Jenkins v Surecall Limited (in liq) HC Dunedin Civ-2006-412-939

[2007] NZHC 1701

IN THE HIGH COURT OF NEW ZEALAND DUNEDIN REGISTRY

CIV-2006-412-000939

UNDER  Section 271 of the Companies Act 1993

BETWEEN  PAUL WILLIAM GERRARD JENKINS IAIN ANDREW NELLIES

Plaintiffs

AND  SURECALL LIMITED (IN LIQUIDATION)

First Defendant

AND  B & R MARKETING LIMITED (IN LIQUIDATION)

Second Defendant

Appearances: D P Robinson for Plaintiffs

A J Logan for Employee Creditors of B & R Marketing Limited

Judgment:      28 March 2007

JUDGMENT OF ASSOCIATE JUDGE CHRISTIANSEN

[1]      Both  the  first  defendant  (Surecall)  and  the  second  defendant  (B  &  R Marketing) were placed into liquidation on 19 October 2006.   The plaintiffs, Mr Jenkins and Mr Nellies (the liquidators) seek this Court’s authority to enable them to proceed with the liquidation of the two companies as if they were one company. Hence this application to the Court.

[2]      For more than six months prior to the appointment of the liquidators, the businesses of the two companies were in large part combined.   As Mr Logan, in opposition, fairly acknowledges, “They carried on the same line of business.  They essentially served one client.   They shared the same management.   They had the same governance.   The revenue of both companies was paid  into  a single bank

account operated by B & R Marketing.  Wages and other creditors were paid from

JENKINS AND ANOR V SURECALL LIMITED (IN LIQUIDATION) AND ANOR HC DUN CIV-2006-412-

000939  28 March 2007

that single bank account.  Surecall staff provided administrative and support services for both companies.”

[3]      That much conceded, there is a distinct disadvantage to the employees of B & R Marketing if the liquidation of the two  companies was combined.   There are sufficient assets only to meet the preferential claims of employees.  The preferential claims of Surecall’s employees amount to $43,742.90, but the realisation of assets and the liquidation of Surecall has yielded only $2250.

[4]      The  preferential  claims  of  employees  of  B  &  R  Marketing  amount  to

$30,617.48.   The realisation of assets in the liquidation of B & R Marketing has yielded $33,750.  Other creditors also have preferential claim.

[5]      If the liquidation affairs of the two companies are not combined then the employee creditors of B & R Marketing will receive a divided of between $0.60 and

$0.65 in the dollar.  If the order sought is made, and the employee creditors of both companies are combined then they will receive a divided in the vicinity of $0.20 to

$0.25 in the dollar.  The loss to the employee creditors of B & R Marketing is plainly between $0.40 and $0.45 in the dollar.   The  prejudice to  them from any order directing the liquidation of both companies proceeding as if they were one company, is obvious.

Sections 271 and 272 Companies Act 1993

[6]      Section 271(1)(b) provides that upon the application of the liquidator a Court, if satisfied it is just and equitable to do so, may order that –

(b) Where two or more related companies are in liquidation, the liquidations in respect  of  each  company  must  proceed  together  as  if  they  were one company to the extent that the Court so orders and subject to such terms and conditions as the Court may impose.

[7]      To  some  extent  this  provision  provides  an  exception  to  the  commonly understood position that each company is a separate legal person.  That principal is affirmed by s15 of the Companies Act 1993:

A company is a legal entity in its own right separate from its shareholders and  continues  an  existence  until  it  is  removed  from  the  New  Zealand Register.

[8]      The Court can utilise this exception in the case of related companies.   It is accepted Surecall and B & R Marketing are related, as that term is defined by s2(3) Companies Act 1993.

[9]      Section  272  sets  out  guidelines  for  determining  when  it  is  “just  and equitable” to make a pooling order under s271.   For present purposes subs(2) is relevant.  It provides:

(2) In deciding whether it is just and equitable to  make an order  under s271(1)(b) of this Act, the Court must have regard to the following matters:

(a)  the extent to which any of the companies took part in the management of any other companies:

(b)   the conduct of any of the companies towards the creditors of any of the other companies:

(c)   the  extent  to  which  the circumstances  that  gave  rise  to  the liquidation  of  any  of  the  companies  are  attributable  to  the actions of any of the other companies:

(d)   the extent to which the businesses of the companies have been combined:

(e)   such other matters as the Court thinks fit.

[10]     Counsel report there are few cases which have been the subject of judicial examination under ss271 and 272.  The few cases that have, have been resolved on their  own  facts.    As  counsel  acknowledge,  this  is  understandable  because  the question of what is just and equitable depends upon the circumstances of the individual case.

Matters of commonality between the companies

[11]     The revenue generated by the efforts of the employees of both companies was paid into B & R Marketing’s bank account.  That bank account was used to pay the employees of both companies.   Both companies went into liquidation on the same date, and from that it might be inferred that because of the way the businesses were carried on, that if one company failed then the other would do so also.

[12]   I have already commented upon the similarity of the businesses, their management, governance and administration.

Factors mitigating against a pooling order

[13]     In this case those matters include factors likely to prejudice the employees of B & R Marketing.  Even though there might be an element of prejudice, it may need to amount to something more to be unjust and inequitable.

[14]     The immediate point of contrast in this case is the fact that B & R Marketing employees’ entitlement would be reduced by two-thirds if a pooling order was made.

[15]     Further, as Mr Logan submits, the effect of a pooling order would be to ignore the corporate structures and legal employment arrangements deliberately put in place.  Therefore the making of an order would override the principle that each company is a separate equity.   It would disregard the decision by the companies’ promoters to establish two distinct corporate structures.  It would ignore the distinct business location of the two  companies.   It  would  ignore the deliberately  made employment arrangements of each company; as well as causing a substantial and significant drop in the sums payable to the employees of B & R Marketing.

[16]     I accept those matters are all properly raised in defence of an argument that it is just and equitable to make a pooling order.  Notwithstanding those, I consider a pooling order is appropriate.

Considerations and reasons for decision

[17]     Although in percentage terms the B & R Marketing employees stand to lose significantly,  in  actual  terms  the  difference  does  not  appear  so  great.    It  is  a difference  of  between  $6000  and  $18,000  approximately  divided  between  the number of employees affected.

[18]     Elements of prejudice apart, there are many reasons compelling the making of a pooling order.  Otherwise, to separate the two companies now would suggest a

legal separation which in practice never operated.   In the words of Gallen J  in

Re: Dalhoff v King Holdings Limited (In Liquidation) [1991] 2 NZLR 296:

It would be to prefer some creditors over others, and to do so fortuitously since there does not seem to have been any principal on which the activities of the company were divided, and also to fortuitously prefer certain shareholders over others…   Justice and equity are terms which would normally   involve   equality   of   treatment   taking   into   account   all   the surrounding  circumstances  against  the  background  of  operations  of  this group of companies.   I think it  would be unjust and inequitable both to shareholders and to creditors to allow the liquidation separately, thus preferring some fortuitously against others and, further, separating out activities which always in the past operated together.

[19]     In this case I accept  Mr Robinson’s submission that the most  significant matter for this Court to consider is the fact that all income was received by B & R Marketing when Surecall provided services in respect of which payment was made to B & R Marketing.   Therefore,  it  would be  inequitable  for the employees of Surecall to be denied the fruits of their labour based on a technical objection that the group’s primary business contract was with B & R Marketing.   Although the two businesses were established distinctly, it was always the intention they be combined.

Judgment

[20]     There will be an order pursuant to s271 of the Companies Act 1993 that the liquidation of Surecall and B & R Marketing proceed as if they were one company. This is an appropriate case for the Court to order that the costs of Mr Logan be paid by, and be a priority charge upon, the combined assets of the defendant company.

Solicitors:

Gallaway Cook Allan, Dunedin for Plaintiffs

Ross Dowling Marquet Griffin, Dunedin for Employee Creditors of B & R Marketing