Harnish v Whittfield
[2018] NZHC 2791
•29 October 2018
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2018-404-1177 [2018] NZHC 2791
BETWEEN OWEN CECIL ERIC HARNISH
Applicant
AND
JOHN TREVOR WHITTFIELD Respondent
Hearing: 19 September 2018 Appearances:
J A Browne for the Applicant
S J Nicolson for the RespondentJudgment:
29 October 2018
JUDGMENT OF ASSOCIATE JUDGE SMITH
This judgment was delivered by me on 29 October 2018 at 3,00pm, pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Solicitors / Counsel:
Henderson Reeves Connell Rishworth, Whangarei
Lowndes Jordan, Auckland
HARNISH v WHITTFIELD [2018] NZHC 2791 [29 October 2018]
[1] The respondent, Mr Whittfield (the liquidator), is the liquidator of a company called Whitford Properties Limited (in liquidation) (Whitford). The liquidator was appointed liquidator by resolution of Whitford's shareholders, on 17 September 2014.
[2] The applicant, Mr Harnish, was then a director of, and shareholder in, Whitford. He signed the shareholders' resolution appointing Mr Whittfield liquidator of Whitford.
[3] Mr Harnish now applies for orders under s 256(1)(a)(ii) of the Companies Act
1993 (the Act) directing that the liquidator provide him with copies of the following documents:
(a) all creditors' claim forms; and
(b) all information supporting creditors' claim forms; and
(c) all correspondence between the liquidator and creditors.
[4] Mr Harnish says that he is prepared to pay the liquidator's reasonable costs of providing access to the documents, and that he is content for any privileged material to be redacted or removed.
[5] The liquidator opposes the application. He says:
(a)Mr Harnish has shown no good reason why he should be given leave to inspect or take copies of the documents he seeks;
(b)granting Mr Harnish leave to inspect or take copies of the documents would be likely to cause prejudice to the liquidation, to creditors, and to others; and
(c) the interests of justice favour the liquidator.
[6] The liquidator says that the documents in category (a) in paragraph [3] above comprise 16 sides of paper. The information supporting the creditors' claims (category
(b)) is in three lever arch files. Documents in category (c) are not separately filed. The liquidator says that they would need to be collated from more than two dozen boxes of hard copy files, and also from electronic records. Counsel for Mr Harnish has advised that he is only seeking correspondence in category (c) that concerns creditors' claims, but the liquidator says half of the creditors have other connections with the liquidation (eg as debtors, officers of Whitford, or advisors of Whitford), so if the Court directed that copies were to be provided, an exercise would need to be undertaken to isolate the documents that properly fall into category (c).
[7] Section 256 of the Act materially provides:
256 Duties in relation to accounts
(1) Subject to subsection (2), the liquidator of a company must—
(a)keep accounts and records of the liquidation and permit those accounts and records, and the accounts and records in the company, to be inspected by—
(i) any liquidation committee appointed under section
314, unless the liquidator believes on reasonable grounds that inspection would be prejudicial to the liquidation; and
(ii) if the court so orders, a creditor or shareholder; and
…
[8] No liquidation committee has been appointed in this case.
Background
[9] Mr Harnish acquired a 50 per cent shareholding in Whitford at a public auction held by the sheriff of this Court on 15 March 2014. The shares had been owned by a
Mr Robert Bruce, who owed money to Mr Harnish. Mr Bruce defaulted on the terms of the loan from Mr Harnish, and Mr Harnish obtained judgments in this Court against
Mr Bruce totalling approximately $1.7 million. Mr Harnish moved to enforce his judgments, resulting in the auction just referred to. He says that the Whitford shares were transferred to him on 1 April 2014.
[10] At that time, the remaining shares in Whitford were owned jointly by
Mr Wayne Allen and Mrs Amanda Allen. Mr Harnish became a director of Whitford, with Mr Allen.
[11] Whitford owned valuable land south of Auckland (the property) on which was secured a debt of around $8.5 million to the ANZ Bank (the bank). Whitford defaulted on its debt to the bank, and the bank, acting under its mortgage, put the property up for tender. The effect of a complex series of events that followed was that, eventually, in July of 2014, Mr Bruce (who had guaranteed Whitford's loan from the bank) redeemed the bank mortgage over the property. The cash required to do that was provided by Coumat Limited (Coumat), a company owned or controlled by a Mr Greg Hayhow, on the basis that Coumat would become the owner of the property. The consideration to be provided by Coumat was $10,014,956, comprising the amount required to redeem the bank's mortgage ($7,454,902), extinguishment of a debt of
$1,310,054 owed by Mr Bruce to Mr Hayhow, and the repayment to Mr Hayhow of
$1.25 million (the amount of a deposit Mr Hayhow had funded on an earlier agreement to buy the property from the bank, which deposit had been forfeited to the bank when the purchaser under the earlier agreement failed to complete the transaction).
[12] The transaction was settled on 4 August 2014, when Mr Bruce (having taken an assignment of the bank's mortgage) sold the property to Coumat.
[13] Whitford received nothing from the sale of the property to Coumat, and it did not accept that outcome. It issued a proceeding in this Court against Mr Bruce, Coumat, and Mr Hayhow in relation to the sale (the Coumat proceeding). It claimed that the amounts of the forfeited deposit ($1.25 million) and the extinguished Hayhow/Bruce loan ($1,310,054) should not have been credited against the purchase price payable by Coumat for the property, and that Mr Bruce as mortgagee had acted in breach of trust and in breach of his obligations under s 185 of the Property Law Act
2007 (the PLA) to pay any surplus on the sale to Whitford as mortgagor. Whitford contended that Coumat and Mr Hayhow were liable as knowing assistors of
Mr Bruce's alleged breach of trust.
[14] Following his appointment, the liquidator elected to continue the Coumat proceeding.
[15] Duffy J gave judgment for Whitford in the Coumat proceeding on 4 April
2017,1 for the sum of $2,569,054 together with interest.
[16] The defendants appealed to the Court of Appeal. The appeal was dismissed by the Court of Appeal on 16 February 2018.2 By the time the appeal was dismissed, Coumat Limited, Mr Bruce, and Mr Hayhow owed a total of approximately
$4 million. The amount owing was paid to the liquidator on 7 March 2018.
[17] While Mr Harnish has noted in this case that Coumat sold the property to a third party in late 2016 for around $22 million,3 it was common ground in the Coumat proceeding (both before Duffy J and in the Court of Appeal) that the price of
$10,014,956 agreed by Coumat in 2014 represented the reasonable market value of the property at the time.
[18] In May of this year, Whitford commenced a further civil proceeding in this Court against Coumat and Mr Hayhow4 (the summary judgment proceeding). In response to the summary judgment proceeding, Coumat and Mr Hayhow have filed a notice of opposition and affidavits, and have also filed a counterclaim. They have also filed their own application seeking summary judgment against Whitford and an order striking out the summary judgment proceeding. The summary judgment/strike-out arguments are scheduled to be heard on 22 November 2018.
Mr Harnish's concerns with the liquidation and his grounds for seeking the order under s 256 of the Act
[19] Mr Harnish's ultimate interest is to do what he can to see that the value of his shares in Whitford is not eroded or extinguished, particularly by the admission of any creditors' claims in the liquidation that should not be admitted. Having effectively paid $1.7 million for his shares around six months prior to the liquidation, he considers
1 Whitford Properties Ltd (in liq) v Bruce [2017] NZHC 625.
2 Coumat Ltd v Whitford Properties Ltd [2018] NZCA 15.
3 Noted by the Court of Appeal at [66].
4 CIV-2018-404-1053.
that he has a proper interest in the outcome of the liquidation. To that end he has from time to time sought information from the liquidator. He now wishes to review the creditors' claims, on the basis (as Mr Browne put it in his submissions) that anything
Mr Harnish thinks would be of use would be passed on to the liquidator.
[20] Mr Harnish's criticisms of Mr Whittfield's conduct of the liquidation go back almost to the beginning. Mr Whittfield issued his first liquidator's report on
24 September 2014. Appendix B to the report listed "known creditors and their addresses", and it included Accident Compensation Corporation and New Zealand Customs. It is common ground that they were wrongly included in the list of creditors: neither is or was a creditor of Whitford.
[21] Secondly, Mr Harnish alleges that the liquidator misled him over when the High Court trial of the Coumat proceeding was due to commence. Mr Harnish says that on 29 June 2016 he rang the liquidator seeking an update, and the liquidator told him that the trial was going to begin in October. In fact, the trial was due to commence on 8 August 2016.
[22] The third area of concern identified by Mr Harnish was the liquidator's decision to re-advertise for claims. The liquidator initially fixed 24 October 2014 as the date by which creditors were to make their claims and establish any priority their claims might have under s 312 of the Act.
[23] Having recovered over $4 million in the proceeding against Mr Bruce, Coumat and Mr Hayhow, on 7 March 2018 the liquidator elected to publish a further advertisement calling upon creditors to lodge claims. That was done on 16 March
2018, and a new claims deadline was set for 30 March 2018.
[24] As at 31 March 2017, when the liquidator issued his sixth report, only five claims from creditors had been received (four unsecured creditors with claims totalling
$39,875.22, and one secured creditor (Mr Bruce) with a claim of approximately
$1.5 million). Mr Bruce's claim had been rejected by the liquidator. After the liquidator re-advertised the claims, a total of five additional claims were lodged, with claimed debts totalling $3,965,000. That brought to 10 the number of creditors' claims
lodged with the liquidator. The liquidator summarised them in the following schedule
attached to his affidavit:
Claim Rounded value Claim type Claim Status Original Claims A $150 Unsecured
Not preferential
Provisionally approved but as yet unpaid B $1,500,000 Unsecured (but ambiguous) Preferential Rejected C $3,000 Unsecured Provisionally approved but as yet unpaid D $20,000 Unsecured Queried as to part E $25,000 Secured Challenged and withdrawn Subsequent claims (after re-advertisement) F $100,000 Unsecured Rejected G $15,000 Unsecured Queried H $1,000,000 Not stated Under query – supporting documents recently provided I $2,800,000 Unsecured Under query – voluminous supporting documents recently provided J $50,000 Secured but recently surrendered pursuant to s.305(9) of the Act Under query
[25] Mr Harnish contends that the liquidator acted wrongly in providing a further opportunity for creditors to lodge claims.
[26] Fourthly, Mr Harnish is concerned at the reasons for the (roughly) 100-fold increase in the value of unsecured creditors' claims (from under $40,000 following the first advertisement for claims, to over $4 million following the March 2018 advertisement). He says that the two largest claims lodged after the re-advertisement,
totalling $3.8 million, could have been expected to have been lodged soon after
Whitford went into liquidation if they were genuine claims.
[27] Fifthly, Mr Harnish alleges that the liquidator has adopted inconsistent positions. He says that on the one hand the liquidator is now holding over $3 million in cash, and has only accepted $30,000 worth of claims, while on the other hand (and within days of re-advertising for more creditors, and before the 30 March 2018 amended claims deadline had passed) was telling people that there would be no recovery for shareholders. That could only have been the case if the liquidator had already decided in favour of the two large recent claims.
[28] Sixthly, Mr Harnish refers to a rumoured attempt to strip money from Whitford in favour of a company called Whitford Green Limited (Whitford Green). Mr Harnish referred to a "fourth unsecured creditor which is said to be owed around $4 million", who emerged following the second advertisement for claims. He said that the liquidator had not identified this creditor or the basis of their claim, but it had been suggested to him that the creditor was a group of Chinese investors who had allegedly put money into Whitford. Mr Harnish said that his understanding, derived from a May
2018 conversation with Mr Bruce, was that the Chinese investors did not put their money into Whitford but into Whitford Green (an entirely separate company).
[29] Mr Browne acknowledged in his submissions that these suggestions were hearsay and lacking in documentary support, but submitted that such an attempt to claim from Whitford would be consistent with the fact that the liquidator has found many of the claims to be either unjustified or wanting (over $1.6 million worth of claims have already been rejected, including Mr Bruce's claim for $1.5 million).
[30] Seventhly, Mr Harnish says that he has been kept in the dark over the conduct of the liquidation generally. Statutory reports have not been sent to him, and it was not acceptable that Mr Harnish had to obtain copies through his lawyers (who had to chase the liquidator for them). Calls he made to the liquidator were not returned.
[31] Eighthly, Mr Harnish is concerned at the attitude the liquidator has taken to his application for access to Whitford's documents. He says that the liquidator previously
advised him that he would abide the Court's decision in relation to the application, but the application is now opposed. The liquidator has not explained the "about face".
[32] In support of his case for access to the documents he seeks, Mr Harnish points out that before Whitford was put into liquidation, he was a director of Whitford and as such entitled to know exactly who the creditors of Whitford were. He was entitled to see all documents and correspondence with creditors regarding their claims — no question of privacy or confidentiality could have arisen. Mr Harnish is not a creditor of Whitford, or a commercial competitor of the company. He is a shareholder who is now retired, and lives in another part of the country.
[33] Mr Harnish says that he is not an "officious creditor" looking to second guess the liquidator's decisions, and he is willing to spend his own time and money to investigate the genuineness of the claimed debts. Giving him the access to documents he seeks will not hinder or delay the liquidation.
The liquidator's evidence
Appointment as liquidator
[34] The liquidator is an experienced insolvency practitioner, who was a partner of
McDonald Vague, Insolvency Practitioners between 2002 and 2010.
[35] In September 2014 the liquidator was approached by Mr Michael Black, barrister, to accept appointment as liquidator of Whitford. Mr Black told him about the Coumat proceeding, indicating that the Coumat proceeding involved a complex series of land transactions and that the directors and shareholders wished to continue with it. The liquidator's consent would be necessary for that to occur if Whitford was placed in liquidation.
[36] A meeting was convened in Mr Black's chambers in September 2014, and
Mr Allen and Mr Harnish were present, along with a number of solicitors. The liquidator had never previously spoken to Mr Allen or Mr Harnish, nor had any dealings with them. As a result of the discussions at the meeting, the shareholders resolved to place Whitford into liquidation.
The steps taken by the liquidator since his appointment
[37] While the Coumat proceeding was going through the High Court and the Court of Appeal, Whitford had no liquid assets of value. As the liquidator put it, the liquidation was in a holding pattern while it was not known whether there would be any funds for distribution to creditors. During this period, the liquidator carried out a number of liquidator's ordinary functions, including investigating Whitford's assets and liabilities and recovering its accounting records from two accountancy firms. In addition, he considered and rejected Mr Bruce's $1.5 million claim referred to above.
[38] While only four unsecured creditors' claims totalling $39,875.22 were lodged following the first advertisement for claims, the liquidator became aware of further creditors' claims which would be presented if Whitford recovered funds in the Coumat proceeding.
[39] Of the total creditors' claims, the liquidator noted that approximately
$3,885,000 worth of them remain under active review. There is no single claim for
$4 million as Mr Harnish appears to have believed.
[40] The liquidator said that he is presently in the information-gathering stage. He has received a large volume of information in support of one of the claims in response to a request he had made, but had not yet had time to review the material. Further information requests are outstanding on four other claims. The liquidator is also making demands on debtors of Whitford, with a total debt value of $1.5 million. Some debtors are also creditors. The liquidator said that he expected that formal recovery proceedings would be necessary in some cases.
[41] The liquidator also wrote to Mr Gilbert, who had purportedly been appointed receiver of Whitford by Mr Bruce in August 2014. The liquidator considered Whitford did not owe any money to Mr Bruce, and on that basis he challenged the validity of
Mr Gilbert's appointment.
[42] In addition to those activities, the liquidator gave evidence of "other significant items of business" in Whitford's liquidation, which he did not identify. He said that to describe these items would be to prejudice the conduct of the liquidation, including
jeopardising commercial strategies and legal privilege, and matters that are before the
Court.
The liquidator's objections to disclosing information about creditors' claims to
Mr Harnish
[43] The liquidator referred generally to concerns about commercial sensitivity and creditors' privacy, and also expressed the view that collating and distributing the sort of information Mr Harnish is asking for can be burdensome and disruptive to a liquidator (by way of example, on the $2.8 million creditor's claim, the liquidator has received 163 supporting documents which he had not yet had time to review). And there would be difficulties in providing Mr Harnish with all correspondence with creditors. To determine which documents fall into which category, he would need to review his full files and those of Whitford's various solicitors, over a four year period. There would be hundreds of emails and two dozen-plus boxes of files to review. The exercise would be complicated by the fact that many of the creditors have other roles in the liquidation, and some of the documents have been obtained through discovery in the Coumat proceeding and are accordingly subject to publication restrictions.
[44] In addition to those general concerns, he considers that, at least in some cases, disclosing the claims information to Mr Harnish would be prejudicial to the efficient and effective conduct of the liquidation. He said he was constrained in fully expressing his concerns, as to do so would reveal particular information which he believes to be sensitive. Subject to that reservation, he expressed the view that it is prudent for liquidators to assess claims in the right order, and as far as possible, while claimants are unaware of each other's claims. Claims can be presented by more than one party simultaneously when in truth only one of them (or neither) has a right to recover. The liquidator said that this may be such a case, but he needs time to investigate further. In the meantime, he is concerned that, if he had the documents he seeks, Mr Harnish could contact creditors while the liquidator is still trying to gather information from them and assess claims. That could prejudice the information gathering.
[45] Next, the liquidator said that, in some cases, the Whitford creditor is a person with whom Mr Harnish has had a disharmonious relationship, and/or who has claims
in relation to Mr Harnish. And in at least one case the Whitford creditor information contains privileged material which may need to be redacted.
[46] A further point made by the liquidator was that allowing Mr Harnish the opportunity to effectively peer review his claims assessments would make him feel constrained from making distributions to creditors.
[47] Finally, the liquidator pointed out that his interests and those of Mr Harnish are not identical — the liquidator's obligation is to make a proper and dispassionate assessment and value of creditors' claims, while Mr Harnish's interest is clearly in minimising the number of claims that are accepted.
Response to Mr Harnish's concerns over the conduct of the liquidation
[48] First, the liquidator acknowledged including Accident Compensation Corporation and NZ Customs in the list of creditors forming part of his first report. He explained that it is his normal procedure when acting as liquidator to issue his first report to those Government organisations and the Inland Revenue Department, seeking enquiry if there are any liabilities owed to them.
[49] The liquidator denied keeping Mr Harnish in the dark about the Coumat proceeding or the liquidation generally. He said that he had communicated often with
Mr Harnish and his legal advisers, and Mr Black also spoke on a number of times with
Mr Harnish's lawyers. Also, Mr Harnish moved from the Howick property where he was residing, and did not provide the liquidator with a new address.
[50] The liquidator said that he received a call in October 2017 from a solicitor acting for Mr Harnish. The solicitor asked to be kept up to date on the progress with the liquidation. The liquidator then emailed the solicitor a copy of his seventh six-monthly liquidator's report, saying: "Please forward this on to [Mr Harnish] as I don't have his current address".
[51] The liquidator said that he spoke with Mr Harnish directly by telephone at least half a dozen times, including in October, November, and December of 2014. After that, the contact was mainly through legal counsel. He said that Mr Harnish often
called him during the Coumat proceeding, asking for updates on the Court timetabling. He said that he did his best to answer Mr Harnish's queries, but the dates for various hearings and the trial were adjourned from time to time, meaning that he could not always give Mr Harnish a definitive answer.
[52] The liquidator denied failing to send Mr Harnish any liquidator's report. He referred to the seventh report, that was sent to Mr Harnish's lawyer. He also noted that the reports are publicly available documents, which can be read on the Companies Office website. Mr Harnish was legally represented throughout, and the liquidator did not have a postal address for Mr Harnish (he said that he now has one).
[53] On the issue of misleading Mr Harnish over the date for the start of the trial in the Coumat proceeding, the liquidator said that he had been back through his records to see if he could make sense of the assertion. He said that the trial date had been set down since October 2015, and briefs of evidence and submissions had been filed. He said that he was certain that if Mr Harnish had called him and asked him about an important date such as a trial date, he would have answered him honestly and to the best of his knowledge. He noted that Mr Bruce made a very late application to adjourn the trial,5 and he wondered whether Mr Harnish might have called him during the period after Mr Bruce had made his adjournment application but before it had been dealt with.
[54] On the issue of re-advertising for claims, the liquidator repeated the point that he had been aware for some time that there were other Whitford creditors waiting for Whitford to receive funds before presenting their claims. Had Whitford not succeeded in the Coumat proceeding, they may never have bothered to lodge the claims, as returns would have been unlikely.
[55] The liquidator also referred to his duties to protect the rights of unsecured creditors, and to ensure that creditors of the same class rank equally in distributions. He expressed the view that it would have been a breach of his duties if he had made a final distribution to creditors in the initial group, in the full knowledge that there were other creditors who had yet to come forward.
5 Dismissed by Gilbert J on 4 August 2017.
[56] On the Whitford Green issue, the liquidator noted Mr Harnish's belief that the sole Whitford creditor was a group of Chinese investors who made no investment into Whitford and instead invested in Whitford Green. The liquidator said that Mr Harnish is incorrect about that, and he did not consider Mr Harnish was appropriately placed to second guess the review of creditors' claims the liquidator is conducting. However, if Mr Harnish believes that he has information which should be considered by the liquidator he is most welcome to provide it.
[57] The liquidator said that he would do his upmost to critically test the validity of all claims, and that he is in the midst of carrying out that work. But he wants to gather the further information from creditors and assess the claims without outside influence. His files contain commercially sensitive and/or privileged documents which he has not yet reviewed, and it would be disruptive, costly and time consuming to compile the information sought.
The evidence of Mr Black
[58] Mr Black provided a short affidavit describing the appointment of the liquidator, ongoing updates provided to Mr Harnish, and Whitford's current litigation.
[59] On the liquidator's appointment, Mr Black said that it was he who recommended Mr Whittfield as a potential liquidator. He described the meeting of Whitford shareholders, held at his Chambers, which led to the liquidator's appointment. Mr Harnish was present at the meeting, and was also represented by counsel, Mr Endean.
[60] Mr Black said that he had a number of discussions with Mr Endean in the course of the Coumat proceeding. He estimated the number of telephone calls as at least four or five, always initiated by Mr Endean. Generally, Mr Black would explain the stage the Coumat proceeding had reached. Mr Black acted as counsel for Whitford in the Coumat proceeding, and he recalled the late application made by Mr Bruce for an adjournment of the trial. The adjournment application was opposed by Mr Black on behalf of Whitford, and he said that it may have been mentioned to Mr Endean — he could not recall. The trial had originally been scheduled to start on 8 August 2016, but Mr Bruce applied to adjourn it on 2 August 2016. Mr Black's recollection was that
an alternative late-October start date may have been discussed, but ultimately the adjournment application was refused and the trial proceeded as scheduled.
[61] Mr Black described a lengthy discussion with Mr Endean on 23 August 2016.
Mr Black relayed to Mr Endean relevant details about the trial in the Coumat proceeding, and told Mr Endean that the parties were awaiting a reserved judgment.
Mr Black said it was apparent from the discussion that the only prospect of any recovery for Whitford creditors was going to be from a favourable judgment in the Coumat proceeding and its successful enforcement. Mr Black's belief was that the likelihood of an appeal against any successful judgment was also discussed with
Mr Endean.
[62] Mr Black's recollection was that, once the judgment was issued in the Coumat proceeding, he sent or referred it to Mr Endean.
[63] Mr Black said that he has been retained to act as counsel for Whitford in the summary judgment proceeding, which he confirmed as being allocated a hearing date for 22 November 2018.
Reply evidence for Mr Harnish
Mr Harnish's reply affidavit
[64] Mr Harnish first expressed displeasure at the fact that his application under s 256 of the Act is being opposed. He referred to a letter dated 13 June 2018 from the liquidator's solicitors, in which they advised that the liquidator would not oppose an application for access to the category (a) documents (list of Whitford creditors and creditors' claim forms). Mr Harnish said that he partially relied on that letter in filing his application, and he has not received any explanation as to why the liquidator has changed his position.
[65] On the question of the liquidator's appointment, Mr Harnish said that the liquidator had first been engaged by Mr Allen. He produced a copy of part of a letter dated 5 September 2014 from the liquidator to Mr Allen, in which the liquidator said: "We understand that Wayne Allen (you) are our client in this matter …".
[66] On the matter of Whitford Green, Mr Harnish said that Whitford Green was formerly a joint venture with Whitford to develop the property. Whitford Green had been owned by a trust associated with Messrs Allen and Bruce (they held a 50 per cent
interest; Chinese investors held the other 50 per cent). However, Mr Harnish's understanding was that Mr Allen's trust later bought out the Chinese interests, and it now owns 75 per cent of the shares in Whitford Green. Mr Harnish said that he had been told by several people that he would get nothing from Whitford, as Mr Allen would divert funds from Whitford to Whitford Green. He said that he had also recently spoken to Mr Hayhow, who had informed him that Whitford is claiming costs that were incurred (and paid for) by Whitford Green.
[67] Mr Harnish then produced an email dated 19 March 2018 recording a communication between the liquidator and Mr Harnish's previous lawyer, Mr Chris Taylor. Mr Taylor reported to Mr Harnish that the liquidator had told him that there would be no payment to shareholders in the liquidation. Mr Harnish also produced a copy of another document provided by the receivers of a company with which
Mr Harnish has been associated, showing that the liquidator told the receivers on
20 March 2018 that Mr Harnish would not receive a distribution from Whitford.
[68] Mr Harnish said that he was not sure who the liquidator was referring to when he suggested that some of the creditors of Whitford had disharmonious relationships with Mr Harnish. Mr Harnish said that he has no axe to grind with anyone.
[69] On the issue of the liquidator's alleged failure to communicate with him,
Mr Harnish said that the liquidator had his email address throughout, and has indeed emailed him on a couple of occasions. However, the liquidator never sent Mr Harnish the six-monthly reports, and Mr Harnish had to chase those up through his lawyers.
Mr Harnish denied that either the liquidator or Mr Black provided him with updates on the Coumat litigation. He had to seek those himself, or through his lawyer.
[70] Mr Harnish referred to his telephone billing records in identifying the date of the telephone call in which he says the liquidator gave him incorrect advice about the trial date in the Coumat proceeding. He said the date was 29 June 2016. Mr Harnish
said he only learned the true starting date of the trial from Mr Hayhow, when he spoke to Mr Hayhow about a week before the trial started.
[71] Mr Harnish concluded by saying he had a scepticism with most things concerning Whitford. He expressed the view that nobody involved seemed particularly trustworthy (although he had always found Mr Hayhow to be "a straight up fellow").
Affidavit of Mr Stephen Bennett
[72] Mr Bennett is a chartered accountant practising in Whangarei. He is regularly appointed to act as a liquidator, and has carried out approximately 120 insolvency assignments since 1995.
[73] The purpose of Mr Bennett's evidence was to provide expert opinion on the liquidator's decision to publish a second advertisement calling for claims to be lodged.
Mr Bennett had read the liquidator's affidavit, the first liquidator's report dated
24 September 2014, and the advertisements for claims published on 17 September
2014 and 16 March 2018.
[74] Mr Bennett expressed the opinion that a liquidator has no duty to re-advertise for claims, and said that he had never heard of a liquidator re-advertising for creditors. He found it extraordinary that there was further advertising some three and a half years after the first advertisement and after the date for submission of proofs of debt had passed.
Applications under s 256(1)(a)(ii) of the Act – legal principles
[75] The leading authority is the Court of Appeal decision in Levin v Lawrence.6
The Court of Appeal said that there was no presumption against inspection. Rather, there must be "good reason" to order inspection.7 The Court went on to describe the "good reason" test in the following terms:8
6 Levin v Lawrence [2013] NZCA 394.
7 At [28].
8 At [53].
(a)Mere suspicion or assertion by a creditor that a liquidator has not undertaken – or is not undertaking – the liquidator's statutory task properly is not sufficient.
(b)It is not permissible for a creditor to apply merely in order to embark on a fishing expedition – in order to sift through the accounts and records of the liquidation to see if that might turn something up.
(c)As a minimum, the applicant must put forward some persuasive, tangible or concrete reason why inspection should be granted. An example might be where the creditor, from its own dealings with the company in liquidation, has a genuine concern about a particular aspect of the company's affairs. If the liquidator declined to investigate this area, or declined to say whether it had been investigated, we think the s 256(1)(a)(ii) threshold would be crossed.
[76] On the facts in Levin, the Court of Appeal upheld the High Court's refusal to grant access, as it considered the application was a fishing expedition.
[77] Mr Browne referred to Steggall Nutrition Pty Ltd v Haywood as an example of a case where the High Court found good reason existed to permit a creditor to inspect the company's records. In that case, an unsecured creditor applied to the Court for access to the company's records so that it could make its own investigation of whether there was sufficient evidence to support a claim against the directors for reckless trading. The unsecured creditor had been advised by the liquidators that if an application were made under s 256 it would not be opposed. However, the liquidators did formally oppose the application.
[78] The High Court accepted that there was substance in the issues raised by the unsecured creditor in relation to the possibility of reckless trading. There were matters that invited further analysis and investigation by someone prepared to incur the time and expense, and the time and expense issue had clearly been a matter of concern for the liquidators when balancing the interests of other creditors. The Judge did not find that there had been any dereliction of their duties by the liquidators, but took the view that there were additional lines of enquiry that might lead to a different decision on the prospects of a reckless trading claim. His Honour noted that the unsecured creditor was apparently prepared to incur the costs of the analysis and investigation, and in those circumstances it became "just" to give the creditor the opportunity to do so.9
9 Steggall Nutrition Pty Ltd v Haywood [2015] NZHC 413, [2015] NZCCLR 11 (HC), at [65]-[66].
[79] Mr Browne also mentioned Willeston Ventures Ltd v Scutter, for the proposition that where an application under s 256 for access to a company's documents is too general, insufficiently focused, and appears to be driven by a desire to second guess professional decisions taken by a liquidator, the application is unlikely to be granted.10
[80] Ms Nicolson accepted that Mr Browne had identified the relevant authorities. She noted that there are essentially two limbs to the test of whether leave should be granted: (i) is there "good reason" to order inspection? and (ii) would inspection prejudice the liquidation?11
[81] Ms Nicolson summarised the authorities by reference to classes of cases where orders for access might be granted to a creditor or shareholder under s 256, and those where they might not. Situations where access might be granted to a creditor or shareholder were said to include:
(a)as a minimum, the applicant can put forward some persuasive, tangible or concrete reason why inspection should be granted;12
(b)the creditor, from its own dealings with the company in liquidation, has a genuine concern about a particular aspect of the company's affairs, and the liquidator has declined to investigate this aspect, or has declined to say whether it has been investigated; or
(c)the conduct which the applicant wishes to consider is clearly identified, there are further matters which reasonably invite further analysis and investigation by someone prepared to incur the time and expense (which expense is of concern to the liquidator);13 or
10 Willeston Ventures Ltd v Scutter [2016] NZHC 3146.
11 Levin v Lawrence, above n 6, at [61].
12 Levin v Lawrence, above n 6, at [53](c).
13 Steggall Nutrition Pty Ltd v Haywood, above n 9, at [48] and [65]-[66].
(d)(where there is no opposition) the applicant has good reason to investigate recovery options and the liquidator does not have the funds to undertake extensive litigation.14
[82] Categories in which access under s 256 would not be granted to a creditor or shareholder might include:
(a)where the applicant has a mere suspicion or makes a mere assertion that a liquidator has not undertaken – or is not undertaking – his statutory task properly;15 or
(b)the applicant wishes to merely embark on a fishing expedition – in order to sift through the accounts and records of the liquidation to see if that might turn something up;16 or
(c)where an application is too general, insufficiently focused, and appears to be driven by a desire to second-guess professional decisions taken as liquidator, even if those decisions might be ones on which reasonable minds could differ.17
[83] More generally, Ms Nicolson submitted that the Courts have consistently taken the view that they will not interfere with matters of day-to-day administration of a company liquidation, or in any other decision made by a liquidator in the absence of fraud, unless a liquidator has not exercised his or her discretion in good faith or has
not acted in a way in which a reasonable liquidator would act.18
14 Body Corporate 194481 v Mason [2016] NZHC 2858 at [8]-[9].
15 Levin v Lawrence, above n 6, at [53](a).
16 Levin v Lawrence, above n 6, at [53](b).
17 Willeston Ventures Ltd v Scutter, above n 10, at [38], citing Levin v Lawrence, above n 6, at [54].
18 Referring to the Court's broad jurisdiction under s 284 of the Act to supervise the conduct of liquidations, and citing Lynne Taylor (Farrar & Watson eds) Company & Securities Law in
New Zealand (online ed, Thomson Reuters at [31.5.4].
Submissions of counsel
Mr Browne
[84] Mr Browne submits that there is good reason to grant access to the documents, based on the cumulative effect of Mr Harnish's concerns as set out in paragraphs [19] to [32] above.
[85] On the issue of the second notice calling for claims from creditors, Mr Browne referred to Regulation 12 of the Companies Act 1993 Liquidation Regulations 1994 (the Regulations), which reads:
12 Notice to creditors to claim
(1)Subject to the provisions of the Act, and unless otherwise ordered by the court, the liquidator may fix a certain day, which shall not be less than 10 working days from the date of the notice, on or before which the creditors of the company are to make their claims, and to establish any priority their claims may have under section 312 of the Act.
(2)The liquidator shall give public notice of the day fixed in accordance with subclause (1).
[86] Regulation 13(1) of the Regulations provides that any creditor who fails to make his or her claim before the day fixed in accordance with Regulation 12 "shall be excluded from the benefit of any distribution made before his or her claim is made". Regulation 13(2) provides that a creditor who makes a claim after the day fixed in accordance with Regulation 12, and whose claim is admitted, is entitled to receive the benefit of any distribution from which the creditor was previously excluded if any assets remain, or, in the opinion of the liquidator, are likely to remain, available for distribution.
[87] Mr Browne relied on Mr Bennett's expert evidence that the liquidator had no duty to re-advertise, submitting that the Court need not resolve this difference. The difference in itself demonstrates that there is "good reason" to grant access.
[88] Mr Browne submitted that it is not necessary for the Court to find liquidator misconduct, and Mr Harnish does not allege misconduct. He accepts that the liquidator may have made a mistake when misinforming Mr Harnish about the trial
date. But even with the conflict of evidence on this and other matters, there is clearly enough for the Court to find "good reason" to grant the access Mr Harnish seeks.
[89] Mr Browne acknowledged that the liquidator is an insolvency practitioner of long experience and good standing, but submitted that that is a neutral factor on the question of whether access should be granted.
[90] In response to the liquidator's contention that he has carefully conducted the liquidation in accordance with his obligations, Mr Browne referred to the liquidator's first report, which referred to ACC and NZ Customs as creditors when they were not creditors, describing the report as misleading. Secondly, he referred to the (perhaps innocent) misleading of Mr Harnish as to the trial date in the Coumat proceeding. Thirdly, he pointed to the re-advertising for claims after three and a half years, describing that as "contentious practice".
[91] He submitted that granting access will not prevent the liquidator from getting on with his tasks in the liquidation, and Mr Harnish might be able to provide useful information if he has access to the documents.
[92] On the time and cost involved in complying with the order for access,
Mr Browne submitted that the liquidator's concerns have been overstated. There are only 10 claims in the liquidation, and for much of the time the liquidation has been in a "holding pattern". As for the liquidator's reference to some of the documents being confidential and/or privileged, Mr Browne doubted that there could be any privilege, but confirmed that Mr Harnish is not looking to see privileged documents in any event.
Ms Nicolson
[93] Ms Nicolson submitted that the application is driven by Mr Harnish's wish to second-guess the liquidator's professional decisions whether to accept or reject creditors' claims (even before the liquidator has completed his investigations into the majority of the claims, and none has so far been paid out).
[94] Secondly, this is not a case where the liquidator has not had the inclination or funds to pursue some particular avenue of enquiry, and the applicant creditor or shareholder has volunteered to do so.
[95] Next, Ms Nicolson submitted that there has been no dereliction of the liquidator's duties. She noted that Mr Harnish is not now alleging liquidator misconduct, and submitted that the fact that there may have been some degree of confusion over the trial date in the Coumat proceeding cannot amount to "good reason" to require the production of the documents.
[96] On the issue of re-advertising for claims, Ms Nicolson submitted that a liquidator has a positive duty to identify the company's creditors, as part of the liquidator's principal duty under s 253 of the Act to take possession of, protect, realise and distribute the company's assets, or their proceeds, in accordance with the Act. She submitted that a liquidator may be found to have acted negligently in the discharge of his or her duties and liable to unpaid creditors for damages if he or she knows of creditors who have not proved their claims and fails to make sufficient efforts to see that they are dealt with.19 The practice of re-advertisement is permissible under the Act and the Regulations. That is implicit in Regulation 13 of the Regulations, which confirms that the only consequence for creditors who fail to produce their claims by a fixed date is that they may lose the benefit of distributions already made before they lodged their claims. In this case, no distributions have yet been made.
[97] Ms Nicolson also produced with her submissions some examples of
re-advertisements for claims which have been published in the New Zealand Gazette, showing the practice adopted by the Official Assignee and other liquidators.
[98] Ms Nicolson objected to certain hearsay evidence contained in Mr Harnish's reply affidavit, particularly as to the statements allegedly made by the liquidator to the effect that Mr Harnish would get nothing out of the liquidation. Alternatively, she submitted that the liquidator should be given the opportunity to file further evidence
19 Referring to James Smith & Sons (Norwood) Ltd v Goodman [1936] Ch 216; [1935] All ER Rep p 697, and Re HIH Casualty & General Insurance (NZ) Ltd (in liq) v FAI (NZ) General Insurance Company (in liq) HC Auckland, CIV-2009-404-3637, 10 September 2010.
in response (the statements relied upon by Mr Harnish having been furnished only in his reply evidence).
[99] More generally, Ms Nicolson submitted that all claims in the liquidation will be properly scrutinised, and distributions made accordingly. There is no basis for any allegation of misconduct by the liquidator, who has been extremely successful in his role to date. He has taken legal advice throughout, and dealt with all parties professionally and properly.
[100] Ms Nicolson noted that, following the second advertisement for claims, there were creditors' claims totalling $5,513,150, against company assets of $3,064,634 (the recovery in the Coumat proceeding less costs). There is therefore a provisional shortfall, which would suggest that there would not be a distribution to shareholders. However that position may change with further investigation, if some of the creditors' claims are rejected. Whether shareholders will receive any payment appears to depend on the following:
(a) rejection or acceptance of untested creditors' claims;
(b) the outcome of the summary judgment proceeding;
(c)recoveries from demands against Mr Bruce and Mr Allen for shareholders' current account debts;
(d)the costs of declaring the liquidation solvent (ie interest on all claims, retrospective accounting and tax assessments, IRD audit, and declarations and solvency certification);
(e) further costs in the liquidation, including legal costs.
[101] On the question of prejudice to the liquidation if the application is granted,
Ms Nicolson relied on the sensitive nature of the claims information the liquidator presently holds, and the need for the liquidator to maintain control over who has knowledge of the 10 separate creditors' claims, how they relate to one another, and how they may overlap and/or contradict each other. It is important that the liquidator
maintain that control. Secondly, the liquidator's files contain commercially sensitive information, some of which may be subject to privilege owned by others, and much of which has not yet been fully reviewed by the liquidator. She advised that at least one of the claimants is a law firm which has produced supporting invoices that record legal advice given to third parties relating to their relationship with Mr Harnish.
[102] Ms Nicolson submitted it would be disruptive, costly and time consuming to compile the information sought, particularly in respect of the category (c) documents.
Discussion and Conclusions
[103] I start by summarising what kind of case this is not.
[104] In my view this is not a case where Mr Harnish has pointed to some reasonable avenue of further enquiry or investigation, which the liquidator has failed or refused to pursue. There is nothing in the evidence, for example, which identifies possible claims against third parties which might have been pursued but have not; indeed, the liquidator prosecuted the Coumat proceeding to a successful conclusion, and is now pursuing the summary judgment proceeding. It appears also that the liquidator contemplates issuing some proceedings against Whitford's debtors (if that should be necessary), and he has already rejected the substantial claim made by Mr Bruce (and challenged the purported appointment by Mr Bruce of a receiver).
[105] Mr Harnish's real concern appears to lie with the 10 creditors' claims against Whitford, and whether or not they will be rigorously scrutinised by the liquidator and rejected if that appears to be appropriate. In short language, there is nothing before me to suggest that that will or may not occur. The liquidator is an experienced insolvency practitioner, and he has made it clear that he is carefully assessing all of the creditors' claims.
[106] Mr Harnish raised the possibility of a claim or claims made by a group of Chinese investors that might have been wrongfully made against Whitford (and not against Whitford Green), but that is no more than speculation, based on unsubstantiated hearsay statements. It could not provide "good reason" to allow
Mr Harnish access to the documents.
[107] The next thing this case is not, is a case where the liquidator has misconducted himself. Mr Browne expressly disavowed reliance on any allegation of misconduct on the part of the liquidator, and it seems to me that none of the various matters raised by Mr Harnish would in any event, whether treated individually or together, provide any reason for the Court to interfere with the liquidator's continuing conduct of the liquidation. In saying that, I accept that the reference to the ACC and New Zealand Customs as "creditors" in the liquidator's first report was an obvious error, but it was an error that was sufficiently explained by the liquidator by reference to his usual practice, and the error has had no adverse effect on the conduct of the liquidation. Nor is it easy to see any arguable cause and effect relationship between this error and any "good reason" for Mr Harnish to have access to the documents he seeks.
[108] Similarly, the error or misunderstanding relating to advice given about the date of the start of the trial in the Coumat proceeding has had no impact on the conduct of the liquidation, and there is no apparent reason why the liquidator might have wished to mislead Mr Harnish on the point. Again, it is difficult to see how the error in this
case, if error it was, might provide a basis for a "good reason" argument on
Mr Harnish's behalf.
[109] I accept that Mr Harnish was entitled to receive the liquidator's six-monthly reports,20 but the liquidator explains that for much of the period since the liquidation he did not have a physical address for Mr Harnish to which the documents could be sent. Section 391(1) and (3A) of the Act together provide that the liquidator may only send his reports to a creditor or shareholder by email if the creditor has agreed in advance to that procedure, and there is no evidence in this case that Mr Harnish formally advised the liquidator that he wished to receive the six-monthly reports by email.
[110] The one matter of possible substance raised by Mr Harnish was the argument, supported by Mr Bennett's evidence, that the liquidator should not have re-advertised for claims. However, the liquidator's evidence is clear that he became aware following the expiry of the initial claims period that there were some creditors who had not
20 Companies Act 1993, s 255.
lodged proof of debt forms, and I do not read Regulation 12 of the Regulations as precluding the placing of a second claims notice in such circumstances. The purpose of Regulation 12, read with Regulation 13, is to provide a procedure where dividends or interim dividends can be paid out to those creditors who have lodged proof of debt forms by the prescribed date, without those dividends being disturbed by claims later received from creditors who did not lodge their claims in time. Also, Regulation 13(2) expressly contemplates a creditor who has not lodged his or her claim by the date fixed under Regulation 12 participating in a subsequent distribution if funds remain available.
[111] The effect of Regulation 13(2) appears to be to allow the liquidator to correct the position for creditors who fail to lodge their claims in time, and if such creditors have an entitlement to participate in the distribution of any remaining assets (as they do) it would seem odd if the liquidator were precluded by the scheme of the Act and the Regulations from taking appropriate steps to find out whether such creditors may exist, and if so who they are. On that point, I accept Ms Nicolson's submission that the liquidator's principal duties under s 253 of the Act include distributing the company's assets in accordance with the requirements of the Act, and (for that purpose) the liquidator has a positive duty to identify the company's creditors. I note in that regard that a liquidator's duties under s 253 also include the distribution of any "surplus assets" (ie assets remaining after the company's creditors have been paid), and surplus assets could only be identified if the liquidator had details of all of the company's creditors and the debts owed to them. As the learned authors of Brookers Insolvency Law & Practice note:21
CA304.03 Liquidator's duty
(1) Duty to creditors
Section 313(1) provides that after paying the preferential creditors in accordance with s 312 the liquidator must apply the assets of the company in satisfaction of all other claims. As part of this statutory duty a liquidator is also under a duty to ascertain from the company's books and papers the creditors of the company and contact "known creditors" who have yet to file a claim to determine whether they wish to do so. A liquidator may be found to have acted negligently in discharge of his or her duties and liable for damages for unpaid
21 Lindsay Hampton & Others (eds) Brookers Insolvency Law & Practice (loose leaf ed, Brookers)
at [CA304.03(1)].
creditors if he or she knows of creditors who have not proved their claims and fails to make sufficient efforts to see that they are dealt with: James Smith & Sons (Norwood) Ltd v Goodman [1936] Ch 216; [1935] All ER Rep 697.
[112] In circumstances where the liquidator became aware of parties having claims who would or might be entitled to participate in any distribution to creditors, and where a relatively large sum of money had become available to the liquidator (making it worthwhile for creditors who had not previously bothered to file a proof of debt to do so), it was arguably reasonable22 for the liquidator to ensure that any creditors who had taken a similar approach (ie, not bothered to lodge a proof of debt) would be treated in a similar fashion to those non-claiming creditors of which the liquidator was aware ie be given a further opportunity to lodge a proof of debt.
[113] I accept Mr Browne's submission that I do not need to finally determine the issue of whether, under the Act and the Regulations, a liquidator is precluded from publishing a second advertisement for claims after the expiry of the date fixed for lodging claims by the first publication, and I expressly refrain from determining the point. But I do not accept Mr Browne's submission that the fact that this might be a contentious issue23 somehow provides, whether on a stand-alone basis or considered with other factors, "good reason" for an order for production of the documents
Mr Harnish seeks. The approach the liquidator took appears to be supported by a general practice adopted by at least some other insolvency practitioners, and, whether it is right or wrong, I do not think it could provide a reason to allow Mr Harnish to work alongside the liquidator, scrutinising the creditors' claims.
[114] For the rest, I do not believe Mr Harnish's concerns go beyond the level of mere suspicion, or a desire to go on a fishing expedition, in the hope of finding information which would justify the rejection of the claims of one or more of the larger creditors in the liquidation.
[115] Mr Harnish expresses concern at statements said to have been made by the liquidator that he (Mr Harnish) would not recover anything in the liquidation. The
22 A liquidator is required to carry out his or her duties under s 253 "in a reasonable and efficient manner".
23 If it is, and I am by no means sure that even that can be said.
evidence of these statements does appear to be hearsay, but even if they were admissible under one or more of the exceptions to the rule against hearsay I do not think that would avail Mr Harnish on the present application. The implication of the argument appears to be that the liquidator has somehow made a pre-judgment in favour of the various large claims, which would result in a shortfall for creditors and thus nothing for shareholders such as Mr Harnish. But the statements, if made, may have been no more than an early reflection of the fact that total creditors' claims appeared to exceed total assets, made at a time or times when it is quite clear that the liquidator had not gone far down the track of investigating what appeared to be claims which are not all straightforward. The liquidator is an officer of the Court, and he has provided an affidavit making it clear that all of the claims will be investigated carefully and dispassionately, and the hearsay evidence relating to statements made by the liquidator to the effect that Mr Harnish would not make any recovery would have to be read in that light (particularly as the full contexts of the statements allegedly made by the liquidator are not before the Court).
[116] I also accept Ms Nicolson's submissions based on possible prejudice to the liquidator in the conduct of the liquidation. I accept that it is for the liquidator, not the Court, to determine how the various creditors' claims are to be assessed and analysed, and in what order. In this case, there is evidence that some of the claims are overlapping, and it appears that there is at least the possibility of contradicting claims being made by some of the creditors. In my view the manner of handling that situation, and any tactical decisions as to what information should be provided to which creditor, must be for the liquidator, and I accept that the liquidator's ability to control that process could be compromised if access to the documents relating to the creditors' claim were made available to a third party such as Mr Harnish. It is more difficult to assess the liquidator's concerns relating to the confidentiality and/or privilege of some of the documents, but that is of lesser concern, especially as Mr Harnish has indicated that any privileged or confidential parts of documents could be redacted.
[117] I think the main issue on prejudice to the liquidation must relate to the liquidator's right to control the manner in which creditors' claims are assessed, including controlling the flow of information to individual creditors to ensure that the claims are all properly examined, and that all creditors are treated fairly.
[118] For all of the foregoing reasons, I am not satisfied that there is good reason to make the order sought. The application is accordingly dismissed, with costs to the liquidator on a 2B basis, and disbursements as fixed by the Registrar.
Associate Judge Smith
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