Foundation Securities (NZ) Limited v Direct Labour Services Limited HC Auckland CIV 2006-404-4391
[2007] NZHC 1630
•16 February 2007
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV 2006-404-4391
IN THE MATTER OF the Companies Act
BETWEEN FOUNDATION SECURITIES (NZ) LIMITED
Plaintiff
AND DIRECT LABOUR SERVICES LIMITED First Defendant
AND CASE BOREHAM ASSOCIATES LIMITED
Second Defendant
Hearing: 16 February 2007
Appearances: S McAnally for plaintiff
Mr G. Denholm for first and second defendants
Mr W. Manning for Liquidators
Judgment: 16 February 2007
ORAL JUDGMENT OF ASSOCIATE JUDGE J P DOOGUE
Counsel:
Keegan Alexander, P O Box 999, Auckland (S McAnally) G Denholm, P O Box 5080, Auckland
Laurent Law, Suite 4, 1st Floor, 93 Dominion Road, Mt Eden, Auckland – by email:
Copy:
Foy & Halse, P O Box 26-218, Epsom, AucklandMr W Manning, P O Box 5844, Wellesley Street, Auckland
FOUNDATION SECURITIES (NZ) LIMITED V DIRECT LABOUR SERVICES LIMITED AND ANOR HC AK CIV 2006-404-4391 16 February 2007
[1] Last year Foundation Securities (NZ) Limited plaintiff took proceedings to put the two defendants into liquidation. The initial hearing date was 5 October 2006. An opposition was filed and I heard the opposed application to place the company in liquidation on 15 December 2006. I reserved my decision and subsequently made the orders sought. There were some additional complications along the way including the recall of my judgment for various purposes which are not of immediate relevance to the present matter that’s before me. On 14 February the second defendant filed an application for a “stay of execution” of judgment which purported to be made pursuant to r 12 of the “High Court Rules” but which as I understand it is based on the entitlement of the defendant to seek a stay of execution pending the hearing of an appeal. The grounds given included:
b.That such a stay of execution of the judgment is necessary in the circumstance pending the determination of the appeal.
c. That in the event no stay is granted, the second defendant’s right of appeal will be rendered nugatory.
[2] The application went on to recite that the second defendant was a private training establishment involved in educating students and that it was amongst other things funded by the Tertiary Education Commission.
[3] An affidavit was filed in support which elaborated on the grounds. The affidavit was given by Robyn Marie Case who was a director of the second defendant. She deposed that the company has eight branches in the North Island and employs 20 staff. She said that approximately 120 students had been enrolled and are currently attending courses. She said that as a result of the order that I had made placing the company in liquidation the New Zealand Qualifications Authority had contacted the second defendant threatening to withdraw registration. She also gave evidence that she apprehended that the Tertiary Education Commission would cancel its agreement with the second and discontinue funding. Such a step she said would effectively put the second defendant out of business. She said the second defendant needed to continue providing educational services to preserve its position until the outcome of the Appeal is known.
[4] Because of the urgent circumstances, I made an order in Chambers for an interim order for stay of execution pending further order of the Court on 14 February
2007. The objective that I had in view was that that would hold the position until other interested parties had the opportunity to be heard on the application for stay. Documents have now been filed by the plaintiff and by the liquidators that I appointed. In both cases they oppose the application for stay of execution. What is required from this point is that the Court documentation which the parties need to file should be completed and the matter given an urgent hearing – to be heard on notice rather than on a effective ex parte basis which is how I dealt with it in chambers when I made the interim order.
[5] Mr Denholm for the second defendant objected to my hearing from Mr Manning for the liquidation and Mr McAnally for the plaintiff. He said they had no standing. I am not going to try and resolve that issue on a conclusive basis today. It does however seem to me that there is ample ground for supposing that the two parties do have standing. The question of standing can be explored further if necessary at the hearing which I propose to take place next week.
[6] I have had the advantage today of hearing submissions from all counsel. The reasons why I should not have made my interim order and why a permanent order for stay should not be made have been outlined by counsel for the plaintiff and for the liquidators of the second defendant. The evidence at this stage is not complete but hearing the submissions even without the advantage of affidavit evidence has been helpful. I should say for the sake of completeness that Mr Manning for the liquidators tells me that part of the evidence that is intended to be filed by the liquidators will include evidence showing that the second defendant is grossly insolvent. That is not a matter that I can come to a conclusion today.
[7] The argument before me however turned up some conceptual difficulties about making an order for stay of execution in a case like this. I am not going to recite all the submissions that I have received but it seems apparent from having listened to counsel that the Court cannot, in the guise of making an order for stay of execution, displace the liquidators from the statutory office to which they have been appointed. My conclusion is a provisional one, because argument has been limited
and it may be something that the Court will go into next week. But if the liquidators are in office then it seems to logically follow that they have control of the company and that that is an inherent part of their role which they cannot be prevented from exercising so long as they occupy that office. Equally the other effects of making an order for liquidation are that the directors powers with unimportant exceptions expire. I mention this because the objective of Mr Denholm’s client, Ms Case, a director of the company, is to keep running the business previously carried on by the second defendant. To do so, she wants to get into a position where she re-gains control over assets of the company, including bank accounts, so that she can pay due accounts. Without that she says the business will fail.
[8] While the commencement of a liquidation does not vest the property of the company in the liquidators, they are entitled to custody and control of the assets: Section 248 Companies Act 1993 provides:
248 Effect of commencement of liquidation
(1)With effect from the commencement of the liquidation of a company,— (a)The liquidator has custody and control of the company's assets:
(b)The directors remain in office but cease to have powers, functions, or duties other than those required or permitted to be exercised by this Part of this Act:
(c)Unless the liquidator agrees or the Court orders otherwise, a person must not—
(i)Commence or continue legal proceedings against the company or in relation to its property; or
(ii)Exercise or enforce, or continue to exercise or enforce, a right or remedy over or against property of the company:
(d)Unless the Court orders otherwise, a share in the company must not be transferred:
(e)An alteration must not be made to the rights or liabilities of a shareholder of the company:
(f)A shareholder must not exercise a power under the constitution of the company or this Act except for the purposes of this Part of this Act:
(g)The constitution of the company must not be altered.
(2)Subsection (1) of this section does not affect the right of a secured creditor, subject to section 305 of this Act, to take possession of, and realise
or otherwise deal with, property of the company over which that creditor has a charge
[9] See also Thompson Brooker’s Company Law commentary:
CA248.01Liquidator has custody and control of company’s assets
Unlike the position that applies under bankruptcy law, the assets of a company in liquidation are not vested in the liquidator. However, no other person has better title to those assets than the liquidator following the commencement of liquidation: Sutherland v North Shore Marine & Industrial Ltd (in liq) (1981) 1 NZCLC 95-019.
[10] I have not overlooked Mr Denholm’s submission that if the rules conferring a right on the Court to grant a stay of execution do not apply in these circumstances then in nearly all cases rights of appeal will be only a theoretical possibility and will have no practical benefit to the shareholders and directors of a company that has been placed in liquidation. He may well be right but if there is some omission in the law it may well be that it’s there because there is no way of effectively resolving an impasse of this kind.
[11] If I am correct in my view what Ms Case seeks to do is legally impossible so long as the liquidators are in office, there is therefore no point in continuing the order for stay of execution. The view I have just expressed is of course not with the benefit of any detailed well-developed submissions and is again a matter which will have to be finally ruled upon next week.
[12] The matter though is urgent and the second defendant will wish to argue for a permanent stay as a matter of priority. I have arranged for the proceeding to be placed in the Duty Judges list next week. I have no time in my diary to deal with the matter. To get the matter ready for hearing, I direct that the liquidators and the plaintiff are to file and serve any affidavits in opposition by 5 p.m. Monday 19
February 2007.
[13] It would also be helpful if the parties would file and serve synopses of
argument by the same time and date.
J.P. Doogue
Associate Judge
0
0
0