Bethell v Mainzeal Property and Construction Limited (in receivership and in liquidation)
[2013] NZHC 1556
•25 June 2013
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2013-404-1024 [2013] NZHC 1556
BETWEEN ANDREW JAMES BETHELL AND BRIAN MAYO-SMITH AND STEPHEN JOHN TUBBS
Applicants
ANDMAINZEAL PROPERTY AND CONSTRUCTION LIMITED (IN RECEIVERSHIP AND IN LIQUIDATION)
First Respondent
ANDMAINZEAL GROUP LIMITED (IN LIQUIDATION)
Second Respondent
ANDMAINZEAL LIVING LIMITED (IN RECEIVERSHIP AND IN LIQUIDATION)
Third Respondent
AND200 VIC LIMITED (IN RECEIVERSHIPAND IN LIQUIDATION)
Fourth Respondent
ANDBUILDING FUTURES GROUP HOLDINGS LIMITED (IN LIQUIDATION)
Fifth Respondent
ANDBUILDING FUTURES GROUP LIMITED (IN LIQUIDATION) Sixth Respondent
ANDMAINZEAL RESIDENTIAL LIMITED (IN LIQUIDATION)
Seventh Respondent
ANDMAINZEAL CONSTRUCTION LIMITED (IN LIQUIDATION) Eighth Respondent
ANDREW JAMES BETHELL AND BRIAN MAYO-SMITH AND STEPHEN JOHN TUBBS v MAINZEAL PROPERTY AND CONSTRUCTION LIMITED (IN RECEIVERSHIP AND IN LIQUIDATION) [2013] NZHC
1556 [25 June 2013]
ANDMAINZEAL LIMITED (IN LIQUIDATION)
Ninth Respondent
ANDMAINZEAL CONSTRUCTION SI LIMITED (IN LIQUIDATION) Tenth Respondent
ANDMPC NZ LIMITED (IN LIQUIDATION) Eleventh Respondent
ANDRGRE LIMITED (IN LIQUIDATION) Twelfth Respondent
ANDKING FACADE LIMITED (IN LIQUIDATION)
Thirteenth Respondent
ANDRICHINA GLOBAL REAL ESTATE LIMITED
Fourteenth Respondent
ANDISOLA VINEYARDS LIMITED (PREVIOUSLY KNOWN AS WAIHEKE VINEYARDS LIMITED)
Fifteenth Respondent
Hearing: 20 June 2013
Appearances: Z G Kennedy and M D Pascariu for Applicants
Judgment: 25 June 2013
JUDGMENT OF KEANE J
This judgment was delivered by on 26 June 2013 at 10am pursuant to Rule 11.5 of the High Court Rules.
Registrar/ Deputy Registrar
Date:
Solicitors:
Minter Ellison Rudd Watts, Auckland
[1] On 27 February 2013 Andrew Bethell, Brian Mayo-Smith and Stephen Tubbs, chartered accountants, were given leave by this Court to accept appointment as liquidators of Mainzeal Property and Construction Limited and 11 related companies.
[2] The next day the controlling shareholders of those companies appointed them liquidators by special resolution. They were also appointed liquidators of a further company, King Facade Limited, a related company that had been placed in liquidation on 12 February 2013.
[3] The companies now in liquidation are part only of the Richina Group, which is owned wholly by companies and special partnerships in which Richard Yan has the controlling interest. The other companies in the group, not in liquidation or receivership, include the two remaining respondents to this application, Richina Global Real Estate Limited and Isola Vineyards Limited.
[4] The liquidators have concluded on their review of the records of the companies in liquidation that they are linked to each other and to other companies in the wider group by inter company balances and by administrative and trading links to such an extent that they never traded truly independently at arm’s length from each other; they traded as if they were each part of a single entity.
[5] The liquidators have discovered, they say, that the Richina Group had recently been restructured twice, the second time within two months of their appointment and that a further restructuring then planned was frustrated by their appointment. They have concluded that shareholdings within the group had been reallocated at questionable values. Inter company balances have been adjusted by journal entry without apparently agreed terms or consideration.
[6] The liquidators have concluded that the effect of the restructuring exercises has been to denude of any value those companies in liquidation with creditors (there are 2000 creditors of MPCL principally, but also of KFL). Conversely, they have concluded, the value of the companies not in receivership or liquidation had been enhanced, in the interests of their shareholders but at the expense of creditors.
[7] Consequently, on 29 May 2013, the liquidators applied for two forms of order. The first they seek is to enable them to conduct the liquidation as if the 13 companies in liquidation were a single entity. The second is to require RGREL to contribute to the liquidation $15,150,847, which before restructuring it owed to MPCL, and $5,786,606.77, which it originally owed to KFL; and to require IVL to contribute $2,478,165 owed originally to MPCL.
[8] On 30 May 2013, in accord with directions given that day, service was effected on RGREL and IVL. They have not filed notices of opposition and the application proceeds by formal proof on the affidavit evidence of one of the liquidators, Mr Bethell. At the hearing I said I would make the orders applied for. I now make those orders, giving my reasons.
Single liquidation order
[9] I am only able to make the first and wider order the liquidators seek, to permit them to conduct the liquidation of all 13 companies ‘as if they were one company’, if I am satisfied that would be just and equitable, having regard to these five matters:1
(a) The extent to which any of the companies took part in the management of any of the other companies:
(b) The conduct of any of the companies towards the creditors of any of the other companies:
(c) 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:
(d) The extent to which the businesses of the companies have been combined:
(e) Such other matters as the Court thinks fit.
Structural financial and trading links
[10] The liquidators contend that the Richina group in New Zealand, the companies in liquidation and those that are not, have traded as a single entity, and
1 Companies Act 1993, ss 271(b), 272(2).
[11] First, they say, MPCL, the primary trading company in New Zealand, was the conduit by which the other New Zealand companies in the group were funded: a fact acknowledged by the Groups’ own solicitors in a letter to the liquidators, dated 19
April 2013, to be a funding arrangement that was ‘not conventional’.
[12] Secondly, and consistently, they say, inter company obligations were fixed without apparent commercial purpose. On 31 December 2012, to take one example, KFL is recorded to owe MPCL $21.566M, and Mainzeal Living Limited to owe
$1.716M. Yet how those debts came about is not recorded.
[13] Thirdly, a primary group asset, Mainzeal House, 200 Victoria Street, Auckland, was purchased by 200 Vic Limited relying on a BNZ loan for $9.596M. All further costs were met by MPCL. According to MPCL’s records 200 Vic Limited owes it $2.784M for purchase and refurbishment. Also, MPCL’s fixed asset schedule report, dated 31 December 2012, records leasehold improvements to Mainzeal House of $2.344M. Yet on what terms this happened is not recorded.
[14] Fourthly, MPCL supplied to KFL information systems, management accounting and other back office functions, or in part funded those facilities, and KFL traded from MPCL’s head office within the central business district of Auckland and out of a Mt Wellington warehouse leased from MPCL in December
2012.
[15] Fifthly, between January 2012 and the appointment of MPCL’s receivers the group’s facade business operations were carried on by KFL. Also MPCL recorded in the accounting ledger of a related company, King Facade (NZ) Limited, transactions which effectively amalgamated its accounts with those of KFL, including transfers of inter company debts.
[16] Sixthly, KFL had a significant role in many of MPCL’s projects and while both suffered significant losses, as the group’s principal Mr Yan accepted when speaking with the liquidators, more were allocated to KFL than would have been
[17] Also, as at 31 December 2012 MPCL’s records record that KFL owed it
$21.566M. Yet, of this $6.012M related to a prepaid goods account for construction and building materials set up in December 2011 between MPCL and Richina Pacific (China) Investments Limited, a Chinese company, under which MPCL assigned to that company its rights to a $33.139M receivable owed by MLG Trading, another company in the group not in liquidation.
[18] Seventhly, apart from the fact that MPCL met KFL’s trading costs and payments to KFL’s suppliers and the wages of its employees, it funded other companies within the group. MPCL met, to take another example, invoices relating to the Christchurch residential development undertaken by Mainzeal Living Limited, which were simply recorded by journal entry as inter company debts.
[19] Eighthly, illustrative of the extent to which the group traded as a single entity, the liquidators say, is that creditors have proved uncertain as to the company with which they contracted. Some have issued invoices to MPCL, when they traded with KFL. Some have claimed on MLL, when they traded with MPCL. Some have claimed on two non trading entities, Mainzeal Limited and Mainzeal Construction Limited.
Justice and equity
[20] An order that the companies be liquidated as a single entity, the liquidators contend, is just and equitable firstly because on a full realisation of the major assets of MPCL, MLL, 200 Vic, and assuming Isola Vineyards Limited will contribute under the second order sought, and assuming particular sales, the secured creditor, BNZ, is likely to be repaid in full.
[21] Secondly, the liquidators say, the preferential creditors whose security interests are encompassed by the receivership will be paid out by the receivers; and the remaining preferential creditors, and KFL’s preferential creditors and the unsecured third party creditors of MPCL, KFL and MLL, will not be detrimentally affected. The assets available to meet their claims can only increase as a result of the
[22] Thirdly, they say, of the 2000 unsecured creditors that have made a claim, most are creditors of MPCL. But as a result of the restructuring undertaken some may receive something and others nothing, whereas if all companies in liquidation are treated as a single entity, creditors will receive a uniform dividend.
[23] Finally, they say, unless an order is made, any surplus on the sale of 200
Victoria Street will go to the shareholder of 200 Vic Limited, RGREL, a related company not in liquidation. Its shareholders will be preferred to the detriment of the vast majority of creditors. That is unjust.
Related party contribution order
[24] The related party contribution order the liquidators seek against RGREL and IVL, assumes they still owe to MPCL and KFL the debts claimed to be owing despite the group restructuring exercises.
[25] To obtain that order, under s 271(1)(a), the liquidators must first establish that RGREL and IVL are ‘related companies’ to those in liquidation: that they are in a relationship of holding company and subsidiary, or are linked by shareholding in excess of one half the the issued shares in the relevant company, or are so closely tied together that they retain no identifiable separate business.2
[26] Then the liquidators must establish that an order is just and equitable having regard to four matters which are very similar to those germane to a pooling order:
(a) the extent to which the related company took part in the management of the company in liquidation:
(b) the conduct of the related company towards the creditors of the company in liquidation:
(c) the extent to which the circumstances that gave rise to the liquidation of the company are attributable to the actions of the related company:
(d) such other matters as the Court thinks fit.
2 Section 5.
Related companies
[27] RGREL and IVL, the liquidators say, like the companies in liquidation, are wholly owned subsidiaries within the Richina group, ultimately controlled by Richard Yan, and are so closely interrelated that none have identifiable separate businesses.3
[28] The liquidators do not say that RGREL and IVL are linked just because Mr Yan is a common director.4 Nor that he played any part in their their management. Nor that RGREL and IVL interacted with the creditors of the companies in liquidation.5 They say that, on restructuring, RGREL and IVL benefited at the expense of the companies in liquidation, in that way contributing to their insolvency.
The two debt claims
[29] On the second restructuring exercise, the liquidators say, MPCL’s shares in MLL were transferred to MGL, as were RGREL’s shares in MPCL, and MLL’s shares were valued at $17.551M, even though MPCL was within two months of receivership. Furthermore, a $2.400M vendor finance loan by RGREL to MGL was entered in the books of both companies.
[30] The effect on MPCL, the liquidators say, on the transfer of RGREL’s shares in it to MGL, was to reduce RGREL’s debt to MPCL by some $15.151M and to increase the debt owed MPCL by MGL by the same figure; and this was without any cash exchange, or deed of novation or any apparent consideration. It was to substitute for a debt owed to MPCL by RGREL, not in receivership or liquidation, one owed by MGL, shortly after placed in liquidation.
[31] As at 31 December 2012 also, the liquidators say, MPCL’s records show that IVL owed it $2.395M for trading expenses and wages. KFL’s ledger records showed that IVL owed it $4.490M for payments made to acquire IVL’s property at Onetangi Road, Waiheke Island. On the most restructuring IVL’s debt to KFL was
extinguished, as was its debt to MPCL.
3 Sections 2(3), 5.
4 Section 272(1)(a).
5 Section 272(1)(b).
Justice and equity
[32] In the restructuring the liquidators say RGREL and IVL benefitted substantially because their debts were extinguished and MPCL and KFL lost the ability to recover what they were owed. As a matter of fairness and equity RGREL and IVL ought to contribute those sums to the liquidation.
[33] Here too, the liquidators say, related considerations are the extent to which their businesses were combined with those of the companies in liquidation and apart from the fact that Mr Yan was a common director these two companies were managed and operated, like those in liquidation, as a single trading enterprise.
[34] MPCL paid the trading costs and payments to suppliers of RGREL, and the wages of its employees. MPCL provided MPL with office support by way of shared use of accounting staff and IT infrastructure and payroll processing and payment. Mr Yan’s wife, Tina Wang, an IVL director, worked from offices leased by MPCL.
[35] The receivers and the liquidators say they have commenced proceedings to recover the sums in issue. They have not received any payment. RGREL’s lawyers contend, in response, that under the funding regime in place before liquidation the debt it owed to KFL was not a receivable in any usual accounting sense.
[36] That letter, the liquidators point out, acknowledges that for funding purposes all the New Zealand companies within Richina Group, other than MPCL as the conduit, were treated as one entity. The liquidators consider that there is no proper legal or accounting basis to support this claim.
Orders
[37] I am satisfied on the liquidators’ evidence, and on their analysis of the evidence, as a matter of formal proof, that it is just and equitable to make the two orders they apply for.
[38] There will be an order that the liquidation of the 13 companies in liquidation is to be conducted by the liquidators as if those companies were one company. There
will be an order that RGREL contribute to the liquidation $15,150,847, which it originally owed MPCL, and $5,786,606.77, which it owed originally to KFL, and that IVL contribute $2,478,165, which it owed originally to MPCL.
[39] I do not understand that the liquidators seek any further order. But, if they do, they have leave to apply.
P.J. Keane J
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