Grant v Bank of New Zealand
[2024] NZCA 108
•12 April 2024 at 11.30 am
| IN THE COURT OF APPEAL OF NEW ZEALAND I TE KŌTI PĪRA O AOTEAROA |
| CA389/2023 [2024] NZCA 108 |
| BETWEEN | DAMIEN GRANT and |
| AND | BANK OF NEW ZEALAND |
| Hearing: | 7 November 2023 |
Court: | Katz, Mander and Osborne JJ |
Counsel: | R J Hollyman KC and A J Steel for Appellants |
Judgment: | 12 April 2024 at 11.30 am |
JUDGMENT OF THE COURT
AThe appeal is allowed.
BThe declaration granted by the High Court is quashed.
CThe respondent is to pay the appellants’ costs for a standard appeal on a band A basis and usual disbursements.
DThe costs incurred in the High Court are remitted to that Court for determination.
REASONS OF THE COURT
(Given by Osborne J)
Para No
| The receivership of the Claymark Group | [2] |
| The GSAs | [19] |
| Standing | [20] |
| The Judgment | [22] |
| Structure | [22] |
| Liquidators’ statutory powers | [23] |
| Secured Property | [25] |
| The GSAs | [26] |
| Outcome | [33] |
| Summary of the Judgment | [34] |
| Grounds of appeal | [35] |
| Appellants’ submissions | [36] |
| The context | [36] |
| The powers of a liquidator in relation to charged property | [37] |
| Respondent’s submissions | [41] |
| The Receivers’ powers | [42] |
| “Section 254 of the Act does not assist the appellants” | [52] |
| In the alternative: no residual discretion | [57] |
| The Receivers’ powers over the shares | [62] |
| Analysis | [67] |
| The Court’s supervision of liquidations | [67] |
| The shares as secured property | [69] |
| The effect of GTL’s liquidation upon BNZ’s rights | [71] |
| The decision in Gibbston Downs — the conferred residual discretion | [72] |
| Suspension of a company’s board’s powers while receiver has an interest in charged assets | [83] |
| Conclusion — the appellants’ s 284 application | [88] |
| Costs | [95] |
| Orders | [96] |
At issue in this appeal is whether the liquidator of a company may validly appoint liquidators to the company’s wholly owned subsidiaries at a time when a receiver has been appointed by a secured creditor and the secured creditor has not surrendered its security. From the receiver’s perspective the issue is whether a secured creditor (or its appointed receiver), without having surrendered its security, may have its right to vote the shares in the subsidiaries (part of the secured property) affected by the actions of the company’s director through a prior appointment of liquidators of the subsidiary companies.
The receivership of the Claymark Group
Bank of New Zealand (BNZ), as the banker for the Claymark Group of Companies, had general security agreements (GSAs) (as first-ranking secured creditor) of Ex-CM Group Trustee Ltd[1] (GTL) and seven subsidiary (or sub-subsidiary or sub-sub-subsidiary) companies (the subsidiaries).[2]
[1]Previously called Claymark Group Trustee Ltd, now in receivership and liquidation.
[2]The subsidiary is Ex-CM Group Holdings Ltd with sub-subsidiaries Ex-CM Assets Ltd, Ex-CM Ltd, Profiles Woodproducts Ltd and Ex-CM International Ltd (which has sub-sub-subsidiaries Ex‑CM Europe Ltd and Ex-CM US Ltd). Other trustee companies associated with the former Claymark Group, to which the receivers also were appointed but from which appointment they since have retired and the respondents appointed as their liquidators, are not in issue.
Under the GSAs, GTL and the subsidiaries granted BNZ security over all their present and after-acquired property, which includes all the shares in the subsidiaries.
In early December 2019, the sole director of GTL and the subsidiaries, Mark Clayton, asked BNZ to appoint receivers to the companies. This was an event of default in terms of the GSAs.
BNZ, on 4 December 2019 under each subsidiary’s GSA, appointed receivers over all the property of GTL and the subsidiaries (the Receivers). The Receivers were entitled in terms of the GSAs to exercise all rights in respect of that property as if they were its absolute owner.
The Receivers realised assets. They repaid BNZ some $61 million by December 2021, leaving an unpaid debt of some $2 million.
In February 2021 the Receivers officially reported there were “minimal residual assets to realise” and in February 2022 that there were “no further assets to realise”. The Receivers in February and August 2022 recorded they anticipated retiring once other “final matters in the receivership” had been resolved.
Apart from the subsidiaries, there were other companies in the Claymark Group which were indebted to BNZ pursuant to guarantees (the Other Companies). The Other Companies had not provided GSAs to BNZ. BNZ in 2021 had issued statutory demands against the Other Companies but had withdrawn those demands while working to finalise the accounting of all remaining debt. Fresh demands were issued on the Other Companies in 2022 and BNZ intended to proceed with liquidation applications against those companies.
One of the Receivers, Neale Jackson, explained the Receivers’ intentions:
Most recently, we were finalising the records of the distributions paid to the bank and the bank’s residual debt, then we intended to exercise rights as shareholder to put the relevant companies in liquidation, finalise tax filings and retire. The hold-up has been in resolving the bank’s debt position to enable us to appoint liquidators to the entirety of the group.
On 21 November 2022, BNZ’s solicitors advised Mr Clayton’s solicitors that it would be taking steps to put the subsidiaries in the group into liquidation.
BNZ’s strategic business services director, Ennis Young, deposed that BNZ expected it would obtain liquidation orders against the Other Companies around the same time as the Receivers would pass shareholder resolutions, putting the subsidiaries into liquidation.
On 25 November 2022, the appellants, Damien Grant and Adam Botterill, were appointed as liquidators of GTL by shareholder resolution of GTL. That appointment is not disputed as BNZ does not hold security over the shares of GTL (those shares being owned by a trustee company).
Immediately upon the appellants’ appointment as liquidators of GTL, and without notice to or the consent of BNZ or the Receivers, the appellants purported to vote the shares of the subsidiaries to appoint themselves as liquidators of those companies.
Mr Clayton, on the same day, entered into a Deed of Indemnity and Creditor Funding with the appellants. In that, it was recorded the appellants as liquidators would investigate the affairs of the companies, including “sales of assets” and that the Claymark Group undertook to provide funding.
BNZ and the Receivers challenged the appellants’ appointments by seeking directions under s 284 of the Companies Act 1993 (the Act). They asserted, pursuant to the Receivers’ appointment to GTL’s property as if it were absolute owner, only they could pass the necessary special resolutions to appoint liquidators to GTL.
Mr Grant provided the appellants’ evidence in opposition to the BNZ application. He inferred from correspondence sent by BNZ’s solicitors that BNZ considered appointing a liquidator of BNZ’s own choosing was important. Mr Ennis, as BNZ’s strategic business services director, deposed in response that BNZ “is largely indifferent as to the identity of any liquidators …” but would expect any liquidators appointed to be liquidators who would act validly.
BNZ has also pursued a claim (yet to be determined) to put the subsidiaries into liquidation. For their part, the appellants say they are funded to investigate conduct of the receivership, which may not be the case for other liquidators.
Upon the application of BNZ to the High Court, Jagose J declared the appellants’ appointment as liquidators of the subsidiaries invalid (the Judgment).[3]
The GSAs
[3]Bank of New Zealand v Grant [2023] NZHC 1507 [judgment under appeal].
Relevant provisions of the GSAs were summarised in the Judgment:
[5] The GSAs granted the bank “a Security Interest in the Secured Property as security for payment of the Secured Amounts and the performance of [the company’s] obligations to [the bank] from time to time”.
[6] By ‘Security Interest’, the GSA generally means in terms of s 17 of the Personal Property Securities Act 1999, otherwise “a fixed charge”. The ‘Secured Property’ is “all of [the company’s] present and after-acquired property, and all personal property in which [the company has] rights, whether now or in the future”. And ‘Secured Amounts’ are:
… all amounts that at any time are due and owing by [the company] to [the bank], or [the company owes the bank] but are not then due, or [the company owes the bank] upon a contingency (directly or indirectly and for any reason).
Such is “to provide [the bank] with the broadest possible security”.[4]
[7] By the GSA, under cl 6.1, the company agreed not to deal with the Secured Property without the bank’s consent “except as permitted by cl 6.2”, which generally permitted dealings with the company’s inventory and money “in the ordinary course of, and for the purpose of carrying on, [the company’s] ordinary business, on ordinary arms-length commercial terms and for proper value”. Under cl 6.4, “[o]n the occurrence of any Event of Default all of [the company’s] rights under this clause 6 to deal in any way with the Secured Property shall immediately cease”.
[8] Clause 14.1.7 entitles the bank, “[a]t any time after an Event of Default occurs” (subject to notice), to “appoint any person or persons to be a Receiver of all or any part of the Secured Property”. Clause 13.1.6 defines an ‘Event of Default’ to include “if [the company requests] you to appoint a Receiver”.
Standing
[4]Strategic Finance Ltd (in rec & in liq) v Bridgman [2013] NZCA 357, [2013] 3 NZLR 650 at [23]; see comparable wording at [25]–[29].
This issue related to the standing of BNZ and the Receivers respectively to obtain leave to seek directions under s 284(1) of the Act. The Judge found BNZ had standing as a “creditor” and granted it leave.[5] Consequently, BNZ is the single appellant on this appeal.
[5]Judgment under appeal, above n 3, at [18].
On this appeal, no issue arises as to BNZ’s standing to seek directions.
The Judgment
Structure
The Judge addressed sequentially:
(a)the statutory powers of liquidators, including vis a vis secured creditors and receivers;[6]
(b)the subject-matter of “Secured Property” under the GSA;[7]
(c)BNZ’s rights under the GSA, including vis a vis GTL;[8] and
(d)the consequential entitlement of BNZ to the exclusion of the appellants (as liquidators of GTL) to exercise GTL’s shareholding entitlement to appoint liquidators to the subsidiaries.[9]
Liquidators’ statutory powers
[6]At [22]–[24].
[7]At [25].
[8]At [26]–[29].
[9]At [30].
The Judge observed liquidation does not limit the secured creditors’ rights of enforcement.[10] He referred to the right of the liquidators to take possession of and realise a company’s assets, but subject to the right of the secured creditor to take possession of and realise the charged property.[11]
[10]At [22], citing Dunphy v Sleepyhead Manufacturing Co Ltd [2007] NZCA 241, [2007] 3 NZLR 602 at [43].
[11]Judgment under appeal, above n 3, at [22], citing the Companies Act 1993, ss 248(2) and 253.
The Judge then identified that the power to put a company into liquidation by appointment of a liquidator (except by court order under s 241(2)(c) of the Act) attaches either to share ownership directly (s 241(2)(a)) or indirectly by constitutional delegation to the company’s board on occurrence of a specific event (s 241(2)(b)).[12]
Secured Property
[12]At [23].
The Judge identified the “Secured Property” as identified by the GSAs remains within the liquidators’ custody and control but subject to BNZ’s rights to deal with it.[13]
The GSAs
[13]At [25].
The Judge identified the source of BNZ’s right to deal with the secured property as predominantly cl 15.1 of the GSAs which authorised BNZ, when entitled, to approve any person as receiver. The powers the receiver then has under cl 15.2 include:[14]
(a)at cl 15.2.1, a non-exhaustive power to “take immediate possession of all or any part of that Secured Property and exercise and enforce all or any of [the company’s] Rights in respect of it”; and
(b)at cl 15.2.11, a power to “generally do and cause to be done any act, matter or thing in respect of that Secured Property … the Receiver might do or cause to be done if the Receiver was the absolute owner of the Secured Property…”.
[14]At [26].
The Judge identified that “Rights”, per cl 35.1 of the GSAs, means the company’s “rights, remedies, powers, authorities, discretions and privileges under this agreement, or any Collateral Security or other document …, or at law (whether express or implied)”.[15] BNZ or the Receivers are entitled under cl 21.1 to exercise those “Rights” at their respective discretion.[16]
[15]At [26].
[16]At [26].
The Judge next identified, under s 31(1)(a) of the Receiverships Act 1993 (“powers of receiver on liquidation …”), “a receiver may … continue to act as a receiver and exercise all the powers of a receiver in respect of property of … a company … that has been put into liquidation”. The Judge recognised that the liquidators’ assumption of custody and control of a company’s assets is effective to terminate any agency (including the express agency under cl 15.3 of the GSAs) but observed agency was not the source of BNZ’s right to appoint receivers (being only a prospective incident of it).[17]
[17]At [27].
The Judge next identified the right of BNZ at stake is to exercise the right of GTL (the parent company) as shareholder of its subsidiaries “to vote … on the question” of the liquidator’s appointment.[18]
[18]At [28], citing Companies Act, s 241(2)(a)–(b).
The Judge referred to his earlier identification (above at [24]) of the parent company having that voting right at law.[19] He further noted provisions of the GSAs (cls 21.1 and 15.2 respectively) entitle BNZ to exercise that right either directly or indirectly (the latter by appointment of a receiver with power also to exercise the right).[20]
[19]At [28].
[20]At [28].
The Judge next recorded that GTL (under cl 6.1 of the GSA) required BNZ’s consent to exercise its voting entitlement and that, in the event of default, GTL (under cl 6.4) surrendered even that conditional right.[21]
[21]At [29]–[30].
Consequently, there was no voting power GTL could exercise in relation to its shareholding in the subsidiaries and the appellants’ custody and control of GTL’s assets as liquidators did not include power to exercise GTL’s shareholding right.[22]
Outcome
[22]At [29].
The Judge declared the appellants’ appointment as liquidators of the subsidiaries invalid.
Summary of the Judgment
The judgment held (as summarised by Hollyman KC for the appellants):
(a)the appointment of liquidators to the subsidiaries was a “dealing” with the shares in terms of cl 6 of the GSAs and the company had surrendered any right to “deal with” the shares upon the occurrence of an Event of Default;
(b)the appellants (as liquidators) had no “power” to exercise rights attaching to the shares in the subject companies, at any time, without BNZ’s consent; and
(c)the appellants, as liquidators, could not exercise the power to pass resolutions in relation to the shares because those rights were subject to the GSAs and were the sole preserve of the Receivers.
Grounds of appeal
By their grounds of appeal, the appellants asserted the Judge had erred by declaring they had been invalidly appointed as liquidators of the subsidiaries. They asserted the Judge erred by:
(a)failing to hold that the appellants, as liquidators of GTL, had passed valid shareholder resolutions in relation to the subsidiaries;
(b)failing to give effect to s 254 of the Act (as to liquidators exercising the powers in relation to property that is subject to a charge);
(c)holding that the charges or GSAs ousted the GTL liquidators’ powers to appoint liquidators to the subsidiaries (having regard to s 254);
(d)holding the GTL liquidators’ powers were wholly surrendered to BNZ on default, and in doing so:
(i)failing to give effect to the legal inability of receivers or secured parties to act as agent of a liquidated company without the consent of the liquidator;
(ii)finding that an event of default under BNZ’s GSA or related loan documents deprives a debtor company’s liquidators of powers under s 254 or Part 16 of the Act more generally, when on liquidation a debtor company will almost invariably be in default;
(iii)failing to recognise the limits on the powers of secured parties and receivers (below at (f));
(iv)failing to give effect to this Court’s decision in Gibbston Downs Wines Ltd v Property Ventures Ltd (in rec and in liq), regarding liquidators’ powers under s 254;[23]
[23]Gibbston Downs Wines Ltd v Property Ventures Ltd (in rec and in liq) [2013] NZCA 546 [Gibbston Downs (CA)], affirming Gibbston Downs Wines Ltd v Property Ventures Ltd (in rec and in liq) [2012] NZHC 3592 [Gibbston Downs (HC)]. The Supreme Court refused leave to appeal: Gibbston Downs Wines Ltd v Property Ventures Ltd (in rec and in liq) [2014] NZSC 21 [Gibbston Downs (SC)].
(e)therefore failing to recognise that BNZ and the Receivers had no legitimate interest in the GTL shares given the state of realisations and signalled intention to retire;
(f)holding that the rights of BNZ and the Receivers over GTL’s property were absolute when the rights were only by way of security, as a consequence of which:
(i)they were required to act bona fide for the predominant purpose of obtaining repayment of the secured debt;[24]
(ii)directors (and a fortiori) liquidators may carry out actions in relation to charged assets as long as they do not prejudice the position of the charge holder.[25]
(g)holding that under the charge/GSA, the liquidators’ custody and control of GTL’s assets did not extend to exercising powers in property, such as appointing liquidators.
Appellants’ submissions
The context
[24]Citing Downsview Nominees Ltd v First City Corporation Ltd [1993] 1 NZLR 513 (PC); Coltart v Lepionka [2016] NZCA 102, [2016] 3 NZLR 36; and Fatupaito v Harris [2018] NZCA 497, [2019] NZAR 192.
[25]Citing Brooklands Motor Co Ltd (in rec) v Bridge Wholesale Acceptance Corp (Australia) Ltd (1994) 7 NZCLC 260,449 (HC).
Mr Hollyman submitted the key to this appeal is the context of the appellants’
actions in appointing liquidators to the subsidiaries, namely:
(a)the Receivers’ reporting as to the lack of further assets to realise and their intention to retire;
(b)GTL’s shares having no value; and
(c)BNZ’s position being that it is “indifferent” to the identity of the subsidiaries’ liquidator.
The powers of a liquidator in relation to charged property
Mr Hollyman identified the background to the introduction of s 254(a) of the Act, namely to reverse the decision in Re Your Size Fashions Ltd.[26] He referred to this Court’s discussion of the provision in Gibbston Downs,[27] submitting that it governs the present case in that:
(a)s 254 of the Act conferred a discretion on the appellants to exercise a power in relation to property subject to BNZ’s charge; and
(b)the power to appoint a liquidator over the subsidiaries was properly exercised, there being no prejudice to any charged asset, and the Receivers having confirmed that all assets had been realised.
[26]Gibbston Downs (CA), above n 23, at [10], citing Williamson J in Re Your Size Fashions Ltd [1990] 3 NZLR 727 (HC) at 735, that where a secured creditor takes no steps in relation to assets subject to the security, the liquidator was obliged to realise the assets as they remain assets of the company.
[27]Gibbston Downs (CA), above n 23, at [21].
Mr Hollyman submitted the liquidators’ actions here were for a proper purpose, namely to have the actions of the Receivers rescinded.
Mr Hollyman next submitted there were limits on receivers’ powers over the company’s shares that applied in this case, recognised by the Privy Council in Downsview Nominees Ltd v First City Corporation Ltd.[28] He submitted Downsview Nominees Ltd confirms the Receiver’s power to deal with company assets is conditional, and that, as found by Blanchard J in Brooklands Motor Co Ltd (in rec) v Bridge Wholesale Acceptance Corp (Australia) Ltd, the powers of a director of a company in receivership are suspended “so far as requisite to enable the receiver to discharge his functions”, but remain available to be used by the directors so long as they do not prejudice the position of the debenture holder in relation to its recoveries.[29]
[28]Downsview Nominees Ltd, above n 24, at 521.
[29]Brooklands Motor Co Ltd, above n 25, at 260,457, citing Re Emmadart Ltd [1979] Ch 540 at 544.
Accordingly, in Mr Hollyman’s submission, the appellants were validly appointed as liquidators of GTL.
Respondent’s submissions
For BNZ, Mr Hunter KC dealt with his legal submissions under four heads:
(a)the Receivers’ powers;
(b)s 254 does not assist the appellants;
(c)in the alternative: no residual discretion; and
(d)the Receivers’ powers over the shares.
The Receivers’ powers
Mr Hunter first referred to the Receivers’ exclusive control of the subsidiaries’ shares following an event of default and the appointment of the Receivers. He referred also to the Receivers’ power, under cl 15.2.11 of the GSAs, generally to do in the name of the subsidiaries anything in respect of the secured property that the Receivers might do if the Receivers were the absolute owner of that property (including passing shareholder resolutions without notice).[30]
[30]Citing Walker v Gibbston Water Services Ltd [2013] NZHC 2933 at [46]–[58].
Mr Hunter invoked the provisions of s 248(2) of the Act as providing:
(a)a company’s liquidation does not affect secured creditors’ property rights in their charged assets;[31]
(b)secured creditors stand outside the liquidation;[32]
(c)the rights of secured creditors are not against the company but are to its property;[33]
(d)the liquidators must respect such rights of the secured creditors;[34] and
(e)a creditor holding a security interest is unaffected by liquidation and may proceed to realise the security as if the company were not in liquidation.[35]
[31]100 Investments Ltd v IAG New Zealand Ltd [2018] NZHC 3244 at [26]; and Peter Blanchard and Michael Gedye Private Receivers of Companies in New Zealand (3rd ed, LexisNexis, Wellington, 2008) at [12.05].
[32]Dunphy, above n 10, at [43]; and Gibbston Downs (CA), above n 23, at [20].
[33]Blanchard and Gedye, above n 31, at [12.05], citing Re David Lloyd & Sign Co (1877) 6 ChDE 339; and Re Aro Co Ltd [1980] Ch 196 at 204, [1980] 1 All ER 1067 at 1071.
[34]Dunphy v Sleepyhead Manufacturing Co Ltd, above n 10, at [35].
[35]Roy Goode Principles of Corporate Insolvency Law (4th ed, Sweet & Maxwell, London, 2011) at [3-04].
Mr Hunter noted (in relation to s 248(2) being subject to s 305 of the Act) the appellants in this case had never required BNZ to make an election whether to realise property subject to BNZ’s charge.
He noted the powers the liquidator inherits are those the company already had, including the power to deal with assets but subject to the rights of secured creditors over their charged property.[36] Consequently, liquidators do not owe duties to unsecured creditors in respect of charged property.[37] The property of a company that is subject to a charge does not form part of the company’s free assets.[38]
[36]Citing Consolidated Technologies Development (NZ) Ltd v McCullagh (2006) 9 NZCLC 264,056 (HC) at [27].
[37]Gibbston Downs (CA), above n 23, at [20].
[38]Citing Buchler v Talbot [2004] UKHL 9, [2004] 2 AC 298 at [29]–[30].
Referring both to s 31(1) of the Receiverships Act and case law, Mr Hunter observed a receiver’s entitlement to act in managing the business and property of a company does not cease upon liquidation;[39] the receiver continues to have custody and control of the charged assets;[40] the company has only an equity of redemption;[41] and while the company’s assets do not vest in the receivers, the receivers have power to exercise their appointing secured creditors’ property rights in the charged assets.[42]
[39]Cripps v Lakeview Farm Fresh Ltd (in rec) [2006] 1 NZLR 238 (HC) at [19].
[40]Blanchard and Gedye, above n 31, at [12.08].
[41]Roy Goode, above n 35, at [2-27] and [3-03].
[42]Cripps v Lakeview Farm Fresh Ltd (in rec), above n 39, at [18]–[19]; and Roy Goode, above n 35, at [10-24].
Mr Hunter submitted, by reference to observations of Hoffman J in Gomba Holdings (UK) Ltd v Homan, that a company’s board during the term of a receivership has no powers over assets in the possession or control of the receiver.[43] His Lordship observed “some kind of diarchy over all the company’s assets” would be contrary to principle and wholly impractical.
[43]Gomba Holdings (UK) Ltd v Homan [1986] 1 WLR 1301 (Ch) at 1307.
Mr Hunter submitted these principles indicate receivers’ powers predominate over or are superior to liquidators’ powers.[44] This flows from the fact that property subject to a charge is property in which unsecured creditors have only a residuary interest.[45] Secured creditors have their priority because they bargained for it.[46]
[44]Citing Re Landmark Corp Ltd (in liq) [1968] 1 NSWR 705 (NSWSC) at 705.
[45]Merchantile Credits Ltd v Atkins &Ors (1985) 3 ACLC 485 (NSWSC) at 490.
[46]Roy Goode, above n 35, at [2-29].
Mr Hunter submitted that shares, a form of personal property, and the rights and powers attaching to them, cannot be treated differently to any other form of personal property.[47]
[47]Companies Act, ss 35 and 36.
Accordingly, in Mr Hunter’s submission, the appellants had no control over, and no right to exercise the votes attaching to, the shares of GTL’s subsidiaries. It would follow that the appellants acted unlawfully in purporting to vote the shares to appoint themselves liquidators of those companies. Jagose J therefore correctly recognised and applied the law in the conclusion summarised at [34] above.
Mr Hunter, acknowledging that the Receivers lost their general agency to act on GTL’s behalf following the appointment of the appellants as liquidators of GTL, submitted the termination of the general agency is irrelevant. That is because the Receivers continued to have the ability to manage GTL and its property without the liquidators’ consent. The Receivers’ powers to hold and dispose of charged assets are not reliant upon their agency position.[48] The shares in the subsidiary companies accordingly remained in the Receivers’ exclusive control.
“Section 254 of the Act does not assist the appellants”
[48]Blanchard and Gedye, above n 31, at [12.05]; and Roy Goode, above n 35, at [10-42].
Mr Hunter describes s 254(a) of the Act as not doing several things:
(a)it did not provide a general power of intervention for liquidators in respect of secured property;
(b)it did not give the liquidators the right to vote the subsidiaries’ shares; and
(c)it did not displace the primacy accorded to the secured party’s rights and their appointed Receivers’ powers.
Mr Hunter submitted s 254(a) was never intended to do more, and does nothing more, than absolve liquidators from duties in respect of secured property. The powers the liquidator inherits are those the company already had, being the power to deal with assets subject to the rights of secured creditors over their charged property. He submitted Jagose J correctly found the liquidators’ custody and control of the parent company’s assets omitted power to exercise the shareholding right (which the company had surrendered to BNZ under the GSAs).[49]
[49]Judgment under appeal, above n 3, at [29].
In Mr Hunter’s submission, the appellants, by purporting to vote the subsidiaries’ shares to appoint themselves liquidators, usurped BNZ’s rights in the subsidiaries’ shares. Parliament cannot have intended through s 254(a) to have allowed liquidators to effectively alienate a secured asset in that way. Mr Hunter referred to the legislative scheme (in particular, s 305 of the Act) which enables a liquidator who wants to deal with property without a secured creditors’ consent to require that creditor to elect to exercise its powers or otherwise surrender the charge.
Mr Hunter submitted the discussion of a “residual discretion” in Gibbston Downs does not assist the appellants — the ruling needs to be understood in its proper context. That context, where the liquidator had not sought the receivers’ consent to issue the demands, was that the receivers were content to stand by and (as identified in the fresh evidence before the Court of Appeal) were happy for the creditor to pursue the debt and regarded the liquidator as acting as the receivers’ agent for that purpose.[50] Mr Hunter noted this Court’s recognition, in Gibbston Downs, that if the receivers had not supported the liquidators’ actions there would have been “issues as to whether the liquidator was using [his] power for a proper purpose”.[51]
[50]Gibbston Downs (CA), above n 23, at [12]–[15].
[51]At [24].
In Mr Hunter’s submission, it is clear the evidence filed late in the Gibbston Downs proceedings was fundamentally important to the outcome.[52] Mr Hunter noted the subsequent observation of the Supreme Court, in dismissing an application for leave to appeal, that “[t]here was scope for genuine argument as to the entitlement of the liquidator to initiate recovery proceedings in relation to the debts”.[53] In summary, Mr Hunter submitted Gibbston Downs did not squarely address the conflict in the present case between the rights of liquidators and those of a secured party or a receiver appointed by that secured party — the case is accordingly not authority for the proposition that a liquidator may usurp a secured creditors’ rights in secured property.
In the alternative: no residual discretion
[52]At [38]; this Court did not award costs “because of the significance the respondent’s late filed evidence had to the outcome”.
[53]Gibbston Downs (SC) above n 23, at [5].
Mr Hunter next addressed a submission in the alternative — that if this Court finds s 254(a) of the Act permits a liquidator in certain circumstances to interfere with a secured creditors’ rights, the present circumstances did not give rise to any “residual discretion” for the appellants to vote the subsidiaries’ shares.
Mr Hunter noted this Court, in Gibbston Downs, referred to the “residual discretion” being conferred by s 254 “in certain circumstances”.[54] The particular circumstances contemplated in Gibbston Downs were where “a liquidator will need to exercise this [residual] power even though the secured creditor has not surrendered its security”.[55] The example given was where the secured creditor has indicated it will take no steps to realise the asset, but does not use the s 305 mechanism to surrender the charge.[56] Mr Hunter distinguished the present case where the appellants without notice to BNZ or the Receivers voted rights in the charged shares to appoint themselves liquidators of the subsidiaries. Had they enquired of BNZ and the Receivers, the appellants would have received confirmation that liquidators were going to be appointed. For there to be a liquidation, the appellants did not need to exercise any power they possessed.
[54]Gibbston Downs (CA), above n 23, at [21].
[55]At [21].
[56]At [21].
In these circumstances, Mr Hunter submitted the appellants unilaterally assumed responsibility for appointing liquidators was the exact kind of officious intervention this Court was concerned in Gibbston Downs to rebuke.[57] In this case, BNZ and the Receivers still intended to exercise the very rights the appellants purported to exercise (to the exclusion of BNZ and the Receivers).
[57]At [23].
Mr Hunter submitted there was inherent prejudice in BNZ being denied the exercise of its legal rights. Its right to vote the shares subject to the security at the time of its choosing would be extinguished if the appellants’ actions are permitted.
Mr Hunter submitted the scheme of pt 16 of the Act is such that the appellants ought to have sought permission from BNZ and the Receivers before voting the shares. Section 254(a) must be read considering s 305, which reinforces secured creditors’ priority. The clear intention of the legislative scheme is that the liquidator bears the onus of enquiring about the secured creditors’ intentions before dealing with the secured property and cutting across the secured creditors’ rights. In Mr Hunter’s submission, the appellants’ actions were unlawful through their failure to use the s 305 powers, and the purported appointments invalid.
The Receivers’ powers over the shares
Mr Hunter next turned to the appellants’ submission that they were entitled to act as they did because the Receivers had no interest in the shares as the shares had no value and the Receivers had realised all available assets.
Mr Hunter observed the decision in Brooklands, relied upon by the appellants, arose in the context of the company’s right of redemption. There was no contest about whether the secured party’s rights or the company’s rights in secured property prevailed, the dispute being between a third-party financier and two companies in receivership. The finance contract entered into by the directors, without objection by the Receivers, in order to exercise the company’s right of redemption was valid — it did not prejudice the Receivers or the secured creditors.[58]
[58]Brooklands Motor Co Ltd, above n 25, at [260,458].
In Mr Hunter’s submission, BNZ and the Receivers had an interest in the shares because they intended to exercise the very rights in the shares that the appellants purported to exercise to their exclusion.
Mr Hunter invited this Court to reject the appellants’ “utility” argument by which it is suggested the liquidators appointed by the appellants will serve an important oversight role. Mr Hunter submits that argument does not address the fact the appellants never had the necessary powers to appoint themselves as liquidators.
Mr Hunter invited the Court to reject, in any event, the proposition that there would be some greater utility in the companies having the appellants as their liquidators rather than liquidators appointed by BNZ. He referred to evidence relating to the funding and indemnity arrangements GTL’s sole director, Mr Clayton, entered into with the appellants. Mr Hunter noted the unlikelihood of Mr Clayton’s funding now being available given he has subsequently been adjudicated bankrupt.[59] Mr Hunter submitted also that the arrangements between the appellants and Mr Clayton appear to indicate an intention to collaterally challenge the Receivers and BNZ’s sale process of assets (a challenge that had previously failed and been struck out). Mr Hunter suggested liquidators of the subsidiaries might appropriately wish to investigate and potentially sue Mr Clayton himself in relation to his conduct as sole director of GTL and the subsidiaries. Assuming other liquidators were appointed, there is no reason those new liquidators could not obtain funding for any valid claim.
Analysis
The Court’s supervision of liquidations
[59]Nothling v Clayton [2023] NZHC 2253.
BNZ and the Receivers brought their application under s 284 of the Act.
The extent of the Court’s supervisory role on such an application is well-established. Where a matter falls within the scope of the liquidator’s powers, the Court’s power will be exercised where the liquidator’s discretion has not been exercised in good faith or where the liquidator has acted unreasonably. The question is whether, in all the circumstances including any absence of consultation, the liquidator’s actions were unreasonable.[60]
The shares as secured property
[60]Consolidated Technologies Development Ltd v McCullough (2006) 9 NZCLC 264,056 (HC) at [15]; Re Callis [1996] 7 NZCLC 261,211 (CA) at 261,217; and United Civil Construction Ltd v Hayfield Sha Ltd (in liq) [2023] NZCA 377 at [15].
Through the GSA granted by GTL to BNZ, the shares in the subsidiaries owned by GTL form part of the secured property. So long as there was no event of default under GTL’s GSA, GTL retained limited rights to deal with the secured property but those rights were suspended when an event of default occurred in 2019.[61] The event of default also entitled BNZ to appoint the Receivers, as it did.
[61]See discussion of suspension of powers below at [83]–[87].
The Receivers, upon the appointment, were entitled to and did take immediate possession of the secured property to exercise and enforce all GTL’s rights in respect of it. The Receivers were entitled to generally do and cause to be done anything in respect of the secured property as if its absolute owner. The assets themselves did not vest in the Receivers.[62]
The effect of GTL’s liquidation upon BNZ’s rights
[62]Cripps v Lakeview Farm Fresh Ltd (in rec), above n 39, at [18].
Under s 248(1)(a) of the Act, the appellants, as GTL’s liquidators, had custody and control of GTL’s assets with effect from the commencement of GTL’s liquidation. But that status, pursuant to s 248(2), did not affect the right of BNZ, as a secured creditor, to possess and deal with shares in the subsidiaries, unless BNZ’s charge were surrendered or otherwise affected under the procedures set out in s 305 of the Act. BNZ did not surrender its charge. None of the other s 305 qualifications applies in this case.
The decision in Gibbston Downs — the conferred residual discretion
The appellants invoke, as the power they exercised in appointing themselves liquidators of the subsidiaries, the power “confirmed or conferred” by s 254 of the Act, as articulated in Gibbston Downs.[63]
[63]Gibbston Downs (CA), above n 23, at [21]–[22].
The context in which this Court identified in Gibbston Downs that s 254 conferred a residual discretion upon the liquidator means care is required not to overstate the extent of the residual discretion. As was subsequently explained by the Supreme Court in refusing leave to appeal:[64]
There was scope for genuine argument as to the entitlement of the liquidator to initiate recovery proceedings in relation to the debts. But the question whether leave should be granted to GDWL falls to be determined in a very particular context in which (a) there is no longer any challenge to the debt, (b) it is clear that GDWL is insolvent, and (c) the secured creditor supports the liquidation application.
[64]Gibbston Downs (SC), above n 23, at [5].
In short, Gibbston Downs was a case in which a third party (a debtor) and not a receiver was challenging a liquidator’s purported exercise of power (in issuing a statutory demand in the name of a company to recover a debt owed to the company). Furthermore, the receivers would not have attempted to recover the debt.[65]
[65]Gibbston Downs (CA), above n 23, at [23].
In that context, this Court in Gibbston Downs held:
(a)s 254 confers a residual discretion upon the liquidator to take steps to realise assets subject to a charge; and
(b)the discretion arises only in certain circumstances; and
(c)it is a discretion and not an obligation.
The Court’s judgment in Gibbston Downs identifies two sets of circumstances in which the residual discretion would not be available to the liquidator:
(a)where the liquidator has no good reason for intervening (such as an intervention for the improper purpose of generating fees for the liquidator);[66] and
(b)where the liquidator would be officiously intervening without good reason in a realisation (proposed by the receivers) with resultant increased costs for the liquidation.[67]
[66]At [22].
[67]At [21].
It may be noted that those identified countervailing circumstances correspond to the settled tests in relation to the Court’s supervisory role under s 284 of the Act, as summarised at [68] above.
The Court in Gibbston Downs identified one situation which may fall within its concept of “certain circumstances” justifying liquidator intervention. This is the factual situation which was subsequently confirmed in Gibbston Downs on the application for leave to appeal to the Supreme Court. Namely, where the secured creditor indicates it will take no steps to realise the asset but has not under the s 305 mechanism surrendered the charge.[68] As was noted by this Court, that had been the factual situation in Sintel-Com Ltd (in liq) v Telecom NZ Ltd.[69] We observe that in the judgment in Sintel-Com, Rodney Hansen J identified a second set of circumstances in which a liquidator might intervene, namely where a security holder’s conflict of interest would serve to obstruct the mortgagor’s fundamental right to retrieve its property, creating a clog on the equity of redemption.[70]
[68]At [21].
[69]Sintel-Com Ltd (in liq) v Telecom NZ Ltd (2006) 9 NZCLC 264,040, at [45].
[70]At [45], citing Brooklands Motor Co Ltd, above n 20 at 260,458. See also Coltart v Lepionka & Co Investments [2016] NZCA 102, [2016] 3 NZLR 36 at [32].
A related set of circumstances arise where, absent the appointment of liquidators to a company in receivership, the directors of the company institute proceedings in the company’s name in a bona fide challenge to the security and/or the appointment of the receivers. Such is viewed as a residual aspect of the company’s affairs not caught by the security.[71]
[71]Hawkesbury Development Co Ltd v Landmark Finance Pty Ltd [1969] 2 NSWR 782 at 790–791.
What this Court did not specifically identify in Gibbston Downs, but is clearly the correct legal position, is any intervention of a liquidator based on the residual discretion conferred by s 254 of the Act cannot be an action that prejudices the legitimate interests of the security holder. That principle was identified by Rodney Hansen J in Sintel-Com.[72]We observe Mr Hunter’s submissions did not identify a particular prejudice that the appellants’ appointment of liquidator to the subsidiaries would have on BNZ’s interest in obtaining repayment — the shares in the subsidiaries had no value; BNZ anticipated no further recovery; and on its own evidence anticipated the appointment of liquidators and was largely “indifferent” to their identity. Although Mr Hunter in his submissions, (above at [60]) referred to BNZ as having been “inherently prejudiced” through the denial of its legal rights, that is not the type of prejudice with which Gibbston Downs and other authorities are concerned — the relevant prejudice is in relation to the secured creditor’s recovery of its debt.
[72]Sintel-Com Ltd (in liq), above n 69, at [45]–[46]. See also Re Geneva Finance Ltd (receiver and manager appointed) (1992) 7 ACSR 415 at 428–430.
We note the observations made in Gomba Holdings as to the impracticability of a “diarchy” over assets in a receiver’s possession or control (cited by Mr Hunter, above at [47]) were made in the context of the relationship between receivers of a company and the company’s board. The use of that image has not been universally recognised as helpful.[73] In any event, it cannot inform the present case where at issue are the liquidators’ powers as conferred by s 254 of the Act.
[73]See Re Geneva Finance Ltd, above n 72, at 430 (as with Gomba Holdings, above n 43, a contest between directors and receivers), Owen J observing that the “real question is whether the directors, wishing to exercise a power which they would otherwise have, can do so without prejudicing the legitimate interests of the receiver and the secured creditor in the realisation of the assets”.
This Court’s decision in Gibbston Downs recognised, in certain circumstances, a residual discretion permits a liquidator to take steps to deal with assets subject to a charge which on its terms gives absolute control to the charge holder and/or appointed receivers. We therefore respectfully disagree with the reasoning in the High Court judgment that GTL’s entitlement to deal with (among other assets) the shares in its subsidiaries was, upon the occurrence of an event of default, a power entirely unable to be resorted to by GTL’s liquidators in any circumstances.
Suspension of a company’s board’s powers while receiver has an interest in charged assets
Rather, what happens when the possession and control of the secured property passes to the charge holder and/or receivers (as if they were “the absolute owner of the Secured Property”) is a suspension of the board’s powers. In Brooklands, Blanchard J referred to this situation precisely as involving a suspension of powers.[74] His Honour referred to the explanation of the nature of this suspension in Hawkesbury Development Co Ltd v Landmark Finance Pty Ltd:[75]
Receivership and management may well dominate exclusively a company’s affairs in its dealings and relations with the outside world. But it does not permeate the company’s internal domestic structure. That structure continues to exist notwithstanding that the directors no longer have authority to exercise their ordinary business-management functions. A valid receivership and management will ordinarily supersede, but not destroy, the company's own organs through which it conducts its affairs. The capacity of those organs to function bears a direct inverse relationship to the validity and scope of the receivership and management.
[74]Brooklands Motor Co Ltd, above n 25, at [260,456]–[260,457].
[75]At [260-456], citing Hawkesbury Development Co Ltd v Landmark Finance Pty Ltd, above n 71, at 790.
Blanchard J further explained:[76]
The powers of the directors in relation to the assets charged under the debenture are suspended “so far as requisite to enable the receiver to discharge his functions”: Re Emmadart Ltd.[77] Although the suspension of power may often be very extensive its purpose, enabling the discharge of the receiver’s functions, must not be lost sight of, and the suspension unduly enlarged. When a receiver has no interest in a charged asset, such as a right of action possessed by the company, the directors may, so long as they do not prejudice the position of the debenture holder by threatening or imperilling the assets in which the debenture holder and receiver are truly interested, utilise the asset and exercise the rights of the company by bringing proceedings: Newhart Developments Ltd v Co-operative Commercial Bank Ltd,[78] Paramount Acceptance Co Ltd (in rec) v Souster.[79]
[76]At [260,457].
[77]Re Emmadart Ltd [1979] Ch 540 at p 544.
[78]Newhart Developments Ltd v Co-operative Commercial Bank Ltd [1978] 2 All ER 896; [1978] QB 814.
[79]Paramount Acceptance Co Ltd (in rec) v Souster (1981) I NZCLC 95-021.
In Brooklands, Blanchard J expressly rejected English criticisms of the above approach and adopted, as “the proper perspective”, observations in the judgment of Owen J in the Supreme Court of Western Australia in Re Geneva Finance Ltd, recording:[80]
Owen J correctly says that it is necessary to focus on the purpose for which a receiver is appointed and the effect which the appointment has on the company and its organs. The enquiry should be as to “the effect which the exercise of the power [sought to be exercised by the directors] will have on the receiver’s functions rather than to concentrate on the identification and delineation of the residual duties reposed in the directors” (at pp 428-429). I agree with his comment that it is difficult to see why a director should be prevented from taking a step which the director believes to be in the interests of the company unless that step would, in the reasonable opinion of the receiver, prejudice the proper administration of the receivership.
[80]Brooklands Motor Co Ltd, above n 25, at [260,457], citing Re Geneva Finance Ltd, above n 72.
The judgment of Lord Templeman in Downsview Nominees Ltd is the well-established authority for the equitable rule that powers conferred on a mortgagee must be exercised in good faith for the purposes of obtaining repayment, a rule that applies equally to a receiver and manager appointed by the mortgagee.[81]
[81]Downsview Nominees Ltd, above n 24.
In relation to receivers in particular, the “general duties of receivers” are relevantly identified in s 18(1)–(3) of the Receiverships Act:
18 General duties of receivers
(1)A receiver must exercise his or her powers in good faith and for a proper purpose.
(2)A receiver must exercise his or her powers in a manner he or she believes on reasonable grounds to be in the best interests of the person in whose interests he or she was appointed.
(3)To the extent consistent with subsections (1) and (2), a receiver must exercise his or her powers with reasonable regard to the interests of—
(a)the grantor; and
(b)persons claiming, through the grantor, interests in the property in receivership; and
(c)unsecured creditors of the grantor; and
(d)sureties who may be called upon to fulfil obligations of the grantor.
…
Conclusion — the appellants’ s 284 application
The focus under s 284 of the Act is on the intervention of the appellants as liquidators appointed to GTL by Mr Clayton. The liquidators understood (correctly) the Bank foresaw no further recoveries. They had been informed the Receivers intended to retire. They understood the Bank itself was intending to pursue the liquidation of the subsidiaries (and the Other Companies).
The appellants’ powers, as recognised in the authorities we have referred to, were residual. They were limited in nature.[82] That followed from the power GTL and the subsidiaries had recognised the Receivers would have (above at [26(b)]) to do anything with the shares as if they were the absolute owner. As exemplified in the examples of circumstances justifying liquidator intervention discussed above at [78]–[79], a situation likely to justify liquidator intervention arises when the secured creditor has declined to exercise powers which would achieve benefits for the company. We find the appellants here, pursuant to their residual powers, were also entitled to conclude it was appropriate that they appoint liquidators, when it was common ground that liquidators should now be appointed. This was far removed from a situation of “officious” intermeddling.
[82]Re Geneva Finance Ltd, above n 72, at 429.
The appellants voting the shares to appoint liquidators to the subsidiaries could not amount to an interference — “officious” or otherwise — in the rights of the Receivers in the circumstances as they existed in November 2022. That was because the Receivers’ legitimate purpose in dealing with company assets, including shareholdings (namely obtaining repayment of the BNZ debt), had been achieved to the extent possible and the appellants’ actions could not prejudice the Receivers’ (or BNZ’s) legitimate interests in dealing with the assets to achieve realisation.
We also find it was reasonable for the appellants to appoint themselves as liquidators, with the responsibilities that attach and supervision that applies to insolvency practitioners under the Insolvency Practitioners Regulation Act 2019.
Mr Grant deposed Mr Clayton wanted, and was willing to fund, liquidators known to be independent and not associated with either BNZ or the Receivers. This led to a submission of Mr Hollyman which implicitly suggested the appellants as liquidators would be the preferable liquidators of the subsidiaries because they would serve as “an official and independent watchdog” of the Receivers’ actions. Issues as to the ability or inability of Mr Clayton to make available funding after his subsequent bankruptcy cannot alter the assessment of the appropriateness of the appointments at the time they were made.
While the parties may hold distinctly different views as to who would be preferable as liquidators of the subsidiaries, the twofold test to be applied before the Court intervenes under s 284 of the Act — whether the liquidators’ powers were not exercised in good faith, or the liquidators acted unreasonably — has not been satisfied. BNZ has not established either limb of that test.
BNZ has therefore not established the appellants’ appointments as liquidators of the subsidiaries were invalid. The appeal must be allowed.
Costs
Costs in this Court will follow the event. The issue of costs in the High Court will be remitted to that Court for determination.
Orders
The appeal is allowed.
The declaration granted by the High Court is quashed.
The respondent must pay the appellants’ costs for a standard appeal on a band A basis and usual disbursements.
The costs incurred in the High Court are remitted to that Court for determination.
Solicitors:
Keegan Alexander, Auckland for Appellant
Buddle Findlay, Auckland for Respondent
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