Darkdale Pty Limited v Waller HC Auckland Cp686-Sd00

[2001] NZHC 298

IN THE HIGH COURT OF NEW ZEALAND
AUCKLAND REGISTRY CP686-SD00

BETWEEN DARKDALE PTY LIMITED
Plaintiff

AND JOHN ANTHONY WALLER and RICHARD DALE AGNEW
Defendants

Hearing: 4 April 2001

Counsel: D.J. Friar for Plaintiff/Respondent
T.J.G. Allen for Defendants/Applicants

Judgment: 26 April 2001

JUDGMENT OF LAURENSON J.

[1] The defendants in this case seek an interlocutory order staying the substantive proceeding in which they have been sued by the plaintiff in their capacity as statutory managers of Max Resources Ltd (in Statutory Management) (“Max”) and Robregal Investments Ltd (in Statutory Management) (“Robregal”).

[2] The plaintiff’s proceeding arose out of the following circumstances:

On 5 July 1995 the plaintiff, Max, a Mr D.J. Hawtin and Australasian Gold Mines Limited, (AGM) entered into a joint venture. The plaintiff was the beneficial owner, and entitled to be the registered proprietor of, a 10 per cent interest in certain mining tenements.

On 6 November 1997 the plaintiff, Robregal and Max entered into an agreement whereby the plaintiff sold this interest to Robregal for $A1,100,000.

The purchase price was to be paid by-

[a] A cash deposit of $A50,000 upon execution of the agreement; and

[b] The balance of $A1,050,000 by bank cheque payable to the plaintiff on or before 31 March 1998.

The balance was to be secured by a security by way of mortgage over, inter alia, Robregal’s interest in 8,750,000 fully paid AGM shares. Robregal’s obligations under the agreement were guaranteed by Max as the principal debtor.

The deposit was paid and the mortgage executed.

Robregal did not pay the balance by 31 March 1998.

On 5 May 1998 the plaintiff and Max, as guarantor of Robregal, entered into a deed of compromise which made provision for the payment of the balance by three instalments.

Pursuant to this arrangement Robregal paid a further $A200,000 to the plaintiff, however, a condition precedent to the performance of the deed of compromise was not met. The terms of the compromise accordingly ceased to have effect.

The plaintiff then demanded payment of the balance of $A850,000 still owing, but neither Max nor Robregal complied.

On 31 August 1998 Max was placed under Statutory Management by Order in Council pursuant to s.38(1) of the Corporations (Investigations and Management) Act 1989 (the Act). The defendants were appointed Statutory Managers. Pursuant to s.38(2) of the Act Robregal, as a subsidiary of Max, was also deemed to be placed under Statutory Management and the defendants were deemed to be the Statutory Managers.

On or about 11 February 2000 the defendants sold the AGM shares held by Robregal. This sale followed an agreement reached between the plaintiff and the defendants pursuant to which the proceeds of sale were held by the defendants in a separate trust account pending resolution of the validity of the plaintiff’s claim to be a preferred creditor under its mortgage.

This arrangement arose because the defendants had concerns as to both the validity of the sale of the plaintiff’s interest in the joint venture to Robregal and the mortgage subsequently given by Robregal.

By October 2000 the defendants had concluded that Max was insolvent and the only viable option for it was to have it placed in liquidation. They advised the plaintiff they were preparing an application to have Max placed in liquidation so as to enable the liquidators to formally request and assess all creditors’ claims including the plaintiff’s.

The plaintiff responded on 6 December 2000 by making demand for the immediate payment to it, as secured creditor under the mortgage, of the proceeds of sale.

The defendants did not do so.

On 21 January 2001 the plaintiff issued proceedings to recover the proceeds from the defendants.

[3] On 1 March 2001 this Court ordered, following application by the defendants, that Max be put into liquidation under the provisions of the Companies Act 1993. The defendants were constituted jointly and severally as liquidators. On 3 April 2001 they resolved that Robregal, the subsidiary company, also be put into liquidation and they be appointed as liquidators.

The Plaintiff’s Claim

[4] There are two causes of action:

[a] Breach of statutory duty;

[b] Breach of trust.

[5] The breach of statutory duty is based on s.51(2) of the Act which authorises a statutory manager to -

“(a) Sell or otherwise dispose of any property or assets of a corporation pursuant to s.50(1) of this Act; . . . notwithstanding the existence, or the terms and conditions, of any security over the property or those assets in favour of any other person.”

Section 51(2) then states:

“Where the statutory manager of a corporation sells or otherwise disposes of any property or assets of that corporation pursuant to section 50(1) of this Act, being property or assets subject to a fixed charge in favour of any person, the person entitled to the charge shall be paid out of the proceeds of sale or other disposition in priority to all other claims other than the costs of the statutory manager in selling or disposing of the property or assets and claims in respect of preferential payments made under [section 312 of the Companies Act 1993] (as applied by section 55 of this Act).”

[6] The plaintiff pleads that any payment of the AGM share proceeds by the defendants to the liquidators of Max and Robregal, rather than to the plaintiff (as the person entitled to the security interest), would be in breach of the defendant’s obligations under s.51(2) of the Act.

[7] The breach of trust relied on is the agreement reached between the parties in December 1999, prior to the sale by the defendants of the AGM shares, under which the proceeds were to be held by the defendants in a separate trust account and/or the requirement under s.51(2) of the Act for the defendants to pay to the plaintiff the AGM share proceeds owing to the plaintiff. Accordingly, any payment of those proceeds to the liquidators of Max and Robregal, rather than to the plaintiff (as the person entitled to the security interest), would be a breach of the defendants’ obligations under the trust.

[8] The relief sought in each case is:

“a. An injunction restraining the defendants from transferring to the liquidators to be appointed in respect of Max and/or Robregal the AGM share proceeds owing to Darkdale.

b. An injunction requiring the defendants to transfer to Darkdale in part satisfaction of the balance of the purchase price the AGM share proceeds owing to Darkdale.

c. Costs.”

The Defendants’ Response

[9] On 23 January 2001 the defendants filed an appearance under protest to jurisdiction pursuant to R.131 of the High Court Rules. They contended the Court had no jurisdiction to hear and determine the plaintiff’s claim because the plaintiff is required to obtain leave of the Court to commence this proceeding under s.42 of the Act. No such application had been made.

[10] This was followed by the filing on 21 February 2001 of the application for stay which is the subject of this judgment. The application seeks an order that the plaintiff’s proceeding be stayed until the plaintiff has obtained leave of this Court to bring the proceeding and costs upon the following grounds:

“(a) The plaintiff’s proceeding is in respect of any property in the possession of the corporation in statutory management; or

(b) Is in pursuance of a charge over the property of the corporation in statutory management; and

(c) Where the plaintiff’s original charge has been substituted for a charge over funds held in the statutory manager’s trust account.”

[11] Section 42(1) and (2) of the Act states:

“42. Moratorium - (1) Where a corporation is declared under section 38 of this Act to be subject to statutory management, no person shall -

(a) Commence or continue any action or other proceedings, including proceedings by way of counterclaim, against that corporation:

(b) Issue any execution, attach any debt, or otherwise enforce or seek to enforce any judgment or order obtained in respect of that corporation:

(c) Apply or resolve to put the corporation into liquidation:

(d) Foreclose, enter into possession, sell, or appoint a receiver of the property of that corporation, or property in respect of which the corporation has an equity of redemption:

(e) Exercise or continue any power or rights under, or in pursuance of, any mortgage, charge, debenture, instrument, or other security over the property of that corporation:

(f) Claim or recover, pursuant to any retention of title clause, hire purchase agreement, mortgage, lease, or security, any property in the possession of the corporation:

. . .

(2) Notwithstanding the provisions of subsection (1) of this section, an action or proceeding may be commenced or continued against a corporation for the purpose of determining whether any right or liability exists if the leave of the statutory manager or the Court is first obtained.”

The Arguments Relating to Stay

[12] The defendants’ position is quite simple. They submit this proceeding is, pursuant to s.42(1)(e), an attempt to exercise, or continue rights under or in pursuance of, the mortgage security over the AGM shares which were the property of Robregal but are now represented by the fund created following the sale by the defendants of those shares by agreement between the parties.

[13] Alternatively the defendants argue, pursuant to s.41(1)(f), the proceeding is an attempt to claim or recover, pursuant to a mortgage, property, namely the fund, in the possession of the corporation.

[14] Hence, in either case, the proceeding is prohibited by s.42(1) unless leave is obtained pursuant to s.42(2).

[15] The plaintiff’s response is equally simple. It submits s.41 is concerned only with proceedings against a corporation whereas, the present proceeding is against the defendants personally as the statutory managers of Robregal. Therefore, the requirement under s.42(2) to obtain leave has no application because this refers only to an action or proceeding commenced against a corporation. The defendants’ short answer to this is, that if this is the case, then the plaintiff, by issuing proceedings against the defendants, rather than the company, is attempting to employ a device to circumvent the obvious intention of the Act.

[16] The plaintiff argues further, that in any event, both causes of action are not within the terms of either ss.42(1)(e) or (f) because they rely, not on any rights under the mortgage, but rather on the terms of the agreement to, in effect, create a separate trust in respect of the fund.

Discussion

[17] In my view the answer to the issues raised in the defendants’ application are quite clear. The plaintiff’s proceeding is simply an attempt to avoid the clear intent of s.42 and, as a matter of statutory interpretation, it must fail. My reasons are:

[18] The General objects of the Act are contained in s.5 which states:

“(a) To confer powers on the Registrar of Companies to obtain information concerning, and to investigate the affairs of, corporations to which this Act applies:

(b) In the case of a corporation that is, or may be, operating fraudulently or recklessly, to limit or prevent-

(i) The risk of further deterioration of the financial affairs of that corporation; and

(ii) The carrying out, or the effects of, any fraudulent act or activity:

(c) In the case of a corporation referred to in section 4(b) of this Act, to preserve the interests of its members or creditors or beneficiaries or the public interest:

(d) To provide for the affairs of corporations to which this Act applies to be dealt with in a more orderly and expeditious way.”

[19] To facilitate dealing with the affairs of a company placed in statutory management in a more orderly and expeditious way, s.42 imposes a moratorium on the rights of creditors, including secured creditors. In Wilson v Aurora Group [1990] 1 NZLR 61, Master Williams QC (as he then was) described the effect of this section in these terms:

“The section seems to be a comprehensive recital of various actions which might well be taken by persons against a corporation in statutory management and which, if allowed to proceed to completion, would be likely to erode the financial position of the corporation, often already parlous, to the detriment of those set out in s 41(1)(a). Such action may also inhibit the resolution of the corporation’s difficulties and make it more difficult for its affairs to be dealt with in an orderly and expeditious way. It may also trench across the statutory manager’s ability to preserve the corporation’s business and undertaking.”

and at p.71

“(ii) Section 42(1)(c) suspends the right to take any action to wind up the corporation. It therefore severely erodes the rights of creditors and members to take such steps to protect their own interests. So far as it relates to petitions, the provision may be superfluous having regard to the provisions of s 42(1)(a).

(iii) The combined effect of ss 42(1)(d)-(f) automatically prevents such persons as mortgagees, chargeholders, debenture-holders, grantors of instruments, lessors or secured creditors from exercising their legal rights although a statutory manager may waive the application of s 42(1) in respect of creditors or classes of creditors. Not only do those subsections prevent such persons from exercising those rights but in addition the legislature, in using the verb “continue” in subs (1)(e) and (g), must have intended that where the exercise of those rights had commenced prior to the intervention of the statutory management, that exercise shall automatically cease and be forthwith suspended on the coming into operation of the statutory management. From that point onwards, unless the persons exercising those rights are creditors and can either persuade the statutory manager to waive the operation of the subsection pursuant to s 42(3) or can claim that the statutory manager has an obligation to bear their interests in mind in the exercise of his powers (s 41(1)(a)), the rights that those persons formerly had or were in the process of exercising at the intervention of the statutory management appear to be incapable of revival unless they sue for them with the leave of the statutory manager of the Court.”

[20] The individual sub-sections in s.42(1) do not, in every case, refer to actions or proceedings against the corporation. Where appropriate, they do so specifically. In s.42(1)(e) and (f) there is no such mention. I consider there is good reason for this. The object of s.42(1)(e) and (f) is to ensure that property of the corporation is to be held safe from the exercise of any right by, inter alia, a mortgagee by any means other than by a proceeding against the company. Examples could be re-entry by the mortgagee or, as in this case, a collateral attack on trustees holding property for the company.

[21] Quite obviously cases may arise where the imposition of a moratorium on the exercise of rights by a mortgagee may cause grave inconvenience or injustice to that mortgagee. The Act recognises this possibility by providing, as a safeguard, that a mortgagee may, notwithstanding the comprehensive moratorium imposed by s.41(1), commence or continue a proceeding against the corporation for the purpose of determining whether any right exists if the leave of the statutory manager or the Court is first obtained.

[22] In the present case there can be no doubt -

[a] The plaintiff’s claim is based on its claimed rights under the mortgage of the AGM shares previously owned by Robregal; and

[b] The AGM shares were sold with the agreement of the plaintiff.

[23] What is less clear is the precise terms of the nature of the trust created following the sale. The correspondence between the parties is imprecise. In a letter dated 10 November 1999 the plaintiff’s solicitors stated the position as follows:

“Darkdale considers that the statutory manager should take steps to sell the ATE shares for best price (hopefully at least 6 cents per share) whilst there appears to be market interest. Darkdale would agree to the statutory manager undertaking this transaction, on the condition that the proceeds of sale are held in a separate trust account on the basis that the funds in trust will not be applied to any purpose, other than repayment to Darkdale Pty Ltd, without either:

(a) the prior written consent of Darkdale Pty Ltd; or

(b) Darkdale Pty Ltd being given 30 days prior written notice of the intention to otherwise apply the funds.”

The defendants responded by letter dated 9 February 2000:

“We have recently sought an updated bid for Max’s shareholding in AGM and attach a copy of this for your information. Following due consideration we intend to counter the offer at AU11.5 cents subject to:

• The consent of Darkdale to a sale; and

• The proceeds from any sale being held in trust by an independent third party pending either satisfactory resolution as to the ongoing strategy for Max (e.g. ongoing statutory management; restructuring; or liquidation) or, a settlement of the debt claimed by Darkdale.”

and by letter dated 11 February 2000:

“As you may be aware we have reached agreement with Hartley Poynton to sell the AGM share at AU11.0 cents. In your absence Phil has agreed to the sale and our suggestion that the proceeds be placed in trust pending resolution of Darkdale’s claim against Max.”

[24] Notwithstanding the lack of precision in this exchange, I am satisfied the underlying intention was to preserve the fund until such time as the validity of the plaintiff’s security could be determined.

[25] The defendants have concluded this can best be achieved in accordance with the statutory procedures available within the context of a liquidation.

[26] I was informed from the Bar that when the defendants’ application to place Max in liquidation was heard, the parties addressed the issue of the fund because there was no guarantee the defendants would necessarily be appointed as liquidators. There was, therefore, an acceptance by the defendants that if, for example, the Official Assignee was appointed, the trust fund should be held in accordance with the arrangement between the parties. An undertaking was given by the defendants that the fund would be preserved pending resolution of the plaintiff’s claim to it. On this basis the plaintiff withdrew its opposition to the application to place Max in liquidation. In the event the defendants were appointed as liquidators. This ensured the fund was preserved and the plaintiff’s claim could be determined in the normal course of the liquidation.

[27] The result was the essential purpose of the original agreement between the parties at the time when the fund was created, was preserved.

[28] Having achieved this position the plaintiff has now sought to go behind that arrangement by means of the present proceeding.

[29] My conclusions at this point are, therefore:

[a] The proceeding is prevented by s.42(1)(c) and/or s.42(1)(f).

[b] Furthermore, even though the proceeding may have been commenced with the intention of determining whether the plaintiff’s right to the fund exists, it has not been commenced against the company.

[c] It is not, therefore, a proceeding which is amenable to leave by either the statutory managers or the Court.

[d] It is, nevertheless a proceeding which should be stayed, but not for the reason that it has not obtained the necessary leave. Rather it must be stayed because it comes within a class of conduct statutorily prevented by s.42.

[30] Quite apart from this conclusion, I also consider the proceeding cannot succeed for the following additional reasons:

[a] There has been no breach of s.51(2). This section applies only when the claimant is entitled to a charge. In this case, notwithstanding there has been a sale of the shares subject to the mortgage, the issue as to whether the plaintiff is entitled to a charge still remains to be determined. Furthermore, the section does not prescribe when payment out is to be made. It simply requires that if a person is entitled to the charge then that charge is to prevail.

[b] I do not consider there has been any breach of trust on the part of the defendants in the sense that they have paid over the fund to another person, namely to themselves as liquidators. Change of ownership of that fund came about as a matter of law consequent upon the order for liquidation.

[c] The nature of the relief sought in the proceeding in relation to both the claimed causes of action cannot be granted. The fund has now, by operation of law, left the hands of the defendants in the capacity of statutory managers. Therefore, any injunctive relief directed to them in this capacity is simply not possible.

[31] In summary, I conclude the defendants’ application must succeed, but not for the reason that prior leave to the proceeding is required. This proceeding is forbidden by s.42(1). It is not amenable to leave under s.42(2) and, in my view, even if it did proceed it cannot succeed.

[32] The defendants are entitled to costs which I consider can properly be met on the basis of the 2B formula. If either party wishes to argue the issue of costs further, a memorandum is to be filed and served within 14 days of the release of this decision. The other party may respond within a further 14 days.