Gower

[2021] NZHC 1282

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE

CIV-2020-409-106

[2021] NZHC 1282

UNDER

Section 32 of the Receiverships Act 1993

IN THE MATTER

Of the receiverships of CONE

ENTERPRISES (NEW ZEALAND)
LIMITED (in receivership and in

liquidation) and SHAKE SHED & CO NZ LIMITED (in receivership) and SHAKE SHED & CO HOLDING LIMITED (in

receivership)

AND

IN THE MATTER

of an application pursuant to s 32 of the Receiverships Act 1993

BETWEEN

COLIN ANTHONY LATHAM GOWER and ANDREW JAMES GRACE

Applicants

AND

ABC

Defendant

Appearances:	C R Vinnell for Applicants
Judgment:	2 June 2021
(Determined on the papers)

JUDGMENT OF OSBORNE J

This judgment was delivered by me on 2 June 2021 at 4.00 pm Pursuant to Rule 11.5 of the High Court Rules

Registrar/Deputy Registrar

………

GOWER and GRACE [2021] NZHC 1282 [2 June 2021]

Introduction

[1]    On 12 February 2020, the applicants, Colin Gower and Andrew Grace (the receivers), were appointed receivers and managers of:

(a)Cone Enterprises (New Zealand) Limited (in receivership and in liquidation);

(b)Shake Shed & Co NZ Limited (in receivership); and

(c)        Shake Shed & Co Holding Limited (in receivership) (together “the companies”).

[2]    At the start of the receivership, the companies were the lessees of some 27 properties around New Zealand (the premises). The companies operated businesses from the premises either directly or through franchisees.

The statutory liability of the receivers

[3]    The receivers seek orders under s 32(7) Receiverships Act 1993 (the Act) excusing them from certain liabilities.

[4]    This judgment, and its predecessors as I will describe below, are necessary because of the effect of s 32(5) and (6) of the Act which provide:

32       Liabilities of receiver

…

(5)Subject to subsection (7), a receiver is personally liable, to the extent specified in subsection (6), for rent and any other payments becoming due under an agreement subsisting at the date of the appointment of the receiver relating to the use, possession, or occupation by the grantor of property in receivership.

(6)The liability of a receiver under subsection (5) is limited to that portion of the rent or other payments which accrue in the period commencing 14 days after the date of the appointment of the receiver and ending on—

(a)the date on which the receivership ends; or

(b)the date on which the grantor ceases to use, possess, or occupy the property,—

whichever is the earlier.

[5]    Section 32(7) of the Act empowers the court to alter the liability which would otherwise arise:

(7)The court may, on the application of a receiver,—

(a)limit the liability of the receiver to a greater extent than that specified in subsection (6):

(b)excuse the receiver from liability under subsection (5).

The receivers’ previous applications to the Court

[6]    The receivers have, on numerous occasions, applied under s 32(7) of the Act to the Court to be excused from liability.

[7]    In a series of judgments, the Court has incrementally excused the receivers from liability for the rent of the premises from 27 February 2020 (that is after the expiry of the 14 day grace period in s 32(6) of the Act) through to 11 September 2020.

[8]    Those applications were granted initially because of difficulties the receivers had in obtaining full details of the lease arrangements. The receivers also hoped to be able to sell the master franchise rights in respect of the franchised businesses.

[9]    The receivers sought by 2 March 2020 expressions of interest in the companies’ businesses.

[10]   The receivers negotiated with a potential buyer (despite the disruption caused by the COVID-19 lockdowns in early 2020) a confidential heads of agreement.

[11]   The Court’s earlier orders (under s 32(7) of the Act) excusing the receivers from liability for rent and other payments under the various leases are as follows:

(1)an order dated 3 March 2020 covering the period from 27 February 2020 to 18 March 2020;1

(2)an order dated 23 March 2020, covering the period from 19 March 2020 to 8 April 2020;2

(3)an order of dated 8 April 2020 covering the period from 9 April 2020 to 27 May 2020;3

(4)an order dated 5 June  2020,  covering  the  period  28 May 2020  to 30 June 2020;4

(5)an order dated 7 July 2020, covering the period 1 July 2020 to 31  July 2020;5 and

(6)an order dated 5 August 2020, covering the period 1 August 2020 to 11 September 2020.6

(collectively “the earlier orders”)

[12]In the judgment of 5 August 2020 van Bohemen J recorded:7

[18]I am satisfied that the receivers have continued to make responsible  and efficient progress towards resolving the issues around the companies in receivership and that, consistently with the orders made previously, it is appropriate to excuse the receivers from personal liability for rent and other payments for the period of due diligence and to enable completion of the purchase as described in Mr Gower’s affidavit.

[13]   The Court had earlier recognised that the prospects of selling the entire franchise business as a going concern was the best option to provide a return for all concerned.

1      Re Gower [2020] NZHC 461 to recall judgment of Churchman J [2020] NZHC 461.

2      Re Gower HC Christchurch CIV-2020-409-106, 23 March 2020 (Minute No 1).

3      Re Gower HC Christchurch CIV-2020-409-106, 8 April 2020 (Minute No 2).

4      Re Gower [2020] NZHC 1239.

5      Re Gower [2020] NZHC 1605.

6      Re Gower [2020] NZHC 1948.

7      Re Gower, above 7.

[14]   The Court granted the later extensions while the receivers were continuing to negotiate with the potential buyer.

[15]   Unfortunately,  negotiations  with  that  potential   buyer   fell   through   on 29 November 2020.

[16]   On 16 December 2020, the receivers gave notice to the lessors of the premises that the receivers would cease to occupy the premises. The receivers’ position is that because of the nature of the franchise operations and the licence and lease arrangements they had not in fact had “the use, possession or occupation” of the premises for the purposes of s 32(5) of the Act.

[17]   Accordingly, the liquidators’ notice that they were ceasing to occupy the premises was out of an abundance of caution and to signal to the lessors that the prospect of a sale was at an end.

Present application

[18]   With the prospect of a sale having come to an end, the receivers now apply for a further order under s 32(7) excusing them from liability under the remaining leases for the period from the expiry of the last order, that is 11 September 2020, through to 16 December 2020 the date when the receivers gave their notice of cessation to occupy.

[19]   Each of the earlier orders made after 3 March 2020 was made pursuant to leave reserved in this proceeding for the receivers to apply to vary the orders made. So too is this application made.

Service

[20]   Of the original 27 lessors, there are 10 remaining landlords who would be affected by this application. Each of them have been served. None of the landlords served have taken any steps.

[21] Accordingly, this judgment concerns whether there should be a final order excusing the receivers for the period referred to at [18] above.

Retrospective order?

[22]   The order sought is retrospective  as  it  covers  a  period  that  finished  on  16 December 2020. All previous orders have assumed there is jurisdiction to retrospectively excuse the receivers from liability for rent as the various judgments have included a retrospective as well as prospective element.

[23]   I am satisfied that the jurisdiction may be exercised to retrospectively excuse a receiver from a liability that may have already arisen. Section 32(5) of the Act was influenced by the findings of the “Harmer Report” of the Australian Law Reform Commission. The Commission considered that it was inequitable that a receiver could permit a company to continue to obtain the benefit of the occupation of premises or use of chattels without the receiver being liable for rent.8

[24]   Section 32(7) of the Act is designed to prevent hardship in certain circumstances. One of the examples of hardship given in the Harmer Report was where a receiver “could not have been expected to have been aware of the existence of a relevant lease or agreement until after the [grace] period had expired”.9

[25]   In Gilbert v Body Corporate 162791, the receiver sought to rely on s 32(7) of the Act as a defence to a summary judgment application for body corporate levies.10 Relief was not granted for substantive reasons, not because the receiver was seeking retrospective relief under s 32(7). The Court found that the receiver knew of the body corporate levies and derived a benefit from his occupation of the premises and, accordingly, the Court’s discretion was exercised against granting relief. Relief was not declined because it was not available by reason of retrospective effect.

8      Stephen Russell and John Walsh (eds) Insolvency Law and Practice (online ed, Thomson Reuters) at [RA32.04(a)], citing Australian Law Reform Commission General Insolvency Inquiry (ALRC R45, 1998) at [220].

9      Australian Law Reform Commission, above n 8, at [404].

10 Gilbert v Body Corporate 162791 [2016] NZSC 61, [2018] 1 NZLR 1.

Discussion

[26]   For the period between the expiry of the last order and 29 November 2020 when negotiations with the purchaser came to an end, the situation was essentially the same as for the previous extensions. The receivers were trying to keep the possibility of a sale alive. There is no material difference between the circumstances of the period up to 29 November 2020 and those in which the previous orders have been made.

[27]   What then  of the  period from 29  November 2020 to 16 December 2020?  Mr Gower deposes that, after the breakdown of negotiations with the potential purchaser, the receivers were approached by another overseas-based buyer interested in purchasing the franchise network in its then existing form. That interested party had a connection to the director of the companies in receivership, Chang Xi. Chang Xi had a connection with a company, BB ICY Ltd, which operated eight of the franchised stores. Given the connection with Chang Xi and the substantial rental arrears resulting from BB ICY Ltd’s failure to meet its rental obligations, the receivers were clear in their correspondence with the overseas party and ChanG Xi that any potential sale would be on the basis that the rental liability after 11 September 2020 owed by BB ICY Ltd would be paid in full. The receivers were unable to obtain any realistic or firm commitment from the interested party.

[28]   Mr Gower deposes that the receivers worked as quickly as they could with the new  potential  purchaser  to  ascertain  whether  a  sale  could  be  concluded.  Mr Gower says that, unfortunately and in line with previous dealings they had had with Mr Chang Xi, the process became convoluted and subject to many issues. The receivers took the view that matters could not continue while the lessors remained in an uncertain position. Hence, the receivers concluded that a sale was not possible.

[29]   Having  exhausted  all  available  sale  options,   the  non-use  notices   on   16 December 2020 were issued.

[30]   The receivers had to balance whether to continue to seek a sale in circumstances that were problematic or to give notice that the companies had ceased to occupy the premises.

[31]   I am satisfied that it was reasonable for the receivers to spend approximately two weeks attempting to determine if the potential purchaser was genuine. The receivers then promptly came to a view that it was not worth pursuing the sale to the new purchaser.

[32]   None of the 10 lessors affected by the orders now sought by the receivers has taken steps to oppose the orders sought. I am satisfied that it is appropriate to grant the application. That is because the receivers properly continued to pursue the prospective sale to a point where those negotiations broke down. They then again responsibly deferred issuing the non-use notices for only two weeks to ascertain whether the new purchaser was genuine. Had the receivers issued the notice of cessation to occupy immediately upon the cessation of negotiations with the original purchaser, they may have been subject to criticism for not engaging with the (new) prospective purchaser. Equally, the receivers could have been criticised if they had allowed the position with the new purchaser to drift on. As I have said, the receivers came to a view as to the merits of pursuing the new purchaser promptly.

[33]Accordingly, I find it appropriate to grant the receivers the order they now seek.

Order

[34]   There is an order excusing the receivers from liability for rent and any other premises becoming due for the period between 12 September 2020 to 16 December 2020 under leases of the premises at:

(a) Barrington: Barrington Shopping Centre 256 Barrington Street, Christchurch 8024;

(b) Bush Inn Centre: Waimairi Road, Riccarton, Christchurch 8041;

(c) Eastgate: 20 Buckleys Road, Linwood, Christchurch 8062;

(d) Hornby: The Hub, 418 Main South Road, Hornby, Christchurch 8042;

(e) Northlands: 55 Main North Road, Papanui, Christchurch 8052;

(f) Palmerston North: 84 The Square, Palmerston North 4410;

(g) Papatoetoe: Hunters Plaza Shopping Centre, Papatoetoe, Auckland 2025;

(h) Upper Hutt: Trentham Shopping Centre, 185 Main  Street,  Upper Hutt 5018; and

(i) West City: West City Shopping Centre, 7 Catherine Street, Henderson, Auckland 0612.

Justice Osborne

Solicitors:

Anthony Harper, Christchurch