estate Ltd v Grand Lakes Properties Ltd [2010] NZCA 425, (2010) 20 PRNZ 141 at [16], discussed below at para 1.6.

20.

Medisys Ltd v Getinge Castle Ltd HC Auckland M1426-IM00, 9 February 2001 at [12(b)]; Resource & Hire Ltd v Page Vivian Motors Ltd HC Wellington CIV2008-454-416, 7 November 2008 at [68]– [71].

21.

AMC Construction Ltd v Frews Construction Ltd (2008) 19 PRNZ 13 (CA) at [7].

22.

Arzan Investments Ltd v Beresford Apartments Ltd (2003) 16 PRNZ 825; Ingleburn Developments Ltd v BRC Ltd (2008) 10 NZCLC 264,325.

23.

Livi Investments Ltd v Butler Gilpat Ltd (1998) 11 PRNZ 680; Timberworld Ltd v Tanner Sawmills Ltd (2002) 9 NZCLC 262,983; Ingleburn Developments Ltd v BRC Ltd (2008) 10 NZCLC 264,325 at [12] and [29]–[32], declining to follow Timbalok New Zealand Ltd v Sky-Hi Roofing Ltd (1996) 10 PRNZ 271 where defective service of an application to set aside a statutory demand was cured under High Court Rule 11 [the equivalent to R 1.9 of the 2008 High Court Rules].

24.

Kensington Park Properties Ltd v HEB Smithbridge Ltd HC Auckland CIV-2008404-1444, 23 May 2008.

25.

Wealand International (NZ) Ltd v Complete First Aid Supplies Ltd HC Auckland CIV-2008-4041371, 24 April 2008.

26.

Companies Act 1993, s 291(2).

27.

Birchfield Developments Ltd v Kent Prier Real Estate Ltd (1999) 8 NZCLC 261,889.

28.

For this purpose, time begins to run from the first minute of the day following the date of service: Queen City Residential Ltd v Patterson Co-Partners Architects Ltd [1995] 3 NZLR 307, (1995) 7 NZCLC 260,898.

29.

Companies Act 1993, s 290(2).

30.

Peace Industries 2007 Ltd v Commercial Factors Ltd HC Auckland CIV-2007404-8047, 19 May 2008.

31.

Hartner Trustee Ltd v Colin MacKenzie Plastering Ltd (2001) 15 PRNZ 318; Ingleburn Developments Ltd v BRC Ltd (2008) 10 NZCLC 264,325 at [13].

32.

Land Rover Parts Ltd v Forward Specialties Ltd HC Auckland CIV-2008404-3242, 4 July 2008 at [7]; Ingleburn Developments Ltd v BRC Ltd (2008) 10 NZCLC 264,325 at [14].

33.

Kensington Park Properties Ltd v HEB Smithbridge Ltd HC Auckland CIV-2008404-1444, 23 May 2008 at [6]–[8].

34.

Queen City Residential Ltd v Patterson Co-Partners Architects (No 2) (1995) 7 NZCLC 260,936; Silverpoint International Ltd v Wedding Earthmovers Ltd HC Auckland CIV-2007-404-104, 30 May 2007 at [18]. That formulation was approved by the Court of Appeal in United Homes (1988) Ltd v Workman [2001] 3 NZLR 447 at 451–452. The formulation “genuine and substantial dispute” was used in Covington Railways Ltd v Uni-Accommodation Ltd [2001] 1 NZLR 272 at [11].

35.

Paramoor Eleven Ltd v Pramb Wong Enterprises Ltd HC Auckland M146094, 10 April 1995; Commissioner of Inland Revenue v Central Equipment Co Ltd (2006) 22 NZTC 19,891 at [29]. For the threshold to be applied see also Pioneer Insurance Co Ltd v White Heron Motor Lodge Ltd [2009]

NZCCLR 14, (2008) 19 PRNZ 286 (CA) at [19]. 36.

United Homes (1988) Ltd v Workman [2001] 3 NZLR 447 (CA) at [34].

37.

Androcles Investments Ltd v Highway Publications Ltd HC Christchurch M455/00, 14 February 2001 at [6]; Carpet Plus 2003 Ltd v A Team Flooring Specialist Ltd HC Auckland CIV-2008-404-4725, 19 January 2009 at [4]; Xo Ltd v Bartermen Turkey SADV HC Wellington CIV-2009-485-166, 2 June 2009 at [13].

38.

See discussion at para 8.1, Court’s jurisdiction to stay liquidation proceedings under High Court Rule 31.11.

39.

Covington Railways Ltd v Uni-Accommodation Ltd [2001] 1 NZLR 272 (CA) at [11].

40.

Body Corp S 66289 v Rua Developments Ltd HC Hamilton M328/96, 24 April 1998; Alfex Doors & Windows v Alutech Windows & Doors Ltd (2001) 16 PRNZ 963 (CA) at [15].

41.

John Shearer v Gehl Co (1995) 18 ACSR 780 at 787 (provided the claim is genuine and equal to or in excess of the sum demanded).

42.

Re a Bankruptcy notice [1934] 1 Ch 431 at 438; Re Brink, ex parte Commercial Banking Co of Sydney Ltd (1980) 30 ALR 433, (1980) 44 FLR 135; Re Smith, ex parte Chesson (1992) 106 ALR 359 (affirmed on appeal, (1992) 35 FCR 594) and John Shearer Ltd v Gehl Co (1995) 18 ACSR 780 at 786–787.

43.

Industrial Group Ltd v Bakker [2011] NZCA 142, (2011) 20 PRNZ 413 at [24]–[25]. The test may be compared with the principles developed in fields such as applications to remove caveats, leave to appeal an arbitrator’s award and opposition to summary judgment. The tight time constraints distinguish the s 290 discretion from that exercised on a summary judgment application, where the presence of complex legal issues is not necessarily a bar to a remedy.

44.

Covington Railways Ltd v Uni-Accommodation Ltd [2001] 1 NZLR 272 (CA) at 274 citing Bryanston Finance Ltd v De Vries (No 2) [1976] Ch 63 at 78 and Taxi Trucks Ltd v Nicholson [1989] 2 NZLR 297 at 299.

45.

Phoenix Organics Ltd v RD2 International Ltd (2003) 9 NZCLC 263,380 at [26]–[36].

46.

According to Silverpoint International Ltd v Wedding Earthmovers Ltd HC Auckland CIV-2007-404104, 30 May 2007 it does qualify, but the effect of Volcanic Investments Ltd v Dempsey & Wood Civil Contractors Ltd (2005) 18 PRNZ 97, (2005) 11 TCLR 256 and Freemont Design & Construction Ltd v Natures View Joinery Ltd HC Hamilton CIV-2006-419-269, 26 July 2006, is that it does not. See discussion and criticism by H Thomas “Transactions” [2007] NZLJ 339 at 340–343; S Robertson “Is Volcanic Extinct or Merely Dormant?” NZ Lawyer (New Zealand, 3 August 2007) at 18.

47.

Laywood & Rees v Holmes Construction Wellington Ltd [2009] 2 NZLR 243 at [61]–[63]. Leave to appeal to Supreme Court refused on grounds that Court of Appeal judgment compelling and proposed appeal had no prospect of success: Laywood v Holmes Construction [2009] 2 NZLR 243. Section 79 of the Construction Contracts Act provides for the court not to give effect to counterclaims, set-off or cross-demands (other than a set-off of a liquidated amount) in proceedings for recovery of certain debts under the Construction Contracts Act if judgment has been entered for that amount and there is no dispute between the parties in relation to the claim for that amount.

48.

The Court referred to AMC Construction Ltd v Frews Construction Ltd (2008) 19 PRNZ 13 at [7] in this context, discussed at para 1.7 below.

49.

Browns Real Estate Ltd v Grand Lakes Properties Ltd [2010] NZCA 425, (2010) 20 PRNZ 141.

50.

Bountiful Holdings Ltd v University of Auckland [2012] NZHC 1076.

51.

Commissioner of Inland Revenue v Chester Trustee Services Ltd [2003] 1 NZLR 395.

52.

Commissioner of Inland Revenue v Chester Trustee Services Ltd [2003] 1 NZLR 395 at [48].

53.

Commissioner of Inland Revenue v Chester Trustee Services Ltd [2003] 1 NZLR 395 at [57]. See also Pioneer Insurance Co Ltd v White Heron Motor Lodge Ltd [2009] NZCCLR 14, (2008) 19 PRNZ 286 (CA) at [21].

54.

Commissioner of Inland Revenue v Chester Trustee Services Ltd [2003] 1 NZLR 395 at [55].

55.

Commissioner of Inland Revenue v Chester Trustee Services Ltd [2003] 1 NZLR 395 at [58]–[59].

56.

Commissioner of Inland Revenue v Chester Trustee Services Ltd [2003] 1 NZLR 395 at [60].

57.

Commissioner of Inland Revenue v Chester Trustee Services Ltd [2003] 1 NZLR 395 at [84].

58.

Bioneutral Laboratories Ltd v Novelle HC Auckland CIV-2007-404-4368, 21 May 2008 at [35]–[36] citing Willis v R A Shaw & Associates Ltd HC Auckland M482-91, 15 July 1991; Arundel v Designers International (1994) 7 PRNZ 657; Landsdown Run Corp Ltd v Brodie (1998) 12 PRNZ 141, and Fletcher Homes Ltd v Ellis HC Auckland M471-IM99, 23 July 1999.

59.

Rocklands Park Ltd v Logan Samuel Ltd (2004) 9 NZCLC 263,535 at [11]; Medisys Ltd v Getinge Castle Ltd HC Auckland M1426-IM00, 9 February 2001 at [12]; Resource & Hire Ltd v Page Vivian Motors Ltd HC Wellington CIV-2008-454-416, 7 November 2008) at [68]–[71]. As noted at para 1.2, the reasoning in the latter two cases was based on the view that the purpose of a statutory demand is to create the basis for a presumption of insolvency, not to recover commercial debts. The Court of Appeal has more recently taken the view that obtaining payment of a debt is a purpose of the statutory demand procedure.

60.

AMC Construction Ltd v Frews Construction Ltd (2008) 19 PRNZ 13 at [7].

61.

See, for example Auravale Industries Ltd v Shalimar Knitwear Ltd (1999) 8 NZCLC 262,074.

62.

Home Pride Ltd v Feature Furniture Ltd HC Auckland CIV-2007-404-610, 24 July 2007 at [55].

63.

Primary Health Remuera Ltd v Avoca Residential Construction Ltd (2004) 9 NZCLC 263,647 (CA) at [42]; Alfex Doors & Windows v Alutech Windows & Doors Ltd (2001) 16 PRNZ 963 (CA) at [14]. See also Home Pride Ltd v Feature Furniture Ltd HC Auckland CIV-2007-404-610, 24 July 2007 at [56].

[page 16]

CHAPTER 2 Interim Liquidators 2.1

Appointment of Interim Liquidator

Section 246 of the Act provides that the court may appoint an interim liquidator if an application has been made to the court to put a company into liquidation, and if the court is satisfied that it is necessary or expedient for the purpose of maintaining the value of assets owned or managed by the company. High Court Rule 31.23 provides that the application may be made by anyone who is entitled to apply for the appointment of a liquidator under s 241(2)(c). Section 246(1) makes it clear that the object of an interim liquidation order is to maintain the value of assets owned or managed by the company, pending resolution of the liquidation proceeding. That objective is consistent with the need for an interim liquidator to preserve assets pending disposition of the liquidation proceeding.1 The appointment of an interim liquidator is a significant step. The courts have noted that the appointment of an interim liquidator “trenches across directors’ powers, effects a major irruption into the company’s business and to a large degree, amounts to a pre-judgment on the winding-up application itself”.2 In order to appoint an interim liquidator, an application must be made for an order that the company be put into liquidation, there must be a likelihood that the application to liquidate will succeed, and there must exist a need for interim control.3 The court must be satisfied that there is a need for urgency.4 [page 17] The controlling principle appears to be that such liquidators will be appointed if it is thought necessary to protect private interests of creditors, or where the public interest requires an appointment; for example, protection of investors

where money has been solicited from the public.5 In Robert Bryce & Co Ltd v Chicken & Food Distributors Ltd,6 Eichelbaum CJ developed a three-stage test for whether there is a need for the appointment of an interim liquidator to assume interim control:7 the court must be satisfied that the company’s assets are in jeopardy, consider whether the status quo should be maintained, and determine whether the interests of creditors are safeguarded. The Robert Bryce criteria have been described as a “useful litmus test”, to be regarded as a framework for analysis, rather than as stating exhaustively relevant considerations. If any other criteria were to exist that would impact upon the need to maintain value of the company’s assets pending determination of the substantive liquidation proceeding, they ought to be taken into account. The weight to be given to each factor will vary from case to case.8 Under s 246, an order must either be “necessary” or “expedient”. The word “expedient” conveys a relatively low threshold.9 The court must not appoint an interim liquidator of a company in administration if the court is satisfied that it is in the interests of the company’s creditors for the company to continue in administration rather than have an interim liquidator appointed.10 As with a liquidator, an interim liquidator can be a named person or an Official Assignee. If a company is not in fact put into liquidation, the court has no power to appoint an interim liquidator, and any existing appointment will come to an end.11

2.2

Powers of Interim Liquidator

Section 246(2) of the Act provides that an interim liquidator has the rights and powers of a liquidator to the extent necessary, or desirable, to maintain the value of assets owned or managed by the company. Under s 246(3), [page 18] the court may limit the rights and powers of an interim liquidator in such manner

as it thinks fit. Under the unamended Companies Act 1955, the only power conferred upon a provisional liquidator was the power to “take into his custody, or under his control, all the property and things in action to which the company is or appears to be entitled”.12 In one case it was held that this meant that the provisional liquidator’s duty was to preserve the status quo with the least possible harm to all concerned, and that the provisional liquidator had no jurisdiction to commence proceedings to challenge the validity of debentures.13 The interim liquidator appears to have more extensive powers under the 1993 Act. To maintain the value of assets it may be necessary to trade them, which goes beyond merely taking control or custody of them. This is consistent with the Law Commission’s explanation of the provision: “[t]he use of ‘value’ clarifies that the liquidator is not required to preserve assets if their value is declining; he or she may, for example sell perishable goods, thereby preserving their value”.14 The powers of the interim liquidator are still limited in comparison with those of the liquidator. So, for example in Re New Zealand Childflight Charitable Trust Inc,15 the air ambulance service run by the trust applied initially for the appointment of an interim liquidator, but changed to an application for the appointment of a permanent liquidator. This was due to concern that the provisions of s 246(2) of the Act limit the powers of an interim liquidator to those powers which are necessary or desirable to maintain the value of the assets of the entity put into liquidation, which may have made it difficult for the liquidator to actually carry on the ambulance service. While the Act specifies at s 248(1)(b) that the directors cease to have powers, functions and duties other than those required or permitted to be exercised by Part 16 with effect from the commencement of liquidation (that is, appointment of a liquidator), it is silent as to the directors’ powers on appointment of an interim liquidator. The English courts have held that once a provisional liquidator has been appointed, the powers of the directors to carry on the business are terminated, except for the power to oppose the liquidation application.16 The same must be the case in respect of the [page 19]

appointment of interim liquidators under the New Zealand Act if they are to be in a position to carry out their functions.17

2.3

Costs of Interim Liquidator

The interim liquidator’s costs are usually properly payable by the company concerned. Rule 31.28 of the High Court Rules provides that interim liquidators are entitled to be paid out of property of the company. Whether or not it was appropriate to bring the application for the appointment of an interim liquidator is of limited relevance in deciding how the interim liquidator should be paid.18 The principles applicable to liquidator’s remuneration have been applied to assessing the reasonableness of an interim liquidator’s costs.19 ____________________ 1.

Shen v An Ying International Financial Ltd HC Auckland CIV-2006-404-3088, 28 July 2006 at [12].

2.

Elders Pastoral v New Zealand Ostriches Ltd HC Rotorua M2-99, 8 February 1999 at 6; Tayawa v Iam Import Export & Distributor Ltd HC Wellington CIV-2008-485-764, 15 April 2008 at [27].

3.

Eden Crescent Ltd (in liq) v First City Trust No 2 Ltd HC Auckland CIV-2006404-3329, 21 September 2006 at [26].

4.

Tayawa v Iam Import Export & Distributor Ltd HC Wellington CIV-2008-485764, 15 April 2008 at [3].

5.

Shen v An Ying International Financial Ltd HC Auckland CIV-2006-404-3088, 28 July 2006 at [13].

6.

Robert Bryce & Co Ltd v Chicken & Food Distributors Ltd (1990) 5 NZCLC 66,648, [1991] MCLR 133.

7.

Following a Western Australian decision Re Jeans West (Distribution) Pty Ltd 139/90, 9 April 1990 WASC, per Master Ng.

8.

Shen v An Ying International Financial Ltd HC Auckland CIV-2006-404-3088, 28 July 2006 at [15].

9.

Carter Holt Harvey Ltd v Timbalock New Zealand Ltd (1997) 11 PRNZ 435 at 438; Eden Crescent Ltd (in liq) v First City Trust No 2 Ltd HC Auckland CIV-2006-404-3329, 21 September 2006 at [47].

10.

Companies Act 1993, s 239ABW.

11.

Tayawa v Iam Import Export & Distributor Ltd HC Wellington CIV-2008-485764, 15 April 2008 at [3].

12.

Companies Act 1955, s 238 (unamended).

13.

Re Chateau Hotels Ltd [1977] 1 NZLR 381. See also Re Hammersmith Town Hall Co (1877) 6 Ch D 112 where the provisional liquidator was appointed to take possession of and protect the assets of the company, but was not to distribute them without a further order from the court. In Re Alexandra Palace & Park Co Ltd (1889) 61 LT 325 the provisional liquidator could only carry out arrangements actually made and not new business of any kind without the leave of the court.

14.

Law Commission Company Law Reform and Restatement (NZLC R9, 1989) at [663].

15.

Re New Zealand Childflight Charitable Trust Inc HC Auckland CIV-2003-4044530, 21 August 2003.

16.

Re Mawcon Ltd [1969] 1 WLR 78, [1969] 1 All ER 188 at 192. Pennycuick J said “on the appointment of a provisional liquidator the powers of the directors to act as such are determined and they could not be revived so long as the provisional liquidator remained in office”. See also Re Union Accident Insurance Co Ltd [1972] 1 All ER 1105, [1972] 1 WLR 640.

17.

See the reference to the appointment of an interim liquidator trenching across director’s powers in Elders Pastoral v New Zealand Ostriches Ltd HC Rotorua M2/99, 8 February 1999 at 6; Tayawa v Iam Import Export & Distributor Ltd HC Wellington CIV-2008-485-764, 15 April 2008 at [27].

18.

GCA Legal Trustee (2004) Ltd v Consultant Management Services Ltd HC Dunedin CIV-2007-41256, 1 November 2007 at [28].

19.

Parbery v Heat Exchanger HC Christchurch CIV-2009-409-2624, 18 March 2010, involving the Official Assignee acting as interim liquidator. The principles applicable to liquidator’s remuneration are discussed at para 10.24 below.

[page 21]

PART 2 COMMENCEMENT OF A LIQUIDATION

[page 23]

CHAPTER 3 Appointment of a Liquidator 3.1

Procedure for Appointment of Liquidator

3.1.1

Means by which a liquidator may be appointed

A company is put into liquidation by the appointment of a liquidator.1 Liquidation commences on the date on which the liquidator is appointed.2 Section 241(2) provides that a liquidator may be appointed by: special resolution of those shareholders entitled to vote and voting on the question (s 242(2)(a));3 the board of the company upon the occurrence of an event specified in the company’s constitution (s 242(2)(b)); or the court (s 242(2)(c)). For a shareholders’ resolution to appoint a liquidator under s 241(2)(a) to be effective, the liquidator’s written consent to the appointment must be obtained prior to the passing of the resolution.4 A liquidator may be appointed to a company in administration by the court under s 241(2)(c), by resolution of the creditors at the watershed meeting,5 or at a meeting convened under s 239ADF to consider the termination of the deed of company arrangement.6 [page 24] The power to appoint a liquidator expressly includes the power to appoint two or more persons.7 Where more than one liquidator is appointed, those persons must act jointly, unless their appointment expressly provides otherwise.8 Regulation 36 of the Companies Act 1993 Liquidation Regulations 1994

provides that no defect or irregularity in the appointment of a liquidator shall invalidate any act done by the liquidator in good faith.

3.1.2

Applications to the court

An application to the court under s 214(2)(c) may be made by: the company, a director, shareholder or other entitled person; a creditor of the company (including any contingent or prospective creditor); the administrator (if the company is in administration); the Reserve Bank of New Zealand (in the case of a licensed insurer);9 the Financial Markets Authority (in the case of a financial markets participant); or the Registrar. Section 241(2)(c)(viii) provides for the court to appoint a liquidator for a company that has been removed from the New Zealand companies register once the company is restored to the register. An order putting a company into liquidation is also one of the orders available to a court on the application of a shareholder who considers that the company has acted towards them in an oppressive, unfairly discriminatory, or unfairly prejudicial manner under s 174(2)(g). An order for liquidation is seen as a last resort in the context of s 174.10 The procedure for making an application to the court to appoint a liquidator is set out in High Court Rules 31.3–31.5, and High Court Rule 31.9 provides for the advertisement of the application. The failure to seal and serve the order for liquidation under High Court Rule 31.32 does not render it invalid.11 Liquidation proceedings are by their nature accorded urgency and set down by the grant of a [page 25] first call date at the time they are filed. As a result, High Court Rule 31.7 excludes a number of general rules including the setting-down requirements.12

3.1.3

Restrictions on appointment of liquidator by shareholders or board

Section 241AA, which came into effect on 1 November 2007, introduced two new restrictions: where an application for appointment of a liquidator by the court has been filed (but not yet disposed of), a liquidator can only be appointed by special resolution of shareholders or the board of directors if the liquidator is appointed within 10 working days after service of the application on the company; if a liquidator is appointed by shareholders within that 10-day period, then the creditor who filed the application may apply to the court under s 283(4) for review of the appointment. The result of s 241AA is that voluntary liquidation is not an option from 10 days after an application to the court has been served, unless the applicant agrees to the appointment of the proposed liquidator. Section 241AA was included in the Companies Act 1993 to address a concern that the company may seek to pre-empt the court appointment by appointing a partisan liquidator.13 The 10-day period was included to address a concern that where a company’s financial position is precarious, the applicant creditor may be unwilling to consent to the appointment of a liquidator, and delays in obtaining a court hearing may substantially worsen the financial position of the company. The intention was that the provision would allow companies to take quick action to move into voluntary liquidation when necessary, while still preventing a company from delaying voluntary liquidation until shortly before the court hearing.14 In order to protect creditors where the company uses this provision to appoint a debtor-friendly liquidator within 10 days of service of the application, s 241AA(3) allows the creditor that filed the original application to apply to the court to have the appointment of the liquidator reviewed. Until the enactment of s 241AA, the only real opportunity for creditors to seek to replace a liquidator was at a creditors’ meeting under s 243, or by seeking removal for failure to comply with the liquidator’s duties under s 286.15 The court may therefore review the appointment of any liquidator appointed by the shareholders or the board of the company within 10 working days after the service of the creditor’s application. Section 283 has been interpreted as [page 26]

giving the court the power to appoint a different liquidator to the liquidator appointed pursuant to s 241AA(2).16 The question of whether an appointment of a liquidator outside the 10-day period is valid was addressed in Commissioner of Inland Revenue v Kecamaho Haulage Ltd,17 where the Court found that any shareholders’ resolution purporting to be passed in contravention of s 241AA(2) is of no effect. The Court expressed the obiter view that a liquidator appointed outside the 10-day period should enjoy the protection of reg 36 of the Companies Act 1993 Liquidation Regulations 1994, and that the liquidator will be entitled to claim remuneration under reg 35 if removed by the court on a review application.18 At the same time that s 241AA was introduced, s 239I(4) was also introduced. Section 239I(4) provides that where an application for appointment of a liquidator by the court has been filed, the company may only appoint an administrator if the administrator is appointed within 10 working days after service on the company of the application. The Select Committee recommended the inclusion of this section on the basis that in most cases it is likely that the person appointed as administrator of the company will become the liquidator, should the company go into liquidation. The Select Committee was concerned that companies facing likely liquidation may choose to go into voluntary administration first, and then appoint a debtor-friendly administrator, with the intention that this person will become a debtor-friendly liquidator.19

3.1.4

Commencement of liquidation to be recorded

Section 241A requires that both the date on which, and the time at which, the liquidator was appointed be recorded. This provision originated from a proposal of the Reserve Bank, and was intended to ensure that payments that have been completed on the same day, but prior to the time at which a liquidation commences, do not have to be unwound.20 Previous decisions where the failure of a shareholders’ resolution to specify the time at which the resolution was passed (that is, non-compliance with s 241A) resulted in the invalidity of the liquidator’s appointment21 have been superseded by the Court of Appeal decision in Rodewald v Aqua-Agriculture [page 27]

Farms Ltd.22 The Court of Appeal held that s 241A(1)(a) must be taken to be referring to the record constituted by the minute as signed by the chairperson, rather than to the text of the resolution, and which may have been passed by a means other than writing, and that it is sufficient compliance with the section for the chairperson to record in the minute the date and time at which the resolution was actually passed. A resolution validly passed could not subsequently become of no effect because the chairperson had omitted to record the operative time. In most instances, evidence would be available to establish the actual time of the resolution with some accuracy.23

3.2

Criteria for Appointment as Liquidator

The Companies Act 1993 does not provide a set of criteria which must be applied in determining who should be appointed as a liquidator. The court has a broad discretion in this issue. A matter of prime consideration is that the liquidator is independent and must be seen to be independent. Other fundamental prerequisites are competence, integrity and impartiality. The court will also wish to see that the interests of the persons concerned in the liquidation are best served by the appointment, and will have regard to wider public interest. The person who is appointed should not be disqualified from being a liquidator, having regard to s 280 of the Act.24 Taking into account the nature of the particular company and its assets and the complexity of the particular liquidation, the liquidator will need to have access to the resources necessary to conduct the liquidation and have the necessary experience to carry out the liquidation. The court will be influenced by the speed with which the liquidator is able to carry out the liquidation, and the liquidator’s familiarity with the company.25 [page 28] Although one of the court’s primary concerns will be the interests of the parties concerned in the liquidation, namely the creditors and the company’s shareholders, the court always retains a discretion as to whether it will act on the wishes of the creditors or shareholders.26 The person to be appointed (other than the Official Assignee) must consent in terms of s 282, and must also certify in writing that he or she is not disqualified

under s 280(1) from accepting appointment.27 Under s 280, each of the following are prohibited from being appointed as or acting as a liquidator: A body corporate. A person less than 18 years old. A creditor of the company in liquidation. A person who has, within the two years immediately preceding the commencement of the liquidation, been a shareholder, director, auditor or receiver of the company or of a related company. Unless all the creditors consent to his or her appointment,28 a person who has (or whose firm has) provided professional services to the company, or had a continuing business relationship (other than through the provision of banking and financial services) with the company, its majority shareholder, any of its directors, or any of its secured creditors within the two-year period before commencement of the liquidation.29 An undischarged bankrupt. A person who is, or who is deemed to be, subject to a compulsory treatment order made under Part 2 of the Mental Health (Compulsory Assessment and Treatment) Act 1992. A person in respect of whom an order has been made under s 30 or s 31 of the Protection of Personal and Property Rights Act 1988 (which sections relate to temporary orders to protect property and appointments of managers of property). [page 29] A person in respect of whom an order has been made under s 286(5) of the Act (which provides that the court may order that a person is prohibited from being a liquidator because of persistent or serious failure to comply with a relevant duty). A person in respect of whom an order has been made under s 37(6) of the Receiverships Act 1993 (which provides for the court to make a prohibition order in respect of a receiver shown to be unfit to act as a receiver). A person who would, but for the repeal of ss 188A, 189 or 189A of the 1955

Act, be prohibited from being a director or promoter of, or being concerned or taking part in the management of, a company within the meaning of that Act. A person who is prohibited from being a director, officer or promoter of, or being concerned or taking part in the management of, a company under ss 199K, 199L or 199N of the 1955 Act or who would be so prohibited but for the repeal of that Act. A person who is prohibited from being a director or promoter of, or being concerned or taking part in the management of, a company under ss 382, 383 or 385 of the Act, or of an incorporated or unincorporated body under the Securities Act 1978, the Securities Markets Act 1988 or the Takeovers Act 1993. A person who is prohibited under s 299(1)(c) of the Insolvency Act 2006 from acting as a director, or taking part directly or indirectly in the management of any company or class of company (s 299(1)(c) relates to a court order prohibiting a bankrupt, upon discharge, from being a director or manager of a company). A person who is prohibited from being an administrator or deed administrator under s 239ADV. Some of these restrictions mirror the restrictions relating to directors. Many of them are designed to ensure the independence of the liquidator. It is an offence to contravene these provisions, punishable on conviction by a fine not exceeding $10,000.30 The acts of a liquidator are valid, however, even if the person is not qualified to act as a liquidator.31 In the case of a solvent liquidation, a person who has provided professional services to a company, or had a continuing business relationship with the company or other relevant party, may be appointed as a liquidator.32 In a solvent liquidation, the company has sufficient assets to fully cover its debts, and is being liquidated only to distribute the company’s assets to shareholders. In such cases, there is no need for concern about the impartiality or debtor-friendliness of the liquidator. Section 286(4) provides that the court may remove a liquidator from office if they are or become disqualified under s 280. Alternatively, the court

[page 30] may order that they be appointed and act as liquidator notwithstanding the provisions of s 280.33

3.3

Replacement of a Liquidator

The office of the liquidator may become vacant as a result of the liquidator resigning, dying or becoming disqualified.34 Section 283 provides for the process to be followed in such circumstances. Section 283 places the responsibility on resigning liquidators to appoint a replacement for themselves, ensuring no vacuum in the office of liquidator. A liquidator who is not an Official Assignee may resign by appointing a successor, and sending written notice of the appointment to the Registrar for registration.35 With the approval of the Official Assignee for New Zealand, an Official Assignee may resign by appointing another Official Assignee as successor.36 Under s 283(4), the court may review the appointment of the successor on the application of the company, a shareholder or other entitled person, a director or a creditor, and may appoint someone who would have been eligible for appointment when the liquidator was first appointed. There are no criteria or guidelines in s 283 to assist the court in exercising its discretion to review the appointment of a successor to a liquidator and to appoint another person as liquidator. The fact that the court’s power of review arises when a successor is appointed does suggest, however, that it was considered important for the court to have this power when an existing liquidator exercises his or her right to appoint a successor under s 283(2) and that the court’s power exists in order to ensure that the successor appointed by a liquidator is a suitable person to hold that office.37 The court will need to take into account the provisions of the Companies Act 1993 that expressly or implicitly prescribe the qualifications and requirements for the appointment of persons as liquidators under the Act.38 In the normal case, an applicant for the review of the appointment of a liquidator under s 283(4) and for an order appointing a replacement liquidator would need to establish on the balance of probabilities that the person who had been appointed did not have the necessary qualifications, experience, independence

and impartiality, [page 31] and should be replaced by a person who did satisfy these requirements. In a case where the evidence was particularly strong and the need for an urgent decision was established, the court might be persuaded to make orders on an application for an interim injunction, either with or without notice, if the relevant requirements of the High Court Rules and applicable authorities were met.39 Where a vacancy occurs for a reason other than resignation, the Official Assignee for New Zealand must be notified in writing by the person vacating office (or, if that person is unable to act, his or her personal representative).40 As an interim measure, the Official Assignee for New Zealand may appoint a person to act as liquidator until a successor is appointed by the court.41 If there is a vacancy, or the Official Assignee has appointed a liquidator, the court can, on the application of the company, a shareholder or other entitled person, a director, a creditor, or the Official Assignee for New Zealand, appoint someone who would have been eligible for appointment when the liquidator was appointed.42 The appointee must notify the Registrar in writing within 10 working days of being appointed or being notified of his or her appointment.43 Section 283(9) requires the outgoing liquidator to provide all information and assistance to the successor as the successor reasonably requires in taking over the duties of liquidator.44 In addition, reg 34 of the Companies Act 1993 Liquidation Regulations 1994 provides for the outgoing liquidator to deliver books, records, documents and other property, claims and accounts, and records of the liquidation in his or her possession, or under his or her control, to the new liquidator. ____________________ 1.

Companies Act 1993, s 241(1). Either a named person or an Official Assignee for a named district can be appointed.

2.

Companies Act 1993, s 241(5).

3.

According to Ross v P J Heeringa Ltd [1970] NZLR 170 and Re Houto Farms Ltd (in liq) (1991) 4 PRNZ 625, [1991] MCLR 385, (1991) 5 NZCLC 67,184 the resolution cannot be rescinded. An application for termination of the liquidation would need to be made under s 250.

4.

Companies Act 1993, s 282; Voss v Layhatton Innovations Ltd HC Palmerston North CIV-2006-454685, 30 October 2006.

5.

The meeting of creditors called by the administrator to decide the future of the company and, in particular, whether the company and the deed administrator should execute a deed of company arrangement: Companies Act 1993, s 239AS.

6.

Companies Act 1993, ss 239ABU, 241(2)(c)(v).

7.

Companies Act 1993, s 240(2).

8.

Companies Act 1993, s 242.

9.

The Insurance (Prudential Supervision) Act 2010 provides specific grounds for the liquidation of a licensed insurer: see para 5.5 below. Section 240A of the Companies Act 1993 provides that Part 16 applies subject to Part 4 subpart 3 of the Insurance (Prudential Supervision) Act 2010. Part 4 subpart 3 provides for the Reserve Bank’s participation in the liquidation process, allows the court to reduce the value of a licensed insurer’s contracts of insurance and requires the liquidator to carry on the life insurer’s business in certain respects, determine the amount of the liability of the insurer to each policyholder under each contract of insurance and empowers him or her to apply to the court for approval of a scheme of transfer of the insurer’s business to another person.

10.

Marryat v PC Home Hire Ltd (2002) 9 NZCLC 263,033 at [73]. The s 174 remedy is discussed in Chapter 37 of Morison’s Company and Securities Law (looseleaf ed, LexisNexis).

11.

Southcom Ltd v Orbital Transport Solutions Ltd (2000) 8 NZCLC 262,181.

12.

Commissioner of Inland Revenue v Property Ventures Ltd HC Christchurch CIV2010-409-123, 16 April 2010 at [24].

13.

See Explanatory Note to Insolvency Law Reform Bill 2005; WHK (NZ) Ltd v Retail Media Ltd (in rec & liq) (2009) 19 PRNZ 527 at [22].

14.

Commerce Committee report on Insolvency Law Reform Bill 2005.

15.

See discussion by S Barker “Insolvency law reform: everything else you wanted to ask” [2008] CSLB 12.

16.

WHK (NZ) Ltd v Retail Media Ltd (in rec & liq) (2009) 19 PRNZ 527 at [24]–[26]. See para 3.3 below for the principles to be applied on a review of such an appointment.

17.

Commissioner of Inland Revenue v Kecamaho Haulage Ltd (2008) 23 NZTC 21,889, (2008) 10 NZCLC 264,370.

18.

See discussion at [30]–[31] of Commissioner of Inland Revenue v Kecamaho Haulage Ltd (2008) 23 NZTC 21,889, (2008) 10 NZCLC 264,370.

19.

Report of Commerce Committee on Insolvency Law Reform Bill.

20.

Reserve Bank of New Zealand Payments Finality: Proposed Changes to Insolvency Law (August 1996) at [1], [11], [12] and [18]–[20]; Commerce Committee Report on Banking and Insolvency (Netting and Payments Finality) Bill (November 1998).

21.

Flightline Aviation Ltd v Mason Air Ltd (2001) 9 NZCLC 262,463; Re Nikau Enterprises Ltd (in liq) (2001) 9 NZCLC 262,751.

22.

Rodewald v Aqua-Agriculture Farms Ltd [2002] 3 NZLR 501.

23.

See also Voss v Layhatton Innovations Ltd HC Palmerston North CIV-2006-454685, 30 October 2006, where the Court was willing to treat s 241A as effectively complied with where the time at which the shareholders’ resolution was passed could be proved to the satisfaction of the Court.

24.

Flynn v McCallum HC Tauranga CIV-2005-470-611, 17 December 2009 at [128]; Hung v Parts Imports Co Ltd HC Auckland CIV-2007-404-3902, 19 May 2008 at [16]. See also Esoon Ltd v Grieve (2007) 10 NZCLC 264,277 at [16] and [23(d)] for the requirement of impartiality; and Fisher International Trustees Ltd v Waterloo Buildings Ltd (in liq) HC Auckland CIV-2009-404-6640, 12

November 2009 at [21] as to independence and public interest. 25.

Jacobsen Creative Surfaces Ltd v Smith City Ltd [1994] 1 NZLR 128 cited in relation to the 1993 legislation in McPherson v Wespap Ltd HC Rotorua M47/02, 6 April 2003 at [16]; Fisher International Trustees Ltd v Waterloo Buildings Ltd (in liq) HC Auckland CIV-2009-404-6640, 12 November 2009 at [20]. If an interim liquidator has been appointed and that person has become familiar with the affairs of the company that person may be appointed even if not supported by the majority of creditors: Re W G Williams Pty Ltd (1980) 5 ACLR 66. Where the actions of previous liquidators will need to be reviewed, the court is likely to prefer a relatively senior liquidator: Esoon Ltd v Grieve (2007) 10 NZCLC 264,277 at [23(d)].

26.

Flynn v McCallum HC Tauranga CIV-2005-470-611, 17 December 2009 at [128]; Re Johannisberg Land and Gold Trust Co [1892] 1 Ch 583.

27.

Companies Act 1993, s 280(4).

28.

Companies Act 1993, s 280(1A).

29.

The court will decide in the circumstances of each case whether there is such a relationship, and whether it is of such a nature and degree that a person should not be appointed. The court will have particular regard to whether the person or persons seeking appointment (or continuation of an appointment) have a direct relationship or whether it is merely by virtue of their involvement in a firm. It will clearly be a relevant consideration whether or not any other member of the firm could have a role in the decisions or administration of the liquidation. See Re Joeleen Enterprises Ltd, Re Blanchett HC New Plymouth CIV-2008-443-485, 3 October 2008 at [15]. See also Re Rapson Holdings Ltd HC Auckland CIV2010-404-2319, 26 April 2010. Whether a liquidator will be able to continue to act despite such a relationship depends on whether his or her independence or ability to carry out its task as liquidator independently, professionally and effectively is compromised: Re Huntleigh Downs Ltd HC Wellington CIV-2009485-1498, 11 August 2009.

30.

Companies Act 1993, s 280(3).

31.

Companies Act 1993, s 281.

32.

Companies Act 1993, s 280(1)(ca) and (cb).

33.

For recent examples, see Re Otuwhero Estate Wines Ltd HC Christchurch CIV2010-409-2069, 20 September 2010, and Re Rapson Holdings Ltd HC Auckland CIV-2010-404-2319, 26 April 2010. See [9] for precedents for granting leave for applications under s 280 or s 286 to be made by originating application, without notice in proceedings for appointment of a liquidator. See also para 10.9 below.

34.

Companies Act 1993, s 283(1).

35.

Companies Act 1993, s 283(2).

36.

Companies Act 1993, s 283(3).

37.

Fisher International Trustees Ltd v Waterloo Buildings Ltd (in liq) HC Auckland CIV-2009-4046640, 12 November 2009 at [15].

38.

Discussed at para 3.2 above. Fisher International Trustees Ltd v Waterloo Buildings Ltd (in liq) HC Auckland CIV-2009-404-6640, 12 November 2009 at [16].

39.

Fisher International Trustees Ltd v Waterloo Buildings Ltd (in liq) HC Auckland CIV-2009-4046640, 12 November 2009 at [25].

40.

Companies Act 1993, s 283(5).

41.

Companies Act 1993, s 283(6).

42.

Companies Act 1993, s 283(7).

43.

Companies Act 1993, s 283(8).

44.

Companies Act 1993, s 283(9).

[page 32]

CHAPTER 4 Appointment of Liquidator by Court 4.1

Persons Who May Apply to Appoint a Liquidator

4.1.1

Applications by creditors

Prima facie, every creditor is entitled to make an application to appoint a liquidator even though it may appear that nothing will be available for unsecured creditors.1 Section 240(1) defines the term “creditor” to mean a person who, in a liquidation, would be entitled to make a claim in accordance with s 303 that a debt is owing to that person by the company. Section 303 provides that any debt or liability, present or future, certain or contingent, whether an ascertained debt or liability or a liability for damages, may be admitted as a claim against a company in liquidation. Section 240(1) specifies that the term “creditor” includes a secured creditor only: for the purposes of s 241(2)(c) (application for appointment of liquidator), s 247 (application for court to stay or restrain certain proceedings against company), s 250 (application for termination of liquidation), and s 289 (making a statutory demand); or to the extent of the amount of any debt owing to the secured creditor in respect of which the secured creditor claims under s 305 of the Act as an unsecured creditor. [page 33] The creditor must be a creditor at the date when the application is presented.2 A creditor whose debt is genuinely disputed may not qualify as a creditor, and

therefore have insufficient status to make an application.3 An assignee of a debt may apply for the appointment of a liquidator.4 The debt and the right to proceed under the application may be assigned.5 The requirements of High Court Rule 31.24, which provides for the addition and substitution of plaintiffs in liquidation proceedings, would need to be met. The court may, however, in its discretion decline the application of a creditor who has acquired that status for some ulterior motive while the proceedings are pending.6 Creditors wishing to join as a plaintiff (including creditors to whom a debt has been assigned) have two options under the High Court Rules. They may make use of the automatic procedure provided by High Court Rule 31.24(2) for becoming a plaintiff by filing the required documents no later than two working days before the day appointed for the hearing; or if they have filed an appearance in compliance with High Court Rules 31.18 and 31.19, or in accordance with an order under High Court Rules 31.20 and 31.22, or by special leave, they may apply orally under High Court Rule 31.24(4) on the day appointed for the hearing, if no plaintiff wishes to proceed on that day. If neither procedure has been followed there is no opportunity for creditors to become a plaintiff in the proceeding later, although they can commence their own separate proceeding. In the latter event, the court has a discretion to permit consolidation under High Court Rule 31.25.7

4.1.2

Applications by contingent and prospective creditors

Section 288(5) provides that an application for an order that a company be put into liquidation on the ground that it is unable to pay its debts may be made by a contingent or prospective creditor, only with leave of the court, and that the court may give such leave only if it is satisfied that a prima facie case has been made out that the company is unable to pay its debts. [page 34] An applicant for leave under s 288(5) of the Act must therefore establish that: it is a contingent or prospective creditor; and it has a prima facie case that the defendant is unable to pay its debts. The terms “contingent” and “prospective” creditors are not defined for the

purpose of the Act. The courts have provided the following definitions:8 a contingent creditor is a person towards whom under an existing obligation the company may, or will, become subject to a present liability upon the happening of some future event or at some future date;9 prospective creditors are persons in respect of whom there is a “real prospect” of their becoming creditors;10 a prospective creditor is a creditor whose right to payment is yet to be tested by legal proceedings;11 a prospective creditor is a creditor in respect of a debt which will certainly become due in the future, either on some date which has already been determined or on some date determinable by reference to future events. The court must be of the view that there is a realistic possibility of such an occurrence eventuating, as at the time of the application.12 A person claiming unliquidated damages will qualify as a prospective creditor.13 It has been accepted that a trustee who had a claim against the company in negligence which was yet to be tested had standing to apply as a prospective creditor, particularly as the merits of the claim were untested.14

4.1.3

Applications by shareholders

Section 96 defines the term “shareholder” as: a person whose name is entered in the share register as the holder for the time being of one or more shares in the company; until the person’s name is entered in the share register, a person named as a shareholder in an application for the registration of a company at the time of registration of the company; [page 35] until the person’s name is entered in the share register, a person who is entitled to have that person’s name entered in the share register under a registered amalgamation proposal as a shareholder in an amalgamated company. An “entitled person” may also apply for a liquidator to be appointed. “Entitled person” is defined by s 2 as a shareholder and “any person upon whom the

constitution confers any of the rights and powers of a shareholder”. A liquidation application is not an appropriate forum to determine disputes as to the proper ownership of a company’s shares. In all the circumstances, the common sense and justice of the case requires that the ownership of the shares should be finally settled before the company should have to answer to that “owner” by consent, or by the sanction of the court.15 The existence of a genuine dispute as to ownership of the relevant shares or the status of the applicant as shareholder should therefore result in the application being dismissed.16 There is English caselaw that the right of a shareholder to apply for a liquidator’s appointment could not be excluded by the company’s articles.17 This is consistent with s 31(1), which provides that the constitution has no effect to the extent that it contravenes, or is inconsistent with, the Act. At one time the English courts required a shareholder to show that they had a “tangible interest” in the order, which means that there is a prospect that there will be a surplus in which the shareholders share, which, even if small in absolute terms, is appreciable in relation to the size of the shareholder’s shareholding.18 This is probably now a historical rule of practice even in the United Kingdom. Section 241 gives a shareholder an unqualified right to make an application to put a company in liquidation on any of the grounds in subs (4), including the inability of the company to pay its debts.19

4.2

Grounds for Court-Ordered Liquidation

4.2.1

General

Section 241(4) provides that a court may appoint a liquidator if it is satisfied that: the company is unable to pay its debts; the company or its board has persistently or seriously failed to comply with the Act; it is just and equitable that the company be put into liquidation; or [page 36]

the company does not comply with s 10 of the Act (which provides that a company must have a name, one or more shares, one or more shareholders and/or one or more directors). The first three grounds are discussed below.

4.2.2

Company’s inability to pay debts: s 241(4)(a)

Under s 287, unless the contrary is proved (and subject to s 288), a company will be presumed to be unable to pay its debts if: it has failed to comply with a statutory demand; execution issued against the company in respect of a judgment debt has been returned unsatisfied in whole or in part; a person entitled to a charge over all or substantially all the property of the company has appointed a receiver under the instrument creating the charge;20 or a compromise between a company and its creditors has been put to a vote in accordance with Part 14, but has not been approved. Failure to comply with an effective statutory demand gives rise to a rebuttable presumption that the company is unable to pay its debts.21 It follows therefore that a company which does not comply with a statutory demand can successfully defend an application for liquidation if it can prove that it can pay its debts, although it did not comply with the statutory demand, has not paid the creditor which served the statutory demand and had an application to set aside the statutory demand dismissed.22 In these circumstances, the evidence of solvency must be cogent.23 The test is whether the company is able to meet current demands on it, including assets currently realisable.24 In circumstances where a defendant is truly solvent and there is a genuine dispute, the defendant will often lodge the amount in dispute with an acceptable stakeholder.25 [page 37] Normally a defendant that has failed to apply to set aside a statutory demand in time will not be permitted to raise a substantive defence at the liquidation proceedings. The defendant needs to show some exceptional factor to justify its

failure to seek to set aside the statutory demand.26 Similarly, once an application to set aside a statutory demand has been made and dismissed, it will only be in rare cases that the court will consider the issue of whether the debt is disputed at a liquidation proceeding.27 Where a debt owed by a defendant company is due and undisputed, and no substantial reason for its non-payment is given, the defendant company’s failure to pay is itself evidence of an inability to pay.28 Section 288 provides: Evidence of failure to comply with a statutory demand will not be admissible as evidence that a company is unable to pay its debts, unless the application is made within 30 working days after the last date for compliance with the demand. Section 287 (and the presumption of insolvency it creates) will not prevent proof by other means that a company is unable to pay its debts.29 In determining whether a company is unable to pay its debts, its contingent and prospective liabilities may be taken into account.30 The approach in this context overlaps with that in the context of an application for a stay under High Court Rule 31.11 because a liquidation order will not be made where there is a genuine and substantial dispute as to the existence of a debt, such that it would be an abuse of the process of the court to order a liquidation.31 For a judicial review application to constitute a relevant dispute, the debts would need to be expunged as a result of successful judicial review proceedings and there would have to be a reasonable prospect of a successful outcome in [page 38] the judicial review proceedings so that the court should either defer a decision until the outcome of the judicial review is known, or exercise its discretion against ordering liquidation.32 The statutory demand process is discussed in detail above in Chapter 1.

4.2.3

Persistent or serious failure to comply with the Act: s 241(4) (b)

Under s 241(4)(b) the court may appoint a liquidator if it is satisfied that the company or the board has persistently or seriously failed to comply with the Act. Where the control and/or management of companies is left to individuals who have demonstrated little regard for obligations as directors, the management of the company would be deficient so that the company ought to be placed into liquidation.33 The Law Commission envisaged that this ground would be invoked rarely, seeing it as providing an ultimate sanction in enforcing the provisions of the Act.34

4.2.4 4.2.4.1

“Just and equitable” to place company in liquidation: s 241(4)(d) History

The “just and equitable” ground upon which a court may place a company in liquidation under s 241(4)(d) has been carried through from the old version of the 1955 Act. The power can be traced back to the Joint Stock Companies Winding-up Act 1848 (UK). Davies explains the evolution of the “just and equitable principle” in the United Kingdom as follows:35 The provision was influenced by the (then uncodified) partnership law and was originally used mainly in cases where the company was deadlocked. In the course of this century it has been moulded into a means of subjecting small private companies to equitable principles derived from partnership law when they were in reality incorporated partnerships.

It has therefore been held that a company may be put into liquidation on the just and equitable ground if, had the shareholders been partners, those grounds would have been sufficient to justify an order dissolving a partnership. This principle is dependent on the premise that the company was formed to conduct a joint venture to which the incorporators were parties.36 [page 39] 4.2.4.2

Westbourne Galleries principles

The leading authority on the “just and equitable” ground is the decision of the House of Lords in Ebrahimi v Westbourne Galleries Ltd.37 It sets out the following principles:

This ground enables the court to subject the exercise of legal rights to equitable considerations, which may make it unjust or inequitable to insist on legal rights, or to exercise them in a particular way. The superimposition of equitable considerations requires something more than the fact that a company is small or private, which typically may include one or more of the following elements: an association formed or continued on the basis of a personal relationship involving mutual confidence; an agreement or understanding that all or some of the shareholders shall participate in the conduct of the business; restriction upon the transfer of the shareholder’s interest in the company so that he or she cannot take out his or her stake and go elsewhere if, for example confidence is lost. Because the dissolution of a partnership may also be obtained on “just and equitable” grounds,38 there is an overlap between the principles applicable in that context and those applicable in the liquidation context. A shareholder applicant for the liquidation order is not confined to relying on such circumstances as affect him or her in the capacity of shareholder, but can rely on any circumstances of justice or equity which affect him or her in his or her relations with the company or with the other shareholders. The words “just and equitable” are not to be interpreted so as to include matters of the same kind as covered by the other grounds for court-ordered liquidation. Applicants who rely on the “just and equitable” clause in the context of a breakdown in confidence must come to the court with clean hands. If the breakdown in confidence between them and the other parties to the dispute appears to have been due to their misconduct, they cannot insist on the company being liquidated if the other parties wish it to continue.39 [page 40] 4.2.4.3

Other considerations

The existence of alternative adequate remedies and the question whether the applicant is acting reasonably in seeking to have the company liquidated rather than pursuing that remedy (which were circumstances in which a liquidation order was previously prohibited from being made on the just and equitable ground)40 remain cogent considerations when exercising the discretion to

liquidate.41 It is an extreme step to liquidate a successful and properly managed company, and a strong case must be made out before such an order will be made.42 The court will have regard to the contractual obligations of the parties, and any settled and accepted course of conduct between the parties.43 4.2.4.4

Illustrations of liquidations on just and equitable ground

Companies have been liquidated on this ground in the following circumstances: Where there is deadlock in the conduct of the company’s affairs. Mere disagreement or a falling out may not be sufficient.44 Deadlock may arise when there is equality of voting power between competing factions, although deadlock cases are not confined to companies where control is shared equally. The deadlock must be so serious as to impede the continued operation of the company. The basis for relief is essentially frustration by internal discord.45 In one case of deadlock, a provision for arbitration in the company’s constitution was not seen as eliminating the issue of deadlock because it was not seen as directed towards a case, where in the ordinary everyday business of the company, the two directors were unwilling to speak to each other and discuss the affairs of the company. It was instead directed to specific cases where a particular resolution important to the company could not be passed [page 41] because of a difference between the two directors, and it provided for the authority of a third person to be obtained as to what is to be done in those circumstances.46 Failure of substratum of the company’s business, where the company engages in acts that are entirely outside what can fairly be regarded as having been in the original contemplation and understanding of the parties, or where the main objects for which the company was set up have been abandoned.47 Cases where it is impossible to carry on the business of the company at a profit have been seen as falling within this category, as amounting to cases where the company can no longer do what it was formed to do.48 Fraud in the promotion of the company, dishonest conduct by the company,

or misconduct or mismanagement by directors or management, are not of themselves grounds for liquidation.49 However, orders have been made where the fraud, dishonesty or misconduct was of such an extent and gravity to justify them,50 and where the dishonesty or misconduct resulted in a justifiable lack of trust and confidence in the conduct and management of the company’s affairs.51 [page 42] De facto expulsion cases: where the applicant has not been permitted to participate in the management of the company.52 The applicant must be able to prove some special underlying obligation of his or her fellow shareholders in good faith, or confidence, that so long as the business continues he or she shall be entitled to management participation, an obligation so basic that, if broken, the conclusion must be that the association must be dissolved.53 The public interest in investor protection and securing compliance with the companies law (particularly relevant in respect of applications by the Registrar of Companies).54 In World Vision of New Zealand Trust Board v Seal,55 Heath J also refers to a category of unusual cases involving hardship of a type that justifies intervention by the court. It is important not to treat these illustrations as limiting the circumstances in which an application may be successful, in light of the warning by the House of Lords in Westbourne Galleries56 not to reduce the general words to the sum of particular instances, and create categories or headings under which cases must be brought if this ground is to apply. 4.2.4.5

Time at which court must determine just and equitable ground

There had been conflicting authority on the time at which the court must determine whether an applicant has established that a company ought to be liquidated on the “just and equitable ground”. The Privy Council had held that the appropriate time at which to judge whether the discretion ought to be exercised is at the date on which the proceeding to liquidate is filed.57 [page 43]

Other cases held that the issue should be judged as at the date of hearing.58 Heath J resolved this issue in favour of the latter cases in Jenkins v Supscaf Ltd,59 on the ground that it seems sensible to determine an application to put a company into liquidation on the basis of information available at the time of the hearing, and that the Privy Council decision was given at a time when the date of filing of a petition to wind up a company was regarded as the date of commencement of the winding up. The 1993 Act changed the position so that the liquidation commenced on the date at which the liquidation order was made, rather than the date on which the application to appoint a liquidator was filed in court. The focus of s 241(5) of the Act, on the date and time at which a liquidator is appointed, therefore adds weight to the need to consider whether to make an order appointing a liquidator on information available as at the date of hearing.

4.3

Discretion of Court

Ultimately, the court always has a discretion whether or not to grant a liquidation application, even where the applicant has clearly proven the company’s insolvency. The principles that the court takes into account overlap with those that apply in the context of an application to set aside a statutory demand or stay a liquidation. A liquidator should, however, normally be appointed if one of the available s 241(4) grounds is made out. The creditors of a company are entitled to a liquidation order where a company is clearly insolvent, and the courts are reluctant to allow an insolvent company to continue to trade.60 The discretion to refuse to put a company into liquidation is therefore to be sparingly exercised.61 There must be some other factor which outweighs the prima facie entitlement of the creditor to an order putting the insolvent company into liquidation. If the focus is on the justice of the particular case, the discretion must always be exercised on a principled basis and not on an ad hoc perception of what individual justice might require.62 The following principles were adopted in Commissioner of Inland Revenue v Roadmark Systems Ltd:63 there is an unfettered discretion as to whether a liquidation order should be made;

[page 44] in exercising its discretion, the court will pay due regard to the wishes of the company’s creditors,64 and also (but to a far lesser extent where insolvency has been proven) to the wishes of the company’s shareholders; the court will have regard to the wishes of the majority of the creditors,65 and is bound to have regard to the value of the debts on each side; the fact that a majority of creditors oppose the application is not, in itself, sufficient to compel the court to decline the order; it is for the opposing creditors to show that there are reasons for a refusal of the order;66 the court will have regard to all the circumstances relevant to the company and its operations and, among other things, the reasons for and against the liquidation, the interests of other creditors, and in the particular circumstances the weight to be attached to the opposition, in whole or in part, of the creditors; the fact that the assets of the debtor company have been mortgaged to an amount equal to, or in excess of, the assets, or that the company has no assets, is not sufficient in itself to justify refusal of the liquidation order. Where there is no evidence of any opposition to the liquidation application by other creditors, there must be very cogent reasons for the court to refuse the application.67 In the case of creditors of different classes, the interest of the class particularly affected must be primarily considered. Thus, where a company’s assets are entirely covered by charges, the wishes of the unsecured creditors must be regarded in preference to those of the secured creditors. Creditors who are only partly secured, and share the class interest of unsecured creditors in protecting or increasing the value of the company’s assets are, however, entitled to the same consideration as wholly unsecured creditors, in respect of the unsecured portion of their debt.68 [page 45] Previously it had been said that if the company is insolvent, the applicant

creditor is entitled as of right (ex debito justitiae) to a liquidation order.69 Tipping J has held that this view is inconsistent with the s 290(4)(c) provision for other grounds on which a statutory demand may be set aside, which contemplates that it may in some circumstances be inappropriate for a company which is undoubtedly insolvent to be placed in liquidation.70 Even if it is unlikely that there will be any assets available for distribution to unsecured creditors, the court may regard the liquidator as serving useful functions in the investigation of the company’s affairs and acting as a guardian of the interests of unsecured creditors.71 An insolvent trustee company should as a general rule almost invariably be put into liquidation. This enables the court to ensure that the trust is properly administered either by the liquidator or by a replacement trustee.72

4.4

Powers of Court on Application

While the court has a broad discretion as to whether to grant an application for a liquidation order, it is limited in its ability to make orders to suit the circumstances of particular cases, because the procedures as contained in Part 31 of the High Court Rules do not allow the court to substitute any form of relief other than liquidation. Part 31 is a self-contained code, subject only to the court’s inherent jurisdiction. It has therefore been held that it is not possible to seek alternative relief other than the liquidation of the company (or an order under s 174 of the Companies Act 1993), as set out in High Court Rule 31.1(1).73 [page 46] The court will exercise its discretion to adjourn the proceedings on an application by the company only in special circumstances. If all of the creditors oppose an adjournment, the court will be particularly reluctant to grant it.74 The court may adjourn an application for the appointment of a liquidator of a company in administration if the court is satisfied that it is in the interests of the company’s creditors for the company to continue in administration, rather than be placed in liquidation.75 The courts have also adjourned applications to allow time for the company to pay its debts.76

If the company is preparing a scheme of arrangement with sufficient merit, the court is likely to grant an adjournment, to give creditors an opportunity to consider whether the possibilities of the scheme are sufficiently attractive, subject to conditions designed to ensure that the scheme of arrangement be expeditiously prepared and put to creditors.77 ____________________ 1.

In other words, the court is not bound to exercise its discretion by refusing to make the order, merely upon the ground that the order will not produce anything for the unsecured creditors. But the court may refuse the order, having regard to the wishes of other creditors: Re Alfred Melson & Co Ltd [1906] 1 Ch 841; Re Sklan Ltd [1961] 2 All ER 680, [1961] 1 WLR 1013.

2.

Re William Hockley Ltd [1962] 2 All ER 111, [1962] 1 WLR 555; Perak Pioneer Ltd v Petroliam Nasional Bhd [1986] AC 849 (PC).

3.

Bateman Television Ltd (in liq) v Coleridge Finance Co Ltd [1971] NZLR 929; Anglian Sales Ltd v South Pacific Manufacturing Co Ltd [1984] 2 NZLR 249, (1984) 2 NZCLC 99,220; Bital Holdings Ltd v Middleditch (1993) 6 NZCLC 260,224.

4.

Re Steel Wing Co Ltd [1921] 1 Ch 349, discussed with approval by the Privy Council in Parmalat Capital Finance Ltd v Food Holdings Ltd (in liq) [2008] UKPC 23, [2008] BCC 371, [2009] 1 BCLC 274 at [7]–[8]. The Privy Council held that an equitable assignor has sufficient interest to apply for a winding up order without joining the assignee.

5.

Perak Pioneer Ltd v Petroliam Nasional Bhd [1986] AC 849 (PC).

6.

Perak Pioneer Ltd v Petroliam Nasional Bhd [1986] AC 849 (PC); Re Paris Skating Rink Co (1877) 5 Ch D 959.

7.

Bank of New Zealand Ltd v Rada Corp Ltd [1989] 1 NZLR 750, (1989) 1 PRNZ 395, (1989) 4 NZCLC 65,313 (CA).

8.

Miller Design Ltd v P W Hotel Ltd (2003) 17 PRNZ 873 at [39]–[41].

9.

Re Austral Group Investment Management Ltd [1993] 2 NZLR 692 at 698 approving Pennycuick J’s description of a contingent creditor in Re William Hockley Ltd [1962] 1 WLR 555 at 558.

10.

Re Austral Group Investment Management Ltd [1993] 2 NZLR 692 at 699.

11.

Maximum Internet Ltd v Net Stream Internet Ltd HC Hamilton CIV-2004419-694, 13 August 2004 at [8] by reference to Re Austral Group Investment Management Ltd [1993] 2 NZLR 692, [1993] MCLR 154, (1993) 6 NZCLC 68,300.

12.

Stonegate Securities Ltd v Gregory [1981] All ER 241 (CA) at 243 referred to in Commissioner of Inland Revenue v Registrar of Companies (2002) 20 NZTC 17,846 at [16].

13.

Re Austral Group Investment Management Ltd [1993] 2 NZLR 692 at 699, [1993] MCLR 154, (1993) 6 NZCLC 68,300; Hartner Construction Ltd (in rec) v Alotech Walls and Ceilings Ltd (in liq & in rec) HC Auckland M630-IM00, 15 February 2001 at [5].

14.

Re Austral Group Investment Management Ltd [1993] 2 NZLR 692.

15.

Bital Holdings Ltd v Middleditch (1993) 6 NZCLC 260,224.

16.

Re JN2 Ltd [1977] 3 All ER 1104 at 1108; Re Bambi Restaurants Ltd [1965] 2 All ER 79, [1965] 1 WLR 750; Bital Holdings Ltd v Middleditch (1992) 5 PRNZ 605, [1992] MCLR 323, (1992) 6 NZCLC 67,842.

17.

Re Peveril Gold Mines Ltd [1898] 1 Ch 122 (CA).

18.

Bryanston v De Vries [1976] Ch 63.

19.

Re Feltex Carpets Ltd (in rec) (2006) 3 NZCCLR 714 at [46].

20.

See for example Bank of New Zealand v TPS Accounting Ltd (in Rec) (previously known as Tax Planning Services Ltd) [2012] NZHC 899.

21.

Silverpoint International Ltd v Wedding Earthmovers Ltd HC Auckland CIV-2007-404-104, 30 May 2007 at [76]; Investment Enterprises Ltd v Private Sale Co Ltd (1997) 10 PRNZ 282 at 285. Previously failure to comply with a statutory demand gave rise to an irrebuttable statutory presumption of insolvency.

22.

McCallum Petterson and Co v Unity Mutual Financial Services Ltd HC Wellington M39/95, 30 May 1995, Investment Enterprises Ltd v Private Sale Co Ltd (1997) 10 PRNZ 282.

23.

Concept Manufacturing Ltd v Concept Lighting Ltd HC Auckland M896-IM00, 6 July 2000 at [12], followed in Foundation Securities v Direct Labour Services Ltd HC Auckland CIV-2006-404-4391, 1 February 2007 at [24] and Duffill Watts Ltd v Mogans Homes Ltd HC Auckland CIV-2009-404-1483, 28 May 2009 at [28]–[30].

24.

Investment Enterprises Ltd v Private Sale Co Ltd (1997) 10 PRNZ 282 at 285 citing Re Tweeds Garage Ltd [1962] Ch 406.

25.

Duffill Watts Ltd v Mogans Homes Ltd HC Auckland CIV-2009-404-1483, 28 May 2009 at [30].

26.

See Quantum Holdings NZ Ltd v United Recyclers NZ Ltd HC Auckland CIV-2008-404-4564, 20 November 2008 and the authorities referred to at [15]–[17].

27.

Re Taylors Industrial Floorings [1990] BCC 44, (1990) 8 ACLC 3,081, approved in Commissioner of Inland Revenue v Sand Piper Lodge Ltd HC Auckland CIV-2007-404-973, 7 June 2007 and Strategic Options Ltd v Swordfish Lodge Management Ltd [2009] NZCCLR 2; Darby Maritime Ltd v Sensation Yachts Ltd [2009] NZCCLR 6 at [21]. See also Commissioner of Inland Revenue v Berrytime [2009] NZCCLR 28, (2009) 24 NZTC 23,447 at [30].

28.

Investment Enterprises Ltd v Private Sale Co Ltd (1997) 10 PRNZ 282 at 284.

29.

See, for example Apollo Fruit Ltd v Cooper Horticulture Ltd HC Napier CIV-2006-441-908, 14 February 2007; Attorney-General v Waikato Against Toxic and Chemical Hazards Inc (2004) 17 PRNZ 362 at [5]. Commissioner of Inland Revenue v Berrytime [2009] NZCCLR 28, (2009) 24 NZTC 23,447.

30.

Commissioner of Inland Revenue v Ron West Motors (Otahuhu) Ltd (2008) 23 NZTC 21,835 at [9].

31.

However, as discussed at para 4.1.2, a contingent or prospective creditor may only apply for a liquidation on the ground that a company is unable to pay its debts with the leave of the court, and the court may only give such leave (with or without conditions) if it is satisfied that a prima facie case has been made out that the company is unable to pay its debts.

32.

Commissioner of Inland Revenue v Berrytime [2009] NZCCLR 28 at [31]–[32].

33.

Eden Crescent Ltd (in liq) v First City Trust No 2 Ltd HC Auckland CIV-2006404-3329, 21 September 2006 at [36]–[40].

34.

Law Commission Company Law Reform and Restatement (NZLC R9, 1989) at [660].

35.

P Davies Gower and Davies’ Principles of Modern Company Law (7th ed, Sweet & Maxwell, London, 2003) at 527.

36.

Jenkins v Supscaf [2006] 3 NZLR 264 at [113].

37.

Ebrahimi v Westbourne Galleries Ltd [1972] 2 All ER 492, [1973] AC 360 (HL) per Lord Wilberforce at 374–375 and 379–380, with whom Viscount Dilhorne and Lord Pearson concurred at 382. Ebrahimi has been applied on many occasions in New Zealand, for example Vujnovich v

Vujnovich [1988] 2 NZLR 129 (HC) and (CA) and [1989] 3 NZLR 513 (PC); Re Burgess Homes Ltd (in liq) [1987] 1 NZLR 513 at 518 and 528, (1987) 3 NZCLC 100,175 (CA); Jenkins v Supscaf [2006] 3 NZLR 264. The Law Commission also envisaged that it would continue to be applied: Law Commission Company Law Reform and Restatement (NZLC R9, 1989) at [661]. 38.

Partnership Act 1908, s 38(f). See Jenkins v Supscaf [2006] 3 NZLR 264 at [114] and [116] for caution as to allowing partnership concepts to obscure requirements of the companies legislation.

39.

Ebrahimi v Westbourne Galleries Ltd [1972] 2 All ER 492, [1973] AC 360 per Lord Cross at 387; Vujnovich v Vujnovich [1989] 3 NZLR 513 (PC).

40.

Companies Act 1955, s 220(2) (unamended).

41.

Jenkins v Supscaf Ltd [2006] 3 NZLR 264 at [98]; Sea Management Singapore Pte Ltd v Professional Service Brokers Ltd HC Auckland CIV-2011-404-5315, 25 January 2012 at [4]. See also Re Surrey Garden Village Trust, Re Addington Smallholders Ltd [1964] 3 All ER 962, [1965] 1 WLR 974 at 981.

42.

Cumberland Holdings Ltd v Washington H Soul Pattinson & Co Ltd (1977) 2 ACLR 307, (1977) 13 ALR 561 (PC) at 566, cited by Re Burgess Homes Ltd (in liq) [1987] 1 NZLR 513 at 518 and 528, (1987) 2 BCR 282, (1987) 3 NZCLC 100,175.

43.

Re Fildes Bros Ltd [1970] 1 All ER 923, [1970] 1 WLR 592 at 596; Tay Bok Choon v Tahansan Sdn Bhd (1986) 2 BCR 238, [1987] 1 WLR 413 (PC) at 417–418.

44.

The Orthodontic Centre Ltd v M D Courtney Orthodontics Ltd HC Palmerston North CIV-2006-454238, 14 September 2007 at [34] citing Vujnovich v Vujnovich [1988] 2 NZLR 129 (CA) and Jenkins v Supscaf [2006] 3 NZLR 264. See World Vision of New Zealand Trust Board v Seal [2004] 1 NZLR 673 at [75(d)] for types of deadlock and Strachan v Denbigh Property Ltd (2011) 10 NZCLC 264,813, for a recent case where an order for liquidation was made on this ground.

45.

Sea Management Singapore Pte Ltd v Professional Service Brokers Ltd HC Auckland CIV-2011-4045315, 25 January 2012 at [3]; Re Deep Sea Trawlers Ltd, Re Overland Investment Co Ltd (1984) 2 NZCLC 99,137.

46.

Re Yenidje Tobacco Co Ltd [1916] 2 Ch 426 at 435.

47.

Re Eastern Telegraph Co Ltd [1947] 2 All ER 104; Re National Portland Cement Co Ltd [1930] NZLR 564; World Vision of New Zealand Trust Board v Seal [2004] 1 NZLR 673 at [75(a)]. See Cotman v Brougham [1918-19] All ER Rep 265, [1918] AC 514 at 520–521; Re Kitson & Co Ltd [1946] 1 All ER 435; Re Taldua Rubber Co Ltd [1946] 2 All ER 763 in relation to construction of a company’s constitution to determine what the company’s objects are.

48.

Re Bristol Joint Stock Bank (1890) 44 Ch D 703 at 712; Re Diamond Fuel Co (1879) 13 Ch D 400; Davis & Co Ltd v Brunswick (Australia) Ltd [1936] 1 All ER 299 (PC) at 309.

49.

Re Surrey Garden Village Trust, Re Addington Smallholders Ltd [1964] 3 All ER 962, [1965] 1 WLR 974 at 981; Menard v Horwood & Co Ltd (1922) 31 CLR 20. The fact that there has been fraud in the promotion of the company, or a fraudulent misrepresentation in its prospectus, will not in itself be sufficient to induce a court to make a liquidation order, because the majority of the shareholders will generally have the power in general meeting to waive the fraud and to confirm the transactions effected by it: Re Haven Gold Mining Co (1882) 20 Ch D 151. See also Re Medical Battery Co [1894] 1 Ch 444.

50.

See Re Thomas Edward Brinsmead & Sons [1897] 1 Ch 406 which involved a company fraudulent in its inception, carrying on a small business at a loss, having no capital of its own (all the subscribed capital having found its way into the hands of the real, though not the ostensible, promoters) and hopelessly embarrassed by numerous actions brought by shareholders on the ground of fraud where an order was seen as the most effective way of recovering for the shareholders the money dishonestly retained by the real promoters; Re Clandown Colliery Co [1915] 1 Ch 369 which involved the

business of the insolvent company being carried on solely for the benefit of the chairman. 51.

Jenkins v Supscaf [2006] 3 NZLR 264 at [124] and [126]; Re Surrey Garden Village Trust, Re Addington Smallholders Ltd [1964] 3 All ER 962, [1965] 1 WLR 974 at 982; Loch v John Blackwood Ltd [1924] AC 783 (PC); Re Livestock Investments Ltd HC Auckland M525/77, 18 December 1978, [1979] NZ Recent Law 152. So orders have been made where there has been a breach of a statutory, common law or equitable duty by a co-venturer resulting in justifiable loss of confidence and trust: World Vision of New Zealand Trust Board v Seal [2004] 1 NZLR 673 at [75(c)]; Loch v John Blackwood Ltd [1924] AC 783 (PC) cited in Hunt v Border Fancy Canary Club of New Zealand (Inc) (2000) 8 NZCLC 262,140 at [57]–[58]. Contrast Flett v JH Flett (1999) 8 NZCLC 261,893 where the requirement of a justifiable lack of confidence and trust in the conduct and management of the company’s affairs was not discussed in a case involving a governing director who had acted in a way that was prejudicial to the interests of the plaintiff as shareholder on more than one occasion, and breached obligations to the shareholders to treat them fairly and to keep them informed.

52.

World Vision of New Zealand Trust Board v Seal [2004] 1 NZLR 673 at [75(b)].

53.

Ebrahimi v Westbourne Galleries Ltd [1972] 2 All ER 492, [1973] AC 360 per Lord Wilberforce at 380.

54.

World Vision of New Zealand Trust Board v Seal [2004] 1 NZLR 673 at [75]; Re Livestock Investments Ltd HC Auckland M525/77, 18 December 1978 at 31; Australian Securities Commission v AS Nominees Ltd [1995] FCA 1663, (1995) 18 ACSR 459.

55.

World Vision of New Zealand Trust Board v Seal [2004] 1 NZLR 673 at [75(e)].

56.

Ebrahimi v Westbourne Galleries Ltd [1972] 2 All ER 492, [1973] AC 360 per Lord Wilberforce at 374–375.

57.

D Davis Co Ltd v Brunswick (Australia) Ltd (1936) 36 SR (NSW) 215 (PC) at 227–228 (Lord Maugham).

58.

Re Fildes Bros Ltd [1970] 1 All ER 923 at 927; Re Deep Sea Trawlers Ltd (1984) 2 NZCLC 99,137 at 99,146; and Re Rongo-ma-Tane Farms Ltd (1987) 3 NZCLC 100,145 at 100,150.

59.

Jenkins v Supscaf Ltd [2006] 3 NZLR 264.

60.

Bank of New Zealand Ltd v Rada Corp Ltd [1989] 1 NZLR 750 (CA) at 756–757.

61.

Re Feltex Carpets Ltd (in rec) (2006) 3 NZCCLR 714 at [38].

62.

Commissioner of Inland Revenue v Chester Trustee Services Ltd [2003] 1 NZLR 395, (2002) 9 NZCLC 263,016 (CA) at [3].

63.

Commissioner of Inland Revenue v Roadmark Systems Ltd [1997] 3 NZLR 744 at 749, (1997) 18 NZTC 13,331, upheld on appeal Roadmark Systems Ltd v Commissioner of Inland Revenue [1998] 3 NZLR 138, (1998) 18 NZTC 13,769; citing Re Thames Freightlines Ltd (1981) 1 NZCLC 98,112 at 98,113.

64.

For a case where the creditors were evenly balanced, both in numbers and amounts, see Re Jacobs River Sawmilling Co Ltd [1961] NZLR 602.

65.

Saiteysmcmahon Property Ltd v Morning Star Enterprises Ltd HC Auckland CIV-2007-404-6632, 9 July 2008 at [17]. See also Central Equipment Co Ltd v Commissioner of Inland Revenue (2008) 23 NZTC 21,722 (CA) at [13] and Re Bryan Construction Co Ltd [1957] NZLR 748 at 750 where the opposing shareholder was required to show “some very good reason why the court should not have regard to and give effect to the wishes of the great majority of the creditors” that the company not be wound up.

66.

In Re SOS Motors Ltd [1934] NZLR s 129 where practically all creditors had intimated to the company or the receiver for the debenture-holders that they did not desire a winding-up order to be

made, the court granted the order after having regard to their reasons for opposing the order and the fact that the reasons did not include that they were likely ultimately to secure a greater benefit in respect of their claims against the company. 67.

Saiteysmcmahon Property Ltd v Morning Star Enterprises Ltd HC Auckland CIV-2007-404-6632, 9 July 2008 at [18].

68.

Commissioner of Inland Revenue v Chester Trustee Services Ltd [2003] 1 NZLR 395, (2002) 20 NZTC 17,925, (2002) 9 NZCLC 263,016 at [58], citing Halsbury’s Laws of England (4th ed, 1996), vol 7(3) at [2240].

69.

Commissioner Of Inland Revenue v Roadmark Systems Ltd [1997] 3 NZLR 744 at 749, (1997) 18 NZTC 13,331 (upheld on appeal: [1998] 3 NZLR 138). The order which the creditor seeks is not an order for his or her benefit, but an order for the benefit of a class of which he or she is a member. The right ex debito justitiae is not his or her individual right, but his or her representative right: Bank of New Zealand Ltd v Rada Corp Ltd [1989] 1 NZLR 750 at 756–757 citing Buckley J in Re Crigglestone Coal Co Ltd [1906] 2 Ch 327 at 381–382.

70.

CIR v Chester Trustee Services Ltd [2003] 1 NZLR 395 at [1].

71.

Re Feltex Carpets Ltd (in rec) (2006) 3 NZCCLR 714 at [38]; Re SOS Motors Ltd [1934] NZLR s 129; Re Marlborough Sealink Ltd (1986) 3 NZCLC 99,501. See also Westgold Finance Ltd v Pan Pacific Cameras Ltd HC Christchurch M644/88, 11 May 1989 citing Re Robert Raymond Associations Ltd (1975) NZ Recent Law 294.

72.

Commissioner of Inland Revenue v Newmarket Trustees Ltd [2012] NZCA 351 at [75].

73.

Jugum v Stevenson & Jugum Ltd (1989) 4 NZCLC 64,880; Nippon Credit Australia Ltd v Girvan Corp New Zealand Ltd (1991) 5 NZCLC 67,498; Bital Holdings Ltd v Middleditch (1992) 5 PRNZ 605, [1992] MCLR 323, (1992) 6 NZCLC 67,842.

74.

Re Morgan Shipping Corp Ltd (1986) 3 NZCLC 99,876; Re Camburn Petroleum Products Ltd [1979] 3 All ER 297, [1980] 1 WLR 86.

75.

Companies Act 1993, s 239ABV.

76.

See, for example Commissioner of Inland Revenue v Ron West Motors (Otahuhu) Ltd (2008) 23 NZTC 21,835; Fletcher Concrete and Infrastructure Ltd v Phoenician Management Ltd HC Hamilton M105/01, 10 August 2001.

77.

Re Dorothy Butler Video Books Ltd (1987) 3 NZCLC 99,927.

[page 47]

CHAPTER 5 Liquidation of Other Entities 5.1

General

The phrase “just and equitable” is also used as a touchstone to determine whether other corporate entities should be placed in liquidation. So, for example s 25(1) of the Charitable Trusts Act 1957, which provides for the jurisdiction to liquidate a charitable trust states: “[a] Board may be put into liquidation by the appointment by the court as liquidator of a named person or an Official Assignee for a named district if the court is satisfied that it is just and equitable that the Board should be put into liquidation”. Other similar provisions appear at s 15(e) of the Agriculture and Pastoral Societies Act 1908, ss 90 and 138 of the Friendly Societies and Credit Unions Act 1982 (in relation to friendly societies and credit unions respectively), s 282(1)(f) of the Te Ture Whenua Mäori Act 1993 (in relation to Maori incorporation), s 25(e) of the Incorporated Societies Act 1908, s 17A of the Judicature Act 1908, s 46(1) of the Unit Titles Act 1972 and s 38(f) of the Partnership Act 1908. The courts have emphasised the need to adapt the jurisprudence dealing with corporate trading entities to meet the circumstances surrounding the specific entity in issue.

5.2

Societies Incorporated Societies Act

Under

Incorporated

The courts have warned that the company law authorities on the “just and equitable” ground should be approached with caution, as “the law or practice relating to limited liability companies is not necessarily a helpful analogy” when considering the position of an incorporated society “where the raison d’etre of an organisation is not to make profits but to promote a certain

[page 48] activity”, and committee members are often unpaid volunteers with little or no professional training.1 While noting this warning, Asher J in The Registrar of Incorporated Societies v The Hearing Association Whangarei Branch Inc went on to measure the actions of the Hearing Association against two categories where the just and equitable ground has been made out in the companies context, asking whether the Hearing Association’s action could, on an objective basis, be said to give rise to a justifiable loss of confidence in its conduct or management, or a justifiable conclusion that its affairs have been conducted in a way which is oppressive or unfairly prejudicial on the approach taken in Flett v JH Flett.2

5.3

Bodies Corporate Under Unit Titles Act

In World Vision of New Zealand Trust Board v Seal,3 which involved a body corporate established under the Unit Titles Act 1972, the Court discussed s 46(1) of the Unit Titles Act 1972, which empowers the court to dissolve a body corporate or cancel a plan on the ground that “having regard to the rights and interests of any creditor of the body corporate and of every person who has any interest in any unit or in the land or in any part of the land, it is just and equitable that the body corporate be dissolved and the plan cancelled”. The Court held that: World Vision must satisfy the court, on a balance of probabilities, that cancellation of the unit plan and dissolution of the body corporate is “just and equitable”, having regard to all relevant rights and interests.4 The circumstances in which the jurisdiction should be exercised under the Unit Titles Act differ significantly from the circumstances in which it might be exercised in relation to a common business enterprise. A person is likely to invest funds in a business enterprise either to enable a particular venture to be undertaken, or to obtain a commercial return from the existing business, while a person is likely to invest in a development under the Unit Titles Act either to achieve a commercial return, or to acquire a private residence in which to live. In a mixed-use development of the type undertaken in that case, the differing approaches are more stark than in other cases. While a

residential development may involve some owners whose interest is purely of a commercial nature and others who intend to reside in a unit, commercial developments, almost inevitably, involve solely commercial objectives. In this context there is [page 49] some difficulty in evaluating proposals with the intention of exercising a “just and equitable” jurisdiction when those who have interests in the property have such disparate aspirations or expectations.5 Examples of circumstances where it may become necessary for the court to intervene under s 46 are if a building has deteriorated through inadequate maintenance or cannot, through the unavailability of funds, be maintained properly (and is therefore no longer fit for its original purpose), and if a disparate group of proprietors, together comprising a body corporate, interact so dysfunctionally as to require intervention from the court (on a basis similar to that in the deadlock cases in the company and partnership law context).6

5.4

Board Registered Under Charitable Trusts Act

It should not be assumed that a charitable trust will be liquidated simply because that is the most convenient course.7 In Peilua v Evangelical Samoan Wesleyan Methodist Church of Otahuhu Board (No 2),8 it was held that it was not just and equitable for Peilua to obtain an order liquidating the Board and recover anything from it, as Peilua had voluntarily left and renounced liability for its management. The Court considered that: … the starting point is that someone who worships at a particular church makes contributions to it voluntarily. While some might suggest that tithing brings about a degree of compulsion, the reality is that, by joining a church at which a tithe is paid, an individual voluntarily assumes an obligation to contribute in that way.9

5.5

Licensed Insurer Under Insurance (Prudential Supervision) Act 2010

In the case of a licensed insurer that may be put into liquidation under or in accordance with the Companies Act 1993, the court may appoint a liquidator on an application by the Reserve Bank if it is satisfied that:10 the insurer is unable to pay its debts;11 the insurer is failing to maintain a solvency margin; the insurer has persistently or seriously failed to comply with any direction, condition or other requirement imposed by or under the [page 50] Insurance (Prudential Supervision) Act 2010 or the regulations in force under that Act; or it is just and equitable that the insurer be put into liquidation. The court may also, on the application of the Bank, appoint a liquidator for a body corporate that may be put into liquidation under or in accordance with the Companies Act 1993 if it is satisfied that the body corporate is carrying on insurance business in New Zealand without holding a licence, in breach of the Insurance (Prudential Supervision) Act. ____________________ 1.

The Registrar of Incorporated Societies v The Hearing Association Whangarei Branch Inc HC Auckland CIV-2007-488-406, 25 October 2007 at [9], citing Finnigan v NZRFU [1985] 2 NZLR 159 at 178. See also Atchinson v Aviation New Zealand Wing Inc HC Auckland CIV-2004-404-2043, 29 October 2004 and Hunt v Border Fancy Canary Club of NZ (Inc) (2000) 8 NZCLC 264,140.

2.

Flett v JH Flett (1999) 8 NZCLC 261,893.

3.

World Vision of New Zealand Trust Board v Seal [2004] 1 NZLR 673.

4.

World Vision of New Zealand Trust Board v Seal [2004] 1 NZLR 673 at [77].

5.

World Vision of New Zealand Trust Board v Seal [2004] 1 NZLR 673 at [84]–[85].

6.

World Vision of New Zealand Trust Board v Seal [2004] 1 NZLR 673 at [84]–[86].

7.

Congregational Christian Church of Samoa (Westmere) Trust Board v Tilaima HC Auckland CIV2008-404-1893, 20 December 2010 at [98].

8.

Peilua v Evangelical Samoan Wesleyan Methodist Church of Otahuhu Board (No 2) HC Auckland CIV-2006-404-2441, 16 November 2007.

9.

Peilua v Evangelical Samoan Wesleyan Methodist Church of Otahuhu Board (No 2) HC Auckland CIV-2006-404-2441, 16 November 2007 at [42].

10.

Insurance (Prudential Supervision) Act 2010, s 151.

11.

For that purpose, s 287 of the Companies Act 1993 applies with all necessary modifications whether

or not the insurer is a company.

[page 51]

PART 3 SUBSEQUENT STAGES OF A LIQUIDATION

[page 53]

CHAPTER 6 Meetings of Creditors and Shareholders 6.1

Initial Meeting of Creditors

Unless s 245 or s 243(8) applies, s 243 requires the liquidator to call a meeting of the creditors of the company: if the liquidator is appointed pursuant to a shareholders’ resolution or by the directors, for the purpose of resolving whether to appoint another liquidator in place of the liquidator appointed by either the shareholders or the directors; where the liquidator is appointed by the court, a director or shareholder, other entitled person, a creditor, or the Registrar under s 241(2)(c), for the purpose of resolving whether to make an application to the court for the appointment of another liquidator in place of the liquidator so appointed; in either case, for the purpose of determining whether to pass a resolution to communicate their views on any matter relevant to the liquidation, to the liquidator. Section 243(11) provides that s 243 does not apply if the liquidator is appointed at a watershed meeting held under s 239AT (except for s 243(5) which requires all meetings of creditors to be held in accordance with Schedule 5). Notice of the creditors’ meeting must be given to every known creditor, with the report and notice required to be given by the liquidator under s 255(2)(c). If the liquidator has determined not to call a meeting, and has received a notice under s 245(1)(b)(iii) requiring a meeting of creditors to be called, notice must be given within 10 working days after receiving the s 245(1)(b)(iii) notice,1 and a meeting of creditors must be held within 15 working days after receipt of the notice.2 [page 54]

Public notice of the creditors’ meeting must be given by the liquidator at least five working days before the date of the meeting.3 Meetings of creditors must usually be held within 10 working days (in the case of an appointment by the shareholders or the board), or within 30 working days (in the case of a court appointment), of the liquidator’s appointment.4 Creditors’ meetings must be held in accordance with the procedures set out in Schedule 5,5 and in accordance with regs 17–27 of the Companies Act 1993 Liquidation Regulations 1994. The creditors’ meeting may resolve to appoint another person as liquidator if the liquidator has been appointed either by the shareholders or by the directors, pursuant to either s 241(2)(a) or (b). Upon the resolution being made, the nominated person will become the liquidator.6 If the creditors’ meeting resolves to apply to the court for the appointment of a person as liquidator in place of the liquidator appointed under s 241(2)(c), then the incumbent liquidator must apply to the court for the appointment of the other person as liquidator and if it thinks fit the court may appoint that person as liquidator.7 The court has a discretion whether or not to appoint the replacement liquidator nominated at the meeting.8 If the liquidator has been appointed by the shareholders or the directors under s 241(2)(a) or (b), s 243(8) provides that the creditors will not have power to meet and appoint another liquidator if, within 20 working days before the appointment of the liquidator, the directors of the company have resolved that the company would, upon the appointment of a liquidator under either para (a) or para (b), be able to pay its debts, and a copy of that resolution is delivered to the Registrar for registration. In a solvent liquidation there is no need for concern about the impartiality or debtor-friendliness of the liquidator. The company has sufficient assets to fully cover its debts, and is being liquidated only to distribute the company assets to shareholders. Directors who vote in favour of such a resolution must sign a certificate stating that in their opinion the company would, on the appointment of the liquidator under either para (a) or para (b) as the case may be, be able to pay its debts, and must also set out the grounds for that opinion.9 Any director failing to comply with this requirement commits an offence, punishable by a fine not exceeding $5,000.10 However, even if s 243(8) initially applies, if the liquidator, once appointed, is either satisfied that the directors who voted in favour of the solvency

[page 55] resolution did not have reasonable grounds to believe that the company would on the appointment of the liquidator be able to pay its debts, or that the company is not able to pay its debts, then he or she must call a meeting of the creditors unless he or she dispenses with the creditors’ meeting under s 245.11 Under s 245, the liquidator has a general discretion to dispense with the creditors’ meeting if: the liquidator considers, having regard to the assets and liabilities of the company, the likely result of the liquidation of the company and any other relevant matters, that no such meeting should be held; the liquidator gives a notice in writing to the creditors stating that he or she does not consider that a meeting should be held, the reasons for reaching that view, and that no such meeting will be called unless a creditor gives notice in writing to the liquidator within 10 working days after receiving the notice, requiring a meeting to be called; and no notice requiring the meeting to be called is received by the liquidator from any creditor within that period. Section 245A gives the court the power to intervene where the outcome of voting at a meeting of creditors is determined by the votes of creditors who are related entities of the company in liquidation. A director or shareholder of the company in liquidation who is also a creditor is a common example.

6.2

Further Meetings of Creditors and Shareholders

The liquidator has a discretion to summon further meetings of creditors or shareholders, and is required to do so: as specified by any shareholders’ resolution passed at a meeting held to appoint a liquidator; as specified by any creditors’ resolution passed at the initial meeting of creditors under s 243; when required to do so by notice given by shareholders holding shares on which not less than 10 percent of the total amount paid up on all shares issued by the company has been paid up;

when required to do so by notice given by creditors to whom not less than 10 percent of the total amount owed to all creditors of the company is owed.12 Schedules 1 or 5 apply to the proceedings of these meetings.13

6.3

Meetings of Creditors or Shareholders to Appoint a Liquidation Committee

Section 314 requires the liquidator to call a meeting of creditors or shareholders at any time in the course of the liquidation, at the written request [page 56] of a creditor or shareholder, for the purpose of appointing a liquidation committee to act with the liquidator. The liquidator may decline such a request if it is frivolous or vexatious, not made in good faith, or the costs of calling the meeting would be out of proportion to the value of the company’s assets (unless a creditor or shareholder agrees to meet the costs).14 Such a decision is reviewable by the court.15 The meeting must be held in accordance with the procedures set out in Schedules 1 or 5 of the Act.16 A difference between a decision at a meeting of creditors and a decision at a meeting of shareholders as to the appointment or membership of a liquidation committee is to be resolved by the court.17 In the case of a sole shareholder, a view that he or she presents to the liquidator is to be treated as if it were a decision taken at a meeting of shareholders.18 The Law Commission saw the primary function of the liquidation committee as to assist the liquidator, but also considered that it had a supervisory role.19 The membership and powers of, and procedures to be followed by, liquidation committees are set out in s 315. Regulation 33 of the Companies Act 1993 Liquidation Regulations 1994 provides: Subject to the leave of the court, no member of a liquidation committee may

directly or indirectly be entitled to derive any benefit from any transaction arising out of the assets of the company, or receive out of the assets of the company any payment for services rendered by him or her in connection with the administration of the assets, or for any goods supplied by him or her to the liquidator, for or on account of the company. Where the leave of the court is sought in respect of any payment for services, the leave shall be given only where the services performed are of a special nature, and the order shall specify the nature of the services for which leave is given. Except by the leave of the court, no remuneration shall, under any circumstances, be paid to a member of a liquidation committee for services rendered by him or her in the discharge of the duties attaching to his or her office as a member of the committee. The court may disallow or recover any benefit or payment made contrary to the provisions of this regulation. The court may give its leave under this regulation on such terms and conditions as it thinks fit. ____________________ 1.

Companies Act 1993, s 243(2).

2.

Companies Act 1993, s 243(4A).

3.

Companies Act 1993, s 243(3).

4.

Companies Act 1993, s 243(4).

5.

Companies Act 1993, s 243(5).

6.

Companies Act 1993, s 243(6).

7.

Companies Act 1993, s 243(7).

8.

Re Securitibank Ltd (Judgment No 19) [1979] NZ Recent Law 319; The Fellaz Co Ltd v Land Development Solutions Ltd HC Auckland CIV-2008-404-3332, 1 May 2009 at [9], where such an application was declined.

9.

Companies Act 1993, s 243(9).

10.

Companies Act 1993, s 243(10).

11.

Companies Act 1993, s 244.

12.

Companies Act 1993, s 258(1).

13.

Companies Act 1993, s 258(2).

14.

Companies Act 1993, s 314(2).

15.

Companies Act 1993, s 314(3).

16.

Companies Act 1993, s 314(4).

17.

Companies Act 1993, s 314(5).

18.

Companies Act 1993, s 314(6).

19.

Law Commission Company Law Reform and Restatement (NZLC R9, 1989) at [644].

[page 57]

CHAPTER 7 Distribution of Assets 7.1

General Order of Distribution

The general order of distribution in a liquidation is: secured creditors; costs of administering the liquidation; other preferential claims provided for under Schedule 7; unsecured creditors; shareholders and other entitled persons according to their rights and interests in the company. The rules applicable to each category of claim are discussed below.

7.2

The Rules of Bankruptcy Apply

Section 302(1) provides that the rules in force under the law of bankruptcy apply, in the liquidation of a company that is unable to pay its debts, to: the rights of secured and unsecured creditors; claims by creditors; the valuation of annuities and future and contingent liabilities, and that all persons who in bankruptcy would be entitled to make claims and receive payments in whole or in part are entitled to the same extent in a liquidation. The words “the rules in force under the law of bankruptcy” are intended to refer to the general body of law, both statutory and common law, which is in force in relation to bankruptcy with respect to the estates of persons adjudged bankrupt.1

[page 58] So, for example, the rules as to proof by a surety2 and the rule against double proof3 are imported into the liquidation of insolvent companies. The bankruptcy rules apply to any company in liquidation until it is shown that the assets are sufficient for the payment of the debts of the company in full.4 Once it is obvious that the company is solvent, s 302(1) ceases to apply. The bankruptcy rules do not apply if there turn out to be surplus assets.5 Where the assets are sufficient to pay debts and liabilities but not the costs of liquidation, then it appears that the company will be considered insolvent for the purposes of this provision.6 The bankruptcy rules only apply if their application is not already provided for in Part 16. So, for example, it has been held that ss 35(1), 88(4) and 131 of the Insolvency Act 1967,7 which permitted the release of the names of both secured and unsecured creditors to any person who has lodged a proof of debt, and the inclusion of a list of creditors in the first report pursuant to s 255(2)(c)(ii) of the Companies Act 1993, could not prevail in the face of the regime provided in s 256 of the Act.8 Another example is the regime for mutual credit and set-off which is provided for in s 310 of the Act, therefore excluding the application of s 254 of the Insolvency Act 2006.9

7.3

Options Available to Secured Creditors

7.3.1

What is a secured creditor?

The term “secured creditor” is defined in s 2 of the Act as meaning a person entitled to a charge on or over property owned by that company. “Charge” is defined as a right or interest in relation to property owned by a company, by virtue of which a creditor of the company is entitled to claim payment in priority to creditors entitled to be paid under s 313, but does not include a charge under a charging order issued by a court in favour of a judgment creditor. The test for a charge is whether, if the security were given up, it would [page 59]

augment the liquidation “pool” of assets.10 It follows that if the property over which security is held is the property of a third party, then the creditor is not a “secured creditor” in respect of the insolvent company.11 A mortgagee of land who, before liquidation, has bought the mortgaged property through a sale conducted by the Registrar of the High Court is not a secured creditor (as he or she has in effect parted with the property and is in the position of an unsecured creditor) and may prove for any deficiency.12

7.3.2

Status of proprietary rights

The scheme of Part 16 of the Companies Act 1993 is to exclude from the ambit of the liquidation property which is subject to a charge. The Act contemplates that secured creditors will operate independently of the liquidation, unless they decide to surrender their security in terms of s 305(1)(c). The definition of “creditor” in s 240(1) makes it clear that secured creditors are excluded except for very limited purposes. Section 248(2) makes it clear that the liquidation does not limit the secured creditors’ rights of enforcement, and s 253 provides that the liquidator’s principal duty is to take possession of the assets and distribute them or their proceeds to “creditors” (which, for this purpose, excludes secured creditors). Similarly, ss 312 and 313, which provide for the payment of creditors by the liquidator, exclude from their ambit secured creditors.13 The priority of a secured creditor is, however, subject to cl 2(1)(b) of Schedule 7 which provides for some preferential claims to have priority over unperfected security interests in certain circumstances. This provision is discussed at para 7.4.5 below. A beneficiary of property held in trust by the company is not generally bound to prove in competition with ordinary creditors. But the liquidator’s costs of administering trust assets can be met out of the assets.14 [page 60] Where a party consigned goods to a company on terms such that the company was an agent for the consignor, on the company’s liquidation the consigner was held to be entitled to the traceable proceeds of the goods and to prove for the balance.15 Similarly, a person who has paid under a mistake of fact retains equitable property in it and is entitled to such of the money as is still traceable.16

7.3.3

Secured creditors’ options

Section 305 attempts to reconcile the needs of efficient administration of liquidation with reasonable opportunity for recognition of secured creditors’ claims.17 By s 305(1) the following three courses are open to a secured creditor of a company in liquidation: realising the property subject to a charge, if entitled to do so; valuing the property subject to the charge and claiming in the liquidation as an unsecured creditor for the balance due, if any; or surrendering the charge to the liquidator for the general benefit of creditors and claiming in the liquidation as an unsecured creditor for the whole debt. Sections 305(2)–(3) spell out the powers and duties of a secured creditor who elects to realise property subject to a charge under subs (1)(a). Secured creditors may realise the property subject to the charge, whether or not they have valued the property and claimed in the liquidation for the balance: s 305(2). Section 305(3) provides that a secured creditor, who realises property subject to a charge: may, unless the liquidator has accepted a valuation and claim by the secured creditor under s 305(6), claim as an unsecured creditor for any balance due after deducting the net amount realised; must account to the liquidator for any surplus remaining from the net amount realised after satisfaction of the debt, including interest payable in respect of that debt up to the time of its satisfaction, and after making any proper payments to the holder of any other charge over the property subject to the charge. Subsections (4)–(7) deal with a secured creditor who elects to value the charged property and to claim in the liquidation under subs (1)(b). The valuation and any claim must be made in the prescribed Form 218 and must [page 61] contain full particulars of the valuation and any claim, and of the charge including the date on which it was given, and must identify any documents that

substantiate the claim and the charge.19 Where the secured creditor values the security and claims for the balance due, s 305(6) requires the liquidator to either: accept the valuation and claim; or reject the valuation and claim in whole or in part (in which case the creditor may make a revised valuation and claim within 10 working days of receiving notice of the rejection, and the liquidator may subsequently revoke or amend the decision to reject the valuation and claim).20 Under s 305(7), where the liquidator accepts the creditor’s valuation and claim, then the liquidator may at any time redeem the security on payment of the assessed value. Subsections (8) and (9) permit the liquidator to require a secured creditor to elect which of the powers in subs (1) it wishes to exercise. Section 305(8) provides that the liquidator may at any time by notice in writing require a secured creditor to exercise one of the options available under s 305(1) within 20 working days after receipt of the notice. Section 305(9) provides that if the secured creditor fails to respond within that time then he or she is taken to have surrendered the charge to the liquidator for the general benefit of creditors, and is reduced to claiming in the liquidation as an unsecured creditor for the whole debt. Submission of proof by a secured creditor for the whole of the debt due is evidence of an election to surrender but is not conclusive.21 Whether there has been a surrender is a question of fact depending on the circumstances.22 Lodgement of proof in which the creditor stated that he held no security for the debt has been held to be a surrender.23 If a secured creditor has voluntarily surrendered the charge, s 305(10) allows the surrender to be withdrawn and the charge relied on, or a new claim submitted with the leave of the court or the liquidator and subject to such terms and conditions as the court or liquidator thinks fit, at any time before the liquidator has realised the property charged. The s 305(10) power is broad and unfettered, and should be exercised having regard to the scheme and purpose of s 305 and to all relevant circumstances, which include the reasons for surrender and for the desire to withdraw it, and the effect of a decision one way or the other on the secured creditor on the one hand and on the general body

[page 62] of creditors on the other.24 The qualification to subs (10), however, is that this must occur before the liquidator has realised the property charged. Once the charged property has been realised, then strictly speaking s 305(10) does not apply. A creditor is, however, not bound by his election as to whether or not his claim is as a secured or unsecured creditor if his original proof was filed as a result of a mistake and nobody is prejudiced by the change of election.25 A secured creditor who does not prove in accordance with the s 305 rules is excluded from distribution.26 Secured creditors are entitled to apply their securities in discharge of whatever liability of their debtors they think fit. If a secured creditor holds securities not specifically applicable to any particular debt, the creditor is therefore entitled as against the liquidator (and also as against a surety) to apply the proceeds in discharge of whichever debt the creditor thinks fit.27 Secured creditors are also entitled to marshall their securities so as to secure the maximum benefit from them,28 and may appropriate the proceeds as they think fit between preferential and non-preferential claims.29 The leave of the court is required where a secured creditor seeks to take proceedings to enforce its remedies.30 The better view is that a creditor does not need to obtain leave to realise the security by means of a mortgagee sale through the Registrar of the High Court.31 [page 63] Where a receiver has been appointed, the receiver’s rights to the assets of the company are superior to those of the liquidator,32 unless the receivership is terminated or limited by the court.33 As noted at para 10.2 below there is, however, a need for a liquidator to oversee any actions of the receivers that might prejudice the interests of preferential or unsecured creditors.34

7.4

Preferential Claims Under Schedule 7

The assets of the company are distributed to the creditors in accordance with their relative pre-insolvency entitlements, except to the extent that Parliament has determined that the public interest in providing greater protection to one or more creditors outweighs the economic and social costs of any such priority.35 The claims which have been given priority over other creditors for policy reasons are set out in Schedule 7. Section 312 requires the liquidator to pay out of the assets of the company the preferential claims set out in Schedule 7 to the extent and in the order of priority specified in that Schedule. This requirement is subject to the rights of secured creditors as is confirmed by s 312(2) which provides that the term “assets” will not include assets subject to a charge, unless the charge has been redeemed or surrendered to the liquidator under s 305. Any creditor who fails to establish any priority that his or her claim may have on or before the date fixed by the liquidator under reg 12 of the Companies Act 1993 Liquidation Regulations 1994 (for creditors to establish the priority of their claims) will be excluded from objecting to any distribution made before the priority of his or her claim is established. The liquidator may, in making any distribution after the claim is admitted, make an assumption as to the priority that the claim may have and accord the creditor the benefit of the distribution accordingly. A creditor who establishes the priority of his or her claim after the date fixed by the liquidator is entitled to receive the benefit of any distribution from which they were previously excluded (if any) [page 64] if any assets remain, or, in the opinion of the liquidator, are likely to remain, available for distribution.36

7.4.1

Costs of administering the liquidation

Under Schedule 7 cl 1(1), the liquidator must first pay various costs associated with the liquidation in the following order: Fees and expenses properly incurred by the liquidator (including remuneration) in carrying out the duties and exercising the powers of liquidator. Fees and expenses properly incurred by the administrator (including

remuneration) in carrying out the duties and exercising the powers of administrator. The reasonable costs of a person who applied to the court for a liquidation order (including the reasonable costs incurred between lawyer and client in procuring the order). Actual out-of-pocket expenses necessarily incurred by a liquidation committee. Where a creditor has protected, preserved the value of, or recovered assets of the company for the benefit of the company’s creditors by the payment of money or the giving of an indemnity: (i)

the amount received by the liquidator by the realisation of those assets, up to the value of that creditor’s unsecured debt; and

(ii) the amount of costs incurred by that creditor in protecting, preserving the value of or recovering those assets. The priority accorded to these costs of administering the liquidation reflect the fact that administration costs are costs incurred on behalf of the general body of creditors which should be borne by the creditors, not pre-existing debts of the insolvent company, as well as that it would otherwise be difficult, if not impossible, to find qualified people to act as liquidators.37 Although the liquidator is required to pay these costs before the other preferential claims provided for in cl 1(2)–(5), only the cl 1(2)–(5) claims have priority over certain unperfected security interests, as discussed below at para 7.4.5. Where the liquidator incurs costs before meeting the claims of secured creditors, the liquidator’s costs will only be met in preference to the secured creditors’ claims to the extent that the liquidator was not aware of the secured creditors’ claims. Where a secured creditor has earlier represented that it was an unsecured creditor, an estoppel defence is available to the liquidator. But [page 65] once the liquidator doubts the representation, it is no longer fair to rely on it.38

7.4.2

Employees’ claims

Schedule 7, cl 1(2) provides for a second set of preferential claims which must be paid once the first set has been paid and which rank equally among themselves. The list begins with the following employees’ claims, the allowance for which is subject to cl 3 which provides for a maximum amount of $16,420 to be paid to any one employee with provision for adjustments over time by the Governor-General by Order in Council: employees’ wages or salary (including commissions, time or piece work) in respect of services provided to the company during the four months preceding the commencement of the liquidation; holiday pay payable to an employee on the termination of the employment before or because of the commencement of the liquidation; compensation for redundancy owed to an employee that accrues before, or because of, the commencement of the liquidation; amounts deducted by the company from the wages or salary of any employee in order to satisfy obligations of the employee; any reimbursement or payment provided for, or ordered by, the Employment Relations Authority, the Employment Court or the Court of Appeal under s 123(1)(b) or s 128 of the Employment Relations Act 2000, to the extent that the reimbursement or payment does not relate to any matter set out in s 123(1)(c) of the Employment Relations Act 2000, in respect of wages or other money or remuneration lost during the four months before the commencement of liquidation.

7.4.3

Other statutory preferences

In addition to the employees’ claims set out above, cl 1(2) provides for the following claims: preferential claims under s 263(2) (debts in respect of which a lien arises before the commencement of the liquidation up to a maximum prescribed amount); all amounts payable to the Commissioner of Inland Revenue in accordance with s 167(2) of the Tax Administration Act 1994 as applied by s 67 of the KiwiSaver Act 2006; all sums that, by any other enactment, are required to be paid in accordance with the priority established by cl 1(2).

[page 66] After satisfaction of the cl 1(2) priorities, cl 1(3) and (4) require that the liquidator must next pay: first, all sums for which a buyer is a creditor in the liquidation under s 11 of the Layby Sales Act 1971 paid by a buyer to a seller on account of the purchase price of goods, or to which a buyer is or becomes entitled to receive from a seller under s 9 of the Layby Sales Act 1971; then, the amount of liability of any costs referred to in s 234(c) (the costs incurred in organising and conducting a meeting of creditors for the purpose of voting on a proposed compromise).

7.4.4

Crown priority

Under cl 1(5) the following items have next priority, ranking equally among themselves: tax payable by the company under Part 3 of the Goods and Services Tax Act 1985; tax deductions made by the company under the PAYE rules of the Income Tax Act 2004; non-resident withholding tax deducted by the company under the NRWT rules of the Income Tax Act 2004; resident withholding tax deducted by the company under the RWT rules of the Income Tax Act 2004; excise duty payable by the company within the meaning of s 2(1) of the Customs and Excise Act 1996.

7.4.5

Provisions relating to security interests over all or part of company’s accounts receivable and/or inventory

Under cl 2(1)(b) of Schedule 7, in so far as the company’s assets are insufficient to meet the claims provided for in cl 1(2)–(5), they have priority over the claims of persons under a security interest to the extent that the security interest is over all or any part of the company’s accounts receivable and inventory (or all or any part of either of them) and provided the security interest is not: A purchase money security interest that has been perfected at the time specified in s 74 of the Personal Property Securities Act 1999 (which

provides that a purchase money security interest in inventory or its proceeds has priority over a non-purchase money security interest in the same collateral given by the same debtor if the purchase money security interest in the inventory or its proceeds is perfected at the time the debtor, or another person at the request of the debtor, obtains possession of the collateral, whichever is earlier). A security interest that has been perfected under the Personal Property Securities Act 1999 at the commencement of the liquidation and that arises from the transfer of an account receivable39 for which new value is provided by the transferee for the acquisition of that account receivable [page 67] (whether or not the transfer of the account receivable secures payment or performance of an obligation). Such claims under cl1(2)–(5) must accordingly be paid out of any accounts receivable or inventory subject to that security interest (or their proceeds). The House of Lords in Buchler v Talbot40 discusses the history of this provision at some length. A class of preferential debts were created by statute in the United Kingdom in the 19th century which did not affect the proprietary rights of chargees because the legislation was concerned with the assets of the insolvent company, not assets to the extent they belonged to secured creditors. Preferential creditors were therefore given priority over other unsecured creditors in the distribution of the company’s free assets, but like unsecured creditors were postponed to the expenses of the liquidation and had no right to be paid out of any charged assets. However, the development of the floating charge, which enabled a company to grant a charge over the whole or substantially the whole of its undertaking, changed the picture. The floating charge deprived preferential creditors of much of the benefit which they were intended to have by the legislation as it enabled the chargeholder to withdraw all or most of the assets of an insolvent company from the scope of the liquidation and leave the liquidator with little more than an empty shell and nothing with which to pay the preferential debts. This led to legislative amendments to make preferential debts payable out of the proceeds of a floating charge in priority to the debt secured by the charge. Those amendments did not, however, provide for any of the costs and expenses of the liquidation to be paid out of assets subject to

the floating charge. According to the House of Lords, the purpose of the amendments “was to provide a secondary fund for the payment of preferential debts, not to relieve liquidators by making new provision for the payment of the costs of winding up at the expense of the holder of a floating charge”.41 As a result of the enactment of the Personal Property Securities Act 1999, the concept of a floating charge no longer exists in New Zealand. Schedule 7 was consequentially amended to create a right to priority over accounts receivable and inventory of a company instead. Prior to the introduction of the personal property securities regime, it had been held that under s 299 of the Companies Act 1955 (which provided for administration costs to be payable out of the assets of the company in priority to all other claims, and is the predecessor of s 278 which provides for the expenses and remuneration of the liquidator to be paid out of the assets of the company) and its overseas equivalents, that if a floating charge of a debenture-holder had crystallised prior to the commencement of a winding up, the liquidator’s costs may not be claimed in priority to the charge of the debenture-holder because the liquidator’s costs could only be recovered from [page 68] “assets of the company”, and the assets the subject of the crystallised charge had passed to the secured creditors.42 A different result was reached in Re Barleycorn Enterprises Ltd.43 In Re Gwyndene Carpets Ltd (in rec and liq),44 Fisher J observed that in Re Barleycorn, the winding up commenced before the creation of the fixed charge. His Honour suggested that perhaps in cases like that it might be arguable that s 299 or its equivalent would have time to give the liquidator priority before he or she faced a competing fixed charge, but stated that it is not easy to see how such priority could continue after the charge did crystallise. The Court did not consider that there was any difference between the 1955 and 1993 Acts in respect of the question whether the liquidator’s costs enjoy priority over the claims of a debenture-holder where the floating charge had crystallised before the winding up commenced. It considered that cl 9(b) of Schedule 7 (now cl 2(1)(b)) made it clear that only preferential claims other than liquidation costs took priority over floating charges. The Court left open the

question whether the result would differ if the floating charge had not crystallised before the winding up had commenced. The Re Barleycorn decision has since been overruled by the House of Lords in Buchler v Talbot.45 The current language of the Companies Act 1993 (in particular the definition of “assets” in s 312(2) and “charge” in s 2, and the deliberate exclusion of administration costs from cl 2(1)(b)) and the introduction of the personal property securities regime make it difficult to see how the Barleycorn decision could have been adopted in New Zealand in any event. From a practical perspective, in most instances where this issue has the potential to arise, a receiver will have been appointed and the cl 1(2)–(5) preferences are likely to be paid first by the receiver under s 30 of the Receiverships Act 1993, with no assets of the company coming into the hands of the liquidator. Section 30 of the Receiverships Act only applies, however, when the company is not in liquidation at the time of the receivership. If the company is already in liquidation, it is the liquidator’s obligation to pay the preferential creditors. The House of Lords in Buchler v Talbot considered that costs incurred by liquidators in identifying preferential creditors and paying them pursuant to their statutory obligation, in circumstances where there are no uncharged assets, are payable ahead of debenture-holders’ claims, on the same basis that costs incurred by liquidators in realising charged assets are payable ahead of the chargeholders’ claims.46 [page 69] Clause 2(1)(b) of Schedule 7, and some of the difficulties to which it gives rise, are discussed further in the receiverships context at [14.63] of Heath & Whale on Insolvency (looseleaf ed, LexisNexis).

7.4.6

Other Schedule 7 provisions

All preferential claims, other than the first priority group provided for in cl 1(1) (administration costs) must be paid in full unless the assets are insufficient to meet them, in which case they abate in equal proportions.47 Clause 4 provides for the subrogation of a third party who finances the payment of a preferential claim to the priority of the creditor who has been paid. If a person has seized goods or effects of the company in lieu of payment

(distrained) during the 20 working days before the commencement of the liquidation, the preferential claims are a first charge on the goods or effects (or the proceeds from their sale). Where, however, money is paid to a claimant under that charge, the person has the same rights of priority as that claimant; that is, they are subrogated to the rights of the preferential creditor.48

7.5

Pari Passu Principle

The way in which an insolvent company’s assets are to be distributed among the general body of unsecured creditors begins with the pari passu principle, the fundamental principle that claims rank equally among themselves and abate rateably in the event of a deficiency: s 313(1)–(2).49 A creditor can surmount the pari passu principle to its own advantage only by bringing itself within a recognised exception to that rule. The principal exceptions are: a prior charge over property (s 305); some other form of proprietary interest in property held by the company; a set-off (s 310); a preferential claim (s 312); an agreed subordination of debt (s 313(3)); an equitable subordination of debt as between creditor and surety.50 An agreement purporting to contract out of the pari passu principle to the detriment of the general body of creditors is invalid. A creditor can validly agree to subordinate its own debt to those of the general body of creditors but it cannot achieve the reverse by a contract to which other creditors are not a party.51 [page 70] According to s 313(3), where before the commencement of a liquidation a creditor agrees to accept a lower priority in respect of a debt than that which it would otherwise have had under the Act, nothing prevents the agreement from having effect according to its terms. It is clear that for s 313(3) to apply, positive assent by a creditor will be

required and that assent will not bind those creditors who do not assent. If the company wishes to institute a scheme binding on all creditors it ought to proceed under the provisions for compromises, particularly if some creditors do not positively consent.52 It is likely that, notwithstanding these provisions, while the right to share equally in a liquidation can be waived by the creditor, the company cannot by its own contract, even though entered into for bona fide commercial reasons, confer a higher right on some of its creditors.53 The pari passu principle only comes into effect once secured creditors’ claims are met, any equities affecting the company’s assets (eg the right to avoid a transaction for misrepresentation) are resolved and other claims which rank in priority to those of the unsecured creditors (such as Schedule 7 claims) are met.

7.6

Procedure for Unsecured Claims

Under s 304, claims by unsecured creditors are required to be made in the prescribed form54 and must, among other things, contain full particulars of the claim. The liquidator is required as soon as possible either to admit or reject the claim in whole or in part. A liquidator who rejects a claim in whole or in part must notify the creditor in writing. If the liquidator subsequently considers that a claim has been wrongly admitted or rejected in whole or in part, that decision may be revoked or amended.55 Subject to the Act and unless otherwise ordered by the court, the liquidator may fix a day on or before which the creditors of the company must make their claims, and establish any priority which their claims may have under s 312. The liquidator must give public notice of this day, which must not be less than 10 working days from the date of the notice.56 Any creditor who fails to make his or her claim on or before the date fixed by the liquidator will be excluded from the benefit of any distribution made before his or her claim is made. However, such creditors shall be entitled to receive the benefit of any distribution from which they were previously excluded if any assets remain, or, in the opinion of the liquidator, are likely to remain, available for [page 71]

distribution.57 A similar provision applies in respect of a creditor who fails to establish any priority that his or her claim may have by the date fixed by the liquidator.58 Despite the provision for this procedure, English caselaw suggests that the liquidator is under a duty to take all reasonable steps to ascertain whether there are other claims and should write to potential claimants requiring them to prove their claims within a set time in order to fulfil the requirement to see that the assets are applied in satisfaction of the company’s claims pari passu (ss 253 and 313).59 While it is debatable whether such a duty exists in New Zealand, the English authorities should be regarded as articulating a “best practice” for liquidators. Late claims might be permitted (at least after a court review of the liquidator’s decisions, in which case the court might well admit the late claim) but without disturbing previous dividends60 even though the admission of the claim might result in some of the shareholders having been overpaid at the expense of others61 A creditor who has not proved in time is not entitled to recover from shareholders to whom the liquidator has distributed the surplus62 but may be able to recover from the liquidator if the liquidator has failed to make sufficient effort to ascertain the existence of the creditor,63 even if the liquidator was acting on legal advice.64 It is for this reason, for his or her own protection, that the liquidator should apply to the court for directions wherever there is any doubt, especially if large sums are involved. A claim made under s 304 which is admitted by the liquidator is to be treated as if it were a debt proved in accordance with the requirements of the Insolvency Act 2006.65 It is an offence to make a false or misleading claim.66 [page 72] The liquidator’s position in examining a proof of debt is the same as that of the Official Assignee in bankruptcy; namely, that no judgment against a bankrupt and no account stated with a bankrupt can deprive the Assignee of the right to investigate the nature and grounds of the claim made against the estate: the Assignee is therefore entitled to go behind these forms and to require

satisfactory evidence that the debt on which the proof is founded is a real debt.67 A liquidator, when examining a proof of debt with a view to its admission or rejection, is entitled also to examine a set-off to that proof, if it is a matter of account, in order to arrive at the amount, if any, for which the proof is to be allowed.68 The liquidator may be estopped from rejecting a proof in circumstances where the creditor was induced by reason of the liquidator’s apparent acquiescence not to take steps to his or her benefit.69

7.7

Review of Liquidator’s Decision on Claim

The liquidator’s decision to admit or reject any claim can be reviewed under s 284(1)(b).70 Where a creditor applies for an order under s 284, the liquidator may make provision for the dividend on the claim and the probable cost of the application in the event of the claim being admitted.71 The liquidator is required by reg 15(2) of the Companies Act 1993 Liquidation Regulations 1994 to exclude all claims which have been rejected from participation in the dividend where no notice of an application under s 284 has been given within the time specified in the High Court Rules for appeals to the High Court.72 Regulation 15(2) therefore has the effect of limiting the time within which an application can be made under s 284(1)(b) to 20 working days after the decision to be reviewed.73 The court’s task is to undertake a fresh assessment of whether the claim should be admitted to proof. The court is able to consider evidence that was [page 73] not before the liquidator to reach its own conclusions regarding the validity of the claim based on the evidence adduced before it.74 Where a creditor makes a s 284 application in respect of a decision to reject its claim, the court may allow the costs of any creditor to be added to the claim, allow any costs of any party to be paid out of the assets of the company (such costs being deemed to be expenses of the liquidator) and order any costs to be paid by any party to the proceeding other than the liquidator.75 Another option is to seek leave to commence proceedings against the

company, as in some cases this will be the more convenient procedure for determining the claim; for example, where the case is of sufficient complexity that it is likely that the liquidator would reject the claim.76 Section 307(2) allows a claimant who is aggrieved by an estimate made by the liquidator to apply to the court for the court to determine the amount of the claim. A liquidator may be liable for the negligent admission of a wrong proof.77

7.8

Admissible Claims

Section 303 provides that any debt or liability, present or future, certain or contingent, ascertained or a liability for damages, may be admitted as a claim against the company in liquidation, and specifically excludes fines, monetary penalties, and costs to which s 308 applies.

7.8.1

Future claims

Under s 303, a creditor may prove in respect of future claims. A claim in respect of a debt that, but for the liquidation, would not be due and payable until six months or more after the commencement of the liquidation, is to be treated as a claim for the present value of the debt, which is determined by deducting interest at the rate prescribed by s 87(3) of the Judicature Act 1908 from the amount of the debt for the period from the date on which the company is put into liquidation to the date when the debt is due.78 [page 74] If a contract provides for a fixed sum to be paid to a party by way of liquidated damages for early termination, that party is entitled to prove for that sum.79 If no fixed amount is provided for in the case of a contract for employment, the party whose office or employment is terminated will be entitled to prove for the reasonable damages he is likely to suffer having regard to his chances of getting other employment.80 In one case it was held that the party was entitled to prove for the present value of his or her salary for the remainder of the term, less

a deduction for being at liberty to obtain other employment.81 It is a matter of construction whether an agent can prove for loss of commission for the remainder of the term of a contract with the company. Where the agent did not have the right to determine what the extent of the business was to be and the company was able to reduce it to nothing, the agent was not able to prove.82

7.8.2

Contingent claims

A contingent claim is founded on an obligation incurred by an insolvent company before it is put in liquidation which will crystallise on the happening of some future event into a present debt or liability provable in the liquidation.83 Liquidators are obliged to accept contingent claims.84 Section 307 provides for the liquidator to estimate the amount of a claim subject to a contingency, or refer it to the court. Such claims fall to be valued in accordance with the general law. As a result, liquidators are required to make a ‘just estimate’ of the value of such claims as do not bear a certain value. The valuation of contingent debts is to be at the date of the liquidation order, but subsequent events are taken into account for the purposes of retrospective adjustment of the value of the estimate. There is no limit to the period during which hindsight can be used to adjust the value of the contingent claims except that prior dividends cannot be disturbed and the completion of the liquidation renders the distribution final. There are therefore difficulties for liquidators in completing the liquidation of an insurance company, as policy holders may make claims which the liquidators are required to accept, after the date that the liquidation has commenced. In [page 75] the United Kingdom there are specific regulations dealing with the valuation of contingent claims including those made in respect of insurance policies. There are no similar regulations in New Zealand.85 Because of the absence of a statutory framework for dealing with the liquidation of an insurance company, the court has accepted that it is proper for liquidators to seek, under s 284, confirmation from the court that the procedure that they intended to adopt is the appropriate mechanism for ensuring that known

creditors with accepted claims are paid promptly and that contingent creditor claims are dealt with, and that the administration is conducted in the most efficient and cost-effective manner possible.86

7.8.3

Claims in contract

Proof may be made for damages for breach of contract.87 Such a claim may include damage sustained under a continuing breach of contract after the liquidation commenced.88 Liquidation does not automatically terminate an ongoing contract and can lead to a claim for damages for wrongful breach.89

7.8.4

Sureties

Consistent with s 85 of the Judicature Act and equitable principle, s 272 of the Insolvency Act 2006, as invoked for companies by s 302 of the Companies Act 1993, makes provision for a surety to prove in the bankruptcy or liquidation where the surety has paid the debt, or paid part of it in discharge of the whole, even after adjudication. In that situation the surety can stand in the place of the creditor if the creditor has already submitted a claim. If the creditor has not submitted a claim, the surety can prove for the payment that the surety has made. But in either case, the surety’s direct or indirect right to prove arises only where the creditor’s debt has been paid or otherwise fully discharged. Except for a situation in which the guarantee had only extended to part of the debt, there can be no question of competing proofs from creditor and surety.90 Because of the rule against double proof, the surety can prove in the principal debtor’s liquidation only if the creditor does not do so. The proof of a surety cannot displace the proof of the principal creditor unless and until the [page 76] surety has fully discharged all his or her liabilities to the creditor. A fortiori it cannot do so where no payment has been made and the liability to the surety remains contingent. So long as any liabilities of the surety are outstanding, the creditor remains entitled to prove for the full amount of the debt due to him or her at the date of commencement of the liquidation and the surety’s proof is excluded.91 It has been held that where a payment has been made in reduction of a debt by

any member of a debtor group (in the sense of a principal debtor and one or more sureties), a creditor’s proof in the subsequent liquidation of that or any other member of the group must give credit for the payment, that is, must be limited to the net sum owed as at the date of the liquidation. That is so whether it is the principal debtor or the surety who made the part payment. Provisions to the contrary in a “whole of moneys” guarantee are ineffective to avoid that result.92 Until the surety pays the principal creditor there is only a contingent right of proof, and a payment to the surety may be a voidable preference.93

7.8.5

Bills of exchange

A person holding bills accepted by the company may prove in the liquidation, but only for the amount actually due. If part payment has been received, even after commencement of the liquidation, the holder of the bills may prove for the balance only.94 In Re Securitibank,95 the High Court held that the rule in Waring’s Case96 applies in New Zealand. That rule provides that, where both the acceptor and the drawer of a bill of exchange are insolvent, the holder of the bill is entitled to have any securities given by the drawer to the acceptor applied in payment of the bill. For the rules that apply where the drawee or acceptor is in liquidation: to presentation of bills of exchange, see Bills of Exchange Act 1908, ss 41(1)(da), 41(2)(fa), 45(2)(gb), 46(2)(bb), 46(2)(c)(iii) and (d)(iii); to notices of dishonour, see Bills of Exchange Act 1908, s 49(ka); and to noting or protest of a bill, see Bills of Exchange Act 1908, s 51(7). [page 77]

7.8.6

Lessor’s position

Where the company holds a lease the liquidator may assign it, disclaim it, or continue in occupation. Where the company was the original lessee and it or the liquidator has assigned the lease, the lessor may prove for the loss of the benefit of the company’s covenants.97 It is likely that an assignor of a lease to the company can

also prove for the loss of the company’s covenant of indemnity.98 In some cases, the liquidator on an application to the court for directions or other orders, has been required to keep the company alive and retain its assets, or to set aside a fund to meet the company’s liability to the lessor.99 The courts are now unlikely to make such a direction except in extraordinary circumstances.100 If the lease is disclaimed, the lessor may claim as a creditor for loss incurred.101 The lessor may also prove if willing to accept a surrender.102 Where the liquidator elects to continue with the lease for the benefit of the liquidation, the liquidator is liable to pay the full rent to the lessor and to perform the other covenants of the lease.103 The lessor is able to claim the whole of the rent under the lease for the period subsequent to the liquidation but is only able to prove for the amount due prior to the liquidation.104 Section 227(1)(b) of the Property Law Act 2007 provides that a lessor unreasonably withholds its consent to various actions, including a proposed assignment or sublease, if it does so on the basis that the lessee is bankrupt, in receivership or in liquidation.

7.8.7

Claims which are not legally enforceable

Only legally enforceable claims are to be admitted under s 303. A party whose claim is not legally enforceable is not relevantly a creditor whose claim [page 78] a liquidator is entitled to recognise.105 As a result, the following claims have not been admitted under s 303: contracts made on behalf of the company before incorporation, or before it was entitled to commence business, unless the contract has been ratified by the company before liquidation;106 gratuities (for example a pension);107 voluntary payments for the benefit of the company where there is no equitable right of recoupment;108 a debt incurred by the company, in reality and to the knowledge of the creditor, to support the private transaction of a director and not for the benefit of the company.109

The same principle applies where a claim is statute-barred and in the case of barristers’ fees.110 It has been held that a gratuitous payment in respect of a claim not admissible as of right can be made with the sanction of the court in a proper case.111 The courts have previously declined to enforce claims for foreign taxes and penalties for public policy reasons.112 However, more recently courts in a number of jurisdictions have allowed revenue claims to be enforced when those claims form part of the debts of an insolvent debtor subjected to an insolvency regime.113 [page 79]

7.9

Limitation Act

Time under the Limitation Act 2010 ceases to run against a creditor upon the appointment of a liquidator.114 A debt barred at the date a liquidator is appointed cannot be proved,115 and cannot, even in a solvent liquidation, properly be paid unless the shareholders assent to the payment.116

7.10

Liquidation Set-Off

7.10.1

General

Section 310 provides a regime for mutual credit and set-off. Section 310 requires that for liquidation set-off to apply, there must have been mutual credits, mutual debts or other mutual dealings between a company and a person who seeks or, but for the operation of the section, would seek to have a claim admitted in the liquidation of the company. Legal set-off is confined to debts which, at the time when the defence of setoff is filed, were due and payable and either liquidated or in sums capable of ascertainment without valuation or estimation. Liquidation set-off has a much wider scope.117 The courts have held that the liquidation set-off provision, and in particular the word “dealings”, is to be given a wide interpretation.118 The cause of action

need not be restricted to contract. The debts can arise by contract, statute or tort, voluntarily or by compulsion.119 It is not necessary that the debt be a legal one. It can be an equitable one.120 Liquidation set-off affects the substantive rights of the parties by enabling creditors to use their indebtedness to the company in liquidation as a form [page 80] of security. Instead of having to prove with other creditors for the whole of their debt, they can set off dollar-for-dollar what they owe the company in liquidation and prove for or pay only the balance.121 Where s 310 applies, the set-off is automatic and self-executing. The original claims are extinguished and only the net balance remains owing one way or the other.122 The rights of persons to obtain set-off against the company in liquidation, by taking an assignment of a debt owing by the company, are limited by s 310(2) and (3), which provide that such persons are not able to claim the benefit of a set-off arising from an assignment within the specified period unless they can prove that they had no reason to suspect the company was unable to pay its debts as they fell due. Section 310(4) provides that the set-off rules do not apply to any amount paid or payable by a shareholder as the consideration or part-consideration for the issue of a share or in satisfaction of a call in respect of an outstanding liability of the shareholder made by the directors or by the liquidator. This provision prevents a shareholder from setting off the liability on a call against a preliquidation debt owed to the shareholder by the company. It has been held that the liquidation set-off provisions are mandatory and parties cannot contract out of them,123 and as a result money paid under the mistake that no set-off was available may be required to be repaid.124 However, s 313(3) provides that a pre-liquidation agreement by a creditor to accept a lower than pari passu ranking in the liquidation will be valid in the liquidation. Where a debtor seeking a set-off has a preferential and an ordinary debt, the amount to be set off should be set off rateably against the non-preferential and the preferential debts in proportion to the respective amounts of the debts.125

7.10.2

Policy reasons for set-off

The allowance for liquidation set-off represents a significant exception to the pari passu rule. Two related policy justifications have been suggested. According to the Supreme Court in Trans Otway Ltd v Shephard,126 s 310(1) recognises the [page 81] general policy of insolvency law that obligations between a creditor and an insolvent are to be assessed on a net basis. “It is regarded as unfair that someone who owes an amount to an insolvent person should have to pay it in full whilst exposed to the peril of receiving only a dividend, or nothing at all, from the estate in respect of an amount owed by the insolvent.”127 The other justification is based on the legitimate expectations of parties engaged in mutual dealings who extend credit in reliance on their ability to take what is due out of what they owe, without which they would not have extended credit in the first place.128

7.10.3

Requirement of mutuality

The claims must be mutual. In Gye v McIntyre,129 the High Court of Australia treated mutuality as having three aspects: The claims must be between the same parties. The claims must be in the same right or interest. Thus, a debt due to an executor in that capacity cannot be set off against a debt due in his or her own personal right,130 a partnership debt cannot be set off against a debt owing by a single partner,131 and a debt due before liquidation cannot be set off against a debt incurred in a liquidation.132 This requirement also explains decisions that moneys paid for a special purpose are, whether before or after that purpose has been achieved, outside the scope of the set-off and mutual dealing provisions.133 It has therefore been held that no set-off arises where the claim relates to money provided to a solicitor for a specific purpose,134 or to money lodged with a bank for the payment [page 82]

of dividends.135 The rule does not apply where the money was provided for the specific purpose of being handed over to the other party.136 The claims must be commensurable; that is, they must ultimately sound in money. It may, however, be more logical to treat this requirement as distinct from the concept of mutuality. The requirement of mutuality has also been treated as the reason that a debt which cannot be proved by a company (A) in the liquidation of another company (B) cannot be set off against B’s proof of debt in the liquidation of A.137

7.10.4

Requirement of commensurability

There do not need to be two enforceable debts at the commencement of the liquidation, that is, a debt provable in the liquidation and a debt enforceable by the liquidator against the creditor claiming to prove. It is sufficient that at the commencement of the liquidation mutual dealings exist which involve rights and obligations, whether absolute or contingent, of such a nature that they mature or develop into pecuniary demands capable of set-off. If the end contemplated by the transaction is a claim sounding in money (so that it is commensurate with the cross-demand), no more is required than that at the commencement of the liquidation liabilities shall have been contracted by the company and the other party respectively from which cross-money claims accrue during the course of the liquidation.138 The Australian courts have held that the transaction sought to be set off must as at the commencement of the liquidation naturally, or in the ordinary course of business, end in a debt. That is, as long as it has become an actual liability by the time the account has been taken between the company and the proving creditor, it is not necessary that as at the commencement of the [page 83] liquidation the transaction must of necessity result in a debt.139 The English courts have held that contingent liabilities of all kinds, including liability for breaches occurring on or after the receiving order of contracts entered into before that date, are debts provable, and in general all provable debts resulting from mutual dealings are capable of set-off. Contingent liabilities and claims for unliquidated damages would need to be quantified by the time the claim to set-

off was made.140 Section 307 provides a mechanism for quantification by estimation of the amount of a claim.141 As a result of the requirement that the claims ultimately sound in money, a claim for the return of goods in specie, such as an action in detinue for wrongful detention of goods, does not give rise to a set-off, although a claim for damages for conversion might do so.142 There is a distinction between property provided to be sold and property provided to be used or worked on. So, where property is delivered with the direction to turn it into money then a set-off can arise, as where a commission agent is entrusted with goods for sale, but a set-off will not arise in respect of tools to be used in installing the sold goods.143

7.10.5 No reason to suspect company unable to pay debts Section 310(2) requires that a person claiming the benefit of certain types of setoff — arising from a transaction made within six months preceding the commencement of liquidation (or two years in the case of a related person) — prove that at the time of the transaction it did not have reason to suspect that the company was unable to pay its debts as they became due. The reason for this qualification is to prevent a creditor taking opportunistic advantage over other creditors by engineering a situation in which it also becomes a debtor of the company at a time when it must be taken to have appreciated the company’s insolvent position.144 In this context, the transaction is the event giving rise to the potential claim to assert the set-off, not the set-off itself.145 The Supreme Court in Trans Otway Ltd v Shephard held that the test is an objective one, and requires “more than a mere idle wondering whether something exists or not”. It requires “a positive feeling of actual apprehension or mistrust, amounting to a slight opinion but without sufficient evidence”. [page 84] A reasonable person in the situation of the payee must have an actual apprehension or fear that the situation of the payer is in actual fact that it is unable to pay its debts. It “is insufficient that the circumstances give a reason to suspect the debtor might be insolvent: they must be such that the creditor should have suspected that the debtor was insolvent”.146 Set-off in the bankruptcy and liquidation context, including the provision for

set-off under netting agreements, is discussed further at [30.3] of Heath & Whale on Insolvency (looseleaf ed, LexisNexis).

7.11

Quantification of Claims

The amount of the claim must be ascertained as at the date of the commencement of the liquidation.147 The amount of a claim based on a debt or liability denominated in a currency other than New Zealand currency must be converted into New Zealand currency at the rate of exchange on the date of the commencement of the liquidation, or if there is more than one rate of exchange on that date, at the average of those rates.148 If the claim as lodged can be treated as being for damages, s 307 applies. Section 307 provides for the liquidator to estimate the amount of the claim or refer it to the court if it is subject to a contingency, is for damages or is not certain for some other reason.149 The liquidator, or a claimant who disagrees with an estimate made by the liquidator, can apply to the court for the court to determine the amount of the claim as it sees fit.150 Nothing in Part 16 of the Act limits or affects the recovery of:151 a fine imposed on a company, whether before or after the commencement of the liquidation, for the commission of an offence; [page 85] a monetary penalty payable to the Crown imposed on a company by a court, whether before or after the commencement of the liquidation of the company, for the breach of any Act; or costs ordered to be paid by the company in relation to proceedings for the offence or breach. A claim in respect of a debt, that but for the liquidation would not be payable until at least six months after the liquidation commenced, is to be treated for the purposes of the Act as a claim for the present value of the debt. The present value of the debt is determined by deducting from the amount of the debt interest at the prescribed rate (as defined in s 87(3) of the Judicature Act 1908) for the

period from the date of payment of the debt to the date when the debt is due.152 A creditor making his or her claim is required to deduct all trade discounts which he or she would otherwise have given if the company had not gone into liquidation.153 Where any payment (including rent) falls due at stated periods and liquidation commences at any time other than at the beginning of one of those periods, the creditor may claim up to the date of the commencement of the liquidation as if the payment accrued on a daily basis. This does not affect the right of a lessor of the property to claim rent that accrues on or after the commencement of liquidation.154

7.12

Interest on Claims

Section 311(1) provides that the amount of a claim made by a creditor in a liquidation may include interest up to the date of commencement of the liquidation: at such rate as may be specified or contained in any contract that makes provision for the payment of interest on that amount; or in the case of a judgment debt, at such rate as is payable on the judgment debt. Interest is only paid on admitted claims if surplus assets remain after the payment of all admitted claims. In that case, s 311(2) provides that interest will be paid at the prescribed rate (under s 87(3) of the Judicature Act 1908) on those claims from the date of commencement of the liquidation to the date on which each claim is paid. If the amount of the surplus assets is insufficient to pay interest in full on all claims, payment will abate rateably among them. A further interest payment is made if further surplus remains after payment of the interest provided for in s 311(2). In that case, s 311(3) provides that interest will be paid on all admitted claims from the commencement of the liquidation to the date on which the claim is paid at a rate equal to the excess between the prescribed rate and the rate of interest which may be claimed [page 86]

under s 311(1), and such payment shall abate rateably if there are insufficient assets to make payment in full.

7.13

Distribution of Surplus to Shareholders

7.13.1

General rule

Any surplus after payment of all claims (including interest payable under the Act) must be distributed by the liquidator in accordance with the company’s constitution and the Act.155 Section 36(1)(c) provides that a share confers on the holder a right to an equal share in the distribution of the surplus assets of the company (subject to the constitution and the terms on which the share was issued). This is consistent with the position at common law which is that, subject to the constitution and the terms of issue of the shares, the surplus assets are divided between, and losses borne by, shareholders in proportion to the nominal amounts of the shares (and not in proportion to the amounts paid up), after the capital account has been equalised by calling up or treating as called up unpaid capital; that is, every shareholder loses or gains the same percentage of what he or she had subscribed and paid.156 In circumstances where different amounts have been paid up, no interest is payable on the difference (in the absence of an agreement or provision in the constitution providing for such interest).157 The terms of the constitution may prevent calls from being made on partly-paid shares to equalise amounts paid up.158 Where some shareholders have made payments in advance of calls, they are normally entitled to a refund of such payments with interest, at the agreed rate, up to the date of repayment before any return of capital to the other shareholders in the same class.159 [page 87] The rule in Cherry v Boultbee160 is that any shareholder who is a debtor of the company must pay the full debt before he or she is entitled to share in any surplus. (This rule would be displaced in corporate insolvency by the provisions for liquidation set-off, but s 310(4) excludes from the set-off procedure amounts paid or due as consideration for the issue of a share and in satisfaction of calls.)

Where a company has proved against the estate of a bankrupt shareholder for the full amount unpaid on shares but has only recovered part of that amount, the shares are not treated as fully paid until the holders of the other shares, which are in fact paid up, have received dividends sufficient to reduce the amount paid on their shares to the amount which the company has received on the bankrupt’s shares.161 The same rule applies to partly-paid shares held by an insolvent company.162

7.13.2

Effect of preferential rights

Where no provision to the contrary is made in the constitution, the common law rule has been that a preferential shareholder is entitled, after repayment of all the paid-up capital, to participate in the surplus assets of the shareholders in proportion to the nominal amount of his or her shares,163 even though the surplus, had it been distributed prior to the liquidation, would have belonged to the ordinary shareholders.164 In Scottish Insurance Corp Ltd v Wilsons and Clyde Coal Co Ltd,165 however, the House of Lords held that where on the construction of the constitution, the preferential right to repayment of capital attached to preference shares is meant to delimit the whole right of the holders of preference shares and not merely give them priority as to repayment (as is prima facie the case with the onus on the holder of preference shares to show the contrary), preference shareholders are not entitled to share further in the surplus assets after repayment of capital.166

7.13.3

Effect of provision for dividends

A provision in the constitution conferring on preference shareholders the right to a preferential dividend does not of itself confer any preference as to [page 88] the return of capital on a liquidation, which must be distributed amongst the shareholders according to their capital.167 If dividends have been declared, they will be debts owing from the company and will be payable in the liquidation immediately after all outside debts have been discharged.168 If dividends have not been declared, the holders of preference shares have no

right to receive payment of arrears of dividend in a liquidation, even though the company has earned sufficient profits to pay them,169 unless: the constitution or the terms of issue of the shares provide for the profits to be applied by way of preferential dividends without the necessity of any actual declaration of dividend, but then only to the extent that there are sufficient profits;170 or the constitution or the terms of issue of the shares provide that arrears of preference dividends shall be paid in a liquidation.171 Such dividends have been held to be payable even though there were not sufficient accumulated profits.172 In the absence of express wording such dividends are only payable to the date of liquidation and not to the date of repayment of capital.173

7.14

Liquidation Surplus Account

The Liquidation Surplus Account174 is funded by money representing unclaimed assets and administered by the Public Trust. Upon the completion of a liquidation, a liquidator must forward any unclaimed monies to the Public Trust. Those funds are held by the Public Trust for 12 months to enable any entitled creditors to claim those monies. If those funds are not claimed within that time, they are paid into the Liquidation Surplus Account. Applications for funding from the Liquidation Surplus Account are made to the Official Assignee for New Zealand, who may issue directions to the [page 89] Public Trust to make any payments. Any application for funding must meet the following criteria in accordance with s 316: The application for funds must be made to meet the claims of creditors of a company in liquidation. The funding for the claims of creditors must relate to the payment of costs of proceedings in the liquidation after the commencement of the liquidation; or legal or other expert advice; or the costs of any expert witness. The Official Assignee must be satisfied that it is fair and reasonable for those costs to be met out of the account.

In considering an application for funding of proceedings, the Official Assignee will also consider:175 the merits of the case; the amount likely to be recovered; the estimated total cost of the proceedings; the proportion of the amount requested from the Liquidation Surplus Account in relation to the total cost of proceedings (where possible the Official Assignee expects that creditors will make a contribution); and the extent to which there is a public interest element in the proceedings (such as the need to enforce duties of directors or other obligations owed by persons who might reasonably be expected to have regard to creditors or shareholders of the company). An application must contain the following details: a list of the creditors who have filed proofs of debts, along with the amount of each proof; and a list of all assets realised and assets still to be realised.176 In some circumstances claims will be determined on a staged basis and bulk sums will only be granted upon an undertaking from those involved that they will see the matter through to completion despite any rise in costs that may occur. Any assets that are recovered must be used to reimburse the Liquidation Surplus Account as first priority.177 [page 90] The fund may also be used to pay any person entitled to payment in a liquidation where money representing the surplus assets of that liquidation has been paid into the fund. In making a payment under s 316, the Public Trust is not required to ascertain that money or sufficient money was received on account of any company to which the claim for payment relates.178 Money in the fund may be invested in accordance with the provisions of the Trustee Act 1956 as trust funds and any interest on the money must be distributed in accordance with s 316.179

The application of the Unclaimed Money Act 1971 to money in the liquidation surplus account is specifically excluded.180 ____________________ 1.

Re Tasman Pacific Airlines of NZ Ltd (in rec & liq) [2002] 1 NZLR 688 at [29]. See Chapters 2–11 of Heath & Whale on Insolvency (looseleaf ed, LexisNexis) for discussion of the law of bankruptcy.

2.

Insolvency Act 1967, s 103; Insolvency Act 2006, s 272; Stotter v Equiticorp Australia Ltd (in liq) [2002] 2 NZLR 686, (2002) 9 NZCLC 262,783. See para 7.8.4.

3.

The rule that only one person can prove on a debt: Re Oriental Commercial Bank, ex parte European Bank (1871) 7 Ch App 99, discussed in Re SSSL Realisations (2002) Ltd (in liq) [2006] EWCA Civ 7, [2006] Ch 610 at [93]–[94] in particular.

4.

K J Rew & Co Ltd v Hayvice (1989) 2 PRNZ 199 at 204 citing Re Milan Tramways Co, ex parte Theys (1884) 25 Ch D 587 at 591 and Fryer v Ewart [1902] AC 187 at 192.

5.

Re Stewart Timber & Hardware (Whangarei) Ltd (in liq) & Stewart Timber & Hardware Ltd (in liq) (1991) 5 NZCLC 67,137 at 67,140–67,141; Re Fine Industrial Commodities Ltd [1955] 3 All ER 707; Re Rolls-Royce Ltd [1974] 1 WLR 1584, [1974] 3 All ER 646.

6.

Re Leng, Tarn v Emmerson [1895] 1 Ch 652 at 658, 662.

7.

Now ss 75, 100 and 233 of the Insolvency Act 2006. Note that only s 100 now provides for creditors to have access to proofs of debt.

8.

Re Tasman Pacific Airlines of NZ Ltd (in rec & liq) [2002] 1 NZLR 688.

9.

The regime for mutual credit and set-off is discussed at para 7.10.

10.

Re Jacobs (1890) 9 NZLR 293 at 294; Re B E Williams [1916] NZLR 650 at 654 (if a release or forfeiture of the security causes the property to fall into the estate of the debtor); Commercial Property and Finance Co Ltd v Harrison (1908) 27 NZLR 431 at 434 (a creditor is not allowed to prove against a bankrupt’s estate and to retain a security which, if given up, would go to augment the estate against which he proves. If a creditor is compelled on proving to give credit for his security, the security to be deducted must be upon the same estate as that against which the proof is directed). For further discussion of the meaning of “charge”, see Stapleton v FTS O’Donnell Griffin & Co (Q’Land) Pty Ltd (1961) 108 CLR 1086; Re Edelstein, DCT (NSW) v Donnelly (1989) 89 ALR 232.

11.

For discussion of a case where property over which security is held is the property of the insolvent company and a third party jointly, see Ex parte West Riding Union Banking Co, Re Turner (1881) 19 Ch D 105 at 112–113; Re Rushton, ex parte National Westminster Bank Ltd v Official Receiver [1972] 1 Ch 197.

12.

Re Benjamin and Jacobs (1890) 9 NZLR 152 at 156.

13.

Dunphy v Sleepyhead Manufacturing Co Ltd [2007] 3 NZLR 602, (2007) 10 NZCLC 264,313 (CA) at [43].

14.

See Re Ararimu Holdings Ltd (1989) 4 NZCLC 65,104; McKenzie v Alexander Associates Ltd (No 1) (1991) 5 NZCLC 67,030; Ng v Van Der Velde [2011] FCAFC 35 (15 March 2011) for discussion of the Australian position in respect of the status of trust assets when a trustee is in liquidation, and other cases referred to at para 10.24.7 below. See also cases holding that a trustee has a right to be indemnified out of the trust assets against personal liabilities incurred in the performance of the trust: Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360, (1979) 4 ACLR 575; Re Staff Benefits Pty Ltd (in liq) (1979) 4 ACLR 54.

15.

Ex parte Cooper, Re J G Ward Farmers’ Assoc (1897) 15 NZLR 420.

16.

Chase Manhattan Bank NA v Israel-British Bank (London) Ltd [1979] 3 All ER 1025.

17.

Law Commission Company Law Reform and Restatement (NZLC R9, 1989) at [701].

18.

See Companies Act 1993 Liquidation Regulations 1994, reg 7.

19.

Companies Act 1993, s 305(4).

20.

The amended decision must be recorded in writing: Companies Act 1993 Liquidation Regulations 1994, reg 8.

21.

Re Douglas Homes Queensland Pty Ltd (1978) 3 ACLR 715.

22.

Health and Life Care (in liq) v South Australia Asset Management Corp (1995) 16 ACSR 453 at 458 (SASC).

23.

Re International Tyre Co Pty Ltd (1979) 4 ACLR 553.

24.

Consolidated Technologies Development (NZ) Ltd v McCullagh (2006) 9 NZCLC 264,056 at [59].

25.

Commissioner of Inland Revenue v Northshore Taverns Ltd (in liq) [2009] NZCCLR 5, citing Re Winefield [1885] NZLR 394. See also Re F (a bankrupt) [1968] NZLR 518.

26.

Re H (a Bankrupt) [1968] NZLR 231 at 237–238, 241.

27.

Ward v National Bank of NZ (1888) 8 NZLR 10 at 13.

28.

Heyman v Dubois (1871) LR 13 Eq 158.

29.

Re William Hall (Contractors) Ltd [1967] 1 WLR 948, [1967] 2 All ER 1150.

30.

Companies Act 1993, s 248(1)(c). Applications for leave by secured creditors are normally granted: Wellington City Council v Gracelands Exports Ltd (in rec & liq) [1991] 3 NZLR 61; Re David Lloyd & Co, Lloyd v David Lloyd & Co (1877) 6 Ch D 339 (CA).

31.

Both the application and the subsequent steps by the Registrar were considered by the Court to be “proceedings” in Haupiri Courts Ltd (in liq) v Piako Construction Ltd [1969] NZLR 401. In Laycock v Klaxon Autos Ltd (1976) 1 BCR 76 at 79, Mahon J declined to follow Haupiri Courts. The conflict between these two cases came before the Court in Russell Alpine Motels (NZ) Ltd v Devon Nominees Ltd (1977) 1 BCR 105. White J observed that it was desirable that the question of interpretation be decided by the Court of Appeal but granted an injunction according to the interpretation of “action or proceeding” given in Haupiri Courts on the basis that this was the fair and reasonable course in all the circumstances of the case. In Re Prestidge (1989) 4 PRNZ 292, the Court held (without reference to Haupiri, Laycock or Russell Alpine) that an application to the Registrar of the High Court pursuant to s 99 of the Property Law Act is not a “proceeding” because it is an application to the Registrar and not to the court. See also Downley Properties Ltd v Stirling (1993) 7 PRNZ 241.

32.

Receiverships Act 1993, s 31(1). Mineral & Chemical Traders Pty Ltd v T Tymczyszyn Pty Ltd (in liq) (1995) 15 ACSR 398; Bufalo Corp Pty Ltd v Leone (2001) 40 ACSR 327; Perpetual Trustees Australia v Bank of Western Australia (2004) 50 ACSR 34, (2004) 22 ACLC 1263; Re Lakeview Farm Fresh Ltd (in rec & liq) [2006] 1 NZLR 238 at [19]–[20]. See also [14.92] of Heath & Whale on Insolvency (looseleaf ed, LexisNexis).

33.

Receiverships Act 1993, ss 31(2) and 35.

34.

Petterson v Gothard (No 3) [2012] NZHC 666 at [46]–[48]. For discussion of the approach to receivers in the liquidation context, see also Corporate Affairs Commission v ASC Timber Pty Ltd (1993) 10 ACSR 525; SA Asset Management Corp v Sheahan (1995) 13 ACLC 1138.

35.

For a detailed discussion of the policy justifications for preferential claims, see Law Commission Priority Debts in the Distribution of Insolvent Estates: An Advisory Report to the Ministry of Commerce (NZLC SP2, 1999) and P Heath “Preferential Payments on Bankruptcy and Liquidation in New Zealand: Are they Justifiable Exceptions to the Pari Passu Rule?” (1996) 4(2) Wai L Rev 24.

36.

Companies Act 1993 Liquidation Regulations 1994, reg 14.

37.

Law Commission Priority Debts in the Distribution of Insolvent Estates: An Advisory Report to the Ministry of Commerce (NZLC SP2, 1999) at [30]–[35]; P Heath, “Preferential Payments on Bankruptcy and Liquidation in New Zealand: Are They Justifiable Exceptions to the Pari Passu Rule?” (1996) 4(2) Wai L Rev 24 at 40.

38.

Commissioner of Inland Revenue v Northshore Taverns Ltd (in liq) [2009] NZCCLR 5. In this case the Court held that the costs and expenses incurred by the liquidators until they became aware of the true position should be met out of the fund before the secured creditor’s claims — either because of the operation of the estoppel defence or as a condition applicable to the granting of leave to the secured creditor to change its election to that of a secured creditor.

39.

For discussion of the meaning of “account receivable” see Burns v Commissioner of Inland Revenue (2011) 10 NZCLC 264, 885 at [79]–[101]. Contrast Commissioner of Inland Revenue v Northshore Taverns Ltd (in liq) [2009] NZCCLR 5 at [26]–[35].

40.

Buchler v Talbot [2004] UKHL 9, [2004] 2 AC 298, [2004] 1 All ER 1289.

41.

Buchler v Talbot [2004] UKHL 9, [2004] 2 AC 298, [2004] 1 All ER 1289 at [58].

42.

Re Gwyndene Carpets Ltd (in rec & liq) [1994] 2 NZLR 502, (1994) 7 NZCLC 260,439 citing Re Christonette International Ltd [1982] 3 All ER 225; Re Pacific Print Finishers Ltd (in rec & liq), Smith v Merlo (1986) 3 NZCLC 99,857; and McDonald v AGC (NZ) Ltd [1990] 1 NZLR 227 at 247.

43.

Re Barleycorn Enterprises Ltd [1970] 2 All ER 155 (CA).

44.

Re Gwyndene Carpets Ltd (in rec & liq) [1994] 2 NZLR 502, (1994) 7 NZCLC 260,439.

45.

Buchler v Talbot [2004] UKHL 9, [2004] 2 AC 298, [2004] 1 All ER 1289.

46.

Buchler v Talbot [2004] UKHL 9, [2004] 2 AC 298, [2004] 1 All ER 1289 at [19].

47.

Companies Act 1993, Schedule 7, cl 2(1)(a).

48.

Companies Act 1993, Schedule 7, cl 5.

49.

See also Attorney-General v McMillan & Lockwood Ltd [1991] 1 NZLR 53 at 58 (CA) which approved Professor Goode’s characterisation of the pari passu rule as the most fundamental principle of insolvency law.

50.

Stotter v Equiticorp Australia Ltd (in liq) [2002] 2 NZLR 686, (2002) 9 NZCLC 262,783 at [37].

51.

Stotter v Equiticorp Australia Ltd (in liq) [2002] 2 NZLR 686, (2002) 9 NZCLC 262,783 at [41]; British Eagle International Airlines Ltd v Compagnie Nationale Air France [1975] 1 WLR 758, [1975] 2 All ER 390 (HL).

52.

Re Orion Sound Ltd (in liq) [1979] 2 NZLR 574 at 585.

53.

British Eagle International Airlines Ltd v Compagnie Nationale Air France [1975] 1 WLR 758, [1975] 2 All ER 390 (HL).

54.

See Companies Act 1993 Liquidation Regulations 1994, reg 6.

55.

The liquidator must record his or her amended decision in writing: Companies Act 1993 Liquidation Regulations 1994, reg 8.

56.

Companies Act 1993 Liquidation Regulations 1994, reg 12.

57.

Companies Act 1993 Liquidation Regulations 1994, reg 13.

58.

Companies Act 1993 Liquidation Regulations 1994, reg 14.

59.

Re Armstrong Whitworth Securities Co Ltd [1947] 2 All ER 479, [1947] Ch 673 at 691–692; Pulsford v Devenish [1903] 2 Ch 625; Austin Securities Ltd v Northgate & English Stores Ltd [1969] 1 WLR

529 at 532, 535. See also James Smith & Sons (Norwood) Ltd v Goodman [1936] Ch 216 where the liquidator was held liable in damages for distributing the assets without making provision for the liabilities of the company under the two leases. 60.

Re General Rolling Stock Co Ltd, Joint Stock Discount Co’s Claim (1872) 7 Ch App 646; Re Kit Hill Tunnel, ex parte Williams (1881) 16 Ch D 590; Re R-R Realisations Ltd [1980] 1 All ER 1019, [1980] 1 WLR 805 at 814.

61.

Re Armstrong Whitworth Securities Co Ltd [1947] 2 All ER 479, [1947] Ch 673 at 690. The Court suggested that the remedy may be a claim for contribution.

62.

Butler v Broadhead [1974] 2 All ER 401, [1975] 1 Ch 97 at 109; Re R-R Realisations Ltd [1980] 1 All ER 1019, [1980] 1 WLR 805 at 810.

63.

Pulsford v Devenish [1903] 2 Ch 625; James Smith & Sons (Norwood) Ltd v Goodman [1936] Ch 216; Brown v Cowan (1912) 31 NZLR 1219.

64.

Austin Securities Ltd v Northgate & English Stores Ltd [1969] 1 WLR 529 at 535.

65.

Companies Act 1993, s 302(2).

66.

Companies Act 1993, s 304(6).

67.

Re Van Laun, ex parte Chatterton [1907] 1 KB 155, on appeal [1907] 2 KB 23; Re Home and Colonial Insurance Co Ltd [1930] 1 Ch 102.

68.

Re National Wholemeal Bread and Biscuit Co [1892] 2 Ch 457.

69.

Re Alexander Eccles Ltd (in liq), ex parte His Majesty’s Arcade and Theatre Co Ltd [1937] NZLR 86.

70.

This is assumed by Companies Act 1993 Liquidation Regulations 1994, regs 15 and 16. See discussion of court’s approach to s 284 at para 10.8. The application should be brought by interlocutory application in the liquidation proceeding under High Court Rule 31.35: Waller v Max Resources Ltd (in liq) (2003) 16 PRNZ 915.

71.

Companies Act 1993 Liquidation Regulations 1994, reg 15(1).

72.

This must be a reference to the time provided in the High Court Rules for appeals to the High Court as of right under Part 10 (within 20 working days after the decision appealed against is given: R 704): see Commissioner of Inland Revenue v Fatac Ltd (in liq) HC Auckland AP114-00, 22 August 2001 at [66]. Applications under s 284 are, however, now to be made under High Court Rule 31.35, which provides for the procedure for applications in relation to liquidation proceedings.

73.

Commissioner of Inland Revenue v Fatac Ltd (in liq) HC Auckland AP114-00, 22 August 2001 at [66]: there is no ability to extend this time limit.

74.

Manifest Capital Management Pty Ltd v Lawrence HC Auckland CIV-2010404-7741, 20 December 2011 at [8]; Trinity Foundation (Services No 1) Ltd v Downey (2005) 9 NZCLC 263,917 at [94]–[99].

75.

Companies Act 1993 Liquidation Regulations 1994, reg 16.

76.

Clarence Holdings Ltd v Mount Albert TVs (1993) Ltd (1999) 8 NZCLC 262,072; Hook v Gulf Harbour Development Ltd (in liq) HC Auckland CIV-2002-404-1931, 23 November 2005; Bunting v Buchanan [2012] NZHC 766, (2012) 11 NZCLC 98-005 at [45]. See discussion of principles applying to applications for leave at para 9.4.5.

77.

Re Home and Colonial Insurance Co Ltd [1930] 1 Ch 102 at 126; Re Windsor Steam Coal Co (1901) Ltd [1929] 1 Ch 151. But see para 10.7 below as to whether a liquidator is subject to a duty of care in negligence.

78.

Companies Act 1993, s 309.

79.

Re London and Scottish Bank, ex parte Logan (1870) LR 9 Eq 149.

80.

Re R S Newman Ltd, Raphael’s Claim [1916] 2 Ch 309.

81.

Re English Joint Stock Bank, Yelland’s case (1867) LR 4 Eq 350.

82.

Re English and Scottish Marine Insurance Co, ex parte Maclure (1870) 5 Ch App 737. Compare Re Premier Products Ltd (in liq) [1965] NZLR 50 at 62–63 where the company did not have such a power to regulate the business to be done by the agent.

83.

Re William Hockley Ltd [1962] 1 WLR 555, [1962] 2 All ER 111; Re HIH Casualty and General Insurance (NZ) Ltd HC Auckland CIV-2003-404-2838, 17 December 2003 at [19].

84.

Re HIH Casualty and General Insurance (NZ) Ltd HC Auckland CIV-2003404-2838, 17 December 2003 at [19]; Transit Casualty Co v The Policyholders Protection Board [1992] 2 Lloyds Rep 358 at 359.

85.

Re HIH Casualty and General Insurance (NZ) Ltd HC Auckland CIV-2003404-2838, 17 December 2003 at [19].

86.

Re HIH Casualty and General Insurance (NZ) Ltd HC Auckland CIV-2009404-3637, 10 September 2010 at [62].

87.

Re Condrens Parking Ltd (in rec & in liq), Jordan v O’Sullivan HC Wellington CIV-2004-485-2611, 13 May 2008 at [279]; Bunting v Buchanan [2012] NZHC 766, (2012) 11 NZCLC 98-005 at [41]– [46].

88.

Re Trent and Humber Co, ex parte Cambrian Steam Packet Co (1868) 4 Ch App 112.

89.

Re Premier Products Ltd (in liq) [1965] NZLR 50 (CA); Reigate v Union Manufacturing Co (Ramsbottom) Ltd [1918] 1 KB 592; Fowler v Commercial Timber Co Ltd [1930] 2 KB 1.

90.

Stotter v Equiticorp Australia Ltd (in liq) [2002] 2 NZLR 686, (2002) 9 NZCLC 262,783 at [49].

91.

Stotter v Equiticorp Australia Ltd (in liq) [2002] 2 NZLR 686, (2002) 9 NZCLC 262,783 at [48] citing Re Yerex, Barker and Finlay Ltd (1910) 29 NZLR 199; Re Fenton [1931] 1 Ch 85 and Barclays Bank Ltd v TOSG Trust Fund Ltd [1984] AC 626 at 643.

92.

Stotter v Equiticorp Australia Ltd (in liq) [2002] 2 NZLR 686, (2002) 9 NZCLC 262,783 at [71].

93.

Re Blackpool Motor Car Co Ltd, Hamilton v Blackpool Motor Car Co Ltd [1901] 1 Ch 77; Re Paine, ex parte Read [1897] 1 QB 122.

94.

Re Oriental Commercial Bank, ex parte Maxoudoff (1868) LR 6 Eq 582.

95.

Re Securitibank Ltd (in liq) [1978] 1 NZLR 97 at 197; reversed on another point at Re Securitibank Ltd (No 2) [1978] 2 NZLR 136 (CA).

96.

Re Brickwood & Co, ex parte Waring (1815) 19 Ves 345, 34 ER 546.

97.

James Smith & Sons (Norwood) Ltd v Goodman [1936] Ch 216; Re House Property and Investment Co Ltd [1954] Ch 576, [1953] 2 All ER 1525 at 1533.

98.

Midland Coal, Coke and Iron Co, Craig’s Claim [1895] 1 Ch 267; on appeal subnom Craig v Midland Coal and Iron Co (1896) 74 LT 744.

99.

Re Victoria Street Properties Ltd (in liq) [1927] NZLR 95; Oppenheimer v British and Foreign Exchange and Investment Bank (1877) 6 Ch D 744; Gooch v London Banking Association (1885) 32 Ch D 41; Elphinstone (Lord) v Monkland Iron and Coal Co (1886) 11 App Cas 332 (HL); Re Lucania Temperance Billiard Halls (London) Ltd [1966] Ch 98, [1965] 3 All ER 879.

100. Re House Property and Investment Co Ltd [1953] 2 All ER 1525 at 1544. 101. Companies Act 1993, s 269(5). 102. Re Panther Lead Co [1896] 1 Ch 978.

Hardley v Fatupaito and McCloy (as liquidators of Normanby Project Ltd (in liq)) HC Auckland 103. CIV-2008-404-8585, 30 June 2009 at [69]; Re New Oriental Bank Corp (No 2) [1895] 1 Ch 753; Re Levi & Co [1919] 1 Ch 416. 104. South Kensington Co-operative Stores (1881) 17 Ch D 161; Re ABC Coupler & Engineering Co Ltd (No 3) [1970] 1 WLR 702, [1970] 1 All ER 650. 105. Polperro Corp Ltd v International Marine Services Ltd HC Auckland CIV-2006404-2390, 16 July 2007 at [65]–[69]; Government of India, Ministry of Finance (Revenue Division) v Taylor [1955] AC 491. 106. Re National Motor Mail-Coach Co Ltd, Clinton’s Claim [1908] 2 Ch 515; New Druce-Portland Co Ltd v Blakiston (1908) 24 TLR 583; Re Irvin & Herdman Ltd (in liq) [1934] GLR 580; Re Matheson, Prain & Co Ltd (1903) 22 NZLR 813. 107. Re Birkbeck Permanent Benefit Building Society [1913] 1 Ch 400; compare Re Profits and Income Insurance Co [1929] 1 Ch 262; Re Houghton Main Colliery Co Ltd [1960] 3 All ER 300. 108. Re Cleadon Trust, Ltd [1939] 1 Ch 286 at 315: a payment made voluntarily and without any legal liability or compulsion in discharge of the debt of another raised no implied contract for repayment. The company had not given the requisite authority to make the payments on its behalf. 109. Re Hudson & Marriott Ltd, ex parte Marriott (1911) 30 NZLR 483. 110. Katavich v Meltzer [2011] NZCCLR 8 (HC) at [34]. 111. Re Banque des Marchands de Moscou (Koupetschesky) [1953] 1 All ER 278. 112. Government of India, Ministry of Finance (Revenue Division) v Taylor [1955] AC 491; Re Yerex, Barker & Finlay Ltd (1909) 29 NZLR 199. 113. Ayres v Evans (1981) 39 ALR 129; Re Tucker (a bankrupt), ex parte Bird [1988] LRC (Comm) 995 (Isle of Man); Priestly v Clegg (1985) 3 SA 955 (South Africa); Law Commission Cross-Border Insolvency (NZLC R52, 1999) at [149]. See Avowal Administrative Attorneys Ltd v North Shore District Court [2008] 1 NZLR 675, (2007) 23 NZTC 21,616 for indications of movement away from the approach in Government of India, Ministry of Finance (Revenue Division) v Taylor [1955] AC 491. See also discussion of the Model Law at Chapter 53 of Heath & Whale on Insolvency (looseleaf ed, LexisNexis). 114. Re General Rolling Stock Co Ltd, Joint Stock Discount Co’s Claim (1872) 7 Ch App 646; Financial Services Compensation Scheme Ltd v Larnell (Insurances) Ltd (in liq) [2005] EWCA Civ 1408, [2006] QB 808 at 814–815. 115. Financial Services Compensation Scheme Ltd v Larnell (Insurances) Ltd (in liq) [2005] EWCA Civ 1408, [2006] QB 808 at 814. 116. Re Art Reproduction Co Ltd [1951] 2 All ER 984, [1952] Ch 89; cited in Re Compania de Electricidad de la Provincia de Buenos Aires Ltd [1978] 3 All ER 668, [1980] 1 Ch 146 at 176. 117. Stein v Blake [1996] AC 243, [1995] 2 All ER 961 at 964 (HL). 118. Secretary of State for Trade and Industry v Frid [2004] 2 AC 506 (HL) (mutual dealings could include the commission of a tort or the imposition of a statutory obligation, which give rise to a commensurable cross-claim). Compare Smith v Bridgend County Borough Council, Re Cosslett [2002] 1 AC 336 where the House of Lords held that conversion of the company’s property was not a mutual dealing between the council and the company. See also Gye v McIntyre (1991) 171 CLR 609 (HCA) at [13]. 119. Re D H Curtis (Builders) Ltd [1978] 2 All ER 183, [1978] Ch 162 at 173–175; Re West End Networks Ltd [2004] 2 AC 506, [2004] 2 All ER 1042; Gye v McIntyre (1991) 171 CLR 609 (HCA) at [40]. 120. Managh v Jordan HC Napier CIV-2008-441-547 19 June 2009 at [50]; Mathieson’s Trustee v Burrup

Mathieson & Co [1927] 1 Ch 562; Gye v McIntyre (1991) 171 CLR 609 (HCA) at [21]. 121. Stein v Blake [1996] AC 243, [1995] 2 All ER 961 at 964 (HL). 122. CIR v The Fishing Co (2011) 25 NZTC 20-016 at [20]; Stein v Blake [1996] AC 243, [1995] 2 All ER 961 at 964 (HL). 123. CIR v The Fishing Co (2011) 25 NZTC 20-016 at [20]; National Westminster Bank Ltd v Halesowen Presswork and Assemblies Ltd [1972] 1 All ER 641, (1972) AC 785 at 803, 808–809, 824; Rendell v Dawes & Dawes Ltd (in liq) [1975] 2 NZLR 191; Gye v McIntyre (1991) 171 CLR 609 (HCA) at [18]. 124. Re Cushla Ltd [1979] 3 All ER 415. 125. Re Unit 2 Windows Ltd [1985] 3 All ER 647 declining to follow dictum of Buckley J in Re E J Morel (1934) Ltd [1961] 1 All ER 796. 126. Trans Otway Ltd v Shephard [2006] 2 NZLR 289, (2006) 9 NZCLC 263,973 at [15]. 127. See also Gye v McIntyre (1991) 171 CLR 609 (HCA) at [13] and Stein v Blake [1996] AC 243, [1995] 2 All ER 961 at 964 (HL). 128. Goode Principles of Corporate Insolvency Law (3rd ed, Sweet & Maxwell, London, 2005) at [7–22]. 129. Gye v McIntyre (1991) 171 CLR 609 (HCA). For a recent discussion of the requirement of mutuality by a New Zealand court see McCullough v Base Control Ltd (in liq) HC Auckland CIV-2008-4043375, 24 November 2008 at [29]–[34]. 130. Bishop v Church (1748) 3 Atk 691. 131. Ex parte Caldicott, Re Hart (1884) 25 Ch D 716. 132. Flynn v McCallum (No 2) HC Tauranga CIV-2005-470-611, 19 April 2011 at [27]; Paganini v Official Assignee (1999) 8 NZCLC 261,811, upheld on appeal Paganini v Official Assignee CA308/98, 22 March 1999. 133. MS Fashions Ltd v BCCI [1993] 1 Ch 425 at 448–449; Re City Equitable Fire Insurance Co Ltd [1930] 2 Ch 293; Halesowen Presswork & Assemblies Ltd v National Westminster Bank Ltd [1972] AC 785 at 808, [1972] 1 All ER 641 (HL). 134. Re Pollitt, ex parte Minor [1893] 1 QB 455 at 458; MPS Constructions Pty Ltd (in liq) v The Rural Bank of New South Wales (1980) 4 ACLR 835 at 844–845; Re Mid-Kent Fruit Factory [1896] 1 Ch 567. Contrast Shand v M J Atkinson Ltd (in liq) [1966] NZLR 551 where the Court of Appeal held that a solicitor could set off money paid to it for a specific purpose on the basis that the right of setoff was preserved by s 71(4) of the Law Practitioners Act 1955. 135. Barclays Bank Ltd v Quistclose Investments Ltd [1968] 3 All ER 651, [1970] 1 AC 567 at 580 (HL): the mutual intention of the respondents and of Rolls Razor Ltd, and the essence of the bargain, was that the sum advanced should not become part of the assets of Rolls Razor Ltd, but should be used exclusively for payment of a particular class of its creditors, namely, those entitled to the dividend. A necessary consequence of this must be that if, for any reason, the dividend could not be paid, the money was to be returned to the respondents. The basis for the decision was that the money advanced for the specific purpose did not become part of the bankrupt’s estate. 136. Re Rolls Razor Ltd v Cox [1967] 1 All ER 397 (HL) at 403. 137. Re SSSL Realisations (2002) Ltd (in liq) [2006] EWCA Civ 7, [2006] Ch 610 at [90] citing Secretary of State for Trade and Industry v Frid [2004] 2 AC 506 (HL) at [13]. 138. McCullough v Base Control Ltd (in liq) HC Auckland CIV-2008-404-3375, 24 November 2008 at [35]–[43]; Hiley v Peoples Prudential Assurance Co Ltd (in liq) (1938) 60 CLR 468 at 496; approved in Re Charge Card Services Ltd [1987] Ch 150 at 180, [1986] 3 All ER 289 at 310 (upheld on appeal [1988] 3 All ER 702, where these issues were not raised).

139. Day & Dent Constructions Pty Ltd (in liq) v North Australian Properties Pty Ltd [1982] 40 ALR 399 (HCA). 140. Re Charge Card Services Ltd [1987] Ch 150 at 180, [1986] 3 All ER 289 at 311. 141. McCullough v Base Control Ltd (in liq) HC Auckland CIV-2008-404-3375, 24 November 2008 at [40]–[41]. Section 307 is discussed at para 7.11 below. 142. Eberle’s Hotels & Restaurant Co v Jonas (1887) 18 QBD 459; Rolls Razor Ltd v Cox [1967] 1 All ER 397, [1967] 1 QB 552 at 576 (HL). Compare Smith v Bridgend County Borough Council; Re Cosslett [2002] 1 AC 336 (HL). 143. Re Rolls Razor Ltd v Cox [1967] 1 QB 552, [1967] 1 All ER 397 at 404–405 (HL). 144. Trans Otway Ltd v Shephard [2006] 2 NZLR 289, (2006) 9 NZCLC 263,973 at [17]. 145. Trans Otway Ltd v Shephard [2006] 2 NZLR 289, (2006) 9 NZCLC 263,973 at footnote 11. 146. Trans Otway Ltd v Shephard [2006] 2 NZLR 289, (2006) 9 NZCLC 263,973 at [21] citing Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266 at 303 and Hamilton v Commonwealth Bank of Australia (1992) 9 ACSR 90 at 113. 147. Companies Act 1993, s 306(1); Stotter v Equiticorp Australia Ltd (in liq) [2002] 2 NZLR 686, (2002) 9 NZCLC 262,783 at [38]; Re Dynamics Corp of America [1976] 2 All ER 669. Contrast Re Oriental Commercial Bank, ex parte Maxoudoff (1868) LR 6 Eq 582 at 588 (a creditor must show that he or she is a creditor for the amount of his or her claim at the date of the proof). 148. Companies Act 1993, s 306(2). 149. In Re Aynek Syndicate Ltd [1936] 1 All ER 406 a claim for damages was made against the company, the liquidator issued a summons to determine whether a claim should be allowed, the Court made an order for an enquiry into the amount of damage suffered and the damages were ascertained by the registrar. When the applicants put in their proof, the liquidator rejected it on the ground that a shareholder, while retaining his or her shares, cannot claim damages in respect of them. It was held that this objection should have been taken on the hearing of the summons or an appeal from it and it was too late to raise it. 150. Companies Act 1993, s 307(2). 151. Companies Act 1993, s 308. 152. Companies Act 1993, s 309. 153. Companies Act 1993 Liquidation Regulations 1994, reg 9. 154. Companies Act 1993 Liquidation Regulations 1994, reg 10. 155. Companies Act 1993, ss 36(1)(c) and 313(4). “Surplus assets” either means that which remains after all claims of the creditors and the costs of the liquidation have been paid: Re Crichton’s Oil Co [1902] 2 Ch 86 at 93 or the amount remaining after these payments and returns of share capital to shareholders have been made: Re Ramel Syndicate [1911] 1 Ch 749, depending on the particular provision. The term does not normally include capital uncalled at the date of liquidation which is not required to meet liabilities: Re Life Funds of Australia Ltd (in liq) (1980) 5 ACLR 552. 156. Re Hodge’s Distillery Co, ex parte Maude (1870) 6 Ch App 51; Birch v Cropper (1889) 14 App Cas 525 at 543; Re Driffield Gas Light Co [1898] 1 Ch 451; Re Whakamaru Timber Co Ltd (in liq) [1944] NZLR 1; Re Life Funds of Australia Ltd (in liq) (1980) 5 ACLR 552 at 555. 157. Re Ladysmith Gold-dredging Co Ltd [1921] NZLR 204. 158. Re Kinatan (Borneo) Rubber Ltd [1923] 1 Ch 124; Re Federal Portland Cement Co Ltd (1905) 24 NZLR 813; Re Hattons Confectionery Co Ltd (in liq) [1936] NZLR 802; King v Tait (1936) 57 CLR 715; Re Life Funds of Australia Ltd (in liq) (1980) 5 ACLR 552 at 555.

159. Re Exchange Drapery Co (1888) 38 Ch D 171 at 175; Re Wakefield Rolling Stock Co [1892] 3 Ch 165 at 174; Re United Provident Assurance Co [1910] 2 Ch 477 at 480. 160. Cherry v Boultbee (1839) 4 My & Cr 442, 41 ER 171. See also Re SSSL Realisations (2002) Ltd (in liq) [2006] EWCA Civ 7, [2006] Ch 610 at [12] and [79]. 161. Re West Coast Goldfields Ltd [1906] 1 Ch 1. 162. Re Auriferous Properties Ltd (No 2) [1898] 2 Ch 428; Re Hattons Confectionery Co Ltd (in liq) [1936] NZLR 802. See also Re SSSL Realisations (2002) Ltd (in liq) [2006] EWCA Civ 7, [2006] Ch 610 at [114]: the notional contribution of the insolvent company or bankrupt is the full amount of the claim. 163. Birch v Cropper (1889) 14 App Cas 525; Re Hawera County Electric Co Ltd (in liq) [1930] NZLR 1000. 164. Dimbula Valley (Ceylon) Tea Co Ltd v Laurie [1961] Ch 353 (CA). 165. Scottish Insurance Corp Ltd v Wilsons and Clyde Coal Co Ltd [1949] AC 462 (HL). 166. Applied in Re Isle of Thanet Electricity Supply Co Ltd [1950] Ch 161. See also Jones v Garnett (Inspector of Taxes) [2007] 4 All ER 857 (HL) at [35]. 167. Re London India Rubber Co (1868) LR 5 Eq 519; Re Driffield Gas Light Co [1898] 1 Ch 451; Re Accrington Corp Steam Tramways Co [1909] 2 Ch 40. 168. Re London India Rubber Co (1868) LR 5 Eq 519 at 526; Re Severn and Wye and Severn Bridge Railway Co [1896] 1 Ch 559; Re Compania de Electricidad de la Provincia de Buenos Aires Ltd [1980] Ch 146 at 184. 169. Re Crichton’s Oil Co [1902] 2 Ch 86; Re Te Kumi Land Co Ltd [1944] NZLR 924; Re W Foster & Son Ltd [1942] 1 All ER 314 at 316; Re Catalinas Warehouses and Mole Co Ltd [1947] 1 All ER 51 at 54. 170. Re Bridgewater Navigation Co [1891] 2 Ch 317; Bishop v Smyrna and Cassaba Railway Co [1895] 2 Ch 265; Re Holben, Hubbard & Co Ltd (in liq) [1938] NZLR 54 at 57–58. 171. Re Walter Symons Ltd [1934] Ch 308; Re F de Jong & Co Ltd [1946] Ch 211, [1946] 1 All ER 556; Re Finance Corp of New Zealand Ltd (in liq) [1940] NZLR 419; Re C M Banks Ltd [1944] NZLR 248 at 256. 172. Re Springbok Agricultural Estates Ltd [1920] 1 Ch 563; Re Wharfedale Brewery Co Ltd [1952] Ch 913; Re New Zealand Hardware Co Ltd [1926] NZLR 76. 173. Re E W Savory Ltd [1951] 2 All ER 1036 at 1040. 174. Companies Act 1993, s 316. 175. The Official Assignee’s requirements are currently set out on the Ministry of Economic Development’s website under “Liquidation: Frequently Asked Questions: What is the Liquidation Surplus Account?” (July 2012) . 176. Ministry of Economic Development “Liquidation: Frequently Asked Questions: What is the Liquidation Surplus Account?” (July 2012) . 177. Ministry of Economic Development “Liquidation: Frequently Asked Questions: What is the Liquidation Surplus Account?” (July 2012) . 178. Companies Act 1993, s 316(6). 179. Companies Act 1993, s 316(3).

180. Companies Act 1993, s 316(7).

[page 91]

CHAPTER 8 Circumstances in which a Liquidation is Stayed or Comes to an End 8.1

Court’s Jurisdiction to Stay Liquidation Proceedings Under High Court Rule 31.11

Where there is a disputed debt, in addition to applying to set aside a statutory demand, the defendant company (or, with the leave of the court, a creditor, shareholder or the Registrar of Companies) may also apply under High Court Rule 31.11 for an order restraining advertising of an application for liquidation, and for an order staying the liquidation proceedings. High Court Rule 31.11(2) requires the court to deal with such application as if it were an application for an interim injunction, and provides that if the court makes the order sought, it may make it on such terms as the court thinks fit. The principles to be applied in considering applications under High Court Rule 31.11 are as follows:1 The court has an inherent jurisdiction to stay liquidation proceedings where the debt upon which such proceedings are founded is the subject of a genuine dispute. The jurisdiction is an inherent one to prevent abuse of process. There is no inflexible rule. The governing consideration is whether the proceedings suggest unfairness or undue pressure. [page 92] It is a serious matter to stay liquidation proceedings, so the decision to do so

is never made lightly. The onus is on the applicant and it is normally necessary to demonstrate something more than the balance of convenience considerations, which are usually considered on an application for interim injunction. If there has been an opportunity to file appropriate affidavits, the applicant is required to establish a strong prima facie case of the existence of a genuine dispute on substantial grounds, or show that there are clear and persuasive grounds for a stay. If the defendant company can show a strong prima facie case that it is entitled to a set-off, then the court has a discretion to order a stay. A dispute as to only part of a debt is not sufficient to justify a stay. Where the applicant relies on the existence of a substantial dispute, it must show both a substantial dispute as to the existence of the debt2 — that being the debt on which the proceeding is based — and that it would be unfair to allow the dispute to be resolved in liquidation proceedings rather than by proceedings in the usual way.3 Additional factors which will weigh in favour of a stay are if the application asserts doubtful rights, and could cause substantial or irreparable damage.4 An application is not an abuse of the process of the court simply because the applicant is actuated by malice, unless there were not sufficient grounds to make an application.5 It is an abuse of the process of the court where there are two proceedings that are identical, or sufficiently similar, and where the remedies sought in each are equally effective. The court may therefore stay or adjourn the proceedings pending the resolution of related proceedings.6 The solvency of a company is not a basis for staying the liquidation proceeding that has been issued on the basis of an unsatisfied statutory demand. This follows the position taken by the Court of Appeal in AMC Construction Ltd v Frews Contracting Ltd7 in respect of solvency as a ground for setting aside a statutory demand. Solvency is to be considered at the hearing.8 [page 93] The principles which apply in this context overlap with those relevant to an

application for the setting aside of a statutory demand. But the grounds for making the two types of order differ. For example, the existence of a counterclaim which does not amount to an equitable set-off will not constitute a sufficient ground for an order.9 If a counterclaim is alleged it must exceed the company’s debt to the applicant, and must be based on substantial grounds.10 The principles which apply in this context also overlap with the principles applicable to an application to appoint a liquidator.11 The courts have been prepared to entertain an application for a stay, even though a subsisting statutory demand has not been challenged. However, in light of the strict time limits permitted in respect of statutory demands, good reasons will need to be advanced to justify a challenge to a debt under High Court Rule 31.11 when no challenge was made to the statutory demand under the procedure set out in s 290 of the Act.12 The courts have adopted the following principles in these cases: each case must be considered on its particular facts; a defendant which fails to apply to set aside a statutory demand on the ground that the debt is disputed will need to show some exceptional factor to justify the failure to apply (in light of the strict time limits permitted in respect of statutory demands); and that factor is likely to reflect the existence of a genuine dispute; the court retains a discretion to consider a dispute where it is satisfied that there is a genuine basis for it; a defence raised late may well count against the defendant in costs.13 [page 94] The courts have given orders staying liquidation proceedings conditional upon payment into court or some other form of security being provided.14 Such an order is normally made because the financial ability of the applicant for the order is suspect and/or the counterclaim or set-off raised by the applicant for the order is weak.15 A stay leaves the liquidation valid but inoperative.16

8.2

Termination of Liquidation by Court

Section 250 provides that the court may make an order terminating the liquidation of the company if it is satisfied that it is just and equitable to do so. An application may be made by the liquidator, deed administrator (if the company has executed a deed of company arrangement), a director or shareholder of the company, any other entitled person, a creditor of the company, or the Registrar or the Financial Markets Authority (where the company is a financial market participant). The discretion given by s 250(1) is broad and turns on the court’s view as to whether it will be just and equitable to order the termination of the liquidation. The following matters are generally considered to be necessary pre-conditions to the termination of a liquidation: all creditors had been paid in full, or satisfactory provision has been made for them to be paid in full, or they consent to the application; the liquidators’ costs have been fully paid or secured; all shareholders consent or would be no worse off than if the liquidation had proceeded to its conclusion.17 The court will also have regard to the public interest and whether the proposal before the court is conducive or detrimental to commercial morality. The court will be concerned to protect the interests of the present creditors of the [page 95] company, as well as the interests of those parties who would, in future, have dealings with it if the liquidation were terminated.18 Even if it appears that the order placing the company in liquidation may have been tainted by some error, that would not necessarily be decisive.19 It appears that the court will not be concerned about whether the termination of liquidation is sought to avoid tax losses.20 Section 250(2A), which applies to applications by a deed administrator, requires the court to have regard to any misconduct by the company’s officers reported by the deed administrator, the liquidator or the Registrar; the commercial decision of the creditors in accepting the deed of company

arrangement; whether the deed of company arrangement would leave the company insolvent; and any other matters that the court thinks fit. Orders for termination of liquidation proceedings have been made: where it had been overlooked that the outstanding debt, which was the subject of a statutory demand, had been paid;21 where the company was unaware of the proceedings, although it was properly served;22 where the original objectives of the shareholders in resolving to liquidate had not been met by the liquidation.23 It has been held that the s 250 procedure does not appear to be appropriate where there was no basis for the making of the liquidation order.24 However, the wording of s 250 is arguably wide enough for such a situation.

8.3

Completion of Liquidation

“In contrast with the formalities attendant on the birth of a company, its death takes place with a singular absence of ceremony.”25 [page 96] As soon as practicable after completing his or her duties in relation to the liquidation, s 257(1) requires the liquidator to prepare and send the following documents to every creditor and shareholder whose claim has been admitted, and to the Registrar for registration: a final report and statement of realisation and distribution; a statement that all known assets have been disclaimed, realised or distributed without realisation, all proceeds of realisation have been distributed and the company is ready to be removed from the New Zealand register; a summary of the grounds on which the creditor or shareholder can object to the removal from the register under s 321. Section 257(2) empowers the court, on the liquidator’s application, to exempt the liquidator from compliance with these requirements or modify their application.

Section 249 provides that a liquidation is completed when the liquidator provides these documents to the Registrar, or provides to the Registrar any court order made under s 257(2), with any documents required to comply with the order. Section 279 provides that the liquidator ceases to hold office at that point, but with the liquidator remaining subject to supervision by the court under s 284 or a compliance order under s 286. The effect of s 279(2) is that, although the liquidation has ended and the liquidator no longer holds office, orders can still be sought under ss 284 and 286 in respect of the liquidator’s actions in that liquidation. If it is necessary to apply to have the company restored, in order to give effect to the relief granted by the court under ss 284 or 286, that can be done.26 Section 284 has been used to revoke the liquidator’s final report, and appoint new liquidators (after the company was restored to the register under s 329).27 ____________________ 1.

Nemisis Holdings Ltd v North Harbour Industrial Holdings Ltd (1989) 1 PRNZ 379 at 385; Kitchener Nominees Ltd v James Products Ltd (2002) 9 NZCLC 262,882 at [5] and [6]; Ordeal Enterprizes Ltd v Calan Healthcare Properties Ltd (2003) 9 NZCLC 263,184 at [35] and [36]; Apollo Fruit Ltd v Cooper Horticulture Ltd HC Napier CIV-2006-441-908, 14 February 2007 at [16]; Commissioner of Inland Revenue v Duvall HC Auckland CIV-2007-404-2708, 29 February 2008 at [7] and [8].

2.

Or as to the due date of the debt: Stonegate Securities Ltd v Gregory [1980] 1 All ER 241, [1980] 1 Ch 576.

3.

Hewlett-Packard (NZ) Ltd v Compusales Software and Hardware Ltd (1990) 3 BCR 593, (1990) 5 NZCLC 66,281.

4.

Charles Forte Investments Ltd v Amanda [1963] 2 All ER 940, [1964] Ch 240 at 252.

5.

Bryanston Finance Ltd v de Vries (No 2) [1976] 1 All ER 25, [1976] 1 Ch 63 at 75.

6.

Bank of New Zealand v Rada Corp Ltd (1990) 5 NZCLC 66,221; Plumbing & Heating Services Ltd v J H Willson Ltd (1992) 6 NZCLC 67,674.

7.

AMC Construction Ltd v Frews Contracting Ltd (2008) 19 PRNZ 13.

8.

Gill Construction Co Ltd v Butler HC Wellington CIV-2009-406-203, 2 November 2009 at [25]; Spencer v Jed Rice Building Contractors Ltd HC Auckland CIV-2007-404-7539, 21 February 2008 at [16]. Compare McCallum Petterson and Co v Unity Mutual Financial Services Ltd HC Wellington M39/95, 30 May 1995 at 4, where the view was expressed that a stay would be granted if a company was solvent, although in that case the Court had other concerns about the continuation of the liquidation proceeding.

9.

Anglian Sales Ltd v South Pacific Manufacturing Co Ltd (1984) 2 NZCLC 99,220, [1984] 2 NZLR 249 at 252 (CA); Hewlett-Packard (NZ) Ltd v Compusales Software and Hardware Ltd (1990) 3 BCR 593, (1990) 5 NZCLC 66,281; Bank of New Zealand v Packer & Jones Ltd (1990) 5 NZCLC 66,485. The set-off is regarded as extinguishing the plaintiff’s claim thereby depriving the plaintiff of the status of “creditor”: Bean Supreme Ltd v ASDA Wholesale Ltd (1989) 4 NZCLC 65,134; New Zealand Factors Ltd v The Farmers Trading Co Ltd [1992] 3 NZLR 703, [1992] MCLR 559, (1992) 6 NZCLC 67,892.

10.

Hewlett-Packard (NZ) Ltd v Compusales Software and Hardware Ltd (1990) 3 BCR 593, (1990) 5

NZCLC 66,281. 11.

See Commissioner of Inland Revenue v Ron West Motors (Otahuhu) Ltd (2008) 23 NZTC 21,835 at [9] in particular.

12.

Kitchener Nominees Ltd v James Products Ltd (2002) 9 NZCLC 262,882 at [8] and [9]; Edge Computers Ltd v Colonial Enterprises Ltd (1996) 9 PRNZ 621.

13.

Balmoral Marketing Ltd v Karapiro Spa Ltd HC Auckland CIV-2005-4046396, 3 October 2006 at [46] approved in Foundation Securities (NZ) Ltd v Direct Labour Services Ltd (in liq) HC Auckland CIV-2006-404-4391, 1 February 2007 at [6] and Duffill Watts Ltd v Mogans Homes Ltd HC Auckland CIV-2009-404-1483, 28 May 2009 at [5]–[6].

14.

Maru Industries Ltd v Don Forbes Construction Ltd (1989) 2 PRNZ 176; Taylor Smith Lundie Plastics Ltd v Rio Beverages Ltd (1994) PRNZ 70; Taxi Trucks Ltd v Nicholson [1989] 2 NZLR 297; and Morrison v Speedy Parcels Ltd (1995) NZCLC 66,203 (CA).

15.

Taylor Smith Lundie Plastics Ltd v Rio Beverages Ltd (1990) 4 PRNZ 70 at 73.

16.

Re Kim Maxwell Ltd [1992] 1 NZLR 69, (1991) 5 PRNZ 321.

17.

Foundation Securities (NZ) Ltd v Direct Labour Services Ltd (in liq) [2008] NZCCLR 1 at [20] citing Re Bell Block Lumber Ltd (1992) 6 NZCLC 67,690; Commissioner of Inland Revenue v Eden Electroplaters Ltd (2007) 23 NZTC 21,015, (2007) 10 NZCLC 264,243. In Bunting v Buchanan [2012] NZHC 766, (2012) 11 NZCLC 98-005, the Court preferred an approach where the court’s starting point is to consider whether the criteria are met and, if not, whether there are exceptional circumstances which warrant the making of an order even if the criteria are not fully satisfied (as opposed to treating the criteria as a helpful checklist for the court in straightforward cases, but the essential question remaining whether it is just and equitable to terminate the liquidation (regardless of whether the criteria were met).) Compare caution in Foundation Securities at [21]–[22] against treating them as an “exclusive set of criteria for the exercise of what is a very broadly expressed power”.

18.

Foundation Securities (NZ) Ltd v Direct Labour Services Ltd (in liq) [2008] NZCCLR 1 at [22]; Foundation Securities (NZ) Ltd v Direct Labour Services Ltd (in liq) HC Auckland CIV-2006-4044391, 19 March 2007; Commissioner of Inland Revenue v Eden Electroplaters Ltd (2007) 23 NZTC 21,015, (2007) 10 NZCLC 264,243 at [42]; Bunting v Buchanan [2012] NZHC 766, (2012) 11 NZCLC 98-005 at [9]–[11].

19.

Foundation Securities (NZ) Ltd v Direct Labour Services Ltd (in liq) [2008] NZCCLR 1 at [25].

20.

Commissioner of Inland Revenue v Eden Electroplaters Ltd (2007) 23 NZTC 21,015, (2007) 10 NZCLC 264,243 at [35].

21.

Commissioner of Inland Revenue v Highline Roofing Ltd HC Wellington CIV-2007-485-1751, 28 November 2007.

22.

Charter Financial Services Ltd v STL Linehaul Ltd HC Wellington M438/98, 25 February 1999.

23.

Re Oxford Productions No 1 Ltd (in liq) HC Auckland CIV-2007-404-7469, 6 December 2007. The company had in mind that a more efficient distribution of parts of the company’s capital would be achieved by liquidation.

24.

Goh v Ridgeview Properties Ltd (in liq) (2009) 10 NZCLC 264,537, [2010] NZCCLR 8. In that case the Court granted leave to commence the proceeding by originating application.

25.

P Davies Gower and Davies’ Principles of Modern Company Law (7th ed, Sweet & Maxwell, London, 2003) at 864.

26.

Official Assignee v Norris [2012] NZHC 961 at [65]–[66].

27.

Katavich v Meltzer [2011] NZCCLR 8 at [40]; Ocean Shipping Ltd (in liq) v Orient Shipping

Rotterdam BV HC Auckland M348/96, 16 July 1996; Black v Selwyn Developments Ltd (in liq) HC Auckland CIV-2007-404-4525, 20 August 2007.

[page 97]

PART 4 THE CONSEQUENCES OF LIQUIDATION

[page 99]

CHAPTER 9 Effect of Commencement of Liquidation Under s 248 9.1

Overview

The liquidation of a company commences at the date and time at which the liquidator is appointed.1 Section 248 provides that, with effect from the commencement of the liquidation of a company: The liquidator has custody and control of the company’s assets. The directors remain in office but cease to have powers, functions, or duties other than those required or permitted to be exercised by the liquidations Part of the Act. Unless the liquidator agrees or the court orders otherwise, a person must not commence or continue legal proceedings against the company or in relation to its property; or exercise or enforce, or continue to exercise or enforce, a right or remedy over or against property of the company. Unless the court orders otherwise, a share in the company must not be transferred. An alteration must not be made to the rights or liabilities of a shareholder of the company. A shareholder must not exercise a power under the constitution of the company or the Act except for the purposes of the liquidations Part of the Act. The constitution of the company must not be altered. [page 100]

These provisions do not affect the right of a secured creditor to deal with property of the company over which that creditor has a charge (subject to s 305 which sets out the rights and duties of secured creditors).2 Transactions entered into by a company at a time when it is insolvent and within a certain time prior to liquidation are addressed by ss 292–299.3

9.2

Liquidator has Custody and Control of the Company’s Assets

The liquidator is the mere administrator of the company’s rights for the purposes prescribed in the statute and in particular for distribution among creditors.4 That position may be compared with the position of the Official Assignee in bankruptcy, who has assets vested in him or her. The role of a liquidator is custodial. In exercising the statutory powers given to him or her, the liquidator is acting as the company’s agent.5 The functions of the liquidator have been described as similar to those of a trustee, official assignee in bankruptcy or an executor in the administration of the estate of a deceased person, with the key difference being that the liquidation order does not of itself divest the company of the legal title to any of its assets.6 While the position in respect of legal title to the company’s assets is clear, the same cannot be said in respect of equitable title to the company’s assets. In Commissioner of Revenue v Linter Textiles Australia Ltd (in liq),7 the High Court of Australia considered the conflict between the line of English authority8 that the making of a liquidation order creates a trust in relation to the company’s assets such that the company no longer “beneficially owns” [page 101] those assets, and Australian authority that beneficial ownership of the assets of a company in liquidation remains with the company, free from any trust. The High Court of Australia determined unanimously that the beneficial ownership of the company’s assets remains with the company in liquidation. It drew a distinction between the power to deal with an asset and matters of ownership or title, holding that the critical point is that the change in control of

the affairs of the company has no impact upon its beneficial ownership of its assets.9 In his concurring decision McHugh J observed, at [128]: The use of trust language in this context invites error. There is no trust in any sense that equity would recognise. To describe the manner in which the company holds its assets for the purpose of discharging its liabilities in accordance with the statutory scheme as bearing the indicia of an equitable trust is erroneous.

His Honour cited a passage from an Australian text, Australian Corporation Law: Principles and Practice, to the effect that the only sense in which a trust is imposed is insofar as the property must be used or disposed of for the benefit of persons other than the legal owner, and that the “company holds the assets for statutory purposes not for persons”. The reasoning of the Australian High Court casts doubt on the correctness of Paganini v Official Assignee,10 where the Court of Appeal expressed the view that although the company still owns the property, it is no longer the beneficial owner.11 This decision appears to have been made without reference to the Australian line of authority referred to above. Under the English and Paganini approach, at the commencement of liquidation the beneficial interest in the property must be either suspended or transferred to those who are entitled to share in the proceeds of realisation of the assets under the statutory scheme. This approach is problematic because it either means no one has beneficial ownership of the assets or that beneficial ownership is transferred to an undefined group (of creditors and shareholders). A conclusion that the body of creditors and shareholders (or the liquidator) have beneficial ownership is inconsistent with outcomes where assets have been paid into the Liquidation Surplus Account or where the amount at issue is too small to justify completing the liquidation. The approach of the Australian courts is therefore more attractive as a matter of principle and logic.12 [page 102] It has also been suggested that a stage will be reached once all liabilities are discharged, where nothing further remains to be done except to distribute the surplus among shareholders, when the individual shareholders will become equitable owners of that property.13 However, it seems unnecessarily confusing to resort to concepts of trust law when the statute provides a readily available

means for shareholders to enforce the liquidator’s duties in this respect.

9.3

Directors Remain in Office but Cease to Have Powers, Functions or Duties

Section 248(1)(b) provides that the directors remain in office, but cease to have any powers, functions or duties other than those required or permitted to be exercised by the Act.14

9.4

Prohibition Against Legal Proceedings Against Company or its Property

9.4.1

Purpose of s 248(1)(c)

Once a company has been put into liquidation, proceedings against it may be continued or commenced only with the leave of the court or agreement of the liquidator.15 The New Zealand courts have suggested that the purpose of s 248(1)(c) is to ensure that when a company goes into liquidation the assets of the company are administered in an orderly fashion for the benefit of all the creditors and that particular creditors should not be able to obtain an advantage by bringing proceedings against the company.16 Identification of the purpose is important to enable the courts to identify the relevant considerations in exercising their discretion under s 248. There has been some discussion of the purpose of the equivalent provision of the Corporations Act 2001 (Cth) in the Australian courts.17 They have observed that preventing a creditor obtaining an advantage over other creditors cannot [page 103] be the major purpose of the provision given that the prohibition is also directed at proceedings by shareholders and others. In addition, it is rare that the institution of proceedings or recovery of judgment operates to confer an advantage on a litigating creditor, so that a more convincing explanation for s

248 may be that without the restriction, a company in liquidation would be subjected to a multiplicity of actions which would be both expensive and timeconsuming, as well as in some cases, unnecessary. The s 248 question of whether a claimant should be permitted to pursue a claim by means of proceedings as opposed to submitting a proof of debt reduces to a question of choosing alternative forms of procedure. This purpose is also reflected in more recent New Zealand case law which has emphasised that the key question is whether the claim is more appropriately dealt with in the liquidation or by proceedings.18

9.4.2

What does the term “legal proceedings” encompass?

The Act does not define the expression “legal proceedings”. The courts have interpreted it broadly having regard to the objectives of s 248.19 The following have been held to be “proceedings” requiring leave: an appeal to the Court of Appeal;20 criminal proceedings against a company;21 arbitrations;22 a third party claim;23 an application for rectification of the share register;24 interpleader proceedings to determine the beneficial ownership of certain shares.25 [page 104] The better view is that an application for a sale of mortgaged land to the Registrar of the High Court by a mortgagee is not a “proceeding”.26

9.4.3

Proceedings not covered by s 248(1)(c)

The courts have held that it is not necessary for a defendant to obtain leave in the following circumstances: If a defendant is cross-claiming for damages only as a set-off to reduce or extinguish the plaintiff company’s claim (to the extent the counterclaim is a defence, and not giving the defendant some right beyond the right of defence to the claim).27 In relation to proceedings commenced outside the jurisdiction. In Re

Vocalion (Foreign) Ltd,28 it was held that the section only applies to proceedings pending in a court of Great Britain and not to proceedings of foreign courts but that the court could, however, in the exercise of its equitable jurisdiction in personam restrain a respondent properly served in Britain from proceeding with an action brought abroad. Re Vocalion was applied in New Zealand in Commissioner of Inland Revenue v Compudigm.29 To apply under the Land Transfer Act 1952 for notification upon the register of re-entry and recovery of possession of leasehold premises.30 [page 105]

9.4.4

Ability to bring derivative actions

In Hedley v Albany Power Centre Ltd (in liq),31 the Court held that once a company is placed in liquidation, the court no longer has, or at least ought not to exercise, its jurisdiction under s 165 to grant leave to bring a derivative action in the company’s name because: as a matter of principle, a s 165 application ought not to be granted when the company is in liquidation because it potentially undermines the liquidator’s principal duty of gathering in and distributing the company’s assets as efficiently as is reasonably possible; section 284 provides not only an adequate, but the most appropriate remedy when a company is in liquidation; an application under s 284 directly engages the liquidator, being an application for a direction to the liquidator, whereas an application under s 165 does not. The s 284 application will enable the liquidator (or company in liquidation) to use the s 301 procedure, which is arguably more straightforward and therefore more economical than a conventional proceeding against directors.

9.4.5

Circumstances in which court will grant leave

In determining whether to grant leave under s 248, the key question for the court is whether there are any circumstances which render it necessary that the legal proceedings should continue, or whether the plaintiff’s claim is not one that can easily be dealt with in the liquidation.32

The courts have indicated that leave should be granted where a plaintiff seeks to enforce a claim to his or her own property.33 Where a proprietary claim is made, the applicant for leave is not a creditor as such and the Act’s procedures for determining creditors’ claims are not appropriate.34 So it has been held that applications for leave by secured creditors are normally granted as a matter of course, as are applications for leave to seek specific performance.35 [page 106] Other factors going to the court’s discretion under s 248 are:36 There must be equality amongst various creditors. Proceedings should not produce an advantage to a particular creditor over other creditors. In most cases the court is likely to consider that the plaintiff should have the opportunity to establish his claim against the company by way of civil proceedings so that he or she can claim alongside the other unsecured creditors.37 This reflects the fact that, as discussed above, it would be rare for proceedings to produce such an advantage. The assets of a company should not be dissipated in wasteful litigation, particularly if there is a more convenient method for determining the claim. The onus is on the party seeking leave to satisfy the court that leave should be given. The court must determine whether it is appropriate for the creditors’ claims to be proved in the liquidation, or whether leave should be given to allow the claims to be established by way of civil proceedings. The question to be considered is whether there are any circumstances which render it necessary that the action be continued or whether the claim could as easily be dealt with in the liquidation. The likely attitude of the liquidator is therefore a relevant factor. If the liquidator is likely to require the claim to be proved (for example, because of the complexity of the proceedings), would not find it easy to determine and be likely to reject it, the most appropriate way of dealing with the matter is in an action with the leave of the court.38 There has been a difference of legal opinion as to the test to be applied. While it has been suggested that the application must show that there is a serious question to be tried, the currently accepted approach is that leave should be declined for a proceeding which is “clearly not sustainable”, but

otherwise the court will not inquire into the merits of the proposed claim.39 [page 107] Leave under s 248(1)(c) will usually be declined if the proceedings sought to be commenced, even if successful, are likely to be fruitless.40 Other considerations are: Delay by the applicant.41 In the bankruptcy context, the courts have consistently held that mere delay in applying for leave will not prevent leave being granted and that leave should not be withheld simply and solely as a punishment.42 The amount and seriousness of the claim, the degree and complexity of legal and factual issues and, if proceedings have already been commenced, the stage they have reached.43 Whether the company is a necessary party to proceedings against third parties.44 Although the failure of a plaintiff to prove in the liquidation and to avail itself of the s 284 procedure for reviewing the decision of a liquidator may be taken into account and should be adequately explained, there is no requirement that the plaintiff seek to prove in the liquidation before making a s 248 application.45 Leave has been granted in the following situations: Where the plaintiff sought to enforce a claim to his or her own property; for example where a secured creditor seeks to enforce a mortgage or security upon a company’s property, unless the same relief is given to the secured creditor in the liquidation as he or she would obtain in the action.46 [page 108] Where the plaintiff sought a remedy not available in a liquidation such as specific performance.47 Where the plaintiff sought to continue proceedings alleging unlawful means of conspiracy, deceit and breach of the Commerce Act 1986 and s 9 of the

Fair Trading Act 1986.48 Where the plaintiffs sought to continue proceedings for breach of an exclusive agency arrangement and their status as a creditor had not been recognised by the liquidator and therefore depended on the determination of the court in the litigation.49 Where the company was one of the several defendants to a defamation action.50 Where proceedings were taken against the company in liquidation for breach of a court order.51 Where a dishonest assistance claim was made, on the basis that findings of credibility are better made by a court and there is a public interest in having allegations of fraud resolved by the court.52 Where leave was sought to commence proceedings in the Employment Relations Authority in relation to sums argued to be due under employment contracts with the company on the basis that claims of all the creditors were able to be met in full, and the applicants were the only parties seeking to make a claim against the company, so no question of the liquidators facing a multitude of claims arose.53 The court can grant leave under s 248(1)(c) retrospectively.54 There is no guidance given in the Act as to when the liquidator should agree to the commencement or continuation of legal proceedings. Costs have been awarded against liquidators on the basis that the liquidator ought to [page 109] have consented to the continuation of the proceeding and ought not to have put the applicants to the expense of making the application.55

9.5

Stay of Proceeding While Application Pending

Under s 247 the court has a discretion to make an order staying or restraining any application or proceeding against a company once an application to appoint a liquidator is filed, on the application of the company, a creditor or a shareholder. The court can make an order on such terms as it thinks fit.

In the absence of special circumstances, the court ought to exercise its discretion by staying or restraining proceedings with a view to securing equal distribution of the assets among creditors of the same class.56

9.6

Restriction on Exercise or Enforcement of a Right or Remedy Over or Against Property of the Company

The principle that all unsecured creditors are to be treated equally requires that creditors who take action against the property of a company be prevented from advantaging themselves at the expense of other creditors. Section 248(1)(c)(ii) provides that a person must not exercise or enforce, or continue to exercise or enforce, a right or remedy over or against property of the company unless the liquidator agrees or the court orders otherwise. Sections 251 and 252 go on to deal more particularly with the situation where an execution process has been commenced but not completed at the point where the liquidation is commenced.57 The courts have taken the approach in this context that they should only depart from the principle that the property of a company is to be distributed to the creditors equally where there are exceptional circumstances.58 The courts have allowed creditors to pursue an execution process in the following situations: where the judgment creditor was induced by a false pretext on the part of the company to postpone the execution, and then the company, taking advantage of that postponement, went into voluntary liquidation, and asked the court to stay execution of the judgment because it was being liquidated;59 [page 110] where the execution was prevented by the company resisting the officer carrying out the execution;60 where the company in liquidation allowed the person proposing to levy execution to alter his or her position;61 and

where the court had given leave to sue and considers it ought, therefore, to allow the plaintiff to reap the fruit of the judgment.62 The High Court has held that a debtor resorting to its contractual right to terminate a contract with a company that is to be liquidated, and therefore unable to continue meeting its obligations, does not fall within the reach of s 248.63

9.7

Effect on Uncompleted Executions, Distraints and Attachments

Sections 251–252 provide for restrictions on the rights of creditors to complete execution, distraint or attachment where those procedures are not completed prior to the liquidation. Section 251(1) provides that a creditor is not entitled to retain the benefit of any execution process, distress, or attachment over or against the property of a company unless the execution process, distress or attachment is completed before: the passing of a special resolution by the shareholders under s 241(2)(a) or a resolution by creditors under s 241(2)(d) appointing a liquidator of the company, or the date on which the creditor had notice of the calling of a meeting at which such resolution was proposed, whichever occurs first; the passing of a resolution by the board of the company under s 241(2)(b) appointing a liquidator, or the date on which the creditor had notice of the calling of the meeting at which such resolution was proposed, whichever occurs first; or the making of an application to the court under s 241(2)(c) for the appointment of a liquidator. The phrase “benefit of any execution” does not include the money received by the creditor under an execution, distress or attachment, but means the benefit of the charge that the creditor obtains by the issue of the execution or attachment. Therefore, the execution creditor is entitled to retain money paid by the debtor direct to him or her or, through the officer charged with the execution process, before the dates specified in the section even though such money is paid to avoid seizure or sale.64 However, if such money is

[page 111] paid after the specified dates then it cannot be retained, as the “benefit of the attachment” includes the right to complete it and the money is received pursuant to that right.65 The court has a general discretion under s 251(3) to set aside the general prohibition to such an extent and on such terms and conditions as it thinks fit. In exercising this discretion in Re City Construction Ltd,66 the High Court focused on the question whether the applicant was induced to accept a position which it would not otherwise have adopted, and thereby lost an opportunity to exercise its right to distrain at a time when it could have done so quite legally, even though this would be to the subsequent detriment of the remaining body of creditors. The courts have exercised the discretion to permit an incomplete execution process to be completed in the following circumstances: Where a company has acted duplicitously and deceived a landlord into a false sense of security. Even though the other creditors would be disadvantaged, this was not a determining factor because it would be unfair to afford those creditors protection at the expense of a landlord who had been tricked into not exercising a pre-existing right to distrain.67 Where the execution creditor has been unreasonably delayed in proceeding with execution by the debtor company,68 but not where all creditors generally have been delayed but one has been more diligent than the others.69 Where money has been paid into court pursuant to a court order as security for the creditor’s claim.70 [page 112] Where a court order is required to perfect the execution and the judgment creditor is not entitled as of right to the order, the court will not make the order where an application is pending.71 Similarly, where a charging order nisi has been obtained, the court is likely to exercise its discretion by refusing to make the order absolute.72

Section 251(4) provides that for the purposes of s 251: an execution or distraint against personal property is completed by seizure and sale; an attachment of a debt is completed by receipt of the debt; an execution against land is completed by sale, and, in the case of an equitable interest, by the appointment of a receiver. Notwithstanding s 251, a person, who in good faith purchases the property of a company from an officer charged with an execution process, acquires a good title as against the liquidator of the company. Similarly, a person acting in good faith, who purchases personal property of a company on which distress has been levied, acquires a good title as against the liquidator.73 If property of a company is taken in an execution process, and before completion of the execution process the officer charged with that process receives notice that a liquidator has been appointed, then that officer must, on being required by the liquidator to do so, deliver or transfer the property and any money received in satisfaction or partial satisfaction of the execution or paid to avoid the sale of the property, to the liquidator.74 The costs of the execution process will be a first charge on any personal property or money delivered to the liquidator who may sell all or some of the property to satisfy that charge.75 Where property of a company is sold in an execution process in respect of a judgment for a sum exceeding $500, or money is paid to the officer charged with the execution process to avoid a sale of the property, then the officer [page 113] must retain the proceeds of sale or the money so paid for 10 working days.76 If during that period the officer receives notice of: the calling of a meeting to pass a shareholders’ or directors’ resolution for the appointment of a liquidator under s 241(2)(a) or (b); or the making of an application to the court to appoint a liquidator under s 241(2)(c); and the company is put into liquidation, then the officer must deduct from the

amount held the costs of the execution process and pay the balance to the liquidator.77 The effect is to place a temporary embargo or stop on the money. Once the liquidator receives this money, he or she is entitled to retain it as against the execution creditor.78 The court has a general discretion to set aside the application of these provisions to such an extent and on such terms and conditions as it thinks fit.79

9.8

Shares in the Company Must Not be Transferred Unless Court Orders Otherwise

Although s 248(1)(d) of the Companies Act 1993 provides that with effect from the commencement of liquidation, a share in the company must not be transferred unless the court orders otherwise, a contract of transfer remains valid as between the parties. The transaction is only void in relation to any effect being given to it by or against the company.80 Section 248(1)(d) therefore does not invalidate a transfer of shares as between transferor and transferee, and nor does it frustrate an otherwise enforceable contract. Regardless of whether or not the court makes an order under s 248(1)(d) to allow the transfer of shares to be registered, the court may make an order for specific performance, including on an application for summary judgment.81 [page 114] It is difficult to obtain relief under s 248(1)(d).82 The court will only give leave to register a transfer if to do so would be of some benefit to the company or those interested in its assets, and it will only exercise its discretion for very strong reasons.83

9.9

Alterations Must Not be Made to the Rights or Liabilities of Shareholders

In Re Sellers,84 the Federal Court of Australia held (in respect of the same restriction applicable in the event of administration) that the provision is

designed to maintain the status quo as regards the rights and obligations of shareholders existing at the commencement of an administration. It observed that if the status quo is not maintained, the rights that a company in administration (or later liquidation) may have against its shareholders could be impaired or lost. In that case the Court considered that the section is concerned with a change in legal rights, not with adverse commercial consequences. It held that none of the rights and privileges which were vested in, nor any of the corresponding duties or obligations which were imposed on, existing shareholders would be affected by the proposed allotment on the basis that a diminution in the value of a share does not change the status of that share or the status of the shareholder. The Court gave the following examples of when there will be an alteration in status: If a preference shareholder becomes an ordinary shareholder, except in the unusual circumstances of Re Blaina Colliery Co Ltd85 where preference shareholders (who had the right to give six months’ notice to convert their shares into ordinary shares) gave notice, but the company went into liquidation within the six months. The Court held that the notice took effect prior to the liquidation and there was no alteration to the status of the shareholders after the commencement of the liquidation. If partly paid shares are converted to fully paid shares without payment of the balance of the uncalled capital. An arrangement, after an application for the liquidation of a company was presented, under which shareholders were to make advances to the company should the company continue to carry on business, or as payments on the amounts unpaid on shares should the company go into liquidation, was held to [page 115] amount to an alteration of the status of the shareholders in Re Oriental Commercial Bank, Barge’s Case.86 If the register is rectified to remove the name of a shareholder.87

9.10

A Shareholder Must Not Exercise a Power Under

the Constitution of the Company or the Act Except for the Purposes of Liquidation Section 248(1)(f) provides that a shareholder must not exercise a power under the constitution of the company or the Act except for the purposes of Part 16 of the Act. This provision was added in 1993 to reflect the changed status of shareholders under the Act.88

9.11

Constitution of the Company Must Not be Altered

Section 248(1)(g) provides that from commencement of liquidation, no alteration must be made to the company’s constitution.

9.12

Effect on Secured Creditors

Section 248(2) provides that none of the effects of the commencement of liquidation provided for in s 248(1) affect the rights of a secured creditor to take possession of and realise or otherwise deal with property of the company over which that creditor has a charge. This provision is subject to s 305, which sets out the rights and duties of secured creditors and is discussed at para 7.3 above.

9.13

Interface with Voluntary Administration

The appointment of a liquidator to a company in administration ends the administration.89 Under s 239ABY the former administrator is the default liquidator. The person in control of the company (administrator, deed administrator or directors) must lodge with the liquidator the report that accompanied the notice to creditors of the watershed meeting, and a report updating the earlier report with certain matters.90 Section 239ACA provides that acts done in good faith by or with the consent of the administrator must not be set aside in the liquidation. Similarly, the voidable transactions provisions do not apply to transactions carried out by or with the authority of the administrator or deed administrator, or specifically authorised by the deed of company arrangement and carried out by the deed administrator.91

[page 116] Sections 239ABU–239ACA of the Companies Act 1993 took effect as from 1 November 2007.92

9.14

Offences

Where a company is in liquidation, or an application has been made to the court for an order that the company be put into liquidation, it is an offence for a person to:93 leave New Zealand with the intention of avoiding payment of money due to the company, avoiding examination in relation to the affairs of the company or avoiding compliance with an order of the court or some other obligation under Part 16 in relation to the affairs of the company; conceal or remove property of the company with the intention of preventing or delaying the liquidator from taking custody or control of it; or destroy, conceal or remove records or other documents of the company. It is an offence if a present or former director or employee of a company in liquidation does not forthwith after the company is put into liquidation give the liquidator details of the property of the company that is in his or her possession or under his or her control.94 It is also an offence if, on being required to do so by the liquidator, such a person fails to deliver the property to the liquidator or such other person as the liquidator may direct, or fails to dispose of the property as the liquidator may direct.95 The penalty on conviction of these offences is a fine not exceeding $50,000 or imprisonment for a term not exceeding two years.96 These provisions emphasise the importance for the proper conduct of a liquidation that a liquidator must have full access to information from directors and other associated parties.97 ____________________ 1.

Companies Act 1993, s 241(5). The doctrine of “relation-back”, according to which a compulsory winding-up was deemed to have commenced on the date of the filing of the court application (and a voluntary winding-up on the date of the passing of the relevant resolution), which applied under the 1955 Act (prior to amendment in 1993), has not been carried through to the 1993 Act.

2.

Companies Act 1993, s 248(2).

3.

See paras 10.21–10.22 below and Chapter 24 of Heath & Whale on Insolvency (looseleaf ed, LexisNexis).

4.

Waller v Paul (1997) 8 NZCLC 261,351, (1997) 10 PRNZ 607 citing Bank of Scotland v McLeod [1914] AC 311 at 321; Re Haupiri Courts‘ App [1969] NZLR 348.

5.

Waller v Paul (1997) 8 NZCLC 261,351, (1997) 10 PRNZ 607 citing Re Furrow’s Bank Ltd [1921] 2 Ch 164.

6.

Ayerst v C & K (Construction) Ltd [1975] 2 All ER 537 (HL) at 541 per Lord Diplock; Re Katherine et Cie Ltd [1932] 1 Ch 70. As legal title to property does not vest in the liquidator, a liquidator does not obtain a sufficient interest in the land of a company to support a caveat in his or her own name: Re An Application by the Liquidator of Haupiri Courts Ltd [1969] NZLR 348.

7.

Commissioner of Revenue v Linter Textiles Australia Ltd (in liq) (2005) 215 ALR 1, (2005) 220 CLR 592.

8.

Including Re Oriental Steam Co Ex Parte Scinde Railway Co (1874) LR 9 Ch 557 and Ayerst v C & K (Construction) Ltd [1976] AC 167, [1975] 2 All ER 537 (HL) which saw the beneficial ownership as being “in suspense” because it was too early to attribute beneficial ownership to the persons for whose benefit the assets are being administered. See also Lord Hoffman in Buchler v Talbot [2004] UKHL 9, [2004] 2 AC 298, [2004] 1 All ER 1289 at [28].

9.

Commissioner of Revenue v Linter Textiles Australia Ltd (in liq) (2005) 215 ALR 1, (2005) 220 CLR 592 at [54]–[58].

10.

Paganini v Official Assignee CA308/98, 22 March 1999.

11.

This was also the approach taken by Shorland J in Shaw Savill and Albion Co Ltd v Commissioner of Inland Revenue [1956] NZLR 211 (CA) at 234. While the judge considered that the beneficial interest is taken out of the company upon commencement of liquidation, his Honour found that it only transferred to the shareholder once it required distribution in specie.

12.

The same view has been expressed by Heath J in Levin v Ikiua [2010] 1 NZLR 400 at [117].

13.

Shaw Savill & Albion Co Ltd v Commissioner of Inland Revenue [1956] NZLR 211 (CA) at 228, 232.

14.

For example, Companies Act 1993, s 261(2) and (3) provide for the directors to provide information to the liquidator, s 274 provides for directors to identify and deliver company property to the liquidator, ss 284, 286 and 283 provide for directors to apply to the court for supervision of the liquidation (with leave), enforcement of the liquidator’s duties, review of the appointment of a liquidator’s successor and to have a replacement liquidator appointed in the event of a vacancy.

15.

Companies Act 1993, s 248(1)(c).

16.

Steel and Tube Co of New Zealand Ltd v Barker & Pollock Ltd and JBL-Sargent Construction Ltd [1973] 2 NZLR 30 at 32 and NZ Express Transport Christchurch Ltd v Fortex Group Ltd [1994] MCLR 366, (1994) 7 NZCLC 260,544, citing Langley Constructions (Brixham) Ltd v Wells [1969] 1 WLR 503, [1969] 2 All ER 46.

17.

The Australian cases are discussed by Refshauge J in Commonwealth v Davis Samuel (2008) 68 ACSR 336 at 338–340.

18.

See para 9.4.5 above and Hook v Gulf Harbour HC Auckland CIV-2002-4041931, 23 November 2005 at [56]–[60], citing Clarence Holdings v Mt Albert TV (1993) Ltd (1999) NZCLC 262,072; Satara Co-Operative Group Ltd v Fus Ltd HC Napier CIV-2008-441-856, 28 January 2010 at [5].

19.

Mcphail (t/a Leaderbrand Produce) v Durbridge Developments Ltd (in liq) (t/a Country Manor Foods) (1998) 8 NZCLC 261,610.

20.

Commissioner of Inland Revenue v H & P Developments Ltd (2007) 23 NZTC 21,027. Compare Humber v John Griffiths (1901) 85 LT 141.

21.

Mcphail (t/a Leaderbrand Produce) v Durbridge Developments Ltd (in liq) (t/a Country Manor Foods) (1998) 8 NZCLC 261,610.

22.

Kiwi Marketing Incorporated v Prima Technologies Ltd (in liq) HC Hamilton CIV-2007-419-1804, 15 May 2008; Downer Construction (New Zealand) Ltd v One Hobson Street Ltd (in liq) HC Auckland CIV-2007-404-2374, 3 August 2007.

23.

Body Corporate 160361 v Auckland City Council HC Auckland CIV-2003-4046306, 25 June 2007. Compare Izard v Scott (1911) 31 NZLR 211, 14 GLR 280 (which dealt with a summons by a third party to strike out part of the fourth party’s statement of defence).

24.

Re Onward Building Society [1891] 2 QB 463 (CA) at 476–478.

25.

Eastern Holdings Establishment of Vaduz v Singer & Friedlander Ltd [1967] 1 WLR 1017, [1967] 2 All ER 1192. Such proceedings would be taken in New Zealand under High Court Rule 4.58.

26.

Both the application and the subsequent steps by the Registrar were considered by the Court to be “proceedings” in Haupiri Courts Ltd (in liq) v Piako Construction Ltd [1969] NZLR 401. In Laycock v Klaxon Autos Ltd (1976) 1 BCR 76 at 79, Mahon J declined to follow Haupiri Courts. The conflict between these two cases came before the Court in Russell Alpine Motels (NZ) Ltd v Devon Nominees Ltd (1977) 1 BCR 105. White J observed that it was desirable that the question of interpretation be decided by the Court of Appeal but granted an injunction according to the interpretation of “action or proceeding” given in Haupiri Courts on the basis that was the fair and reasonable course in all the circumstances of the case. In Re Prestidge (1989) 4 PRNZ 292, the Court held (without reference to Haupiri, Laycock or Russell Alpine) that an application to the Registrar of the High Court pursuant to s 99 of the Property Law Act 2007 is not a “proceeding” because it is an application to the Registrar and not to the court. See also Downley Properties Ltd v Stirling (1993) 7 PRNZ 241.

27.

Langley Constructions (Brixham) Ltd v Wells [1969] 1 WLR 503, [1969] 2 All ER 46 (CA); Mersey Steel & Iron Co v Naylor Benson (1882) 9 QBD 648.

28.

Re Vocalion (Foreign) Ltd [1932] 2 Ch 196.

29.

In Commissioner of Inland Revenue v Compudigm International Ltd (2010) 24 NZTC 24,579, [2011] NZCCLR 6, Associate Judge Gendall notes at [24]–[29] that restraining the proceedings would unnecessarily undermine the operation of the Model Law on Cross-border Insolvency by UNCITRAL that was enacted by the United States in Chapter 15 of the US Bankruptcy Code and that the correct approach in such a case would be for the representative of the insolvency proceeding to apply to the foreign court for relief.

30.

Christoffel v Mokau Collieries Ltd (in liq) [1934] NZLR s 170, [1934] GLR 557.

31.

Hedley v Albany Power Centre Ltd (In liq) [2005] 2 NZLR 196 at [55].

32.

Hook v Gulf Harbour HC Auckland CIV-2002-404-1931, 23 November 2005 at [56]–[60], citing Clarence Holdings v Mt Albert TV (1993) Ltd (1999) NZCLC 262,072; Satara Co-Operative Group Ltd v Fus Ltd HC Napier CIV-2008-441856, 28 January 2010 at [5].

33.

Re David Lloyd & Co (1877) Ch 339 at 344; Commonwealth v Davis Samuel (2008) 68 ACSR 336 at 344. Discussed recently in Commissioner of Inland Revenue v Compudigm International Ltd (2010) 24 NZTC 24,579, [2011] NZCCLR 6.

34.

Fisher v Isbey (1999) 13 PRNZ 182 at [11] and [36].

35.

Wilson v Aurora Group Ltd [1990] 1 NZLR 61 at 72–73 citing Haupiri Courts Ltd v Piako Construction Ltd [1969] NZLR 401 at 406–407 and Re Coregrange Ltd [1984] BCLC 453 at 457.

36.

Satara Co-Operative Group Ltd v Fus Ltd HC Napier CIV-2008-441-856, 28 January 2010; Birchall v Project Works Construction Ltd (in liq) (2004) 9 NZCLC 263,547 at [23]–[24]; Fisher v Isbey (1999) 13 PRNZ 182 (HC) at [19]; Body Corporate 81381 v Trebe New Zealand Ltd (in liq) HC Wellington CIV-2003-485-332, 13 May 2003; Sieradzki v Kahikatea Manufacturing Ltd (in liq)

(2000) 8 NZCLC 262,241 at [6]. 37.

See, for example Satara Co-Operative Group Ltd v Fus Ltd HC Napier CIV-2008-441-856, 28 January 2010 at [12].

38.

Clarence Holdings v Mt Albert TV (1993) Ltd (1999) NZCLC 262,072; Hook v Gulf Harbour Development Ltd (in liq) HC Auckland CIV-2002-404-1931, 23 November 2005 at [56]–[60].

39.

Bastin Enterprises Ltd v Graham HC Auckland CIV-2008-404-4443, 4 November 2009 at [27]; Satara Co-Operative Group Ltd v Fus Ltd HC Napier CIV-2008441-856, 28 January 2010 at [5]; Sieradzki v Kahikatea Manufacturing Ltd (in liq) (2000) 8 NZCLC 262,241 at [7]–[8]. In Australia the test which has been applied is whether there is “a serious question to be tried”: Commonwealth v Davis Samuel (2008) 68 ACSR 336 at 342.

40.

Johnson v CBD Real Estate Ltd (in liq) (1999) 14 PRNZ 320 at 322 at [13].

41.

McPhail (t/a Leaderbrand Produce) v Durbridge Developments Ltd (in liq) (t/a Country Manor Foods) (1998) 8 NZCLC 261,610.

42.

See for example, FE Investments Ltd v Klisser [2010] 2 NZLR 217 at [17]. This approach is also taken in Australia: Commonwealth v Davis Samuel (2008) 68 ACSR 336 at 343.

43.

McPhail (t/a Leaderbrand Produce) v Durbridge Developments Ltd (in liq) (t/a Country Manor Foods) (1998) 8 NZCLC 261,610 at 261,612; Johnson v CBD Real Estate Ltd (in liq) (1999) 14 PRNZ 320 at 322; Body Corporate 81381 v Trebe NZ Ltd (in liq) HC Wellington CIV-2003-485-332, 13 May 2003.

44.

McPhail (t/a Leaderbrand Produce) v Durbridge Developments Ltd (in liq) (t/a Country Manor Foods) (1998) 8 NZCLC 261,610.

45.

Sharnick Holdings Ltd (in liq) v Sharnick Investments Ltd (in liq) (2003) 9 NZCLC 263,294 at [19]– [22]; Hook v Gulf Harbour Development Ltd (in liq) HC Auckland CIV-2002-404-1931, 23 November 2005 at [56]–[60]; Clarence Holdings v Mt Albert TV (1993) Ltd (1999) NZCLC 262,072.

46.

Wellington City Council v Gracelands Exports Ltd (in rec & liq) [1991] 3 NZLR 61; Wilson v Aurora Group Ltd [1990] 1 NZLR 61 at 72; Re David Lloyd & Co, Lloyd v David Lloyd & Co (1877) 6 Ch D 339 (CA); The Zafiro, John Carlborn & Co Ltd v Owners of Zafiro [1959] 2 All ER 537; Re Aro Co Ltd [1980] 1 All ER 1067 (CA) (which involved an action in rem against a ship). See also Commissioner of Inland Revenue v Compudigm International Ltd (2010) 24 NZTC 24,579, [2011] NZCCLR 6 at [42].

47.

Wilson v Aurora Group Ltd [1990] 1 NZLR 61 at 72–73; Re Coregrange Ltd [1984] BCLC 453.

48.

Hook v Gulf Harbour Development Ltd (in liq) HC Auckland CIV-2002-4041931, 23 November 2005.

49.

Sieradzki v Kahikatea Manufacturing Ltd (in liq) (2000) 8 NZCLC 262,241.

50.

Haviland v Joslow (No 4) Pty Ltd (1979) 4 ACLR 373: although the Court ordinarily would not have given leave where there was no prospect of the company being able to meet any part of the verdict (not wanting to give its imprimatur to fruitless proceedings), in this case the proceedings would go ahead in any event against four other defendants. The plaintiff argued that a verdict in itself would be a substantial vindication.

51.

Canon (Scotland) Business Machines, Noter [1992] BCC 620: the Court considered that its interest in having its decrees complied with overrode the concerns of the general body of creditors.

52.

FE Investments Ltd v Klisser [2010] 2 NZLR 217 at [20]–[21], [36]–[37]; citing Navix Line (NZ) Ltd v Milo HC Auckland CP281/SD99, 5 December 2002.

53.

Lock and Sheahan (as liquidators of Ex Ced Foods (in rec & liq)) v Lawrence HC Auckland CIV2011-404-4002, 14 October 2011.

54.

Steel and Tube Co of New Zealand Ltd v Barker & Pollock Ltd and JBL-Sargent Construction Ltd [1973] 2 NZLR 30; McPhail v Durbridge Developments Ltd (in liq) (1998) 8 NZCLC 261,610.

55.

Hoggart v Richworth Properties Ltd HC Auckland M146-IM03, 31 March 2003 at [17]–[19].

56.

Bowkett v Fullers United Electric Works Ltd [1923] 1 KB 160 (CA); Re Dynamics Corp of America [1973] 1 WLR 63.

57.

Discussed below at para 9.7.

58.

Anglo-Baltic and Mediterranean Bank v Barber & Co [1924] 2 KB 410 (CA); Re Gate (1996) 9 PRNZ 568 at 573–575.

59.

Armorduct Manufacturing Co Ltd v General Incandescent Co Ltd [1911] 2 KB 143 (CA).

60.

Re London Cotton Co (1866) LR 2 Eq 53.

61.

Rudow v Great Britain Mutual Life Assurance Soc (1881) 17 Ch D 600 (CA).

62.

Re Wanganui Meat-Preserving Co Ltd, ex parte Peat (1892) 12 NZLR 148.

63.

Gilbert (liquidator of Crystal Waters Management Ltd (in liq)) v About Body Corporates Ltd HC Auckland CIV-2009-404-2048, 23 June 2009 at [25].

64.

Re Andrew, ex parte Official Receiver (Trustee) v Standard Range and Foundry Co Ltd (No 2) [1936] 3 All ER 450 (CA); Re Caribbean Products (Yam Importers) Ltd, Tickler v Swains Packaging Ltd [1966] 1 All ER 181, [1966] Ch 331; Marley Tile Co Ltd v Burrows [1978] QB 241, [1978] 1 All ER 657 (CA).

65.

Re Caribbean Products (Yam Importers) Ltd, Tickler v Swains Packaging Ltd [1966] 1 All ER 181, [1966] Ch 331.

66.

Re City Construction Ltd HC Auckland M2165-IM99, 13 April 2000 at [35].

67.

Industrial Park Holdings Ltd v Turners Fine Food Co Ltd HC Auckland M1437/88, 9 October 1989; ArmorDuct Manufacturing Ltd v General Incandescent Co Ltd [1911] 2 KB 143 discussed in Re City Construction Ltd HC Auckland M2165-IM99, 13 April 2000 at [32]–[33].

68.

Re Gate (1996) 9 PRNZ 568.

69.

It is not sufficient that a creditor acted efficiently and with due regard to its own interests. Chilwell J canvassed the principles to be applied in Re Hideaway Holidays Ltd (in liq) (1980) 1 BCR 262 and concluded that weighty reasons are required to justify departure from the pari passu rules. He adopted the observation of Buckley J in Re Rainbow Tours Ltd [1963] 2 All ER 820 at 827 that diligence alone cannot entitle a judgment creditor to relief under the provision. Compare Re Le Sueur HC Auckland B1479/99, 19 September 2003 at [23].

70.

Sutherland v North Shore Marine & Industrial Ltd (in liq) (1981) 1 NZCLC 98,167 where the Court saw the money as invested with a special character. It considered that it would defeat the purpose for which the payment was made if the liquidator were able to uplift it and saw the case as one of upholding the integrity and unassailability of its own orders. See also Smith v Covington Spencer (No 2) HC Auckland CIV-2005-404-3020, 5 October 2006 at [80] for reference to security being treated as a trust fund that does not form part of the assets of any particular plaintiff, with the consequence that it cannot be diluted through the operation of a formal insolvency regime.

71.

D Wilson (Birmingham) Ltd v Metropolitan Property Developments Ltd [1975] 2 All ER 814; Rainbow v Moorgate Properties Ltd [1975] 2 All ER 821.

72.

Roberts Petroleum Ltd v Bernard Kenny Ltd (in liq) [1983] 2 AC 192, [1983] 1 All ER 564 (HL). Compare Burston Finance Ltd (in liq) v Godfrey [1976] 1 WLR 719, [1976] 2 All ER 976 (CA) applied by the Court of Appeal in Commercial Bills Ltd (in liq) v Molyneux and Cramp [1980] NZ Recent Law 46.

73.

Companies Act 1993, s 251(2).

74.

Companies Act 1993, s 252(1). In Bower v Hett [1895] 2 QB 337 (CA) it was held that this provision does not apply to money paid to avoid seizure as opposed to sale of the goods.

75.

Companies Act 1993, s 252(2). This covers only the costs of the officer charged with the execution process and not those of the creditor: Re Woods (Bristol) Ltd [1931] 2 Ch 320.

76.

Companies Act 1993, s 252(3). The period under the 1955 Act is 14 working days. “Working day” is defined in s 2. The time runs from the date of the sale and not the date of receipt of the proceeds: Re Cripps Ross & Co, ex parte Ross (1888) 21 QBD 472. If money is paid to avoid a sale the time runs from the date of the payment to the officer: Re Walkden Sheet Metal Co Ltd [1960] Ch 170, [1959] 3 All ER 333; Marley Tile Co Ltd v Burrows [1978] 1 QB 241, [1978] 1 All ER 657 (CA).

77.

Companies Act 1993, s 252(4).

78.

Companies Act 1993, s 252(5).

79.

Companies Act 1993, s 252(6).

80.

Re Onward Building Society [1891] 2 QB 463 at 475 (CA); Koutsojiannis v Brown (1981) 1 NZCLC 98,081 at 98,084; Re Discoverers Finance Corp Ltd (Lindlar’s Case) [1910] 1 Ch 312 (CA).

81.

Gillespie v Kinloch Golf Resort Ltd HC Auckland CIV-2007-404-2694, 21 February 2008 at [42], [53]–[54] citing Westland v Rainbow Corp Ltd (1992) 6 NZCLC 67,692 at 67,706. Contrast Sullivan v Henderson [1973] 1 All ER 48, [1973] 1 WLR 333, where the Court refused after commencement of the liquidation, to order specific performance of a contract made to sell shares on the basis that any court would be reluctant to force upon a purchaser, who had agreed to take a fully effective transfer of the shares, a transfer that, although valid as between the purchaser and the vendor, would be void as against the company.

82.

Gillespie v Kinloch Golf Resort Ltd HC Auckland CIV-2007-404-2694, 21 February 2008 at [78]; Re Onward Building Society [1891] 2 QB 463 at 483 (CA).

83.

Hight v Chilcott HC Auckland M1683/96, 20 June 1997 citing Re The Onward Building Society [1891] 2 QB 463 for the “appropriate interpretation of the legislative provision”. See IB Shephard and CM Dunphy HC Wellington CIV-2008-485-2415, 10 November 2008 for circumstances in which a s 248(1)(d) order was made.

84.

Re Sellers (2003) 21 ACLC 1319.

85.

Re Blaina Colliery Co Ltd [1926] WN 30.

86.

Re Oriental Commercial Bank, Barge’s Case (1868) LR 5 Eq 420.

87.

Re London & Suburban Bank (1872) LR 15.

88.

Law Commission Company Law Reform and Restatement (NZLC R9, 1989) at [664].

89.

Companies Act 1993, s 239ABX.

90.

Companies Act 1993, s 239ABZ.

91.

Companies Act 1993, s 239ACB.

92.

Voluntary administration is discussed at Chapter 17 of Heath & Whale on Insolvency (looseleaf ed, LexisNexis).

93.

Companies Act 1993, s 273.

94.

Companies Act 1993, s 274(1)(a).

95.

Companies Act 1993, s 274(1)(a).

96.

Companies Act 1993, ss 273(2), 274(2) and 373(3).

97.

International Direct Ltd (in liq) HC Wellington CIV-2006-485-2020, 17 November 2006 at [25].

[page 117]

CHAPTER 10 The Liquidator’s Duties, Rights and Powers 10.1

Introduction

The liquidator has a unique legal status which is difficult to describe with precision. It may best be described as principally an agent for the company who occupies a position which is fiduciary in some respects and who is bound by the statutory duties imposed by the Act. The liquidator’s duties and tasks are wideranging in nature: administrative, investigative and quasi-judicial.1 The nature of a liquidator’s duties means that, on occasion, difficult legal or commercial decisions may need to be made by him or her. On legal points, the liquidator is entitled to seek directions from the High Court under s 284(1)(a) of the Act.2 However, the court will rarely assist if purely commercial decisions are in issue: those are aspects with which the liquidator should deal.3 [page 118]

10.2

Principal Duty of the Liquidator: Realisation and Distribution of Assets

Section 253 of the Act sets out the principal duty of the liquidator, which is, in a reasonable and efficient manner: to take possession of, protect, realise and distribute the assets, or the proceeds of the realisation of the assets, of the company to its creditors in accordance with the Act; and if there are surplus assets, to distribute them or their proceeds in accordance with the Act.

It follows from this duty that there is a need for a liquidator to oversee any actions of the receivers that might prejudice the interests of preferential or unsecured creditors.4 Section 253 reflects the existing common law. As discussed above, the liquidator is required to apply the company’s assets in the following order of priority: The secured creditors’ rights to take possession of, and realise or otherwise deal with, property of the company over which they have a charge are unaffected by the commencement of liquidation, subject to s 3055 which provides for the secured creditors’ options and the liquidator’s role where a claim is made by a secured creditor (discussed at para 7.3). The expenses, fees and claims set out in Schedule 7 in the order of priority specified6 (discussed at para 7.4). All other unsecured creditors’ claims (discussed at paras 7.5–7.12). If any surplus assets remain, the liquidator must distribute them in accordance with the company’s constitution or in accordance with the Act if the company does not have a constitution.7 Section 254 provides for two exceptions to the liquidator’s principal duty. Section 254(a) of the Act provides that a liquidator may, but is not required to, carry out any duty or exercise any power in relation to property that is subject to a charge. [page 119] Section 254(a) absolves a liquidator from any duty to realise assets on behalf of a secured creditor, reversing the result of Re Your Size Fashions Ltd,8 in which Williamson J held that if secured creditors do not take any steps in relation to assets which are the subject of their security, or resort to them, the liquidator is obliged to collect those assets since they remain the assets of the company.9 A liquidator is no longer obliged to act if the secured creditor chooses not to. However, s 254(a) makes it clear that where the charge is not surrendered or redeemed under s 305, a liquidator may exercise any power in relation to the property.10

By ss 253 and 254 the liquidator may therefore exercise its powers in relation to secured property but is not obliged to. Section 254(b) provides that if the liquidator is the Official Assignee and has been appointed by the court, and there are no assets available for distribution to the creditors, the Official Assignee is not required to carry out any duty that would incur expense unless the responsible Minister consents.

10.3

Application of Agency and Fiduciary Principles

The liquidator’s relationship to the company is that of an agent. This is not a normal agency position because the liquidator controls the principal (the company) and has statutory duties under the Companies Act 1993 which are focused on protecting the interests of creditors. It is an agency subject to external rules and ethical obligations.11 The consequences of the application of agency principles are that: The liquidator is able to bind the company but is not personally liable for contracts entered into in the company’s name.12 However, if it appears to the court that a liquidator has misapplied or retained, or become liable or accountable for, money or property of a company, or been guilty of negligence, default, or breach of duty or trust in relation to the company, the court may inquire into the liquidator’s conduct and order that he or she repay the money with interest or pay compensation to the company.13 Some cases also suggest that the court has jurisdiction to direct the liquidator to return money where it would be inequitable for the company’s assets to be enriched with it at the expense of the [page 120] person seeking recoupment, for example where it was paid under a mistake of law.14 Fiduciary principles apply. A liquidator’s role in directing the affairs of the company after liquidation is comparable to (but not the same as) that of the director before liquidation. The liquidator’s position, while sometimes referred to as “trustee”,15 is better

described as that of a statutory agent whose responsibilities are to perform obligations under the Act and to distribute property divisible among creditors in accordance with the statutory priorities.16 The liquidator does not hold assets in trust for unsecured creditors17 but has a fiduciary duty, arising out of the nature of the agency, to apply property in terms of the statutory requirements and to recognised legal and equitable rights of third parties. Aspects of the liquidator’s fiduciary duties are: A duty to act impartially and in the interests of the whole body of shareholders and the whole body of creditors.18 Many of the restrictions on who may be appointed a liquidator are aimed at ensuring the independence of the liquidator and avoiding any conflict of interest. It is also a central consideration in the exercise of the court’s discretion to appoint a liquidator.19 In a potential conflict of interest situation a liquidator would be wise to apply to the court for directions under s 284(1)(a). A duty not to profit from the office except according to law. The duty under reg 31 of the Companies Act 1993 Liquidation Regulations 1994 not to become, either directly or indirectly, a purchaser of any [page 121] part of the company’s assets accords with this broader duty.20 It reflects the common law where, for example, a liquidator was not permitted to sell the undertaking of the company nominally to a new company but really to himself (the sale was set aside and the property was ordered to be conveyed back to the old company)21 and a liquidator who was a solicitor and conducted proceedings on behalf of himself and his co-liquidator was held to be prevented from receiving remuneration beyond what was allowed by the legislation by his fiduciary relationship with the shareholders and creditors of the company.22 Similarly, a court-appointed liquidator is not entitled to receive payment in respect of work undertaken when a conflict of interest exists.23

10.4

Duty Of Good Faith, to Act Impartially and for Proper Purposes

The liquidator must be, and appear to be, both independent and impartial. The court can review the decision of a liquidator who fails to act even-handedly as between the various groups whose interests he or she is required to advance or consider. Where those interests conflict, the liquidator is required to act in good faith, in a fair and principled way, and consistently with statutory requirements.24

10.5

Duty to Report to Creditors, Shareholders and the Public

The 1993 Act provided for creditors and shareholders to play a greater role in supervising the conduct of liquidations, and reduced the role of the court. As a result, more extensive reporting duties were placed on the liquidator.25

10.5.1

Notice of appointment

After being appointed as liquidator or being notified of appointment, the liquidator must give public notice of the appointment, the date and time of the commencement of the liquidation and the address and telephone number [page 122] of the liquidator for inquiries by creditors and shareholders during normal business hours.26 The liquidator must also give notice of that appointment to the Registrar within 10 working days of being appointed or being notified of appointment.27

10.5.2

Reporting requirements

Within five working days (where the liquidator has been appointed by resolution of shareholders, by directors or by resolution of creditors at a watershed meeting) or 25 working days (in the case of a court-ordered liquidation) of the liquidator’s appointment, or such longer time as allowed by a court, the liquidator must:28 prepare a list of every known creditor of the company and their address (if known); and send to every creditor, shareholder and the Registrar, that list, a report

containing a statement of the company’s affairs, proposals for conducting the liquidation and, if practicable, the estimated date of its completion, and a notice explaining the creditor and shareholder’s right to require the liquidator to call a meeting of creditors under s 314. The Law Commission considered it preferable that the liquidator compile reliable, if sometimes incomplete, information, and give that to creditors and shareholders, rather than expend resources on obtaining a statement of affairs from difficult directors.29 At the end of every six-month period after the commencement of the liquidation the liquidator must, within 20 working days, report to the creditors, shareholders and the Registrar on the conduct of the liquidation during the preceding six months and on any further proposals the liquidator has for completing the liquidation.30 The court may, on the application of a liquidator, exempt the liquidator from providing the initial and/or sixth-monthly report or modify these requirements.31 The liquidator is required to prepare and send a final report (along with other documents) to every creditor whose claim has been admitted and every shareholder, and to the Registrar for registration, as soon as practicable after completing his or her duties in relation to the liquidation.32 Again, the court has the power to exempt the liquidator from these requirements, or modify their application, on the liquidator’s application.33 [page 123]

10.5.3

Duties in relation to accounts

The liquidator is required to keep accounts of the liquidation and to permit inspection of those accounts and the accounts and records of the company that the liquidator holds by any liquidation committee (unless the liquidator believes on reasonable grounds that inspection would be prejudicial to the liquidation) and by a creditor or shareholder if the court so orders. The liquidator is required to retain the accounts and records for one year after the completion of the liquidation.34 If the liquidator is the Official Assignee, then the Official Information Act 1982 is also applicable. The Registrar may, before or after completion of liquidation, authorise the disposal of accounts and records, or require accounts or records to be retained for longer than a year after the

completion of the liquidation.35

10.5.4

Procedural requirements as to documents

Documents entered into, made or issued by a liquidator on behalf of a company in liquidation must state in a prominent position on the document that the company is in liquidation.36

10.5.5

Duty to summon meetings and have regard to views of shareholders and creditors

The creditors and shareholders’ role in a liquidation is facilitated by the liquidator’s statutory duties to have regard to their views, and to summon meetings for that purpose.37 Section 258(2) requires the liquidator to summon a meeting: where shareholders, when resolving that a liquidator should be appointed, have passed a resolution specifying that a meeting should be held; where creditors, when meeting after a company has gone into liquidation to choose a different liquidator, have passed a resolution specifying that a meeting should be held; where at least 10 per cent of paid up shareholders have requested a meeting by notice in writing; where creditors who are owed not less than 10 per cent of the total amount owed to all creditors of the company have requested a meeting by notice in writing. [page 124] The liquidator may also summon a meeting at his or her discretion. The conduct of shareholders’ meetings is governed by Schedule 1 of the Act and creditors’ meetings by Schedule 5.38 Section 258(1) requires the liquidator to have regard to the views: set out in resolutions made at a meeting of shareholders where it is resolved that a liquidator be appointed; set out in resolutions made at a meeting of creditors under s 243; and set out in resolutions made at any of the meetings called under s 258(2). The liquidator must also have regard to the views of the liquidation

committee (if there is one) if they are given in writing to the liquidator.39 The precise ramifications of the duty to have regard to creditors’ and shareholders’ views are unclear, particularly in light of s 258(4), which provides that nothing in s 258 limits or prevents a liquidator from exercising his or her discretion in carrying out his or her functions and duties under this Act.

10.5.6

Service on shareholders and creditors

A notice, statement, report, accounts or other document to be sent to a shareholder or creditor who is a natural person may be:40 delivered to that person; posted to that person’s address or delivered to a box at a document exchange which that person is using at the time; or sent by facsimile to a telephone number used by that person for the transmission of documents by facsimile. If a shareholder or creditor is a company, documents may be sent by any of the methods of serving documents set out in ss 388 or 390.41 If a shareholder or creditor is a body corporate (not being a company or an overseas company), documents may be:42 delivered to a person who is a principal officer of the body corporate; delivered to an employee of the body corporate at the principal office or principal place of business; delivered in such manner as the court directs; delivered in accordance with an agreement made with the body corporate; posted to the address of the principal office of the body corporate or delivered to a box at a document exchange which the body corporate is using at the time; or sent by facsimile to a facsimile number used for the principal office or principal place of business of the body corporate. Where documents are sent to the last known address of a shareholder or creditor who is a natural person or to the address for service of a shareholder [page 125]

or creditor that is a company, and the documents are returned unclaimed three consecutive times, the liquidator need not send further documents to that shareholder/creditor until it gives notice to the company of its new address.43

10.5.7

Duty to notify suspected offences

Section 258A imposes a duty on a liquidator to report to the Registrar if he or she considers that an offence that is material to the liquidation has been committed by the company or any director against the Companies Act 1993, Crimes Act 1961, Securities Act 1978, Securities Markets Act 1988, Financial Reporting Act 1993, Takeovers Act 1993, or Insurance (Prudential Supervision) Act 2010. If a company is a licensed insurer, a copy of the report must be sent to the Reserve Bank. If the report is made in respect of a financial markets participant, the Registrar may supply a copy to the Financial Markets Authority.44 The report and any communications between liquidator and Registrar, Reserve Bank or Financial Markets Authority are protected by absolute privilege. Failure to comply with this duty is an offence.

10.6

Duty to Allow Creditors to Choose Another Liquidator

Section 243 requires the liquidator to call a meeting of creditors to give them an opportunity to appoint a different liquidator. Section 243 does not apply if the liquidator is appointed at a watershed meeting held under s 239AT.45 In the case of a liquidator appointed by the shareholders or the board, the purpose of the meeting which must be held within 10 working days of the liquidator’s appointment (unless allowed otherwise by the court)46 is to resolve whether to confirm the appointment of that liquidator or to appoint another liquidator.47 In the case of a liquidator appointed by the court, the purpose of the meeting, which must be held within 30 working days of the liquidator’s appointment unless allowed otherwise by the court,48 is to resolve whether to confirm the appointment of that liquidator or to apply to the court for the appointment of another liquidator.49 The requirements in relation to such meetings, and in particular the notice

requirements, are discussed further at para 6.1. [page 126] The meeting may resolve to appoint another liquidator. Where the liquidator was appointed by the shareholders or the board, the new appointee is the liquidator, subject to that person providing consent in writing.50 Where the liquidator was appointed by the court, and the creditors resolve to apply for the appointment of another liquidator, the existing liquidator must apply to the court for the appointment of the replacement liquidator.51 The court has a discretion whether or not to act on the wishes of the meeting of creditors and appoint the replacement liquidator nominated at the meeting.52 If the appointment of a liquidator under s 241(1)(2)(a) or (b) is not confirmed at the meeting and another liquidator is not appointed in place of that liquidator, the appointment of the original liquidator continues until another liquidator is appointed.53 The liquidator is not required to call such a meeting. However, if within 20 working days before the appointment of the liquidator, the board resolved that the company would be able to pay its debts, a copy of the resolution must be delivered to the Registrar,54 and the directors who voted in favour of the resolution must sign a certificate stating that in their opinion the company would be able to pay its debts and the grounds for that opinion.55 In this case, however, s 244 requires the liquidator to call a meeting to permit the selection of another liquidator if he or she is satisfied either that the company is not able to pay its debts, or that the directors who voted in favour of the resolution that the company would be able to pay its debts, on the appointment of the liquidator, did not have reasonable grounds to believe that the company would be able to pay its debts. A liquidator is not required to call a meeting under ss 243 or 244 if the liquidator considers that, having regard to the assets and liabilities of the company, the likely result of the liquidation and any other relevant matters, a meeting should not be held. The liquidator must give the creditors notice of his or her belief that a meeting should not be held, of the reasons for that view, and that no meeting will be called unless a creditor gives notice in writing to the liquidator requiring a meeting to be called, within 10 working days after

receiving the notice.56 The liquidator’s notice must be given with the s 255 report (containing a statement of the company’s affairs, proposals for conducting the liquidation and, if practicable, the estimated date of its completion) and notice (explaining the creditor and shareholder’s right to [page 127] require the liquidator to call a meeting of creditors under s 314).57 A meeting need not be called unless, within 10 working days of receiving notification from the liquidator, a creditor gives notice requiring a meeting.

10.7

Liquidator’s Duties of Skill and Care

Liquidators have been sued for negligence by creditors who suffer loss as a result of a breach of duty, and may be liable even if the liquidator was acting on legal advice.58 In those cases the courts have required a high standard of care and diligence from liquidators on the basis that they are paid for their services; they are able to obtain wherever it is expedient the assistance of solicitors and counsel; and they are entitled, in every case of serious doubt or difficulty in relation to the performance of their statutory duties, to submit the matter to the court, and to obtain its guidance.59 The following propositions have also been accepted by recent Australian authorities:60 The court should not be quick to condemn a person in the difficult position of liquidator, and, in particular, should not judge his or her conduct with wisdom born of hindsight. It is not every error of judgement that will be accounted negligence. At the same time, a high standard of care and diligence is to be expected of a liquidator as a professional person who is being paid for his or her services. A liquidator is under a duty to complete the administration of the assets within a reasonable time and not to protract the liquidation unduly. If there is a difficulty at any stage of the administration, it is the liquidator’s clear duty to inform the court and seek directions. However, it is not obvious that a general duty of care in negligence would be

imposed on liquidators by a New Zealand court in light of the approach of the Privy Council in Downsview Nominees Ltd v First City Finance Ltd.61 In that case the Privy Council reversed the finding of the Court of Appeal that a receiver owed a duty of care in negligence on the grounds that the duties imposed by equity on a receiver left no room for a general duty in negligence to take reasonable care in the exercise of powers and in dealing with the assets of the company subject to the security. [page 128]

10.8

Court Supervision of Liquidation

10.8.1

Overview

Section 284 provides a mechanism for certain persons to apply to the court for orders in relation to the conduct of the liquidation. The persons who may apply are the liquidator, a liquidation committee or with the leave of the court, a creditor, shareholder, other entitled person62 or a director of the company in liquidation. For this purpose, a creditor is an unsecured creditor.63 Section 284 enables the court to: give directions in relation to any matter arising in connection with the liquidation; confirm, reverse or modify an act or decision of the liquidator; order an audit of the accounts of the liquidation;64 order the liquidator to produce the accounts and records of the liquidation for audit and to provide the auditor with such information concerning the conduct of the liquidation as the auditor requests; in respect of any period, review or fix the remuneration of the liquidator at a level which is reasonable in the circumstances;65 to the extent that an amount retained by the liquidator as remuneration is found by the court to be unreasonable in the circumstances, order the liquidator to refund the amount; declare whether or not the liquidator is validly appointed or validly assumed

custody or control of property;66 make an order concerning the retention or the disposition of the accounts and records of the liquidation or of the company. The s 284 powers are in addition to any other powers the court may exercise in its jurisdiction relating to liquidators under the Act. The power may be exercised in relation to a matter occurring either before or after the commencement of the liquidation, or the removal of the company from the register, and whether or not the liquidator has ceased to act as liquidator when the application or order is made.67 [page 129] A liquidator who has obtained a direction of the court and acted in accordance with it, is entitled to rely upon having so acted as a defence to a claim in relation to anything done or not done in accordance with the direction.68 This protection can be denied by the court depending on the circumstances in which the direction was obtained.69

10.8.2

Court’s power to confirm, reverse or modify acts or decisions of liquidators

Section 284(1)(b) empowers the court to confirm, reverse or modify any act or decision of the liquidator. An application to have a liquidator’s decision reversed or modified should be brought by interlocutory application in the liquidation proceeding under High Court Rule 31.35.70 In deciding whether to grant leave, the court acts as a gatekeeper, to ensure that only appropriate challenges proceed to a full hearing.71 The power to review a liquidator’s actions will be exercised in cases of fraud, where the liquidator’s discretion has not been exercised in good faith or where the liquidator has acted unreasonably. The actions of a liquidator can be unreasonable without being in breach of an express statutory provision. The question is whether in all the circumstances, including the absence of consultation, the liquidator’s actions were unreasonable.72 The courts are reluctant to interfere with the good faith exercise of a liquidator’s discretionary powers and have repeatedly held that liquidators

should remain free to undertake their duties in a cost effective and efficient manner. If creditors were free to challenge every act or decision of a liquidator, this objective would be undermined.73 The court will not interfere with matters of day-to-day administration, or with the exercise in good faith of the liquidator’s discretionary powers. Neither will it hold a liquidator accountable for an error of judgement.74 [page 130] It is unlikely that the power conferred on the court to review the liquidator’s actions would extend to affecting rights acquired by an innocent third party as a consequence of the challenged act or decision of the liquidator.75 A liquidator’s decision to admit or reject a claim, and to disclaim can be reviewed under s 284(1)(b), and s 284 has been used to revoke the liquidator’s final report, and appoint new liquidators.76

10.8.3

Requirement for creditor, shareholder, entitled persons and directors to obtain leave to apply under s 284(1)

The key issues in determining whether to exercise the discretion to grant leave under s 284(1) are whether there is a reasonable factual basis for the application and a likelihood that the court will disturb the liquidator’s decision.77 The courts have derived assistance from principles applied by the court in considering whether to grant leave to a creditor under s 248(1)(c)(i) to commence or continue proceedings against a company in liquidation, although a wider range of considerations are likely to be relevant to an application for leave under s 284(1).78 Section 284(1) provides a filtering mechanism, which is designed to ensure that leave to challenge the acts and decisions of a liquidator is only given in appropriate cases so that a balance is struck between preserving the rights of meritorious claimants and ensuring that the assets of the company are not dissipated as a result of claims that are unlikely to succeed. A creditor seeking leave under s 284(1) therefore needs to do more than merely demonstrate that its claim is sustainable. The creditor will need to show that it has an arguable case. In this context an arguable case has two characteristics. First, it must have a credible factual basis. Second, there must be a reasonable likelihood that, if the

claim is established, the court will disturb the act or decision in question. The court is likely to take this step only if the act or decision is unreasonable.79 Section 284(1) is also designed to ensure that such challenges are brought only by those with a sufficiently direct interest in the liquidation.80 [page 131]

10.8.4

Directions as to distribution

There have been many cases where liquidators have sought directions as to distribution.81 In Kiwi International Airlines Ltd (in liq), Re Waller82 the court directed that funds be paid into the Liquidation Surplus Account where distribution was uneconomic, as this was the solution best according with equality of treatment of the creditors and common sense.

10.8.5

Funding arrangements

The High Court has indicated that it would be prudent for liquidators and litigation funders who may be contemplating a funding arrangement to obtain a court’s assessment of a proposed arrangement by way of an application by the liquidator for directions. On any such application, the court would want to be satisfied that litigation was justified by reference to the merits of the claim and the prospects of recovery.83

10.8.6

Limits on directions that may be sought by liquidators as to conduct of liquidation

One of the respects in which the role of the court was reduced in the 1993 Act was the removal of the requirement for the liquidator to have the sanction of the court (or committee of inspection) to bring proceedings in the name of the company.84 A liquidator is, however, entitled to apply for directions in relation to any matter arising in connection with the liquidation under s 284(1)(a). As a general proposition, if there is a difficulty at any stage of the administration, it is the liquidator’s clear duty to inform the court and seek directions.85 The liquidator’s ability to seek directions is not unlimited. As discussed at para 10.1, the courts have indicated that they will not make a commercial decision for the liquidator except where a liquidator’s decision is criticised by creditors as being unreasonable or as evidence of bad faith. It is also not clear

whether the s 284(1)(a) power enables the court to determine substantive rights. In England, the courts have determined substantive rights in this context, while in Australia, the courts have required that all affected parties consent.86 [page 132] In Waimate Investments Ltd (in liq) v O’Dea,87 the Court of Appeal considered an application for directions that the filing and prosecution of a proceeding was a proper exercise of the powers of the liquidators. It held that the Act gave the liquidator power to determine whether proceedings should be issued and for the court to entertain applications seeking to revert to the old position would be inconsistent with the 1993 amendments. The Court held that as a general rule, liquidators should make their own determination on legal advice but that it may be appropriate for a liquidator to apply for directions as to proposed litigation by the company in a situation where there is a genuine conflict as to the best interests of the creditors to be resolved. Examples identified by the Court are where there is a difference of view based on conflicting opinions from counsel as to the benefits of the proposed litigation or opposition by creditors to the proposed litigation based on a conflicting opinion from counsel. These comments apply only to proceedings to be brought on behalf of the company. Where liquidators act personally, they must take their own advice and make their own decisions. The court cannot be asked to secondguess the outcome of proposed litigation with a view to protecting one party visà-vis another.

10.8.7

Role as officer of the court

It is often said that a court-appointed liquidator is an officer of the court.88 So, for example in one case the court doubted whether interim injunctive relief to restrain the liquidator was necessary at any stage: … because a liquidator is an officer of this Court. For such an officer to act in a way which effectively (for want of funds) bars a proper proceeding by [the company] against its directors, or deprives shareholders of the opportunity to seek an appropriate direction under s 284, would not be consistent with the proper discharge of the liquidator’s duties and the liquidator’s obligations to this Court.89

In Cassin v Richardson,90 the Court of Appeal referred to persons whom it had appointed as liquidators as officers of the court and proceeded on the basis that the court has inherent jurisdiction to give directions to such persons

[page 133] because they have been appointed by the court and remain subject to the court’s supervision. There is Australian, English and New Zealand (pre-1993 Act) authority91 suggesting that a liquidator appointed other than by the court is not an officer of the court. However, the fact that under the 1993 Companies Act all liquidators fulfil the same roles and functions and are subject to the court’s supervision militates against that view. The same rules now apply to all liquidators (aside from those relating to appointment), unlike under the 1955 legislation or Australian and English regimes.

10.9

Orders to Enforce the Liquidator’s Duties Under s 286

The Law Commission preferred a method of enforcement of liquidator’s duties which relies on the court ordering compliance with a particular duty, with the possibility of prohibition orders for serious or persistent default, depriving the liquidator of the right to practise, instead of penalty provisions for acts or omissions by the liquidator.92 Section 286 provides for certain remedies if a liquidator fails to comply with any statute, rule of law or rules of court, or any order or direction of a court. An application under s 286 may be made by:93 a liquidator; a person seeking appointment as a liquidator; a liquidation committee; a creditor, shareholder, other entitled person,94 or a director of the company in liquidation; a receiver appointed in relation to property of the company in liquidation; if the liquidator is a chartered accountant, the President of the New Zealand Institute of Chartered Accountants; if the liquidator is a barrister and solicitor or a solicitor, the President of the New Zealand Law Society;

an Official Assignee. A notice of failure to comply must first be served on the liquidator (except in cases where the liquidator is the applicant to the court) and then an application can be made to the court if the failure to comply has not been remedied within five working days.95 [page 134] The notice must meet the purpose of s 286(2). The purpose of the notice is to enable the liquidator, if able and willing to do so, to avoid the court’s involvement by remedying the alleged failure. This purpose is apparent from the requirements that the notice must be given before an application is made, the application can only be made if there is a continuing failure to comply and the court is empowered to relieve the liquidator of the duty to comply or order the liquidator to comply.96 To achieve its purpose, the notice must fairly inform the liquidator of the duty alleged to be breached and how the duty is alleged to have been breached, so that the liquidator is able to determine what needs to be done to avoid an application to the court.97 A “failure to comply” is defined in s 285 as a failure of a liquidator to comply with a relevant duty arising under the Companies Act 1993, any other Act, rule of law or Rules of court, or under any order or direction of a court (other than an order to comply made under s 286). A liquidator who fails to comply with a s 286(3) order (or who is or becomes disqualified under s 280) may be removed from office under s 286(4). The court also has the power under this provision to order that the liquidator be appointed and act, or continue to act, as liquidator.98 Section 286(7) provides that it is evidence of “persistent failures to comply” that two or more applications for compliance orders (with which the person has complied before the hearing) or compliance orders themselves have been made in respect of the same person.99 This means that if an applicant is relying on the seriousness of a failure to comply, he or she need only establish that there has been a failure to comply as defined by s 285 (which includes the failure to comply with a relevant duty arising under the Act) and that this failure is so serious that the person is unfit to act as a liquidator. The applicant does not need to show that the liquidator has previously been the subject of an application to

the court. The position is different where the applicant contends that it is the persistence of the failures to comply that make the person unfit to act as a liquidator. In that case, the applicant can rely on evidence that on two or more occasions a court has made an order to comply (under s 286(3)) in respect of the same person. Alternatively, the applicant can rely on evidence that on two or more occasions an application for an order to comply has been made in respect of the same person, and that in each case the person complied [page 135] with the relevant duty after the application was made and before the hearing of the application.100 However, a persistent failure to comply may potentially be proven in other ways. Section 286(7) does not purport to provide an exhaustive definition. Rather, it sets out two particular ways persistence may be proven. Those two ways will provide guidance as to what will be evidence of persistent failures to comply in other cases.101 If the court is satisfied there has been a failure to comply, it can either relieve the liquidator of the duty to comply wholly or in part, or order the liquidator to comply. The latter order is without prejudice to any other remedy which may be available in relation to the breach of duty by the liquidator.102 If the court is satisfied that a person is unfit to act as liquidator because of persistent failures to comply, or the seriousness of a failure to comply, the court must prohibit that person from acting as a liquidator or a receiver. The period of the order is a matter for the discretion of the court but the court may make a prohibition order for an indefinite period of time.103 The effect of the order is that the person to whom it applies may not act as a liquidator or receiver in a current or other liquidation or receivership.104 Prohibition orders are held by the Official Assignee, filed by reference to the name of the liquidator.105

10.10 Overview: The Liquidator’s Powers and Rights

Section 260 provides that a liquidator has the powers: necessary to carry out the functions and duties of a liquidator under the Act; conferred on a liquidator by the Act; and set out in Schedule 6. The Act provides in ss 261–267 and 274 for powers that enable the liquidator to obtain documents and information, in s 260A for the power to assign the right to sue and in ss 268 and 269–270 for the liquidator to be able to make calls on shares or enforce liabilities of shareholders and to disclaim onerous property. Section 275 sets out a rule about the provision of essential services to a liquidator, and ss 273–274 provide for offences. Sections 276–278 set out rules relating to the liquidator’s remuneration. Liquidators have the power to apply to set aside certain transactions with creditors that take place and charges that are given within the period prior [page 136] to the liquidation under ss 292–296. Sections 297–301 provide for other circumstances in which a liquidator can obtain a contribution from directors and other parties towards the pool of assets available for creditors in a liquidation.

10.11 Power to Enable Administration: Schedule 6 While s 260 provides a general statement of the liquidator’s powers, it also provides that the liquidator has the specific powers set out in Schedule 6. The Schedule 6 powers include both powers to act in the name and on behalf of the company, and also powers which may be exercised in the liquidator’s name. Schedule 6 provides for powers to enable the administration of a liquidation to take place, including the following powers: To commence, continue, discontinue and defend legal proceedings. The power to commence proceedings includes proceedings which should be brought in the name and on behalf of the company and those proceedings which may be brought in the name of the liquidator. It is a question of

statutory interpretation and analysis of the right sought to be enforced whether a particular right is enforceable by the liquidator in the company’s name or in the liquidator’s name.106 The liquidator can ratify proceedings irregularly commenced in the company’s name before the liquidation.107 The practice has been that, where a properly advised liquidator brings proceedings, there should not be an order for security for costs against the liquidator other than in exceptional cases (such as where the taxpayer or the creditors are funding the litigation or the proceedings are exceptionally long and complex).108 The court has drawn a distinction between this practice and the practice which should apply when considering an application for an order for costs against liquidators.109 To the extent necessary for the liquidation, to carry on the business of the company. Where a liquidator carries on business it must be for the [page 137] purpose of the liquidation and not the continuation of the company.110 The liquidator’s conduct should not be judged by an objective standard set up after the event; it is sufficient if the liquidator bona fide and reasonably formed the opinion that the carrying on of the business was necessary for the liquidation.111 To appoint a solicitor. When a solicitor has been properly retained on behalf of a company in liquidation, his or her retainer is not revoked by the removal of the liquidator who appointed the solicitor.112 To sell or otherwise dispose of the property of the company. If a liquidator is shown to be interested in a purchase in any way, the sale may be set aside.113 To draw, accept, make and endorse a bill of exchange or promissory note in the name and on behalf of the company, with the same effect as if the bill or note had been drawn, accepted, made or endorsed by or on behalf of the company in the course of its business. To borrow money on the security of the company’s assets. To appoint an agent to do anything which the liquidator is unable to do. The purpose of the provision is to enable the delegation of specific tasks which the liquidator, for one reason or another, is not able to undertake. It does not permit general delegation of the liquidator’s duties.114 A liquidator who is so

disabled in some way that he or she cannot perform the duties for which he or she has been appointed, should resign, not appoint an agent.115 Although it has been held that the power to appoint an agent is limited to acts of a purely administrative nature which do not involve the exercise of professional judgement,116 it may be open to a liquidator to seek a direction under s 284(1)(a) that a specific task or responsibility be delegated to an agent where the liquidator faces a conflict of interest in respect of that particular aspect of the liquidation, [page 138] particularly if it is a comparatively minor aspect of the liquidation, to avoid the need to appoint a new liquidator.

10.12 Power to Obtain Documents and Information A liquidator has extensive powers to obtain documents and information.117

10.12.1 Access to documents Section 261(1) reflects a legislative intention that a liquidator is entitled to obtain delivery of books, records or documents of the company as of right, without the need to expend liquidation funds to pay remuneration or expenses of the person required to comply with the obligation. Section 262 ameliorates that position when documents are sought from a receiver.118 Section 261(1) provides that a liquidator, by notice in writing, may require a director, shareholder of a company in liquidation or any other person to deliver to the liquidator books, records or documents of the company in that person’s possession or under his or her control. That power may be exercised to such extent “as the liquidator requires”. Legal advisers and barristers acting on behalf of a company prior to liquidation have been held to clearly fall within these provisions and be persons who can be compelled to produce company records pursuant to s 261, given the broad intention behind s 261. Where privilege belongs to the company, it is the privilege of the liquidators.119 Section 264(1) provides that a person is required to deliver a document to a

liquidator under s 261(1) even though possession of the document creates a charge over the property of a company. The priority or existence of the charge is not prejudiced by providing it to the liquidator and the liquidator must make the document available to the person entitled to it for the purpose of dealing with or realising the charge or the secured property.120 If a receiver has books, records or documents that the receiver requires for exercising his or her functions, the receiver is not required to deliver them to the liquidator, but must, if required to do so by the liquidator in writing, make them available for inspection, and provide copies.121 The liquidator [page 139] must pay the reasonable expenses of the receiver in complying with such a request.122 The liquidator may take copies of the information.123 Section 263(1) provides that a person cannot claim or enforce a lien over books, records or documents of a company in liquidation as against the liquidator. In this context it has been held that “documents of the company” are not limited to documents “owned” by the company but extend to documents held by the company.124 If the lien arises in relation to a debt for the provision of services to the company before it went into liquidation, the debt is a preferential claim to the extent of 10 per cent of the total value of the debt, up to a maximum amount of $2,000.125 Section 263 does not apply where the board of the company in liquidation has passed a resolution, within 20 working days before the appointment of the liquidator, that the company would be able to pay its debts, and the liquidator has not called a meeting of creditors on the grounds that he or she was satisfied that the directors did not have reasonable grounds for that belief or on the grounds that the liquidator is satisfied that the company is not able to pay its debts.126

10.12.2 Power to obtain information Sections 261(2) and (3) empower a liquidator by notice in writing to require a director or former director, a shareholder, a person who was involved in the promotion or formation of the company, an employee or former employee, a receiver, accountant, auditor, bank officer, other person having knowledge of the affairs of the company, or a solicitor or former solicitor of the company, to:

attend on the liquidator at times and places specified (including at a meeting of creditors);127 provide information about the business, accounts, or affairs of the company; be examined on any matter relating to the business, accounts, or affairs of the company; assist in the liquidation. If a person fails to comply with these requirements, the court may order the person to comply.128 Section 261(4)–(6) deal with the circumstances in which a person required to do something under s 261 may have expenses or remuneration met out of the liquidation fund. Section 261(4) reposes a discretion in a liquidator to pay “reasonable travelling and other expenses” to certain parties (former employees, receivers, accountants, auditors, bank officers, other persons with knowledge of the [page 140] company’s affairs and solicitors), in relation to a requirement to comply with s 261(3). Section 261(4) does not apply to compliance with a request for documents made under s 261(1). These parties (and the liquidator) may apply to the court for an order entitling them to receive “reasonable remuneration and travelling and other expenses” to comply with a s 263(3) requirement. No such ability extends to a request for documents under s 261(1).129 These parties cannot refuse to comply with a requirement of the liquidator under s 261(3) by reason only of a failure to pay remuneration or other expenses, or the existence of a pending application in this court.130 A party who fails to comply with any notice given under s 261 commits an offence.131 A person is not excused from answering a question in an examination by the liquidator under s 261 (or the court under s 266) on the grounds of selfincrimination.132 The testimony of a person examined is not admissible in criminal proceedings against that person except on a charge of perjury in relation

to that testimony.133 A liquidator, or a barrister or solicitor acting on behalf of the liquidator, may administer an oath to, or take the affirmation of, a person examined by the liquidator under s 261. They must also record the examination. The person examined is entitled to be represented by a barrister or solicitor.134

10.12.3 Power in relation to company property The liquidator may direct a present or former director or employee of the company in liquidation to deliver property of the company in his or her possession or under his or her control to the liquidator or to another person nominated by the liquidator, or direct that the property be disposed of.135 The liquidator may also enter the company’s premises to obtain or inspect assets, documentation or records. In R v Whimp,136 the Court of Appeal held that from the time of appointment the liquidator became, by operation of law, the agent of the company. It was therefore a misconception to consider that after appointment the liquidator needed any additional formal or informal, actual or implied authority to do anything in respect of the company. If there were assets, documentation or records relating to the company at its premises, he or she was entitled to deal with them in any way he or she thought fit. The liquidator was not a third party, but the agent of the company and the sole means by which the company could lawfully exist, act or operate. There [page 141] could therefore be no issue that the liquidator had legal authority to go to the premises and retrieve documents, and there was no search in terms of s 21 of the New Zealand Bill of Rights Act 1990. However, in that case the staff of the Official Assignee did act unlawfully to the extent that their search extended to third parties using the same premises.

10.12.4 Power in relationship to receivers The application of these provisions to receivers is discussed by Heath J in Petterson v Gothard (No 3).137 Receivers are not specifically referred to in s 261(1) but they clearly fall within the reference to “any other person”. Under s 261(1) a liquidator may require a receiver to deliver books, records or

documents of the company to him or her. Section 261(1) is a statutory acknowledgement that liquidators need to have access to this material to perform their duties. Section 262(1) allows the receiver, in specified circumstances, to withhold some or all of the documents sought. Section 262(1) recognises that there will be occasions (when the documents are required for the purpose of the receivership) when a receiver must have a prior right to possession of them. In that situation, the liquidator’s position is protected through the availability of other means of obtaining access to the documents; namely, by inspection or copying. In this way, the ability for a liquidator to fulfil his or her duties is preserved without impinging on the receivers’ need to carry out their own functions. There is an underlying expectation that receivers and liquidators will co-operate to ensure that their respective statutory duties can be fulfilled efficiently.138 When s 262 applies, a liquidator is obliged to pay the reasonable expenses incurred by the receivers in complying with his requirements.139 Where receivers do not provide documents requested by a liquidator, it is necessary to consider the interplay between the Companies Act 1993 and the Receiverships Act 1993. They contemplate a two-stage approach. First, the liquidator requires a receiver to supply documents falling within s 261(1) of the Act. Second, if the documents are not provided, the liquidator must issue a notice of failure to comply, under s 37(3) of the Receiverships Act.140 Heath J identified three of a liquidator’s functions which may require access to books and records held by a receiver.141 First, access might be required to some books and records for the purpose of compiling reports that must be lodged with the Registrar of Companies, under s 255 of the Act. Second, there is a need for a liquidator to oversee any actions of the receivers that [page 142] might prejudice the interests of preferential or unsecured creditors.142 Third, access to some books and records will be required in order to determine whether any actions should be commenced in relation to voidable transactions. A receiver does not have power to bring such proceedings. In assessing the importance of that right, regard must be had to the strict time limits within which a liquidator can act.

The class of information that a liquidator is entitled to require a receiver to provide is defined expansively in s 261(1) as “such books, records, or other documents of the company in that person’s possession or under that person’s control”. Records created after the receivership (including cheque books, receipt books, bank statements, PAYE and wage records, invoices, contracts and correspondence affecting contracts made for and on behalf of the company, proceedings received by the respondent in relation to claims either upon himself as receiver or upon the company, and correspondence or copies of correspondence sent or received in relation to such matters) are correctly classified as documents or records created or received by the respondent as agent for the company and in the course of his or her agency, and accordingly are documents “belonging to” the company (as opposed to the receiver’s own working documents). These documents include documents prepared by the receiver for the purpose of the receivership that are reasonably required in order to comprehend the state of the receivership, and therefore of the company.143 Under s 261(3) a liquidator may require a receiver to attend on him or her (including at a meeting of creditors) and to provide the liquidator with information about the business, accounts or affairs of the company, as the liquidator requests; to be examined on oath or affirmation on any matter relating to the business, accounts or affairs of the company; or to assist generally in the liquidation to the best of his or her ability. The ability to exercise these powers against a receiver is expressly conferred by s 261(2)(e).

10.13 Examination by the Court Section 266(2) provides for a court, on the application of a liquidator, to order any of the persons to whom s 261 applies (a director or former director, a shareholder, a person who was involved in the promotion or formation of the company, an employee or former employee, a receiver, accountant, [page 143] auditor, bank officer, other person having knowledge of the affairs of the company, or a solicitor or former solicitor of the company) to: attend before the court and be examined on oath or affirmation by the court or the liquidator, or a barrister or solicitor acting on behalf of the liquidator,

on any matter relating to the business, accounts or affairs of the company; produce any books, records or documents relating to the business, accounts or affairs of the company in that person’s possession or under that person’s control. The formality of the examination under s 266(2) is exemplified by the need for the record of the examination to be transcribed and for it to be signed by the person summoned.144 Subject to any directions of the court, the record is admissible in any proceedings under Part 16, s 383 (which relates to disqualification of directors), s 60A of the Securities Act 1978, s 43F of the Securities Markets Act 1988 or s 44F of the Takeovers Act 1993.145 In contrast to the 1955 Act, where there was separate provision for private and public examinations before the court, the 1993 Act leaves the decision as to whether the proceedings are held in public or in private to the court’s discretion.

10.14 Purpose of Provisions Enabling Liquidator to Obtain Documents and Information It is in the public interest for a liquidator who considers that he or she may be under a duty to try to recover something from someone who is concerned with the company’s affairs, to be able to discover, with as little expense as possible and with as much ease as possible, the facts surrounding any such possible claim. Normally the court will seek to assist the liquidator to carry out these duties in this way.146 The legislative intent of enabling the liquidator to properly discharge his or her duties by discovering facts relating to the affairs of the company has been seen as requiring a broad interpretation.147 In Re Rolls Razor Ltd (No 2) [1970] Ch 576 Megarry J said: The [s 266(2)] process … is needed because of the difficulty in which the liquidator in an insolvent company is necessarily placed. He usually comes as a stranger to the affairs of a company which has sunk to its financial doom. In that process, it may well be that some of those concerned in the management

[page 144] of the company, and others as well, have been guilty of some misconduct or impropriety which is of

relevance to the liquidation. Even those who are wholly innocent of any wrongdoing may have motives for concealing what was done. In any case, there are almost certain to be many transactions which are difficult to discover or to understand merely from the books and papers of the company. Accordingly, the legislature has provided this extraordinary process so as to enable the requisite information to be obtained. The examinees are not in any ordinary sense witnesses, and the ordinary standards of procedure do not apply. There is here an extraordinary and secret mode of obtaining information necessary for the proper conduct of the winding up. The process, borrowed from the law of bankruptcy, can only be described as being sui generis.

10.15 Circumstances in which a Court will Prevent or Limit Examinations The reasonable requirements of the liquidator in seeking to discharge his or her functions and duties, need to be balanced against the need to avoid making an order which is unreasonable, unnecessary or oppressive to the person concerned.148 The courts have been concerned in particular that the liquidator not use these powers to obtain any unfair or improper advantage in the course of or for the purpose of litigation.149 Generally speaking, a liquidator will not be prevented by the court from convening an examination simply because a firm decision to issue proceedings against the proposed examinee has been made or, indeed, in circumstances where the proceedings have, in fact, been issued. It is necessary, however, for the court to strike a balance between the liquidator’s rights to acquire information and such rights of silence or privacy as may exist on the part of the examinee.150 There have been two approaches to approving examinations and production of documents: the traditional approach, which asks whether the liquidator is taking a bona fide step in the liquidation to obtain information for genuine purposes, and the Cloverbay or “reconstitution” approach,151 which asks what is required to put the liquidator in the same position as the directors so far as knowledge of the company’s affairs are concerned. In Carrow Holdings [page 145] v Sadiq152 Heath J held that in reality the two approaches work together as it is equally important for the liquidator to re-constitute knowledge of directors of the company as it is for him or her to make informed decisions about what steps to take for the benefit of creditors. In this context, other factors are that liquidators

usually have limited funds with which to work and it is in the public interest that they ascertain relevant information with as little expense as possible and in the most expeditious manner. The examination or production must not impose an unnecessary and unreasonable burden on the person concerned, taking into account the requirements of the liquidator. The House of Lords has observed that: … [a]n application is not necessarily unreasonable because it is inconvenient for the addressee of the application or causes him a lot of work or may make him vulnerable to future claims, or is addressed to a person who is not an officer or employee of or a contractor with the company in administration, but all these will be relevant factors, together no doubt with many others.153

Other considerations likely to influence a court in deciding whether it is reasonable and necessary to make an order under s 266(2) are the availability of alternative legal procedures, the degree of involvement which the person had with the company prior to liquidation, and the probable significance of the information sought by the liquidator.154 So an application for an examination before the court is likely to be declined if the liquidator is able to continue with his or her examination under s 261.155 In addition, the type of litigation and the claim that may be made may affect the court’s decision. The court has indicated that it will be more concerned to prevent unfairness where the claim is for negligence or breach of contract as opposed to a claim for recovery of property of the company, repayment of debt or the remedying of misconduct by a director or other similar officer of the company.156 The public interest is also relevant.157 [page 146]

10.16 Practical Considerations Relating to Examination of Persons by the Liquidator The liquidator’s s 261 notice must be specific and exact, including identifying exactly what documents are required.158 It will be possible to mitigate unfairness in some cases by submitting in advance a list of questions in writing to the person to be examined.159 This will be particularly appropriate where the person to be examined is a professional person in respect of whom credibility is unlikely to be an issue.160

The requirement to submit to questioning has been treated as a detention under an enactment for the purposes of ss 22 and 23 of the New Zealand Bill of Rights Act 1990.161 As a result, the examinee should be advised of the reason for their detention and of their right to consult and instruct a lawyer without delay in the notice itself, and it would be prudent to repeat it at the commencement of the examination.162 Section 261 does not abrogate legal professional privilege,163 although privilege belonging to the company is the privilege of the liquidators so the provision of information can only be resisted on the basis of privilege belonging to another party.164 If there is a joint privilege, the liquidator can waive it.165 Where large amounts of documentation are sought, the court may order disclosure subject to qualifications as to the classes of documents and staged disclosure of different documents from different locations over different periods.166 [page 147]

10.17 Power to Enforce Liability of Shareholders and Former Shareholders Section 268 empowers the liquidator to make calls on shares (in writing) and if a shareholder or former shareholder is liable to the company, to enforce that liability.167

10.18 Power to Disclaim Onerous Property 10.18.1 Overview Section 269(1) sets out the power of a liquidator to disclaim onerous property even though the liquidator has taken possession of it, tried to sell it, or otherwise exercised rights of ownership in relation to it.168 Onerous property is defined in s 269(2) as: an unprofitable contract; property of the company which is unsaleable, or not readily saleable, or that

may give rise to a liability to pay money or perform an onerous act; or a litigation right that, in the opinion of the liquidator, has no reasonable prospect of success or cannot reasonably be funded from the assets of the company. It does not include: a netting agreement to which ss 310A–310O apply; any contract of the company that constitutes a transaction under a netting agreement; or a payment instruction or a settlement under the rules of a payment system that is declared to be a designated payment system under Part 5C of the Reserve Bank of New Zealand Act 1989. A liquidator who disclaims onerous property must, within 10 working days of the disclaimer, give notice in writing of the disclaimer to every person whose rights are, to the knowledge of the liquidator, affected by the disclaimer.169 Section 269(5) empowers a person suffering loss or damage as a result of a disclaimer to claim as a creditor of the company for the amount of the loss or damage, taking account of the effect of the order of the court, and apply to the court for an order that the disclaimed property be delivered to or vested in that person.

10.18.2 Policy The public policy objective underlying the disclaimer provisions is that the property of insolvents should be divided equally amongst their unsecured creditors. An important aspect of that policy is the ability to disclaim onerous property. Otherwise the available assets are, in practice, appropriated to the [page 148] future or prospective creditor who holds the right corresponding to the onerous property.170 The power to disclaim onerous property also enables the liquidator “to achieve an early closure of the liquidation”.171 These provisions therefore prevent the liquidation being held up by continuing obligations under unprofitable contracts or continued ownership and possession of assets of no

value to the estate, and avoid the continuance of liabilities in respect of onerous property which would be payable as expenses of the liquidation to the detriment of unsecured creditors. They avoid the stalemate resulting from the situation where the liquidator is not obliged to procure the company to continue performance and the other party cannot be compelled to treat the contract as at an end.172

10.18.3 Unprofitable contract Whether or not a contract is unprofitable is not limited to the issue of whether the company will make a profit or loss. Instead, it focuses on a broader issue, namely whether the contract can be satisfactorily carried out by the liquidator having regard to the liquidator’s duty to realise and distribute the assets of the company in a reasonable and efficient manner. That duty is embodied in s 253 of the Act. The following principles apply:173 A contract is unprofitable if it imposes on the company continuing financial obligations which may be regarded as detrimental to the creditors, which presumably means that the contract confers no sufficient reciprocal benefit. Before a contract may be unprofitable for the purposes of the section it must give rise to prospective liabilities. Contracts which will delay the liquidation of the company’s affairs because they are to be performed over substantial periods of time and will involve expenditure that may not be recovered are unprofitable. A contract is not unprofitable merely because it is financially disadvantageous. A contract is not unprofitable merely because the company could have made, or could make, a better bargain. [page 149]

10.18.4 Property The courts have held that “property” has a wide meaning and extends to any property, whether or not benefit to the creditors can accrue from it.174 In Re SSSL Realisations,175 the Court considered that for something to qualify as “property” it must involve some element of benefit or entitlement for the person holding

it.176 It includes freehold land.177

10.18.5 Other limitations on power to disclaim The following considerations, previously taken into account by courts in exercising their discretion whether or not to allow the liquidator to disclaim, may now be relevant on an application to reverse or modify a decision to disclaim under s 284: The effect of the disclaimer on the liquidation process. Leave to disclaim was refused where it would have been ineffective in its practical effect178 and allowed where refusing the disclaimer would hamper the course of the liquidation without giving any corresponding benefit to those who oppose it.179 The effect of the disclaimer on interested parties. The courts have refused to allow disclaimer if substantial injury would result.180 [page 150] Another issue which has arisen is whether the statutory power to disclaim has been impliedly excluded by specific legislation. In Re Mineral Resources Ltd,181 the Court did not allow a disclaimer of a waste disposal licence in respect of a landfill site, on the basis that the specific provision in the statute which conferred the licence (providing that the licence should continue in force until expressly revoked or surrendered) overrode the more general declaimer provisions in the English insolvency legislation. The Court was influenced in reaching its conclusion by the policy considerations which pertained in that case, namely, the maintenance of a healthy environment and the upholding of the principle of direct responsibility for polluters. This decision has since been overruled by Re Celtic Extraction Ltd (in liq), Re Bluestone Chemicals Ltd (in liq).182 In the context of the New Zealand Act, where the court is no longer required to sanction disclaimers, it would appear that s 269 was intended to have general application, overriding specific statutory provisions. This interpretation is likely to have some undesirable consequences because all persons affected by the disclaimer may not be adequately compensated for its consequences and it may undermine policies which form the basis of specific statutory regimes, particularly in the area of environmental protection.

10.18.6 Effect of disclaimer The effect of a disclaimer is to bring to an end from the date of the disclaimer the rights, interests, and liabilities of the company in relation to the property disclaimed. A disclaimer does not, except so far as necessary to release the company from a liability, affect the rights or liabilities of any other person.183 A disclaimer only has effect in the future and does not have an effect on any accrued rights or liabilities so that, for instance, a company in liquidation is still liable for calls made on its shares before disclaiming the shares.184 Disclaimer will, inevitably, have an adverse impact on others: those with whom the contracts were made, and those who have rights and liabilities in respect of the property. The rights and obligations of these other persons are to be affected as little as possible. They are to be affected only to the extent necessary to achieve the primary object: the release of the company from all liability. Those who are prejudiced by the loss of their rights are entitled to prove in the liquidation as though they were creditors.185 In the case of a lease, disclaimer operates to determine both the tenant and landlord’s rights and obligations and the leasehold estate therefore ceases to [page 151] exist. However, the rights and liabilities of others, such as guarantors and original tenants remain as though the lease had continued and not been determined. Similarly, a subtenant holds his or her estate on the same terms and subject to the same rights and obligations as would be applicable had the tenant’s interest continued. The lessor can therefore look to a guarantor or original tenant for payment.186 The same principle has been held to apply to contracts generally, so that unless a guarantee expressly excludes liability in the event of a disclaimer, the guarantor’s liability survives the disclaimer of the underlying contract as between the immediate parties.187 Freehold land which is disclaimed vests in the Crown.188

10.18.7 Ability to seek vesting order or claim for loss or damage Section 269(5) provides that a person suffering loss or damage as a result of the

disclaimer can apply for a vesting order in relation to the disclaimed property and claim as a creditor of the company for the amount of the loss or damage. The court is likely to make a vesting order only where it would be just to do so for the purpose of compensating the person subject to the liability in respect of the disclaimer.189 The effect of a vesting order is to be taken into account in assessing the extent of any loss or damage sustained by any person in consequence of the disclaimer.190 In assessing the quantum of the claim which may be made in the liquidation by a person suffering loss as the result of a disclaimer, it is necessary to quantify the relevant sum in money terms. This is the same exercise as has to be undertaken when assessing the damages for breach of contract. Where the loss will be suffered over a period in the future, the computation has to make allowance for any advancement that has occurred, otherwise the claimant will be over-compensated. So, in the case of a disclaimed lease, the subject matter of the landlord’s proof is compensation for loss of his or her right to future rent, and the amount of any receipts which would have accrued at a later date must be discounted to an amount that reflects their present value.191 [page 152] Following disclaimer of a lease, the landlord of an insolvent tenant is entitled to prove for the difference between the rental payable under the lease and the rental obtained when the equipment or land is released.192 If a liquidator disclaims partly-paid shares, the company whose shares are disclaimed may claim for the capital unpaid. The solvent company whose shares are disclaimed may set off the insolvent company’s liability in respect of calls against any debt that it owes to the insolvent company.193

10.19 Supply of Essential Services to Liquidator or Company in Liquidation Section 275 provides that suppliers of essential services must not refuse to supply them to a liquidator. The Law Commission adopted this innovation from the Australian Law Reform Commission’s report.194 It prevents monopoly

suppliers of essential services from using their position to obtain a preference for the payment of past debts by making continued supply to a liquidator dependent on those past debts.195 Section 275 prohibits a retail supplier of gas or electricity, or a supplier of water or telecommunications services, from refusing to supply the services to the liquidator or the company in liquidation by reason of the company’s default prior to the liquidation. Nor can the supplier make it a condition of further supply that the outstanding charges be paid or that the liquidator personally guarantee payment of the charges. These prohibitions prevail over any contract or any other Act.196 The charges incurred by the liquidator for the supply of an essential service are an expense incurred by the liquidator which has the preferential status given to expenses properly incurred by a liquidator in Schedule 7.197 Parliament elected to restrict the operation of the section to the four essential services identified. In so doing, it must be taken to have intended that suppliers of other services would remain entitled to rely on their contractual rights.198 [page 153]

10.20 Power in Relation to Rights to Sue Like any asset of the company, a cause of action vested in the company may be sold. At common law a liquidator could assign the fruits or part of the fruits of a cause or causes of action vested in a company in liquidation at the time of liquidation (that is, rights of action that are an incident of the property of the company) provided it did not give the purchaser the right to influence the course of, or interfere with the liquidator’s conduct of the proceedings.199 Section 260A, which was enacted in 2006, allows the liquidator, subject to court approval, to assign a right to sue that is conferred on the liquidator by the Act. A liquidator is not required to maintain a degree of control over litigation where he or she has assigned the company’s claims to a third party. Ownership of the cause of action includes all rights of control relating to it. Because the liquidator is entitled to assign a company claim absolutely, there is no reason to require him or her to exercise any degree of control over the litigation, except to the extent of complying with statutory obligations. The position would be

otherwise200 if the liquidator was pursuing a claim in his or her name and in accordance with a statutory power.201 A funding agreement for litigating a company’s causes of action is not champertous or otherwise improper provided that a liquidator’s responsibilities, including the conduct of the litigation, and the liquidator’s recourse to and amenability to directions by the court are not fettered by the terms of the funding agreement.202

10.21 Voidable Transactions Regime 10.21.1 Overview Sections 292–296 set out the voidable transactions regime that applies to transactions entered into and charges given by an insolvent company in the period leading up to liquidation.203 Liquidators have the power to apply to set aside certain transactions with creditors that take place and charges that [page 154] are given within this period. The creditor or charge-holder must then prove in the liquidation along with other unsecured creditors, rather than retaining the benefit of the voidable transaction or charge.204 The purpose of these provisions is twofold:205 to protect the statutory scheme for distribution of assets in an insolvency, and in particular the rule that unsecured creditors rank pari passu, by preventing managers of a failing company from diverting assets to insiders and other favoured creditors with special connections to the management of the company; and to reduce the incentive for creditors of a company in financial difficulties to engage in a “race to enforcement”, which would increase the likelihood of, and accelerate, company failures.

10.21.2 Insolvent transaction voidable Section 292 provides for “insolvent transactions” entered into within the “specified period” to be voidable.

An insolvent transaction is a transaction entered into at a time when the company is unable to pay its due debts and that enables another person to receive more towards satisfaction of a debt owed by the company than the person would receive, or would be likely to receive, in the company’s liquidation.

10.21.3 Transaction “Transaction” is defined in s 292(3) as: conveying or transferring the company’s property; creating a charge over the company’s property; incurring an obligation; undergoing an execution process; paying money (including paying money in accordance with a judgment or an order of a court); anything done or omitted to be done for the purpose of entering into the transaction or giving effect to it. “Transaction” includes a transaction by a receiver, except a transaction that discharges, whether in part or in full, a liability for which the receiver is personally liable under s 32(1) of the Receiverships Act 1993 or otherwise personally liable under a contract entered into by the receiver.206 Section 292 only applies to debts owed by the company in liquidation. In other words, it only applies to transactions which prefer creditors of the [page 155] company in liquidation and not to payments to persons other than creditors. So it was held not to apply to a payment by the company in liquidation of school fees of children of directors and shareholders.207 A payment made by a third party to a creditor of the company in liquidation, on behalf and at the direction of the company, may constitute a transaction for the purposes of s 292.208 It appears also that s 292 does not apply to prepayments and cash on demand transactions.209

10.21.4 Unable to pay due debts

There is a presumption that a transaction that is entered into within the restricted period is entered into at a time when the company is unable to pay its due debts.210 The “restricted period” is the period of six months prior to the appointment of a liquidator.211 The courts have taken into account the following principles in considering whether a company was able to pay its due debts:212 The ability of the company to pay debts is concerned with the position of the debtor at the time when the charge or payment is made or other specified act took place. The concern is with the present. In considering the present position, regard may properly be had to the recent past — relevant to this is whether the debtor has in recent weeks been unable to pay debts as they become due. In determining the ability to meet debts as they become due, account must be taken of outstanding debts. The company is not required to keep cash in hand. The courts have recognised that a company may maintain solvency by recourse to borrowed funds, provided that the borrowing is on deferred terms or that the lender is not a creditor whose debt cannot be repaid when it becomes due and payable.213 The section is concerned with solvency, so there must be a substantial element of immediacy in the ability to provide cash from non-cash assets. An excess of assets over liabilities will not by itself satisfy the test if [page 156] there is no ability to pay. The ability to procure sufficient money to pay debts by realisation by sale or by mortgaging or pledging assets within a relatively short period of time will satisfy the test. If convertibility to cash from non-cash assets on hand may be taken into account in determining solvency, so too must debts becoming due while that conversion takes place. The issue of a company’s solvency requires a consideration of the company’s financial position in its entirety. A temporary lack of liquidity does not

necessarily evidence insolvency. For that reason, a consideration of the debtor’s position over a period of time is required. The test of insolvency is an objective one. When assessing whether a company is unable to pay its due debts, care must be taken in counting as assets cash resources which are available only if the business is sold.214

10.21.5 Preferential effect The requirement that the liquidator must show that the payment “enabled another person to receive more towards satisfaction of a debt than the person would otherwise have received or be likely to have received in the liquidation” has been the subject of conflicting interpretation. The first issue that has arisen is whether the liquidator must prove only that the creditor has likely received more than would otherwise have been the case in the liquidation or whether the liquidator must in addition prove that the general body of creditors has been disadvantaged as a result of the treatment afforded to one of their number. The Court of Appeal in Levin v Market Square Trust held that all the liquidator must show in order to satisfy s 292(2)(b) is that the creditor received a greater payment than he or she would otherwise have received in the liquidation.215 The second issue is whether the test for preference under s 292(2)(b) involves a comparison of what the payee has received with what he or she would have obtained in a hypothetical liquidation on the date of the payment, or whether the correct comparison is with what the payee is likely to receive in the actual liquidation. The Court of Appeal in Levin v Market Square Trust held that the degree of any preferment is to be measured against what the creditors would receive in the actual liquidation.216 [page 157] The Supreme Court held in Trans Otway Ltd v Shephard, that the effect of the provision for set-off (s 310) is that a payment by way of set-off would not give a creditor any advantage because the creditor would not be in a better position than in the liquidation and (provided the creditor did not have reason to suspect the company was unable to pay its debts as they fell due)217 the creditor has

therefore not been preferred under s 292.218 It has also been held that the word “enable” in s 292(2)(b) only requires that the creditor is given the means to improve its position over that of other creditors, not that it will necessarily succeed in doing so. So in a case involving the assignment of causes of action, it was held that the assignment had the effect of providing the means to advance the litigation but that s 292(2)(b) does not connote certainty of outcome and the liquidator was, therefore, not required to prove what the outcome of the litigation would be. The Court held that the words “would be likely to receive” suggest a threshold akin to the standard of the balance of probabilities, which required an assessment as to the value of the cause of action that was not dissimilar to the assessment of a loss of chance.219

10.21.6 Specified period The specified period under ss 292(5), 293(6) and 297(3) refers to the period two years prior to the liquidation.220 In the case of a court-ordered liquidation, the specified period is the two years before the filing of the liquidation application in court plus the period from filing to the liquidation order. Where an application is filed in court but the liquidator is subsequently appointed by shareholders’ resolution or the board, the specified period is the two years before the filing of the liquidation application in court plus the period from filing to the appointment of the liquidator.

10.21.7 Transactions as part of continuing business relationship In 2007, the previous “ordinary course of business” exception was abandoned. Instead s 292(4B) adopts the Australian test of “continuing business relationship”,221 providing for transactions that are part of a continuing [page 158] business relationship between the company and creditor, involving ebbs and flows of net indebtedness to the creditor over time, to be treated as a single transaction for the purposes of the voidable transactions regime. Section 292(4B) identifies a “running account” as an example of a continuing business relationship within the provision. In considering whether there is such a relationship, the courts have had regard to commercial reality. It has therefore been held that what might in the eyes of

the law be individual transactions may be linked commercially to form part of a business relationship. The transactions that give rise to a commercial relationship need not necessarily be legally enforceable agreements, but there will be separate parties dealing with each other consensually.222 The “running account” cases are premised on a relationship under which one party continues to deal with the other in the expectation of doing further business.223 The effect of s 292(4B) is that while a single payment taken in isolation may meet the test of voidability, the series of transactions of which it is a part may not, because overall the supplier may not receive more in the customer’s liquidation than the supplier would otherwise have received.224 In Australia, the following principles have been stated by the High Court: The effect of a payment for the purposes of s [292] depends on whether it is paid: (a) simply to discharge a debt then owing to the creditor (including the permanent reduction of the balance of an account that is owing at the time of the payment), or (b) as part of a transaction which, if carried out to its intended conclusion, would include future dealings giving rise to further amounts owing by the debtor to the creditor. A payment may be part of a transaction that includes such subsequent dealings, although it reduces the amount of a debt owing at the time of payment. Where the payment is part of such a transaction, it is the effect of the transaction that determines the effect of the payment for the purposes of s [292]. A payment is treated as part of such a transaction if it is made in circumstances showing that it is impossible in a business sense to treat the immediate effect of the payment as the only effect and to omit consideration of dealings subsequent to the payment.225 [page 159]

10.21.8 Voidable charges A charge is voidable if given within the specified period (of two years prior to the liquidation) and immediately after it was given, the company was unable to pay its due debts: s 293.226

Again, s 293 reflects the rationale for the voidable transactions regime by seeking to prevent attempts by a company’s creditors to obtain priority for antecedent debts by taking a belated security. If such a security were allowed to stand, the secured property would be available only towards settlement of the antecedent indebtedness and thus effectively removed from the pool of assets that would otherwise be available to creditors.227 The presumption that the company is unable to pay its debts also applies where a company has given a charge within the restricted period of six months prior to the liquidation.228 There are exceptions for the following charges: Charges which secure money actually advanced or paid, or the actual price or value of property sold or supplied to the company, or any other valuable consideration given in good faith by the grantee of the charge at the time of, or at any time after, the giving of the charge.229 Charges in substitution for a charge given before the specified period.230 This exception does not, however, apply to the extent that the amount secured by the substituted charge exceeds the amount secured by the existing charge or the value of the property subject to the substituted charge at the date of the substitution exceeds the value of the property subject to the existing charge at that date.231 Charges given by a company that secures the unpaid purchase price of property, whether or not the charge is given over that property, if the instrument creating the charge is executed not later than 30 days after the sale of the property or, in the case of the sale of an estate or interest in land, not later than 30 days after the final settlement of the sale.232 These exceptions are consistent with the policy rationale for the voidable transactions regime. In general terms, other creditors will not be prejudiced if a fresh security is associated with fresh value to the company or is merely a substitute for an existing security. These provisions are to be looked at from a business point of view, placing the emphasis on substance rather than form.233 The onus of proving that “other valuable consideration” was given in good faith under s 293(1A)(a) rests on the charge-holder. If it obtained a security for past indebtedness in circumstances in which it knew or had good reason [page 160]

to suspect that other creditors would be left unpaid, then it fails to prove that it acted in good faith.234 The English courts have given the expression “at the time of” a generous interpretation for the purposes of determining whether valuable consideration was given “at the time of, or at any time after, the giving of the charge”.235 But there is also English authority that the phrase “at the same time as”236 is not satisfied if the making of the advance precedes the execution of the charge by any time at all, unless the interval is so short that it can be regarded as minimal and the payment and execution can be regarded as contemporaneous.237 Blanchard J held in Re C & D Webster Ltd (in liq), that regardless of which approach is adopted, there must be continuity between the giving of the consideration to the company and the giving of the charge so that they can be seen as part of one continuous transaction. “The events must be linked and there must be no break in the chain”.238 It is the substance and not the form of the transaction that is important in determining whether a transaction comes within s 293. So in a case where directors, knowing the company was hopelessly insolvent, issued a debenture for £900, paid the two directors £350 each and a Mr Davis £200 (these sums being debts then due to them) and it then transpired that the whole of the £900 had been supplied by Mr Davis, it was held that the object and effect of the transaction was not to benefit the company but merely to provide money for the benefit of certain creditors of the company to the prejudice of other creditors.239 Section 293(5) provides that, for the purpose of these exceptions, where any charge was given by the company within the two-year specified period, all payments received by the grantee of the charge after it was given shall be deemed to have been appropriated so far as may be necessary: towards repayment of money actually advanced or paid by the grantee to the company on or after the giving of the charge; or towards payment of the actual price or value of property sold by the grantee to the company on or after the giving of the charge; or [page 161] towards payment of any other liability of the company to the grantee in respect of any other valuable consideration given in good faith on or after the

giving of the charge.240

10.21.9 Procedure for setting aside transactions and charges Section 294 requires a liquidator wishing to set aside a voidable transaction or charge to file in court a notice meeting certain requirements241 and serve the notice on the creditor or charge-holder and any other party from whom the liquidator intends to recover. If the person on whom this notice is served does not object by way of written notice received by the liquidator within 20 working days after service of the liquidator’s notice, the transaction or charge is automatically set aside. If the transaction or charge is not automatically set aside, it may still be set aside by the court on application by the liquidator.

10.21.10 Orders available to the court Orders under s 295 are made after a transaction has been set aside. Section 295 allows the court to make the following orders: an order that a person pay to the company an amount equal to some or all of the money that the company has paid under the transaction; an order that a person transfer to the company property that the company has transferred under the transaction; an order that a person pay to the company an amount that, in the court’s opinion, fairly represents some or all of the benefits that the person has received because of the transaction; an order that a person transfer to the company property that, in the court’s opinion, fairly represents the application of either or both of the following: money that the company has paid under the transaction; proceeds of property that the company has transferred under the transaction; an order releasing, in whole or in part, a charge given by the company; [page 162] an order requiring security to be given for the discharge of an order made under this section; an order specifying the extent to which a person affected by the setting aside

of a transaction or by an order made under this section is entitled to claim as a creditor in the liquidation. The purpose of s 295 is to give the court the power to return the parties to the position that they were in at the outset. That is, there is a restitutio in integrum, similar to the powers that a court exercises in equity after it has rescinded a transaction. A creditor who has received a preference should be required to surrender it for the benefit of all creditors.242 Doubt has been expressed as to whether an award of interest can be made under s 295.243 However s 295, and in particular the reference in s 295(c) to paying an amount representing “the benefits that the person has received because of the transaction” is expressed in broad terms. In addition, there is authority for the award of interest under an earlier version of s 295 or under s 87 of the Judicature Act 1908.244

10.21.11 Position of third parties Section 296(1) and (2) provide that where a transaction or charge is set aside or a s 295 order is made, that does not affect the title or interest of third parties in property acquired for valuable consideration: from a person other than the company, without knowledge of the circumstances under which the property was acquired by the company; or as the result of the exercise of a power of sale by the grantee of the charge without knowledge of the circumstances relating to the giving of the charge. Section 296(3) prevents a court ordering the recovery of company property (or its equivalent value) if the third party from whom recovery is sought proves that it received the property in good faith, could not reasonably have suspected that the company was or would become insolvent, and gave value for the property or altered its position in the reasonably held belief that the transfer of the property to it was valid and would not be set aside.245 In order to prove “good faith”, the recipient of the property or money must show that he or she honestly believed that the transaction would not involve any element of undue preference either to himself or herself or to any [page 163]

guarantor.246 A creditor who has actual or implied knowledge of the company’s financial difficulties, due to the company’s cheques being dishonoured, its failure to pay its debts on time, or other circumstances indicating serious cashflow problems, is likely to fail this test.247 Section 296(4) provides that nothing in the Land Transfer Act 1952 restricts the operation of ss 292–296.

10.22 Recovery in Other Cases Sections 297–301 provide for other circumstances in which a liquidator can obtain a contribution from directors and other parties towards the pool of assets available for creditors in a liquidation. Sections 297–299 are discussed below. Section 300 is discussed at para 11.3.4 and s 301 is discussed at paras 10.23 and 11.3.1.

10.22.1 Transactions at undervalue Section 297 deals with transactions at an undervalue. A liquidator may recover the difference in value if the transaction was entered into within the specified period and the company was unable to pay its due debts when it entered into the transaction or the company became unable to pay its due debts as a result of entering into the transaction. Section 297 contemplates disposition of a company asset for which the company received too little consideration. The High Court held in Kings Wharf Coldstore Ltd v Wilson, that: … [i]n this context, a transaction is something by which the company gave consideration, by parting with something. It is something the company has “entered into” that involves giving such consideration and receiving too little consideration or benefit in return for it. The section presumes the asset itself may have been placed beyond the liquidator’s reach, and allows recovery of the deficiency in value. A transaction having these qualities is most likely to occur under a contract. But the section does not require that the transaction be with a person who has any legal relationship with the company. It avoids the language of contract or obligation, focusing instead on the effect of what has been done.248

The Court went on to conclude that: … a transaction for the purposes of s 297 comprises at minimum a disposition of a company asset to another person. It may also take the form of a contract or arrangement, or a series of them where the series is properly characterised as a single transaction, that results in property of the company being transferred to another person. In such a case, persons other than the recipient of the asset

[page 164] may be parties to the transaction. Because the section is concerned with the transfer of property, the better view is that it uses “party to” in the narrower sense of a side to a contract or litigation, or in this case, to a disposition or arrangement forming part of the transaction under which the property was transferred.249

10.22.2 Transactions for inadequate or excessive consideration with directors and certain other persons Section 298 deals with transactions between the company and its own directors, other companies with common directors, related companies, or certain other related parties including parties who control the subject company. Where consideration has been inadequate or excessive, the difference in value is recoverable provided the transaction occurred within the specified period, which in this provision refers to a period of three years prior to the liquidation (plus any period between filing a liquidation application and the appointment of a liquidator).

10.22.3 Court may set aside certain securities and charges in favour of directors and certain other persons Section 299 empowers the liquidator to apply to set aside certain securities or charges created in favour of the company’s directors, other companies with common directors, related companies or certain other related parties, including parties who control the subject company, if the company is unable to meet all its debts. The court has a discretion to set aside the security or charge if it considers that, having regard to the circumstances in which the security or charge was created, the conduct of the person, relative, company or related company, as the case may be, in relation to the affairs of the company and any other relevant circumstances, it is just and equitable to make the order. It has the power to make other orders for the purpose of giving effect to a s 299 order.250 Securities or charges transferred to a third party (not identified in s 299(1)) in good faith and for valuable consideration are excepted.251

10.23 Recovery from Promoter, Director, Manager,

Administrator and/or Receiver Section 301 provides a procedure for a liquidator to pursue promoters, directors, managers, administrators and/or receivers for breaches of their duties to the company. The section does not, of itself, create or impose any such duties.252 Section 301 empowers the court to inquire into the conduct of people in these positions, order them to repay or restore money or property (together [page 165] with interest) or contribute such sum to the assets of the company by way of compensation as the court thinks just. Relief under s 301(1)(b) of the Act can be calculated on a restitutionary (a monetary award in lieu of an account of profits) and not just a compensatory basis.253 The section is cast in discretionary terms. It also covers a wide range of possible causes of action. The courts have sometimes emphasised the discretionary nature of the jurisdiction and have treated as relevant the degree of the defendant‘s culpability. But in a context where the s 301 claim is very much a proxy for a direct claim against a party, there is no reason why that party should be left worse off under s 301 than they would have been if the company had sued them, recovered what was due and owing and distributed the proceeds of the claims to the creditors.254 Section 301 is discussed further below at para 11.3.1.

10.24 Remuneration of Liquidator 10.24.1 Introduction Liquidators are entitled to charge reasonable remuneration, which is payable out of the assets of the company.255 Remuneration, and fees and expenses incurred by the liquidator, have priority over all other payments out of the company’s assets.256 The remuneration provisions of s 276(2) of the Act differentiate between

liquidators appointed by the court and those appointed by shareholders or directors of the company. They also differentiate between the remuneration payable to the Official Assignee and a private liquidator.257 Time under the Limitation Act 2010 does not begin to run in respect of a liquidator’s claim to remuneration until the liquidation is complete.258 It is likely that where a liquidator’s appointment is ultimately found to be invalid it would still be able to claim remuneration as a result of reg 36 of the Companies Act 1993 Liquidation Regulations 1994 (which provides for no defect or irregularity in the appointment of a liquidator to invalidate any act done by him or her in good faith).259 [page 166]

10.24.2 Method by which remuneration is fixed Liquidators (other than the Official Assignee) who are appointed by the shareholders or the board of the company may charge reasonable remuneration.260 They do not need court approval to fix the remuneration, whether or not the company is insolvent. Those liquidators are subject to review of their remuneration on an application under s 284(1)(e) and (f). In practice, that means that creditors of a company put into liquidation through the appointment of a liquidator by either shareholders or directors must take an active stance in challenging remuneration charged under s 284(1)(e). Otherwise unscrupulous liquidators may charge as they like.261 The Official Assignee and all liquidators appointed by the court must charge remuneration at rates prescribed by the Act and Regulations, unless the court orders otherwise.262 If higher rates are sought, a prospective application for remuneration must be made and granted.263 The court is therefore required to fix remuneration in three instances: when a liquidator seeks prospective approval to charge higher rates; when a liquidator seeks, on a retrospective basis under s 284(1)(e), to fix his or her actual remuneration on a basis other than the application of the prescribed rates; when a third party applies to review or fix reasonable remuneration for the

liquidator under s 284(1)(e) or seeks disgorgement of any amount unreasonably retained under s 284(1)(f). In practice, liquidators other than the Official Assignee who are appointed by the court have found the prescribed rates to be inadequate, giving rise to a large number of applications under s 267(2) for the fixing of rates of remuneration at higher levels than those permitted by the Regulations.264

10.24.3 Assessment of remuneration: general principles In May and October 2000 in the Medforce judgments and again in December 2009 in Flynn v McCallum, the Court considered the principles applicable to applications in respect of liquidators’ remuneration, in light of difficulties [page 167] experienced by the court and parties.265 Two of the principal concerns identified were the need for more predictability, and proportionality between the cost of the evidence required and the amount at stake in the liquidation.266 The following general principles were identified by Venning and Heath JJ in Flynn v McCallum: In “common fund” cases an inquiry is undertaken both into work carried out and whether it was reasonably necessary, having regard to the nature and value of the issues at stake.267 In assessing “value”, the same factors that are applied in assessing the reasonableness of solicitor’s costs should be applied.268 The court must be mindful that, in many cases, the number and value of individual creditors will not be sufficient to provide an incentive for a particular creditor to apply to the court to review the fees charged by the liquidator. The lack of an appropriate incentive to challenge what might be unreasonable fees requires the court to act in a more protective manner than might, otherwise, be desirable.269 When appointees are known by a court to be independent and experienced, the court is likely to have confidence in such people to abide by ethical standards of any professional organisation to which they belong and to adhere to their obligations as officers of the High Court.270

Remuneration must be proportionate to the nature, complexity and extent of work undertaken, and the information required by the court to justify it should be proportionate to the amount sought, as well as those other factors.271 The court is required to fix adequate remuneration on the assumption that fees are payable on an hourly basis.272 [page 168]

10.24.4 Prospective applications The court only needs to be satisfied that the hourly rates to be charged are reasonable because the final remuneration, calculated on those rates (by their nature) require retrospective approval.273 If liquidators do not make a prospective application for approval of higher remuneration, they would be limited to deducting fees on an interim basis at the rate fixed by the regulations.274 In Flynn v McCallum, a more streamlined process was suggested, making use of the written consent to appointment required by s 282. This process involves the court approving (subject to s 284) fee rates proposed by liquidators in the required s 282 “consent to act” at the time the company is put into liquidation. Where the court has no knowledge of the person nominated, the court can require the nominee to provide, with the consent to act, a brief resume confirming his or her independence and outlining relevant prior experience. Where a person is regularly appointed by the court, he or she can indicate rates that have recently been approved. Where a person is not known by the court, the court may not be prepared to deal with issues of remuneration on making a liquidation order, depending on the content of the resume. In most cases, a prospective order will be made on a standard basis, requiring the overall remuneration to be fixed, on the application of the liquidator, at the time the liquidator is ready to distribute proceeds of realisations of assets to creditors. In more complex liquidations, special terms could be crafted to ensure issues of remuneration could be reviewed on a continuing basis, in an endeavour to foreclose the possibility of a major dispute being raised at the end of the liquidation. For example, counsel could put before the court, on the application to put the company into liquidation, a memorandum identifying proposed

processes to be incorporated into an order to enable regular disclosure of fees charged to all creditors and information about a creditor’s or shareholder’s right to seek review of any remuneration charged under s 284(1)(e). In a very complex case, an order could incorporate a protocol by which an independent review of remuneration could be undertaken, from time to time, to avoid unnecessary time and cost in establishing quantum to the satisfaction of the court.275

10.24.5 Retrospective applications A retrospective application for approval is necessary in every case where fees higher than those set by the Regulations have been charged as a result of approval given on a prospective application, or where approval is sought in [page 169] respect of higher remuneration for work already done and not charged, or in respect of which charges have been made at the rate prescribed by the Regulations.276 A more flexible exercise of judicial discretion to fix an amount on a global basis is preferable to the liquidator being required to provide a detailed taxation of costs. The liquidator bears the onus of establishing the reasonableness of the remuneration, and the benefit of the doubt based on any inadequacy of information should be resolved in favour of the creditors.277 A liquidator must provide sufficient information to the court for it to make a judgement on whether the amount claimed is fair and reasonable. What constitutes “sufficient” information is a question of judgement for the court to determine.278 In terms of the nature and extent of the information required: A statement of the work undertaken during the course of the liquidation, together with an expenditure account sufficiently itemised to enable the charges made to be related to the work done, will ordinarily be required. The detail would have to be sufficient to enable the judicial officer to determine whether the personnel involved in the liquidation and their respective charge out rates were appropriate to the nature of the work undertaken.279 Assuming that approval has already been given to the scale of fees to be charged, a memorandum certified as correct by the liquidator is sufficient. In that case, the information to be supplied to the court would normally consist

of a brief overview of the liquidation, signed by the liquidator, attaching all of the reports (including a draft final report) required to be lodged with the Registrar of Companies under s 255(2)(d) of the Act. The draft final report would be prepared on the assumption that the remuneration claimed was approved and would be in the form required by s 257. A statement that regs 29–31 of the 1994 Regulations had not been breached would be appropriate. Accounts sufficiently itemised to provide the information referred to above should be attached to the report. In the case of those firms which keep a computer record of hours charged with some form of narrative, a print out of that record might be sufficient. Where approval has not already been given, a formal application with supporting affidavit is required.280 However, information of this type will probably not be required if, in the second and subsequent reports under s 255, a liquidator discloses [page 170] voluntarily the amount of fees charged and the largest components of them, as well as the ability of any creditor or shareholder to challenge remuneration under s 284(1)(e), and no steps are taken to challenge the remuneration by the time the retrospective application is made.281 Where such disclosure is not made, the court has jurisdiction to require a greater or lesser degree of proof of the reasonableness of the remuneration charged, depending on the quantum sought.282 The Court in Flynn v McCallum considered that the following three tiers283 provide a satisfactory basis for such an approach, subject to regular adjustments to reflect commercial realities:284 The first tier, which should be approved with little further inquiry, are those where fees in a liquidation, including GST but excluding expenses, do not exceed $7,500. The second tier involves those that, provided the court is satisfied as to the extent and nature of the work carried out and the reports filed give an adequate overall picture, it is likely the court will not be called upon to make further inquiry — those in the $7,500 to $25,000 range. The third tier, those involving fees in excess of these amounts, place a heavier burden on the liquidator if not initially, at least finally, to inform the

court of the nature of the liquidation, the urgency of the dealings, the number of creditors and whether they are preferred and/or are a sole creditor or there is a creditors committee, and the reasons for substantial input of time and the cost thereof — particularly if there is minimal recovery. In rare cases involving a lengthy consideration of a substantial number of documents, a report might be obtained from an assessor.285 The second Medforce decision286 set out detailed guidelines in relation to the form and costs of applications.

10.24.6 Applications by third parties The court may review a liquidator’s remuneration and, if it is found to be unreasonable, may order the liquidator to refund it.287 An application by a third party under s 284(1)(e) or (f) involves a contested review of the [page 171] remuneration charged. The liquidator is obliged to respond to the evidence led by the applicant. The court’s function is the same as on a retrospective application: the assessment of the reasonableness of the remuneration. That is because, under s 284(1)(f), the court is required to form a judgment on any amount unreasonably retained, in order to exercise its jurisdiction to compel the liquidator to refund appropriate creditors or shareholders.288

10.24.7 Remuneration for trust administration The authorities recognise an inherent jurisdiction in the court to allow expenses to liquidators out of trust assets to meet the costs of trust administration.289 The courts have made it clear that the power of the liquidator to be remunerated from the trust assets was restricted to remuneration qua trustee, to the extent to which their services relate to the preservation and proper disposal of those assets, and not to remuneration generally as liquidator.290

10.25 Legal Costs In most cases, the party to the litigation is the company, not the liquidator, even in the case of a proceeding commenced against the company after it is in

liquidation. The liquidators are merely agents for the company in relation to the litigation.291 A non-party such as a director or liquidator is not at risk of a costs award in other than exceptional circumstances, that is, circumstances outside the ordinary run of cases where parties pursue or defend claims for their own benefit and at their own expense. There is jurisdiction to order a liquidator as a non-party to pay costs personally but such an order will not be made unless there has been some relevant impropriety on the part of the liquidator. [page 172] The courts recognise that the other party can protect its position, should it be successful, through its ability to seek in advance an order for payment of security for costs. In some cases where a non-party may have both controlled the proceeding and funded it, or is to benefit from it, justice will require that if the proceeding fails, the non-party will pay the successful party’s costs. Such a party is the real party to the litigation. But that is not ordinarily the position of a liquidator, although it may be the position of a creditor or shareholder who funds a liquidator.292 Where the non-party is a liquidator, he or she can realistically be regarded as acting in the interests of the company (and more especially its shareholders and creditors) rather than in his or her own interests. The courts are reluctant to make awards against liquidators who are non-parties because otherwise they may not be prepared to take on the role and enter into liquidation that may be beneficial for the company and thus for creditors.293 The position is different when the liquidator is required, or chooses, to bring a proceeding or application in his or her own name, for example an application to set aside an insolvent transaction under s 292 of the Companies Act 1993, which is a right given to the liquidator and not to the company in liquidation. In such a case, if the liquidator is unsuccessful, he or she may be exposed to a costs award personally — whether or not he or she is able to obtain reimbursement from available company assets.294 The fact that a liquidator has acted responsibly in the proceeding will be a relevant factor in considering not only whether an award for costs should be made, but also quantum.295

____________________ 1.

MGR Gronow McPherson’s Law of Company Liquidation (5th ed, Thomson Reuters, Sydney, 2006) at [8.20].

2.

Re Securitibank [1978] 1 NZLR 97 at 105–106 (SC), [1978] 2 NZLR 133 (CA); Re Timberland Ltd (in liq) and Equitable Forestry Services Pty Ltd (in liq), Commissioner for Corporate Affairs v Harvey (1979) 4 ACLR 259 at 281; Re Home and Colonial Insurance Co Ltd [1930] 1 Ch 102 at 125; ASIC v Edge [2007] VSC 170 at [47]. See Finnigan v Butcher [2012] NZHC 810 for discussion as to whether applications for directions can be used to determine substantive rights and para 10.8.6 below.

3.

Re Blastclean Services Ltd (in Rec) (1985) 2 NZCLC 99,282 at 99,285 (HC). See also Re HIH Casualty and General Insurance (NZ) Ltd HC Auckland CIV-2009-404-3637, 10 September 2010 at [62]; Finnigan v Butcher [2012] NZHC 810 at [17]–[18] (directions given on commercial decisions where a liquidator’s decision is criticised by creditors as being unreasonable or as evidence of bad faith). See discussion at para 10.8.6 below.

4.

Petterson v Gothard (No 3) [2012] NZHC 666 at [46]–[48], referring to Blanchard and Gedye The Law of Private Receivers of Companies in New Zealand (LexisNexis, Wellington, 2008) at [12.01] for description of the liquidator’s role as “an official and independent watchdog” on the receiver. Heath J also refers to the Receiverships Act, s 30 (in requiring proceeds of circulating assets to be used for the benefit of preferential creditors) as a good example of a situation in which a liquidator may need to perform that role; the liquidator’s ability to seek orders reviewing or fixing the reasonable remuneration of a receiver and to seek an order terminating or limiting the receivership, and the receiver’s duty to unsecured creditors, when exercising a power of sale of property, to obtain the best price reasonably obtainable as at the time of sale.

5.

Companies Act, s 248(2).

6.

Companies Act, s 312(1).

7.

Companies Act, s 313(4), discussed at para 7.13.

8.

Re Your Size Fashions Ltd [1990] 3 NZLR 727.

9.

Dunphy v Sleepyhead Manufacturing Co Ltd [2007] 3 NZLR 602, (2007) 11 TCLR 952, (2007) 10 NZCLC 264,313 at [43]–[44] (CA).

10.

Sintel-Com Ltd (in liq) v Telecom NZ Ltd (2006) 9 NZCLC 264,040.

11.

Dunphy v Sleepyhead Manufacturing Co Ltd [2007] 3 NZLR 602, (2007) 11 TCLR 952, (2007) 10 NZCLC 264,313 at [22].

12.

Re Anglo-Moravian Hungarian Junction Railway Co, ex parte Watkin (1875) 1 Ch D 130; Stead, Hazel & Co v Cooper [1933] 1 KB 840; Re Nation Life Insurance Co Ltd [1978] 1 WLR 45.

13.

Companies Act 1993, s 301.

14.

Re Cushla Ltd [1979] 3 All ER 415 at 423; Government of India v Taylor [1955] AC 491 at 512–513, [1955] 1 All ER 292 at 300 (HL). In Wambo Coal v Ariff (2007) 25 ACLC 809, [2007] NSWSC 589 the liquidator was held liable to account as a constructive trustee for moneys he received after he had knowledge that the payments were made by mistake.

15.

Re Paraguassu Steam Tramroad Co, Black & Co’s Case (1872) 8 Ch App 254 at 262; Re Oriental Inland Steam Co, ex parte Scinde Railway Co (1874) 9 Ch App 557; IRC v Olive Mill Ltd [1963] 2 All ER 130 at 138; Re Timberland Ltd (in liq) and Equitable Forest Services Pty Ltd (in liq), Commissioner for Corporate Affairs v Harvey (1979) 4 ACLR 259.

16.

See by way of analogy Re Sadlier [1977] 1 NZLR 214 (SC).

17.

Goode Principles of Corporate Insolvency Law (3rd ed, Sweet & Maxwell, London, 2005) at [5–02];

Commissioner of Revenue v Linter Textiles Australia Ltd (in liq) (2005) 215 ALR 1, (2005) 220 CLR 592; ASIC v Edge [2007] VSC 170 at [43]; Mineral & Chemical Traders Pty Ltd v T Tymczyszyn Pty Ltd (in liq) (1995) 15 ACSR 398 at 416–417. See also para 9.2 above. 18.

Mason v Lewis HC Auckland CIV-2010-404-8, 21 December 2010 at [27]–[29]; Leucadia National Corp v Wilson Neill Ltd HC Auckland CP365-94, 12 July 1996 at 18 citing Re Contract Corp, Gooch’s Case (1872) 7 Ch App 207 at 211; Re Allebart Pty Ltd [1971] 1 NSWLR 24; Re Inter Continental Properties Pty Ltd (in liq) (1977) 2 ACLR 488.

19.

These restrictions and the court’s discretion are discussed at para 3.2 above.

20.

Consolidated Technologies Development (NZ) Ltd v McCullagh (2006) 9 NZCLC 264,056 at [33].

21.

Silkstone and Haigh Moor Coal Co v Edey [1900] 1 Ch 167.

22.

Re R Gertzenstein Ltd [1937] 1 Ch 115, [1936] 3 All ER 341. See Kawhia Offshore Services Ltd v Rutherford HC Hamilton CP61-99, 24 April 2002 at [23]–[30] for discussion of the profit rule in the context of directors.

23.

Flynn v McCallum HC Tauranga CIV-2005-470-611, 17 December 2009 at [29].

24.

Mason v Lewis HC Auckland CIV-2010-404-8, 21 December 2010 at [27]–[29]; Consolidated Technologies Development (NZ) Ltd v McCullagh (2006) 9 NZCLC 264,056 at [46]; Leucadia National Corp v Wilson Neill Ltd HC Auckland CP365-94, 12 July 1996 at 18; Re Contract Corp, Gooch’s Case (1872) 7 Ch App 207 at 211; Re Allebart Pty Ltd [1971] 1 NSWLR 24 at 30; Bovis Lend Lease v Wily [2003] NSWSC 467 (17 June 2003) at [126]–[132].

25.

Law Commission Company Law Reform and Restatement (NZLC R9, 1989) at [670]–[671].

26.

Companies Act 1993, s 255. See s 3 for public notice procedure.

27.

Companies Act 1993, s 255(2)(b).

28.

Companies Act 1993, s 255(2)(c). This duty is in contrast to the 1955 Act where the responsibility for compiling a statement of affairs was on the directors of a company.

29.

Law Commission Company Law Reform and Restatement (NZLC R9, 1989) at [669].

30.

Companies Act 1993, s 255(3)(d).

31.

Companies Act 1993, s 255(4).

32.

Companies Act 1993, s 257(1).

33.

Companies Act 1993, s 257(2).

34.

Companies Act 1993, s 256(1). The basis on which the court will allow a creditor or shareholder to inspect accounts and records is discussed in Levin v Lawrence [2012] NZHC 1452. There must be some good reason for the court to order inspection in circumstances where the statutory scheme does not ordinarily permit it. Whether the court will exercise its discretion to order access to the records will depend on the particular circumstances of each case.

35.

Companies Act 1993, s 256(2).

36.

Companies Act 1993, s 259.

37.

Companies Act 1993, s 258.

38.

Companies Act 1993, s 258(3).

39.

Companies Act 1993, s 258(1).

40.

Companies Act 1993, s 391(1).

41.

Companies Act 1993, s 391(2).

42.

Companies Act 1993, s 391(3).

43.

Companies Act 1993, s 391(4).

44.

Companies Act 1993, s 258B.

45.

Companies Act 1993, s 243(11). Except for s 243(5) which requires all meetings of creditors to be held in accordance with Schedule 5. The voluntary administration procedure is discussed in Chapter 17 of Heath & Whale on Insolvency (looseleaf ed, LexisNexis). See [17.87] in particular.

46.

Companies Act 1993, s 243(4).

47.

Companies Act 1993, s 243(1)(a).

48.

Companies Act 1993, s 243(4).

49.

Companies Act 1993, s 243(1)(b).

50.

Companies Act 1993, s 243(6).

51.

Companies Act 1993, s 243(7).

52.

Flynn v McCallum HC Tauranga CIV-2005-470-611, 17 December 2009 at [128]; Re Johannisberg Land and Gold Trust Co [1892] 1 Ch 583; Re Securitibank Ltd and others (Judgment No 19) [1979] NZ Recent Law 319; The Fellaz Co Ltd v Land Development Solutions Ltd HC Auckland CIV-2008404-3332, 1 May 2009 at [9] (where such an application was declined).

53.

Companies Act 1993, s 243(1A).

54.

Companies Act 1993, s 243(8).

55.

Companies Act 1993, s 243(9).

56.

Companies Act 1993, s 245(1).

57.

Companies Act 1993, s 245(2).

58.

Austin Securities Ltd v Northgate & English Stores Ltd [1969] 1 WLR 529 at 535; Re Windsor Steam Coal Co [1929] 1 Ch 151.

59.

Re Home and Colonial Insurance Co [1930] 1 Ch 102 at 125.

60.

ASIC v Edge [2007] VSC 170 at [47]; Pace v Antlers Pty Ltd (in liq) (1998) 26 ACSR 490.

61.

Downsview Nominees Ltd v First City Finance Ltd [1993] 1 NZLR 513. See the discussion of Downsview and the English Court of Appeal decision in Medforth v Blake [2000] Ch 86, [1999] 3 All ER 973 where broader duties were imposed on receivers, at [14.61] of Heath & Whale on Insolvency (looseleaf ed, LexisNexis).

62.

“Entitled person” is defined in s 2 as a shareholder and a person upon whom the constitution confers any of the rights and powers of a shareholder. The Official Assignee is not an “entitled person”: Official Assignee v Norris [2012] NZHC 961 at [20] and [28].

63.

Companies Act 1993, s 240(1); Consolidated Technologies Development (NZ) Ltd v McCullagh (2006) 9 NZCLC 264,056 at [19].

64.

Audits of the accounts of a liquidation were originally compulsory under the 1955 Act (s 244) prior to repeal by Companies Amendment Act 1989. In 1989, the audit of liquidations undertaken by the Official Assignee was made discretionary, although audits of liquidations administered by others remained compulsory: unamended Companies Act 1955, ss 244A and 244B.

65.

Remuneration of liquidators is discussed at para 10.24 below.

66.

Birchall v Project Works Construction Ltd (in liq) (2004) 9 NZCLC 263,547.

67.

Companies Act 1993, s 284(2).

68.

Companies Act 1993, s 284(3). It is not appropriate for liquidators to seek directions in relation to matters which are within their jurisdiction merely to gain this protection: Re HIH Casualty and General Insurance (NZ) Ltd HC Auckland CIV-2009-404-3637, 10 September 2010 at [62].

69.

Companies Act 1993, s 284(4).

70.

Waller v Max Resources Ltd (in liq) (2003) 16 PRNZ 915 at [4].

71.

Manifest Capital Management Pty Ltd v Lawrence HC Auckland CIV-2010-4047741, 20 December 2011 at [7].

72.

Consolidated Technologies Development (NZ) Ltd v McCullagh (2006) 9 NZCLC 264,056 at [15]; Callis v Pardington (1996) 7 NZCLC 261,211 at 261, 216 (CA).

73.

Trinity Foundation (Services No 1) Ltd v Downey (2005) 9 NZCLC 263,917 at [18], upheld on appeal Trinity Foundation (Services No 1) Ltd v Downey (2006) 3 NZCCLR 401; Manifest Capital Management Pty Ltd v Lawrence HC Auckland CIV-2010-404-7741, 20 December 2011 at [7].

74.

CIR v Hulst; CIR v Oriana Finance Ltd (2000) 19 NZTC 15,693, (2000) 8 NZCLC 262,266 at [25]; Trinity Foundation (Services No 1) Ltd v Downey (2005) 9 NZCLC 263,917 at [19].

75.

Re Chirnside [1929] VLR 217; Willoughby v Official Trustee in Bankruptcy (WA) [1999] FCA 1715; CIR v Hulst; CIR v Oriana Finance Ltd (2000) 19 NZTC 15,693, (2000) 8 NZCLC 262,266 at [41]– [44].

76.

See paras 7.7, 8.3 and 10.18.5.

77.

Trinity Foundation (Services No 1) Ltd v Downey (2005) 9 NZCLC 263,917; Consolidated Technologies Development (NZ) Ltd v McCullagh (2006) 9 NZCLC 264,056 at [23].

78.

Trinity Foundation (Services No 1) Ltd v Downey (2005) 9 NZCLC 263,917 at [12]; Birchall v Project Works Construction Ltd (in liq) (2004) 9 NZCLC 263 at [21]–[24].

79.

Trinity Foundation (Services No 1) Ltd v Downey (2005) 9 NZCLC 263,917 at [21]; upheld on appeal Trinity Foundation (Services No 1) Ltd v Downey (2006) 3 NZCCLR 401 (the legal test was not contested on appeal). See also Official Assignee v Norris [2012] NZHC 961 at [18].

80.

Official Assignee v Norris [2012] NZHC 961 at [18].

81.

See for example, Re International Investment Unit Trust [2005] 1 NZLR 270.

82.

Kiwi International Airlines Ltd (in liq), Re Waller HC Auckland CIV-2005404-7051, 26 July 2007.

83.

Re Nautilus Developments Ltd (in liq) [2000] 2 NZLR 505, (2000) 8 NZCLC 262,235. The Court pointed out that that was the course taken by the liquidator in Re Tosich Construction Pty Ltd, ex parte Wily (1997) 143 ALR 18 and could have been taken in Re Nautilus if the liquidator had not commenced proceedings without apparently securing funding for them in advance.

84.

See para 10.11 for the liquidator’s powers in relation to proceedings.

85.

See para 10.7 above.

86.

See para 10.1 above and discussion at [17]–[21] of Finnigan v Butcher [2012] NZHC 810.

87.

Waimate Investments Ltd (in liq) v O’Dea [2004] 2 NZLR 433 (CA) at [34]–[36]. The application was made under the 1955 Act equivalent of s 284 (s 258).

88.

Flynn v McCallum HC Tauranga CIV-2005-470-611, 17 December 2009 at [107], [131]; Re Medforce Healthcare Services Ltd (in liq) (No 2) [2001] 3 NZLR 158 at [6]; US International Marketing Ltd v National Bank of New Zealand Ltd [2004] 1 NZLR 589, (2004) 8 NZBLC 101,514 at [56]; ASIC v DFK Securities (2002) 20 ACLC 1613 at [29]. See also Lab-Plas Holdings Ltd (in liq) HC Auckland M499/97, 3 May 2000 at [8] where the Court referred to “the significance of their responsibilities to this Court as liquidators appointed by this Court with the same responsibility as a Barrister and Solicitor to this Court”. See also [38.41] and [38.42] of Heath & Whale on Insolvency (looseleaf ed,

LexisNexis). 89.

Lilburne v Albany Power Centre Ltd HC Wellington M183/02, 27 November 2002 at [30].

90.

Cassin v Richardson [2006] NZFLR 1068 at [38]–[42]. See also Flynn v McCallum HC Tauranga CIV-2005-470-611, 17 December 2009 at [131]; and discussion at [23]–[27] of Official Assignee v Norris [2012] NZHC 961.

91.

In Re David Hamilton & Co (1928) NZLR 419, Skerrett CJ held that a liquidator in a voluntary liquidation is not an officer of the court. See also Re TH Knitwear [1988] Ch 275 (UK CA); Clutha Ltd (in liq) v Millar (No 5) [2002] NSWSC 833, (2002) 43 ACSR 295 at [18]; Hall v Poolman [2009] NSWCA 64 at [62] and Heath & Whale on Insolvency (looseleaf ed, LexisNexis) at [38.42].

92.

Law Commission Company Law Reform and Restatement (NZLC R9, 1989) at [648].

93.

Companies Act 1993, s 286(1).

94.

“Entitled person” is defined in s 2.

95.

Companies Act 1993, s 286(2).

96.

Official Assignee v Norris [2012] NZHC 961 at [42].

97.

Official Assignee v Norris [2012] NZHC 961 at [43].

98.

See para 3.2 above and Re Otuwhero Estate Wines Ltd HC Christchurch CIV-2010-409-2069, 20 September 2010 and Re Rapson Holdings Ltd HC Auckland CIV-2010-404-2319, 26 April 2010. See [9] for precedents for granting leave for applications under s 280 or s 286 to be made by originating application, without notice in proceedings for appointment of a liquidator.

99.

Companies Act 1993, s 286(7).

100. Official Assignee v Norris [2012] NZHC 961 at [71]–[72]. At [72] the Court noted that it is this alternative ground for a prohibition order that accords with any industry understanding that there is a “two strikes” rule. 101. Official Assignee v Norris [2012] NZHC 961 at [70]–[73]. 102. Companies Act 1993, s 286(3). 103. Companies Act 1993, s 286(5). 104. Companies Act 1993, s 286(6). 105. Companies Act 1993, s 286(9). 106. Waller v Paul (1997) 8 NZCLC 261,351; Gilbert (liquidator of Crystal Waters Management Ltd (in liq)) v About Body Corporates Ltd HC Auckland CIV-2009404-2048, 23 June 2009 at [27]–[29]. 107. Alexander Ward and Co Ltd v Samyang Navigation Co Ltd [1975] 1 WLR 673, [1975] 2 All ER 424 (HL). 108. Securitibank Ltd (in rec & in liq) v Rutherford (No 28) (1984) 2 NZCLC 99,073; Re Pacific Wools Ltd (in rec & in liq), Crott v Touche Ross & Co (1990) 5 NZCLC 66,730, (1990) 2 PRNZ 469; ROA 91 Ltd (in liq) v NZ Railways Corp [1994] MCLR 458. Compare Family Care (Henderson) Ltd (in liq) v Fowler & Botros (1998) 8 NZCLC 261,617. 109. Hart v Stiassny (1998) 12 PRNZ 240 at 244; Cripps v Lakeview Farm Fresh Ltd (in liq) HC Wellington CIV-2003-485-1616, 26 August 2004; Re Strand Wood Co [1904] 2 Ch 1. The responsibility of liquidators for legal costs is discussed at para 10.25. 110. Re Wreck Recovery and Salvage Co (1880) 15 Ch D 353 (CA) at 360; Re New Vogue Ltd (in liq), Hope Gibbons Ltd v Collins [1932] NZLR 1633 at 1641, [1932] GLR 467 at 116 (CA). 111. Re Great Eastern Electric Co Ltd [1941] Ch 241 at 246, [1941] 1 All ER 409. The onus of proving

that a contract entered into was not required for the liquidation of the company lies on the party objecting to the contract: Hire Purchase Furnishing Co v Richens (1887) 20 QB 387 (CA). 112. R v Lord Mayor of London, ex parte Boaler [1893] 2 QB 146 at 149. 113. Silkstone and Haigh Moor Coal Co v Edey [1900] 1 Ch 167. 114. Ah Toy v Registrar of Companies (NT) [1986] FCA 187, (1986) 10 FCR 356, 72 ALR 107 at [21], where the liquidator appointed Price Waterhouse as his agent for both the provisional liquidation and the liquidation. 115. Ah Toy v Registrar of Companies (NT) [1986] FCA 187, (1986) 10 FCR 356, 72 ALR 107 at [21]. 116. Consolidated Technologies Development (NZ) Ltd v McCullagh (2006) 9 NZCLC 264,056 at [38]. It does not, for example, entitle a liquidator to appoint the firm of which he or she is a member to act as his or her agent for the purpose of the liquidation. 117. The Official Assignee has similar powers in the bankruptcy context, which are discussed at [6.10] of Heath & Whale on Insolvency (looseleaf ed, LexisNexis). 118. Petterson v Gothard (No 3) [2012] NZHC 666 at [12]. 119. International Direct Ltd (in liq) HC Wellington CIV-2006-485-2020, 17 November 2006 at [41] and [51]; Foleys Transport Ltd v Weddel NZ Ltd (in rec & liq) (1996) 7 NZCLC 261,126. Legal advice provided to a company’s directors in respect of their own individual and personal responsibility and liability may not be obtainable under this provision, if the privilege attaching to the material is limited to the directors and the court considers that the documents are therefore not the company’s documents: Foley’s Transport Ltd v Weddel New Zealand Ltd (in rec & in liq) (1996) 7 NZCLC 261,126. 120. Companies Act 1993, s 264(2). 121. Companies Act 1993, s 262. 122. Companies Act 1993, s 262(4). 123. Companies Act 1993, s 262(3). 124. Buddle Findlay v Isaac (1996) 7 NZCLC 261,132. 125. Companies Act 1993, s 263(2). 126. Companies Act 1993, s 263(3). 127. Companies Act 1993, s 261(3A). 128. Companies Act 1993, s 266(1). 129. Companies Act 1993, s 261(5). 130. Companies Act 1993, s 261(6). 131. Companies Act 1993, s 261(6A). 132. Companies Act 1993, s 267(1). 133. Companies Act 1993, s 267(2). 134. Companies Act 1993, s 265. 135. Companies Act 1993, s 274. 136. R v Whimp CA451-06, 2 April 2007 at [24]–[27], [29], [33]. Leave to appeal refused: Whimp v R [2009] NZSC 3. 137. Petterson v Gothard (No 3) [2012] NZHC 666. 138. Eagle and Gothard v Petterson HC Auckland CIV-2011-404-7387, 16 December 2011 at [50]–[52].

139. Companies Act, s 262(4); Petterson v Gothard (No 3) [2012] NZHC 666 at [13]. 140. Petterson v Gothard (No 3) [2012] NZHC 666 at [29]. 141. Petterson v Gothard (No 3) [2012] NZHC 666 at [47]. 142. The existence of the “oversight” function supports the view that a liquidator is entitled to seek documents in order to determine whether there has been any material error in the calculation of moneys to be paid to preferential creditors under s 30 of the Receiverships Act. The possibility of allocation of too much of the receivers’ costs to circulating assets or the allocation of too little to noncirculating assets and general administration may each be relevant to whether any material error has been made. See also para 10.2 above. 143. Petterson v Gothard (No 3) [2012] NZHC 666 at [53]–[56] following Re Tricorp Investments Ltd; Watson v Russell (1988) 4 NZCLC 64,620 (HC) at 64,625–64,628. Contrast Gomba Holdings UK Ltd v Minories Finance Ltd [1989] 1 All ER 261 (CA). 144. Companies Act 1993, s 266(3); Carrow Holdings Ltd (in liq) v Sadiq HC Auckland CIV-2007-4042855, 5 June 2008 at [21]. 145. Companies Act 1993, s 266(4). 146. Re Rolls Razor, Ltd [1968] 3 All ER 698 at 700, cited at 65,183 of Laing v KPMG Peat Marwick (1989) 4 NZCLC 65,180; Carrow Holdings Ltd (in liq) v Sadiq HC Auckland CIV-2007-404-2855, 5 June 2008 at [32]. 147. ANZ Banking Group (NZ) Ltd v Official Assignee & Liquidator of Wrapz Marketing Ltd (in liq) (1987) 2 BCR 397 at 404, (1987) 4 NZCLC 64,151. Compare discussion at [20]–[24] of Managh v Curry (2011) 10 NZCLC 264,841. 148. Re Pepi Holdings HC Christchurch M170/98, 4 June 1998. 149. Laing v KPMG Peat Marwick (1989) 4 NZCLC 65,180 at 65,182; Re Harland Developments Ltd (in liq) (1986) 3 NZCLC 99,540 at 99,541; Re Epicorp Investments Ltd (in rec & in liq) [1993] MCLR 385. 150. Smith v Official Assignee, Re Smith (a bankrupt) (1991) 8 FRNZ 328, [1992] NZFLR 241 (CA) at 245–246; Carrow Holdings Ltd (in liq) v Sadiq HC Auckland CIV-2007-404-2855, 5 June 2008 at [27]. 151. This was the approach taken in the decision in Cloverbay Ltd (Joint Administrators) v Bank of Credit & Commerce International SA [1991] Ch 90, [1991] 1 All ER 894. The Cloverbay approach was also rejected by the House of Lords in British and Commonwealth Holdings plc (joint administrators) v Spicer & Oppenheim (a firm) [1992] 4 All ER 876 (HL) at 884–885. 152. Carrow Holdings Ltd (in liq) v Sadiq HC Auckland CIV-2007-404-2855, 5 June 2008 at [29]–[32]. 153. British and Commonwealth Holdings plc (joint administrators) v Spicer & Oppenheim (a firm) [1992] 4 All ER 876 (HL) at 884–885, cited by Heath J in Petterson v Gothard (No 3) [2012] NZHC 666 at [62]. See also Peter John Whelan v Australian Securities Commission [1994] FCA 1078, (1994) 12 ACLC 419, (1994) ACSR 427 at [13]. 154. Re Pepi Holdings HC Christchurch M170/98, 4 June 1998. 155. This was the outcome in Laing v KPMG Peat Marwick (1989) 4 NZCLC 65,180. 156. Laing v KPMG Peat Marwick (1989) 4 NZCLC 65,180 at 65,185. 157. In Re Northrop Instruments & Systems Ltd (in rec) [1992] 2 NZLR 361, (1991) 5 NZCLC 67,392, [1991] MCLR 571 at 575 the Court considered that in that case “the public interest favours early ascertainment of fact, as opposed to the alternative vexation of procedure on suspicion”. 158. Re Harland Developments Ltd (in liq) (1986) 3 NZCLC 99,540.

159. Laing v KPMG Peat Marwick (1989) 4 NZCLC 65,180; 65,185; Re Rolls Razor Ltd (No 2) [1970] Ch 576 at 595. 160. Re Harland Developments Ltd (in liq) (1986) 3 NZCLC 99,540. 161. Re Hunt (a bankrupt); Official Assignee v Murphy [1993] 3 NZLR 62. The decision of Thomas J was criticised by P Heath in “Bankruptcy and the Bill of Rights” [1993] NZLJ 347. See also Sullivan v Ministry of Fisheries [2002] 3 NZLR 721, where the Court of Appeal regarded the requirement to submit to questioning under the Fisheries Act 1996 as a detention under an enactment for the purposes of ss 22 and 23 New Zealand Bill of Rights Act 1990. 162. Re Hunt (a bankrupt), Official Assignee v Murphy [1993] 3 NZLR 62 at 72. 163. Re The Coachman Tavern (1985) Ltd (in liq) (1990) 5 NZCLC 66,320 at 66,322; Re Merit Finance and Investment Group Ltd (in liq) [1992] MCLR 450. 164. International Direct Ltd (in liq) HC Wellington CIV-2006-485-2020, 17 November 2006 at [51]; Foleys Transport Ltd v Weddel NZ Ltd (in rec & liq) [1996] 7 NZCLC 261,126. Legal advice provided to a company’s directors in respect of their own individual and personal responsibility and liability may not be obtainable under this provision, if the privilege attaching to the material is limited to the directors and the court considers that the documents are therefore not the company’s documents: Foley’s Transport Ltd v Weddel New Zealand Ltd (in rec and in liq) (1996) 7 NZCLC 261,126. 165. Re Konigsberg [1989] 3 All ER 289; Re Wong [1997] NZFLR 300 (HC); Kupe Group Ltd v Auckland City Council (1989) 2 PRNZ 60 (HC). 166. Re Bank of Credit and Commerce International SA Morris v Bank of America National Trust & Savings Association [1997] BCC 561. 167. This power is discussed in more detail at para 11.2 below. 168. Disclaimer is discussed in the bankruptcy context at [6.7] and [6.8] of Heath & Whale on Insolvency (looseleaf ed, LexisNexis). 169. Companies Act 1993, s 269(4). 170. Trinity Foundation (Services No 1) Ltd v Downey (2005) 9 NZCLC 263,917 at [51]; Re Celtic Extraction Ltd [2001] Ch 475 at 491. 171. Trinity Foundation (Services No 1) Ltd v Downey (2005) 9 NZCLC 263,917 at [52]; Re Park Air Services [2002] 2 AC 172 at 184. 172. Goode Principles of Corporate Insolvency Law (3rd ed, Sweet & Maxwell, London, 2005) at [6–20], cited in Re SSSL Realisations (2002) Ltd [2004] EWHC 1760 (Ch), [2005] 1 BCLC 1 at [43]. 173. Trinity Foundation (Services No 1) Ltd v Downey (2005) 9 NZCLC 263,917 at [49]–[50] citing Re SSSL Realisations (2002) Ltd [2004] EWHC 1760 (Ch), [2005] 1 BCLC 1 at [64] and [65] and Transmetro Corp Ltd v Real Investments Pty Ltd (1999) 17 ACLC 1314 at [21]. 174. Re Maughan, ex parte Monkhouse (1885) 14 QBD 956. 175. Re SSSL Realisations (2002) Ltd [2004] EWHC 1760 (Ch), [2005] 1 BCLC 1. 176. This view was endorsed by the Court of Appeal in that case: Re SSSL Realisations (2002) Ltd (in liq) [2006] EWCA Civ 7, [2006] Ch 610 at [35]. 177. Re The Nottingham General Cemetery Co [1955] Ch 683, [1955] 2 All ER 504 (land to which exclusive rights of burial attached); Re Middle Harbour Investments Ltd [1977] 2 NSWLR 652 (land subject to a mortgage); Re Tulloch Ltd (in liq) (1978) 3 ACLR 808 (land subject to rates and land tax). 178. Re Ice Rinks (Timaru) Ltd (in vol liq) [1955] NZLR 641. See also Tubbs v Futurity Investments Ltd

[1998] 1 NZLR 471, (1998) 8 NZCLC 261,518. 179. Re The Nottingham General Cemetery Co [1955] 2 All ER 504, [1955] Ch 683 at 697. See also Tubbs v Futurity Investments Ltd [1998] 1 NZLR 471, (1998) 8 NZCLC 261,518. 180. Re Katherine et Cie Ltd [1932] 1 Ch 70 where disclaimer of a lease was refused as the disclaimer would operate to discharge the guarantors. The concern which this principle appears to have been applied most often to address (that a disclaimer would prejudice a lessor by discharging guarantors from liability) is no longer an issue after Hindcastle Ltd v Barbara Attenborough Associates Ltd [1996] 1 All ER 737, [1997] AC 70 (HL) which held that the rights of guarantors continue as if the lease had not been determined. In Hindcastle the House of Lords observed at 92 that the practice of refusing to allow disclaimers where this would prejudice the lessor by discharging the surety from liability continued until the Act of 1986 brought corporate insolvency into line with personal insolvency regarding leave to disclaim. Now the landlord generally has no opportunity to object. The effect on interested parties was, however, also considered in Re The Nottingham General Cemetery Co [1955] 2 All ER 504, [1955] Ch 683 at 697 and in Re Ice Rinks (Timaru) Ltd (in vol liq) [1955] NZLR 641 at 643. See also Tubbs v Futurity Investments Ltd [1998] 1 NZLR 471, (1998) 8 NZCLC 261,518; Re Middle Harbour Investments Ltd [1977] 2 NSWLR 652 at 660. 181. Re Mineral Resources Ltd [1999] 1 All ER 746. 182. Re Celtic Extraction Ltd (in liq), Re Bluestone Chemicals Ltd (in liq) [2001] Ch 475, [1999] 4 All ER 684 (CA). Although note that Re Mineral Resources is cited in passing by the House of Lords in Re Toshoku Finance UK plc [2002] 1 WLR 671 at [45], on the assumption that it is correct. 183. Companies Act 1993, s 269(3). 184. Anderson Group v Tynon Motors (2006) 65 NSWLR 400 citing Re Hallett, ex parte National Insurance Co (1884) 71 LT 408. 185. Hindcastle Ltd v Barbara Attenborough Associates Ltd [1996] 1 All ER 737, [1997] AC 70 (HL) at 87. 186. Hindcastle Ltd v Barbara Attenborough Associates Ltd [1996] 1 All ER 737, [1997] AC 70 (HL) at 87–89, overruling Stacey v Hill [1901] 1 KB 660 (CA) which held that a disclaimer by a liquidator discharges a surety from liability for future rent. See also Sandtara Pty Ltd v Abigroup Pty Ltd (1996) 14 ACLC 888; Re Park Air Services plc [2000] 2 AC 172, [1999] 1 All ER 673 (HL). 187. Global Television v Sportsvision Australia (2000) 35 ACSR 484 at [48]–[49]. 188. Re Mercer and Moore (1880) 14 Ch D 287; Re Tulloch Ltd (in liq) (1978) 3 ACLR 808 at 813; Re David James & Co Ltd (in liq) [1991] 1 NZLR 219, (1990) 5 NZCLC 66,613; Rural Banking and Finance Corp of NZ Ltd v Official Assignee of Vanenckevort [1991] 2 NZLR 351, (1990) 1 NZ ConvC 190,589. 189. Hindcastle Ltd v Barbara Attenborough and Associates Ltd [1996] 1 All ER 737, [1997] AC 70 (HL) at 86. 190. Companies Act 1993, s 269(5)(a). 191. Re Park Air Services plc [2000] 2 AC 172, [1999] 1 All ER 673 (HL). 192. Hindcastle Ltd v Barbara Attenborough and Associates Ltd [1997] AC 70, [1996] 1 All ER 737; Re Tasman Logistics Ltd (in liq) [2004] 3 NZLR 237 at [34]. In Re McEwan, ex parte Blake (1879) 11 Ch D 572 a landlord under a disclaimed lease was permitted to claim a lump sum as compensation for the loss of future rent, and the amount needed to repair the property. 193. Re Anderson [1924] NZLR 1163. 194. Law Commission Company Law Reform and Restatement (NZLC R9, 1989) at [646] and [683]. 195. New Zealand Parliament Justice and Law Reform Committee Report of the Justice and Law Reform

Committee on the Companies Bill (15 December 1992) at 13. 196. Companies Act 1993, s 275(3). 197. Companies Act 1993, s 275(4). 198. Hardley v Fatupaito and McCloy (as liquidators of Normanby Project Ltd (in liq)) HC Auckland CIV-2008-404-8585, 30 June 2009 at [73]. 199. Consolidated Technologies Development (NZ) Ltd v McCullagh (2006) 9 NZCLC 264,056 at [41]. See also Edmonds Judd v Official Assignee [2000] 2 NZLR 135 (CA) at [39] and Heath & Whale on Insolvency (looseleaf ed, LexisNexis) at [6.9] in relation to assignment of a right to sue by the Official Assignee. 200. As in Re Nautilus Developments Ltd (in liq) [2000] 2 NZLR 505, (2000) 8 NZCLC 262,235. 201. ALF No 9 Pty Ltd v Ellis [2010] NZCA 529 at [55]. 202. Re Nautilus Developments Ltd (in liq) [2000] 2 NZLR 505, (2000) 8 NZCLC 262,235 at [22]. See discussion of English and Australian authorities at [16]–[21]. For consideration of what amounts to a sufficient level of control on the part of the liquidator and a survey of recent authorities, see AMP Capital Investments No 4 Ltd v IBS Group Ltd (in liq) [2009] NZCCLR 19 at [14]–[24]. For a recent discussion of champerty and maintenance generally see Auckland City Council as Assignee of Body Corporate 16113 v Auckland City Council [2008] 1 NZLR 838 (HC). 203. The voidable transactions regime is discussed in detail in Chapter 24 of Heath & Whale on Insolvency (looseleaf ed, LexisNexis). 204. Re Stephenson, ex parte Official Receiver (1888) 20 QBD 540; Federal Commissioner of Taxation v Jaques (1956) 95 CLR 223, [1956] HCA 40 at [7]. 205. Anzani Investments Ltd v Official Assignee [2008] NZCA 144 at [6]; Parsons v Norris [2002] 2 NZLR 497 (CA) at [19]; Re Modern Terrazzo Ltd (in liq) [1998] 1 NZLR 160 at 173–174; Waikato Freight v Meltzer [2001] 2 NZLR 541 at 546–547. 206. Companies Act 1993, s 292(4). 207. Gray v Chilton St James School (1997) 8 NZCLC 261,306. See also Saunders & Co v Fagerlund HC Christchurch M486/00, 22 June 2001. 208. Levin v Market Square Trust [2007] 3 NZLR 591 (CA). See also Emanuel (No 14) Pty Ltd (in liq) (1997) 24 ACSR 292. Contrast Ramsay v National Australia Bank Ltd (1988) 6 ACLC 625. 209. VR Dye & Co v Peninsula Hotels Pty Ltd (in liq) (1999) 32 ACSR 27 at [24]. 210. Companies Act 1993, s 292(4A). 211. Companies Act 1993, s 292(6). 212. Rea v Russell [2012] NZHC 11 at [29]; Blanchett v Joinery Direct Ltd HC Hamilton CIV-2007-4191690, 23 December 2008 at [27]; Re Northridge Properties Ltd (in liq) SC Auckland M46/75, 13 December 1977. 213. Rea v Russell [2012] NZHC 11 at [30]. See also Re Armour, ex parte Official Receiver v Commonwealth Trading Bank of Australia (1956) 18 ABC 69. 214. Levin v Market Square Trust [2007] 3 NZLR 591 (CA) at [29], referring to Re Timbatec Pty Ltd (1974) 24 FLR 30 at 36–37 (NSW SC). 215. Levin v Market Square Trust [2007] 3 NZLR 591 (CA) at [38] approving the High Court decisions of Chatfield v Mercury Energy Ltd (1998) 8 NZCLC 261,645 and Cobb & Co Restaurants Ltd v Thompson (2004) 9 NZCLC 263,638. This is consistent with the Australian approach: Walsh v Natra Pty Ltd [2000] 1 VR 523 at 538.

Levin v Market Square Trust [2007] 3 NZLR 591 (CA) at [38] approving Re Yukich Brothers Ltd (in 216. liq), Porter Hire Ltd v Blanchett (2006) 9 NZCLC 264,070 and distinguishing Spedley Securities Ltd (in liq) v Western United Ltd (in liq) (1992) 27 NSWLR 111 (SC). See also Walsh v Natra Pty Ltd [2000] 1 VR 523 at [34]. 217. Companies Act 1993, s 310(2). See para 7.10.5 above. 218. Trans Otway Ltd v Shephard [2006] 2 NZLR 289, (2006) 9 NZCLC 263,973 (SC) at [13]–[14]. 219. Managh v Morrison [2012] 1 NZLR 78 at [17]. 220. The reference in s 292(5)(a) to the period of two years before “the date of commencement of the liquidation”, together with the period commencing on that date and ending at “the time at which the liquidator is appointed”, is confusing because a liquidation commences on the date on which the liquidator is appointed: Companies Act 1993, s 241(5). 221. Corporations Act 2001 (Cth) s 588FA. Commerce Committee report on Insolvency Law Reform Bill 2005 at 14. Australian “running account” cases such as Richardson v Commercial Banking Co of Sydney Ltd (1952) 85 CLR 110; Queensland Bacon v Rees (1966) 115 CLR 266 and Ferrier v Civil Aviation Authority (1994) 127 ALR 472 (FCA) are therefore relevant to its interpretation. See Rea v Russell [2012] NZHC 11 at [61]. 222. Rea v Russell [2012] NZHC 11 at [60]. 223. Rea v Russell [2012] NZHC 11 at [61]. 224. Explanatory Note to Insolvency Law Reform Bill 2005 at 13. 225. Airservices Australia v Ferrier (“Compass Airlines case”) [1996] HCA 54, (1996) 185 CLR 483 at [11]. 226. Companies Act 1993, s 293(1). 227. Fisk v Mahoney HC Wellington CIV-2010-485-2518, 13 June 2011 at [20]. 228. Companies Act 1993, s 293(2). 229. Companies Act 1993, s 293(1A)(a). 230. Companies Act 1993, s 293(1A)(b). 231. Companies Act 1993, s 293(3). 232. Companies Act 1993, s 293(4). 233. Parsons v Norris [2002] 2 NZLR 497 (CA) at [20]. 234. Re C & D Webster Ltd (in liq) [1995] 3 NZLR 590; Re McColl [1935] GLR 105 at 109 (Ostler J), followed in Re Holm (a bankrupt) [1974] 2 NZLR 455, Re Austin (a bankrupt) [1982] 2 NZLR 525 and Meo v Official Assignee [1987] 2 NZLR 1. 235. Re Columbian Fireproofing Co Ltd [1910] 2 Ch 120. In Re F & E Stanton Ltd [1929] 1 Ch 180, 54 days elapsed between the making of an advance and the giving of debenture to secure it, yet the charge was held to be valid. 236. Found in s 245(2) of the Insolvency Act 1986 (UK). 237. Power v Sharp Investments Ltd [1994] 1 BCLC 111 at 123, 129; [1993] BCC 609 (also reported as Re Shoe Lace Ltd (1993) 11 ACLC 3162). 238. Re C & D Webster Ltd (in liq) [1995] 3 NZLR 590; Re Port Supermarket Ltd [1978] 1 NZLR 330, at 338. See Official Assignee v Pisarek [2012] NZHC 1495 for recent application. 239. Re Destone Fabrics Ltd [1941] Ch 319; applied in Re Manson and James Ltd (in liq) (1984) 2 NZCLC 99,092 and Re Port Supermarket Ltd [1978] 1 NZLR 330, 346–347.

240. Section 293(5) avoids the application of the rule in Re Clayton’s Case, Devaynes v Noble (1816) 1 Mer 572; 35 ER 78. The rule in Clayton’s Case is that in the absence of any statutory requirement for payments made by a debtor company to be applied in a particular manner, such as is found in subs (5), and in the absence of a binding arrangement between debtor and creditor governing the application of payments, receipts on a current account are (unless there has been a contrary appropriation by the creditor) taken to have discharged the earliest outstanding indebtedness: first in repays first out. In Re Yeovil Glove Co Ltd [1965] 1 Ch 148 it was held that, in accordance with the rule in Clayton’s Case, money paid into the account after the date of creation of the charge was to be set against the earliest advances made; that is, against indebtedness of the company existing before the date of the charge, with the consequence that because the turnover of money through the account after the debenture was given was greater than the debt at that time, that unsecured debt had been repaid and replaced by a new secured debt. See discussion in Re C & D Webster Ltd (in liq) [1995] 3 NZLR 590. 241. For discussion of requirements see Levin v Rastkar [2011] NZCA 210 at [7]. 242. Farrell v E & E Aps (2012) 11 NZCLC 98-004 at [35]. 243. Levin v Market Square Trust [2007] 3 NZLR 591 (CA) at [65]. 244. Westpac Banking Corporation v Nangeela Properties Ltd (in liq) [1986] 2 NZLR 1. See Ian Douglas Ferrier and Desmond William Knight (as liquidators of Compass Airlines Pty Ltd (in liq)) v Civil Aviation Authority [1994] FCA 1571, (1994) 55 FCR 28 at [214]–[221] as to whether interest should run from the date of demand or commencement of liquidation. 245. Compare Corporations Act 2001 (Cth) s 588FG(2). 246. Levin v Market Square Trust [2007] 3 NZLR 591 (CA) at [54] citing Re Orbit Electronics Auckland Ltd (in liq), W H Jones & Co (London) Ltd v Rea (1989) 4 NZCLC 65,170 and Re Number One Men Ltd (in liq), Meltzer v Axiom International Ltd (2001) 9 NZCLC 262,671. 247. Levin v Market Square Trust [2007] 3 NZLR 591 (CA) at [54]. 248. Kings Wharf Coldstore Ltd (in rec & in liq) v Wilson (2005) 2 NZCCLR 1042 at [75]. 249. Kings Wharf Coldstore Ltd (in rec & in liq) v Wilson (2005) 2 NZCCLR 1042 at [79]. 250. Companies Act 1993, s 299(3). 251. Companies Act 1993, s 299(2). 252. Re Condrens Parking Ltd (in rec & in liq), Jordan v O’Sullivan HC Wellington CIV-2004-485-2611, 13 May 2008. 253. Sojourner v Robb [2008] 1 NZLR 751 (CA) at [53] and [77]. 254. Sojourner v Robb [2008] 1 NZLR 751 (CA) at [55]. 255. Companies Act 1993, ss 276 and 278. 256. Companies Act 1993, Schedule 7, cl 1(1)(a). See para 7.4.1. Although other preferential claims have priority over an unperfected security interest over all or any part of the company’s accounts receivable and inventory in certain circumstances, claims under cl 1(1)(a) do not have such priority: see para 7.4.5. 257. Companies Act 1993, s 276(1); Flynn v McCallum HC Tauranga CIV-2005470-611, 17 December 2009 at [38]. 258. Re New Zealand Times Co Ltd (in liq) [1941] NZLR 677, [1941] GLR 415. 259. Commissioner of Inland Revenue v Kecamaho Haulage Ltd (2008) 23 NZTC 21,889, (2008) 10 NZCLC 264,370 at [3]–[31]. See also Nationwide News Pty Ltd v Samalot Enterprises Pty Ltd (No 2) (1986) 5 NSWLR 227, 10 ACLR 748, 4 ACLC 386 (in respect of provisional liquidators); Monks v

Poynice Pty Ltd (1987) 8 NSWLR 662, 11 ACLR 637 (in respect of receivers). 260. Companies Act 1993, s 276(1). 261. Flynn v McCallum HC Tauranga CIV-2005-470-611, 17 December 2009 at [40]. 262. Companies Act 1993, s 276(2) and regs 28–35 of the Companies Act 1993 Liquidation Regulations 1994. 263. ReMedforce Healthcare Services Ltd (in liq)[2001] 3 NZLR 145, (2000) 8 NZCLC 262,246 at [22]– [28]; Flynn v McCallum HC Tauranga CIV-2005-470-611, 17 December 2009 at [41]. 264. Re Medforce Healthcare Services Ltd (in liq) [2001] 3 NZLR 145, (2000) 8 NZCLC 262,246 at [7]. In Flynn v McCallum HC Tauranga CIV-2005470-611, 17 December 2009 at [124] the Court noted its expectation that the number of prospective applications will diminish because the amended default hourly rates in reg 28 of the 1994 Regulations are closer to market rates and will be sufficient for many practitioners. 265. Re Medforce Healthcare Services Ltd (in liq) [2001] 3 NZLR 145, (2000) 8 NZCLC 262,246; Re Medforce Healthcare Services Ltd (in liq) (No 2) [2001] 3 NZLR 158, (2000) 8 NZCLC 262,406; Flynn v McCallum HC Tauranga CIV-2005-470-611, 17 December 2009. 266. Flynn v McCallum HC Tauranga CIV-2005-470-611, 17 December 2009 at [113]–[115]. 267. Flynn v McCallum HC Tauranga CIV-2005-470-611, 17 December 2009 at [46]. 268. Flynn v McCallum HC Tauranga CIV-2005-470-611, 17 December 2009 at [103]–[104]. 269. Flynn v McCallum HC Tauranga CIV-2005-470-611, 17 December 2009 at [106]. 270. Flynn v McCallum HC Tauranga CIV-2005-470-611, 17 December 2009 at [107]. 271. Flynn v McCallum HC Tauranga CIV-2005-470-611, 17 December 2009 at [108]. 272. Flynn v McCallum HC Tauranga CIV-2005-470-611, 17 December 2009 at [44]. 273. Flynn v McCallum HC Tauranga CIV-2005-470-611, 17 December 2009 at [98]. 274. Re Medforce Healthcare Services Ltd (in liq) [2001] 3 NZLR 145, (2000) 8 NZCLC 262,246 at [28]. 275. Flynn v McCallum HC Tauranga CIV-2005-470-611, 17 December 2009 at [125]–[135]. 276. Re Medforce Healthcare Services Ltd (in liq) [2001] 3 NZLR 145, (2000) 8 NZCLC 262,246 at [29]. 277. Flynn v McCallum HC Tauranga CIV-2005-470-611, 17 December 2009 at [138]–[143]. 278. Flynn v McCallum HC Tauranga CIV-2005-470-611, 17 December 2009 at [98]–[99]. 279. Re Medforce Healthcare Services Ltd (in liq) [2001] 3 NZLR 145, (2000) 8 NZCLC 262,246 at [34]. 280. Re Medforce Healthcare Services Ltd (in liq) [2001] 3 NZLR 145, (2000) 8 NZCLC 262,246 at [35]– [36]. 281. Flynn v McCallum HC Tauranga CIV-2005-470-611, 17 December 2009 at [146]–[152]. 282. Flynn v McCallum HC Tauranga CIV-2005-470-611, 17 December 2009 at [156]. 283. Re Medforce Healthcare Services Ltd (in liq) (No 2) [2001] 3 NZLR 158, (2000) 8 NZCLC 262,406 at [11]. 284. Flynn v McCallum HC Tauranga CIV-2005-470-611, 17 December 2009 at [156]–[157]. 285. Flynn v McCallum HC Tauranga CIV-2005-470-611, 17 December 2009 at [159]–[164]. 286. Re Medforce Healthcare Services Ltd (in liq) (No 2) [2001] 3 NZLR 158, (2000) 8 NZCLC 262,406. 287. Companies Act 1993, s 284(1)(e) and (f). 288. Flynn v McCallum HC Tauranga CIV-2005-470-611, 17 December 2009 at [101], [170]–[172].

289. Re Secureland Mortgage Investments Ltd (1988) 4 NZCLC 64,266; Re Francis James Nominees Ltd (in liq) (1988) 4 NZCLC 64,279; McKenzie v Alexander Associates Ltd (No 1) (1991) 5 NZCLC 67,030. Similarly, the English courts have held that costs incurred by liquidators in realising charged assets are payable ahead of debenture-holders’ claims, as are costs incurred by liquidators in identifying preferential creditors and paying them pursuant to the statutory obligation in circumstances where there are no uncharged assets: Re Regent’s Canal Ironworks Co, ex p Grissell (1875) 3 Ch D 411 at 427; Buchler v Talbot [2004] UKHL 9, [2004] 2 AC 298, [2004] 1 All ER 1289 at [19], [31] and [63]. 290. Re Secureland Mortgage Investments Ltd (1988) 4 NZCLC 64,266; Re Ararimu Holdings Ltd (1989) 4 NZCLC 65,104; McKenzie v Alexander Associates Ltd (No 1) (1991) 5 NZCLC 67,030. A trustee has a right to be indemnified out of the trust assets against personal liabilities incurred in the performance of the trust: Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360, 4 ACLR 575; Re Staff Benefits Pty Ltd (in liq) (1979) 4 ACLR 54. See also para 7.3.2 above and Ng v Van Der Velde [2011] FCAFC 35 (15 March 2011) for discussion of the Australian position in respect of the status of trust assets when a trustee is in liquidation. 291. Mana Property Trustee Ltd v James Developments Ltd [2011] 2 NZLR 25 (SC) at [9]. 292. Mana Property Trustee Ltd v James Developments Ltd [2011] 2 NZLR 25 (SC) at [10]–[11]. The Court of Appeal has held that non-party cost orders should not have the effect of deterring creditors from funding litigation bought by liquidators. There is a public interest in encouraging the pursuit of claims by liquidators where the purpose is to benefit creditors and shareholders generally by recovering property from those who have allegedly acted wrongfully. S H Lock (NZ) Ltd v New Zealand Bloodstock Leasing Ltd [2011] NZCA 675 at [30] citing State Bank of New South Wales v Brown [2001] NSWCA 223, (2001) 38 ACSR 715 at 728 per Hodgson JA (Handley JA concurring). 293. Mana Property Trustee Ltd v James Developments Ltd [2011] 2 NZLR 25 (SC) at [11]. 294. Mana Property Trustee Ltd v James Developments Ltd [2011] 2 NZLR 25 (SC) footnote 6; Re Wilson Lovatt & Sons Ltd [1977] 1 All ER 274 (Ch); Hart v Stiassny (1998) 12 PRNZ 240 (HC); Waimate Investments Ltd (in liq) v O’Dea [2004] 2 NZLR 433 (CA) at [32]. Compare discussion of the principles in the Australian context in Silvia v Brodyn Pty Ltd (2007) 25 ACLC 385, [2007] NSWCA 55 at [49]–[54]. 295. Commissioner of Inland Revenue v AK Oriental Ltd (in liq) (2007) 18 PRNZ 436, (2007) 23 NZTC 21,249 at [15]; Hart v Stiassny (1998) 12 PRNZ 240.

[page 173]

CHAPTER 11 Liability of Related Companies, Shareholders and Directors in a Liquidation 11.1

Recovery by Liquidator from Related Companies and Pooling of Assets of Related Companies

11.1.1

Orders under s 271(1)(a) and (b)

If satisfied that it is just and equitable to do so, the court may order: that a company related1 to a company in liquidation pay the whole or part of any or all of the claims made in the liquidation (s 271(1)(a)). where two or more related companies are in liquidation, that the liquidations in respect of each company proceed together as if they were one company, to the extent that the court orders and subject to such terms and conditions as the court may impose (s 271(1)(b)). The court may make orders or give directions to facilitate the orders as it thinks fit.2 An applicant for a s 271(1)(b) order must give notice of the application to the liquidator and creditors of each related company in the liquidation, unless the court orders otherwise.3 [page 174]

11.1.2

Applicable principles: “just and equitable”

The question of what is just and equitable depends upon the circumstances of the

individual case. However, s 272(1) requires that the court, in deciding whether to make a s 271(1)(a) order that a related company contribute to the liquidation, have regard to: The extent to which the related company took part in the management of the company in liquidation. The conduct of the related company towards the creditors of the company in liquidation. Post-liquidation conduct of a related company, that directly or indirectly affects the creditors of the company being liquidated, has been taken into account in considering whether it is just and equitable that an order be made under the equivalent provision in the unamended 1955 Act.4 The extent to which the circumstances that gave rise to the liquidation of the company are attributable to the actions of the related company. Such other matters as the court thinks fit. Section 272(2) requires that the court, in deciding whether to make a s 271(1)(b) order that companies in liquidation be treated as one, must have regard to the following: The extent to which any of the companies took part in the management of any of the other companies. “Taking part in the management” has quantitative and qualitative elements.5 Mere participation of a holding company in the management of a subsidiary will not of itself justify a pooling order. “If the holding company uses its authority to cause the subsidiary to trade while insolvent, that fact is obviously relevant to a pooling application. A fortiori when the subsidiary is a slave of the holding company, dependent on the health of the holding company for its own survival.”6 The conduct of any of the companies towards the creditors of any of the other companies. This consideration overlaps with the last. If the holding company removes funding which would permit the subsidiary to survive independently of it, or causes or permits the subsidiary to trade while insolvent, it is putting at risk the subsidiary’s creditors, in breach of the solvency requirements.7 The extent to which the circumstances that gave rise to the liquidation of any of the companies are attributable to the actions of any of the other companies. Causing the subsidiary to trade while insolvent by providing it with bad debt is also relevant to this consideration.8

[page 175] The extent to which the businesses of the companies have been combined. Causing a subsidiary to grant credit to an insolvent holding company falls within this consideration.9 Such other matters as the court thinks fit. Matters in this category include the solvency provisions of the Act and benefits that have accrued to one company as a result of breaches of duty by the insolvent company’s directors (according the principle that a party will not be permitted to take advantage of its own wrong).10 Section 272(3) provides that reliance by the creditors of a company in liquidation on the fact that another company was related to it is not a ground for making an order. The following additional principles have also been identified by the courts: The fact that a pooling order would override the principle of separate personality and legal arrangements deliberately put in place, while relevant, is not sufficient to prevent the making of a pooling order.11 However, the court is not to use the s 271 discretion so as to dilute the principle of separate personality without solid reason grounded in the policies of the Act. Trading while insolvent is a sufficient reason.12 Creditors of a subsidiary cannot be entitled to recover on a pooling application more than they would have secured had the directors complied meticulously with their obligations.13

11.1.3

Cases where orders have been made

In Re Pacific Syndicates (NZ) Ltd (in liq), investors’ funds were pooled in one account, there was complex inter-company debt and it was impossible to divide the funds held by the liquidators between the companies.14 In Re Dalhoff and King Holdings Ltd15 and Naylor v Demic Construction Ltd (in liq),16 the companies had operated as one, with each taking part in the management of the other. The Court took into account that creditors would or might be better off if a pooling order was made. In Re Dalhoff, the Court considered that separating the companies would involve fortuitously preferring some creditors and shareholders over others and

“[j]ustice and equity are terms which would normally involve equality of [page 176] treatment taking into account all the surrounding circumstances against the background of operations of this group of companies”.17 Similarly, in Goodson v Wingate Two Ltd18 and Re McCullagh,19 there appears to have been a wholesale failure to differentiate in any way between separate corporate entities. In Re Dalhoff; Naylor and Shephard v Carm Holdings Ltd (in liq),20 creditors were confused as to which company they had contracted with.21 In Shephard, employees worked for various companies but were paid from whatever source had funds. There was inter-company borrowing, and intermingling of funds. On a day-to-day basis income was banked into a central bank account. The Court saw the difficulty in attempting to segregate the intermingled income derived from the separate entities from its proper expenditure itself as grounds for conducting the liquidations of these companies together. It considered that pooling the companies would enable the liquidators to act in the best interests of all creditors across the group and use the pooled resources of the various companies to obtain the highest return. In Goodson, the fact that the pragmatic and relatively narrow pooling orders sought would allow the administration of the liquidations to be brought to an end was a factor in the decision to grant the orders.22

11.2

Shareholders’ Liability

11.2.1

General

The Act provides for shareholders to contribute towards the debts and liabilities of a company in liquidation, and the costs of the liquidation in some circumstances. The issues previously raised by shareholders’ liability only arise in exceptional circumstances under the 1993 Act because it is now relatively uncommon for an obligation to pay calls or otherwise contribute to the assets of the company to be attached to a share.

[page 177]

11.2.2

Liability of present and former shareholders

Section 268 empowers the liquidator to make calls on shares, and if a shareholder or former shareholder is liable to the company, to enforce that liability. The original shareholder to whom a share was issued retains liability for unpaid consideration in respect of the issue of the share.23 Present shareholders are liable for any obligation to pay calls or other liability that is attached to a share.24 In order to prevent shareholders transferring their shares to avoid liability where they know insolvency is imminent, s 98 provides for former shareholders who ceased to be shareholders within a year before the commencement of the liquidation to be liable for amounts unpaid on their shares or liability provided for in the constitution, if the present shareholders cannot meet that liability. Under s 97(2), unless the constitution provides for unlimited liability, the liability of a present shareholder to the company (and therefore to contribute to payment of its debts in liquidation) is limited to: any amount unpaid on a share held by the shareholder; any liability expressly provided for in the constitution; any liability under ss 131–137 of the Act, that arises by reason of s 126(2) (deemed directorship); any liability to repay a distribution received by the shareholder to the extent that the distribution is recoverable under s 56; any liability for the payment of a call under s 100.

11.2.3

Liability incurred prior to cancellation or reduction of shareholder’s liability

Section 99 provides for liability of a shareholder or former shareholder to the company (and therefore liable to contribute to its debts in liquidation) in the following circumstances: where the shareholder was at any time liable to the company in respect of a share and that liability was cancelled or reduced by an alteration of the constitution, repurchase or redemption of the share, or amalgamation; or

reregistration of the company in accordance with the Companies Reregistration Act 1993; or a change of registration under s 30 of the 1955 Act; and the company is, at the commencement of liquidation, subject to liabilities incurred prior to any of the above matters; and the assets of the company are not sufficient to discharge those liabilities. The shareholder is liable for the lesser of the amount by which the liability in respect of that share was reduced, or the amount required to be contributed in order to discharge the liabilities. [page 178]

11.2.4

Effect of incorrect entry or failure to enter on register

If a person’s name is incorrectly entered on the share register it may be rectified under s 91, and any liability to contribute to the debts of the company will be avoided. The incorrect entry on the share register exposes directors to a fine under s 90 (and the company and directors to a claim for compensation under s 91) but does not affect the shareholder’s liability.25 Section 91 provides for the “person aggrieved” or a shareholder to apply to the court for rectification of the register and/or compensation for loss. It is not clear whether for the purposes of s 91 the liquidator will be a “person aggrieved”.26 In the bankruptcy context, case law indicates that a “person aggrieved” is someone who would benefit, even in a relatively minor degree, from the order sought.27 Where two persons appear on the share register as holding shares in their separate names, nevertheless it may be shown that the original arrangement was that the shares were to be held jointly, in which case such shareholders’ liability will also be determined on a joint basis.28

11.2.5

When is a liability for unpaid shares satisfied?

According to the authorities:29 A sum payable on a share held in a company limited by shares, in response to a call made while the company is a going concern, is effectually paid up, so as to protect the shareholder pro tanto from further liability on the share, if

that sum is paid in money or money’s worth.30 [page 179] A payment is an effective payment in money’s worth if the consideration given by way of payment is something which is bona fide regarded by the parties to the payment as fairly representing the sum which the payment is to discharge.31 A payment is not an effective payment in money’s worth if the consideration given by way of payment is “a mere blind or clearly colourable or illusory”. This will be a question of fact in each case.32

11.2.6

Shareholder’s ability to set-off calls due

The general rule at common law is that a shareholder cannot set off a debt owing to him or her by the company against calls due by him or her.33 This principle is reflected in s 310(4) which excludes from the set-off procedure amounts paid or due as consideration for the issue of a share and in satisfaction of calls. The shareholder must pay due calls and then prove as a creditor; otherwise he or she would obtain a preference over other creditors.34 This rule applies to calls made before35 or after36 the liquidation commenced, even where the shareholder has set up the defence of set-off in an action for a call but the company goes into liquidation before judgment.37 Unless an agreed set-off has been implemented before liquidation,38 it cannot be relied on after liquidation. It appears that the general rule does not apply where the shareholder is bankrupt as the provision for set-off in the Insolvency Act 2006 does not contain an exception equivalent to s 310(4).39 But it does apply where the company in liquidation is both a creditor and shareholder of another company in liquidation.40 [page 180]

11.2.7

No ability to agree that shareholder not liable for uncalled

capital A company cannot enter into an agreement with a shareholder, binding on a liquidator, that a shareholder shall not be liable to pay up uncalled capital.41 The only manner in which the liability on uncalled capital can be met is by money or money’s worth. The liability of a shareholder to pay the company the amount of his shares is a statutory liability. It is beyond the power of a company to release the shareholder from his obligation without payment in money or money’s worth.42

11.2.8

Liability of deceased shareholder’s personal representatives

The liability of personal representatives of a deceased shareholder is limited to the proportional amount available from the assets of the estate, after satisfaction of prior claims, for distribution among creditors of the estate; being assets which, at the time when any demand is made for the satisfaction of the liability, are held by that personal representative on the same trusts as apply to that share.43 When a joint holder of shares dies, all liability in respect of the shares (apart from any liability on a several obligation) accrues to the survivor, and the executors of the deceased shareholder are not liable as present shareholders.44 But it has been held that they can be liable as past shareholders.45 [page 181] If the personal representatives of the deceased shareholder distribute funds of the estate, without making proper provision for the liability of the estate to contribute to the company’s debts, they will be liable for the amount distributed,46 although they can probably recover their liability from the beneficiary who received the distribution.47

11.2.9

Liability in case of bankruptcy

Section 103 places the same limits on the liability of the assignee of the property of a bankrupt shareholder as are placed on the liability of the personal representatives of a deceased shareholder. So the assignee’s liability does not exceed the proportional amount available from the property of the estate of the bankrupt, after satisfaction of prior claims, for distribution among creditors of the estate; being property of the bankrupt which is vested in the Official

Assignee at the time when demand is made for the satisfaction of the liability. The Assignee may disclaim any liability under shares owned by the bankrupt in any company by disclaiming the shares as onerous property under s 117. But s 119 (which relates to the position of a person who suffers loss as result of disclaimer) and s 120 (which provides that the Assignee may be required to elect whether to disclaim) do not apply to a disclaimer of liability under shares.48 The Assignee loses the right to disclaim liability under shares if (a) the company or a person who has an interest in the shares has sent the Assignee a written notice requiring the Assignee to elect whether to disclaim liability under the shares; and (b) the notice specifies a date to disclaim that is not less than 20 working days after the Assignee has received the notice; and (c) the Assignee does not disclaim liability under the shares before the close of that date.49 Under s 127 of the Insolvency Act 2006,50 after disclaimer the Assignee may (subject to the rules of any other Act and to the constitution of the company) transfer the shares in question to any person who has an interest in them. If that person refuses to accept the transfer or if no person has an interest in them, the Assignee may transfer the shares to the bankrupt if the bankrupt consents, and in that case the bankrupt is entitled as against the Assignee to retain the shares and the proceeds if the bankrupt sells them. If [page 182] the Assignee does not transfer the shares to a person who has an interest in them or to the bankrupt, the board of the company may sell the shares or, with the court’s approval and whatever any other Act may say, cancel the shares as it thinks appropriate. The Assignee is a director of the company for the purposes of transferring, selling, or cancelling the shares under s 127 if immediately before adjudication the bankrupt was a director of the company, and the number of directors is less than the minimum number of directors required by law or the company’s constitution as a result of the bankrupt’s disqualification as a director. Whether liability under shares has been disclaimed or not, a company which has not been put into liquidation is entitled to prove only for the amount of unpaid calls on the bankrupt made before adjudication of bankruptcy and for the value of the calls to be made in the period of one year after adjudication. If the Assignee and the company cannot agree on the value of calls to be made, the

court must determine it.51 Section 271(4) provides that s 271 does not affect the provisions of ss 103 and 268 of the Act in the event that the company is put into liquidation. Because s 268 empowers the liquidator to make calls on shares and enforce the liability of shareholders and former shareholders, this provision suggests that the liquidator is not limited to calls made within a year of adjudication. As discussed above at para 11.2.6, although a shareholder’s right of setoff as against the liquidator is limited by s 310(4), it appears that the debts due to a bankrupt shareholder who is also a creditor of the company must be set off against calls as a result of the operation of the insolvency legislation. Schedule 6, para (i) provides for the liquidator’s power to prove, rank, and claim in the bankruptcy or insolvency of a shareholder for any balance against that person’s estate, and to receive dividends in the bankruptcy or insolvency, as a separate debt due from the bankrupt or insolvent, and rateably with the other separate creditors. A bankrupt’s shares will not by reason of the proof in the bankruptcy be treated as fully paid shares for the purpose of the distribution of the surplus assets. Although proof is payment in the sense that it deprives the creditor of any other remedy against the debtor or the debtor’s estate, it is not treated as payment so that the company is to be treated as having received, in cash, a portion of its capital which it did not actually receive.52

11.2.10 Contract for subscription can no longer be rescinded on commencement of liquidation Once a liquidation intervenes, a registered shareholder who has acquired his or her shares under a voidable contract can no longer rescind that contract. If the shareholder has not taken sufficient steps before the liquidation to set the contract aside, it is too late, because he or she is a shareholder of the company [page 183] at the date of the liquidation and the creditors have accordingly obtained, in effect, crystallised rights against him or her.53 The position would be otherwise if the contract of acquisition were void from the beginning, as then the registered shareholder would never have become a

shareholder.54

11.3

Liability of Directors in a Liquidation

11.3.1

Power of court to require directors to repay money or return property

11.3.1.1 Nature of liability Section 301 confers a power on the court in the exercise of its judgement, if it thinks proper to do so, to impose personal liability without limitation on an officer of a company for all or any part of its debts.55 Directors may be liable under s 301 if the court finds that they have misapplied, retained, or become liable or accountable for money or property of the company, or been guilty of negligence, default, or breach of duty or trust in relation to the company. The courts have treated s 301, not as creating new cause of action, but as a procedural mechanism for bringing a claim by a liquidator to enforce claims which could have been brought at common law or in equity, and statutory claims such as the s 135 duty.56 Whether or not, at a particular point in time, directors are likely to breach their duties (under ss 135 and 136 in particular) will depend on the financial position of the company. If the company’s financial position deteriorates significantly so that the position of the creditors becomes considerably more risky, the directors may need to pay more attention to the position of the [page 184] creditors. That need becomes most pressing where a company is insolvent, or near to insolvency.57 11.3.1.2 Parties who can bring a s 301 action Section 301 of the Act contemplates the possibility of actions being brought by a creditor or shareholder, as well as the liquidator.58 It may be appropriate to seek to stay proceedings other than those brought by the liquidator on the basis that

the same relief is sought,59 or consolidate the proceedings. 11.3.1.3 Remedies under s 301 Section 301 empowers the court to inquire into the conduct of the director, and order the director to repay or restore money or property (together with interest) or contribute such sum to the assets of the company by way of compensation as the court thinks just, or order payment or transfer of property (together with interest) to an applicant creditor. Claims brought pursuant to s 301 are to be approached in two stages. First, the court should consider whether there has been a breach of duty. Once a breach of duty is established, the question is whether and to what extent directors should be required to contribute to the assets of the company.60 The standard approach has been to begin by looking to the deterioration in the company’s financial position between the date inadequate corporate governance became evident (the “breach” date) and the date of liquidation. Once that figure has been ascertained, the extent to which loss has been caused by the trading, and the overall culpability61 and duration of the trading are three factors distinctly relevant to the exercise of the court’s discretion.62 The jurisdiction to order recompense is of an equitable character. The courts approach claims of this character in a relatively “broad-brush” way,63 [page 185] which reflects the generalised nature of a discretionary power under s 301 to do what is just and fair; that is, to view the claim broadly once jurisdiction is established and the qualifying elements of causation, culpability and duration of trading are considered.64 The conceptual basis for taking into account a director’s means has been described as problematic by the courts. However, circumstances might possibly arise where a court, when fixing a “just” compensation payment, may conclude that some allowance should be made in favour of a negligent director who has suffered a significant personal financial loss on a company’s failure as a result of the misconduct of a fellow director.65 Failings of others have also been taken into account.66 How badly unsecured creditors were affected by the activities of the directors, and the extent to which they had legitimate claims, are also

relevant to the question of remedies.67 A director may be liable under s 301 to contribute to a company’s losses to the extent those losses arose due to damages which are claimed under s 307.68 The language of s 301 naturally encompasses restitutionary claims (including a claim for an account of profits). It follows that relief under s 301(1)(b) may be calculated on a restitutionary and not just a compensatory basis.69 The reference in s 301(1)(b)(ii) to a contribution by the director by way of compensation means that such a contribution has to be equated with what was lost.70 The type of relief that can be granted is designed to restore the company to the position it would have been in had the relevant breach not occurred. The underlying idea is to retrieve all assets that would have been available for distribution to creditors, had they not been removed from the pool of assets. [page 186] As a result, a claim under s 301 for misapplication of company funds would ordinarily result in restoration of those funds to company assets for distribution among all creditors. However, the court has exercised its discretion to award any monies for which judgment is entered to be paid to the creditor rather than the liquidator, particularly when the liquidator takes no steps.71 In Löwer v Traveller, the Court of Appeal considered that the deterrent purpose of the provision is served in cases involving a high degree of culpability by orders which are punitive as well as compensatory.72 Under s 16 of the Limitation Act 2010, the start date of the primary and longstop periods of a money claim under s 301 is the date in which the liquidator of the company was appointed.

11.3.2

Liability of directors to creditors

In Kings Wharf Coldstore Ltd, 73 the High Court accepted that a director does not by reason of his or her position owe any duty to creditors of the company and discussed the cases in which it has been suggested that such a duty may arise when the company is insolvent. Nicholson v Permakraft 74 was a liquidator’s action for breach of duty by directors in distributing a capital profit to shareholders. In that case Cooke J

observed: In my opinion, a payment made to the prejudice of current or continuing creditors when a likelihood of loss to them ought to have been known is capable of constituting misfeasance by the directors; and they may be made liable for it in an action of the present kind. Alternatively an application may be made under s 321 of the Companies Act, which in the substituted form enacted in 1980 extends to ‘any negligence, default, or breach of duty or trust in relation to the company’.

In Winkworth v Edward Baron Development Ltd,75 Lord Templeman held that the directors owe a duty to the company and its creditors to ensure that the company’s affairs are properly administered and that its property is not dissipated or exploited for the benefit of the directors themselves. [page 187] In Kings Wharf Coldstore Ltd the High Court held that it is clear from the Companies Act 1993 that such a duty is not owed. The Law Commission’s 1989 Report Company Law Reform and Restatement recommended that a duty not to take unreasonable risks of breaching the solvency test should be owed to the company, not to the creditors, on the basis that to provide creditors with such a remedy would be to undermine the statutory regime for liquidations. This was reflected in the Draft Companies Bill, which provided that the duty to comply with the solvency test was owed solely to the company. That policy is reflected in the Act. Reckless trading involves injury to creditors but the duty in s 135 is owed to the company under s 169(3). In equity the company means the shareholders as a whole, but in law it is an entity separate from them, and it is that entity to which the legal duty in s 135 is owed. As a practical matter, a duty to the company is not likely to be enforced until creditors have realised a loss and the company is under the control of a liquidator or receiver.76

11.3.3

Liability if proper accounting records not kept

Section 300 provides for the consequences of failing to keep proper records where the company is in liquidation. The court can declare that a director or former director is personally responsible, without limitation of liability, for all or any part of the company’s debts and liabilities if it considers that the failure has contributed to the company’s inability to pay its debts, has resulted in substantial uncertainty as to the assets and liabilities77 of the company, has substantially impeded the orderly liquidation, or for any other reason it is proper to make such a declaration.

The underlying purpose of s 300 is the same as that of s 301: if directors have breached their duties, the court is empowered to make declarations for the benefit of affected creditors.78 In Mason v Lewis,79 the Court of Appeal observed that s 300: … works in tandem with s 135: a director cannot be heard to say ‘I did not realise we were in such a pickle, because we did not have any, or adequate books of account.’ It is fundamental that such books must be kept, and the directors must see to it that they are kept.

A defence is provided for in s 300(2): no declaration must be made if the court considers that the director took all reasonable steps to secure compliance by the company and had reasonable grounds to believe and did believe that a [page 188] competent and reliable person was charged with the duty of complying with the record-keeping obligations and was in a position to discharge that duty. In Mason v Lewis the Court acknowledged that in complex situations the adequacy of financial accounts may be a real issue, and there may be issues as to how far a director was misled, but found in that case that the s 300(2) defence was not made out because the directors knew that no adequate system was in place and they themselves were not getting any accounts.80 ____________________ 1.

For the definition of “related companies”, see s 2(3); Jordan v First City Trust No 2 Ltd (in liq) HC Auckland CIV-2008-404-176, 11 April 2011; Re McCullagh HC Auckland CIV-2008-404-3417, 14 July 2008.

2.

Companies Act 1993, s 271(2).

3.

Companies Act 1993, s 271A. See s 271A(3) for requirements of content of notice.

4.

Rea v Barker (1988) 4 NZCLC 64,312 at 64,316; Re Dalhoff and King Holdings Ltd (in liq) [1991] 2 NZLR 296, (1991) 5 NZCLC 66,959.

5.

Mountfort v Tasman Pacific Airlines of NZ Ltd [2006] 1 NZLR 104 at [84].

6.

Mountfort v Tasman Pacific Airlines of NZ Ltd [2006] 1 NZLR 104 at [86]–[87].

7.

Mountfort v Tasman Pacific Airlines of NZ Ltd [2006] 1 NZLR 104 at [89].

8.

Mountfort v Tasman Pacific Airlines of NZ Ltd [2006] 1 NZLR 104 at [91].

9.

Mountfort v Tasman Pacific Airlines of NZ Ltd [2006] 1 NZLR 104 at [92].

10.

Mountfort v Tasman Pacific Airlines of NZ Ltd [2006] 1 NZLR 104 at [94].

11.

Jenkins v Surecall Ltd (in liq) HC Dunedin CIV-2006-412-939, 28 March 2007 at [15]–[16].

12.

Mountfort v Tasman Pacific Airlines of NZ Ltd [2006] 1 NZLR 104.

13.

Mountfort v Tasman Pacific Airlines of NZ Ltd [2006] 1 NZLR 104 at [28].

14.

Re Pacific Syndicates (NZ) Ltd (in liq) (1989) 4 NZCLC 64,757 at 64, 767–64,768.

15.

Re Dalhoff and King Holdings Ltd (in liq) [1991] 2 NZLR 296, (1991) 5 NZCLC 66,959.

16.

Naylor v Demic Construction Ltd (in liq) HC Palmerston North CIV-2006-454949, 29 January 2007 at [11].

17.

Cited with approval in Jenkins v Surecall Ltd (in liq) HC Dunedin CIV-2006412-939, 28 March 2007 at [18].

18.

Goodson v Wingate Two Ltd HC Wellington CIV-2008-485-1942, 11 February 2010.

19.

Re McCullagh HC Auckland CIV-2008-404-3417, 14 July 2008.

20.

Shephard v Carm Holdings Ltd (in liq) HC Wellington CIV-2009-485-1332, 16 September 2009.

21.

Compare Jordan v First City Trust No 2 Ltd (in liq) HC Auckland CIV-2008404-176, 11 April 2011 where the business of each of the companies, or a substantial part of it, was readily identifiable.

22.

See also Re Pacific Syndicates (NZ) Ltd (in liq) (1989) 4 NZCLC 64,757 where allocating any final dividend pro rata between all creditors of both companies would allow the liquidation to be brought to an end without further expenditure on accountants and lawyers.

23.

Companies Act 1993, s 100(2).

24.

Companies Act 1993, s 100(1).

25.

Official Assignee v Walker [1995] 1 NZLR 652, (1995) 7 NZCLC 260,640 citing Re London Hamburg & Continental Exchange Bank, Evans’s Case (1867) 2 Ch App 427; Re Esparto Trading Co (1879) 12 Ch D 191. See also Re JN2 Ltd [1977] 3 All ER 1103 at 1108. See [13.22] of Morison’s Company Law (looseleaf ed, LexisNexis) for discussion of rectification of register.

26.

Re Sly, Spink & Co [1911] 2 Ch 430 involved a successful application by the company in liquidation for rectification of the register. Liquidators successfully applied for rectification of the register in Re Imperial Mercantile Credit Association, Payne’s Case (1869) LR 9 Eq 223 (where registration of a transfer had been procured fraudulently) and in Re Cheshire Banking Co, Duff’s Executors’ Case (1886) 32 Ch D 301. In Re Joint Stock Discount Co, Sichell’s Case (1867) 3 Ch App 119 the liquidator was not considered to have sufficient standing to make an application where a transfer of shares had not been registered owing to a default by the company. The Court considered that he or she could not make the application as representative of the company because it would not be appropriate to rectify the register in circumstances where the rectification is required because of the culpable delay of the company in registering transfers, and where there had been a change in the affairs of the company to the prejudice of the shareholder.

27.

Khan v Official Assignee HC Auckland HC133/95, 5 February 1996.

28.

Re Matheson Bros & Co Ltd, ex parte Matheson (1885) NZLR 3, SC 367.

29.

Official Assignee v Walker [1995] 1 NZLR 652, (1995) 7 NZCLC 260,640 citing Re White Star Line Ltd [1938] Ch 458 at 476 and Re BA Russell Ltd (1980) 1 BCR 246.

30.

Re White Star Line Ltd [1938] Ch 458 at 476.

31.

Official Assignee v Walker [1995] 1 NZLR 652 at 655; Re White Star Line Ltd [1938] Ch 458 at 476.

32.

Re White Star Line Ltd [1938] Ch 458 at 476.

33.

Re Julie Warner Boutiques Ltd (in liq) (1984) 2 NZCLC 99,254; Re Matheson Bros & Co Ltd, ex parte Matheson (1885) NZLR 3, SC 323 citing Re Overend, Gurney & Co, Grissell’s Case (1866) 1 Ch App 528; Re Auriferous Properties Ltd [1898] 1 Ch 691 at 696.

34.

Official Assignee v Walker [1995] 1 NZLR 652, (1995) 7 NZCLC 260,640; R Harding & Co Ltd (in liq) v Hamilton [1929] NZLR 338; Re Overend Gurney & Co, Grissell’s Case (1866) 1 Ch App 528; Re Paraguassu Steam Tramroad Co, Black & Co’s Case (1872) 8 Ch App 254.

35.

Re Breech-Loading Armoury Co, Calisher’s Case (1868) LR 5 Eq 214; Re Stranton Iron & Steel Co, Barnett’s Case (1875) LR 19 Eq 449.

36.

Re Overend, Gurney & Co, Grissell’s Case (1866) 1 Ch App 528; Re White Star Line Ltd [1938] Ch 458; Ramsay v Jacobs (1988) 6 ACLC 121.

37.

Re Hiram Maxim Lamp Co [1903] 1 Ch 70: two distinct and separate debts remain until judgment.

38.

Harding & Co Ltd v Hamilton [1929] NZLR 338 at 349 (CA).

39.

Insolvency Act 2006, s 254 (previously Insolvency Act 1967, s 93); Re Duckworth (1867) 2 Ch App 578; Re Auriferous Properties Ltd [1898] 1 Ch 691 at 697; Re Julie Warner Boutiques Ltd (in liq) (1984) 2 NZCLC 99,254.

40.

Re Auriferous Properties Ltd [1898] 1 Ch 691; Re Hattons Confectionery Co Ltd (in liq) [1936] NZLR 802.

41.

Wijnstok v Mcdonald (1997) 8 NZCLC 261,392 citing Muir v City of Glasgow Bank (1879) 4 App Cas 337, Lord Penzance at 372; Re Slutzkin Pty Ltd [1932] VLR 229, MacFarlane J at 235; Woodgers and Calthorpe Ltd v Bowring (1935) 35 NSW SR 483, Jordan CJ at 484 and 485.

42.

Official Assignee and Romco Corp Ltd (in liq) v Walker [1995] 1 NZLR 652 at 656 and 668.

43.

Companies Act 1993, s 102; compare 1955 Act s 225, which was not clear as to whether the liability of the personal representative was so limited. A deceased member of the company remains a member of the company for the purposes of the constitution, so long as his name remains on the register of members, without notice to the company of his death: New Zealand Gold Extraction Co (NewberyVautin Process) v Peacock [1894] 1 QB 622 at 632. Section 93 allows the personal representative of a deceased person whose name is registered as the holder of a share to be registered as the holder of that share as personal representative. The liquidator is entitled to prove against the estate of a deceased insolvent shareholder for the estimated value of his liability, although no call has actually been made, and to have a proportionate share of the funds set aside to meet it: Re Muggeridge (1870) LR 10, Eq 443; and see the Insolvency Act 2006, Part 6 as to the administration of the estates of deceased bankrupts.

44.

Re Maria Anna and Steinbank Coal and Coke Co, Maxwell’s Case, Hill’s Case (1875) LR 20 Eq 585 at 598.

45.

Permanent Trustee Co of New South Wales Ltd v Palmer (1929) 42 CLR 277. In New Zealand this liability would be under s 98 if they ceased to be shareholders within a year before the commencement of the liquidation and present shareholders cannot meet the liability.

46.

Standard Insurance Ltd (in liq) v Sidey [1967] NZLR 86. See s 73 of the Trustee Act 1956 for the court’s power to relieve a trustee from personal liability.

47.

Public Trustee v Flower (1991) 13 NZTC 8,042, (1990) 15 TRNZ 97; Jervis v Wolferstan (1874) 18 Eq 18; Whittaker v Kershaw (1890) 45 Ch 320. See also Re Diplock, Ministry of Health v Simpson [1951] AC 251 as to a direct claim by the creditor against the legatee.

48.

Insolvency Act 2006, s 125 (previously Insolvency Act 1967, s 78(1)). The Assignee’s power to disclaim liability under shares is also discussed at [6.8] of Heath & Whale on Insolvency (looseleaf ed, LexisNexis).

49.

Insolvency Act 2006, s 126 (previously Insolvency Act 1967, s 78(3)).

50.

Previously Insolvency Act 1967, s 78(4).

51.

Insolvency Act 2006, ss 128 and 271 (previously Insolvency Act 1967, ss 78, 101(1)).

52.

Re West Coast Gold Fields Ltd, Rowe’s Trustee’s Claim [1906] 1 Ch 1.

53.

Coupe v Coupe Publishing [1981] 1 NZLR 275, (1981) 1 NZCLC 95-014 (CA) at 277. See also Re Lancashire Investments Ltd (in liq) HC Auckland M1880/89, 19 September 1995, upheld on appeal Daalman v Official Assignee CA238/95, 1 September 1997 at 9.

54.

Various authorities have recognised this distinction by holding that if there never was a contract between an applicant for removal from the list of contributories and the company, the applicant is entitled to be removed from the list, unless he or she has assented to being treated as a shareholder or has acquiesced or is estopped: Coupe v Coupe Publishing [1981] 1 NZLR 275, (1981) 1 NZCLC 95014 (CA) at 277, citing Oakes v Turqu (1867) LR 2 HL 325 at 346, 367, 375, unless the only “acquiescence” is delay which has not prejudiced the company: Re New Zealand Dairy Farmers’ Cooperative Co Ltd, Taiaroa’s Case (1897) 16 NZLR 78.

55.

Löwer v Traveller [2005] 3 NZLR 479 at [78].

56.

Arataki Properties Ltd v Craig [1986] 2 NZLR 294 (CA) at 297, 299, 301; Benton v Priore [2003] 1 NZLR 564 at [40]–[47]; Kings Wharf Coldstore Ltd (in rec & in liq) v Wilson (2005) 2 NZCCLR 1042 at [110].

57.

Nicholson v Permakraft (NZ) Ltd [1985] 1 NZLR 242 at 249–250 (adopted by both the House of Lords in Brady v Brady [1989] AC 755 at 758 and the High Court of Australia in Spies v R (2000) 201 CLR 603 at 636); Re Condrens Parking Ltd (in rec & in liq), Jordan v O’Sullivan HC Wellington CIV-2004485-2611, 13 May 2008 at [34] and [69]. See also Mountfort v Tasman Pacific Airlines [2006] 1 NZLR 104 at [19]–[21] and [23].

58.

Companies Act 1993, s 301(1); Benton v Priore [2003] 1 NZLR 564 at [52]. Cases which deal with the approach to be adopted on an application by a creditor are Morphitis v Bernasconi and others [2003] 1 Ch 552 at 576 and Re Gerald Cooper Chemicals Ltd [1978] 1 Ch 262 at 871.

59.

Benton v Priore [2003] 1 NZLR 564 at [54].

60.

Mason v Lewis [2006] 3 NZLR 225 (CA) at [55], Peace and Glory Society Ltd (in liq) v Samsa (2009) 10 NZCLC 264,603 (CA) at [48].

61.

For discussion of culpability see Goatlands Ltd (in liq) v Borrell (2006) 3 NZCCLR 726, (2007) 23 NZTC 21,107 at [128]–[133]; Löwer v Traveller [2005] 3 NZLR 479 at [83].

62.

Mason v Lewis [2006] 3 NZLR 225 at [109] and [120]; Lewis v Mason (2009) 10 NZCLC 264,545 at [60]; Re Condrens Parking Ltd (in rec & in liq), Jordan v O’Sullivan HC Wellington CIV-2004-4852611, 13 May 2008 at [70]; Goatlands Ltd (in liq) v Borrell (2007) 23 NZTC 21,107 at [121]–[133].

63.

Mason v Lewis [2006] 3 NZLR 225 at [118].

64.

FXHT Fund Managers Ltd (in liq) v Oberholster [2010] NZCA 197 at [24].

65.

FXHT Fund Managers Ltd (in liq) v Oberholster [2010] NZCA 197 at [41]. See Mason v Lewis HC Auckland CIV-2003-404-936, 1 October 2008 at [63], [104]–[106] (reversed on appeal but not on this point); Re Cellar House Ltd (in liq) HC Nelson CP13/00, 18 March 2004 at [236]. But in Re Wait Investments (in liq) [1997] 3 NZLR 96 Barker J considered that there is no mandate for the court to reduce the amount because the consequences for the individual may be drastic. See also FXHT Fund Managers Ltd (in liq) v Oberholster (2009) 10 NZCLC 264,562 at [122].

66.

Mason v Lewis HC Auckland CIV-2003-404-936, 1 October 2008 at [63], [96]–[103] (reversed on appeal but not on this point); Re Cellar House Ltd (in liq) HC Nelson CP13/00, 18 March 2004 and Re South Pacific Shipping (2004) 2 NZCCLR 8, (2004) 9 NZCLC 263,570 at [235].

67.

Mason v Lewis [2006] 3 NZLR 225 at [98].

68.

Re Condrens Parking Ltd (in rec & in liq), Jordan v O’Sullivan HC Wellington CIV-2004-485-2611, 13 May 2008 at [280].

69.

Robb v Sojourner [2008] 1 NZLR 751 at [53] referring to Charter plc v City Index Ltd [2007] 1 WLR 26 (Ch). In City Index the defendant’s gain – for which restitutionary relief was sought – was equivalent to the plaintiff’s loss, something which is not always the case.

70.

Peace and Glory Society (in liq) v Samsa (2009) 10 NZCLC 264,603 (CA) at [75].

71.

Sanders v Flay (2005) 9 NZCLC 263,906; Marshall Futures Ltd v Marshall [1992] 1 NZLR 316 at 332–333 and Re Cyona Distributors Ltd [1967] Ch 889 (CA).

72.

Löwer v Traveller [2005] 3 NZLR 479 at [83]. The High Court in Mason v Lewis HC Auckland CIV2003-404-936, 1 October 2008 at [51] and [60] suggested that a punitive element to an award may be permissible in appropriate cases. This decision was reversed in Lewis v Mason (2009) 10 NZCLC 264,545. See in particular [89] which suggests that the Court may have been correct to exclude any punitive element from the amount payable.

73.

Kings Wharf Coldstore Ltd (in rec and in liq) v Wilson (2005) 2 NZCCLR 1042.

74.

Nicholson v Permakraft [1985] 1 NZLR 242 at 250. The action failed on the facts, as there were sound commercial reasons for the transaction and the company was solvent immediately following it. Richardson and Somers JJ accordingly declined to examine the question whether directors may acquire a duty to creditors when the company is, or may be, insolvent.

75.

Winkworth v Edward Baron Development Ltd [1986] 1 WLR 1512 at 1516.

76.

Kings Wharf Coldstore Ltd (in rec and in liq) v Wilson (2005) 2 NZCCLR 1042 at [101]–[103]. See also Levin v Ikiua [2010] 1 NZLR 400 at [142]. For a recent Court of Appeal decision on s 135 see Robb v Sojourner [2008] 1 NZLR 751 (CA).

77.

See Mason v Lewis HC Auckland CIV-2003-404-936, 1 October 2008 at [55]–[57] for discussion of the meaning of “other liabilities of the company”.

78.

Mason v Lewis HC Auckland CIV-2003-404-936, 1 October 2008 at [42]–[51]. There may also be a punitive element in appropriate cases: [51].

79.

Mason v Lewis [2006] 3 NZLR 225, (2006) 9 NZCLC 264,024 at [85].

80.

Mason v Lewis [2006] 3 NZLR 225, (2006) 9 NZCLC 264,024 at [86]–[88].

INDEX References are to paragraph numbers. Introduction numbers are referred to as Intro.

A Assets see also Distribution of assets; Property custody and control of .… 9.2 distribution of see Distribution of assets liquidator’s powers over .… 10.12.3 R v Whimp CA451-06, 2 April 2007 .… 10.12.3 ownership of in liquidation Commissioner of Revenue v Linter Textiles Australia Ltd (in liq) (2005) 215 ALR 1 .… 9.2 Paganini v Official Assignee CA308/98, 22 March 1999 .… 9.2 preservation pending .… 2.1 subject to a charge .… 7.4 voidable .… 10.21.8 surplus bankruptcy rules and .… 7.2 distribution of .… 7.13, 10.2 value of .… 2.1

C Claims see also Secured creditors; Set–off or counterclaim; Unsecured creditors admissible and non-admissible .… 7.8 breach of contract .… 7.8.3

contingent .… 7.8.2 creditors’ .… 4.1.1, 7.3.1, 7.3.3, 7.5 pari passu principle .… 7.5 directors’ breach of duty .… 11.3.1.3 employees’ .… 7.4.2, 7.4.3 enforceable and unenforceable .… 7.8.7 exclusion of .… 7.7 future .… 7.8.1 interest on .… 7.12 late .… 7.6 misapplied funds, restoration of, Löwer v Traveller [2005] 3 NZLR 479 .… 11.3.1.3 opportunistic advantage .… 7.10.5 preferential .… 4.1.1, 7.4, 7.4.1, 7.4.2, 7.4.3, 10.2 payment of .… 7.4.6 quantification of .… 7.10.4, 7.10.5, 7.11 review of .… 7.7 secured creditors’ .… 7.3.3, 7.4, 7.4.1, 7.4.5 time limitations .… 7.9 unsecured creditors’ .… 7.6 Companies see also Directors accounts receivable and inventory .… 7.4.5 alternative remedies to liquidation .… 4.2.4.3 compromise not approved .… 4.2.2 constitution of .… 9.11 creditors, continuing business relationship with .… 10.21.7 debts, inability to pay .… 1.2, 1.6, 1.7, 1.8, 4.2.2

principles considered by court .… 10.21.4 deed of company arrangement .… 3.1.1 directors see Directors documents and records of .… 10.12.1, 10.12.4 failure to comply with Act .… 4.2.3 interim liquidation of see Interim liquidation leases .… 7.8.6 disclaimed .… 10.18.7 legislation, generally .… Intro 2 liquidation of see Liquidation proceedings liquidator see Liquidator property see Property purchase money security interest .… 7.4.5 related companies .… 11.1.2 security interests, Buchler v Talbot [2004] UKHL 9 .… 7.4.5 solvency, proof of .… 4.2.2, 7.2 AMC Construction Ltd v Frews Construction Ltd (2008) 19 PRNZ 13 .… 1.7 taxation payable by .… 7.4.4 transactions while insolvent .… 9.1 voluntary administration of .… 9.13 winding up .… Intro 2 Counterclaim see Set–off or counterclaim Court’s powers and discretion creditors .… 3.2 creditors’ and shareholders’ meetings .… 6.1 examination of persons .… 10.13, 10.15, 10.16

interim liquidator .… 2.2 “just and equitable” grounds for .… 4.2.4.5 liquidation proceedings .… 4.2.1, 4.3, 4.4, 10.8.1, 10.8.3 High Court Rule 31.11 .… 8.1 liquidator .… 3.1.3, 3.3, 10.6, 10.9 liquidator, appointment of .… 3.1.3, 3.3, 10.6 Cassin v Richardson [2006] NZFLR 1068 .… 10.8.7 liquidator’s duties and functions .… 10.8.1, 10.9 liquidator’s remuneration .… 10.24 liquidator’s right to sue .… 10.20 personal liability of company directors .… 11.3 recovery for breach of duty .… 10.23 securities and charges, setting aside .… 10.22.3 setting aside a statutory demand .… 1.1, 1.6, 1.7 shareholders .… 3.2 vesting order for loss or damage .… 10.18.7 voidable transactions, recovery of .… 10.21.10 Creditors see also Claims; Creditors’ and shareholders’ meetings; Property; Secured creditors; Unsecured creditors bankruptcy rules and .… 7.2 claims see Claims company, continuing business relationship with .… 10.21.7 compromise with .… 4.2.2 contingent and prospective .… 4.1.2 costs incurred by .… 7.4.1 court’s discretion regarding .… 3.2 definition of .… 4.1.1, 7.3.2

directors’ liability to Kings Wharf Coldstore Ltd (in rec and in liq) v Wilson (2005) 2 NZCCLR 1042 .… 11.3.2 Law Commission report on .… 11.3.2 Nicholson v Permakraft [1985] 1 NZLR 242 .… 11.3.2 Winkworth v Edward Baron Development Ltd [1986] 1 WLR 1512 .… 11.3.2 documents, mode of delivery to .… 10.5.6 executions, distraints and attachments .… 9.7 City Construction Ltd, Re HC Auckland M2165-IM99, 13 April 2000 .… 9.7 exercise or enforcement of a right .… 9.6, 9.7 interests protected by liquidation .… 2.1, 3.2 liquidator appointment of .… 4.1.1 leave to challenge acts and decisions of .… 10.8.3 replacement of .… 10.6 meetings of see Creditors’ and shareholders’ meetings mutual credit and set-off .… 7.2 names of .… 7.2 opportunistic advantage .… 7.10.5 Trans Otway Ltd v Shephard [2006] 2 NZLR 289 .… 7.10.5 pari passu ranking .… 7.10.1 plaintiffs in liquidation proceedings .… 4.1.1 pooling application, recovery from .… 11.1.2 preferential claims .… 7.4 related companies .… 11.1.2 rights and powers of, .… 9.6

secured see Secured creditors setting aside application and .… 1.4, 1.7 Commissioner of Inland Revenue v Chester Trustee Services Ltd [2003] 1 NZLR 395 .… 1.7 sureties and .… 7.8.4 unsecured see Unsecured creditors views to be regarded .… 10.5.5 Creditors’ and shareholders’ meetings see also Creditors; Liquidation proceedings court intervention in .… 6.1 dispensing with .… 6.1 initial and subsequent .… 6.1, 6.2 liquidation committee, appointment of .… 6.3 liquidator, appointment of .… 6.1 liquidator, replacement of .… 3.1.3 liquidator’s duty to summon .… 10.5.5 procedures for .… 6.1, 10.5.5

D Debts see also Disputed debts; Preferential debts; Set–off or counterclaim amount of, specified .… 1.6 bills of exchange Brickwood & Co, Re; ex parte Waring (1815) 19 Ves 345, 34 ER 546 .… 7.8.5 Securitibank Ltd, Re (in liq) [1978] 1 NZLR 97 .… 7.8.5 construction contracts and Browns Real Estate Ltd v Grand Lakes Properties Ltd [2010] NZCA 425 .… 1.6 Laywood & Rees v Holmes Construction Wellington [2009] 2 NZLR 243

.… 1.6 contingent .… 7.8.2 creditors’ claims .… 4.1.1, 7.3.3 disputed see Disputed debts “due” requirement .… 1.1, 1.3 inability to pay .… 1.2, 1.6, 1.7, 1.8, 4.2.2, 7.2, 7.8.4 principles considered by court .… 10.21.4 non-liability for .… 1.5 preferential .… 7.4.3 present value of .… 7.8.1, 7.11 seizure of property as payment of .… 7.4.6 specified amount of .… 1.6 sureties and .… 7.8.4 third-party finance .… 7.4.6 Directors breach of duty court-ordered remedies .… 11.3.1.3 defence .… 11.3.3 Mason v Lewis [2006] 3 NZLR 225 .… 11.3.3 personal liability for .… 11.3.3 financial accounts, failure to keep, personal liability for .… 11.3.3 liability to creditors Kings Wharf Coldstore Ltd (in rec and in liq) v Wilson (2005) 2 NZCCLR 1042 .… 11.3.2 Law Commission report on .… 11.3.2 Nicholson v Permakraft [1985] 1 NZLR 242 .… 11.3.2 Winkworth v Edward Baron Development Ltd [1986] 1 WLR 1512 .… 11.3.2

liquidation, effect of .… 9.3 misapplied funds, restoration of Löwer v Traveller [2005] 3 NZLR 479 .… 11.3.1.3 personal liability of .… 11.3, 11.3.1.2 voidable transactions and .… 10.22 Disputed debts see also Debts; Preferential debts; Set–off or counterclaim amount specified in demand .… 1.6 consideration of, in liquidation proceedings .… 4.2.2 liquidation proceedings, stay of .… 1.5, 4.2.2, 8.1 statutory demands, setting aside .… 1.5, 1.7 Pioneer Insurance Co Ltd v White Heron Motor Lodge Ltd [2009] NZCCLR 14 (CA) .… 1.1 Distribution of assets see also Assets; Property creditors and .… 7.3.3 directions as to Kiwi International Airlines Ltd (in liq), Re Waller HC Auckland CIV2005-404-7051, 26 July 2007 .… 10.8.4 general order of .… 7.1 insolvent companies and .… Intro 1 liquidation proceedings and .… Intro 1 pari passu principle .… Intro 1, 7.5, 7.6 exceptions .… 7.5 preferential claims .… 7.4 rules of bankruptcy .… 7.2

I Interim liquidation see also Interim liquidator; Liquidation; Liquidator application for .… 2.1

effect of .… 2.1, 2.2 purpose of .… 2.1 Robert Bryce & Co Ltd v Chicken & Food Distributors Ltd (1990) 5 NZCLC 66,648 .… 2.1 Interim liquidator see also Interim liquidation; Liquidation; Liquidator appointment of .… 2.1 costs of .… 2.3 court limits on rights and powers of .… 2.2 requirement for Robert Bryce & Co Ltd v Chicken & Food Distributors Ltd (1990) 5 NZCLC 66,648 .… 2.1 rights and powers of .… 2.1 New Zealand Childflight Charitable Trust Inc, Re HC Auckland CIV2003-4044530, 21 August 2003 .… 2.2

L Liquidation see also Creditors’ and shareholders’ meetings; Interim liquidation; Interim liquidator; Liquidator; Liquidator’s duties and functions; Property accounts receivable .… 7.4.5 administration costs .… 7.4.1 liquidator’s power to enable .… 10.11 administrator, role of .… 3.1.3, 7.4.1 alternative remedies to .… 4.2.4.3 application for .… 1.3, 3.1.2–4.1.2, 4.1.3 adjournment of .… 4.4 opposition to .… 2.2 Commissioner of Inland Revenue v Roadmark Systems Ltd [1997] 3

NZLR 744 .… 4.3 assets see Assets bills of exchange Brickwood & Co, Re; ex parte Waring (1815) 19 Ves 345, 34 ER 546 .… 7.8.5 Securitibank Ltd, Re (in liq) [1978] 1 NZLR 97 .… 7.8.5 bodies corporate .… 5.3 World Vision of New Zealand Trust Board v Seal [2004] 1 NZLR 673 .… 5.3 charitable trusts .… 5.4 Peilua v Evangelical Samoan Wesleyan Methodist Church of Otahuhu Board (No 2) HC Auckland CIV-2006-404-2441, 16 November 2007. … 5.4 commencement record .… 3.1.4 committee .… 6.3, 7.4.1 company’s documents and records .… 10.12.4 court powers .… 4.3, 4.4 court powers and supervision .… 4.2.1, 10.8.1, 10.8.3 creditors’ claims see Claims Crown priority .… 7.4.4 debts, lien relating to .… 7.4.3 deed of company arrangement .… 3.1.1 directors, effect on .… 9.3 documents and records .… 10.12.1 documents and records of .… 3.3 employees’ claims see Claims essential services, supply of .… 10.19 funding arrangements .… 10.8.5

grounds for .… 4.2 incorporated societies .… 5.1, 5.2 Flett v JH Flett (1999) 8 NZCLC 261,893 .… 5.2 The Registrar of Incorporated Societies v The Hearing Association Whangarei Branch Inc HC Auckland CIV-2007-488-406, 25 October 2007 .… 5.2 insurance companies .… 7.8.2 notification of suspected offences .… 10.5.7 insurer .… 5.5 interim liquidator see Interim liquidator inventory of company .… 7.4.5 “just and equitable” grounds for .… 4.2.4, 4.2.4.1 generally .… 4.2.4.1 court determination of .… 4.2.4.5 Ebrahimi v Westbourne Galleries Ltd [1972] 2 All ER 492 .… 4.2.4.2, 4.2.4.4 Jenkins v Supscaf [2006] 3 NZLR 264 .… 4.2.4.5 World Vision of New Zealand Trust Board v Seal [2004] 1 NZLR 673 .… 4.2.4.4 leases assignment of .… 7.8.6 disclaimed .… 10.18.7 legal proceedings during .… 9.4.1, 9.4.4, 9.4.5, 9.6 exemptions .… 9.4.3 necessary circumstances .… 9.4.5 restrictions on .… 9.6 retrospective granting .… 9.4.5 section 247 .… 9.5

Commissioner of Inland Revenue v Compudigm International Ltd (2010) 24 NZTC 24,579 .… 9.4.3 Hedley v Albany Power Centre Ltd (in liq) [2005] 2 NZLR 196 .… 9.4.4 Vocalion (Foreign) Ltd, Re [1932] 2 Ch 196 .… 9.4.3 types of .… 9.4.2 Liquidation Surplus Account .… 7.14 liquidator see Liquidator mutuality requirement .… 7.10.4 object of .… 1.7 offences during .… 9.14 other entities .… 5.1 pooling order Dalhoff and King Holdings Ltd, Re (in liq) [1991] 2 NZLR 296 .… 11.1.2 Goodson v Wingate Two Ltd HC Wellington CIV-2008-485-1942, 11 February 2010 .… 11.1.2 McCullagh, Re HC Auckland CIV-2008-404-3417, 14 July 2008 .… 11.1.2 Pacific Syndicates (NZ) Ltd, Re (in liq) (1989) 4 NZCLC 64,757 .… 11.1.2 Shephard v Carm Holdings Ltd (in liq) HC Wellington CIV-2009-4851332, 16 September 2009 .… 11.1.2 preferential claims see Claims prejudiced shareholders and .… 3.1.2 property disclaimer .… 10.18 property subject to a charge .… 7.3.2 voidable .… 10.21.8 receiver, appointment of .… 7.4.5 related companies and, pooling order .… 11.1.2

security interests, Buchler v Talbot [2004] UKHL 9 .… 7.4.5 set-off provision .… 7.10.1 termination of, pre-conditions .… 4.1.1 transfer of shares .… 9.8 Liquidation proceedings see also Creditors’ and shareholders’ meetings; Interim liquidation; Interim liquidator; Liquidation; Liquidator; Liquidator’s duties and functions administration costs .… 7.4.1 bankruptcy, rules of .… 7.2 sureties and .… 7.8.4 breach of duty, recovery for .… 10.23 commencement .… 3.1.4, 9.1 effect of .… 9.1, 9.12 record of .… 3.1.4 completion of .… 8.3 directors, effect on .… 9.3 discretion of court .… 4.3 disputed debts, consideration of .… 4.2.2 documents and records of .… 8.3 examination of persons .… 10.13, 10.15 liquidation committee .… 6.3 views to be regarded .… 10.5.5 plaintiffs in .… 4.1.1 related companies see Related companies review of .… 7.7 rules of bankruptcy .… 7.2 stay of .… 1.5, 4.1.1, 4.2.2, 7.14 High Court Rule 31.11 .… 8.1

principles for consideration .… 8.1 AMC Construction Ltd v Frews Contracting Ltd (2008) 19 PRNZ 13 .… 8.1 termination of, pre-conditions .… 8.2 Liquidator see also Interim liquidation; Interim liquidator; Liquidation; Liquidation proceedings; Liquidator’s duties and functions acts or decisions challenges to .… 10.8.2, 10.8.3 directions, entitlement to seek .… 10.8.6 Waimate Investments Ltd (in liq) v O’Dea [2004] 2 NZLR 433 (CA) .… 10.8.7 appointment of .… 1.8, 3.1.1, 3.1.2, 3.1.3, 4.1.1, 6.1, 10.5.2 application for .… 4.1.1 defect or irregularity in .… 3.1.1 persons who may appoint .… 4.1 procedure for .… 3.1 Commissioner of Inland Revenue v Kecamaho Haulage Ltd (2008) 23 NZTC 21,889 .… 3.1.3 New Zealand Childflight Charitable Trust Inc, Re HC Auckland CIV2003-404-4530, 21 August 2003 .… 2.2 assets, title to .… 9.2 cessation of office .… 8.3 consent to appointment as .… 3.1.1, 3.2 court-appointed .… 3.1.3, 3.3 officer of the court .… 10.8.7 remuneration .… 10.24, 10.24.2 replacement of .… 10.6 court’s jurisdiction over .… 3.1.3, 3.3, 10.6, 10.9 criteria for appointment as .… 3.2

disposal of company’s property .… 10.11 documents and records of .… 3.3, 10.5.3, 10.5.4 duties and functions see Liquidator’s duties and functions essential services to be supplied to .… 10.19 fees and expenses .… 7.4.1, 7.4.5, 10.11 legal costs .… 10.25 voidable .… 10.10 Barleycorn Enterprises Ltd, Re [1970] 2 All ER 155 (CA) .… 7.4.5 Gwyndene Carpets Ltd, Re (in rec & liq) [1994] 2 NZLR 502 .… 7.4.5 information, right of access to .… 10.5.3, 10.5.4, 10.12, 10.12.2, 10.12.4 Carrow Holdings Ltd (in liq) v Sadiq HC Auckland CIV-2007-404-2855, 5 June 2008 .… 10.13 Cloverbay Ltd (Joint Administrators) v Bank of Credit & Commerce International SA [1991] Ch 90 .… 10.15 practical considerations .… 10.16 Rolls Razor Ltd, Re [1968] 3 All ER 698 .… 10.14 liquidator’s duties and functions, Official Assignee .… 10.2, 10.5.3, 10.24.2 negligence of .… 10.7 Downsview Nominees Ltd v First City Finance Ltd [1993] 1 NZLR 513 . … 10.7 officer of the court Cassin v Richardson [2006] NZFLR 1068 .… 10.8.7 Official Assignee, remuneration .… 10.24.2 order for costs against .… 10.11 persons prohibited from appointment as .… 3.2 powers and rights see also Liquidator’s duties and functions .… 10.10 bills of exchange .… 10.11 borrowing of money .… 10.11

carrying on a business .… 10.11 delegation of specific duties .… 10.11 legal proceedings, involvement in .… 10.11 onerous property, disclaimer of .… 10.18 shares, calls on .… 11.2.2 solicitor, appointment of .… 10.11 qualifications of .… 3.2 receivers and .… 10.12.4 record of appointment of, Rodewald v Aqua-Agriculture Farms Ltd [2002] 3 NZLR 501 .… 3.1.4 removal or resignation of .… 3.2, 3.3, 10.6, 10.9 remuneration .… 7.4.1, 10.10 generally .… 10.24 fixed by court .… 10.24.2 remuneration, assessment of .… 10.24.3 application, prospective .… 10.24.4 application, retrospective .… 10.24.5 Flynn v McCallum HC Tauranga CIV-2005-470-611, 17 December 2009 .… 10.24.3, 10.24.4, 10.24.5 information required by court .… 10.24.5 third-party application .… 10.24.6 Medforce Healthcare Services Ltd, Re (in liq) [2001] 3 NZLR 145 .… 10.24.3 replacement of .… 3.1.3 rights and powers generally .… 10.1 right to sue .… 10.20 trust administration .… 10.24.7

Liquidator’s duties and functions access to company’s documents and records .… 10.12.4 compliance with .… 8.3, 10.2, 10.9 court direction of .… 10.8.1 delegation of .… 10.11 documents and records of .… 10.5.3 duty of care in negligence .… 10.7 enforcement ordered by court .… 10.9 failure to comply .… 10.9 definition of .… 10.9 notice of .… 10.9 persistent .… 10.9 remedies for .… 10.9 Your Size Fashions Ltd, Re [1990] 3 NZLR 727 .… 10.2 fiduciary .… 10.3 good faith .… 10.4 impartiality .… 10.4 meetings to be held .… 10.5.5 modification of .… 8.3 notification of suspected offences .… 10.5.7 officer of the court Cassin v Richardson [2006] NZFLR 1068 .… 10.8.7 public notification of appointment .… 10.5.1 reporting requirements .… 10.5 skill and care .… 10.7

P Preferential debts see also Debts; Disputed debts

repayment of .… Intro 1 Property see also Assets; Distribution of assets disposal of by liquidator .… 10.11 distrainment of .… 7.4.6 liquidator’s powers over R v Whimp CA451-06, 2 April 2007 .… 10.12.3 property disclaimer generally .… 10.18.1 Celtic Extraction Ltd (in liq), Re, Bluestone Chemicals Ltd (in liq), Re [2001] Ch 475 (CA). .… 10.18.5 effect of .… 10.18.6 exclusion by legislation .… 10.18.5 limitations on .… 10.18.5 loss or damage .… 10.18.7 Mineral Resources Ltd, Re [1999] 1 All ER 746 .… 10.18.5 policy .… 10.18.2 property, meaning of .… 10.18.4 SSSL Realisations (2002) Ltd, Re [2004] EWHC 1760 (Ch) .… 10.18.4 unprofitable contract .… 10.18.3 secured creditors and .… 7.3.2, 7.3.3 seizure of .… 7.4.6 sold in an execution process .… 9.7 subject to a charge .… 7.3.1, 7.3.2, 9.12 voidable .… 10.21.8

R Related companies pooling of assets .… 11.1 recovery from

court orders .… 11.1.1 “just and equitable” grounds for .… 11.1.2

S Secured creditors generally .… 7.3.1 asset distribution and .… 7.3.3 claims see Claims options for .… 7.3, 7.3.3 property subject to a charge .… 9.12 proprietary rights .… 7.3.2, 9.1, 10.2 rights and duties of .… 7.3.3 Set-off or counterclaim see also Debts generally .… 7.10.1 construction contract debts Browns Real Estate Ltd v Grand Lakes Properties Ltd [2010] NZCA 425 .… 1.6 Laywood & Rees v Holmes Construction Wellington [2009] 2 NZLR 243 .… 1.6 debt, amount specified less than .… 1.6 debtor shareholders .… 7.13.1, 11.2.6 limitations on .… 7.10.1 mutuality requirement, Gye v McIntyre (1991) 171 CLR 609 (HCA) .… 7.10.3 pari passu rule and .… 7.10.1 Trans Otway Ltd v Shephard [2006] 2 NZLR 289 .… 7.10.2 requirements .… 7.10.1 shareholders, payments by .… 7.10.1

Setting aside a statutory demand see also Statutory demand amount specified in demand .… 1.6 appellant’s options .… 1.3 application for .… 1.3, 1.4 conditions for .… 1.3 court’s jurisdiction over .… 1.1, 1.6, 1.7 “cross-demand” .… 1.6 defects or irregularities .… 1.1, 1.3 disputed debts see Disputed debts failure in .… 1.7 grounds for .… 1.3, 1.7 insolvency exception, Commissioner of Inland Revenue v Chester Trustee Services Ltd [2003] 1 NZLR 395 .… 1.7 jurisdiction for .… 1.3 residual discretion for .… 1.8 solvency, proof of, AMC Construction Ltd v Frews Construction Ltd (2008) 19 PRNZ 13 .… 1.7 timeframes for .… 1.3, 1.4 unliquidated damages claim .… 1.6 Shareholders see also Creditors’ and shareholders’ meetings; Shares amounts paid or due .… 11.2.6 assets, rights to .… 7.13.1 bankrupt .… 7.13.1 liability of .… 11.2.9 court’s discretion regarding .… 3.2 debtor shareholders, Cherry v Boultbee (1839) 4 My & Cr 442, 41 ER 171 . … 7.13.1

deceased shareholder’s representatives, liability of .… 11.2.8 definition of .… 4.1.3 dividend declaration .… 7.13.3 documents, mode of delivery to .… 10.5.6 “entitled persons” .… 4.1.3 exercising a power .… 9.10 joint holders, liability of .… 11.2.4, 11.2.8 liability generally .… 11.2.1 enforcement by liquidator .… 10.17 limits of .… 11.2.2 present and former .… 11.2.2 reduced amount of share .… 11.2.3 shares jointly held .… 11.2.4 uncalled capital .… 11.2.7 Blaina Colliery Co Ltd, Re [1926] WN 30 .… 9.9 Oriental Commercial Bank, Barge’s Case, Re (1868) LR 5 Eq 420 .… 9.9 Sellers, Re (2003) 21 ACLC 1319 .… 9.9 liquidation application for .… 3.1.2 interests protected by .… 3.2 liquidator appointment of .… 3.1.1, 3.1.2, 3.1.3 leave to challenge acts and decisions of .… 10.8.3 Official Assignee, liability under shares .… 11.2.9 preferential rights of .… 7.13.1 Scottish Insurance Corp Ltd v Wilsons and Clyde Coal Co Ltd [1949] AC

462 (HL) .… 7.13.2 prejudiced .… 3.1.2 rights and powers of Blaina Colliery Co Ltd, Re [1926] WN 30 .… 9.9 Oriental Commercial Bank, Barge’s Case, Re (1868) LR 5 Eq 420 .… 9.9 Sellers, Re (2003) 21 ACLC 1319 .… 9.9 share register, rectification of errors .… 11.2.4 transfer of shares .… 9.8 unpaid shares .… 11.2.5 views to be regarded .… 10.5.5 voidable contract of acquisition .… 11.2.10 Shares see also Shareholders ownership disputes .… 4.1.3 Statutory demand see also Setting aside a statutory demand amount specified in .… 1.6, 1.7 construction contract debts Browns Real Estate Ltd v Grand Lakes Properties Ltd [2010] NZCA 425 .… 1.6 Laywood & Rees v Holmes Construction Wellington [2009] 2 NZLR 243 .… 1.6 creditors and .… 1.1, 4.1.1 criteria for .… 1.1 debt .… 1.1, 1.2, 1.6, 1.7 enforcement measures .… 1.6 payment requirement .… 1.1 presumption of inability to pay .… 1.2, 1.7 specified amount of .… 1.6 defects or irregularities .… 1.1, 1.3, 1.7

failure to comply with .… 4.2.2 failure to set aside .… 1.7 judicial approaches to Laywood & Rees v Holmes Construction Wellington [2009] 2 NZLR 243 (CA) .… 1.2 Link Electrosystems Ltd v GPC Electronics (New Zealand) Ltd (2007) 18 PRNZ 946 (CA) .… 1.2 Pioneer Insurance Co Ltd v White Heron Motor Lodge Ltd [2009] NZCCLR 14 (CA) .… 1.2 Silverpoint International Ltd v Wedding Earthmovers Ltd HC Auckland CIV-2007-404-104, 30 May 2007 .… 1.2 Volcanic Investments Ltd v Dempsey & Wood Civil Contractors Ltd (2004) 11 TCLR 256 .… 1.2 prescribed amount of .… 1.1 procedural requirements for .… 1.1 purpose of Pioneer Insurance Co Ltd v White Heron Motor Lodge Ltd [2009] NZCCLR 14 (CA) .… 1.2 service on company .… 1.1 setting aside see Setting aside a statutory demand solvency, proof of AMC Construction Ltd v Frews Construction Ltd (2008) 19 PRNZ 13 .… 1.7

U Unsecured creditors see also Claims; Creditors asset distribution and .… Intro 1 claims see Claims directors’ breach of duty and .… 11.3.1.3 pari passu principle .… 10.2

pari passu principle exception .… 7.5

V Voidable transactions .… 10.21.6 generally .… 10.21.1 charges .… 10.21.8 exceptions .… 10.21.8 directors and certain other persons .… 10.22.3 inadequate or excessive consideration .… 10.22.2 insolvent transactions .… 10.21.2 preferential effect Levin v Market Square Trust [2007] 3 NZLR 591 (CA) .… 10.21.5 proof by liquidator .… 10.21.5 specified period .… 10.21.6 Trans Otway Ltd v Shephard [2006] 2 NZLR 289 (SC) .… 10.21.5 recovery award of interest .… 10.21.10 directors’ contributions .… 10.22 orders of the court .… 10.21.10 third parties .… 10.21.1 transactions at undervalue .… 10.22.1 setting aside .… 10.21.9 transaction, defined .… 10.21.3 transactions at undervalue Kings Wharf Coldstore Ltd (in rec and in liq) v Wilson (2005) 2 NZCCLR 1042 .… 10.22.1