Application by Jackson (Forestlands)

[2018] NZHC 2447

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2018-404-1849 [2018] NZHC 2447

UNDER

Part 19 of the High Court Rules and sections

280 and 286 of the Companies Act 1993

IN THE MATTER OF

an application concerning FORESTLANDS N.Z. LIMITED

IN THE MATTER OF

an application by NEALE JACKSON and

GRANT ROBERT GRAHAM Applicants

Hearing:	31 August 2018
Appearances:	D T Broadmore and HCMS Snell for the Applicants C Matsis for Leaders Real Estate (1987) Limited (Creditor)
Judgment:	1 September 2018
Reasons:	18 September 2018

REASONS JUDGMENT OF MUIR J

This judgment was delivered by me on Tuesday 18 September 2018 at 4.30 pm pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar  Date:………………………….

Counsel/Solicitors:

Buddle Findlay, Auckland

Gault Mitchell Law, Wellington

Re an application by Jackson and Graham (Forestlands) Reasons [2018] NZHC 2447 [1 September 2018]

Introduction

[1]      On 31 August 2018 I heard argument from the applicants, Neale Jackson and

Grant Graham, who filed applications:

(a)seeking leave to commence proceedings by way of originating application; and

(b)      permitting  them  to  act  as  liquidators  of  Forestlands  N.Z.  Limited

(FNZ).

[2]      In my results judgment of 3 September 2018, I granted both applications.

[3]      My reasons now follow.

Background

[4]      The applicants are partners in the Auckland office of KordaMentha (a specialist corporate advisory and “turnaround” firm).   They seek leave to be appointed as liquidators of FNZ under ss 280 and 286(4) of the Companies Act 1993 (the Act). Their application is necessary because;

(a)KordaMentha has been engaged on two prior occasions to provide professional services to FNZ’s sole director, Mr Kearns;

(b)      KordaMentha has a continuing business relationship with ANZ Bank

(which has a first ranking security interest registered against FNZ); and

(c)the applicants anticipate being appointed as liquidators of several other “Forestland entities” which are likely to be in a creditor relationship to FNZ.

[5]      There are 18 such entities, being Forestlands (No’s 2-12 and 14-20) Limited respectively.  I will likewise refer to them as the Forestland entities.  The Financial Markets Authority (FMA) has applied to the Nelson High Court for Messrs Graham and Jackson to be appointed as liquidators to these companies; and on 22 August 2018,

a like application under s 280 and 286(4) was made in respect of such proposed appointments.

[6]      These entities were incorporated between 1999 and 2011 to own and develop forests on various lands.  The sole director of each of these companies is likewise

Mr Kearns.

[7]      Each Forestland entity issued a prospectus for forestry shares which generally entitled subscribers to receive a proportionate share of dividends declared on the harvest of each forest and any surplus assets on a winding up arising from the sale of the underlying land.

[8]      FNZ was involved in the marketing and promotion of the forestry shares for each Forestlands entity.

[9]      Following the issuing of the prospectus for each entity, members of the public subscribed for shares in them and the entities subsequently purchased land and grew forests.

[10]     On or about 22 June 2015, the entities entered into a conditional agreement for sale and purchase with Wairarapa Estate Limited to sell their lands and forests for

$21,400,000.  In June 2016, the agreement for sale and purchase was varied and the selling price increased to $23,500,000. The sale and purchase was settled on or about

19 October 2016, with various deductions made from the sale proceeds. The balance of the proceeds of sale are currently being held in the trust account of Anthony Harper, the solicitors for Mr Kearns and the Forestlands entities, subject to undertakings that those funds not be disbursed without the consent of the FMA or an order of the Court.

[11]     The shareholders of FNZ have now executed a special resolution to put the company into liquidation.  They propose to appoint Messrs Jackson and Graham as liquidators.   That resolution has been held in escrow by the solicitors for the shareholders, pending the outcome of this application.

[12]     Both applications – for leave to commence by way of originating application and for orders permitting the appointment – were filed on a without notice basis. Before a decision was made on the application, however, a memorandum was received from counsel  for  Leader  Real  Estate  (1987)  Limited  (Leaders).    Leaders  has  a judgment against FNZ for $293,750, in respect of which it has served a statutory demand.  In response, FNZ sought to set aside the statutory demand and, in its notice of opposition, Leaders invoked s 291(1)(b) of the Act seeking not only dismissal of the application but an order forthwith placing the company into liquidation.

[13]     The application to set aside the statutory demand and the cross-application by

Leaders were scheduled to be heard in the Nelson High Court on 4 September 2018.

[14]     I  note  at  this  stage  that  the  cross-application  does  not  qualify  as  an “application” for the purposes of s 241AA of the Companies Act 1993, as HCR31.3 provides that any application to place a company into liquidation must be made by statement of claim.

[15]     In the result, the restrictions in s 241AA(2) – stipulating the appointment of a liquidator by shareholders must occur within 10 working days after service of the application for appointment – do not apply.

[16]     Nevertheless, in light of the memorandum from Leaders, Katz J declined to deal with the applications on a without notice basis and listed the matter for mention in the Duty Judge List at 10.00 am on Monday, 3 September 2018. She further directed that the applications be served on Leaders.

[17]     I was the assigned Duty Judge for 3 September 2018.  On receipt of Katz J’s minute, I convened two telephone conferences with counsel for the applicants and Leaders on the afternoon of 31 August 2018.  During the second of these, counsel for Leaders advised that his client did not oppose the orders sought on the basis that Leaders (as with all other creditors of FNZ) retained the right to apply to the Court within ten working days to set aside any appointment of the applicants as liquidators.

[18]     On Monday, 3 September 2018 at 1.00 pm, I issued a results judgment granting the applications.

The law

[19]     The requirement for the applications arises out of the ss 280(1)(b), 280(1)(ca)

and 280(1)(cb) of the Ac.   Those sections stipulate that, unless the court orders otherwise, none of the following persons may be appointed or act as a liquidator of a company:

(b)      a creditor of the company in liquidation;

…

(cb)a person who has, or whose firm has, within the 2 years immediately before the commencement of the liquidation, provided professional services to the company, unless, within 20 working days before the appointment of the liquidator, the board of the company resolves that the company will, on the appointment of the liquidator, be able to pay its debts and a copy of the resolution is delivered to the Registrar for registration:

(cb)a person who has, or whose firm has, within the 2 years immediately before the commencement of the liquidation, had a continuing business relationship (other than through the provision of banking or financial services) with the company, its majority shareholder, any of its directors, or any of its secured creditors, unless, within 20 working days before the appointment of the liquidator, the board of the company resolves that the company will, on the appointment of the liquidator, be able to pay its debts and a copy of the resolution is delivered to the Registrar for registration.

…

[20]     However, s 286(4) provides that the Court may, notwithstanding a person’s disqualification under s 280, still order that the person may be appointed to act as a liquidator.   Since the introduction of s 280, the Courts have considered numerous applications under the section.

[21]     I accept counsel for the applicants’ summary of the key principles in terms:

(a)it is appropriate to make such an application as an originating application under Part 19 of the High Court Rules;

(b)without notice applications will be permitted where the interests of justice require urgency and creditors’ interests can fairly be protected

in other ways, and also on the basis of undue delay or prejudice to the applicants as potential liquidators;

(c)where the order is made on a without notice basis, the Court usually directs the order and application be served on any creditors at the same time and in the same manner as the liquidators’ first report under the Act or notification of the first creditors’ meeting and reserves leave to creditors to apply to vary or set aside the Court’s orders within a certain period of time after service of those orders;

(d)an important issue is whether there is a risk that the proposed liquidators’ independence and ability to carry out their tasks professionally and effectively might be compromised in the particular circumstances; and

(e)the Court must “stand back” and take into account the advantages to the company, its shareholders, creditors and other interested parties when considering the approval of the appointment of a liquidator and the exercise of the Court’s discretion under section 280.

[22]     As Brookers Insolvency Law and Practice notes,1  the purpose of s 280 is to ensure that persons who are appointed as liquidators have sufficient independence, competence and integrity to carry out the role without causing risk to creditors or third parties.

[23]     In Re Joeleen Enterprises Limited,2  Abbott AJ summarised the position as follows:

I remain of the view expressed in Icon Digital Entertainment Limited that the critical issue in considering whether the danger of conflict of interest exists due to a continuing business relationship (however that might be defined) is whether there is a risk that the applicant’s independence and ability to carry out her or his task professionally and effectively could be compromised in the particular circumstances of the case.

[24]     Numerous  cases  recognise  that  prior  knowledge  and  experience  of  the company concerned can sometimes provide an important efficiency advantage to the benefit of all creditors.3

1      S Revill and J Walsh (eds) Brookers Insolvency Law and Practice (online loose-leaf ed, Thomson

Reuters) at [280.03(3)].

2      Re Joeleen Enterprises Limited HC New Plymouth CIV-2008-443-485, 3 October 2008 at [18].

3      Cargill International SA. v Solid Energy New Zealand Ltd [2016] NZHC 1817 at [102]; Icon

Digital Entertainment Ltd v Westpac New Zealand Ltd HC Auckland CIV-2007-404-7124, 20

November 2007 at [19]; Re Madagascar (No 1) 2013 Ltd [2014] NZHC 385 at [27]; and Re

Rapson Holdings Ltd HC Auckland CIV-2010-404-2319, 26 April 2010 at [20].

Discussion

[25]     The application to commence by way of originating application is routine and is granted.

[26]     In respect of the substantive application, the reasons for it are now discussed in more detail.

Previous services to Mr Kearns

[27]     KordaMentha has previously been engaged to provide professional services to

Mr Kearns as follows:

(a)on or about 19 April 2017, to undertake an independent review of the position of each of the Forestland entities; and

(b)on or about 8 February 2018, to undertake independent verification work relevant to the disbursement of funds.

[28]     Such engagements occurred in the context of FMA enquiries in relation to the entities.    It  is  significant,  in  my  view,  that  the  FMA considers  KordaMentha’s engagement to have been discharged with sufficient integrity, objectivity and independence that it seeks Messrs Jackson and Graham’s appointment as liquidators of those entities, in circumstances where the entities are likely to be creditors of FNZ and where Messrs Graham and Jackson have already made some preliminary assessment of the quantum of that liability.

[29]     In his affidavit in support of the application, Mr Jackson deposes that the two engagements by Mr Kearns have come to an end, that KordaMentha will not be providing further services to him and that he can have no expectation of such services because the terms of both engagements expressly recorded that the engagements would not constitute an ongoing professional relationship.

[30]     I am satisfied these two discrete engagements do constitute a “continuing business  relationship”  for  the  purposes  of  s 280(1)(cb)  or  the  “provision  of

professional services to the company” within the terms of s 280(1)(ca). Nevertheless, on the information currently available (and subject to the rights of any creditor to bring a subsequent challenge), it should not disqualify them from acting as liquidators. Both are experienced chartered accountants and accredited insolvency practitioners and

Mr Jackson  confirms  their  intention  to  act  independently  and  professionally  in accordance with their statutory obligations.  Indeed, I accept that as a result of the work undertaken at the behest of Mr Kearns, they are likely in a better position than other insolvency practitioners to deliver benefits in the liquidation from a cost and efficiency perspective.

[31]     I am fortified in that conclusion by the position adopted by the FMA on the proposed liquidation of the related entities and by the position adopted by Leaders. Necessarily, however, these conclusions are provisional, in the sense that they do not bind any subsequent Judge on application by any creditor of FNZ to set aside any appointment of Messrs Graham and Jackson as liquidators of the company.

Liquidators of creditors of FNZ

[32]     Mr Jackson deposes that, based on the work undertaken during the previous engagements, FNZ is indebted to the related entities.  As such, assuming their appointment as liquidators to such entities, they may technically infringe s 280(1)(a) of the Act.  Such creditor relationship would not, however, be in a personal capacity and is unlikely to create any real conflict of interest. The objective assessment of inter- company positions is a routine part of the role which a professional liquidator must discharge with independence, competence and integrity. The Court has the commitment of the proposed liquidators to do so. Again, however, that conclusion is subject to any additional information which might be brought before the Court on an application to set aside their appointment.

Continuing business relationship with a secured creditor of FNZ

[33]     ANZ Bank New Zealand Limited (ANZ) has a security interest registered against FNZ in respect of all present and after acquired personal property of the company.  Mr Jackson deposes, however, that “Mr Kearns has confirmed to Anthony Harper  that  there  is  nothing  owing  by  FNZ  to ANZ”.    Nevertheless,  because

KordaMentha  has  an  acknowledged  continuing  business  relationship  with ANZ, s 280(1)(cb) of the Act is engaged.

[34]     Mr   Jackson   deposes   to   a   number   of   professional   involvements   by KordaMentha with ANZ over the last two years, including receiverships, administrations and investigative accountant appointments.  However, KordaMentha has had no involvement with ANZ relating to any of FNZ, Mr Kearns or the Forestland entities.

[35]     I accept that KordaMentha (like many other large accountancy and insolvency practices) will routinely act on the instruction of New Zealand banks.  Absent particular disqualifying circumstances (of which there are none on the information currently available to the Court), I do not consider that such associations will typically preclude orders under ss 280 and 286(4).

[36]     Mr Jackson confirms in his affidavit that KordaMentha will not accept any instruction by ANZ in relation to FNZ.

Application without notice

[37]     Several decisions of this Court have confirmed the appropriateness of dealing with applications under ss 280 and 286(4) of the Act on a without notice basis, reserving to creditors the right to set aside any subsequent appointment of liquidators and requiring that the application be served on creditors at the same time and on the same basis as liquidators’ first report/notice under the Act.4

[38]     I am satisfied that there is nothing which takes this case outside the generality of those I refer to. As matters transpired, one such creditor (Leaders) was directed to be served.  It had received advice of the application through its own proceedings.  It reserves its position to apply to set aside any appointment of Messrs Graham and Jackson as liquidators but does not oppose the orders now sought.

4      Icon Digital Entertainment Limited v Westpac New Zealand Limited HC Auckland CIV-2007-404-

7124, 20 November 2007; Madagascar (No 1) 2013 Ltd and Madagascar (No 2) Ltd EX P Tubbs

[2014] NZHC 385; and Fisk v Fargher Construction Limited [2018] NZHC 441 at [19]–[21].

[39]     In my view, requiring service on all creditors at this stage would unnecessarily delay the appointment of liquidators in circumstances where the shareholders have already resolved that such appointment is appropriate.  Moreover, the terms of the proposed order specifically recognise the right of any creditor to apply to set aside the applicants’ appointment. They may also seek to have them removed at the creditors’ meeting.

Result

[40]     In my results judgment I made orders:

(a)granting leave for the applicants to commence proceedings by way of originating application; and

(b)permitting them to act as liquidators of FNZ on the terms appearing in the draft order.

Costs

[41]     The applicants seek the solicitor/client costs of their application. In my results judgment, I ordered that these be limited to those which were reasonable, adopting the approach of Grice J in Fisk and McMillan v Fargher Construction Limited.5

[42]     I consider the case distinguishable from those like Finnigan and van Delden as liquidators of Exlbr Limited (in liquidation) v Commissioner of Inland Revenue.6

In that case liquidators who had previously accepted appointment, applied subsequently to rectify their mistake; in those circumstances, the Court found their costs were not permitted to be taken in the liquidation.  Often the associations which trigger the necessity of a s 280/286(4) application will not impact on a prospective liquidator’s capacity faithfully and independently to discharge their duties.  It may be also that the applicants have institutional knowledge making them the most efficient

appointees.  In the generality of the case, it would not, in my view, be appropriate to

5      Fisk and McMillan v Fargher Construction Limited [2018] NZHC 441 at [31]-[32] and [33](b).

6      Finnigan and van Delden as liquidators of Exlbr Limited (in liquidation) v Commissioner of

Inland Revenue [2016] NZHC 2454.

deter applications by such prospective appointees by requiring them personally to meet the costs of the application.  Nevertheless, each case must be considered on its own merits.

[43]     In the present case, I consider that if the applicants are appointed as liquidators, they should be entitled to claim as expenses in the liquidation the reasonable costs of the application.

Muir J