Cannasouth Bioscience Limited (in liquidation)

[2024] NZHC 1970

IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY

I TE KŌTI MATUA O AOTEAROA KIRIKIRIROA ROHE

CIV-2024-419-174

[2024] NZHC 1970

UNDER

Part 19 of the High Court Rules 2016 and the Companies Act 1993

IN THE MATTER OF

the liquidation of Cannasouth Bioscience Limited (in liquidation)

AND

an application by GARRY CECIL WHIMP and BENJAMIN BRIAN FRANCIS as

liquidators of CANNASOUTH BIOSCIENCE LIMITED (IN LIQUIDATION)

Applicants

Hearing:	On the papers
Counsel:	K K Kommu for Applicants
Judgment:	17 July 2024

JUDGMENT OF O’GORMAN J

This judgment was delivered by me on 17 July 2024 at 3 pm pursuant to r 11.5 of the High Court Rules 2016.

Registrar/Deputy Registrar

…………………………………

Solicitors:
Sharp Tudhope, Tauranga

Re CANNASOUTH BIOSCIENCE LTD (IN LIQUIDATION) [2024] NZHC 1970 (17 July 2024)

[1]    The applicants are Garry Whimp and Benjamin Francis, as liquidators of Cannasouth Bioscience Ltd (in liquidation) (Cannasouth Bio). This application relates to a resolution to be voted on at a creditors’ meeting of Cannasouth Bio set down for 12 pm on 19 July 2024. At that meeting, the creditors are due to vote on resolutions to confirm the appointment of the applicants as liquidators, or to appoint other liquidators in their place, and to appoint a liquidation committee.

[2]    This application concerns how to deal with a related creditor’s intended votes at that meeting, under s 245A of the Companies Act 1993 (the Act). Section 245A(1) requires the liquidator to disregard a related creditor’s vote on a resolution at the meeting of creditors, unless the Court orders otherwise. Section 245A(2A) provides that a related creditor may apply for a court order within 10 working days of the meeting, so long as the creditor gave the requisite advance notice in writing to the liquidators about their intention to vote and to apply under s 245A.

[3]    The liquidators have received such as notice in advance of the 19 June 2024 meeting. They have filed a without notice originating application seeking directions under s 284 of the Act to preserve the status quo until the outcome of the related creditor’s application is known. The liquidators propose that, until those applications are determined:

(a)the applicants will remain the appointed liquidators of Cannasouth Bio, pursuant to the special resolution of shareholders dated 6 June 2024; and

(b)the applicants will be entitled to carry out their duties and exercise their powers as liquidators in the liquidation of Cannasouth Bio.

Relevant background

[4]    Cannasouth Bio is part of a group of companies, including Cannasouth Ltd, Cannasouth Cultivation Ltd, Eqalis Group New Zealand Ltd, Eqalis Pharmaceuticals Ltd, Eqalis Innovations Ltd, RestoreMe Clinic Ltd, A-Script International Ltd, CBD Isolates Ltd, Eqalis IP Ltd, Grow BOP Ltd, lce-X International Ltd, Mahana Island

Therapies Ltd, Midwest Pharmaceuticals NZ Ltd and Q-Safe International Ltd (collectively, the Cannasouth Companies).

[5]    The Cannasouth Companies produced cannabis-based medicines and ingredients. The role of Cannasouth Bio was to sell such products, being licensed to do so.

[6]    On 28 March 2024, the applicants were appointed administrators of the Cannasouth Companies.

[7]    The watershed meetings for Cannasouth Ltd and Cannasouth Bio were to take place on 7 June 2024. For the purposes of those watershed meetings, resolutions were proposed that a Deed of Company Arrangement (DOCA) be executed in respect of some of the Cannasouth Companies, but not Cannasouth Bio.

[8]    On 6 June 2024, the creditors voted to return Cannasouth Bio back to its director, Mr Mark John Lucas, as no DOCA was proposed for Cannasouth Bio prior to the watershed meetings.

[9]    However, on 6 June 2024, the sole shareholder of Cannasouth Bio, Cannasouth Ltd, resolved to appoint liquidators as the failure of the group of Cannasouth Companies, including Cannasouth Bio, was due to insufficient funds, significant operating costs and inefficiencies.

[10]   On 13 June 2024, the applicants issued their initial report to creditors and shareholders in relation to the liquidation of Cannasouth Bio (the Initial Report). In that Initial Report, the applicant liquidators indicated that they did not consider that a creditors’ meeting should be held under s 243 of the Act. This was because of the limited funds available in the liquidation and the applicants’ belief that there would be no benefit to the creditors in holding a creditors’ meeting. Also, the liquidation followed a voluntary administration where creditors’ views had been widely canvassed. Nevertheless, the Initial Report also noted that if any creditor wished for a creditors’ meeting to be called, they must write to the applicants within 10 working days of receiving the notice in the Initial Report.

[11]   On 13 June 2024, David Macaskill, on behalf of himself, Andrea Franklin, Daniel Reason, Niki Mills and Waikato Innovation Park Ltd, gave notice via email to the applicants that they would like to call a meeting of creditors. The stated purpose of the creditors’ meeting was to vote on resolutions:

(a)appointing a liquidation committee; and

(b)to replace the current appointed liquidators with Tony Maginness and Jared Booth from Baker Tilly Staples Rodway.

[12]   Accordingly, on 27 June 2024, the applicants served notice of the Creditors’ Meeting in accordance with s 243 of the Act. The Creditors’ Meeting is due to take place by postal vote at 12 pm on 19 July 2024.

[13]   On 27 June 2024, counsel for Cannasouth Ltd emailed counsel for Cannasouth Bio notifying that  Cannasouth  Ltd  intended  to  apply  to  the  Court,  if required, for permission to vote on the resolutions at the Creditors’ Meeting as a related creditor in accordance with subss 245A(2) and (2A) of the Act.

[14]   On 3 July 2024, Cannasouth Ltd submitted an unsecured creditor claim form, which stated that Cannasouth Bio was indebted to Cannasouth Ltd to the sum of

$14,612,475.02.

Legal principles

[15]   By analogy, the applicants refer to two decisions in which directions were made under the Court’s general power in s 239ADO, in the context of voluntary administrations under pt 15A of the Act:

(a)In Jones v Williams,1 Isac J granted orders under s 239ADO(1) of the Act that the voluntary administration of the company not end by operation of s 239E(2)(d) of the Act if the watershed meeting ends without resolution that the company execute a DOCA, until the later of:

1      Jones v Williams [2023] NZHC 2344.

(i)10 working days after the watershed meeting;

(ii)the determination of the application that related creditor votes must be taken into account; or

(iii)any other application made pursuant to s 239AM of the Act.

(b)In Re Cannasouth Ltd,2 van Bohemen J also made similar directions under s 239ADO(1) of the Act.

[16]   The powers of the Court to supervise liquidation processes under s 284(1) of the Act are flexible, but not as wide as the general power under s 239ADO. The supervision powers under s 284 include the ability to reverse or modify decisions made by liquidators, review and fix liquidators’ remuneration, and provide directions on any matter arising in connection with the liquidation.3 As provided for in s 284(2) of the Act, those powers are in addition to any other powers the Court may exercise in its jurisdiction relating to liquidators under pt 16 of the Act.

[17] Section 245A was inserted in the Companies Act under s 18 of the Companies Amendment Act 2006. The section is derived from s 600A of the corresponding Australian legislation, the Corporations Act 2001. In Grant v CP Asset Management Ltd, the Court of Appeal noted that the purpose was to increase liquidators’ accountability to creditors and to “reduce the scope for company shareholders and related parties to defeat the interests of creditors at creditors’ meetings by allowing the court to intervene”.4

2      Re Cannasouth Ltd [2024] NZHC 1495.

3      Companies Act 1993, subss 284(1)(a), (b) and (e).

4      Grant v CP Asset Management Ltd [2013] NZCA 452, [2014] NZCCLR 5 at [37], quoting the Insolvency Law Reform Bill 2005 (14-1) (explanatory note) at 5. See also Baker v Gilbert [2015] NZHC 3311 at [29].

[18]   Subsections 245A (2A) and (2B) were inserted on 1 September 2020.5 These now provide the default position is that the related creditor’s vote is to be disregarded, unless the Court orders otherwise. Prior to those amendments, the default position was that the related creditor’s vote would be counted, subject to a potential court order to the contrary (or other potential forms of relief).

[19]   Under ss 243 and 245A, the scope for Court intervention on the appointment of liquidators is circumscribed:6

Importantly, s 243 does not provide for court intervention in the appointment of liquidators in regularly conducted creditors meetings after a company has gone into liquidation under s 241(2)(a) and (b). Instead the matter is to be decided by a meeting of creditors. Court intervention is required only if something goes wrong, for example, non-compliance with Schedule 5. In such interventions, as when the court is satisfied that substantial injustice has been caused, the court exercises its power remedially — to set aside whatever has gone wrong and give the opportunity to run matters correctly. It is not an occasion for the court to impose its own views in place of the creditors’.

Section 245A allows for court intervention when something has gone wrong in a creditors meeting — when the outcome of voting has been determined by related creditors. The court’s powers under subsection (2) are similarly remedial: set aside the tainted resolution, direct a new meeting and bar related creditors from voting. It allows for a fresh meeting to be run without related creditors influencing the voting, not for the court to appoint its preferred liquidator.

Analysis

[20]   Given that this is a without notice application, I have not received any opposing submissions addressing the question of whether there is jurisdiction to make the orders sought under s 284 or under s 245A(1), notwithstanding that this is before the vote or any related creditor application being made and heard. Without the benefit of being addressed on those matters, I consider there is jurisdiction to make interim “orders otherwise” under s 245A(1), but the Court should be circumspect about doing so on a

5      Insolvency Practitioners Regulation (Amendments) Act 2019 (2019 No 28), s 36(2). These changes were first included in the bill when it was reported from the Economic Development, Science and Innovation Committee, but these specific changes were not discussed: (11 April 2019) 737 NZPD 10553–10558.

6      Baker v Gilbert, above n 4, at [46]–[47] (footnotes omitted) — these comments pre-date the (2A) and (3A) amendments, which further narrow the scope for overriding the outcome of a creditors’ meeting.

pre-emptive basis given the clear default position under s 245A (post-September 2020) that the related creditor’s vote is to be disregarded, at least initially.

[21]   In terms of assessing the usual balance of convenience and interest of justice factors that arise for urgent interim orders, I accept there are valid arguments to preserve the status quo. The liquidators are already familiar with the company and have been in control since their appointment from 6 June 2024. Deferring giving effect to the creditor’s vote until the outcome of a related creditor’s application is known seems logical if it would result in only a short delay that would not prejudice the creditors. Furthermore, a concern has been raised that there are insufficient funds to pay the expenses of new liquidators.

[22]   However, on the evidence before me I am not satisfied that such orders to preserve the status quo are appropriate on the facts and as a matter of my discretion:

(a)In my view, there needs to be good reason to override the default position now provided for under s 245A, given that those provisions have been specifically designed (and recently strengthened) to reduce the scope for company shareholders and related parties to defeat the interests of creditors at creditors’ meetings.

(b)The Initial Report records that the company has “minimal assets remaining at the date of liquidation”, compared with liabilities of in excess of $15.7 million. As also stated in  the  Initial  Report,  creditors have raised concerns regarding the transfers of stock and value between the related companies, of which the liquidators are Deed Administrators.

(c)In practical terms, the most likely  avenue of recovery  for  creditors (if any) will be scrutinising the related party transactions and considering any potential claims  against  directors  and  advisers.  The liquidators say they have engaged “separate counsel to the other companies in the group and are in the process of engaging an independent accountant to provide an expert determination of the

correct allocation of funds between the companies”. Even so, it would be entirely understandable for the creditors of Cannasouth Bio to have concerns about the liquidators’ conflicts of interest given their appointments to other companies in the group, particularly when no DOCA was proposed for this company, in contrast with other companies in the group.

(d)The non-related creditors currently face difficulties of lack of access to the underlying information and in co-ordinating their interests. I am concerned that deferring the effect of the creditors’ vote will keep them at a disadvantage for addressing the intended related creditor’s application under s 245A.

(e)On the documents before me, I am not satisfied that the jurisdictional requirements in  s  245A(2B)  are  met  in  terms  of  substantiating  no unreasonable prejudice to the non-related creditors.

(f)It seems from the Initial Report that liquidation expenses might need to be raised from creditors, or that payment of the liquidators might need to be contingent on recoveries. These are matters that have presumably been considered and addressed in some way by the alternative proposed liquidators. If anything, I consider this factor neutral, assuming that the non-related creditors might be more willing to fund an investigation by new and independent liquidators.

(g)I am concerned that the delay would be more than minimal (possibly several months, even if heard on an urgent basis) until the substantive hearing of an opposed application under s 245A by the related creditor. I considered the option of making interim orders only until the related creditor’s application is filed and served and listed for its first mention. However, this would not enable the Court to apply the requirements of s 245(2B) properly in the context of full evidence and argument. Effectively, the Court would be in no better position than now to assess

interim issues, assuming the vote confirms the wish of the non-related creditors to replace the liquidators.

(h)Declining this ex parte application for interim orders is not a final determination of the underlying issues. I do not accept that it renders nugatory the related creditor’s rights under s 245A. Under s 245A, the related creditor’s application may proceed on notice, and that applicant may seek to satisfy the court of the matters in s 245A(2B), in which case relief will be available.

Result

[23]For the above reasons, I decline the application.

O’Gorman J