Grant v Peoples
[2016] NZHC 2611
•1 November 2016
IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY
CIV-2016-419-207 [2016] NZHC 2611
BETWEEN DAMIEN GRANT AND STEVEN KHOV
AS LIQUIDATORS OF SILVERSPUR DEVELOPMENTS LIMITED (IN LIQUIDATION)
Applicant
AND
PATRICK EDWARD PEOPLES First Respondent
ANTHONY CHARLES HARRIS Second Respondent
ANDREW SHAW Third Respondent
Hearing: 7 October 2016 Appearances:
Ms A Cherkashina for Applicants
Mr S Chatwin for RespondentsJudgment:
1 November 2016
JUDGMENT OF ASSOCIATE JUDGE J P DOOGUE
This judgment was delivered by me on
01.11.16 at 3.30 pm, pursuant to
Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
GRANT AND ANOR as LIQUIDATORS OF SILVERSPUR DEVELOPMENTS LIMITED (IN LIQUIDATION) v PEOPLES & ORS [2016] NZHC 2611 [1 November 2016]
[1] The applicants are the liquidators of Silverspur Developments Limited (“the company”) which was placed in liquidation on 4 April 2016. They have applied to the court seeking orders under s 266 of the Companies Act 1993 (“Act”). Specifically, the liquidators seek orders that the respondents comply with notices issued pursuant to s 261 of the Act, requiring the respondents to attend an examination under oath or affirmation. The respondents oppose the orders sought.
Background
[2] Between June 2014 and December 2015 the company owned a property (“the property”) at 24 Wayside Road, Te Kauwhata. From 24 June 2014, the property was subject to a first registered mortgage in favour of the Baker Trust (“trust”). The mortgage provided security for a loan of $2.1 million by the trust to the company.
[3] Unfortunately, the company fell into default under the mortgage and on 27
February 2015, the trust served a notice on the company pursuant to s 119 of the Property Law Act 2007. Thereafter, the company not having satisfied the default notice, the trust elected to initiate mortgagee sale proceedings. The property was placed in the hands of a real estate firm, Bayleys, to conduct the marketing campaign. On 11 December 2015 the property was sold for the price of $4.35 million.
[4] The liquidators’ interest in the three respondents arises from the respondents’ connections to the trust and to the mortgagee sale process. The first respondent, Mr Peoples, is a trustee of the trust. The second respondent, Mr Harris, is the director of a trustee company, ATL. The third respondent was the real estate agent who was involved, on the instruction of the trustees, in the sale of the property at mortgagee sale.
[5] Some additional details concerning the events leading up to the sale of the property are required to explain the discussion that follows later in this judgment.
The first tender
[6] The property was first listed with Bayleys on 2 April 2015. The firm had submitted a marketing proposal for the property which stated an expectation of achievable sale being in the vicinity of $1.6 million to $2.5 million.
[7] The program that was agreed was that the property would be marketed for approximately one month. The total amount of the budget for media exposure of the property was $6269.80. The aim was to sell the property by tender. However, the proposal which Bayleys put forward noted that if the property did not sell by the closing date for tenders, then that firm would either deal with matters on non-auction terms and/or deal with conditional interest expressed by other buyers attracted by the advertising campaign. The closing date for tenders that was eventually set was 21
May 2015.
[8] On 21 May 2015, the lawyers acting for the company advised that an offer had been made by a company called Tainui Development Authority Limited (“TDAL”). This offer was for what must have seemed a startling amount, namely
$7.7 million. However, the agreement was conditional on a number of matters.
[9] The solicitors acting for the trust were sceptical about the offer, their enquiries having indicated that TDAL did not own any other property in New Zealand. TDAL, which had its office in Te Atatu, had as its directors a Mr Taitimu Maipi and Mr Tukuroirangi Morgan. It did not appear to be an investment vehicle associated with the Tainui iwi. Notwithstanding these concerns, the respondents accepted the tender.1
[10] On 11 September 2015, subdivision consent for the property was granted by the Waikato District Council. Shortly after that date, TDAL gave notice that the
agreement to purchase was at an end. A further round of tenders had to be launched.
1 The agreement for sale and purchase was between the company and TDAL. The respondents adopted the agreement.
The second tender
[11] The property was again advertised for tender in September and October 2015 with tenders closing on 16 October 2015. On this last date, the company accepted an offer put forward by Franklin Homes Ltd (“Franklin”) for the sum of $4,325,000. That offer was apparently accepted following direct negotiations between the company and the offeror and represented the highest tender that had been forthcoming during the second tender round. The settlement date was 11 December
2015.
[12] The agreement to purchase provided for the transfer of the property to Franklin or its nominee. In the event, Franklin nominated a second company, Te Kauwhata Land Limited (“TKLL”) to receive the property under the agreement. As the liquidators noted in their submissions, this company had previously been owned by the second respondent. However FHL acquired TKLL shortly before settlement.
[13] The successful tender resulted in settlement of the sale taking place on 11
December 2015 with the transferee of the property being Te Kauwhata Land Limited. As the liquidators noted in their submissions, this company had been owned by the second respondent but there was a change of shareholding so that the proprietors of FHL acquired the company prior to settlement. Further comment will be addressed to this aspect of the case subsequently in the judgment.
Liquidation and subsequent requests for information
[14] On 4 April 2016, the company was placed into liquidation by special resolution of its shareholders. The liquidators were appointed as joint and several liquidators of the company.
[15] On 6 April 2016, the liquidators sent letters to the trustee company (ATL), Bayleys and to the solicitors acting for the trustees, Chatwin Legal, requesting all documentation in their possession relating to the company and the property. A letter clarifying what documents were sought was sent by Chatwin Legal to the liquidators on 20 April 2016. Thereafter Chatwin Legal arranged to send copies of the requested documents to the liquidators, which in due course occurred.
[16] On 26 April 2016, the liquidators’ in-house counsel, Mr Ho, sought from Chatwin Legal an undertaking that all documentation of the company (presumably meaning relating to the company’s affairs) in the possession of the first respondent, ATL and Bayleys had been provided to the liquidators. That undertaking was provided in a letter dated 5 May 2016. However an additional request in Mr Ho’s letter that the first, second and third respondents make themselves available for examination, was not commented on and was not agreed to by the respondents.
[17] In due course, the liquidators issued notices to the respondents pursuant to s
261 of the Act requiring the respondents to attend an interview under oath or affirmation. The respondents failed to comply with the notices. The present application followed that non-compliance. Orders are sought pursuant to s 266 of the Act.
Originating application and opposition
[18] The originating application filed by the liquidators seeks orders that the respondents attend the offices of the liquidators for interview under oath or affirmation. The application does not provide any particular grounds for the order but notes that the court has jurisdiction to order the respondents to comply with the notices previously served.
[19] Ms Gordon, the manager who has responsibility for this particular liquidation, has given an affidavit. In that affidavit Ms Gordon says, amongst other things:
4.2While the documentation provided by Mr Peoples, ATL and Bayleys provides some insight into the sale, examination of Messrs Peoples, Harris and Shaw is also necessary to obtain an account of the transaction. Further we have questions in regard to the sale that are not answered by the documentation.
[20] Ms Gordon does not identify the questions which she considers still need to be answered. The court therefore must attempt to come to its own conclusions as to the likely subject matter of questions that would be put to the respondents, were they to be summoned for examination.
[21] The respondents have filed a notice of opposition to the liquidators’ application under s 266. Rather than setting out the grounds verbatim, I will summarise them as the document is of moderate length. The notice of opposition puts forward the following grounds of opposition:
(a) Examination of the respondents would be unreasonable, unnecessary and or oppressive and an abuse of process;
(b)The purpose of seeking the orders is to provide the liquidators with an advantage that they would not otherwise obtain in litigation and is for the purpose of bringing pressure to bear on the respondents as potential litigation adversaries;
(c) The liquidators allegedly have already decided to pursue a claim against the first and second respondents for breach of the duty to take all reasonable steps to obtain the best possible price for the subject property at mortgagee sale;
(d)The liquidators are not seeking examination for the purpose of reconstituting the state of knowledge of the company;
(e) The rights of respondents to silence and privacy override the rights of the liquidators to acquire information in the circumstances of this case;
(f) The examination would not be for the benefit of the company or its creditors;
(g) The examination is not reasonably necessary for the discharge of the
liquidators’ duties;
(h)Examination would impose unnecessary and unreasonable burdens on the respondents;
(i)There is no public interest in the orders for examination being granted;
(j)The respondents have previously provided voluminous documentation relating to the mortgagee sale of the property, equivalent to what the liquidators could have obtained under pre-commencement discovery and are therefore in a better position already to assess the alleged pending litigation;
(k) The respondents are not persons covered by s 261(2) of the Act.
[22] The first respondent has also given an affidavit in the proceedings which exhibits the hundreds of pages of documents that have been provided to the liquidators, including documentation produced by Chatwin Legal and by Bayleys in relation to the sales campaign for the property.
[23] Ms Gordon has filed an affidavit in reply. In that affidavit, she says that the liquidators have not made a decision to bring a claim against the first and second respondents for breach of their duty to obtain the best possible price when conducting the mortgagee sale. She says that she has not made any recommendation to commence any claims in respect to the mortgagee sale.
[24] One of the liquidators, Mr Grant, has also sworn an affidavit in reply. In that affidavit he similarly avers that no decision has been made to take any claim against the respondents in regard to a possible failure to take reasonable steps to obtain the best price at mortgagee sale. He also gives evidence that the liquidators have offered to forego any costs on the originating application if the respondents will now submit voluntarily to being examined. Further he deposes that the liquidators have informed the respondents of their willingness to travel to the respondents to conduct the interview thereby “reducing their time and cost of compliance”.
The law and principles applicable
[25] The application brought by the liquidators is made pursuant to ss 261 and 266 of the Act, which relevantly provide as follows:
261 Power to obtain documents and information
…
(2) A liquidator may, from time to time, by notice in writing require—
…
(e) a receiver, accountant, auditor, bank officer, or other person having knowledge of the affairs of the company; or
…
to do any of the things specified in subsection (3).
(3) A person referred to in subsection (2) may be required—
(a) to attend on the liquidator at such reasonable time or times and at such place as may be specified in the notice:
(b) to provide the liquidator with such information about the business, accounts, or affairs of the company as the liquidator requests:
(c) to be examined on oath or affirmation by the liquidator or by a barrister or solicitor acting on behalf of the liquidator on any matter relating to the business, accounts, or affairs of the company:
(d) to assist in the liquidation to the best of the person’s ability.
…
(6A) A person who fails to comply with a notice given under this section commits and offence and is liable on conviction to the penalty set out in section 373(3).
…
[26] I interpolate that the matters upon which a “person having knowledge of the affairs of the company” may be examined is strictly limited to “any matter relating to the business, accounts, or affairs of the company”.
266 Powers of court
(1) The court may, on the application of the liquidator, order a person who has failed to comply with a requirement of the liquidator under section 261 to comply with that requirement.
(2) The court may, on the application of the liquidator, order a person to whom section 261 applies to—
(a) attend before the court and be examined on oath or affirmation by the court or the liquidator or a barrister or solicitor acting on behalf of the liquidator on any matter relating to the business, accounts, or affairs of the company:
(b) produce any books, records, or documents relating to the business, accounts, or affairs of the company in that person’s possession or under that person’s control.
…
[27] I adopt the following summary of principle, as set out EBR Holdings v
McLaren Guise Associates:2
[59] The purpose of the provision is to allow a liquidator to gain access to information about the company in order to perform their duties and protect company assets. The provision provides wide powers for the liquidators to achieve this. In Re Rolls Razor (No 2), Megarry J said:
The [examination] process … is needed because of the difficulty in which the liquidator in an insolvent company is necessarily placed. He usually comes as a stranger to the affairs of a company which has sunk to its financial doom. In that process, it may well be that some of those concerned in the management of the company, and others as well, have been guilty of some misconduct or impropriety which is of relevance to the liquidation. Even those who are wholly innocent of any wrongdoing may have motives for concealing what was done. In any case, there are almost certain to be many transactions which are difficult to discover or to understand merely from the books and papers of the company. Accordingly, the legislature has provided this extraordinary process so as to enable the requisite information to be obtained. The examinees are not in any ordinary sense witnesses, and the ordinary standards of procedure do not apply. There is here an extraordinary and secret mode of obtaining information necessary for the proper conduct of the winding up. The process, borrowed from the law of bankruptcy, can only be described as being sui generis.
[60] …
[61] … The reasonable requirements of the liquidator need to be balanced against the need to avoid unreasonable, unnecessary or oppressive orders. The Court is particularly concerned about the possibility of liquidators using their powers to obtain an unfair or improper advantage for the purposes of litigation. This may be considered an abuse of process. The Court strikes a balance between the liquidator’s rights to acquire information and rights of silence or privacy that the examinee may have. As long as a liquidator is not seeking to bring pressure to bear on a potential litigant for an ulterior
2 EBR Holdings v McLaren Guise Associates [2015] NZHC 1996, [2016] 2 NZLR 96.
purpose he will be allowed to examine. The public interest in the integrity of liquidations has also been held to ensure that the confidential nature of information obtained by a liquidator is maintained. It will likely be considered oppressive to require third parties to give information and expose themselves to liability, or require persons suspected of wrongdoing to prove the case against themselves on oath before separate proceedings are brought against them.
[28] In addition to this general statement of principle, I refer to the judgment of McGechan J in Re Northrop Instruments & Systems Ltd (in rec and liq).3 The case arose in circumstances where the liquidators had received information to the effect that certain assets sold by the company in liquidation shortly before winding-up had been sold at less than market value. The liquidators sought to examine two former employees, Messrs Jones and Vennel, about the transaction. One of the principal
matters that McGechan J took into account when deciding whether or not the discretion to order an examination ought to be made was whether the proposed examination was a “genuine investigative step” as opposed to a “mere fishing expedition” or a case “where the liquidator is seeking to improve an already sufficient position, or is bringing pressure to bear for some ulterior purpose.”4
[29] In the case before him, McGechan J was concerned to balance the public interest in liquidators being entitled to obtain early information about the circumstances of the case (rather than deferring matters until proceedings had been issued and discovery and other remedies exercised), on the one hand, against the
possible oppression of persons being required to submit to an oral examination.5 He
concluded that examination was justified on the facts of the case.
[30] The issue of oppressive conduct was also addressed by Heath J in ANZ National Bank Ltd v Sheahan.6 The Judge referred to:7
… the need for a balance to be struck between a liquidator’s need to obtain information about a company and the prevention of the oppressive conduct against an examinee, or possibly his or her principal. The balancing exercise comes into focus very sharply in cases where a liquidator seeks to examine a personal litigation adversary to obtain admissions under a process that is not
3 Re Northrop Instruments and Systems Ltd [1992] 2 NZLR 361 (HC).
4 At 364.
5 At 365.
6 ANZ National Bank Ltd v Sheahan [2012] NZHC 3037.
7 At [52].
available in ordinary civil proceedings. This approach requires consideration of any oppressive conduct on the part of the liquidator.
[31] This means that conduct which might in some circumstances be merely unobjectionable on the part of the liquidator may be seen as a potentially oppressive conduct in cases where the liquidator of is using the examination process to position himself for a civil claim against the examinee. This is a factor to be weighed along with all the other issues in any particular case.
Is there jurisdiction to order examination of the respondents in this case?
[32] I accept that in the circumstances of this case that it is open to the liquidators to require the respondents to attend for examination concerning the knowledge of those persons with regard to the affairs of the company.8 That is because the sale of the property which the respondents initiated as mortgagees is a relevant aspect of the affairs of the company concerning which the liquidators are entitled to seek information. The real question in this case is whether as a matter of discretion and
after balancing the various factors that are required to be taken into account, the court ought grant the orders which the liquidators seek.
How should the jurisdiction to order examination be exercised in this case?
[33] The particular aspects of the case which bear upon how the discretion ought to be exercised need to be considered.
[34] The starting point is to identify the relevance of the mortgagee sale from the perspective of the liquidators. The liquidators are entitled to avail themselves of any right of action against the mortgagee which might have been available to the company prior to its liquidation. It is no doubt in this area that the liquidators are interested in what happened with the sale of the property at Te Kauwhata. It is not argued that the respondents have any knowledge about the affairs of the company other than the mortgagee sale.
[35] Ms Cherkashina explained that there were two separate aspects of the mortgagee sale that the liquidators were interested in. First, the liquidators
considered that there was a basis for concluding that the mortgagees had failed to take all reasonable steps to obtain the best price obtainable for the property. Secondly, the liquidators were concerned that there had been an attempt on the part of one or more of the first and second respondents to acquire the property for itself/themselves at an undervalue.
Duty under s 176 of the Property Law Act 2007
[36] The mortgagee’s duty is to take reasonable care to obtain the best price
reasonably obtainable at the time of sale.9
[37] In this case, the respondents have made extensive voluntary disclosure of all relevant documentation relating to the mortgagee sale. The transaction itself is simple in nature and should not require further explanation. The liquidators have not indicated that any aspect of the transaction is particular unclear or confusing. The documents show that the process leading up to the mortgagee sale was conducted in a normal and usual way. The services of a real estate agent were retained and that party, the third respondent, advised on matters such as the likely sale price of the property and the marketing program including setting a budget for how much would be spent on advertising the property. The means of sale chosen, tender, it is not in any way unusual.
[38] Under those circumstances, I consider that the liquidators have sufficient information available to them to determine whether it is appropriate to issue proceedings such that an examination of the respondents would not be a genuinely investigative step. Furthermore, to the extent that the information sought relates to the internal decision-making processes of the mortgagees in the lead-up to and following the sale, the information sought does not relate to “the affairs of the company” but rather to the affairs of the mortgagees. Further examination regarding the details of the mortgagee sale would permit the liquidators to obtain a litigation advantage which would otherwise be unavailable. If the liquidators wish to obtain that information then it should, in my view, be more appropriately obtained through discovery proceedings.
[39] The information which has already been made available by the mortgagees does not give rise to any inference that they have failed to properly perform their obligations to take reasonable care to obtain the best price reasonably obtainable at the time of sale. What occurred here would seem to have been a conventional case of an unpaid mortgagee exercising a power of sale to recover what it was owed. Had there been some aspect of the transaction which was particularly unusual or unclear, then the case for examination may have been stronger. Even in that hypothetical scenario, however, the liquidators would still be limited by the requirement that any examination be focussed on the affairs of the company, not the affairs of the mortgagees.
[40] It is necessary to deal with a further point which is that the liquidators submitted, essentially, that if the respondents had nothing to hide there was no reason why they should not submit to examination by the liquidators. That reasoning in my view is fallacious. The respondents like any other party have the right to silence and to have their privacy respected. As noted above, that is one of the reasons why the court has a discretion, rather than an obligation, to order examination.
Sale at undervalue
[41] The second ground that the liquidators put forward for requiring examination of the respondents in this case was that there is evidence to suggest that the respondents may have attempted to acquire the property for themselves at undervalue.
[42] Ms Cherkashina explained to me that there was evidence that a few days before the date of settlement of the transaction by the successful tenderer, the shareholding of TKLL changed. TKLL was the company which was nominated to settle the purchase. Previously, the shares in that company had been owned by the second respondent. Shortly before settlement, the shares were transferred to the principal of FHL, the tenderer. Thereafter as I have already recounted the property was transferred to TKLL.
[43] The liquidators apparently view the transactions involving the shares in TKLL as being consistent with a scheme on the part of the respondents to obtain the property at undervalue for themselves.
[44] I do not consider that the transaction logically should be viewed in that light. In the first place, the net effect of the transaction was to ensure that interests associated with FHL, and not the respondents, were to have the benefit of the purchase. There is no evidence suggesting that any of the mortgagees had any interest in FHL or that the transaction with that company was other than what it seemed, namely an arm’s length purchase at tender. Nor is there any evidence to suggest that FHL was a front for any of the mortgagees and that the company acquired the beneficial interest in the property for the benefit of one of those persons. In the second place, there is no evidence that a sale at undervalue actually occurred.
[45] In summary, there is nothing on the surface of that transaction to indicate any wrongdoing on the part of the respondents. Under those circumstances and given the extensive voluntary disclosure made by the respondents, the liquidators’ request to examine the respondents can appropriately be characterised as a fishing expedition. Furthermore, and again, the proposed subject matter can arguably be characterised as being the affairs of the mortgagees, rather than the affairs of the company and therefore fall outside the jurisdiction of the liquidators’ examination process.
Solvency of the company
[46] A further point that was explored in submissions before me concerned the question of whether or not the company was insolvent. Mr Chatwin submitted that any proceeding which the liquidators might determine to undertake in this case would be for the benefit of the shareholders of a solvent company and that in such circumstances those who were interested in the outcome of the proceeding should be required to take conventional legal steps against the respondents and obtain any additional information that they might want to through the processes of discovery in interrogatories.
[47] The solvency of the company was a relevant factor in ANZ National Bank Ltd v Sheahan, in which Heath J held:
(c) ordinarily, where creditors have been paid and liquidators’ costs are spiralling upwards it would be appropriate to terminate the liquidation, with the consequential ability for the company’s board to take action, if they thought fit, to recover any debt or damages they considered were payable. After the liquidation process is terminated the ability to use the “extraordinary” examination powers is spent.
[48] The justification for this approach would seem to be that an individual should not be required to undergo examination in circumstances where the benefits and/or longevity of the liquidation proceedings are in doubt.
[49] However, Ms Cherkashina was able to point to the fact that the
Commissioner of Inland Revenue has filed a proof of debt in the liquidation.
[50] The liquidators’ first report dated 4 May 2016 contained what was described as an “estimated statement of affairs”. That document described the total assets of the company as unknown and similarly the company’s total liabilities. There was annexed to the report a statement that identified the IRD is the only known creditor of the company. No evidence was provided updating this information. Whether the IRD remains a creditor and, if so, the extent of the liability is therefore unknown.
All secured creditors were paid off from the proceeds of sale received as a result of the tender process. The respondents are therefore on firm ground in questioning whether the company in this case is in fact solvent.
Conclusion
[51] The present case is an unusual one in that there has been substantial provision of background documentation relating to these transactions to the liquidators. Further, the transaction of its nature is one that would be expected to be intensively documented and that is the case here. Consideration of the documents which have been provided from the solicitor’s file, amongst other sources, provides a comprehensive narrative of what actually happened.
[52] As well, the critical elements of the transaction are not in dispute. The liquidators do not dispute that the price obtained was actually obtained, nor do they dispute that the marketing program which led up to the two rounds of tenders actually took place. They are therefore in possession of the factual material which
they will need in order to pursue any claim that the transaction offended s 176 or was designed to bring about an acquisition of undervalue of the property by the respondents.
[53] Further, the allegation that the respondents may have said about to acquire the property at under value is simply not supported by the documents which have been disclosed. They did not acquire the property which is the first and essential preliminary to bringing a claim of the kind which the liquidators are apparently considering.
[54] Finally, there is the matter that the information which the liquidators apparently seek would appear for the most part to be information relevant to the internal decision-making processes of the mortgagees, which is not information relating to the “affairs of the company”, as required by s 261(3)(c).
[55] Taking these matters overall, I do not consider that the discretion ought to be exercised in favour of directing an examination.
Judgment
[56] For the foregoing reasons, the application for orders pursuant to s 266 is dismissed.
[57] For the purposes of costs which are sought by the respondents, the significant point is that the liquidators have failed in their application and therefore should pay the costs of the party who has succeeded.10 I consider that the appropriate costs category is 2B and there will be an order that the liquidators pay costs on the basis of
that scale together with disbursements as fixed by the Registrar.
J.P. Doogue
Associate Judge
10 High Court Rules 2016, r 14.2(a).
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