Haddon v Jackeytown Property 2012 Limited
[2015] NZHC 431
•11 March 2015
IN THE HIGH COURT OF NEW ZEALAND PALMERSTON NORTH REGISTRY
CIV-2014-454-132 [2015] NZHC 431
UNDER Part XVI of the Companies Act 1993 IN THE MATTER OF
A proceeding to put Jackeytown Property
2012 Limited into liquidationBETWEEN
MALCOLM DAVID HADDON, ANNE MARGARET HADDON AND GERALD PETER HADDON
Plaintiffs
AND
JACKEYTOWN PROPERTY 2012
LIMITED Defendant
CIV-2015-454-12
UNDER Part 15A of the Companies Act 1993
BETWEEN MOORE FINANCIAL SOLUTIONS LIMITED (IN LIQUIDATION) Plaintiff
AND JACKEYTOWN PROPERTY 2012
LIMITED Defendant
Hearing: 19 February 2015 Counsel:
D Sheppard for Plaintiffs in proceeding CIV-2014-454-132
M B Ryan for Defendant in proceeding CIV-2014-454-132 and for the Plaintiff in proceeding CIV-2015-454-12
Judgment:
11 March 2015
JUDGMENT OF ASSOCIATE JUDGE SMITH
[1] The plaintiffs in proceeding CIV-2014-454-132 (the Haddon Trustees) apply
for an order putting Jackeytown Property 2012 Ltd (Jackeytown) into liquidation.
MALCOLM DAVID HADDON, ANNE MARGARET HADDON AND GERALD PETER HADDON v
JACKEYTOWN PROPERTY 2012 LIMITED [2015] NZHC 431 [11 March 2015]
They say that Jackeytown owes them the sum of $547,086.29, being an advance of
$500,000 made under a term loan agreement entered into on 1 November 2012, and accrued interest.
[2] A statement of defence was filed by Jackeytown, in which it acknowledged that it failed to comply with a statutory demand which had been served on it, but denied liability for the $547,086.29. Jackeytown also denied that it was unable to pay its debts.
[3] A fixture was made to hear the liquidation application on a defended basis, and affidavits have been filed on both sides.
[4] On 17 February 2015, two days before the scheduled hearing of the Haddon Trustees’ liquidation claim, Moore Financial Solutions Ltd (in liquidation) (Moore Financial), a creditor of Jackeytown, filed an application under s 239L of the Companies Act 1993 (the Act) for the appointment of an administrator of Jackeytown. Moore Financial applied to have its application heard with the Haddon Trustees’ liquidation claim. The request to have the two applications heard together was not opposed by the Haddon Trustees, and by consent both applications were heard on 19 February 2015.
[5] At the hearing, Mr Ryan accepted that Jackeytown is unable to pay its debts, and acknowledged that if Moore Financial’s application for appointment of an administrator does not succeed, an order should be made placing Jackeytown in liquidation.
Background
[6] Jackeytown was incorporated in September 2012. The majority of the shares are owned by Mr Peter Moore and his wife Beverley Moore. Mr and Mrs Moore are the sole directors.
[7] Until its liquidation in November 2012, Mr and Mrs Moore also owned and operated the business of Moore Financial.
[8] Jackeytown owns rural land near Palmerston North (the land) which it leases to Jackeytown Blooms Ltd (Blooms). The directors of Blooms are Mr and Mrs Moore, and Mr Doug Jones. Blooms grows hydrangeas and nerines on the land, for sale commercially.
[9] Prior to late 2012, the land had been owned by Moore Financial. Moore Financial had been running the flower-growing business on the land, apparently with mixed results – a number of varieties of planted bulbs had failed to yield satisfactory numbers of flowers.
[10] Moore Financial took advice, but it ran into further difficulties, including a fungal problem which affected some of the flowers. By 2012, it had suffered a substantial loss. There was a need for an injection of cash into the business.
[11] Mr Moore says that it was then that he was introduced to one of the plaintiffs, Mr Gerald Haddon. Mr Gerald Haddon is an accountant, and he was asked by the Moores to see if he could put together a group of investors who would provide the required additional capital.
[12] Mr Gerald Haddon produced an Investment Proposal document, in which it was proposed that a new company would be formed to purchase the land. The new company was Jackeytown. (Blooms was an existing company owned by Mr and Mrs Moore, but it was not then trading). It was proposed that Blooms would take a ten year lease of the land from Jackeytown and operate the nursery business on the land.
[13] The proposal stated that the first year’s sales of flowers grown on the land had been reasonably successful, and that Mr and Mrs Moore had found a successful export market (90 per cent of the flowers were then intended for export). The land had recently been valued by Lincoln Charles, a registered valuer, at $1,340,000, but Mr Gerald Haddon and Mr and Mrs Moore considered that figure to be on the high side. The Proposal accordingly provided for Jackeytown to purchase the land (including all improvements) for a total sum of $1,240,000, which would include
$140,000 to be spent on capital improvements. The ten year lease to Blooms would
start from 1 October 2012, with an initial rental of $99,000 (that would give an
8 per cent return on the purchase price).
[14] Mr Gerald Haddon prepared cashflow forecasts for Blooms based on a 2012 business plan that Moore Financial had prepared. Revenue projections for the three years from 2012-2013 to 2014-2015 showed expected growth in sales in each of those years, and the business plan was generally “upbeat” in tone.
[15] In anticipation of the purchase of the land from Moore Financial, Jackeytown was incorporated on 3 September 2012. A deed of lease was entered into between Jackeytown and Blooms on 18 October 2012.
[16] Settlement of the sale of the land from Moore Financial to Jackeytown took place on 2 November 2012. Mr Gerald Haddon had been unable to attract all of the investor interest for which he had hoped, and in the end only approximately
$750,000 was funded from outside sources. Moore Financial left in unsecured vendor finance of $450,000.
[17] The outside funding of $750,000 included a loan from the Haddon Trustees of $500,000 (the loan on which the liquidation claim is based), and a loan of
$100,000 from Hallwall Industries Ltd (Hallwall) and Mr Gerald Haddon’s family
trust. Hallwall is a company owned by Mr Gerald Haddon.
[18] The $500,000 advanced by the Haddon Trustees was secured by first registered mortgage on the land, and the loan from Hallwall and Mr Gerald Haddon’s trust was secured by a second mortgage.
[19] On 22 November 2012, Mr Gerald Haddon was appointed an additional director of Blooms. He says that the appointment reflected the role he was playing at the time managing Blooms’ finances. He remained a director of Blooms until May 2013.
[20] The Moores put Moore Financial into voluntary liquidation on 27 November
2012, by shareholders’ special resolution. The liquidator of Moore Financial is
Mr Roderick McKenzie, and it is Mr McKenzie who is behind the late-filed application by Moore Financial to have an administrator appointed for Jackeytown.
[21] Unfortunately, Blooms’ business did not prosper. Although it had agreed to pay rent for the land at $99,000 plus GST per annum, it could not pay rent at that level, and it never did.
[22] Jackeytown accepted that reality, and initially it only charged Blooms rent at the rate of $52,000 plus GST per annum. After 31 May 2013, that figure was increased to $58,000 plus GST per annum.
[23] Mr Gerald Haddon says that the reason Blooms could not pay the full rent was simply that its sales revenue was a lot lower than Mr and Mrs Moore had forecast. He says that Mr Moore acknowledged that to him in conversations the two had. Mr Moore put the lower revenues down to difficulties Blooms ran into in the Japanese export market for the nerines. Not many nerines were exported in 2014.
[24] Mr Gerald Haddon says that Blooms fell into default in meeting its rent obligations to Jackeytown, even at the reduced level, as early as May 2013. As at 31
August 2014, the rent shortfall was $66,940. No rent payments were made in the period between 23 June 2014 and 11 February 2015.
[25] Jackeytown in turn fell into default in meeting interest payments on the second mortgage to Hallwall and Mr Gerald Haddon’s family trust. By March 2014, Jackeytown had failed to make 11 of the monthly interest payments which were due. A formal notice was issued under s 119 of the Property Law Act 2007, calling on Jackeytown to remedy the defaults by 8 April 2014. If the defaults were not remedied by that date, the notice advised that all amounts secured by the mortgage would become payable, and the mortgagees would be entitled to exercise various rights, including their power to sell the land.
[26] Jackeytown failed to remedy the defaults, and Hallwall and Mr Gerald Haddon’s family trust put in train the steps necessary to sell the land by mortgagee sale. They started by obtaining an updated valuation of the land from
Mr Charles. This showed that the market value of the land had fallen to $770,000 as at 1 July 2014.
[27] Hallwall and the Gerald Haddon family trustees then arranged to sell the land by auction. The auction was scheduled for 21 August 2014, and a reserve price set at
$650,000. That sum would be sufficient to clear the debt owing to Hallwall and Mr Gerald Haddon’s family trust, as well as the first mortgage debt owing to the Haddon Trustees.
[28] The land was passed in at auction. The highest bid was only $360,000.
[29] No further attempts were made to sell the land, and Mr Gerald Haddon says that since the auction Jackeytown has made no further payments in reduction of the second mortgage debt. The balance owing on the second mortgage as at February
2015 was approximately $122,000.
[30] The debt of $500,000 owing to the Haddon Trustees on the first mortgage was originally due to be paid in one sum on 31 October 2015, on demand first being made by the Haddon Trustees. However, Jackeytown fell into arrears with its interest payments on this mortgage too, and by February 2014 there were interest arrears in excess of $16,800. The Haddon Trustees then issued their own notice under s 119 of the Property Law Act, detailing Jackeytown’s defaults and requiring that they be remedied by 8 April 2014, failing which all amounts secured by the first mortgage would become payable on demand.
[31] Jackeytown failed to respond to the Haddon Trustees’ Property Law Act
notice, and the defaults went unremedied.
[32] Mr Malcolm Haddon, a brother of Mr Gerald Haddon and one of the Haddon Trustees, gave evidence of a visit he made to the nursery immediately after the August 2014 auction. He spoke to Mr Moore in the course of his visit, and Mr Moore told him that in about two weeks’ time he would be pulling out some nerine bulbs and selling them to a Dutch company for $160,000. Mr Moore spoke about how he intended to make money from the nursery.
[33] Notwithstanding Mr Moore’s optimism, the Haddon Trustees never received any payment in reduction of the first mortgage debt.
[34] On 24 September 2014, the Haddon Trustees made formal demand on Jackeytown for the principal and interest owing on the first mortgage. When no payment was received, they issued their statutory demand under the Act and (when the demand was not met) filed their application to put Jackeytown into liquidation.
[35] Mr Gerald Haddon produced financial statements for Jackeytown for the year ended 31 March 2014. Substituting Mr Charles’ July 2014 market value of $770,000 for the land into the statement of financial position gives a net asset position of minus $393,387. That figure would be correspondingly worse if the figure of
$360,000 (the amount of the highest bid at the August 2014 auction) were substituted for the (historical cost) figure of approximately $1.1 million used in the statement of financial position.
[36] Mr Gerald Haddon also referred to a number of unsecured creditors of Jackeytown, including the Inland Revenue Department, the Manawatu District Council, and the Manawatu-Wanganui Regional Council. These debts were for relatively minor sums, totalling a little over $7,000.
[37] Mr McKenzie provided an affidavit in support of Moore Financial’s application for the appointment of an administrator. He confirmed that he has been the liquidator of Moore Financial since November 2012, and stated that Moore Financial’s only remaining asset is the debt of $450,000 owing by Jackeytown following the transfer of the land to Jackeytown in November 2012.
[38] Mr McKenzie expressed concern that if there is a liquidation of Jackeytown there is likely to be a forced sale of the land, and Moore Financial will recover nothing.
[39] Mr McKenzie acknowledged that Blooms has not been able to operate at a sufficient level to pay the demanded rent for the land. He attributed this to the “run down” state of the property. He expressed the view that Blooms needs several
seasons of operation to allow replanting and build up to peak production, and that time will be required to achieve full value for the land, and the best outcome for creditors (including Moore Financial). In his view that can be achieved if Jackeytown is placed in administration, giving the administrator the opportunity to maximise the value of Jackeytown’s assets over time.
Should an administrator be appointed?
Relevant statutory provisions
[40] Section 239L of the Act materially provides as follows:
239L Appointment by court
(1) The court may appoint an administrator on the application of a creditor, the liquidator (if the company is in liquidation), the FMA (if the company is a financial markets participant), or the Registrar.
(2) The court may appoint an administrator if—
(a) the court is satisfied that the company is or may become insolvent and that an administration is likely to result in a better return for the company's creditors and shareholders than would result from an immediate liquidation of the company; or
(b) it is just and equitable to do so.
[41] Section 239L forms part of Part 15A of the Act, which was introduced with effect from 1 November 2007. The objects of Part 15A are set out in s 239A as follows:
239A Objects of this Part
The objects of this Part are to provide for the business, property, and affairs of an insolvent company, or a company that may in the future become insolvent, to be administered in a way that—
(a) maximises the chances of the company, or as much as possible of its business, continuing in existence; or
(b) if it is not possible for the company or its business to continue in existence, results in a better return for the company's creditors and shareholders than would result from an immediate liquidation of the company.
[42] Under s 239U of the Act, an administrator is empowered to carry on the business and manage the property and affairs of the company. He or she is also empowered to terminate or dispose of all or part of the business, and may dispose of any part of the company’s property.
[43] Under s 239AE, the administrator is required to investigate the company’s affairs, and consider possible courses of action. Specific matters which the administrator must consider as soon as practicable after appointment, include the investigation of the company’s business, property, affairs, and financial circumstances. The administrator must then form an opinion as to whether it would be in the creditors’ interests for the company to execute a Deed of Company Arrangement, whether it would be in the creditors’ interests for the administration to end, or whether the creditors’ interests would be better served by the appointment of
a liquidator.1
[44] An administrator is required to call a number of meetings of creditors. The first such meeting is convened for the purpose of considering whether a committee of creditors should be appointed.2 That meeting must be held within 8 working days
after the date of commencement of the administration.3
[45] The second meeting which the administrator is required to convene, is a “watershed meeting”. A watershed meeting is the meeting at which the creditors vote to decide the future of the company, and in particular whether the company should enter into a Deed of Company Arrangement.4 The watershed meeting must be convened within 20 working days after the date on which the administrator is appointed.
[46] With the notice of the watershed meeting, the administrator is required to send to the creditors a report about the company’s business, property, affairs and financial circumstances, and any other matter material to the creditors’ decisions to
be considered at the meeting. The administrator is also to provide the creditors with
1 Companies Act 1993, 239AE.
2 Section 239AJ.
3 Section 239AN.
4 Section 239AS.
a statement setting out his or her opinion, with reasons, as to whether the administration should continue (and the company execute a Deed of Company Arrangement), or whether it would be in the creditors’ interests for the administration to end (and if so, whether the company should be put into liquidation).5 If the administrator recommends that the company enter into a Deed of Company Arrangement, the administrator must enclose a statement setting out the details of the proposed Deed.
[47] A Deed of Company Arrangement must provide for a number of matters. They are set out at s 239ACN, and they include the nature and duration of any moratorium period, the extent to which the company will be released from its debts, the conditions (if any) for the Deed to come into operation, and the circumstances in which the Deed will terminate. The Deed must also provide for the order in which the proceeds of realisation of the company’s property are to be distributed among creditors who are bound by the Deed, and the “cut-off day” (being the day on or before which creditors’ claims must have arisen if they are to be admissible under the
Deed).6
[48] If in the notice of the watershed meeting a Deed of Company Arrangement has been proposed, the creditors may resolve at the watershed meeting that the company execute a Deed of Company Arrangement specified in the resolution. Alternatively, they may resolve that the administration should end, or (unless the company is already in liquidation) resolve to appoint a liquidator.7
Counsel’s submissions
[49] In support of Moore Financial’s application for an appointment of an administrator, Mr Ryan points to the fact that, when the land was put up for sale at auction in August 2014, the highest bid was only $360,000. He submits that it is difficult to see how an immediate sale of the land by a liquidator could now achieve any significantly better outcome. If an immediate sale produced anything less than
$500,000, the Haddon Trustees would be out of pocket, and the second mortgagee
5 Companies Act 1993, s 239AU.
6 Section 239ACN.
7 Section 239ABA.
and Moore Financial would both receive nothing. He submits that if an immediate sale is undesirable, an administrator ought to be appointed (i) to investigate whether Blooms can continue trading and generate enough income to pay rent at a sufficient level to enable Jackeytown to pay interest under its mortgages and, (ii) to have an independent person collect rent and pay interest to the mortgagees.
[50] Mr Ryan submits that if at any time during the administration the administrator forms the view that continuing with the administration is not likely to result in a better return for Jackeytown’s creditors and shareholders than an immediate liquidation, then the administrator can apply for an order putting Jackeytown into liquidation. He submits that no one’s interests will be prejudiced by an administration, but everyone’s interests are likely to be improved by an administration: Jackeytown’s present position is “rock bottom”, and appointing an administrator cannot worsen the position. It is more likely to improve it.
[51] In support of his submissions, Mr Ryan referred to a number of High Court decisions. The first of them was the decision of Associate Judge Abbott in Icon Digital Entertainment Ltd v Westpac New Zealand Ltd.8 In that case, the Associate Judge accepted the following summary of the role of an administrator under pt 15A of the Act provided by counsel:9
In many respects, the role of an administrator is similar to that of a receiver, in that each would usually trade the business on, and look to sell or restructure the assets to provide for maximum return. The key distinction is that the administrator puts a restructuring proposal to all creditors, who then vote on it at the watershed meeting. The administrator is obliged to achieve the best result for creditors as a whole, whereas the receiver is primarily responsible to recover the secured creditor’s funds. The receiver is however obliged to have regard to other creditors’ and the company’s interests so the difference in terms of duties owed is perhaps not so marked.
[52] Mr Ryan also referred to the judgment of Associate Judge Doogue in
Strategic Options Ltd v Swordfish Lodge Management Ltd.10 In that case, the applicant Strategic applied for an order that the respondent (Swordfish) be placed in
8 Icon Digital Entertainment Ltd v Westpac New Zealand Ltd HC Auckland CIV-2007-404-
007124, 20 November 2007.
9 At [15(ii)].
10 Strategic Options Ltd v Swordfish Lodge Management Ltd HC Auckland CIV-2008-404-1017,
4 March 2008.
administration. Strategic owned a unit at the Gulf Harbour town centre at Whangapararoa, being one of 35 units in a complex known as the Gulf Harbour Lodge. The unit owners had purchased their units in a leased state, but had not been paid rent for quite some time. Swordfish was the lessee.
[53] Units at Gulf Harbour Lodge were individually let as part of a hotel business. All room payments were received by a lodge manager, whose evidence was that she paid them into Swordfish’s bank account. The manager had no control of the room payments after that, and no way to ensure that the individual unit owners were paid by Swordfish.
[54] The lodge employed staff, and it continued to trade. Strategic and supporting unit owners considered that if the trading operations were interrupted, it would take many weeks for the unit holders to find staff and take over the operation of the hotel. Essentially for those reasons, Strategic preferred the appointment of an administrator, who would take control of the hotel and investigate whether Swordfish could continue trading and/or whether the hotel operation could continue in one form or another. Strategic also argued that an administrator was required urgently, to ensure that the rents which were being collected “are being maintained”.
[55] Associate Judge Doogue was satisfied that Swordfish was or might become insolvent.11 However he considered the question of whether an administrator should be appointed under s 239L(2)(a) was not so straightforward. The Court did not have before it any up-to-date information about Swordfish’s financial position.12
[56] The Associate Judge noted the possibility that Swordfish was running at a loss. In that event, the Associate Judge considered it unlikely that an order would be made which would in effect perpetuate that state of affairs – such an order could not be justified in terms of s 239L(2)(a). On the other hand, the Associate Judge noted that the inference was open that Swordfish would not have continued to stay in
business if it were losing money.13
11 Strategic Options Ltd v Swordfish Lodge Management Ltd above n 10, at [18].
[57] The Associate Judge considered it legitimate to look at the expression “likely to result in a better return” as used in s 239L(2)(a) in broad way. He considered that the legislation should be applied on a reasonably liberal and benevolent way, in order to give effect to its objectives, including those set out in s 239A of the Act. The expression was not necessarily confined to receipt of income in the short term, and maintaining the business as a going concern, while the administrators exerted control, might well provide the opportunity for the administrators to reduce expenses and perhaps restructure the business, even closing down unprofitable parts of the operation. The Associate Judge granted the application, and appointed
administrators of Swordfish.14
[58] The third decision referred to by Mr Ryan was GBR Investments Ltd v Goose
Bay Ranch Holdings Ltd & Ors.15
[59] The defendant’s position in GBR Investments was that an order for administration was likely to achieve better prices on the critical sale of the company’s properties, as administration would provide for greater flexibility (including possible share sales) and might leave in place arrangements between the current shareholders and the company. Associate Judge Gendall accepted that liquidation “must always be a last resort”, but held on the facts of the case that
administration under pt 15A was not appropriate.16
[60] The Associate Judge noted that all parties accepted that there was no chance that the company and its business could continue in existence.17 Nor was a sale of shares in the company considered to be a realistic possibility.
[61] The defendants in GBR Investments ran the same argument which Mr Ryan runs in this case, namely that there was a “strong likelihood” of substantially reduced values being achieved for the sale of the company’s assets if they were sold on a forced liquidation sale basis, rather than in the course of a statutory administration
under p 15A of the Act. The Associate Judge noted that that submission was not
14 Strategic Options Ltd v Swordfish Lodge Management Ltd above n 10, at [22]-[24].
15 GBR Investments Ltd v Goose Bay Ranch Holdings Ltd & Ors HC Christchurch CIV-2009-409-
613, 27 November 2009.
supported by any evidence, and accordingly was not a strong factor mitigating against the making of a liquidation order.18
[62] Associate Judge Gendall noted that the duty of any liquidator is to obtain the best possible price for the company assets,19 and referred to the evidence of an experienced company liquidator that, on occasion, sales of particular properties by liquidators have exceed valuations, or achieved better than expected results. Liquidation sales are often advertised as such, and that can attract a wider variety of buyers, all seeking a bargain and thus encouraging competition.20 The Associate Judge could see no reason why a liquidator might arrange a sale of the company’s properties in anything other than an orderly and measured way: he was not convinced that selling the properties by way of voluntary administration was likely to lead to better prices.21
[63] A telling factor in favour of the liquidation order that was made in GBR Investments was that the appointment of a liquidator would facilitate a thorough and independent investigation of the company’s affairs.22 The Associate Judge also referred to the serious breakdown in the relationship between the shareholders, and considered that any remedy other than liquidation would not be realistic.23
Discussion and conclusions
[64] In his affidavit, Mr Moore says that by giving Blooms sufficient time to become profitable, “the mortgagee will receive interest on their mortgage”. While no financial statements for Blooms were produced in evidence, it seems clear from that statement that Blooms was not operating profitably at the date the affidavit was sworn (23 January 2015).
[65] It is fairly clear that, at least without a substantial injection of capital, Blooms is unable to pay the rent payable under its lease. Even at the reduced rent figure of
approximately $55,000 plus GST per annum there are question marks over Blooms’
18 GBR Investments Ltd v Goose Bay Ranch Holdings Ltd & Ors above n 15 at [85].
19 At [86].
20 At [87].
21 At [89].
ability to pay. I note that in his valuation report dated 30 June 2014, Mr Charles noted that a statement of financial performance for Blooms which he had been shown highlighted “a gross turnover well below earlier expectations. After due allowance for fixed costs, variable costs, a return on plant and equipment and manager’s salary, little monies are available for rental”.
[66] Financial statements for Jackeytown as at 31 March 2014 were produced in evidence. They show that Jackeytown made a small net loss in that year. Its only income was rent, presumably paid by Blooms under its lease of the land.
[67] The principal problem appears to be that neither Jackeytown nor Blooms has apparently been able or willing to fund the capital expenditure on the land which is necessary to increase the area of land in production, and thus increase revenue. Under cl 47 of the lease, all development expenditure was to be borne by Blooms, but it appears that that has not been done. At the date of his June 2014 report, Mr Charles estimated that there was approximately $125,000-$130,000 of expenditure required to reinstate parts of the land which had been subject to storm damage, let alone bring more of the land into production. There may be an issue over whether the costs of necessary repairs following the storm should have been covered by insurance taken out by Jackeytown as lessor, or if no insurance was taken out, paid for by Jackeytown. But in the present context the issue of liability as between Jackeytown and Blooms appears to be academic: neither appears to have had sufficient funds to reinstate the damaged plant on the land, and get the land up to full productivity.
[68] Mr Moore complains that Mr Gerald Haddon failed to introduce a sufficient number of investors, and/or source sufficient capital, at the time Jackeytown purchased the land back in 2012. But it seems clear that Jackeytown, then controlled by Mr and Mrs Moore elected to proceed with the transaction with full knowledge of the level of outside investment in the venture. They were apparently sufficiently confident in their business plan that they regarded the project as still viable, notwithstanding that Moore Financial would have to leave in $450,000 of the purchase price.
[69] In his 30 June 2014 valuation report, Mr Charles noted that the continued horticultural use on the land was heavily dependent on the gross turnover from sales. He observed that “in the event this continues to struggle then the ability for the operator to cope with the payment of rental and all outgoings as noted under the lease will be severely threatened”. In the course of his report, Mr Charles recommended that Blooms “refocus upon sales within the New Zealand market for the stock currently on hand”.
[70] Neither Jackeytown nor Moore Financial has produced up-to-date evidence of the financial position of Blooms, or anything to suggest that its business operations on the land are viable without a substantial injection of capital (which it is apparently unable to provide). In those circumstances, I do not believe that there is sufficient evidence for me to be satisfied that placing Jackeytown in administration is likely to result in a better return for creditors and shareholders than would result from an immediate liquidation. Indeed, it seems that further delay in bringing matters to a head may make matters worse.
[71] In considering the “broad, reasonably liberal” approach adopted by Associate Judge Doogue in Strategic Options Ltd, I bear in mind that Jackeytown’s only activity appears to be the leasing of the land and receiving rental income from it. It does not appear to have any employees, or carry on any other trading activities. This is not, then, the sort of case where a moratorium on the payment of its debts (or similar financial relief), would give the company a chance to “turn the corner”. Those sorts of considerations might have been relevant if the company in question were Blooms, which is a trading entity whose fortunes might conceivably fluctuate for the better, but I am not here concerned with Blooms. The question is whether an administrator should be appointed for Jackeytown.
[72] The argument for the appointment of an administrator of Jackeytown seems to me to be entirely dependent on the possibility that Blooms may achieve an improvement in profitability, and therefore be in a position to pay at least a market rent for the land (if not the $99,000 per annum figure provided for in the lease). If Blooms could pay a higher rent (and perhaps contribute to some of the necessary capital outlays which have to be made on the land), and the argument is that the
value of the land would increase, and there would be a better outcome for creditors. But in the absence of evidence of Blooms’ financial position and trading prospects, all of that seems to me to be no more than speculation.
[73] Nor can I accept Mr Ryan’s submission that Jackeytown is now in a “rock bottom” position, from which things can only get better. Blooms has now had several years of apparently unprofitable trading. In the absence of some concrete evidence that that state of affairs has changed or is about to change, I cannot be sure that the value of the land will not drop as the lack of repairs to damaged structures on the land, and the likelihood of inadequate expenditure on maintenance and development, render the land less attractive to prospective buyers. In those circumstances, there is no basis in the evidence before me on which I could conclude that further delay while an administrator is appointed and considers the position is likely to result in a better return for creditors than the alternative of accepting the apparent reality (an insolvent or marginally solvent tenant on the land, with no evidence of likely improvement in its fortunes) and bringing matters to a head by appointing a liquidator.
[74] Mr Ryan submits that a liquidation order is unlikely to achieve a better result than the unsuccessful attempt to sell the land at auction in August 2014. But there is no evidence of that, nor any evidence that liquidators would be likely to sell immediately. The liquidators will presumably look at the best means of realisation of Jackeytown’s assets, and that may require as a first step the recovery of the unpaid rent from Blooms (and/or from Mr and Mrs Moore as guarantors of Blooms’ liability), and the securing of a viable lease of the land. Those will be considerations for the liquidators when appointed, and it is not for the Court to direct them how to discharge their responsibilities on hearing this application. It is enough to conclude, as I do, that it is by no means certain that the appointment of a liquidator would result in an immediate sale of the land on an “as is where is” basis.
[75] In GBR Investments Ltd, the Associate Judge noted that he could see no reason why a liquidator might arrange a sale of the company’s properties in anything other than an orderly and measured way: he was not convinced that selling the relevant properties in the course of an administration under pt 15A was likely to lead
to better prices. I think the same consideration applies in this case – the very limited evidence does not justify a conclusion that there would be a better realisation for creditors if the land were to be sold (at some point) by an administrator, than if the sale were in the hands of liquidators.
[76] On the question of what benefits the appointment of an administrator might bring, Mr Ryan submits that an administrator would investigate the profitability of Blooms, and in particular its ability to continue trading and generate enough income to pay rent that would enable Jackeytown to pay interest under its mortgages for the time being. An administrator would also be an independent person to collect rent and pay interest to the mortgagees for the time being. But it seems to me that something more than those claimed benefits would be necessary for me to be satisfied, now, that an administration would be likely to result in a better return for Jackeytown’s creditors than they would get on an immediate liquidation.
[77] Mr Ryan’s relies on the decision of Associate Judge Doogue in Strategic Options Ltd, but I think that case was very different from the present. In Strategic Options Ltd, Strategic and the supporting unit owners were concerned that if the trading operations were interrupted, it would take many weeks for unit holders to find staff and take over the operation of the hotel. The Associate Judge noted that maintaining the business as a going concern, while the administrator exerted control, might well provide the opportunity to reduce expenses and perhaps restructure the business even closing down unprofitable parts of the operation. None of those considerations applies in this case, where Jackeytown’s only business involves the receipt of rent income from the land and there is little scope for any restructuring of its operations. Nor does the possibility of the situation worsening appear to have been a significant factor in Strategic Options Ltd, where Associate Judge Doogue noted that it was unlikely that an order would have been made under s 239L if the effect of the order would be to perpetuate a loss-making state of affairs.
[78] Finally, I accept Mr Sheppard’s submission that the appointment of an administrator to Jackeytown will achieve nothing unless the creditors are able to reach agreement at the watershed meeting on the terms of a Deed of Company Arrangement. The Haddon Trustees, Mr Gerald Haddon’s family trust, and Hallwall
all appear likely to oppose any such Deed, and with debts in excess of $600,000, it appears that they have the ability to ensure that no resolution by Jackeytown’s creditors to enter into a Deed of Company Arrangement would be passed. Under s 239AK of the Act, a creditors’ resolution requires the support of a majority in number representing 75 per cent in value of the creditors voting in person or by proxy or by postal vote. The financial statements for Jackeytown as at
31 March 2014 show total liabilities of $1,176,703, so the first and second mortgagees between them would appear to have the voting power to ensure that the “75 per cent in value” voting threshold for passing a resolution at the watershed meeting would not be met.24
[79] If a resolution that Jackeytown enter into a Deed of Company Arrangement were defeated at the watershed meeting, the administration would end, and nothing would have been achieved.
[80] Weighing it all up, I conclude that this is not a proper case for the appointment of an administrator. I am not satisfied that circumstances exist which would permit me to make an appointment under s 239L(2)(a) of the Act, and no basis has been put forward on which I could reasonably find that it would be just and equitable to appoint an administrator for some other reason. Accordingly, the application by Moore Financial to appoint an administrator of Jackeytown is refused.
[81] Costs are awarded to the Haddon Trustees against Moore Financial on its application for appointment of an administrator on a 2B basis, with disbursements as fixed by the registrar.
[82] Mr Ryan acknowledges that if the application to appoint an administrator is not granted, a liquidation order should be made. Mr Sheppard has provided a form of consent to appointment as liquidators signed by Mr Brent Dickens and Mr Hamish Pride. However, I have not been provided with any details of their
qualifications and experience as liquidators, or of the proposed rates at which their
24 Part 15A does not make any distinction between secured creditors and unsecured creditors when it comes to creditors’ meetings and the decisions that may be made at them. Secured creditors may vote at creditors’ meetings in respect of their whole debt, and make a claim without forfeiting their security: see Brookers, Companies and Securities Law (looselead ed, Brooker) at [CA239C.02(2)].
services will be charged if they are appointed. The application for an order putting
Jackeytown into liquidation will accordingly be adjourned to 10am on 26 March
2015, for consideration of who is to be appointed liquidator. The Haddon Trustees are to file an affidavit setting out particulars of the experience and qualifications of Messrs Dickens and Pride, and their proposed charge-out rates, not later than 2 working days before the call on 26 March 2015.
Associate Judge Smith
Solicitors:
Fitzherbert Rowe, Palmerston North for Plaintiffs in proceeding CIV-2014-454-132
M B Ryan, Palmerston North for Defendant in proceeding CIV-2014-454-132 and Plaintiff in
proceeding CIV-2015-454-12
0
0
0