Jollands v Wilson

[2016] NZHC 308

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2013-404-815 [2016] NZHC 308

UNDER	the Companies Act 1993 section 284
IN THE MATTER OF	SILVER OAKS PROPERTY NO.2 LIMITED
BETWEEN	PETER REGINALD JOLLANDS AND CATHERINE JANE JOLLANDS Applicants
AND	GREGORY JOHN WILSON Respondent

Hearing:	16 February 2016
Appearances:	A A Lowe for Applicants No appearance for Respondent
Judgment:	29 February 2016

JUDGMENT OF ASSOCIATE JUDGE R M BELL

This judgment was delivered by me on  29 February 2016 at 4:30pm

Pursuant to Rule 11.5 of the High Court Rules

…………………………………………………….

Registrar/Deputy Registrar

Solicitors:

Alexandra Low & Associates Auckland, for Applicants (Liquidators)

JOLLANDS v WILSON [2016] NZHC 308 [29 February 2016]

[1]      This judgment fixes the liquidators’ fees and expenses in the liquidation of Silver Oaks Property No.2 Limited.  As the liquidators were appointed by the court, their remuneration is limited to the amounts and rates allowed under s 277 of the Companies Act 1993, unless the court orders otherwise.1     When it made the liquidation order on 31 January 2013, the court approved the liquidators’ rates of remuneration.   That was subject to the requirement that at the conclusion of the

liquidation the liquidators should apply to have their overall remuneration fixed. The liquidators did not make any such application when the liquidation was terminated on 20 March 2013.   When the liquidators applied for directions under s 284  of  the  Companies  Act,  I  reserved  the  remuneration  question  for  later determination.2    The shareholders of Silver Oaks Property No.2 Limited have not formally objected to the fees claimed by the liquidators.   Their silence does not relieve  the  court  from  reviewing  the  liquidators’ remuneration.    The  court  acts protectively in the interests of those affected by the liquidators’ fees.3

[2]      In their invoice of 31 March 2013, the liquidators charged fees of $26,244, exclusive of GST and disbursements.  With those added on, their total account was

$33,564.40.    Later  they  received  a  further  lawyer’s  bill  for  $2,756.68.    The liquidation ran for seven weeks, from 31 January 2013 to 20 March 2013, when it was terminated under s 250 of the Companies Act.

[3]      To review the liquidators’ remuneration, it is necessary to consider not only the course of the liquidation, but also how Silver Oaks Property No.2 Ltd came to be put into liquidation.  The company is part of the Silver Oaks group.  It had owned two properties, on which motor inns were operated, but had disposed of them.  When the company was ordered into liquidation it was the landlord of seven commercial premises at Orewa with rating valuations totalling $4,793,000.  Four were rented out for $148,800 plus GST per annum. An agreement to lease was about to be signed for another.  The company was negotiating a potential tenant for a sixth property.  The properties  were  subject  to  a  mortgage  in  favour  of  a  bank  to  secure  group

borrowings.

1      Companies Act 1993, s 276(2).

2      Silver Oaks Property No.2 Ltd, Jollands v Wilson [2015] NZHC 3309, (2015) 27 NZTC 22-037 at [10]-[13].

3      Re Roslea Path Ltd (in liq) [2013] 1 NZLR 207 (HC) at [106].

[4]      Two  other  companies  in  the  Silver  Oaks  group  had  recently  been  in receivership: Silver Oaks Group Ltd and Silver Oaks Property No.1 Ltd.   Silver Oaks Property No.2 Ltd was not put into receivership.  The secured creditors’ claims were resolved by the disposal of some assets in the group, including the sale of two properties owned by Silver Oaks Group No.2 Ltd, and by a refinancing.  Silver Oaks Property No.2 Ltd was not however insolvent.

[5]      Programmed Maintenance Services (NZ) Ltd is the creditor who successfully applied for Silver Oaks Property No.2 Ltd to be put into liquidation.  Its case was that it was a creditor of the company for $131,876.70 under a guarantee of 30 June

2011.  The debtor under the guarantee was Silver Oaks Group Ltd.  The claim by Property Maintenance Services Ltd was in respect of two contracts for two 7-year painting and paint maintenance contracts for hotels in Rotorua and Wellington.   It served a statutory demand on the registered office of Silver Oaks Property No.2 Ltd. The person who received the demand was not an officer or employee of Silver Oaks Property  No.2  Ltd.     Mr Wilson  acknowledges  that  the  statutory  demand  was eventually forwarded to the company, but was overlooked by inadvertence.   The liquidation proceeding was served on the registered office of the company.  At the time of service, the company no longer occupied those premises but it had not yet notified a change of registered office to the Companies Office.  Silver Oaks Property No.2 Ltd did not find out about the liquidation application until the liquidation order was made on 31 January 2013.

[6]      The shareholders and the director of Silver Oaks Property No.2 Ltd did not accept that the company ought to have been put into liquidation.   Programmed Maintenance Services (NZ) Ltd had obtained the liquidation order regularly, but in default of opposition.   While service had been valid, it had not been effective to make the officers of the company aware of the proceeding.   They contested the company’s liability under the guarantee. As it happened, Maintenance Services (NZ) Ltd  had  also  brought  a  proceeding in  the District  Court  against  the  company’s director as a co-guarantor.  Mr Wilson filed a defence to that proceeding alleging that Programmed  Maintenance  Services  (NZ)  Ltd  had  failed  to  carry out  contracted services, that it had wrongly terminated contracts, that its claims were over-stated,

work had not been carried out adequately, resulting in premature deterioration of exterior painting. There were associated claims for set-off.

[7]      If the company had become aware of the liquidation application, it could have taken steps which may have resulted in the liquidation application being dismissed.  When a company has been put into liquidation by default, an application under s 250 of the Companies Act to terminate the liquidation is a remedy to address any miscarriage of justice.  Where the company disputes the debt alleged against it, appropriate  arrangements  can  be  made  to  hold  funds  to  await  the  outcome  of

proceedings as to the validity of the alleged debt.4

[8]      Where a company ordered into liquidation is solvent and has been carrying on business until the liquidation order, such applications need to be brought and disposed of promptly to avoid long-term prejudice to the business of the company. Part of the costs to the shareholders in having the liquidation terminated is that the liquidators must be paid their costs in administering the liquidation.   In my experience, shareholders and directors are not generally in a strong position to query the  liquidators’ charges  on  an  application  under  s  250.    The  need  to  have  the liquidation brought to a speedy end usually means that they do not want to spend time arguing about the liquidators’ charges.

The course of the liquidation

[9]      The day after the company was brought into liquidation, lawyers for Silver Oaks Property No.2 Ltd’s shareholders contacted Mr Jollands to advise that the company had not been aware of the liquidation proceeding and that the director considered the company to be solvent.   The lawyers advised that an application would be made under s 250 of the Companies Act.  Mr Jollands’ response was that he had been appointed liquidator by court order and was required to carry out his duties as liquidator.  He required officers of the company to provide the information which liquidators typically require at the outset  of a liquidation.   He consulted

lawyers acing for Programmed Maintenance Services (NZ) Ltd.   They confirmed

4      Tai Ping Trading Co Ltd v Regina Enterprises Ltd HC Auckland, CIV-2009-404-7754, 29 March

2010.

that the proceeding had been properly served and that in their view the company was insolvent.

[10]     On 7 February 2013 the lawyers representing the director and shareholders of Silver Oaks Property No.2 Ltd sent Mr Jollands directors’ and shareholders’ resolutions  and  certificates  as  to  solvency.    The  directors’ solvency  certificate recorded that over the last 14 years the company had always been able to pay its debts as they fell due in the normal course of business, and the company had never encountered any circumstances which caused it to be unable to pay its debts.  Over the last two years there had been no departure from historical trends which would affect  the  company’s  ability  to  pay  debts.    The  most  recent  annual  financial statements recorded shareholders’ funds of $5,957,874.   The company’s forecasts and budgets showed that the company was to achieve a net positive cash flow and remain solvent.

[11]     The company’s lawyers also sent Mr Jollands a lengthy letter with extensive enclosures explaining how the company came to be put into liquidation by default, giving the background to the Silver Oaks group of companies, outlining the financial position of Silver Oaks Property No.2 Ltd, stating that Programmed Maintenance Services (NZ) Ltd was the only creditor and that its claim was disputed, describing the assets held by the company, providing annual accounts (admittedly based only on management accounts), indicating that an application to terminate the liquidation would be made under s 250 of the Companies Act and explaining the basis for that application.  The letter advised that arrangements would be put in place to meet the liquidators’ costs.   It sought the liquidators’ confirmation that there would be no objection to the application.  The letter also sought the liquidators’ co-operation in executing an agreement to lease one of the commercial premises and to advance negotiations for another.

[12]     The  letter  also  advised  that  the  lawyers  held  in  their  trust  account

$131,876.70 and that they were authorised to undertake to Programmed Maintenance Services (NZ) Ltd to hold the sum on interest-bearing deposit until an order under s 250 and to continue to hold those funds until final order of the court or joint written

instructions  from  Silver Oaks  Property No.2  Ltd  and  Programmed  Maintenance

Services (NZ) Ltd.

[13]     In response, Mr Jollands required the lawyers to pay the $131,876.70 to be held by the liquidators.  He also advised of the costs to date.

[14]     On 12 February the company’s lawyers advised that another entity, not Silver Oaks Property No.2 Ltd, had paid the $131,876.70.  It also advised that, if  need be, Silver Oaks Property No.2 Ltd would be able to raise funds quickly from its bankers, to be held on an undertaking or paid into court if required. The letter showed that the lawyers wanted to advance the application under s 250.  On 14 February $8,000 was paid to the liquidators on account of their fees and expenses.

[15]     The termination application was filed on 15 February 2013 and given an initial call date of 20 March 2013. The affidavit in support of the application broadly repeated matters that had been outlined by earlier correspondence to the liquidators. Mr Wilson, the director, was the applicant.  There was an associated application for leave to proceed by originating application which was granted on 19 February 2013. The liquidators were served on 20 February 2013.

[16]     Mr Jollands’ position was that he was required to continue to administer the liquidation until either the petitioning creditor agreed otherwise, or the court ordered. It  did  not  seem  to  him  at  that  stage that  the  matter would  settle.   He did  not necessarily accept the solvency certificates.  He was concerned that rents from the Orewa properties were being paid into an account not in the name of the company.

[17]     Mr Jollands replied to the company lawyers on 21 February 2013.  He sought information which was consistent with the liquidation continuing.   He wanted to investigate historical transactions relating to the sale of two motor inns.  He advised that he had instructed the petitioning creditor’s lawyers to act for him in the liquidation.  He required rents to be paid to the liquidators’ trust account.  He advised that the liquidators were unable to stop the work in the liquidation until they filed their final report or resigned, or the court ordered otherwise.

[18]     The lawyers provided some of the information requested and indicated that they would ask their client to provide more.  They asked the liquidators not to make any approaches to the persons the director had been dealing with in relation to the two units which had been let, lest that jeopardised negotiations.  Their response also made it clear that this was a straightforward case for termination under s 250.

[19]     Mr Jollands remained unconvinced.  He noted that one of the motor inns had been sold to a related entity.  He believed the company to be insolvent before the sale of the motor inn in March 2011.  He had found out that not all the rates had been paid up to date on the commercial premises in Orewa.  He noted the liquidation had been advertised with notice given to creditors to submit claims.  Only Programmed Maintenance Services (NZ) Ltd filed a claim.

[20]     Mr Jollands’ position was that he had not received proper co-operation from Mr Wilson, the director of the company, and had received conflicting information from the shareholders’ lawyers.   He did not accept that the company was solvent. While the dispute between the company and Programmed Maintenance Services (NZ) Ltd remained unresolved, the application to terminate the liquidation should be opposed.  He used the lawyers for Programmed Maintenance Services (NZ) Ltd for legal advice.

[21]     There were negotiations between the lawyers for Programmed Maintenance

Services (NZ) Ltd and the shareholders’ lawyers.  These resulted in an agreement on

26 February 2013 under which Mr Wilson was to pay $115,000 to Programmed Maintenance Services (NZ) Ltd.  Mr Jollands’ position was that until the claim by Programmed Maintenance Services (NZ) Ltd had been settled, the liquidation could not be terminated.

[22]     Mr Jollands maintains that the lawyers for Silver Oaks Property No.2 Ltd did not adhere to the arrangements but “moved the goalposts again”.  He did not accept their explanation that a payment from their trust account could not be made until the liquidator had authorised it, because the money was being held on undertakings.

[23]     The  liquidators  did  not  file  any  documents  in  opposition  to  the  s  250 application, and did not file a memorandum with the court indicating their non- opposition until 19 March 2013.   Their memorandum indicated that the court had approved their rates of remuneration and advised that the liquidators were ready to resign, that the termination of the case was not opposed, that the claim by the only unsecured creditor had been resolved and that they would file their only report with the Companies Office.  Their memorandum did not expressly address the amounts they were claiming for remuneration.

[24]     The lawyers acting for both Programmed Maintenance Services (NZ) Ltd and the liquidators had advised the company’s lawyers how much should be paid towards the liquidators’ remuneration and expenses.

Review of the fees

[25]     The liquidators have claimed fees of $26,244 (exclusive of GST) for 76 hours

36 minutes of charged time.   That is an average hourly rate of $342.61.   In my experience with liquidators’ applications to approve remuneration, that rate is relatively high.    Insolvency practitioners typically delegate  routine tasks  to  less qualified staff, for whom lower rates are claimed.  In a routine liquidation, where the liquidator may do little more than supervise, average hourly rates tend to range between $200 and $250 an hour, but in some cases are lower.  In cases where the average rates go above $250 an hour, liquidators and higher qualified staff put in greater hours.  The liquidators’ reports describing the liquidation often show grounds for greater input by liquidators and higher qualified staff.  The higher average hourly rate in this case is an outlier.

[26]     In Re Roslea Path (In liq),5  Venning and Heath JJ adjusted the categories identified  by  Master  Gambrill  in  Re  Medforce  Healthcare  Services  Ltd  (in  liq) (No 2).6   This case is in the third category (above $25,000) where a liquidator has a

heavier burden to inform the court of the nature of the liquidation, the urgency of the

5      Re Roslea Path, above n 3, at [157].

6      Re Medforce Healthcare Services Ltd (in liq) (No 2) [2001] 3 NZLR 158 at [11].

dealings, the number of creditors and the reasons for substantial input of time and cost.

[27]     Context for the present application is given by an application to terminate a liquidation I dealt with at the end of 2015 in Re Asian International Group Ltd (in liq).7    This was another case where a liquidation order was made by default on the application  of  a  creditor.    The  company  was  solvent  and  trading  in Auckland. Tauranga liquidators were appointed.  The liquidators learned that the director of the company had not been aware of the liquidation proceeding. The director was keen to pay the creditor’s debt and have the company taken out of liquidation promptly so that it could carry on in business.   The liquidators arranged an overall settlement

between the creditor and the company under which the creditor would be paid and the costs of liquidation would be met.   The liquidators started an application for termination under s 250.  All parties consented.  I made a termination order on the papers.   The liquidators’ remuneration for their work on the liquidation, including arranging for the s 250 application, was $4,051 excluding GST and expenses.  The legal  fees  of  $4,335  on  the  application  were  charged  separately.    That  was  an efficient outcome.  It has to be said that the liquidators took certain shortcuts.  Not all the statutory steps required of a liquidation order were taken. While these liquidators started the s 250 application – and that was appropriate in that case - it does not follow that liquidators generally are required to initiate termination applications. All the same, the case illustrates that matters can be conducted much more efficiently than the liquidators did in this case.  The charge-out rates in the Asian International Group Ltd case were lower than those the court approved for Silver Oaks Property No.2 Ltd.

[28]     There is one obvious reason why the liquidators’ charges are high. They have charged at rates above those allowed by the court when it made the liquidation order. In their consent under s 282 of the Companies Act, the liquidators stated that their

current rates of remuneration were:

7      Re Asian International Group Ltd (in liq) HC Auckland CIV-2015-404-2779.

(a)       Partners/liquidators                 $400.00 (plus GST) per hour

(b)      Managers  $200.00-$250.00 (c)     Senior analysts  $150.00

(d)      Business analysts  $100.00 (e)           Administration staff               $100.00

They also stated that while the liquidators will carry out general supervision of the conduct of the liquidation, routine work would be carried out by staff members to minimise costs and, wherever possible, work would be carried out by a person at the most  appropriate  level  to  carry out  the  work  in  a  competent  and  cost-effective manner.  The sealed liquidation order stated that the liquidators’ rates were approved subject to the requirement that at the conclusion of the liquidation an application would be made to fix the overall remuneration of the liquidators.

[29]     The liquidators did not give notice of any intention to increase charges.  Their billings report shows that Mr Jollands charged for himself at $440.00 per hour plus GST and for a staff member at $180.00 per hour plus GST.  There is no evidence as to the experience or qualifications of the staff member.  Much of her work seems to have been routine administration, but some of it may be more specialised, but no higher than the level of a senior analyst.  Given the range of tasks, I will apply an average: a charge-out rate of $125.00 an hour for her work.  I allow $400 an hour for Mr Jollands.

[30]     The matter does not stop at adjusting the charge-out rates.  In my judgment, Mr Jollands’ approach to the liquidation was flawed.  While he was told at a very early stage in the liquidation that there would be an application to terminate it, for most  of  the  time  he  maintained  a  consistent  position  that  as  liquidator  he  was required to carry out the liquidation on the basis that the company was insolvent. Only very shortly before the application was called in court did he accept that there

was a proper basis for the liquidation to be terminated.  He refused to accede to the

requests from the shareholders’ lawyers that he minimise his attendances.

[31]    At the outset, many liquidators may properly be sceptical of claims by shareholders and directors that a company has been wrongly put into liquidation on the ground of insolvency, that the company is in fact solvent and that the liquidation should be terminated.   But in this case, the shareholders’ lawyers went to some trouble to put before Mr Jollands information which should have satisfied him that:

(a)      Silver Oaks Property No.2 Ltd satisfied both limbs of the solvency test under s 4(1) of the Companies Act;

(b)      the company was bona fide in disputing its liability to Programmed

Maintenance Services (NZ) Ltd;

(c)      there were proper proposals to secure the position of Programmed Maintenance Services (NZ) Ltd if the company were taken out of liquidation; and

(d)      there was a sound explanation for the company’s failure to oppose the

liquidation application.

[32]     Indeed, Mr Jollands could have checked these matters for himself, although he does not appear to have done so.  He did travel to Orewa to discuss matters with the tenants, apparently with a view to arranging for rent to be paid to his office.  That must have assisted him in understanding the real financial position of the company. Steps Mr Jollands took to investigate the sale of assets with a view to looking for voidable transactions were obviously misdirected.  Not only was the liquidation to be terminated,  but  given  that  the  company  assets  were  adequate  to  meet  the  only creditor who had claimed, it was unnecessary to investigate prior transactions, at least not at this stage in the liquidation.

[33]     Mr Jollands failed to understand that an appropriate arrangement on a s 250

application where a creditor’s claim is disputed is to secure funds until the claim is

resolved.  That was notwithstanding that the shareholders’ lawyers cited authority to

that effect in their first letter to him.

[34]     Mr Jollands has not put in evidence any letter in which he responded to the shareholders’ lawyers, setting out any queries as to their application under s 250.  His attitude instead was to assume that the liquidation would carry on regardless, and he should not be diverted from his work as liquidator by the prospect of the liquidation being terminated.   Instead, he took advice from the lawyer for Programmed Maintenance Services (NZ) Ltd on how the application could be opposed.

[35]     While the shareholders’ interests disputed the claim made by Programmed Maintenance Services (NZ) Ltd, that creditor used the fact that it had obtained an order for liquidation in its negotiation to resolve the dispute.  It was asserting that the company had been properly ordered into liquidation and that the liquidation should continue.  It could use its position as an unsecured, unsatisfied creditor to stall the termination application.  That course was open to it.  But ordinarily, it would pay the costs incurred in doing so.  In this case however, Mr Jollands instructed the lawyers for Programmed Maintenance Services (NZ) Ltd to act for the liquidators on the liquidation and on the application under s 250.   The lawyers acting for both Programmed Maintenance Services (NZ) Ltd and the liquidators made no pretence of setting up Chinese walls.  The same lawyer acted for both at the same time.  The liquidators and the creditor followed a consistent course, directed at upholding the position of the creditor as far as possible.  The lawyers billed the liquidators for their work, and the liquidators have claimed those costs as part of their expenses in the liquidation.  That means that legal expenses incurred with a view to protecting the interests  of  the  creditor  in  a  dispute  with  the  shareholders’ interests  have  been charged to the shareholders.   There is no evidence that under its contracts, Programmed Maintenance Services (NZ) Ltd could charge Silver Oaks Property No.2 Ltd for its legal costs incurred in resolving disputes as to its contractual claim, yet  Programmed  Maintenance  Services  (NZ)  Ltd  has  succeeded  in  having  its customer pay its legal costs for it.

[36]     It is not clear why an experienced liquidator such as Mr Jollands would need to take legal advice in this case.   In my experience on applications under s 250,

liquidators act independently of creditors but try to give helpful assistance to the court in ensuring that the criteria under s 250 have been satisfied.  It was an error of judgment  for Mr Jollands  to  align  the liquidators  with  the interests  of the sole creditor in this case.  I do not accept that it is reasonable for the shareholders to be charged the cost of using the creditors’ lawyer in resolving the disputed debt.  Those

expenses were not properly incurred under sch 7(1) of the Companies Act.8

[37]     At a certain point in the liquidation the liquidators ought to have realised that Mr Wilson was serious in pursuing his application to terminate the liquidation.  From that  point  on,  the  liquidators  ought  to  have  accepted  that  termination  of  the liquidation was on the cards.  From then on, it was appropriate for the liquidators to await the outcome of the application rather than press ahead with the liquidation in the interests of the creditors.   Pressing on with the liquidation in the interim was inappropriate because if the s 250 application was successful they would cause unnecessary expense to the shareholders.  The point where the liquidators ought to have realised that the application under s 250 was serious was on 14 February 2013 when they received $8,000 paid into their trust account by Mr Wilson on account of their fees and expenses.

[38]     I accept all the attendances claimed by the liquidators up to 14 February

2013.  There were also necessary attendances after date, such as dealing with matters of routine, dealing with the application under s 250 and reporting to the court, and attending to the handover.  I have not allowed for other work after 14 February.  The liquidators charged their attendances under five heads: preparation of documents; administration general; creditor attendances; debtor attendances; and legal attendances.  I have adjusted the rates claimed to $400.00 per hour for Mr Jollands and $125.00 for Ms Smith-Hughes.

[39]     I fix the liquidators’ remuneration as follows:

8      Horton v Cowley [2014] NZHC 20 at [19].

(a)      Preparation of documents	Mr Jollands: 1 hour Ms Smith-Hughes: 2 hours 54 minutes	$400.00 $362.50
(b)      Administration general	Mr Jollands: 3 hours 12 minutes Ms Smith-Hughes: 17 hours 36 minutes	$1,280.00 $2,200.00
(c)      Creditor attendances	Mr Jollands: 7 hours 24 minutes Ms Smith-Hughes: 1 hour 12 minutes	$2,960.00 $150.00
(d)      Debtor attendances	Mr Jollands:  1 hour	$400.00
(e)      Legal attendances	Mr Jollands: 7 hours 12 minutes Ms Smith-Hughes: 2 hours 12 minutes	$2,280.00 $275.00
TOTAL:  (exclusive of GST)	$10,307.50

[40]     As to disbursements, for the reasons given in [35] and [36] above, legal costs the liquidators incurred in opposing the s 250 application in the interests of Programmed Maintenance Services (NZ) Ltd ought not to be passed on to the shareholders  and  they are therefore not  allowed.    I allow the  liquidators’ other disbursements, totalling $969.34.  Accordingly, I fix the liquidators’ remuneration in the sum of $10,295.00 plus GST plus disbursements as totalling $12,808.59.

[41]   This proceeding will be called in the miscellaneous companies list on Wednesday 16 March 2016 at 11:45am.  The liquidators will be required to show that they have refunded to the company the excess they have taken as fees and expenses.

………………………………….

Associate Judge R M Bell