Exterior Building Care Goleman Ltd v Laing
[2014] NZHC 3321
•18 December 2014
IN THE HIGH COURT OF NEW ZEALAND DUNEDIN REGISTRY
CIV-2014-412-000149 [2014] NZHC 3321
BETWEEN EXTERIOR BUILDING CARE
GOLEMAN LTD Applicant
AND
TREVOR EDWIN LAING First Respondent
AND
ALLAN THOMAS ANDREWS and GAYLENE HEATHER ANDREWS as trustees of the A & G ANDREWS FAMILY TRUST
Second Respondents
Hearing: 11 December 2014 Appearances:
B M Russell and S E Goodwin for Applicant
J C D Guest for First Respondent
D R Tobin for Second RespondentsJudgment:
18 December 2014
JUDGMENT OF ASSOCIATE JUDGE OSBORNE
on application for orders in relation to related creditor voting
[1] The applicant (Goleman) invokes the Court’s power under s 245A of the Companies Act 1993 (the Act) to set aside in certain circumstances a resolution passed at a meeting of the creditors of a company in liquidation.
[2] In issue is whether the threshold requirements of s 245A have all been established and, if so, should the Court exercise its discretion to set aside the resolution.
[3] Goleman also seeks, in the alternative, an order that the liquidator be removed and replaced by other liquidators. Goleman invokes the Court’s
EXTERIOR BUILDING CARE GOLEMAN LTD v TREVOR EDWIN LAING [2014] NZHC 3321 [18
December 2014]
jurisdiction under s 284 of the Act to give directions in relation to a company’s liquidation. That order is opposed, the respondents submitting that the grounds for removal of a liquidator are not made out.
Section 245A Companies Act 1993: the power of the Court where the outcome of voting at a meeting of creditors is determined by a related entity
[4] Section 245A of the Act is relatively new, having been inserted in 2007.1 The provision is based on s 600A of the Australian Corporations Act 2001. The section gives the Court powers whereby it can overcome in the interests of creditors unrelated to a company in liquidation the influence which related creditors may have in relation to voting at creditors’ meetings.
[5] Section 245A provides:
245APower of Court where outcome of voting at meeting of creditors determined by related entity
(1) This section applies if the Court is satisfied that—
(a) a resolution at a meeting of creditors was passed, defeated, or required to be decided by a casting vote; and
(b) the resolution would not have been passed, defeated, or required to be decided by a casting vote if the vote or votes cast by a particular related creditor or particular related creditors were disregarded; and
(c) the passing of the resolution, or the failure to pass it,—
(i) is contrary to the interests of the creditors, or a class of creditors, as a whole; and
(ii) has prejudiced, or is reasonably likely to prejudice, the interest of the creditor who voted against the resolution, or for it, as the case may be, to an extent that is unreasonable having regard to—
(A) the benefits accruing to the related creditor, or to some or all of the related creditors, from the resolution, or from the failure to pass the resolution; and
(B) the nature of the relationship between the related creditor and the company, or between the related creditors and the company; and
1 Inserted on 1 November 2007 by Companies Amendment Act 2006 (2006 No 56), s 18.
(C) any other related matter.
(2) The Court may, on the application of the liquidator or a creditor,—
(a) order that the resolution be set aside:
(b) order that a new meeting be held to consider and vote on the resolution:
(c) order that a specified related creditor or creditors must not vote on the resolution or on a resolution to vary or amend it:
(d) make any other orders that the Court thinks necessary. (3) In this section,—
…
related entity means, in relation to the company in liquidation,—
…
(d) a director or shareholder; or
(e) a relative or spouse of a director or shareholder; or
…
(l) a trustee of a trust under which a person (A) is a beneficiary, if A is a related entity of the company in liquidation under this subsection.
AFO Industrial Ltd and its liquidation
[6] AFO Industrial Ltd (AFO) was put into liquidation by the resolution of the second respondents, Allan and Gaylene Andrews (the Andrews).
[7] On liquidation, AFO appeared to have no assets.2 There were three identified liabilities:
(a) a debt of $15,066.34 to the Commissioner of Inland Revenue
Department;
(b) a claim by Goleman for damages of $385,483.55 pursued in the High
Court;3
2 It transpires that the Andrews, shortly before liquidation, received a voidable preference by way of a credit of $224,943.00 on a purchase: see below at [23].
(c) a debt of $551,958.49 to the Andrews as trustees of the A & G Andrews Family Trust (the Trust).
[8] On 2 May 2014, the first creditors meeting of AFO was held. The liquidator allowed the Goleman and the Andrews claims for voting purposes at lower figures than claimed, being:
Goleman: $255,311.60
Andrews: $327,015.00
The Commissioner’s debt of $15,066.34 was fully allowed. Goleman moved that Iain Sheppard and Heath Gair be appointed as liquidators of AFO in place of Mr Laing. Goleman voted in favour of the motion, the Andrews against. The Commissioner did not vote. The motion was therefore lost.
[9] By May 2014 the liquidator had become aware of a voidable preference of
$224,943.00, a sum credited to the Andrews as trustees when settling the purchase
and AFO’s business on 5 March 2014 (as to which see further below at [23]).
[10] On 12 June 2014, the High Court gave judgment for Goleman on its damages claim against AFO in the sum of $269,639.28 together with costs and disbursements (subsequently sealed in a total sum of $322,732.38).4
[11] On 7 August 2014, a second creditors’ meeting was convened at the request of Goleman. Before the meeting the liquidator reviewed the creditors’ claims. He allowed Goleman’s claim at $271,516.40 (representing the $269,639.28 judgment plus post-judgment interest). He allowed the Andrews’ claim at the full $551,958.49 having satisfied himself that the full amount had been advanced by the Trust to AFO. He thereby treated the AFO debt due as restored to its original level by reason of the reversal of the voidable preference.
[12] At the 7 August meeting, Goleman again moved that the proposed liquidators be appointed as liquidators of AFO in place of Mr Laing. Goleman again voted in
3 Exterior Building Care Goleman Ltd v AFO Industrial Ltd (in liquidation) CIV-2013-409-46.
4 Exterior Building Care Goleman Ltd v AFO Industrial Ltd (in liquidation) [2014] NZHC 1322.
favour of the motion, and the Andrews again against. The Commissioner did not vote. The August motion was therefore lost.
The Goleman/AFO litigation
[13] AFO was a drilling business. Goleman undertook a substantial rock stabilisation sub-contract in Christchurch after the Canterbury earthquakes. AFO supplied components for a drilling and grouting system. In Goleman’s subsequent litigation, Goleman asserted that AFO was also to provide support and advice. Problems were encountered on the sub-contract work. In January 2013 Goleman commenced its litigation against AFO for the $385,483.55 damages. AFO for its part filed a defence and counterclaim.
[14] The proceeding was in 2013 allocated a hearing to commence on 26 May
2014.
[15] The litigation was automatically stayed when AFO was placed in voluntary liquidation on 11 March 2014.
[16] On Goleman’s application, the Court granted leave to Goleman to continue with the proceeding.5 Mr Guest appeared for the liquidator in opposition. The liquidator had not been prepared to accept (as an alternative to the litigation proceeding) a proof of debt from AFO, maintaining he had insufficient information for him to show that the claim was justified.6
[17] On 26 May 2014, immediately before the trial was to commence, the Court heard and dismissed an application by Mr Sim on behalf of AFO for a stay of the earlier judgment.7 Mr Sim then withdrew and the trial proceeded without the appearance of AFO or the liquidator. The judgment for Goleman for $269,639.28, together with costs and disbursements, followed.8 Subsequently the Court recalled the judgment so as to direct that Goleman could retain remaining equipment pending
payment of the judgment sum.
5 Exterior Building Care Goleman Ltd v AFO Fluid Otago Ltd, above n 3.
6 At [16].
7 Exterior Building Care Goleman Ltd v AFO Industrial Ltd (in liquidation) [2014] NZHC 1129.
8 Exterior Building Care Goleman Ltd v AFO Industrial Ltd (in liquidation), above n 4.
[18] There have been three appeals filed by AFO, all now consolidated. The appeals relate to the lifting of the stay; the refused adjournment; and a recall of judgment to deal with remaining equipment. The appeals do not on their face relate directly to the damages award (except that, were either of the first two appeals to succeed, AFO would seek a new trial).
The sale of AFO’s business
[19] In September 2013 the Court had imposed a consent timetable for the exchange of evidence in the Goleman/AFO litigation. Goleman then served its briefs in early-November. AFO never served its briefs.
[20] Around the time of the filing of Goleman’s briefs, Luke Goleman, one of its
directors, became aware that AFO had listed a business for sale on Trademe at
$1,570,000. (It appears that the business and assets for sale included the business and assets of other Andrews controlled companies).
[21] On 4 March 2014, AFO acquired its present name through a name change
from the original “Air Fluid Otago Limited”.
[22] On the same day, the Andrews changed the name of another company to Air- Fluid Otago (2014) Limited (AFO 2014).
[23] On 5 March 2014, AFO sold a business to AFO 2014 for $650,000. The sale included all assets and liabilities except claims and counterclaims in the Goleman/AFO litigation. During March 2014, Luke Goleman became aware that the advertised sale on Trademe now appeared with the vendor changed to AFO 2014 with an asking price still of $1,570,000. A Companies Office search then revealed to Luke Goleman the recent name changes. Approximately a week later, Luke Goleman learnt of AFO’s voluntary liquidation. In subsequent exchanges of correspondence, solicitors for the Andrews explained that the business which had been advertised for sale was the combined business of AFO and AFO 2014 and included a building owned by another company, Fox Street Investments Ltd. The correspondence revealed the $224,943.00 credit given to the Andrews on the
purchase price (subsequently recognised by the liquidator and accepted by the
Andrews to be a voidable preference).
[24] There has also been produced a business valuation completed by Tabak for
AFO. The “AFO business” was valued on a going concern basis at 10 September
2013 at $950,000 (this being the combined assets of AFO and AFO 2014).
The Andrews’ explanation of the sale
[25] Allan Andrews has provided an affidavit.
[26] He is 73 years of age and a professional engineer. For over half a century he has been involved in repairing and making drilling machines for mining and other purposes.
[27] With his wife, Gaylene Andrews, he is the co-owner of the shares in AFO, AFO 2014 and Fox Street.
[28] He explains that AFO (incorporated in 1999) and AFO 2014 (incorporated in
2007) had operated in a co-operative manner with each owning independent stock and plant. He notes that AFO 2014 also had a separate business as a specialist mechanical engineer dealing with hydraulics. AFO was “the public face of the drilling business”. He describes the “totality of the business” (being that of AFO and AFO 2014, together with Fox Street’s property) as having been on and off the market for the last five to six years. By the early part of 2014, the businesses of AFO and AFO 2014 were marketed for a period at $950,000.00, but without buyers.
[29] Mr Andrews has, from 2013, suffered from serious illnesses, requiring exhausting treatment. In late-2013, he received a substantial health insurance payment, most of which he gifted to the Trust which in turn advanced to AFO the
$551,958.49 for which the Andrews (as trustees) have proved in the liquidation. Mr Andrews explains that, with the onset of his ill health, he focused on succession planning and family. Defence of Goleman’s litigation became less important to him.
[30] A decision was made to rationalise the businesses. The Andrews made a decision to “simplify the business structure”, part of which involved putting AFO into liquidation.
[31] The Trust advanced the $551,958.49 to AFO to ensure that AFO’s creditors were paid, with the trustees expecting repayment from a successful sale.
[32] Mr Andrews explains that the Tabak valuation ($950,000) was of the total AFO/AFO 2014 businesses. When the sale from AFO to AFO 2014 was decided upon, Mr Andrews describes the removal of the value of the AFO 2014 assets as having been “manually undertaken” resulting in a valuation of AFO at $650,000 as used for the sale price. Mr Andrews does not identify whether a valuer was used in that exercise. Nor does he produce any written valuation to that effect.
[33] Mr Andrews in his evidence does not comment on a March 2014 Trade Me advertisement in which the AFO 2014 business was advertised with an asking price of $1,570,000.00.
The Goleman concerns over the sale
[34] Luke Goleman explains the importance of the voting on the resolutions at the creditors meeting by reference to the need for investigation of the AFO sale. He records:
The directors [of AFO] could have a lot to lose if a thorough investigation into the sale of the assets to AFO 2014 led to a conclusion that the asset sale involved a breach of the director’s duty to act in the best interests of the company, and to consider the interests of creditors if the company is insolvent or likely to become insolvent. This is causing prejudice to Goleman because a rigorous investigation of that transaction is the main avenue that could lead to a recovery for Goleman.
[35] In his affidavit in opposition, Mr Laing notes the freedom that creditors have
to independently bring an action against the directors for breach of directors’ duty.
[36] Another director of Goleman, Simantov Elimelech, provided Goleman’s reply evidence. He accepts that Goleman is free to pursue an independent course if it wishes to but notes that the liquidator has advantages of investigation. Those
include: extensive powers to require production of documents; to examine directors, shareholders, employees and other persons having knowledge of the company’s affairs; and to bring various types of claims under the Companies Act available only to liquidators. Mr Elimelech records that Goleman is prepared to fund a liquidator to carry out such an investigation but is not prepared to fund Mr Laing as liquidator.
[37] The focus of Goleman is clearly upon a thorough investigation of the sale, including the Andrews’ part in it on both sides. Mr Laing records, in apparent explanation of not taking further steps of investigation into the sale, that –
I would be interested in seeing an analysis of a credible directors’ liability
claim. None has been advanced to me to date.
and:
The Applicant’s advisors have not identified to me any viable cause of action against the directors of AFO. I would be open to consider suggestions.
[38] It might reasonably be said in response to the liquidator’s position that creditors of an insolvent company, especially when there are cash resources available to the liquidator as in this case through recapture of voidable preferences, are entitled to have the liquidator with all his or her powers and experience carry out an open- minded proactive and thorough investigation into a sale and purchase carried out in the week before liquidation in which the directors and/or shareholders of vendor and purchaser are identical. It was a slightly odd proposition to suggest in such circumstances that it is for the creditors to mount a case for investigation (other than by highlighting the circumstances of a sale to related entities).
[39] Both the sale of AFO’s assets and the liquidation of AFO occurred in early- March. In that context, Goleman unsurprisingly characterised AFO 2014 as a “phoenix company”. Although the Court under s 245A of the Act focuses on the interests of creditors and prejudice to creditors rather than on the labels given to events, the fact that AFO 2014 may be viewed as a “phoenix company” as raised by Goleman, has a significant relevance when considering Goleman’s application.
[40] In his evidence, Mr Andrews took issue with the “phoenix” label because, in his words, “a reasonably cursory search” of Companies Office records would have shown that AFO 2014 was not a phoenix company recently set up.
[41] Whether or not Mr Andrews accepts the label, Mr and Mrs Andrews as directors of AFO are potentially governed by the phoenix company rules (ss 386A–
386F Companies Act 1993)9 as AFO 2014 at least arguably has a similar name to
AFO. A person cannot be a director of a phoenix company within five years of the insolvent company’s liquidation without Court approval (unless all creditors of the insolvent company are, within 20 working days notified in writing).
[42] The phoenix company rules exist in part to put creditors on notice. The creditors then have the ability, as Goleman has sought to achieve in this case, to ask the liquidators to investigate the price paid on sale and to consider whether that reflected fair value. The Minister of Commerce, the Honourable Lianne Dalziel, in a paper on the intended legislation, explained a second purpose, in addition to ensuring that creditors were not left to believe they were dealing with the form of business,
namely that the new legislation:10
… would also reduce the risk of the value of the business being lost to the directors (through the non-payment of goodwill associated with the company name).
[43] In a useful article, Duncan MacKenzie commented:11
Phoenix companies are particularly adept at retaining goodwill. Any goodwill that has been established by the original company will be passed to the phoenix company as it shares a similar name and carries on an identical business.
[44] The commentators from the outset recognised a legitimate concern for arms- length creditors when the directors of a phoenix company appoint the liquidator.
9 As introduced in 2007.
10 Hon L Dalziel, Minister of Commerce Paper for Cabinet Economic Development Committee (6
January 2004)
at [45].
11 Duncan MacKenzie “Abusing the Corporate Form: Limited Liability, Phoenix Companies, and a
Misguided Response” (October 2008) Otago University Law Dissertation < Duncan MacKenzie stated:12
… There is a belief in the business community that a “friendly liquidator” can be found. The liquidator’s fees are set in advance and the transfer of assets at an undervalue agreed upon. This gives the transfer a perceived legitimacy. This point is again raised by Lynne Taylor as she states
“Inappropriate phoenix activity may also arise in voluntary liquidations if a
‘director friendly’ liquidator is appointed who sells the company’s business
to its directors at an undervalue”.
(footnotes omitted)
[45] Such commentaries indicate a range of legitimate concerns which creditors may have in relation to the need for appropriate, independent investigation into a phoenix arrangement. Proactive, not reactive, investigation is reasonably called for. So too is thorough investigation.
Goleman wants new liquidators
[46] On 8 April 2014 Goleman, through its solicitors, raised concerns as to the way in which the liquidator was going about the consideration of Goleman’s claim against AFO. Goleman gave notice to Mr Guest, as the liquidator’s solicitor, that it required a meeting to resolve whether to confirm Mr Laing’s appointment or to appoint a new liquidator. Mr Guest recorded that if that was the purpose then the liquidator was unlikely to oppose replacement given that Goleman was the significant (or possibly only) creditor. But in the same letter, Mr Guest recorded that the Goleman’s creditor claim could not be accepted at that stage – Mr Guest also stated that it would not be appropriate to have the Court value the claim on a formal proof basis.
[47] Goleman’s solicitors responded on 14 April 2014. They recorded that Goleman’s outlined concerns had not been addressed to Goleman’s satisfaction. Goleman therefore requested that Mr Laing now resign as liquidator, failing which a meeting was required. The solicitors recorded Goleman’s concerns about the timing
of Mr Laing’s appointment and his refusal to allow the High Court proceeding to
12 At 25. Citing Lynne Taylor “The Regulation of Director Involvement in Phoenix Companies
Under Sections 386A–386F of the Companies Act 1993” (2008) 23 NZULR 111 at 112.
move to formal proof. Mr Guest responded, rejecting criticism of the liquidator and
indicating that a creditors’ meeting would be held on 2 May 2014.
[48] On 23 April 2014, in an email directly to Mr Elimelech, Mr Laing recorded:
I previously indicated I may resign, but following that indication I received a surprising and offensive letter from your legal representative alleging shortcomings on my part and specifically requesting a creditors’ meeting. I then felt I had little choice but to call the meeting.
[49] Mr Laing has subsequently explained his decision to not retire as liquidator – also by reason of the fact that it transpired that the Andrews (as trustees of the Trust) were creditors.
[50] The creditors’ meeting on 2 May 2014 followed, with the High Court having
the previous day lifted the stay of Goleman’s proceeding.
[51] Mr Guest, on 16 May 2014, filed the liquidator’s appeal against the High Court’s stay-lifting judgment. At the same time, the liquidator applied for a stay of that judgment (an application which the High Court dismissed on 26 May 2014). The allocated trial proceeded and produced the damages judgment.
[52] Goleman’s solicitors on 4 July 2014 wrote to Mr Guest with issues both in relation to the sale of AFO’s business and the potentially voidable transaction involving the Trust. Mr Guest replied in relation to the voidable preference that
$10,000 had been paid to the liquidator on 11 June 2014 with a further $10,000 expected in July. He said that the liquidator’s formal notice to set aside the voidable transaction was shortly to be issued. It was subsequently issued on 29 July 2014.
[53] In the meantime, the second creditors’ meeting was scheduled for 7 August
2014. Goleman again nominated their proposed liquidators.
[54] When Goleman’s second resolution was defeated by the Andrews’ vote, Goleman issued the originating application in this proceeding, with its challenge under ss 245A and 284 of the Act.
[55] At the creditors’ meeting, Goleman’s proposal was that the new liquidators would be Iain Sheppard and Heath Gair. The Andrews’ preference was to retain Mr Laing as liquidator and they voted accordingly. It subsequently emerged that the Andrews also had a reservation, should Mr Laing be replaced, that the proposed liquidators were not necessarily neutral. While Goleman maintained that the proposed liquidators were in all ways suitable to be appointed, Goleman for the hearing indicated that it had no strong preference as to who the replacement liquidator should be. A consent to appointment was obtained from Malcolm Hollis and John McKnight.
[56] The suggestion that Messrs Hollis and McKnight be appointed was a significant development at the hearing. On instructions, Mr Tobin was able to indicate that, with the Andrews’ focus being to have impartial and fair liquidators, they had no concerns at to the nomination of Messrs Hollis and McKnight should the Court find in favour of Goleman’s underlying application.
[57] There is a recognition, developed by Mr Guest to some extent in his submissions, that any change of liquidators will bring a duplication of cost while the new liquidators bring themselves up-to-date. Mr Tobin for the Andrews did not submit that such should be a significant consideration in a change of liquidators if the Court is generally in favour of the Goleman application. The more important consideration is to ensure the effective liquidation of the company in the interests of the creditors as a whole and of any different classes of creditors.
Section 245A of the Act: what is not in issue and what is in issue
What is not in issue
[58] The matters not in issue are that:
· Section 245A(a) is met: a resolution was passed at the meeting of creditors on 2 May 2014 and again on 7 August 2014;
· Section 245A(3) is met: the material votes were by related parties, namely the Andrews, who are related under s 245A(3)(d), (e) and (l); and
· Section 245A(1)(b) is met: the resolutions would not have been defeated
but for the related parties’ votes.
What is in issue
[59] In issue is whether the joint threshold requirements of s 245A(1)(c) are satisfied. Was the defeat of each resolution:
· Contrary to the interests of the creditors as a whole or a class of creditors as a whole; and
· Prejudicial or reasonably likely to prejudice the interests of Goleman (as the creditor voting against the resolution) to an extent that is unreasonable having regard to the matters identified in s 245A(1)(c)(ii)A–C?
Issue 1: Goleman within a distinct class of creditors?
[60] Goleman says that it falls within a “class of creditors” affected by the resolution. The class Goleman claims to belong to is that of unrelated creditors, with the Andrews belonging to the class of related creditors.
The term “class of creditors” in s 245A(3)
[61] Mr Tobin initially rejected the proposition that there is in this case a valid class distinction between creditors who are related and creditors who are unrelated to AFO (although in his oral submissions at the hearing he elected not to present further argument in this regard).
[62] Mr Tobin has referred to the Court of Appeal’s discussion of classes in Grant v CP Asset Management Ltd.13 He submitted that the Court in this case should not treat Goleman and the Andrews as belonging to separate classes based on the related/unrelated distinction. In the passage Mr Tobin relied on, Miller J (delivering
the reasons of the Court) stated:
13 Grant v CP Asset Management Ltd [2013] NZCA 452.
[43] The legislation leaves it to the Court to define a class of creditors if it thinks fit. In an insolvency context the Court normally exercises this jurisdiction to prevent injustice that may occur when the interests of some creditors differ materially from those of others. A class is “confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest”. The legislation does not presume that related creditors form a separate class. It recognises rather that their interests need not differ from those of other unsecured creditors, who depend on liquidation processes to recover as much of the money owed to them as is reasonably possible.
(footnotes omitted)
[63] The Court of Appeal in Grant was not suggesting that unrelated creditors (or related creditors) will never form a separate class. The Court’s observations that “their interests need not differ” recognises that in some cases their interests may differ. A Court will carefully examine the circumstances of each case against the protection of any competing interests which the legislation intends to protect. The judgment of Bowen LJ in Sovereign Life Assurance Co v Dodd, from which Miller J quoted in the passage I have cited, contains also useful guidance on when a class
may be found to exist.14 Bowen LJ stated:15
The word “class” is vague, and to find out what is meant by it we must look at the scope of the section, which is a section enabling the Court to order a meeting of a class of creditors to be called. It seems plain that we must give such a meaning to the term “class” as will prevent the section being so worked as to result in confiscation and injustice, and that it must be confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest.
[64] The context of s 245A of the Act is similar to the context of the legislation considered in Sovereign Life Assurance. There the Court was dealing with s 2 of the Joint Stock Companies Arrangement Act 1870, a provision which provided for meetings of, and voting by, classes of creditors when a company was in the course of being wound up. The English provision, as with s 245A of the New Zealand Act, involves the protection of the legitimate interests of creditors at meetings of creditors. The Court has power under both statutes to recognise classes of creditors
by reference to different interests.
14 Sovereign Life Assurance Co v Dodd [1892] 2 QB 573 (CA) at 583.
15 At 583.
[65] In this case, the interests of the related and the unrelated creditors differ. The related parties have no interest in an investigation based on the phoenix aspect of the sale which occurred shortly before the liquidation. In the terms used by Bowen LJ in Sovereign Life Insurance, the Andrews cannot be expected to consult together with unrelated creditors on the phoenix aspect with a view to their common interest. A common interest on that issue does not exist.
[66] I conclude that in relation to this liquidation, the concept of “class” within s
245A(1)(c) requires recognition of Goleman and the Commissioner as unrelated creditors and the Andrews as related creditors.
[67] Mr Guest as counsel for the liquidator did not concede the correctness of that approach but did not submit otherwise.
Issue 2: was the defeat of each resolution contrary to the interests of the class of creditors comprising unrelated creditors?
[68] There were two focuses in Goleman’s moving the resolution for replacement of the liquidator. The first was to have new liquidators who could be expected to proactively investigate the circumstances of the sale and purchase of the AFO assets. The second was to have new liquidators reconsider the time and expense involved in pursuing appeals which might lead to a re-trial of the Goleman/AFO litigation.
[69] I recognise that in determining under s 245A(1)(c)(i) of the Act whether the failure to pass a resolution is “contrary to the interests” of creditors or a class of creditors, I am called upon to make an assessment which is, in the normal course, the assessment performed by the liquidator. The liquidator’s view is entitled to respect particularly where the liquidator is as experienced as Mr Laing, but once a s 245A application is before the Court, the factual determination of where the interests of creditors lie is for me and not for Mr Laing.
[70] I also have regard to the fact that the very nature of the resolution in this case
– to replace Mr Laing as liquidator – reduces the significance of Mr Laing’s personal
view. After Mr Laing’s initial indication that he might resign, it is evident from his
comments of 23 April 201416 that his decision to not offer his resignation was prompted at least in part by his taking offence at the letter from Goleman’s solicitors alleging shortcomings in his performance as liquidator.
[71] I find it sufficient to focus on one aspect of the liquidation, namely the potential for investigation of the Phoenix aspect of the AFO/AFO 2014 transaction. Mr Laing’s approach to the issues thereby raised has not been proactive. Mr Laing’s response to Goleman’s legitimate concern as to the phoenix aspect of the AFO/AFO
2014 transaction was to suggest that Goleman could independently pursue that issue for itself. Yet some money has already come in from the Andrews on account of the voidable preference and much more is yet to come. Funds would be available to investigate the AFO/AFO 2014 transaction but Mr Laing appears to have elected to use such funds as already available with a focus on extinguishing or reducing High Court damages award in the Goleman/AFO litigation.
[72] In a reasonably lengthy passage in his affidavit filed in opposition, Mr Laing has rejected Goleman’s criticism that he had not conducted a fair investigation of the affairs of AFO. He deposes that:
This is exactly what has occurred, and which is continuing to occur.
[73] But what Mr Laing then goes on to identify are all steps in relation to the voidable preference which was identified by both Goleman and the liquidator as early as May 2014. Its voidable character appears to have been patent. Mr Laing identifies what he says are three specific steps he has taken against the Andrews being:
(a) not accepting the claim as lodged in the creditors’ claim form;
(b) identifying and reversing an insolvent transaction; and
16 Above at [48].
(c) Goleman turned up to the second creditors’ meeting without a proxy, and allowed the meeting to continue on the basis that one would be provided.
[74] None of those steps identified by Mr Laing addresses the phoenix aspect of the AFO/AFO 2010 transaction.
[75] In an earlier passage of his affidavit Mr Laing referred to the Goleman allegation as to a phoenix company in this way:
… it is a classic case of “not comparing apples with apples”. What has happened here is not a matter of the business being “hived down” to a phoenix company, but instead being sold to an existing and operating related company. The importance of that is that the transferee company already had assets in it.
[76] There is something of a parallel between Mr Laing’s rejection of the “phoenix” label and that of Mr Andrews. A central consideration giving rise to the legislation concerning phoenix companies lies in the risk of the value of businesses being lost through a transfer of goodwill and/or assets at an undervalue. The fact that the transfer is to an existing and operating related company rather than a classic “hive down” does not alter the risks involved to the liquidated company. They reasonably call for investigation.
[77] In his evidence Mr Laing then continued:
Moreover, the business is being marketed with real estate owned by a third related company that has always owned that real estate. The value of this real estate is more than half of the asking price. Therefore, of course the price expectation was much higher than the price put on the transfer of the assets from AFO. This was explained in the letter from Rodgers Law…which was copied to me.
[78] A difficulty with Mr Laing’s evidence in this regard is that he has not produced evidence of the valuations asserted by those giving him information. He appears to have made an assumption that the information provided to him is accurate. Yet it appears clear from Mr Andrews’ evidence that there was not a stand- alone valuation of the AFO business obtained before its sale. Nor has either of the
respondents obtained valuation evidence to support the assumed sale values. Mr Laing appears to have been reactive to the information he received, accepting it at face value, and not proactive in making actual inquiries into reliable valuation evidence.
[79] Mr Laing’s affidavit then continues:
Although I have not reached a final conclusion yet, my tentative thinking at present is that save for an adjustment in respect of a voidable transaction, there was nothing unduly unfair about the transfer of those assets. I will, however, be keen to examine details of the sale when it occurs. If it sells for something which appears to include goodwill, or some other value that was not taken into account, I will be pursuing that. I have been to the factory many times, and have acquired an understanding of the business. It seems to me that there is unlikely to be much if any goodwill associated with the business in the absence of Mr Andrews. Mr Andrews seems to have something of a reputation in the drilling and machinery filed, and has the ability to draw work to him. But I assess this as being personal to him. There is nothing that I can see in the intellectual property, the location of the premises, longer term relationships with other commercial entities, or corporate reputation, which is of saleable value.
[80] A legitimate concern arises for the unrelated creditors over what Mr Laing deposes is his “tentative conclusion” that “there was nothing unduly unfair about the transfer of those assets”. First, he does not appear to have had the valuation evidence critical to an assessment of whether or not the sale price was fair. It is unclear how the liquidator could form such a conclusion, tentative or otherwise, without evidence other than from those involved in the transaction.
[81] Secondly, the unrelated creditors were reasonably entitled when a liquidator drew tentative conclusions in that way to be apprehensive as to the rigour which would be brought to any subsequent assessment, particularly when Mr Laing’s evidence appears to be that he was in some way content to await the outcome of a later sale process in order to assess the fairness of a separate transaction, of differently composed assets, which occurred in March 2014.
[82] Furthermore, the argument which Mr Laing appears to be developing in relation to an absence of goodwill is at one level understandable. But it arguably ignores the fact that the AFO/AFO 2014 transaction bears some of the hallmarks of a
classic phoenix situation:– a similar name has been retained, which is generally done to preserve perceived goodwill. But, in any event, it is common ground that the transaction between AFO and AFO 2014, as it proceeded, involved no payment for goodwill. Physical assets were being transferred. Yet, even in relation to those assets, the liquidator appears to have made no investigation as to value (other than asking those interested in the transaction). There is no reliable valuation evidence. A quick reading of the Tabak valuation shows that the $950,000.00 figure relied on by Tabak for the combined AFO/AFO 2014 business came from estimates ($400,000.00 for plant and equipment recorded as provided “by owner” and
$550,000.00 for inventory- recorded as an estimate as September 2013, by inference the estimate also of the owner).
[83] In the circumstances of this case and of the AFO/AFO 2014 transaction, the interests of the creditors as a whole and the interests of the unrelated creditors as a class required a liquidator to proactively and thoroughly investigate the AFO/AFO
2014 transaction. The failure of the creditors to pass the resolution replacing Mr Laing with liquidators who might proactively investigate the circumstances of the sale and purchase transaction was, in my judgment, contrary to the interests of the creditors as a whole and also of the unrelated creditors as a class.
[84] In defence of the liquidator’s performance, Mr Guest noted the limited
resources which the liquidator has been able to employ (which I understand to be
$20,000.00 to date). Mr Guest’s submission was the parties and the Court should not have unrealistic expectations of what the liquidator could undertake and achieve in those circumstances. I have some sympathy for the position as stated by Mr Guest, particularly because in his decision to take on appeal numerous aspects of the Goleman/AFO litigation the liquidator has brought upon himself a series or urgent attendances which will have eaten up time and expense. Mr Laing for instance, at one point in his affidavit deposes to having spent since the formal proof fixture:
… many hours with Mr Andrews, the transcripts and briefs, and documents.
[85] But the other creditors of AFO could reasonably look to the liquidator to spend time and money not only on tackling issues over a judgment debt of AFO but also on potential lines of recovery, as lie in the phoenix aspect of the AFO/AFO 2014
transaction. It appears to be not only the Goleman/AFO litigation that Mr Laing has spent time on. In the passage I quoted from his evidence as to a lack of goodwill in AFO17 Mr Laing refers to having been to the factory “many times”. The liquidator clearly had to make decisions about his time and resources. He does not actually depose that he did not have time or resources to put in to a thorough investigation of the AFO/AFO 2014 transaction. Rather his explanation appears to be that he had formed a tentative view that there were no issues with the transfer and that he was prepared to await a sale (in fact a resale) of the business before assessing whether
there were issues arising.
Issue 3: did the failure to pass the resolution prejudice, or was it reasonably likely to prejudice the interest of Goleman to an extent that is unreasonable having regard to the matters identified in s 245A(1)(c)(ii)?
[86] The matters in s 245A(1)(c)(ii) of the Act, to which I am required to have regard when assessing the issue of prejudice, include the benefits accruing to the related creditor from the failure to pass the resolution and the nature of the relationship between the related creditor and the company. As Mr Laing’s past correspondence indicates and his affidavit appeared to reaffirm, the consequence of the failure of the resolution to replace him is that the Andrews as directors and AFO
2014 as purchaser are unlikely to be the subject of any proactive investigation for the time being as he remains liquidator. Any arms-length creditor of AFO (being the Commissioner and Goleman) is reasonably likely to be prejudiced by the absence of a proactive investigation into the sale and purchase. The extent of that prejudice is unreasonable having regard to the effective immunity it provides to the Andrews and AFO 2014.
Satisfaction of the threshold requirements in s 245A of the Act
[87] I am accordingly satisfied that the threshold requirements under s 245A(1) of the Act are each established.
17 Above at [79].
The pending appeal hearing in the Goleman/AFO litigation
[88] In his oral submissions, Mr Guest raised on behalf of the liquidator a legitimate concern which had not been before me in the pleadings, evidence or written submissions. It is this.
[89] The liquidator’s three appeals have been consolidated and have a hearing date in the Court of Appeal in February 2015. There is a timetable for submissions with looming deadlines. Mr Guest observed that, should there be a change of liquidator, the new liquidators may face time problems similar to those which confronted Mr Laing in dealing with the Goleman/AFO litigation when he was appointed.
[90] All counsel recognised that the potential for time problems in the appeal, if I was to make orders which led to the appointment of new liquidators, should be capable of resolution by arrangement between the parties. Mr Russell took instructions in the course of the hearing and informed me that the directors of Goleman undertake, in the event that new liquidators are shortly appointed and if the new liquidators are proceeding with the appeals, to consent to an application by those liquidators for an adjournment of the appeals. It is not for this Court to anticipate how that situation will be dealt with in the Court of Appeal but the arrangements suggested by counsel to deal with the situation in this Court appear to deal with the situation with appropriate regard to all parties’ interests.
Orders under s 245A(2)
[91] Because I am satisfied that the threshold requirements under s 245A(1) are established, I may make one or more of the orders provided for under s 245A(2) of the Act, the first three of which are:
(a) an order that the resolution be set aside;
(b)an order that a new meeting be held to consider and vote on the resolution; and
(c) an order that a specified related creditor or creditors must not vote on the resolution or on a resolution to vary or amend it.
[92] In the circumstances of this case, a full set of those three orders is necessarily required.
[93] I will be making orders accordingly.
An order of the Court removing the liquidator under s 284 of the Act
[94] Goleman made an early and, in my judgment, appropriate decision to deal with its concerns by moving a resolution to replace Mr Laing as liquidator. By invoking the Court’s powers under s 245A of the Act, Goleman has invoked a jurisdiction specifically appropriate to the situation.
[95] Goleman’s additional invoking of the Court’s more general powers under s
284 of the Act was in the nature of an alternative application. I view the specific orders under s 245A which I intend to make as sufficient to meet the needs of the case. Mr Russell, in his submissions accepted that, in the event the Court were to make orders under s 245A of the Act, the s 284 application could appropriately fall away.
[96] There will accordingly be an order formally dismissing that aspect of the application.
Costs
[97] I have heard from counsel as to costs.
[98] Costs should follow the event. Goleman’s application has been successful.
[99] The application has been actively and unsuccessfully opposed by both the first respondent and the second respondents.
[100] Given that Goleman has an interest in the funds available in the liquidation of
AFO, an order for costs which the liquidator might recover from AFO itself as an
aspect of his expenses could work an injustice. Goleman as a creditor would be indirectly contributing to payment of costs awarded in its favour. An order for costs against the Andrews is conventional and clearly just: the Andrews, as they were entitled to, voted against the resolution at the first meeting but then, notwithstanding valid concerns raised by Goleman in the interim, voted against the second resolution. They have now carried on their resistance, by opposing this application.
[101] I conclude that the just outcome on costs is that Goleman has costs on a 2B basis against both respondents. Both the liquidator and the Andrews will be liable as to the costs award, equally as between themselves. The Court requires that each contribute 50 per cent of the payment. As the award is against Mr Laing personally (notwithstanding that he may have a right of recovery from the liquidators), I do not anticipate any difficulty in Goleman obtaining payment. That said, if one respondent defaults, Goleman will be entitled to recover the full sum from the “non-defaulting” party.
Orders
[102] I order:
(a) The resolutions of creditors of AFO Industrial Ltd (in liquidation) at meetings on 2 May 2014 and 7 August 2014 are set aside;
(b)A new meeting shall be held promptly to consider and vote on a resolution that Malcolm Hollis and John McKnight be appointed liquidators of AFO Industrial Ltd in place of Trevor Edwin Laing;
(c) Allan Thomas Andrews and Gaylene Heather Andrews must not vote on the said resolution or on any resolution to vary or amend it;
(d)Trevor Edwin Laing, Allan Thomas Andrews and Gaylene Heather Andrews shall pay to the applicant the costs of the proceeding on a Scale 2B basis together with disbursements to be fixed by the Registrar, with a certificate for the reasonable travel and accommodation costs of counsel for the applicant but with no
certificate for second counsel (“the award”). As between the first and second respondents, they shall each bear 50 per cent of the award, but without limiting the right of the applicant to recover 100 per cent of it award from either respondent should the other not bear its inter- respondent apportionment.
Solicitors:
Lane Neave, Christchurch
Downie Stewart, Dunedin
D R Tobin, Barrister, Dunedin
0
3
1