Boult v Cain
[2023] NZCA 542
•2 November 2023 at 2.30 pm
| IN THE COURT OF APPEAL OF NEW ZEALAND I TE KŌTI PĪRA O AOTEAROA |
| CA511/2022 [2023] NZCA 542 |
| BETWEEN | JAMES BOULT AND |
| AND | RHYS JAMES CAIN |
| Hearing: | 19 July 2023 |
Court: | French, Thomas and Moore JJ |
Counsel: | A R Galbraith KC and G J Ryan for Appellants |
Judgment: | 2 November 2023 at 2.30 pm |
JUDGMENT OF THE COURT
AThe appeal is allowed. The decision of the High Court is quashed and an order is made under s 284(1) of the Companies Act 1993 reversing the respondent’s decision to permit inspection of the documents.
BThere will be no order as to costs.
____________________________________________________________________
REASONS OF THE COURT
(Given by French J)
Introduction
Section 256(1)(a) of the Companies Act 1993 (the Act) states:
256 Duties in relation to records
(1) The liquidator of a company must—
(a)keep accounting records and other documents of the liquidation and permit those records, and the records and other documents of the company, to be inspected by—
(i)any liquidation committee appointed under section 314, unless the liquidator believes on reasonable grounds that inspection would be prejudicial to the liquidation; and
(ii) if the court so orders, a creditor or shareholder; and
…
The focus of this appeal is s 256(1)(a)(i). It concerns applications for the inspection of documents made by a liquidation committee, as distinct from applications by an individual creditor or shareholder which are governed by s 256(1)(a)(ii).
The key issue for determination is whether, correctly interpreted, s 256(1)(a)(i) means a liquidation committee’s purpose for seeking inspection cannot of itself be a ground for declining the application. Under this interpretation, the liquidator can only decline the application if they have a reasonable belief the requested inspection would be prejudicial to the liquidation. Otherwise, they are obligated to permit it.
The competing interpretation is that the right of inspection conferred on liquidation committees by s 256(1)(a)(i) is implicitly limited to requests made for a purpose connected with their statutory functions. Accordingly, a request made for a collateral purpose, outside the liquidation, is outside the scope of s 256(1)(a)(i) and must be declined — even in the absence of prejudice to the liquidation.
The interpretation issue arises in the context of a decision by the respondent liquidator to allow a request made ostensibly on behalf of a liquidation committee to access court documents. At the time the request was made, the assets had all been realised and the liquidation was ready to be ended. All that remained was for the liquidator to provide his final report. Given the liquidation was all but completed, it is accepted on appeal that disclosure of the documents could not be said to be prejudicial to the liquidation.[1]
[1]This was made clear in oral submissions by counsel for the appellants.
The court documents in question concerned a claim which the liquidator had brought against the directors of the company in liquidation and which had been settled. According to the directors, the purpose of the request for inspection was to allow a member of the liquidation committee to investigate whether his company could bring its own claim against the directors, outside the liquidation. And that, the directors say, was an improper use of s 256(1)(a)(i) which of itself meant the liquidator should have declined the application.
In the High Court, Associate Judge Paulsen rejected the directors’ application to reverse the liquidator’s decision to permit inspection.[2] The Judge held that under s 256(1)(a)(i), liquidation committees have a right, not a power, to inspect documents kept by the liquidator, and that the only qualification on that right was if inspection would be prejudicial to the liquidation.[3] There being no prejudice, the liquidator was required to allow inspection.[4]
[2]Boult v Cain [2022] NZHC 2402 [High Court judgment]. The application to reverse the liquidator’s decision was brought under s 284 of the Companies Act 1993. Leave to bring the application, as required under s 284, was granted.
[3]At [49].
[4]At [58]–[60].
The Judge also found that in any event, on the facts, the purpose for which inspection was being sought was a proper purpose.[5]
[5]At [55]–[57].
The appellants now appeal the Judge’s decision on two grounds. They challenge his interpretation of s 256(1)(a)(i) and also say he was wrong on the evidence to find that the request was made on behalf of the liquidation committee and for a proper purpose.
Background
The respondent Mr Cain is the liquidator of Stonewood Homes Ltd and Stonewood Homes New Zealand Ltd (together, Stonewood).[6] The appellants, Messrs Merrick and Boult, were directors of Stonewood.[7] Stonewood was put into liquidation on 21 April 2016 by the High Court on the application of the Inland Revenue Department.
[6]The respondent was originally appointed as joint liquidator with a Mr Logan, but the latter subsequently resigned from the role.
[7]Mr Boult resigned as a director on 1 February 2016, shortly before Stonewood was put into liquidation.
At a meeting of Stonewood’s creditors, held on 17 June 2016, those attending elected a liquidation committee. The elected members were Messrs Lee,[8] Ball and Gilbert. All three were directors of companies which were owed money by Stonewood.
[8]Mr Lee’s own company went into liquidation on 13 September 2018. It appears on the evidence that although he never resigned from the committee neither he nor the liquidators of his company played an active part at the time of the events in issue.
In 2018 the liquidator issued proceedings against the appellants, alleging breach of directors’ duties to Stonewood. The claim was later settled in July 2021 and the proceeding discontinued under a confidential settlement agreement.
On 22 September 2021, the liquidator met with Mr Gilbert and Mr Ball. He advised them the claim against the directors had been settled but that no money was available to unsecured creditors from the settlement. Mr Gilbert and Mr Ball asked the liquidator to provide the court documents relating to the claim but the liquidator told them he was not able to do that because of confidentiality. He suggested they make an application to the High Court.
Mr Ball then applied to the High Court for access to the court documents under the Senior Courts (Access to Court Documents) Rules 2017. The application sought access to all pleadings and affidavits that had been filed. The application stated that Mr Ball was the sole director of two companies (Hagley Building Products Ltd and Hagley Kitchens Ltd — together, Hagley) that were unsecured creditors of Stonewood, one company being owed $1,273,903.20 and the other $27,006.54. The application went on to say that Hagley intended to seek legal advice on whether they might have a claim against the directors of Stonewood for breach of their duties under the Act, and that they were aware other unsecured creditors were considering whether to make a claim.
The application concluded by stating that if Hagley’s application for access was successful, they would be prepared to agree to a condition not to disclose the documents to any third party, except Hagley’s professional advisers.
On being notified of the application, Mr Boult filed a memorandum in opposition.
The contested application was then set down for hearing before Associate Judge Paulsen on 24 March 2022. During the hearing, the Judge asked counsel appearing for Mr Ball whether a request to inspect the liquidator’s documents had been made under s 256 of the Act. The hearing concluded on the basis that counsel would make inquiries and report to the Court within seven days, and also provide any correspondence between Hagley and the liquidator concerning requests for the liquidator’s court file.
The day after the hearing, Mr Ball emailed the liquidator. The email referred to the previous discussion with the liquidator on 22 September 2021 and advised of Hagley’s current application before the Court. The email went on to say that the Judge wanted confirmation Hagley had requested the documents from the liquidator and that the liquidator had said he could not provide them to Hagley. This information was said to be needed by next week. The email concluded by asking the liquidator to confirm in writing as soon as possible whether or not the court documents would be given to them.
On 28 March 2022, the law firm acting for Hagley wrote to the liquidator’s lawyers. The letter stated the firm had recently been advised that Mr Ball was a member of the liquidation committee and went on to refer to the right of a liquidation committee to inspect Stonewood’s records and documents. The letter concluded by advising that Mr Ball was giving:
… formal notice that he wishes to inspect the liquidator’s accounting records and other documents of the liquidation, and the records and other documents of [Stonewood] including the [court documents that were the subject of the application], in accordance with s 256(1)(a)(i) of the Act.
Written confirmation that the liquidator would “allow Geoff Ball to inspect the above documents in accordance with s 256(1)(a)(i)” was sought by midday 30 March 2022.
Presumably in response to a query from the liquidator’s lawyers, Mr Gilbert subsequently emailed Hagley’s counsel saying he was “confirming that the request to access documents under s 256 [sic] (in the attached letter dated 28 March 2022) is made by the Liquidation Committee (by majority).”
On 31 March 2022, counsel for Hagley filed a memorandum in the High Court enclosing a copy of Mr Ball’s email to the liquidator. The memorandum advised the Judge that, in light of the discussion at the hearing about s 256 and the documents available on the court file, counsel had obtained “further new information” from Hagley, which had resulted in Hagley instructing counsel to pursue a request for access under s 256. No specifics were given of the “further new information”. However, we infer given the terms of the letter to the liquidator’s lawyers that it must have been the information that Mr Ball was a member of the liquidation committee.
Following receipt of this memorandum, Hagley’s application under the Senior Courts (Access to Court Documents) Rules was adjourned.
Lawyers acting for the appellants then wrote to the liquidator’s lawyers expressing their clients’ opposition to the liquidator allowing the liquidation committee to inspect the court documents. A key ground of opposition was that the request was an improper use of the committee’s powers under s 256(1)(a)(i).[9] The appellants contended that the request was clearly made on behalf of Mr Ball to assist him to pursue a claim for his own benefit.
[9]Another ground was that disclosure would breach the terms of the settlement agreement. This argument was not advanced before us.
In a subsequent letter, the liquidator’s lawyer advised that he had reached the preliminary view that, with the exception of four affidavits, he was obliged to allow inspection of the court documents in his possession. In so far as the request was couched in much wider terms and effectively sought inspection of all records and documents of the liquidation, and not just those relating to the court proceeding, the letter said that part of the request was unmanageably wide and required narrowing before it could be assessed.
As the letter made clear, the liquidator’s provisional decision to permit inspection of the court documents rested on the view that under s 256(1)(a)(i) the purpose for which the liquidation committee was seeking access to the documents did not provide a basis to refuse inspection. The letter described s 256(1)(a)(i) as creating a presumption in favour of disclosure with only one limited exception, being prejudice to the liquidation. The prejudice to the liquidation exception was only relevant to the four affidavits. They contained confidential and commercially sensitive material relating to third parties, disclosure of which might expose the liquidator or Stonewood to claims. Allowing access to the other court documents would not prejudice the liquidation.
After receiving and considering further correspondence from the various lawyers, the liquidator confirmed his preliminary decision that the liquidation committee would be permitted to inspect the court documents (excluding the four affidavits).[10] The liquidator again noted the appellants’ contention of impropriety and misuse of powers but stated that the fact remained the request had been made by the liquidation committee, not Mr Ball personally. There was, in his view, no basis for treating the request as a request made by a creditor.
[10]Conditions were imposed on the inspection, which Mr Ball challenged.
Dissatisfied with that outcome, the appellants then applied to the High Court for an order under s 284(1) of the Act reversing the liquidator’s decision and preventing inspection.
The parties to the application were the appellants and the liquidator, the latter abiding the decision of the Court. Mr Ball was represented at the High Court hearing. He also abided the decision of the Court, although his counsel filed submissions indicating opposition to the application.
The Judge granted the appellants leave to bring the application but, as already mentioned, declined to grant the substantive application, prompting the current appeal.[11]
[11]Leave to bring the application was required under s 284.
At the hearing before us, the liquidator again appropriately took the position that he was indifferent as to whether he is required to allow inspection or not. His sole concern is to act in accordance with s 256. His counsel did however file brief submissions explaining the reasoning behind the liquidator’s decision, which accorded with the reasoning of the Judge. Mr Ball did not take any part in the hearing.
We now turn to address the two issues at the heart of the appeal, the first relating to the interpretation of s 256(1)(a)(i) and the second concerning the Judge’s evidential findings regarding the propriety of the request.
What is the correct interpretation of s 256(1)(a)(i)?
The statutory functions of liquidation committees
Liquidation committees, or committees of inspection as they were once called, have been a feature of legislation regulating company liquidations for many years.[12] They are the creature of statute. The logical starting point of the analysis is therefore the relevant legislative framework, and in particular the statutory functions of liquidation committees under the Act. The key provisions are ss 314 and 315.
[12]See for example Companies Act 1955, s 248.
The decision to appoint a liquidation committee rests with the creditors and shareholders of the company in liquidation.[13] Under s 314, at any time in the course of the liquidation, the liquidator “shall”, on their own motion or at the written request of a creditor or shareholder, convene a meeting of either shareholders or creditors to vote on a proposal that a liquidation committee be appointed, and if so to choose the members of that committee. The exact words used in s 314 about the proposal that must be put at the meeting is “a proposal that a liquidation committee be appointed to act with the liquidator”.
[13]Lynne Taylor and Grant Slevin Law of Insolvency in New Zealand (2nd ed, Thomson Reuters, Wellington 2021) at [25.2].
As to membership, the committee must consist of not less than three persons who are creditors or shareholders (or their representative) of the company in liquidation.[14] The intention is clearly that the members represent the collective interests of creditors or shareholders. This is reinforced by the statutory powers conferred on liquidation committees, discussed below, and also case law which has held that a committee is in a fiduciary relationship with those who are entitled to participate in the assets on a winding up.[15] It is noteworthy too that s 314 refers to those who are elected at the meeting as taking “office”.
[14]Companies Act 1993, s 315.
[15]Re The Standard Insurance Co Ltd (in liq) [1962] NZLR 762 (SC) at 763. See also Echo Investments Ltd v Kingswood Investments Ltd (1993) 6 NZCLC 68,476 (HC); and Re Carpenters Auctions Ltd (in liq) HC Auckland M1517/92, 18 March 1993, relying on ReFT Hawkins & Co Ltd [1952] Ch 881.
The powers of the liquidation committee are set out at s 315(2). The powers listed are, to:
(a)call for reports from the liquidator on the progress of the liquidation;
(b)call for a meeting of creditors or of shareholders;
(c)apply to the court for an order asking the court to exercise its supervisory jurisdiction over the liquidation, including orders to enforce liquidator’s duties; and
(d)assist the liquidator as appropriate in the conduct of the liquidation.
As will be apparent from the last-mentioned power and the wording of the proposal that leads to the establishment of the committee (“appointed to act with the liquidator”), a primary function of liquidation committees is to assist the liquidator. As to what the liquidator’s functions are, their “principal duty”, as expressed in s 253, is “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”.
In addition to the role of assisting the liquidator, it is also clear from the listed powers in s 315 (such as the power to call for reports from the liquidator) that committees are intended to have an oversight function in relation to the liquidator.[16]
[16]Te Aka Matua o te Ture | Law Commission Company Law: Reform and Restatement (NZLC R9, 1989) at [644].
We turn now to examine s 256 (1)(a)(i).
The text and purpose of s 256(1)(a)(i)
For convenience, we again set out the sub-section.
256 Duties in relation to records
(1) The liquidator of a company must—
(a)keep accounting records and other documents of the liquidation and permit those records, and the records and other documents of the company, to be inspected by—
(i)any liquidation committee appointed under section 314, unless the liquidator believes on reasonable grounds that inspection would be prejudicial to the liquidation; and
(ii) if the court so orders, a creditor or shareholder; and
…
As already indicated, s 256(1)(a) creates a distinction between two categories of applicants who are seeking access to the liquidator’s records. One category of applicant — an individual creditor or shareholder — must make their request to the High Court for determination. The other category of applicant — a liquidation committee — is not required to obtain a court order but is entitled to seek permission directly from the liquidator.
The leading authority on applications by individual creditors or shareholders under s 256(1)(a)(ii) is the decision of this Court in Levin v Lawrence.[17] However, the present case represents the first occasion on which this Court has directly addressed the scope of s 256(1)(a)(i).
[17]Levin v Lawrence [2013] NZCA 394, (2013) 11 NZCLC 98-018.
Turning first to the text of s 256(1)(a)(i). Taken at face value, the wording of s 256(1)(a)(i) appears unambiguous and supports the interpretation adopted by the Judge. The words used are “must … permit” followed by an “unless” indicating an obligation to permit subject to only one ground for refusal. There is no mention of any need for a separate inquiry into the purpose of the request.
The appellants acknowledge this but emphasise that liquidation committees are the creature of statute and like all statutory bodies can only act within the scope of their powers and for the purposes of the relevant statute. As counsel Mr Galbraith KC put it, they cannot go off on a frolic of their own. In his submission, there was no need for Parliament to specifically state the request must be made for the purposes of the committee’s statutory functions. That went without saying. It was a fundamental given.
Thus, according to the appellants’ case, if the request is made for the purposes of the liquidation consistent with the committee’s statutory functions, then the committee has a qualified right to view the records and the liquidator a reciprocal obligation. It follows that the correct approach to the “prejudice to the liquidation” exception is not to see it as all-encompassing, but more accurately to see it as an “add‑on safeguard”.
Mr Galbraith accepted there were statements in Levin quoting from a Law Commission report saying the provision which ultimately became s 256(1)(a)(i) “permits disclosure of the liquidator accounts and records unless the liquidator believes this to be prejudicial to the liquidation”.[18] However, he contended that the Law Commission could only have been considering a liquidation committee conforming with its statutory purposes and functions and would not have contemplated, let alone endorsed, some ulterior collateral purpose for the request, outside of the statutory scheme.
[18]At [46], citing Law Commission, above n 16, at [673].
We find these arguments compelling. They are consistent with long established principles about statutory bodies and with the fiduciary obligations owed by liquidation committees. They are also not dependent on the characterisation of what is conferred by s 256(1)(a)(i) as a power rather than a right, as the Judge appears to have assumed.[19]
[19]High Court judgment, above n 2, at [49].
In our view, the arguments are further reinforced by the existence of the more rigorous process for applications by individual creditors or shareholders. The existence of a different process can only mean there is something about liquidation committees that differentiates them from the individuals whose collective interests they represent, something that persuaded the legislature to dispense with the need for a court order in their case. The something must be their special defined statutory functions and a statutory role which, as we have seen, combines that of an assistant and a supervisor.
In this regard, it is noteworthy that although committees of creditors or shareholders have long been a feature of legislation regulating company liquidations, a provision exempting them — but not the individuals they represent — from the need for a court order to gain access to the liquidator’s records is new to the 1993 Act. The inescapable inference is that s 256(1)(a)(i) represents a deliberate policy choice. That is confirmed by the Law Commission report that drove the reforms.[20]
[20]See for example, Law Commission, above n 16, at [644] and [670]–[673].
The report notes that a major criticism of the 1955 Companies Act was the frequency with which its provisions required liquidators to refer matters to the court for determination.[21] It was considered desirable to reduce this significantly, but not at the expense of protecting creditors and shareholders. The necessary protection was seen as coming instead from the requirement that a liquidator had to be an experienced insolvency practitioner and from new provisions giving liquidation committees an effective measure of supervision.[22] Significantly for present purposes the Law Commission cited as an example of one such measure a provision that was to later become s 256(1)(a)(i).[23]
[21]At [642].
[22]At [642] and [644].
[23]At [673].
If further confirmation was needed, this legislative history confirms that there can be no rational explanation for the difference between s 256(1)(a)(i) and s 256(1)(a)(ii) other than the representative character and statutory functions of liquidation committees. The right of inspection without the need for a court order was given for that reason, and Parliament can only have intended that it would be exercised for that purpose.
It follows that in so far as the Judge interpreted s 256(1)(a)(i) to mean that the liquidator can only ever refuse disclosure to a liquidation committee if he or she believes on reasonable grounds that it would be prejudicial to the liquidation,[24] then that, in our view, was an error. In our view, the correct interpretation is that the committee’s request must be made for the purpose of and in furtherance of its statutory functions and powers. And if the request is not made for that purpose, inspection should be refused, regardless of whether inspection would not prejudice the liquidation. In short, the right to inspect documents conferred by s 256(1)(a)(i) is ancillary to the powers of liquidation committees listed in s 315 and cannot be used for any other collateral purpose outside of the liquidation.
[24]High Court judgment, above n 2, at [49].
If therefore a request, albeit made ostensibly by the liquidation committee in circumstances where there could be no prejudice to the liquidation, was in substance a request by an individual creditor for their own benefit outside the liquidation, the fact that the individual happened to be a member of the liquidation committee would not compel the liquidator to permit it. The proper course for that individual, in accordance with the Act and their fiduciary obligations, would be to seek a court order under s 256(1)(a)(ii) and not, in effect, exploit their position as a member of the liquidation committee.
As this Court in Levin has made clear, were an application to be made under s 265(1)(a)(ii), the individual creditor would need to establish a good reason for the request.[25] The “good reason” threshold test requires that, as a minimum, the applicant must put forward some persuasive, tangible or concrete reason why inspection should be granted.[26] Fishing expeditions are not sufficient.[27] The example given in the Levin decision as to what might constitute a good reason involves dereliction of a liquidator’s duties, but it is clear the categories of good reasons are not closed.[28]
[25]Levin, above n 17, at [29] and [53].
[26]At [53(c)].
[27]At [53(b)].
[28]At [53(c)]; and Steggall Nutrition Pty Ltd v Hayward [2015] NZHC 413, [2015] NZCCLR 11 at [50].
Significantly since Levin, the High Court has held there was good reason under s 256(1)(a)(ii) for an individual creditor,[29] a Body Corporate, to be permitted access to the records of the company in liquidation for the purpose of investigating its own recovery options outside the liquidation for defective building workmanship.[30] The liquidation had only just started and it appeared from the liquidator’s first report that there were insufficient funds for extensive litigation.[31]
[29]Technically the applicant was a contingent creditor, but the Judge accepted that a contingent creditor was a creditor for the purpose of s 256(1)(a).
[30]Body Corporate 194481 v Mason [2016] NZHC 2858.
[31]At [8]–[9].
Before turning to address the appeal ground regarding the Judge’s factual findings, we make two final points. The first is that our interpretation will not involve liquidators undertaking extensive inquiries into the purpose of liquidation committee requests. Ordinarily that will be self-evident. The second and related point is that in the vast majority of cases, the competing interpretations will not in any event make any practical difference to the outcome of the application for inspection. An improper purpose will usually be prejudicial to the liquidation.
It is only in the relatively unusual circumstances of this case that this was potentially not the position.
Were the Judge’s factual findings supported by the evidence?
In the decision under appeal, the Judge held the liquidator was required to treat the application as having been made by the liquidation committee.[32] The Judge pointed out that Messrs Ball and Gilbert had made the same request before and that Mr Gilbert had confirmed in his email the request at issue was made to the liquidator by the committee.[33] In the Judge’s view, the committee was not disentitled to make its own request just because Mr Ball independently sought the documents via the court.[34]
[32]High Court judgment, above n 2, at [55].
[33]At [55].
[34]At [55].
The Judge went on to state that, because the claim against the directors had been settled on terms that did not see the creditors receive any payment, there was a strong justification for the request.[35] All other creditors could be expected to be similarly interested, and depending on what the inspection revealed, there were several possible avenues the creditors might pursue to improve their position in the liquidation.[36]
[35]At [56].
[36]At [56].
We accept if that was the purpose of the request, it might qualify as a proper purpose. However, we are satisfied the finding that this was in fact Mr Ball’s purpose was not justified on the evidence, especially given the surprising absence of any affidavit to that effect from Mr Ball or indeed from Mr Gilbert.
What evidence there is must be derived from the statements in Hagley’s application under the Senior Courts (Access to Court Documents) Rules and the correspondence between the law firms. The weight of that evidence suggests that Mr Ball was never looking to protect the interests of other creditors. Even his own counsel, in a memorandum to the High Court, referred to Hagley as the applicant under s 256(1)(a)(i).
In our assessment, the weight of evidence suggests Mr Ball was at all times acting in his own companies’ interests and seeking information to advance a collateral separate proceeding outside the liquidation for their benefit. That is further reinforced by considering the stage the liquidation had reached. Any further steps were inevitably going to be outside the liquidation.
In our view the proper course of action for Mr Ball was to apply under s 256(1)(a)(ii) for a court order, not to circumvent that process by taking advantage of the happenstance of his membership of the liquidation committee.
It follows from all the above that we have decided to allow the appeal.
In the event the appeal was allowed, the appellants did not seek costs. We therefore make no award.
Outcome
The appeal is allowed. The decision of the High Court is quashed and an order made under s 284(1) of the Companies Act 1993 reversing the respondent’s decision to permit inspection of the documents.
There will be no order as to costs.
Solicitors:
White Fox & Jones, Christchurch for Appellants
Wynn Williams, Christchurch for Respondent
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