Chandra v Shephard
[2013] NZHC 2816
•25 October 2013
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
CIV-2013-485-689 [2013] NZHC 2816
UNDER Part 18 of the High Court Rules
IN THE MATTER of the Companies Act 1993
BETWEEN ANUSHEEL CHANDRA First Plaintiff
PETER ROBERT SEWELL Second Plaintiff
ANDIAIN BRUCE SHEPHARD AND CHRISTINE MARGARET DUNPHY Defendants
Hearing: 12 September 2013
Counsel: C F J Reid and J W McDougall for Plaintiffs
K P Sullivan for Defendants
Judgment: 25 October 2013
JUDGMENT OF GODDARD J
This judgment was delivered by me on 25 October 2013 at 12.00 pm, pursuant to r 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Solicitors:
Gibson Sheat, Wellington for Plaintiffs
DLA Phillips Fox, Wellington for Defendants
CHANDRA v SHEPHARD [2013] NZHC 2816 [25 October 2013]
[1] The plaintiffs sought a hearing of a preliminary question which, if determined in the affirmative, will resolve the substantive proceeding in this matter. To this end the parties filed an agreed statement of facts and an agreed bundle of documents, and stated the preliminary question in the following form:
Does the Successor Company Notice dated 16 May 2013 comply with the requirements of s 386D of the Companies Act 1993?
[2] The proceeding itself is an application under s 386D of the Companies Act
1993 (the Act) seeking an exemption from the prohibitions contained in s 386A(1) of the Act and an order from the Court permitting the plaintiffs to act as directors of the successor companies.
[3] By way of relief, the plaintiffs seek either:
(a) a declaration that the successor company notice dated 16 May 2013 complies with the requirements of s 386D of the Act.
Or an order granting permission to each of the plaintiffs to: (b) be a director of the successor companies;
(c) directly take part in the promotion, formation or management of the successor companies; and
(d) directly take part in the carrying on of a business that has a similar
name as the failed company’s pre-liquidation name.
[4] The agreed statement of facts and agreed bundle of documents contain all relevant evidence. In addition, there is a bundle of authorities which include
academic papers on phoenix companies,1 and decisions on the purposive approach to
1 Trish Keeper “Phoenix Companies” (paper presented to the New Zealand Law Society Business Insolvency Intensive Conference, April 2007) at 117 and Lynne Taylor “The Regulation of Director Involvement in Phoenix Companies Under Sections 386A to 386F of the Companies Act 1993”, NZ Universities LR, Vol 23 (2008) 23 NZULR 111.
be taken to interpreting legislation, particularly in relation to s 33 of the Interpretation Act 1999,2 as well as a copy of the decision of McKenzie J in Groves v TSSN Ltd (in liquidation).3
Background events
[5] The first and second plaintiffs are company directors and were previously directors of a failed company (as defined by s 386B of the Act); viz Command Services Limited (in liquidation) (the failed company).
[6] The failed company was incorporated on 22 October 1993 and carried on business as a consultant and installer of heating, ventilation and air conditioning (HVAC). Effectively, the failed company operated three distinct businesses as part of the one company; viz an installation business, a maintenance and service business, and a management business and holding company.
[7] The failed company had a subcontract with Mainzeal Property and Construction Ltd (in receivership and in liquidation) (Mainzeal) for the installation of HVAC systems on a number of project sites in the lower North Island, including the Tory Street and Victoria University of Wellington Hub projects.
[8] On 31 January 2013 payment by Mainzeal to the failed company for work carried out under the Tory Street contract became due and owing.
[9] On 1 February 2013 the failed company served a Notice to Stop Work on Mainzeal in respect of the Tory Street contract because payment had not been received.
[10] On 6 February 2013, Mainzeal was put into receivership and the receivers suspended all work on all Mainzeal’s sites pending review of Mainzeal’s position.
2 Conference of the Methodist Church of New Zealand v Gray [1996] 2 NZLR 554 (CA); Strategic Finance Ltd (in receivership and liquidation) v Bridgman [2013] NZCA 357; Re DML Resources Ltd (in liquidation) [2004] 3 NZLR 490 (HC); Chapman v Effective Fencing Ltd HC, Auckland CIV-2004-404-5905, 21 April 2005; and Hickman v Turner & Waverley Ltd [2012] NZSC 72, [2013] 1 NZLR 741.
3 Groves v TSSN Ltd (in liquidation) [2012] NZHC 2402, [2013] 1 NZLR 111.
[11] Pre-receivership debts owing to Mainzeal contractors were frozen on the appointment of receivers.
[12] On 6 February 2013 (a public holiday), the directors of the failed company became aware that receivers had been appointed to Mainzeal and called an urgent meeting to discuss the implications and plan for a change in deployment of labour.
[13] Between 7 February and 20 February 2013 the plaintiffs attended various meetings and engaged in discussions with other Mainzeal subcontractors and business consultants to address the issues arising from Mainzeal being placed into receivership.
Incorporation of successor companies
[14] Following the liquidation of Mainzeal and after taking advice from their insolvency and restructuring advisers, the plaintiffs incorporated three successor companies. The Mainzeal collapse had caused the failed company to suffer a loss of payment of $2,807,669.15 for the work done by its installation business. This had a detrimental effect on the other two parts of the business, despite those having had no direct involvement with Mainzeal. The plaintiffs and their advisors therefore considered the businesses would be more resilient against future similar circumstances if each were to operate as a separate entity.
[15] For this reason, three successor companies were incorporated.
[16] Command Care Limited was incorporated on 27 February 2013 by the plaintiffs for the purpose of purchasing the failed company’s HVAC maintenance and servicing business.
[17] Command HVAC Limited was incorporated on 28 February 2013 for the purpose of completing the Tory Street project (involving the principals, Future Tory Limited and Arawata Assets Limited).
[18] Command Management Limited was incorporated on 4 March 2013 by the plaintiffs for the purpose of purchasing the assets of the failed company, including taking assignments of the employment contracts of the failed company.
[19] The plaintiffs were appointed as directors of all three successor companies and have filed director consents with the Registrar of Companies in respect of their directorships of each successor company.
Appointment of liquidators and sale of business and assets of failed company
[20] On 22 April 2013 the failed company was placed into liquidation by a special resolution of shareholders and the defendants were appointed as joint and several liquidators of the failed company.
[21] On 29 April the plaintiffs filed an application for exemption from the phoenix company prohibitions pursuant to s 386E of the Act and the defendants were served with the relevant documentation at the failed company’s registered office.
[22] With the assistance of their legal advisers, the defendant liquidators then negotiated the sale and purchase of all three aspects of the business to the successor companies. Each successor company purchased the relevant aspects of the failed company’s business from the defendants. None acquired a majority of the failed company’s business, but collectively the group of successor companies did. The philosophy was that, rather than sell off the plant and equipment individually, the sale and purchase of the business as a going concern would maximise value. The benefits would be to secure a more favourable price for the management contracts than would derive from selling them alone; and the employees of the failed company would be taken over by the successor companies and the full value of their wages and entitlements met from the sale proceeds.
[23] On 13 May 2013 the agreements settled and settlement statements and tax invoices were issued by the defendants to the successor companies in respect of each agreement.
Successor company notice
[24] On 16 May 2013 the plaintiffs signed a successor company notice prepared by their solicitors and sent it on behalf of the Command group of companies to all creditors of the failed company for whom they had an address.
[25] The notice correctly specified all information and details required under s 386D(3)(c) of the Act and thus was fully compliant, other than in the one respect which is the issue for preliminary determination in this judgment.
The relevant legislation
[26] Section 386A(1) prohibits a director of a failed company from involvement in certain activities in relation to a phoenix company. The prohibition operates for a period of five years after the date of commencement of the liquidation of the failed company. The prohibited activities are:
(a) being a director of a phoenix company;
(b)being concerned in or taking part in the promotion, formation, or management of a phoenix company, whether directly or indirectly;
(c) being concerned in or taking part in carrying on a business with the same name, or a similar name, to the pre-liquidation name of the failed company, whether directly or indirectly.
[27] Section 386A(2) makes contravention of s 386A(1) an offence.
[28] Section 386D of the Act provides, however, for an exception to the s 386A(1)
prohibitions for a person named in a successor company notice, as follows:
386D Exception for person named in successor company notice
(1) Section 386A does not apply to a person named in a successor company notice.
(2) A successor company is a company that acquires the whole or substantially the whole of the business of a failed company under
arrangements made by a liquidator or receiver or made under a deed of company arrangement under Part 15A.
(3) A successor company notice is a notice by a successor company that—
(a) is sent by the successor company to all creditors of the failed company for whom the successor company has an address; and
(b) is sent to those creditors within 20 working days after the arrangements for the acquisition of the business are made under subsection (2); and
(c) specifies—
(i) the name and registered number of the failed company; and
(ii) the circumstances in which the business has been acquired by the successor business; and
(iii) the name that the successor company has assumed, or proposes to assume, for the purpose of carrying on that business; and
(iv) any change of name that the successor company has made, or proposes to make, for the purpose of carrying on that business; and
(d) states, in respect of a person named in the notice,—
(i) his or her full name; and
(ii) the duration of his or her directorship of the failed company; and
(iii) the extent of his or her involvement in the management of the failed company.
[29] The phoenix company provisions were introduced into the Companies Act4
by amendment for the purpose of providing:5
for an insolvency regime that is simple, predictable and efficient to administer, without imposing unnecessary compliance and regulatory costs on its users ... to promote innovation, responsible risk taking, and entrepreneurialism by not excessively penalising business failure ... promote business investment, greater innovation, and economic growth by providing effective and efficient ways to deal with the financial failure of both individuals and companies.
4 Section 386 was inserted from 1 November 2007 by s 35 of the Companies Amendment Act
2006 along with the other phoenix company provisions (s 386A–386F).
5 Third reading of the Companies Amendment Bill (28 October 2006) 634 NZPD 6171.
[30] The phoenix company provisions were also introduced to “restrict the abuse of phoenix company structures by directors of failed companies with the intent to defeat the legitimate interest of creditors”.6
[31] The purposes of the provisions and the abuses they were designed to restrict were referred to by McKenzie J in Groves v TSSN (in liquidation),7 adopting a submission by Mr Sullivan, who was also counsel in that case. Essentially, the purposes as explained by McKenzie J are to prevent a phoenix company from trading and failing again relatively quickly; acquiring the failed company’s assets at undervalue; and misleading creditors of the failed company to believe there has been no change in the corporate structure of the failed company.
The question
[32] The question for this Court is directed solely to the compliance or otherwise of the successor company notice. There can be no doubt that the three successor companies have acquired the whole or substantially the whole of the business of the failed company. That qualification is met. The issue is simply whether, as a question of statutory interpretation, the word “company” in s 386D can be read in the plural as “companies”?
[33] The liquidators support an affirmative answer to the question in the circumstances of this case.
Principles of interpretation
[34] Both counsel referred to the relevant sections of the Interpretation Act 1999
and in particular s 33 providing for “Numbers” as follows:
Words in the singular include the plural and words in the plural include the singular.
[35] Numerous examples of cases in which s 33 and its predecessor,8 have been considered and applied by the Court were cited, including the decision of Thomas J
6 (28 October 2006) 634 NZPD 6171.
7 Above n 3.
8 Acts Interpretation Act 1924, s 4.
in Conference of the Methodist Church of New Zealand v Gray.9 In that decision, Thomas J opined:10
In the first place, I do not consider that s 4 of the Acts Interpretation Act
1924 can be so lightly set to one side. Unless it is inconsistent with the context or where there are words to exclude or restrict the meaning, “words
importing the singular number include the plural number, and words
importing the plural number include the singular number ...”
[36] Other cited cases in the context of insolvency law or under the Act have determined that the plural should include the singular and the singular should include the plural, and concerned the words “accounts receivable”,11 “distribution”,12 “director”13 and “issuer”.14
[37] Reference was also made by both counsel to ss 5 and 6 of the Interpretation Act, the latter providing for enactments to apply to circumstances as they arise, and also to Professor Burrows’ statement that:15
The modern trend [of statutory interpretation] is towards a purposive interpretation where the words of the legislation are read in their fullest context, and with the view to giving effect to the purpose of the legislation.
Discussion
[38] It is clear in the instant case that the liquidators, on the advice of their legal advisers, carefully considered whether the sale of the business and its assets to the three successor companies was in the interests of creditors and decided that it was. Part of their consideration was identification of the benefits to be gained by securing a more favourable price for the management contracts and being able to meet the full value of the wages and entitlements of employees from the sale proceeds.
[39] The liquidators were clearly also satisfied that the plaintiffs are suitable persons to have purchased and to operate the businesses of the failed company and it
9 Conference of the Methodist Church of New Zealand v Gray [1996] 2 NZLR 554 (CA).
10 At 580.
11 Strategic Finance Ltd (in rec & in liq) v Bridgman [2013] NZCA 357 at [41].
12 Re DML Resources Ltd (in liquidation) [2004] 3 NZLR 490 (HC) at [70].
13 Chapman v Effective Fencing Ltd HC Auckland CIV-2004-404-5905, 21 April 2005 at [39].
14 Hickman v Turner and Waverley Ltd [2012] NZSC 72, [2013] 1 NZLR 741 at [125]–[126].
15 J F Burrows Statute Law in New Zealand (4th ed, LexisNexis, Wellington, 2009) at 201.
is also significant for the Court that the liquidators support protection for the directors through application of the phoenix company provisions.
[40] Of significance to the plaintiffs’ suitability is the fact that the failure of Mainzeal was the critical factor in the failure of the failed company and the failure was not attributable to the operating practices of the directors.
[41] In relation to the use of the singular in s 386D, when considering whether one company that has failed must sell to only one new entity, the liquidators advise that in modern times it is common for different aspects of a business to be held by different corporate vehicles; for instance, in respect of ownership of physical assets and the trading business. They say the rationale for this may differ from company to company. Different security arrangements may apply to different parts of a business; there may be different risk profiles; and often different sets of creditors will contract with different parts of a business. The two latter aspects were relevant to the failed company in this case.
Conclusion
[42] I am satisfied that, in line with previous decisions relating to the use of the singular or the plural in insolvency and company law, the definition of a successor company in s 386D of the Act should be interpreted to include the plural. Such a purposive interpretation does no violence to the meaning and purpose of the legislation and nor does it imply that in every case it will be appropriate for a group of successor companies to acquire the business of a failed company and derive the benefit of the exception in s 386D. Whether that should be so will always be a question of fact.
[43] In the present case, having determined the preliminary question in the affirmative, I have no hesitation in moving to make an order granting permission to each of the plaintiffs in the terms sought by them in their amended statement of claim and as set out in paragraph [3](b), (c) and (d) above.
Result
[44] By order of the Court, each of the plaintiffs is granted permission to: (i) be a director of the successor companies;
(ii)directly take part in the promotion, formation or management of the successor companies; and
(iii) directly take part in the carrying on of a business that has a similar
name as the failed company’s pre-liquidation name.
Goddard J
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