Gillovic v Nayacakalou
[2023] NZHC 2348
•28 August 2023
IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY
I TE KŌTI MATUA O AOTEAROA KIRIKIRIROA ROHE
CIV-2022-419-216
[2023] NZHC 2348
UNDER ss 284 and 286 of the Companies Act 1993 IN THE MATTER OF
the removal of liquidator, setting aside transaction and fix liquidator’s feels
BETWEEN
BRENT STEPHEN GILLOVIC
Plaintiff
AND
KELERA NAYACAKALOU
First Defendant
Hearing: 12 July 2023 Counsel:
D Delic and Z Evita for the Plaintiff K Bond for the Defendant
Judgment:
28 August 2023
JUDGMENT OF ASSOCIATE JUDGE BRITTAIN
This judgment was delivered by me on 28 August 2023 2023 at 11am.
Pursuant to Rule 11.5 of the High Court Rules.
…………………..
Registrar/Deputy Registrar
Solicitors/Counsel:
S D Legal, Hamilton
Braun Bond and Lomas, Hamilton
GILLOVIC v NAYACAKALOU [2023] NZHC 2348 [28 August 2023]
Introduction
[1] The plaintiff, Brent Gillovic, holds 100 per cent of the shares in Tesio Thoroughbred Services Limited (in liq) (Tesio Thoroughbred) and 99 per cent of the shares in Tesio Bloodstock Services Limited (in liq) (Tesio Bloodstock). Mr Gillovic is a director of both companies. The defendant, Kelera Nayacakalou, is the liquidator of both companies (the liquidator).
[2] Tesio Bloodstock is registered as the owner of 600,000 shares in CHG Investments Limited (CHG) (the CHG shares). Mr Gillovic is a director of CHG. He says that the shares have a value of at least $400,000.
[3] In August 2021, the liquidator purported to sell the CHG shares to a third party, Naldapat Limited (Naldapat), for a price of $2,000. CHG has refused to register a share transfer. Mr Gillovic now wishes to challenge the share sale as well as the remuneration claimed by the liquidator. He also seeks an order removing the liquidator from office.
[4] Mr Gillovic has filed an application under ss 284 and 286 of the Companies Act 1993 (the Act), by statement of claim. Mr Gillovic, in his capacity as a shareholder of Tesio Thoroughbred and Tesio Bloodstock, requires leave to bring an application under s 284 of the Act.
[5] The liquidator opposes a grant of leave. The liquidator makes two other procedural challenges to Mr Gillovic’s proceeding. First, the liquidator opposes an order removing her from office under s 286 of the Act on the ground that Mr Gillovic failed to serve the notice required under s 286(2) of the Act. The liquidator submits that the claim under s 286 is a nullity, however, there is no formal application to strike out that part of the claim.
[6] Secondly, the liquidator applies to strike out Mr Gillovic’s second cause of action in his amended statement of claim dated 23 December 2022, which seeks to reverse the share sale, on the grounds that the relief sought is not available on an application under s 284 of the Act and where Naldapat is not joined as a party.
Background
[7] Tesio Bloodstock and Tesio Thoroughbred fell into arrears in meeting their tax obligations. Mr Gillovic decided to place Tesio Bloodstock and Tesio Thoroughbred into voluntary liquidation, by resolution of the shareholders. The appropriate resolutions were passed and the liquidator was appointed on 15 May 2015.
[8] That same day, Mr Gillovic, as guarantor, signed two fee agreements with the liquidator, one in respect of each liquidation. Pursuant to cl 4 of each agreement, Mr Gillovic agreed to “personally pay up to $3,500+GST of the costs of the liquidation should insufficient funds be received from the liquidation”.
[9] On 26 May 2015, Inland Revenue lodged a creditor’s claim for $60,516.76 in the Tesio Bloodstock liquidation and a creditor’s claim for $38,972.53 in the Tesio Thoroughbred liquidation. There is no evidence of any other creditors of Tesio Bloodstock or Tesio Thoroughbred.
[10] On 31 August 2015, Mr Gillovic signed a term loan agreement between Bamboo Asia Limited as lender, Gillovic Bloodstock Limited (Gillovic Bloodstock) as borrower, and Tesio Bloodstock as guarantor (the guarantee). Mr Gillovic purported to sign the guarantee on behalf of Tesio Bloodstock, even though the guarantee recorded that Tesio Bloodstock was in liquidation. Mr Gillovic had no power to bind the company. The liquidator denies any knowledge of the guarantee at the time of execution.
[11] The loan agreement recorded that the security for Tesio Bloodstock’s guarantee was a specific security agreement over its shares in CHG. On 31 August 2015, Mr Gillovic signed a general security agreement on behalf of Tesio Bloodstock, purporting to charge the assets of Tesio Bloodstock (the GSA). Again, the liquidator denies any knowledge of the security documentation at the time of execution.
[12]On 30 March 2016, the liquidator issued an invoice for liquidation fees of
$3,500 plus GST in respect of Tesio Bloodstock and $3,500 plus GST in respect of Tesio Thoroughbred. The two fees were included in one invoice, which was addressed
to Tesio Bloodstock, care of Mr Gillovic. The invoice was sent to Mr Gillovic attached to an email dated 30 March 2016, which requested timely payment.
[13] Tesio Bloodstock and Tesio Thoroughbred did not have funds to pay the liquidator’s fees. It is apparent that the liquidator expected Mr Gillovic to pay the invoice personally. Mr Gillovic made a part payment towards the invoice, but the date and amount of that payment are not in evidence.
[14] There is no evidence from the liquidator as to what steps were taken in the liquidations during 2016 and up until mid-November 2017. On 23 November 2017, the liquidator wrote to Mr Gillovic in his capacity as a director of CHG, requesting that he arrange for a transfer of Tesio Bloodstock’s CHG shares into the liquidator’s name, to be held on trust. There is no explanation from the liquidator as to why she considered that step was necessary.
[15] It appears that in late 2017 and January 2018, the liquidator was investigating the guarantee and the GSA executed in August 2015. The liquidator has produced a copy of a letter dated 31 January 2018 from North End Law, the solicitors that acted for Gillovic Bloodstock in 2015, to the liquidator. The letter refers to prior correspondence from the liquidator to North End Law, which is not in evidence. In the letter, North End Law confirmed that they had acted for Gillovic Bloodstock in 2015 and that their instructions came from Mr Gillovic.
[16] On 31 January 2018, the liquidator sent a letter to Mr Gillovic in his capacity as a director of CHG, again requesting that the CHG shares be transferred to the liquidator, to be held on trust as an asset of Tesio Bloodstock. The letter stated the liquidator’s view that the “charges” on the shares were “invalid”. I take that to be a reference to the GSA.
[17] On 9 February 2018, the liquidator wrote to Mr Gillovic, CHG and the Gillovic Family Trust. The liquidator’s letter made it clear that she did not accept that the guarantee and the GSA were genuine. In addition, the liquidator made demand on Mr Gillovic, his wife and the Gillovic Family Trust for allegedly overdrawn current accounts. The liquidator alleged that Mr Gillovic and his wife owed $378,060 and
$71,447, respectively, to Tesio Bloodstock, and that the Gillovic Family Trust owed
$53,905 to Tesio Thoroughbred.
[18] On 27 February 2018, the liquidator sent an email to Mr Gillovic requesting payment of the amount outstanding on her invoice from March 2016.
[19] On 23 May 2018, Mr Gillovic sent an email to the liquidator, advancing a different position in respect of the CHG shares. Mr Gillovic claimed that the CHG shares should have been transferred to a Hong Kong based company, Forever Young Development Limited (Forever Young), claiming that he was the beneficial owner of the shares in that company. The email did not mention the guarantee or the GSA.
[20] Mr Gillovic asserts that Tesio Bloodstock sold the CHG shares to Forever Young in 2006 and that Tesio Bloodstock has held the shares as a bare trustee for Forever Young ever since. Mr Gillovic has produced no documentary evidence to support his assertions.
[21] The liquidator responded to Mr Gillovic by email on 31 May 2018, advising that she did not accept Mr Gillovic’s assertions regarding the transaction with Forever Young.
[22] Nothing more appears to have happened until September 2020, when the liquidator filed a claim in the District Court seeking to recover the specified amounts owed by Mr Gillovic, his wife and the Gillovic Family Trust to Tesio Thoroughbred and Tesio Bloodstock (the District Court proceeding). The liquidator claimed
$350,000 in relief against Mr Gillovic. There is no explanation or evidence from the parties regarding the hiatus in activity from June 2018 to September 2020.
[23] Shortly after filing the District Court proceeding, the liquidator executed a share transfer in respect of the CHG shares, purporting to transfer the shares from Tesio Bloodstock into her own name.
[24] On 4 May 2021, solicitors engaged by Mr Gillovic wrote to the liquidator, advising that Inland Revenue had written off the debts owed by Tesio Bloodstock and
Tesio Thoroughbred. The liquidator independently confirmed the position. The liquidator filed an amended statement of claim in the District Court proceeding, pleading that on 29 June 2021, Inland Revenue advised the liquidator that Inland Revenue was withdrawing its claims.
[25] Despite the absence of any other creditors, the liquidator proceeded to sell the CHG shares to Naldapat. The liquidator signed a share transfer dated 25 August 2021, transferring the shares to Naldapat for consideration of $2,000.
[26] Mr Gillovic has produced a copy of CHG’s constitution, which includes conventional pre-emptive rights in favour of existing shareholders. Mr Gillovic says that the liquidator failed to comply with the pre-emptive rights provisions.
[27] The liquidator says that Naldapat is an arms-length party that purchases “distressed assets from liquidators” and that Naldapat was aware of the “dispute”. The liquidator has not produced any documentary evidence relating to the transaction with Naldapat.
[28] On 10 January 2022, the liquidator filed an amended statement of claim in the District Court proceeding, reducing the amount claimed against Mr Gillovic and the Gillovic Family Trust to $77,807.63, which is the amount pleaded to be due for the liquidator’s outstanding fees. The District Court proceeding has been stayed, pending the outcome of this proceeding.
The amended statement of claim
[29] The subject liquidations are voluntary, so the procedural requirements in rr 31.35 and 31.36 of the High Court Rules 2016 (HCR) which relate to, respectively, miscellaneous applications and applications involving allegations of fraud, negligence, misfeasance or similar behaviour, do not apply. Part 18 of the HCR applies, and the application was appropriately commenced by a statement of claim.
[30] Mr Gillovic’s amended statement of claim dated 23 December 2022, contains three causes of action:
(a)the first cause of action alleges multiple breaches of duty by the liquidator and seeks an order removing the liquidator from office under s 286 of the Act;
(b)the second cause of action under s 284 of the Act impugns the transfer of the CHG shares to Naldapat, and seeks an order setting aside the transaction; and
(c)the third cause of action under s 284 of the Act seeks a review of the liquidator’s remuneration.
[31] Initially, Mr Gillovic did not apply for leave under s 284 of the Act to make his substantive application. An application for leave was subsequently filed and is determined in this judgment.
The first cause of action
Legal principles
[32] Section 286 of the Act prescribes a procedure to be followed where a party seeks to enforce a liquidator’s duties, including where an order is sought removing the liquidator from office. Under s 286(2), no application may be made by a person, other than a liquidator, in relation to a liquidator’s failure to comply with a duty, unless notice of the failure to comply is served on the liquidator at least five working days before the date of the application and, as at the date of the application, there is a continuing failure to comply.
[33] In Official Assignee v Norris, Mallon J stated that a notice under s 286 of the Act must:1
… fairly inform the liquidator of the duty they are alleged to have breached and how they are alleged to have breached that duty, so that the liquidator is able to determine what he or she needs to do if they are to avoid an application to the Court.
1 Official Assignee v Norris [2012] NZHC 961, [2012] NZCCLR 10 at [43].
[34] Failure to serve the requisite notice affects the Court’s jurisdiction to hear an application under s 286.2 If jurisdiction is lacking, then it is open to a party to file an objection to jurisdiction under r 5.49 of the HCR, but that procedure is not mandatory.3
Discussion
[35] The liquidator submits that Mr Gillovic failed to serve the requisite notice and that consequently he lacks standing to apply for an order under s 286.
[36] In response, counsel for Mr Gillovic relied on his letter to the liquidator dated 24 February 2023. This letter referred to previous correspondence from Mr Gillovic’s solicitors to the liquidator dated 19 and 22 April 2022, which predate this proceeding. Although not yet in evidence, this correspondence from April 2022 may satisfy the notice requirements of s 286(2) of the Act.
[37] The notice issue can be resolved at trial. The first cause of action in the amended statement of claim, seeking an order removing the liquidator from office, can proceed. If the Court lacks jurisdiction to make orders under s 286 of the Act, the Court may nonetheless have inherent jurisdiction to order the removal of the liquidator.4
The second and third causes of action
[38] The remaining issue to be determined is whether leave should be granted to Mr Gillovic to pursue his second and third causes of action under s 284 of the Act.
Legal principles
[39] To be granted leave under s 284 of the Act to challenge the acts or decisions of a liquidator, a shareholder must establish:
(a)that the claim has a credible factual basis; and
2 Official Assignee v Norris, above n 1, at [49].
3 Official Assignee v Norris, above n 1, at [50]–[51].
4 See Commissioner of Inland Revenue v Livingspace Properties Ltd [2020] NZHC 1434, [2021] 2 NZLR 252.
(b)that there is a reasonable likelihood that, if the claim is established, the Court will disturb the act or decision in question.5
[40] The latter requires elements of either fraud, lack of good faith in the exercise of a discretion or unreasonableness by the liquidator.6 Unreasonableness means acting in a way that no reasonable liquidator would have acted.7 Serious and obvious lapses in judgment must be shown before the Court will interfere.8
[41] There is conflicting authority from this Court on whether s 284 of the Act confers on the Court jurisdiction to make orders that affect the contractual and property rights of a third party. The case law, and some academic commentary, was comprehensively reviewed by Associate Judge Paulsen in Dalton v Mackley.9 The Associate Judge concluded that such claims will usually be unsuitable for determination in a summary proceeding under s 284.10 I agree, particularly in circumstances where the third party has not been joined to the proceeding.
[42] Subject to this qualification, it is within the ambit of s 284 for the Court to review acts or decisions of a liquidator relating to the realisation of assets of the company in liquidation, and to give directions regarding any further steps that a liquidator should take in respect of those assets.
[43] The liquidator is entitled to charge reasonable remuneration.11 The Court is empowered to review the liquidator’s remuneration under s 284(1)(e) of the Act.
5 Trinity Foundation (Services No 1) Ltd v Downey (2006) 3 NZCCLR 401 (CA) at [23] and [31].
6 Consolidated Technologies Development (NZ) Ltd v McCullagh (2006) 3 NZCCLR 424 (HC) at [15].
7 Re Callis (1996) 7 NZCLC 261,211 (CA) at 215.
8 Re Optimisationz Ltd (in liq) [2012] NZHC 1438, [2012] NZCCLR 23 at [8].
9 Dalton v Mackley [2021] NZHC 2329.
10 At [41].
11 Companies Act 1993, s 276(1).
Discussion
The CHG shares
[44] Mr Gillovic says that from 2006, Tesio Bloodstock has held the CHG shares as bare trustee for Forever Young as beneficiary. Mr Gillovic says that he is the ultimate beneficial owner of Forever Young.
[45] Mr Gillovic’s post-liquidation attempt to bind Tesio Bloodstock to the guarantee and the GSA may appear inconsistent with the assertion of a bare trust. However, if Tesio Bloodstock was a bare trustee it would have had the power pre- liquidation to grant a guarantee and a GSA over the CHG shares, with the consent of the beneficial owner of the CHG shares.
[46] If Mr Gillovic’s assertion of a bare trust in respect of the CHG shares is correct, then the CHG shares had no value to Tesio Bloodstock as bare trustee. With the consent of Forever Young as beneficial owner, the liquidator could have transferred the shares to Forever Young and terminated the trust. Alternatively, the liquidator could have sought directions from the Court.
[47] Significantly, if there was a bare trust, then the liquidator’s transfer of the CHG shares to Naldapat was in breach of trust. Naldapat may have received the CHG shares with knowledge of the trust, given that the liquidator says that Naldapat was aware of a “dispute”. There is presently insufficient evidence on that matter. It is possible that Naldapat acquired an equitable interest in the CHG shares but subject to the equitable interest of Forever Young.
[48] Further, it appears that the liquidator failed to comply with the pre-emptive rights of the other CHG shareholders under the CHG constitution. If so, then Naldapat may have acquired the CHG shares subject to the rights of the other CHG shareholders. Again, there is presently insufficient evidence on that matter.
[49] If the CHG shares were transferred by Tesio Bloodstock in breach of trust then the beneficial owner of the shares would have a claim against Tesio Bloodstock, and therefore standing as a creditor. It would be open to the beneficial owner of the shares
to seek a remedy against the liquidator under s 301 of the Act, and/or a remedy against Naldapat if it had knowledge of the trust when it acquired the CHG shares. These potential claims are not within the ambit of s 284 of the Act.
[50] Similarly, if the CHG shares were transferred by the liquidator in breach of the pre-emptive rights provisions in the CHG constitution, and Naldapat acquired good title, then the other CHG shareholders may have a claim against Tesio Bloodstock, and therefore standing to claim against the liquidator under s 301 of the Act.
[51] If the liquidator is correct and there was no bare trust, and the issue of the pre- emptive rights is put to one side, then the sale of the shares to Naldapat raises the issue of whether $2,000 was a fair price.
[52] Mr Gillovic asserts that the CHG shares may have had a value of $400,000 or more. There is no evidence to support that assertion. If Mr Gillovic is correct, then the sale of the shares for $2,000 may have been in breach of the liquidator’s duties, exposing the liquidator to liability under s 301 of the Act. Again, this claim would not be within the ambit of s 284 of the Act.
[53] The issues with the CHG share sale raised by Mr Gillovic cannot be resolved in an application under s 284 of the Act. Mr Gillovic cannot pursue monetary remedies against the liquidator, or any remedy against Naldapat, under s 284. The second cause of action in the amended statement of claim, seeking an order setting aside the transfer of the CHG shares to Naldapat, cannot proceed in its current form. Insofar as the existing second cause of action seeks a reversal of the share transfer under s 284 of the Act, it is struck out.
[54] The issues with the CHG share sale call into question whether the liquidator should have first taken external advice on value or sought directions from the Court. Given that by the time of the share sale, Inland Revenue had withdrawn its claims as a creditor of Tesio Bloodstock and Tesio Thoroughbred, Mr Gillovic questions whether the liquidator acted in bad faith, motivated by a desire to recover her own fees.
[55] The facts that give rise to the issues with the CHG share sale will be relevant to Mr Gillovic’s application for an order removing the liquidator from office, and to a review of the liquidator’s remuneration.
[56] The facts pleaded in paras [26] to [34] of the second cause of action may remain relevant for the first and third causes of action. Re-pleading is required.
The liquidator’s remuneration
[57] The issue of the reasonableness of the liquidator’s fees requires a consideration of the liquidator’s conduct as discussed above, and any terms for the payment of fees agreed with the shareholders prior to the commencement of the liquidations.
[58] To date, the liquidator has issued only one invoice for fees, dated 30 March 2016, for $7,000 plus GST. Mr Gillovic says that this was the fixed price for the liquidator to complete both liquidations. The liquidator says that the fixed price related only to Mr Gillovic’s personal liability, and her right to claim fees in the liquidations was unlimited.
[59]Clause 4 of the fee agreements signed by Mr Gillovic on 15 May 2015 stated:
4. The undersigned guarantors agree to personally pay up to
$3,500+GST of the costs of the liquidation should insufficient funds be received from the liquidation.
(emphasis added)
That wording is consistent with the liquidator’s position.
[60] However, the covering email that forwarded the invoice on 30 March 2016, provides some support for Mr Gillovic’s position, stating:
Please find attached below is our invoice for the liquidations of these two companies.
There was nothing in the email to suggest it was an interim invoice. More significantly, there was no mention of any unbilled fees in any of the liquidator’s numerous statutory reports that followed.
[61] It is not possible to resolve the question of what was agreed between Mr Gillovic and the liquidator prior to the commencement of the liquidations on the evidence filed to date.
[62] The statement of claim by the liquidator in the District Court in September 2020, to recover the allegedly overdrawn current accounts, was filed by the liquidator as a self-represented party. It does not appear that the liquidator was in receipt of any legal advice. The nature of the claim was conventional and it was filed at a time when Inland Revenue was maintaining its claims as a creditor of Tesio Bloodstock and Tesio Thoroughbred.
[63] The liquidator’s amended statement of claim dated 10 January 2022 deserves closer scrutiny. Again, it was filed by the liquidator as a self-represented party. By this time Inland Revenue had withdrawn its claims as a creditor. The liquidator reduced the amount claimed in her statement of claim to equal the amount that she considered she was due for her own remuneration.
[64]The amended statement of claim pleads that the liquidator incurred fees of
$80,807.63 including GST during the liquidations, and that the liquidator recovered
$3,000 from the sale of assets. The liquidator then pleads that the defendants owe Tesio Bloodstock and Tesio Thoroughbred $77,870.63. The implication is that the
$3,000 recovered from the sale of assets was applied to the liquidator’s fees.
[65] These pleadings by the liquidator do not account for the fees that Mr Gillovic had already paid to the liquidator, pursuant to their agreement made at the time of the liquidator’s appointment.
[66] The liquidator has provided her timesheets, but these require further explanation. The liquidator has not provided sufficient justification for the fees of
$77,870.63 now claimed. The level of the fees claimed by the liquidator will need to be assessed in the context of the work undertaken and the issues with the liquidator’s performance discussed earlier in this judgment.
[67] Mr Gillovic has discharged the onus upon him to establish a credible factual basis to challenge the reasonableness of the liquidator’s remuneration. The third cause of action in the amended statement of claim can proceed.
Result
[68] The first cause of action in the plaintiff’s amended statement of claim dated 23 December 2022 may proceed to trial. The second cause of action seeking a remedy against Naldapat Limited under s 284 of the Act is struck out.
[69] The plaintiff is granted leave to bring an application under s 284 of the Act, seeking a review of the remuneration of the liquidator.
[70] The plaintiff shall file and serve an amended statement of claim by 25 September 2023.
[71] The defendant shall file and serve an amended statement of defence by 20 October 2023.
[72] The proceeding is adjourned for a case management conference on the first available date after 20 October 2023.
[73] The plaintiff has been successful with his application for leave, although the defendant has had some success in striking out part of the plaintiff’s claim. Counsel may file submissions on costs, and I will then determine costs on the papers:
(a)the plaintiff’s submissions on costs, limited to no more than five pages, shall be filed and serve by 8 September 2023;
(b)the defendant’s submissions on costs, limited to no more than five pages, shall be filed and served by 15 September 2023.
Associate Judge Brittain
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