Delorme SE24 Limited (in liquidation) v Spot X Limited

[2023] NZHC 1488

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2023-404-1130

[2023] NZHC 1488

UNDER

the Companies Act 1993

BETWEEN

DELORME SE24 LIMITED (in

Liquidation) Plaintiff

AND

SPOT X LIMITED

Defendant

Hearing:	13 June 2023
Appearances:	J R F Cochrane and H McKee for the Plaintiff/Applicant
Judgment:	15 June 2023

JUDGMENT OF ASSOCIATE JUDGE SUSSOCK

This judgment was delivered by me on 15 June 2023 at 1 pm pursuant to r 11.5 of the High Court Rules

Registrar/Deputy Registrar

Solicitors:

Lane Neave, Auckland

Case Officer:
Vimbai Kudakwashe

DELORME SE24 LIMITED (in Liquidation) v SPOT X LIMITED [2023] NZHC 1488 [15 June 2023]

Introduction

[1]                 The plaintiff/applicant, Delorme SE24 Limited (in liquidation) (Delorme), applies without notice for an order appointing interim liquidators to the defendant, Spot X Limited (Spot X).

[2]                 I convened a telephone conference with counsel for Delorme on 13 June 2023 to hear from counsel as to whether the application ought to proceed on a with or without notice basis. After hearing from counsel, I consider it is appropriate for it to be heard on a without notice basis for the reasons discussed below.

[3]                 I now issue this judgment making orders appointing an interim liquidator to Spot X Limited from 1 pm on 15 June 2023.

Application to appoint interim liquidators

[4]                 Delorme seeks an order appointing its own liquidators, Mr Benjamin Francis and Mr Simon Dalton, as interim liquidators of Spot X. At the same time, Delorme has filed liquidation proceedings based on the failure of Spot X to comply with a statutory demand for a debt of $300,000 owed by Spot X to Delorme.

[5]                 The grounds on which the application to appoint interim liquidators is made include that Mr Lee, who is the sole director of both Delorme and Spot X, has not provided information requested by the liquidators in relation to the debt and has failed to comply with a s 261 Notice requiring him to attend a meeting with the liquidators to give evidence on oath. Just prior to filing the liquidation proceedings, the liquidators became aware that shortly after being served with the s 261 Notice, the shares held by Spot X in one of its subsidiaries had been transferred to a company incorporated following service of the s 261 Notice. The subsidiary owns a property that appeared to be unencumbered but this appears to have been removed from the control of any liquidator of Spot X.

[6]                 Delorme submits the appointment of an interim liquidator is necessary and expedient for the purpose of maintaining the value of assets owned or managed by Spot X, and in particular, the shares owned by Spot X in its two remaining subsidiaries.

[7]                 In addition, Delorme submits the appointment of interim liquidators will enable investigation into the transfer of Spot X’s shares in its subsidiary, in order to safeguard the interests of Spot X and Delorme’s creditors, and if necessary to prevent the further dissipation of assets which would have been under the control of the liquidators if Spot X’s shares in NE52 had not been transferred.

[8]                 Counsel for Delorme says that when weighing the prejudice to Delorme and Spot X’s creditors against any prejudice to Spot X as a result of the appointment, the balance clearly weighs in favour of appointment because of the clear risk to creditors.

[9]The application is made without notice to any other party on the grounds:

(a)that requiring Delorme to proceed on notice would cause undue delay or prejudice to Delorme; and

(b)that the interests of justice require the application to be determined without serving notice of the application.

[10]              These grounds are two of the grounds set out in r 7.46(3)(a) and (e) of the High Court Rules 2016 as appropriate grounds for proceeding on a without notice basis. I am satisfied that the interests of Delorme are sufficiently at risk that the interests of justice require the application to be determined without serving notice of the application. I have however adjusted the orders sought from those proposed by Delorme in an effort to balance the interests of Spot X as discussed further below.

[11]              I set out the factual background in further detail and then the principles applying to applications to appoint interim liquidators before considering the relevant factors.

Background

[12]              The applicant, Delorme, is the plaintiff in liquidation proceedings brought against the respondent, Spot X.

[13]              One of the liquidators of Delorme, Benjamin Francis, has filed an affidavit in support of the application to appoint interim liquidators to Spot X. Mr Francis deposes that Delorme was incorporated to subdivide 24 Seaview Road, Glenfield. Unfortunately, the project ran into difficulties and Delorme defaulted on its first mortgage. The mortgagee therefore commenced a mortgagee sale process.

[14]              Benjamin Francis and Simon Dalton were appointed as liquidators of Delorme by shareholders’ resolution on 4 November 2022.

[15]              Delorme and Spot X share the same director, Mr Cheng Tih (Brandon) Lee. Spot X owns 60% of the shares in Delorme.

[16]              Mr Francis’ evidence is that Mr Lee is engaged in property development and has a practice of incorporating a new company for each property to be purchased. The companies are generally named using “Delorme”, then the first two letters of the address and street number of the property to be purchased. For example, Delorme ST9 Limited was used to purchase 9 Staverton Crescent, Mangere, and Delorme NE52 Limited was used to purchase 52 Newington Road, Henderson.

[17]              Spot X is (or was) the holding company for four companies of which Mr Lee is the sole director. Mr  Lee  is  also  the  sole  director  and  shareholder  of  Delorme CA5 Limited, Delorme Living Limited and Lee + Co Limited. Spot X’s industry is recorded on the Companies Office Extract as “Land development or subdivision (excluding construction)”. The industry for all of the other companies referred to above is either the same or “residential property operation and development (excluding site construction)”.

[18]              Mr Francis deposes that Mr Lee appears to obtain funding from various third party investors and purchasers to acquire and develop the properties. Delorme’s creditors include parties who invested in the 24 Seaview Road property.

[19]              The liquidators of Delorme have ascertained that on or about 13 August 2021 a payment of $300,000 was made from Delorme’s bank account to the trust account

of Davies Law, and was receipted by Davies Law against the trust account ledger for Spot X.

[20]              Delorme’s Xero records describe the payment as “$300k payment made to Staverton is a loan to Brandon’s other company”.

[21]              The liquidators have not located any evidence that is inconsistent with the advance being a loan to Spot X that is repayable on demand.

[22]              Delorme made demand for repayment on 17 November 2022. No response in open correspondence was received.

[23]              The liquidators then sought documents and information from Mr Lee as director of Delorme regarding the payment to Spot X. A written request was emailed on 15 February 2023 with a follow up on 22 February 2023. Mr Lee responded to that request on 22 February 2023 by referring the liquidators to files from Davies Law, which the liquidators had already obtained, and which did not satisfy their request.

[24]              In early March 2023 the  liquidators issued a formal notice  to Mr Lee under  s 261 of the Companies Act requiring Mr Lee to attend to be examined under oath and seeking information including correspondence regarding payments by Delorme to related entities and in relation to any security given to Delorme for advances made to Spot X.

[25]              An affidavit has been filed by Thomas Edmund William James, a licensed private investigator, that sets out his efforts to serve Mr Lee with the s 261 Notice and later the statutory demand. After attempting to serve Mr Lee with the s 261 Notice on 3 March 2023 at the address recorded on the Companies Register and being informed that Mr Lee no longer resides there, Mr James texted and called Mr Lee on the mobile phone number he had been given. Mr Lee called Mr James back on that number and arranged to meet Mr James on 6 March 2023 but Mr Lee did not show up. The s 261 Notice was eventually sent to Mr Lee on 14 March 2023 to the email address from which Mr Lee had corresponded with the liquidators on 22 February 2023 and by text to the mobile number on which Mr James had spoken to Mr Lee on 3 March 2023.

[26]              Mr Lee failed to attend to be examined under oath on 20 March 2023 or otherwise comply with the s 261 Notice. This is despite the notice recording that it was an offence to fail to comply with the s 261 Notice and that the penalty for non-compliance was a fine of up to $50,000 or two-years’ imprisonment, referring to s 373(3) of the Companies Act.

[27]              On 19 April 2023 Delorme's solicitors wrote to Spot X and Mr Lee advising that Mr Lee was in breach of s 261 of the Act. In addition, the letter outlined the basis upon which they considered Mr Lee had breached his duties as a director of Delorme, and his fiduciary duties, by causing Delorme to make the payment to Spot X and by allowing the subsequent disbursement of those funds for the purposes of other related parties. The letter again made demand for repayment of the debt. The letter finished by recording that Delorme’s solicitors appreciated the letter contained serious allegations and strongly encouraged Mr Lee to seek legal representation.

[28]              No response to that letter was received and so Delorme issued a statutory demand for the debt. The statutory demand was served on 2 May 2023 at the registered office and address for service of Spot X. The statutory demand was also emailed to Mr Lee at  the same email  address he had used  when emailing the liquidators on   22 February 2023.

[29]              Prior to serving the statutory  demand,  the  liquidators  enquired  whether  Mr Alden Ho of Crimson Law was authorised to accept service as he had previously acted for Mr Lee but Mr Ho confirmed that he was no longer instructed.

[30]              On 19 May 2023, an email was received from Gilligan Sheppard, an accountancy firm, advising that “Cheng Tih Lee (Brandon Lee) as the director of Spot X has asked us to correspond with you in regard to a statutory demand that he read yesterday (18 May 2023) via email attachment”. The email referred to the fact that the email to Mr Lee attaching the statutory demand recorded that to the statutory demand had been served at 54 Hobson Road, Lucas Heights. In addition,  the Gilligan Sheppard email stated that Mr Lee had advised them that he had not resided at that address since the beginning of the 2023 year and so he had not been properly served. The email continued “[i]n addition, Brandon advises us that the debt is

disputed, and the facts establishing that any debt exists has never been made out or agreed”. The email requested that Delorme’s solicitors “particularize in more detail the allegation of the advance asserted to have been made. Following the provision of those particulars he requires an appropriate timeframe to prepare his response”.

[31]              As referred to above, unbeknown to the liquidators at the time, on 21 March 2023, shortly after the s 261 Notice had been issued, Spot X transferred its shares in one of its subsidiaries, Delorme NE52 Limited, to a newly incorporated company, VIP Family Trustee Limited (VIP). NE52 owned a property at 52 Newington Road, Henderson at the time of the share transfer and still appears to do so. That property was unencumbered by any registered mortgage or other registered encumbrance at the time of the share transfer and Mr Francis’ affidavit.

[32]              The sole shareholder of VIP is Gilligan Sheppard Nominees Limited with the directors being Bruce Sheppard (from Gilligan Sheppard) and Cindy Wei Ching Lee. The liquidators do not know whether Ms Lee is related to the director of Delorme and Spot X, Ms Cheng Tih Lee. The liquidators however point to the fact that one of the employees of Gilligan Sheppard emailed Delorme’s solicitors on 19 May 2023 on behalf of Mr Lee and Spot X as discussed above as strongly suggesting VIP is connected to Mr Lee.

[33]              The liquidators only became aware of the share transfer when preparing the documents for filing the liquidation proceedings.

Applications to appoint interim liquidators/legal principles

[34]Section 246 of the Companies Act relevantly provides:

246     Interim liquidator

(1)If an application has been made to the court for an order that a   company be put into liquidation, the court may, if it is satisfied that it is necessary or expedient for the purpose of maintaining the value of assets owned or managed by the company, appoint a named person, or an Official Assignee for a named district, as interim liquidator.

[35]Rule 31.23 of the High Court Rules 2016 provides:

31.23   Power to appoint interim liquidator

(1)When a proceeding for putting a company into liquidation has been commenced under rule 31.3, the plaintiff and any person entitled to apply to the court for the appointment of a liquidator under section 241(2)(c) of the Companies Act 1993 may apply to the court for the appointment of an interim liquidator.

(2)If the court is satisfied, upon proof by affidavit, that there is sufficient ground for the appointment of an interim liquidator, it may make the appointment, and may limit the rights and powers of the interim liquidator in any manner it thinks just.

[36]              In Truck & Trailer Holdings Limited v Skelly Holdings Limited Associate Judge Osborne (as his Honour then was) summarised the relevant principles as follows:1

[5]        The application is filed under s 246 Companies Act 1993 which permits the Court to appoint an interim liquidator if it satisfied that it is necessary or expedient for the purpose of maintaining the value of assets owned or managed by the company. Accordingly, the over-arching criteria are necessity and expediency. The threshold indicated by the latter term has been explained by the Court in Carter Holt Harvey Ltd v Timbalok NZ Ltd as meaning:2

fitting, suitable, desirable, or convenient.

[6]Chisholm J observed that this conveys a relatively low threshold.

[7]        Beyond the statutory criteria it has been recognised that there are three main pre-conditions to an interim liquidation:

(i)There must be a valid winding-up application underway.

(ii)The application will in all probability succeed.

(iii)       The circumstances must be not merely urgent, but also justify the appointment of an interim liquidator.

[8]The Court has recognised as three important factors:

(a)Whether the company assets are in jeopardy.

(b)Whether the status quo should be maintained.

(c)Whether the interests of creditors are safeguarded.3

1      Truck & Trailer Holdings Limited v Skelly Holdings Limited HC Christchurch CIV-2012-409 541, 11 May 2012 and Shen v An Ying International Finance Ltd HC Auckland CIV-2006-404-003088.

2      Carter Holt Harvey Ltd v Timbalok NZ Ltd (1997) 11 PRNZ 435 (HC) at 438; Robert Bryce & Co

Ltd v Chicken and Food Distributors Ltd (1995) 5 NZCLC 66,648 (CA).

3      Robert Bryce & Co Ltd, above n 2.

[9]  These various formulations are ways of measuring whether necessity or expediency are established. They are a “litmus test”, not exhaustive.4

[37]              Ordinarily, applications without notice for the appointment of an interim liquidator will not be successful unless special circumstances are demonstrated.5

[38]              Below I consider the preconditions and factors referred to by Osborne J in Truck & Trailer Holdings Ltd to assist in determining whether it is appropriate to appoint interim liquidators.

Is there a valid winding up application?

[39]              Delorme has filed a liquidation proceeding against Spot X contemporaneously with the application to appoint interim liquidators. The liquidation proceedings have not yet been served given the liquidators’ concern that notice of the proceeding will cause the assets of the company to be further in jeopardy. This does not affect the fact that there is currently a valid liquidation proceeding. This precondition is therefore satisfied.

Will the liquidation proceedings in all probability succeed?

[40]              The liquidation proceeding is based on Spot X’s failure to comply with a statutory demand.

[41]              The email from Gilligan Sheppard on 19 May 2023 says that Spot X does not consider the statutory demand was properly served. However in my view, it appears that it has been. Statutory demands are not “documents in a legal proceeding” and therefore can be served pursuant to ss 388 and 388A of the Companies Act, rather than s 387.6    Section 388(a) allows service on a company by service on  a director and     s 388A allows service on a director at an email used by the director. Mr Lee’s email address would fall within that category. In that case, the statutory demand will be

4      Shen v An Ying International Finance Ltd HC Auckland CIV-2006-404-003088, 28 July 2006 at [15].

5      Keet v Hidden Valley Limited [2016] NZHC 2089 but see Worldclear Ltd v T1 Holdings Ltd [2018] NZHC 1234 at [36] and Capper v Riverside Pride Ltd [2022] NZHC 2316.

6      Arzan Investments Ltd v Beresford Apartments Ltd (2003) 16 PRNZ 825 (HC) at [21]; Upright Scaffolding Ltd v Pinnies Painters and Plasterers Ltd [2019] NZHC 1495, [2019] NZAR 1084.

deemed to have been served on the day after it was emailed to Mr Lee pursuant to     s 392(ca) of the Companies Act.

[42]              The statutory demand has not been complied with and so there is a prima facie presumption that the company is unable to pay its debts as they fall due.7

[43]              The email from Gilligan Sheppard says that the debt is in dispute and asks Delorme “to particularize in more detail the allegation of the advance asserted to have been made”.

[44]              The liquidators do not accept that they have not provided full details of the facts establishing the debt. These details were provided in the letter of demand from the liquidators dated 17 November 2022 sent to 54 Hobson Road, Lucas Heights at a time when it appears from Gilligan Shepherd’s email on 19 May 2023 that Mr Lee was still living there  and  in  the  further  letter  from  Delorme’s  solicitors  dated  19 April 2023 sent by email to Mr Lee. Other than the short email in February 2023 referring to the files from Davies Law, Mr Lee has not responded to the correspondence.

[45]              It is clear from the above that Mr Lee has been on notice since November 2022 that the liquidators require an explanation for the loan of $300,000 but he has offered none.

[46]              Furthermore, it is Mr Lee as the director of Delorme and Spot X who will have the information necessary to explain the $300,000 loan rather than the liquidators. But Mr Lee has failed to provide that information as requested (or as required by the s 261 Notice).

[47]              The liquidators do not know what other assets Spot X has but given the steps that have been taken by Mr Lee to avoid service and to transfer the shares in NE52 away from Spot X, it appears reasonable to infer that the liquidation proceedings will in all probability succeed.

7      Companies Act 1993, s 287.

Are the circumstances urgent, and do they justify the appointment of an interim liquidator?

[48]              Appointing interim liquidators has been described as a drastic remedy and it clearly is given the impact that it is likely to have on financing agreements and the general disruption of company affairs.8 However, Mr Lee has failed to attend a meeting with the liquidators to be examined on oath pursuant to the s 261 Notice. Section 261(6A) provides that a person who fails to comply with such a notice commits an offence and is liable on conviction to a penalty of a fine not exceeding

$50,000 or to imprisonment for a term not exceeding 2 years (s 373(3)).

[49]              Instead of appearing before the liquidators, Mr Lee appears to have transferred shares in one of Spot X’s subsidiaries, the only subsidiary that Delorme’s liquidators say appears to have owned an unencumbered property. The failure to comply with the s 261 Notice and the steps taken to transfer assets in my view establish the exceptional circumstances necessary for proceeding on a without notice basis and justify the appointment of interim liquidators.

Are the company assets in jeopardy?

[50]              If interim liquidators are not appointed, it appears likely that Mr Lee may take further steps to transfer assets away from Spot X and potentially away from recovery.

[51]              On 9 June 2023, following the filing of the without notice application to appoint interim liquidators, the liquidators received a letter from a barrister advising that he had been instructed to act for Spot X. A copy of the letter was provided to the Court under cover of a memorandum following my request. The letter recorded that the registered office of Spot X is no longer in use and “any documents delivered to the company at that address will not have been received” by Spot X. The letter does note that urgent steps are being taken to rectify that issue. However, the letter does not confirm that the barrister is authorized to accept service or any alternative address for service.

8      Best Invest NZ Company Ltd (in interim liq) v Japan Business Consulting Ltd [2019] NZHC 1037 at [11].

[52]              The letter further records that the barrister is instructed that Spot X is not insolvent and asks that the liquidators to forward to him “any statutory demand, liquidation or other court proceedings that you may be taking against Spot X.” On receipt, the barrister says he will take instructions “with a view to resolving any claim being made”.

[53]              If this letter had provided an alternative address for service, it may have been a factor in favour of not appointing interim liquidators. But alongside the other steps by Mr Lee, this suggests an effort to avoid the usual processes and continues to cause concern in respect of the safety of the company’s assets.

[54]              Weighing up the interests of both Delorme and Spot X’s creditors on one side against the interests of Spot X and Mr Lee, the balance in my view clearly falls in favour of appointing an interim liquidator to maintain the assets to allow for an orderly and efficient distribution.

Should the status quo be maintained?

[55]              It appears necessary and expedient for the status quo to be maintained in the interim so that when permanent liquidators are appointed their job is not rendered impossible by the transfer of assets prior to their appointment.

[56]              The nature of the business suggests that the appointment of interim liquidators will not be as disruptive as if it were a manufacturing or some other business with a number of employees and customers and so forth.

[57]              From the evidence filed, Mr Lee appears to have shown disregard for his obligations as a company director through his failure to cooperate with Delorme’s liquidators, including his apparent failure to comply with the s 261 Notice which is an offence. If steps can be taken to avoid relying on his co-operation with the liquidators of Spot X when they are appointed then in my view it is both necessary and expedient to take those steps.

Would the interests of creditors be safeguarded?

[58]              Delorme may not be the only creditor of Spot X and so I raised a concern with the solicitors for Delorme as to whether it was appropriate to appoint the liquidators of Delorme as the interim liquidators of Spot X.9 Counsel fairly submits that both  Mr Francis and Mr Dalton are registered insolvency practitioners with obligations to the Court and that it is quite common for liquidators to attend to the liquidations of a company group.

[59]              Counsel for Delorme advised, however, that the liquidators of Delorme would not oppose the appointment of the Official Assignee as liquidator, emphasizing that Delorme’s concern was to protect the assets of Spot X.

[60]              To avoid any issues arising in this regard and because the purpose of appointing an interim liquidator in this case is to maintain and preserve the assets (rather than realise any perishable assets for example), I consider that it is appropriate to appoint the Official Assignee rather than the same liquidators as for Delorme.

[61]              Appointing the Official Assignee is also appropriate in circumstances where the application is being brought on a without notice basis and without any undertaking as to damages. I record that Delorme was prepared to offer an undertaking if the Court required it, but such an undertaking is unlikely to be of real value because Delorme is in liquidation.

Form of Orders

[62]              As referred to above, I am appointing the Official Assignee in Auckland as the interim liquidator to avoid any suggestion of a lack of neutrality.

[63]              Delorme seeks a number of orders in respect of the powers of the interim liquidators. Section 246(2) of the Companies Act provides that “[s]ubject to subsection (3), an interim liquidator has the rights and powers of a liquidator to the extent necessary or desirable to maintain the value of assets owned or managed by the

9      See discussion in McCallum v Acoustical Material Supplies Ltd (1998) 8 NZCLC 261,556 (HC).

company”. Subsection 3 then provides the Court with the power to limit the rights and powers of an interim liquidator in such manner as the Court sees fit.

[64]              I do not consider the Official Assignee’s powers as interim liquidator need to be limited in any way but include in the orders made that the Official Assignee’s powers include the matters proposed by Delorme for the assistance of the Official Assignee. In addition, I make an order that the Official Assignee is to prepare a report for the Court as this will assist in the liquidation process.

[65]              The Official Assignee is to apply to the Court for approval of their costs and expenses following the determination of the liquidation proceedings.

Result

[66]              Delorme’s without notice application for interim liquidators to be appointed is granted.

Costs

[67]              Delorme seeks an order that Spot X meets the costs of this application. I do not make such an order as it was held in Caxton Products Ltd v Packaging House Ltd that the previous rule to r 31.23 of the High Court Rules did not allow the Court to order that the plaintiff have priority for its costs. The previous rule permitted the appointment of an interim liquidator to be on “terms” considered appropriate. Rule 31.23(2) now provides that where the Court appoints interim liquidators it “may limit the rights and powers of the interim liquidators in any manner it thinks just”. The authors of McGechan on Procedure comment that the change in the wording of the rule appears to entrench the conclusion reached in Caxton Products Ltd.10

[68]              I therefore reserve costs to be determined following the conclusion of the liquidation proceedings.

Orders

[69]I order:

10     Jessica Gorman (ed) McGechan on Procedure (online ed, Thomson Reuters) at [HR31.23.03].

(a)the Official Assignee of Auckland is appointed as interim liquidator of the defendant, Spot X Limited, from 1 pm on 15 June 2023;

(b)the Official Assignee has the rights and powers of a liquidator to the extent necessary or desirable to maintain the value of assets owned or managed by the defendant as provided for in s 246(2) of the Companies Act and including:

(i)to the extent necessary:

1.       to get in and preserve all the assets of the defendant and meet or continue all expenses necessary to preserve the value of the defendant’s assets; and

2.       to obtain the books and records of the defendant from its offices and any other person.

(ii)the interim liquidator may examine on oath as required under ss 261, 265 and 266 of the Companies Act.

(c)the interim liquidator is to prepare a report for the Court within 20 working days, or such longer period as the Court may on application allow, to include the following information:

(i)a summary of the assets of the defendant;

(ii)a summary of the liabilities of the defendant, including estimates in respect of contingent liabilities; and

(iii)whether the interim liquidator considers an order for liquidation desirable, and if so, why.

(iv)the Official Assignee is given leave to apply to the Court to vary these orders or for further directions on three working days’ notice; and

(v)the costs of the Official Assignee and the plaintiff/applicant are reserved for determination following the conclusion of this liquidation proceeding.

Associate Judge Sussock