Commissioner of Inland Revenue v Ohiwa Developments Limited
[2014] NZHC 2305
•16 September 2014
IN THE HIGH COURT OF NEW ZEALAND TAURANGA REGISTRY
CIV-2013-470-593 [2014] NZHC 2305
BETWEEN COMMISSIONER OF INLAND
REVENUE Plaintiff
AND
OHIWA DEVELOPMENTS LIMITED First Defendant
WILLIAM FERGUSSON TAYLOR Second Defendant
Hearing: 16 September 2014 Counsel:
SJ Leslie and IA Mala for plaintiff
MA Branch for liquidators of first defendant
GC McArthur for second defendantJudgment:
16 September 2014
ORAL JUDGMENT OF ASSOCIATE JUDGE BELL
Solicitors: Crown Law, Wellington Harkness Henry, Hamilton JK Hamilton, Tauranga
Commissioner Of Inland Revenue v Ohiwa Developments Limited [2014] NZHC 2305 [16 September 2014]
[1] On 22 July 2014, on the application of the Commissioner of Inland Revenue, I ordered that Ohiwa Developments Limited be put into liquidation.1 The Commissioner applied on the ground that the company was not able to pay its debts. Insolvency was not contested. I appointed Mr Blanchett and Mr McCloy as liquidators. Immediately after I gave my decision, Mr McArthur, who acted for the company, sought directions. He wanted to take instructions about an appeal. To
enable an appeal to be brought, I joined Mr Taylor, Ohiwa’s director, as second defendant. I directed that the order was not to be sealed for 10 working days to allow time for Mr Taylor to consider whether to appeal.
[2] Mr Taylor has appealed. He challenges the exercise of my discretion under s 239ABV of the Companies Act 1993 not to adjourn the hearing of the liquidation application. The case for Ohiwa was that the company had recently gone into voluntary administration and that should continue under Part 15A of the Companies Act. Mr Taylor argued that the interests of creditors would be better served by the company remaining in voluntary administration rather than going into liquidation.
[3] Not only has Mr Taylor appealed against my decision, but the Commissioner has cross-appealed. The Commissioner contends that I erred in holding that the company had been effectively put into voluntary administration. The Commissioner has appealed against my finding that there was a single secured creditor within s 239K of the Companies Act who could effectively appoint an administrator. Apparently the Commissioner will contend that Edgecumbe Holdings Limited, the mortgagor of the Hairini property, did not hold a charge over the whole or substantially the whole of the company’s property because there was another secured creditor, TSB Bank Limited, which held a mortgage over another company property at 21 Hayward Court, Te Puke.
[4] Mr Taylor has applied for interim relief pending the appeal. There have been interim decisions until now directing the liquidators not to take any further steps in the liquidation pending further order of the Court. This matter is the opposed hearing of Mr Taylor’s application for interim relief under r 12 of the Court of Appeal (Civil) Rules 2005.
[5] Rule 12(3) says:
Pending the determination of an application for leave to appeal or an appeal, the court appealed from or the Court may, on application:
(a) order a stay of the proceeding in which the decision was given or a stay of the execution of the decision; or
(b) grant any interim relief.
[6] This matter is being decided under r 12(3)(b), not under r 12(3)(a). I say that in the light of the decision of the Court of Appeal in Yan v Mainzeal Property and Construction Limited (in rec and in liq).2 The Court disapproved of the decision of Brown J at first instance, that any question of interim relief pending appeal from a liquidation order ought to be considered solely under s 284 of the Companies Act. The Court held that relief under r 12(3)(a) was not available as there is no question
of execution of a judgment to be stayed. The Court noted the usual criteria for applications under r 12(3), these being:
(a) whether the appeal may be rendered nugatory by the lack of a stay; (b) the bona fides of the applicant as to the prosecution of the appeal;
(c) whether the successful party will be injuriously affected by the stay; (d) the effect on third parties;
(e) the novelty and importance of questions involved; (f) the public interest in the proceeding;
(g) the overall balance of convenience; and
(h) the apparent strength of the appeal.3
2 Yan v Mainzeal Property and Construction Limited (in rec and in liq) [2014] NZCA 86.
3 See Keung v GBR Investment Ltd [2010] NZCA 396, [2012] NZAR 17.
[7] The Court of Appeal also noted with approval the judgment of Plowman J in Re A & BC Chewing Gum Ltd4 that relief pending appeal against a liquidation order was sparingly given.
[8] In this case, the interim relief sought is very confined. Mr McArthur made it clear that the application sought to restrain only the advertising and notifications which a liquidator is required to carry out under s 255(2)(a) and (b) of the Companies Act and, in addition, it sought to guide how the liquidators should advise banks when making enquiries as to bank accounts so that the fact of liquidation would not be passed on to the banks. Beyond that, Mr Taylor does not seek any restriction on the liquidators exercising their powers.
[9] Mr Taylor’s concerns are these. He has a number of business entities. One of them, Real Cool Holdings Limited, owns a coolstore at Mt Maunganui. Real Cool Holdings Limited arranged finance from Property Finance Securities Limited for
$5.2m. That company failed in the global financial crisis and is presently in receivership. The mortgage in favour of Property Finance Securities Limited is said to be for 30 years. Currently the receivers are interested in liquidating assets. To that end, they are prepared to take a repayment of the principal now and in consideration of that will offer a discount of $600,000. That is, they would accept payment of $4.6m in repayment of the current mortgage of $5.2m. Mr Taylor sees that as a valuable opportunity. He wishes to obtain refinance through another source. He says that he is presently negotiating with the Bank of New Zealand. Apparently there may be another bank also interested in refinancing.
[10] Mr Taylor’s concern is that if the Bank of New Zealand and the other bank were to get wind of the liquidation of Ohiwa, he would stand to lose this opportunity for an advantageous refinancing. He also says that there is a potential risk in not being able to carry out further development work on the property he owns at 1
Selwyn Street, Tauranga. Again, he paints the picture that arranging finance for redevelopment may be difficult if it is known that a company of which he is a director, Ohiwa Developments Limited, has been placed in liquidation. It is to that end, and that end only, that he seeks an interim restraint on the liquidators
advertising under s 255 and on how they make enquiries with banks as to accounts in the name of Ohiwa.
[11] Before I go on to consider the merits, I note that the position of the company has changed in one respect since my decision ordering it to be put into liquidation. The Hairini property remains in the name of the company and is subject to the mortgage to Edgecumbe Holdings Limited. The Hayward Court property at Te Puke remains registered in the name of the company, although before it went into administration the company had made an agreement to transfer it to Mr Taylor’s family trust. That remains subject to the mortgage in favour of TSB Bank Limited. There has been no change in the registered owner since liquidation. What has changed is that a management contract, which was the subject of my earlier decision, ceased to operate once the company went into liquidation. The management contract was held out as being a good reason for the company to stay in voluntary administration under Part 15A and as offering a means for creditors to be paid. That is now at an end.
[12] I accept, for this application, that the appeal is being run in good faith.
[13] As to the issues for the appeal, I accept also that there is a broader question as to the insolvent administration appropriate for Ohiwa. The choice is between voluntary administration under Part 15A and liquidation under Part 16 of the Companies Act. I decided the form of administration under s 239ABV of the Companies Act. In the hearing on 22 July 2014, no one cited any New Zealand cases under s 239ABV. Australian decisions under the equivalent provisions of Australia’s Corporations Act 2001 (Cth) were cited instead. Today no one has suggested that there are any relevant New Zealand decisions that were not brought to my attention earlier. There have been relatively few decisions under Part 15A of the Companies Act. I am not aware of any other New Zealand decision under s 239ABV.
[14] There are aspects of my decision which may provide material for argument in the Court of Appeal:
(a) I distinguished between creditors associated with Mr Taylor and his interests on the one hand and external creditors on the other.
(b) I decided the case ahead of the watershed meeting.
(c) I preferred the interests of the Commissioner of Inland Revenue as the majority external creditor over other external creditors, who had not been heard, and over creditors associated with Mr Taylor.
[15] Those factors may be relevant to whether I exercised my discretion correctly. I do not regard that aspect of the case as, by any means, spurious or vexatious. There is material there for a considered decision of the Court of Appeal on a provision of the Companies Act which has not been subject to full consideration before.
[16] In saying that, I do not ignore the Commissioner’s cross-appeal. I regard the Commissioner’s cross-appeal also as having been brought in good faith and as raising substantial arguments. That, in turn, poses a problem for Mr Taylor. If the Commissioner succeeds, then the company should never have been put into voluntary administration and it is unnecessary to make a decision under s 239ABV. In those circumstances, liquidation would be inevitable.
[17] In Yan v Mainzeal the Court of Appeal identified the overall balance of convenience as a relevant factor. The decision in this case requires a balancing of competing interests. On the one hand, the Commissioner of Inland Revenue has obtained a liquidation order and, as a successful litigant, is entitled to the fruits of the judgment. Those fruits are that the liquidation be carried out as ordered. Against that, the interests of the appellant are to ensure that it has a fair hearing before the Court and that, if it is successful, the situation before the liquidation order can be reinstated.
[18] In an application under 12(3), it is common to refer to the dictum of
Buckley LJ in Minnesota Mining and Manufacturing Co v Johnson and Johnson
Ltd:5
The object, where it can be fairly achieved, must surely be so to arrange matters that, when the appeal comes to be heard, the appellate court may be able to do justice between the parties, whatever the outcome of the appeal may be... If the defendant in good faith proposes to appeal, challenging either the trial judge’s findings or his law, and has a genuine chance of success on his appeal, the plaintiff’s entitlement to his remedy cannot be regarded as certain until the appeal has been disposed of.
[19] If that ideal can be reached, then a fair balancing can be obtained. The decision in this case has to be made against the fact of Ohiwa’s acknowledged insolvency. There is no doubt that the company should be in some form of insolvency administration.
[20] I take into account the fact that Mr Taylor’s application is a limited one. Overall, he does not object to the liquidation continuing in the interim pending the hearing of the appeal. He is concerned only to protect his other interests from the effect of any adverse publicity arising out of the liquidation order. That concern needs to be put into context. It is inevitable that the fact of Ohiwa’s insolvency will become public knowledge one way or another. It is already on the Court record. When the Commissioner applied for a liquidation order, as required under the High Court Rules, the Commissioner advertised the application. No other person gave notice wishing to appear to support or oppose the application. All the same, given its publication in local newspapers, other creditors could learn of it. If the company were to go into voluntary administration, it would also be required to give notice of
that. That arises under ss 239AEB and 239ADW of the Companies Act.6
[21] Mr Taylor’s concern is that the Bank of New Zealand may get wind of the liquidation of Ohiwa Developments Limited and that will jeopardise his negotiations. In so far as he is trying to arrange refinancing, I would expect the bank to require him to disclose all relevant information so that it can make an informed
decision. I regard it as inevitable that, one way or another, he is going to have to tell
5 Minnesota Mining and Manufacturing Co v Johnson and Johnson Ltd [1976] RPC 671 (CA) at
676.
6 Under s 239ADW an administrator is required to give notice of his appointment to the Registrar, to secured creditors and to advertise it. Under s 239AEB in its documents evidencing or creating obligations the company name must have the words “administrator appointed” or “subject to deed of company arrangement”.
the bank about the liquidation of Ohiwa Developments Limited. He has had the opportunity to address that matter with the bank already. The fact that he may suffer difficulties in other business transactions because he is the director of a company which has not been able to pay its debts when due is one of those consequences of having been associated with an insolvent company. It is not something he can ask the Court to protect him from while he challenges a liquidation decision. Whether the liquidation order is good or not, the plain fact is that Ohiwa Developments Limited is insolvent and some form of insolvency administration is required. Mr Taylor cannot responsibly expect that to remain undisclosed. That factor, in my view, does not properly count for much in the balancing under r 12(3)(b).
[22] Against that, I do see good grounds for the concern of the liquidators that they have not been able to start on their duties. In paragraph 9 of his affidavit, Mr Blanchett has identified a number of duties which the liquidators must attend to on appointment. I accept his case that upon appointment liquidators are immediately required to advertise, to identify and secure assets, to identify creditors and notify them and, if appropriate, call a creditors’ meeting. Those matters have not been attended to yet. Obviously they need to be attended to promptly. For the reasons given by Plowman J in Re A & BC Chewing Gum Ltd, I accept also that there can be risks if those matters are not undertaken promptly. Accordingly, the reasons for requiring the liquidators to continue with their functions in the normal way prevail, in my view, over the matters that Mr Taylor has raised.
[23] Having said that, there may be other matters that may influence the liquidators on how much work they do. Mr Branch made it clear that the liquidators fully intend to carry out the mandatory duties under the Companies Act. Nothing in this decision is intended to suggest that they should not do so. There are, however, other matters where the liquidators need to exercise some judgment. A matter that may bear on the liquidators’ actions is that until the appeal has been decided, they may not know for certain whether the liquidation is to continue. If the liquidation continues, they will have some reassurance as to their entitlement to remuneration. If any assets become available for non-secured creditors, then their right to remuneration will prevail over any other claims on those funds. That arises under s 312 and cl 1(1)(a) of sch 7 of the Companies Act.
liquidators will still be entitled to their remuneration. The Court of Appeal made this clear in Norman v ANZ National Bank Ltd:7
Even if a liquidation order is subsequently set aside, it is not set aside ab initio. The liquidator is obliged to undertake his duties as liquidator during the course of the liquidation until further order of the Court. The liquidator should be entitled to remuneration in the usual way during the time the company remains in liquidation.
[25] The Court of Appeal did not address what happens if the liquidators have not recovered their remuneration during the period of liquidation. What are their entitlements after the company is taken out of liquidation on a successful appeal against a liquidation order? The Court of Appeal did not indicate that there could be recourse to any other parties for payment of their remuneration. The liquidators would appear still to have their entitlement to remuneration under s 276 but as the liquidation has come to an end, they would not enjoy the priority given under s 312 and sch 7. The default position may be that liquidators could only have the rights of unsecured creditors.
[26] Now to consider how that matter might unfold in this case. If the liquidators carry out their functions while the company is in liquidation and before the appeal is heard, they may not recover anything by way of assets from which they could be paid their remuneration. It seems to me that there is a clear risk for these liquidators that if the appeal succeeds, they may not be paid any remuneration during the period of liquidation. They would still be entitled to their remuneration under s 276 but they would then be looking to payment from a company in voluntary administration. The Companies Act is silent on the rights of liquidators to claim in a voluntary administration after a liquidation has come to an end following a successful appeal. The converse position is recognised. That is, if a voluntary administration is followed by liquidation, the administrators’ right to remuneration is given priority. It
comes second after the liquidators’ remuneration.8 Given the absence of an
equivalent provision for liquidators claiming in a voluntary administration, it is not clear to me that the liquidators’ claim ranks ahead of any other unsecured creditor.
7 Norman v ANZ National Bank Ltd [2012] NZCA 356, (2012) 21 PRNZ 261 at [14].
8 See s 312 and cl (1)(1)(b) of sch 7 of the Companies Act.
prolonged investigations until the decision of the Court of Appeal is given. For my part, I would not regard the liquidators as remiss if they were not to undertake extensive work under this liquidation (save their mandatory duties) until they were clear whether the liquidation is confirmed by a decision of the Court of Appeal. To that extent then, a self-regulating mechanism will operate to check the progress of the liquidation pending the outcome of the appeal.
[28] I anticipate that Mr Taylor will be keen to pursue the appeal promptly. There is good reason to believe that this case will qualify for fast-track treatment. It may require no more than half a day for hearing. Similarly, the prospect that the liquidators may embark on matters in depth only after the Court of Appeal upholds the decision may incentivise Mr Taylor to secure a favourable decision. He faces the threat that if he delays, the liquidators may responsibly decide that the appeal is not being pursued in good faith and may undertake further work. In other words, a suitable balance may operate in any event, without requiring further directions from this Court.
[29] For these reasons, I dismiss the application.
Addendum
[30] After I gave my decision, Mr McArthur sought an interim restraint on advertising to allow him to take instructions to appeal to this decision. That would be an application under r 12(5) of the Court of Appeal (Civil) Rules.
[31] As to jurisdiction, I take a wide view of this Court’s auxiliary jurisdiction to grant relief in aid of a proceeding in another court. If there is to be an application to the Court of Appeal, this Court has power to give interim relief to preserve the status quo in the meantime. I give very short relief. For the next five working days, the liquidators are not to advertise under s 255(2) of the Companies Act or to notify the banks of the liquidation. But if that restraint is to continue beyond those five
Associate Judge R M Bell
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