Jacomb v Registrar of Companies
[2013] NZHC 2486
•23 September 2013
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV 2013-485-847 [2013] NZHC 2486
BETWEEN MICHAEL JOHN JACOMB,
TRENA KATHLEEN JACOMB AND PETER REGINALD RICHARDSON AS TRUSTEES OF THE GENSET TRUST Appellants
AND
THE REGISTRAR OF COMPANIES First Respondent
AND
EDEL METALS GROUP LIMITED Second Respondent
Hearing: 19 September 2013 Counsel:
J Toebes and J Grant for Appellants
B Gustafson and C M Hanafin for Second RespondentJudgment:
23 September 2013
JUDGMENT OF RONALD YOUNG J
Introduction
[1] Edel Metals Group Limited (EMG) was incorporated in 2008. The company failed to file its annual return for the 2011 year. The Registrar of Companies struck off the company in February 2012. On 20 November 2012 Mr Gibson, a director of EMG, applied to the Registrar to reinstate the company. He told the Registrar that EMG was still carrying on business. No objection to the reinstatement was received after the statutory advertising period was undertaken and expired. The Registrar
reinstated the company on 8 January 2013 (by notice in the Gazette).
JACOMB v THE REGISTRAR OF COMPANIES [2013] NZHC 2486 [23 September 2013]
[2] The appellants (who are shareholders in EMG) now seek leave to appeal the Registrar’s decision. Section 370 of the Companies Act 1993 permits an appeal within 15 working days after the date of notification of the Registrar’s decision.1
The High Court may allow further time for the filing of the appeal. The application for further time to bring this appeal was made on 13 May 2013, four and a half months after the reinstatement decision.
[3] The appellants say they did not see the public advertisement for the application to reinstate nor the Registrar’s advice that the company had been reinstated.
[4] The appellants say when they first became aware of the reinstatement in mid April 2013, they speedily (given they were then overseas) filed the application to extend time for filing the appeal and filed the appeal itself.
[5] The parties were agreed that there are three matters of importance in this leave application:
(a) the merits of the applicant’s case; (b) the reason for the delay; and
(c) any prejudice to the respondents.
[6] Because I have a clear view of the merits of the appeal, I propose to focus on
(a) above.
[7] The grounds of appeal are:
(a) there was insufficient grounds for the Registrar to reinstate the company and so the reinstatement order should never have been made;
(b)this Court should consider whether grounds exist for reinstatement independently of the Registrar’s decision – essentially a de novo consideration of the evidence before this Court; and
(c) based on this evidence there are no grounds for reinstatement. EMG was not carrying on business at the time of the removal nor were there any other reasons for the company’s continued existence. Even if there may be grounds to reinstate the company, the Court in any event should not exercise its discretion to reinstate the company.
Background
[8] EMG seems to have been incorporated to purchase and hold shares in a Chilean subsidiary. The Chilean company was to purchase a rock crushing machine and other assets of a Chilean mining company. EMG issued 100 million $1 shares,
$23.75 million to be held by the appellants and $76.25 million by Geier Limited. Geier Limited was a trust company that held shares in trust for Mr Ken Wikeley. Mr Gibson was the sole director of Geier Limited. The shares were unpaid.
[9] The appellants loaned EMG USD1.5 million to purchase the Chilean business. Mr Wikeley guaranteed 50 per cent of the loans by the appellants to EMG. However, the purchase of the Chilean company’s assets did not eventuate and the agreement was ultimately cancelled. EMG did not repay the loan and the appellants called on what they claimed was Mr Wikeley’s guarantee.
[10] A dispute arose about the appellant’s advance as it affected Mr Wikeley. The matter was litigated in the High Court.2 The Judge concluded that the plaintiffs in that case (who are the appellants in this case) had loaned USD1.5 million to EMG and Mr Wikeley had guaranteed 50 per cent of the loan (capital and interest). One of the defences raised by Mr Wikeley was that at least two of the individual loans making up the USD1.5 million loan were major transactions in terms of s 129 of the Companies Act 1993 and therefore required but did not have approval of 75 per cent of the shareholders. As to this submission the Judge said:
[48] No accounts for EMG were in evidence. Mr Gibson gave evidence that EMG was a holding company, did not trade, did not have a bank account, did not have an auditor, and did not file a tax return. As Mr Gibson put it, “it was a holding company without any assets or trading”, and so no tax return was filed. In his opinion, EMG was asset less. In my view, as I will explain later, that is not correct as a matter of law, at least for the purposes of s 129.
[11] As to whether the loan was a major transaction, the Judge said:
[51] To constitute a major transaction for the purposes of s 129 of the Companies Act 1993, the transaction would need to involve EMG incurring a liability (including a contingent liability) the value of which is more than half the company’s assets before the transaction. It is plain that a loan incurred by the company will be a major transaction if the liability to repay exceeds half the value of the assets of the company.
[52] “Assets” are defined in s 129(2) of the Act, as “property of any kind, whether tangible or intangible”. As Prof Watts has said the definition does not make clear whether these are gross or net assets. Prof Watts takes the view (which I share) that the better view is that they are gross assets. That is the more literal meaning. A “net asset” reading would require one to read in the concept of “assets minus liabilities”. In terms of the purpose underlying s 129, a gross asset approach seems to achieve a better balance between governance and shareholder interests. As Prof Watts says:
If the section embraces net assets values, companies which are near insolvency would need to pass nearly every transaction before the shareholders. Hence, directors of a company with liabilities $1 less than assets would need to consult shareholders to buy a couple of pencils, even though in gross terms the company’s assets were still quite large.
...
[55] On the premise, as I find, that none of the share capital had been paid, the unpaid capital of NZ$100 million represented a contingent asset of EMG (just as the liability to be called on to pay represented a contingent liability on the part of the shareholders). Uncalled capital – nowadays a somewhat rare beast – is a receivable, a contingent asset of the company that may be called up by receivers and liquidators. Whatever its precise treatment according to current accounting standards, it is I think to be viewed as “property of any kind, whether tangible or intangible” for the purposes of s 129. First, s 129 is I think to be given a reasonably inclusive interpretation when it comes to the meaning of “assets”. The expansive wording in s 129(2) suggests that. Secondly, by parity of reasoning, to the extent that contingent liabilities are part of the evaluation provided for under s 129(2)(c), then contingent assets might logically form part of the broadly defined “assets” against which such liabilities are weighed. Thirdly, in this particular case shareholders have subscribed for shares on the basis that they are liable contingently to pay up capital when called upon to do so by directors. The latter they have empowered for that purpose. Where, as here, no capital payments have been made at all and the company has no other assets to fall back on, it follows necessarily that to operate at all it will need
to borrow. If contingent assets, such as uncalled capital, are excluded from “assets” for s 129 purposes, the result would be that directors would have to go to shareholders on every occasion they wished to borrow even the meanest sum. That would be nonsensical given the structure the shareholders had established and mandated in the first place.
[56] From this it must follow that for s 129 purposes the gross assets of the company in November 2008 were at least NZ$100 million. It follows, also, that EMG’s liability under the loan arrangement for USD1.5 million (for up to 18 months, and at an interest rate of 6.7 per cent per annum) did not require shareholder approval. As is perfectly obvious, the directors of the company could have called on the shareholders to meet its ultimate liability to repay the plaintiffs’ loan. In the event share capital was called up in full by the directors of the company, the plaintiffs would have been liable to pay considerably more to the company than they would have received from it (footnotes omitted).
[12] And so at the time EMG was removed from the Register, it owned shares in the Chilean subsidiary (which have disputed worth), it owed USD1.5 million to the appellants, and had uncalled shareholder capital of $100 million.
Relevant legislation and appeal approach
[13] Section 328 of the Companies Act 1993 provides as follows:
328 Registrar may restore company to New Zealand register
(1) Subject to this section, the Registrar must, on the application of a person referred to in subsection (2) of this section, and may, on his or her own motion, restore a company that has been removed from the New Zealand register to the register if he or she is satisfied that, at the time the company was removed from the register,—
(a) The company was still carrying on business or other reason existed for the company to continue in existence; or
(b) The company was a party to legal proceedings; or
(c) The company was in receivership, or liquidation, or both.
(2) Any person who, at the time the company was removed from the
New Zealand register, was—
(a) A shareholder or director of the company; or
(b) A creditor of the company; or
(c) A liquidator, or a receiver of the property, of the company—
may make an application under subsection (1) of this section.
(3) Before the Registrar restores a company to the New Zealand register under this section,—
(a) In the case of a company that was removed from the New Zealand register under paragraph (b) or paragraph (c) of section 318(1), the Registrar must give public notice setting out—
(i) The name of the company; and
(ii) The name and address of the applicant; and
(iii) The section under, and the grounds on which, the application is made or the Registrar proposes to act, as the case may be; and
(iv) The date by which an objection to restoring the company to the register must be delivered to the Registrar, not being less than 20 working days after the date of the notice:
(b) In the case of a company that was removed from the New Zealand register under paragraph (d) or paragraph (e) of section 318(1), the person who made the application under subsection (1) must give public notice setting out—
(i) The name of the company; and
(ii) The person's name and address; and
(iii) The section under, and the grounds on which, the application is made; and
(iv) The date by which an objection to restoring the company to the register must be delivered to the Registrar, not being less than 20 working days after the date of the notice.
(4) The Registrar must not restore a company to the New Zealand register if the Registrar receives an objection to the restoration within the period stated in the notice.
(5) Before the Registrar restores a company to the New Zealand register under this section, the Registrar may require any of the provisions of this Act or any regulations made under this Act, being provisions with which the company had failed to comply before it was removed from the register, to be complied with.
(6) The Court may, on the application of the Registrar or the applicant, give such directions or make such orders as may be necessary or desirable for the purpose of placing a company that is restored to the New Zealand register under this section and any other persons as nearly as possible in the same position as if the company had not been removed from the register.
(7) Nothing in this section limits or affects section 329 of this Act.
[14] The right of appeal is contained in s 370, which provides as follows:
370 Appeals from Registrar's decisions
(1) A person who is aggrieved by an act or decision of the Registrar under this Act may appeal to the Court within 15 working days after the date of notification of the act or decision, or within such further time as the Court may allow.
(2) On hearing the appeal, the Court may approve the Registrar's act or decision or may give such directions or make such determination in the matter as the Court thinks fit.
[15] I agree with the appellants that the proper approach to a s 328 appeal is for the Court to conduct a de novo consideration of all relevant facts as at the date of the original application. I will then consider, given the facts, whether the appellants have satisfied me that the criteria for reinstatement in s 328 have been met.
[16] Interlocutory orders have already been made permitting evidence to be provided relating to the circumstances of the company as at the date of application to reinstate.3
Inadequacy of evidence before Registrar
[17] The appellants raised as their first ground of appeal a claim that the Registrar did not have sufficient evidence to be satisfied EMG was carrying on business at the relevant time. On 20 November 2012 the Registrar of Companies received an application by Mr Gibson to reinstate EMG to the Registrar on the basis that the company was carrying on business. Although other reasons for the company’s continued existence were mentioned, no specific evidence of carrying on business was identified in the application. The application for reinstatement was advertised but unopposed.
[18] The appellants say that the Registrar should have made enquiries as to the basis on which Mr Gibson asserted that EMG was still in business and, therefore, the company should not be reinstated.
[19] The Registrar concluded that he was satisfied, after Mr Gibson had asserted that the company was in business, after the proposed application for reinstatement was advertised and after those who might disagree with Mr Gibson or assert otherwise had been given the opportunity to respond. In the circumstances there was no challenge to Mr Gibson’s claim, so the Registrar had no reason to doubt what Mr Gibson had said. He was entitled to rely upon the claim in the application. That inevitably meant he would be “satisfied” the company was still carrying on business and that the Registrar was obliged to restore the company. I reject this ground of appeal.
Was EMG still carrying on business?
[20] I am satisfied that the litigation involving the appellants and Mr Wikeley (and indirectly EMG) illustrates that EMG remained in business and was in business at the time of the application for reinstatement and at the time the Registrar made his decision to reinstate.
[21] EMG had not been incorporated to be a trading company. In assessing whether it was “still carrying on business”4 at the time of removal, regard must be had to its “business”. While the plan for its subsidiary in Chile to purchase the mining equipment had been cancelled, EMG still held its shares in the subsidiary. Further, and importantly, there remained company debts and shareholding issues to resolve.
[22] Mr Wikeley had his guarantee of EMG’s debt called up. Understandably he wished to look to EMG first to repay the debt to the appellants, if possible. This, in turn raised questions about a call on the unpaid share capital. These issues all arose from the business of the company, the holding of shares in the Chilean company.
[23] Even if, as the appellants claim, these issues do not establish the company was still in business at removal from the Register, they raise other reasons for the company’s continued existence.
[24] As I have noted there are disputes about the Chilean subsidiary, EMG’s USD1.5 million debt, and the unpaid shares of EMG which readily justify the company’s continued existence.
[25] Part of the appellants’ submissions centre around the conduct of Mr Wikeley and other shareholders of the company after the reinstatement of the company by the Registrar. The appellants claim that the reinstatement would effectively advantage Mr Wikeley over the appellants’ interests in their dispute about Mr Wikeley’s guarantee.
[26] I express no view as to these claims. But they do not seem to me to be relevant. Who might or might not be advantaged by any reinstatement is not the test. Nor could it be relevant. The Court’s function is to assess the facts at the time of the company’s removal against identified statutory criteria, not to speculate as to future consequences. The litigation arising from the guarantee illustrates there remain unresolved issues for the company as far as its debts and unpaid share capital are concerned.
[27] Whatever the merits of each side’s position in these disputes, they are not relevant to this appeal. The existence of disputes which involve allegations that EMG has financial obligations illustrates the reason it was appropriate to reinstate EMG.
[28] In the circumstances leave to appeal out of time is granted. The appeal is dismissed.
[29] Costs should be on a standard 2B basis. However, if the second respondents seek otherwise they should file a memorandum within 14 days and the appellant
should respond with a further 14 days.
Solicitors:
JTLaw, Barristers & Solicitors, Wellington
Lowndes Jordan, Barristers & Solicitors, Auckland
Ronald Young J
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