Levin v Lawrence
[2013] NZCA 394
•23 August 2013 at 3 pm
| IN THE COURT OF APPEAL OF NEW ZEALAND |
| CA430/2012 [2013] NZCA 394 |
| BETWEEN | HENRY DAVID LEVIN AND VIVIEN JUDITH MADSEN-RIES (AS LIQUIDATORS OF PERSONAL HOMES LIMITED) |
| AND | STEPHEN MARK LAWRENCE AND ANTHONY JOHN McCULLAGH (AS LIQUIDATORS OF WATERMAN BUILDING SUPPLIES LIMITED) |
| Hearing: | 6 August 2013 |
Court: | Wild, White and French JJ |
Counsel: | N H Malarao and J M Blythe for Appellants |
Judgment: | 23 August 2013 at 3 pm |
JUDGMENT OF THE COURT
AThe appeal is dismissed.
BThe appellants are to pay the respondents’ costs for a standard appeal on a band A basis with usual disbursements.
____________________________________________________________________
REASONS OF THE COURT
(Given by Wild J)
Introduction
Did the High Court err in not permitting the appellants to inspect the accounts and records of Waterman Building Supplies Ltd (Waterman), a company in liquidation? Did the High Court correctly state the test on an application by a creditor under s 256(1)(a)(ii) of the Companies Act 1993 to inspect? Those are the interrelated questions for decision on this appeal.
The appellants are the liquidators of Personal Homes Ltd (Personal). Personal is a creditor of Waterman. The respondents are the liquidators of Waterman.
The appellants applied to the High Court under s 256(1)(a)(ii) to inspect the accounts and records of Waterman.[1]
[1]The appellants’ application requested inspection of both “the accounts and records of the liquidation of Waterman and the accounts and records of Waterman”. However, this Court’s understanding is that the appellants are particularly interested in the records of the company pre-liquidation. They wish to check that there is no way of recovering money from Waterman, and whether a running account did in fact exist.
The relevant part of s 256 provides:
256 Duties in relation to accounts
(1)Subject to subsection (2) of this section, 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 of this Act, 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 …
In a judgment delivered in the High Court at Auckland on 25 June 2012 Toogood J dismissed the appellants’ application.[2]
Issues on appeal
[2]Levin v Lawrence [2012] NZHC 1452 [High Court judgment].
The parties agreed that the issues on appeal are these:
(1)Presumption against inspection? Did Toogood J err in law in finding that there is a presumption against inspection under s 256(1)(a)(ii)?
(2)Good reason? Did the appellants establish they had ‘good reason’ to inspect the accounts and records of Waterman, pursuant to s 256(1)(a)(ii)?
(3)Relevance of fiduciary principles and s 256(1)(a)(i)? Did Toogood J err by failing to consider the appellants’ submissions that, when interpreting s 256(1((a)(ii):
(a)fiduciary principles are relevant; and
(b)s 256(1)(a)(i) can assist in the interpretation of s 256(1)(a)(ii)?
Background
In his judgment Toogood J recorded that Waterman was a joint venture between Waterman Enterprises Ltd, Trade Mart Ltd and Fletcher Distribution Ltd (FDL) for the operation of the PlaceMakers franchise at Westgate. That may not be correct. FDL was represented in the High Court. It chose not to be represented on this appeal. But, in a memorandum he filed in this Court on 24 July, Mr Fulton for FDL stated that FDL “was not a joint venture partner of Waterman”. This is not a matter we need resolve.
Waterman, which had been loss-making for some time, ceased trading on 30 November 2008. From 1 December 2008 FDL operated the PlaceMakers Westgate business. FDL acquired the business and assets of Waterman and all the shares in Waterman. FDL paid Waterman’s creditors in accordance with standard practice for PlaceMakers branches throughout New Zealand.
FDL then traded with Personal, which continued to purchase goods on credit from PlaceMakers Westgate.
Personal was put into liquidation by order of the High Court on 13 November 2009. The appellants were appointed liquidators.
On 15 July 2010 the appellants filed in the High Court two notices to set aside voidable transactions pursuant to s 292 of the Companies Act 1993:
(a)A notice addressed to FDL. Although this notice was not itself in evidence before the High Court, it gave FDL notice that the appellants wished to set aside and recover Personal’s payments to FDL totalling $340,240.09.
(b)A notice addressed to Waterman.[3] In this the appellants gave notice they wished to set aside and recover Personal’s payments to Waterman totalling $789,725.87.
[3]Levin v Waterman Building Supplies Ltd HC Auckland CIV-2010-404-4494, 15 July 2010.
On a date not in evidence FDL settled the s 292 claim against it by paying the appellants $100,000.
On 11 August 2010 Waterman filed a notice of opposition to the appellants’ s 292 notice to Waterman. Waterman’s grounds of opposition included these:
3.All payments were made in the ordinary course of business.
…
5.The Liquidators’ notice … also fails to address s 292(4B) of the Act. The payments were made and received in circumstances where that provision applies.
6.By letter dated 3 March 2010, the Liquidators claimed that the sum of $165,311.51 was due on the basis that there was a “continuing business relationship with PlaceMakers, and the requirement under section 292(4B) that all transactions be treated as a single transaction”.
7.The Liquidators have adopted a wholly different approach in the Notice, without any explanation for doing so.
…
On a date not in evidence, but shortly before 20 December 2010, Waterman (we assume funded by FDL) offered the appellants $5,000 to settle the appellant’s s 292 notice against Waterman. When the appellants refused this offer, Waterman was put into liquidation by shareholder resolution on 20 December 2010 and the respondents appointed liquidators. The respondents’ evidence in the High Court is that Waterman had no assets or liabilities and that FDL met the costs of its liquidation.
On 23 December 2010 the appellants filed on behalf of Personal in the liquidation of Waterman an unsecured creditor’s claim for $789,725.87.
On 25 February 2011 the respondents admitted Personal’s claim in the reduced amount of $52,858.94. Calculated on “a running account” basis, it was only for that much lower amount that the respondents considered Waterman “may have received a preference”.[4] The appellant Mr Levin deposed that he did not contest the reduced figure of $52,858.94 “with some reluctance and in reliance on the respondents having not disclosed any assets or contingent assets”.[5]
[4]“A running account” is the example used in s 292(4B) of the Companies Act 1993, which provides that all the transactions forming part of a continuing business relationship between debtor and creditor are to be treated as if they together constituted a single transaction for the purposes of s 292(1).
[5]Affidavit in reply sworn by Mr Levin on 22 March 2012 at [7].
The following related events then occurred:
The appellants called on the respondents to hold a meeting of Waterman’s creditors, apparently for the purpose of nominating an alternative liquidator.
The respondents declined. They advised they had accepted one other unsecured creditor claim of $100,000.[6] Given that the appellants would not be in a position to have any resolution passed by both majority numbers and value, the respondents expressed the view that “it seems a futile exercise”.
[6]That was FDL, for the $100,000 settlement figure referred to in [12] above.
The respondents nevertheless persisted, mentioning the ability to conduct the meeting by postal vote.
Following their acceptance and implementation of the postal voting proposal, the respondents advised the appellants that the resolution that no replacement liquidator be appointed to Waterman had been passed, FDL voting in favour, Personal against. Similarly, the resolution to appoint a liquidation committee was defeated.
The respondents answered a number of questions posed by the appellants about the respondents’ investigation into Waterman.
The respondents declined a request by the appellants for an opportunity to review the respondents’ file and records relating to Waterman.
The appellants renewed their request, this time indicating they would apply to the Court for an order for inspection if their request was again declined. It was and they did.[7]
But when the appellants took no further steps, the respondents on 20 January 2012 filed their final report to the creditors and shareholders of Waterman. This report noted that objections to the removal of Waterman from the register of companies must be lodged by 27 February 2012.
On 23 February 2012 the appellants filed an originating application, amending it on 23 March. The orders sought by the appellants included an order under s 256(1)(a)(ii) requiring the respondents to permit the appellants to inspect the accounts and records of Waterman.
The evidence supporting and opposing the application
[7]However, that final request was by letter dated 9 September 2011. It was declined in a letter dated 3 October 2011. But the appellants did not apply until 23 February 2012, over four months later.
In the affidavit he swore in support of the application, Mr Levin detailed the background we have summarised in [10] to [17]. He then deposed:
24.As at today’s date, Personal Homes has not received any payments from Waterman despite holding an accepted claim of $52,858.94.
25.As liquidators of Personal Homes, an unpaid creditor of Waterman, Ms Madsen-Ries and I wish to have access to the accounts and records of Waterman. The respondents have not allowed us such access to date. We respectfully request an order from the Court pursuant to s 256(1)(a)(ii) that the respondents allow us such access.
Mr Lawrence filed an equally detailed affidavit in opposition. In this he set out various actions included in the respondents’ investigations into the affairs of Waterman. This is Toogood J’s summary of that part of Mr Lawrence’s affidavit:
[24] In his affidavit filed in opposition to the application, Mr Lawrence (who as joint and several [liquidator] has carried the argument on behalf of the respondents) deposes that the liquidators’ investigations into the affairs of Waterman included the following actions:
(a)receiving from the sole director of Waterman a business questionnaire which indicated that Waterman had ceased to trade from 30 November 2008, on dissolution of the joint venture, some two years before the company was placed into liquidation;
(b)conducting an examination of Waterman’s financial records from which it was determined that the company had traded at a loss prior to ceasing to trade in November 2008; that as at the time of the liquidation the company had no assets or liabilities; and that there were therefore no assets for realisation by the liquidator;
(c)making inquiries which indicated that no distribution had been made to the Waterman shareholders when the company ceased to trade and that, following closure of the company, FDL had paid all of the creditors of Waterman in accordance with what was the standard practice for PlaceMakers branches throughout New Zealand. The inquiries also revealed that no company funds had been used to pay debts owed by the directors of Waterman;
(d)taking legal advice and being satisfied that there were no potentially voidable transactions for the liquidators to investigate pursuant to s 292 of the Act;
(e)obtaining from FDL documentation relating to the commencement and dissolution of the joint venture; and
(f)making telephone or email inquiries of Mr Mark Waterman, a previous director of Waterman, and deciding that there was no basis on which an examination of Mr Waterman under oath was warranted.
Mr Lawrence stated that those investigations led the respondents to conclude that “there were no issues relating to Waterman’s affairs which required further investigation”.[8] Thus, the respondents had filed their final report to bring the liquidation to a conclusion. Mr Lawrence stated that FDL would “likely” have funded any further investigations the respondents considered necessary.[9]
[8]Affidavit in opposition sworn by Mr Lawrence on 9 March 2012 at [40].
[9]At [41].
Mr Lawrence concluded his affidavit by confirming that the respondents had discharged their statutory duties, and saw no benefit in re-opening the liquidation or granting the application to inspect. He expressed the view that the application to inspect the accounts and records of Waterman was “frivolous, vexatious and unfounded”.[10] If it was granted, he predicted “the liquidation of Waterman is likely to stretch out indefinitely”.[11]
[10]At [43].
[11]At [44].
Mr Levin filed an affidavit in reply making these points:
Only with “some reluctance” had the appellants accepted the reduction of Personal’s claim down to $52,858.94 and would consider seeking admittance of a revised claim of up to the original claimed $789,725.87 if the material available to them on inspection realistically warranted that.[12]
Mr Lawrence had not attached to his affidavit any documentation allowing “me or the Court to test whether [his conclusion that there were no issues warranting further investigation] is right or wrong”.[13]
In his view any materially affected creditor of a failed company such as Waterman had “the right … to test a liquidator’s conclusions”.[14] As Mr Lawrence did not wish to cooperate with him in this exercise, the only alternative was to satisfy himself that there is no recovery possible.
The costs of the inspection if permitted “will be my costs”.[15]
Issue 1: Was the Judge wrong to hold there was a presumption against inspection?
[12]Affidavit in reply sworn by Mr Levin on 22 March 2012 at [7].
[13]At [9].
[14]At [10].
[15]At [12].
Having set out s 256, Toogood J said this:
[33] It can be seen that creditors and shareholders of a company in liquidation do not have a right to inspect accounts and records, but that they may be permitted to do so by the Court. The plain wording of the section implies a presumption against allowing creditors and shareholders to inspect the records of a company in liquidation and the liquidator’s records. The question of principle on which the insolvency practitioners in this case are divided is the basis upon which the Court should exercise its gatekeeper role under the section in relation to creditors.
(Our emphasis.)
The words we have emphasised are the basis for this first ground of appeal.
The Judge did not use the term “presumption” in the sense it is normally used in statutory interpretation. There are a number of “presumptions” of statutory interpretation. The main ones are catalogued and discussed in Burrows and Carter Statute Law in New Zealand.[16]Just two examples are the presumption favouring the right of access to the courts, and the presumption against giving a statute retrospective effect.
[16]J F Burrows and R I Carter Statute Law in New Zealand (4th ed, LexisNexis, Wellington, 2009) at 319–328.
Rather, the Judge used the term “presumption” to contrast s 256(1)(a)(ii) with (i). That is clear from these two further paragraphs in the judgment:
[36] I do not think the approach to be taken under sub-paragraph (i) assists the applicants under sub-paragraph (ii). Liquidation committees are formed to assist the orderly management of creditor interests in a liquidation, particularly where there are a large number of creditors. It is clear Parliament intended that liquidation committees should be provided with access in the ordinary course of events, the only basis for refusal being the liquidator’s reasonable belief that inspection would be prejudicial to the liquidation.
[37] So far as the rights of creditors and shareholders are concerned, however, the presumption is reversed by the wording of s 256(1)(a)(ii), and is against disclosure to such persons unless the Court orders otherwise. Individual creditor or shareholder access is the exception to the usual rule. Permitting such parties to have access in any case where there was no likelihood of prejudice to the liquidation would make access the rule rather than the exception. If that had been Parliament’s intention, there would have been no need for a separate, differently-worded sub-paragraph to deal with the position of creditors and shareholders.
(Again, our emphasis.)
A little later the Judge again used the word “presumption”, this time in rejecting the analogy Mr Malarao had drawn with equitable principles:
[40] The simple answer to that submission is that it reverses the presumption of non-inspection in the absence of a Court order. I have explained above why that proposition is untenable on a plain reading of the legislative wording.
It is clear from those parts of the judgment that Toogood J used the term “presumption” as descriptive of the default or starting position ie no inspection by an individual creditor or shareholder in the absence of a Court order. That is one of its dictionary meanings – “taking something to be true … at the start of a chain of argument …”.[17]
[17]The New Oxford Dictionary of English (Clarendon Press, Oxford, 1998) at 1468.
Beyond an infelicitous use of the word “presumption” we see no error on the Judge’s part. But we agree with Mr Malarao that it is not correct to state that s 256(1)(a)(ii) contains a presumption against inspection. We intend saying nothing more about this ground of appeal, which we view as a makeweight or precursor to the other grounds, particularly the next.
Issue 2: Did the Judge err in holding that the appellants had not established “good reason” to inspect?
The Judge’s test
The Judge propounded his “good reason” test in these terms:
[56] That is not to say that there should be a high threshold for permitting inspection, but there must be some good reason for the Court to order inspection in circumstances where the statutory scheme does not ordinarily permit it.[18] The test of “good reason” does not require any further elaboration; whether the Court will exercise its discretion to order access to the records will depend on the particular circumstances of each case.
[18]Re Birmingham Banking Co, ex parte Brinsley (1866) 36 LJ Ch 150; Re Imperial Land Co of Marseilles [1882] WN 173 (Ch).
The Judge then explained why he was not satisfied the appellants had met the “good reason” test:
Should inspection be permitted in the present case?
[57] I am not persuaded that there is any good reason to impede the orderly liquidation of Waterman by permitting the applicants to inspect the records. It is insufficient that Mr Levin may have suspicions about possible sources of additional funds to meet creditors’ claims arising out of the relationship between Waterman, Trade Mart and FDL. Mr Levin’s suggestions come close to alleging that there may have been some incompetence, if not impropriety, on the part of the respondents in the conduct of their statutory functions. I am more than satisfied that there is no arguable basis for any such proposition.
Submissions
In his oral submissions for the appellants, Mr Malarao accepted Toogood J’s “good reason” test. He acknowledged it was hard to argue against it, because a Court would obviously not order inspection if there was no good reason.
Rather, Mr Malarao took issue with Toogood J’s application here of his “good reason” test. While the Judge said that suspicion was not enough, Mr Malarao submitted that he did not enunciate what would amount to good reason. He suggested that the judgment required proof of impropriety or incompetence on the part of the liquidators before the Court would find “good reason”. He argued that Parliament could not have intended that because there were at least two other procedures in the Companies Act for remedying liquidator impropriety or incompetence. One was s 284 (review of specified decisions of a liquidator), the other s 286 (order to enforce liquidator’s duties; the Court has power to remove a liquidator and prohibit the liquidator acting in other liquidations).
Mr Malarao submitted that a creditor applying under s 256(1)(a)(ii) should therefore not have to cross a high hurdle for inspection to be granted. He relied on Fisher J’s judgment in Ocean Shipping Ltd (in liq) v Orient Shipping Rotterdam BV as establishing creditors’ entitlement “to a full and thorough investigation of the financial history and status of the [failed] company”.[19]
[19]Orient Shipping Rotterdam BV v Ocean Shipping Ltd (in liq) HC Auckland M348/96, 16 July 1996 at 2.
From a review of decisions in the United Kingdom and Australia on the equivalents of s 256(1)(a)(ii) Mr Malarao suggested four “themes” emerge:[20]
(a)Is the applicant a creditor?
(b)Are the books and records in the control of the liquidator?
(c)Is the application made in connection with (or for the purpose of) the winding up of the company?
(d)Is the application ‘just’ in the circumstances of a particular case?
[20]The United Kingdom decisions were North Brazilian Sugar Factories (1887) 37 Ch 83 (CA); Re D P R Futures Ltd [1989] 1 WLR 778 (Ch) and Sunwing Vacation Inc v E-Clear (UK) Plc [2011] BCC 889 (Ch). The Australian decisions were Re BPTC Ltd (1992) 10 ACLC 271 (NSWSC); The Textile Clothing and Footwear Union of Australia (Victorian Branch) v Wight (as liquidator of William Lawrence) (Globe Dyeworks Pty Ltd) (in liq) (1993) 12 ASCR 181 (VSC) and Williamson v Chamberlain [2006] NSWSC 178.
We interpolate here that Mr Hughes for the respondents suggested a fifth theme also emerged:
(e)The Court will not allow an application made for a vexatious purpose or to conduct a fishing expedition.
Legislative background
Although the Judge’s “good reason” test was not ultimately challenged by the appellants, we have considered the legislative background to s 256 to see whether it assists in setting the correct test or threshold for an order under s 256(1)(a)(ii).
The previous statute was the Companies Act 1955. Sections 217–267 of the 1955 Act dealt with “winding up by the Court”. In this part of the 1955 Act there were three separate sections dealing with inspection by creditors or contributories of the company. First, s 242 required the liquidator to keep proper books and records of the liquidation “… and any creditor or contributory may, subject to the control of the Court, personally or by his agent inspect any such books”.
Secondly, s 244 provided that the accounts of every liquidator of a company being wound up by the Court shall be audited by the Audit Office and then:
(2) The accounts so audited shall be open to the inspection of any creditor or contributory, or of any person interested.
Lastly, under the heading “General Powers of Court in Case of Winding Up by Court”, there was s 260(1):
(1) The Court may, at any time after making a winding-up order, make such order for inspection of the books and papers of the company by creditors and contributories as the Court thinks just, and any books and papers in the possession of the company may be inspected by creditors or contributories accordingly, but not further or otherwise.
The marginal notes to those sections record that they were based on provisions in the predecessor New Zealand Companies Act of 1933 and, respectively, on ss 247, 249 and 266 of the Companies Act 1948 of the United Kingdom.
The focus of s 242 was the duty of the liquidator to keep proper books of the liquidation, for example minutes of the liquidator’s meetings.[21] That section allowed any creditor or contributory to inspect those books, subject to the control of the Court. Section 260 dealt with the books and papers of the company, as opposed to those of the liquidation. Those books and papers would include all pre-liquidation books and papers still in the possession of the company. Section 260 only allowed inspection by creditors or contributories of those books and papers by order of the Court. The language of s 242 was more permissive than that of s 260.
[21]The things which liquidators were required to keep a record of in a winding up by the Court were set out in the Companies (Winding Up) Rules 1956, r 148: “all minutes, all proceedings had and resolutions passed at any meeting of creditors or contributories, or of the committee of inspection, and all such matters as may be necessary to give a correct view of his administration of the company’s affairs; but he shall not be bound to exhibit any document of a confidential nature (such as the opinion of counsel on any matter affecting the interest of the creditors or contributories) to any person other than a member of the committee of inspection, or the Official Assignee, or the Audit Office”. Rule 149 also required a cashbook to be kept by the liquidator in a winding up by the Court.
Inspection of the records and liquidation records of companies wound up other than by order of the Court was dealt with by s 294(1)(b) of the 1955 Act (liquidator in a voluntary winding up able to exercise “any of the other powers by this Act given to the liquidator in a winding up by the Court”), and s 210(2) (provisions of the Act with respect to winding up apply, unless the contrary appears, to the winding up of the company by any of the three modes (a) by the court (b) voluntary or (c) subject to the supervision of the court).
On 27 August 1992 the Department of Justice reported to the Chairman of the Justice and Law Reform Committee on the clause in the Companies Bill which is now s 256 of the Companies Act 1993. After referring to ss 242, 244 and 260 of the 1955 Act the Department stated:[22]
Paragraph (a)(i) widens the availability of records to include the committee of inspection but paragraph (a)(ii) continues the present position in relation to individual creditors and shareholders. It is suggested that paragraph (a) proceed unamended.
[22]Department of Justice Companies Bill – Liquidations (Advice to Justice and Law Reform Select Committee, DJ/27, 27 August 1992) at 8.
That indicates that s 256(1)(a)(i) was something new, and (a)(ii) a re-enactment of the existing law.
That is consistent with one of the aims of the 1993 Act. In its Report on Reform of Company Law, the Law Commission pointed out that the 1955 Act made provision for no less than five different ways of ending a company.[23] The Commission considered that complexity was unjustified and that there should be minimum formality in terminating a company. The 1993 Act introduced just two ways of “winding up” a company: by direct removal from the Register where the shareholders or directors wish, or by liquidation (of either a solvent or insolvent company, and either voluntary or imposed by others). Of the proposed reduced role of the Court and increased supervisory role of committees of inspection in what is now the 1993 Act, the Commission said this:
644 The reduced role of the Court also means that committees of inspection, which can be a substitute for the Court (section 240 of the 1955 Act), have a different role. Insolvency practitioners advised us that committees can be helpful in assisting the liquidator, and we see this as their primary function. It is recognised too, however, that the committee represents the creditors or shareholders, and therefore it is empowered to call for reports from the liquidator or call for a meeting. This enables the committee to exercise a measure of supervision in the most effective way.
[23]Law Commission Company Law: Reform and Restatement (NZLC R9, 1989) at 640.
Later, commenting on the draft Companies Act attached to its report, the Law Commission added:
673 Section 208(2)(f)[24] permits disclosure of the liquidator accounts and records unless the liquidator believes this to be prejudicial to the liquidation. In that case, the Court may order disclosure to any shareholder or creditor.
Analysis
[24]This should refer to s 208(2)(g) because that section in the draft Act was the precursor to s 256. It provided:
While this legislative history explains the reason for the insertion of s 256(1)(a)(i), it is perhaps less helpful in relation to (ii).
Section 256 has combined the repealed ss 242 and 260 of the 1955 Act into one section because it applies both to inspection of the accounts and records of the liquidation of the company (s 242 of the 1955 Act) and to inspection of the accounts and records of the company (s 260 of the 1955 Act). Thus there is a question as to what existing law s 256(1)(a)(ii) re-enacted,[25] as the threshold for inspection in the repealed s 242 differed from that in the repealed s 260.[26] The present application is directed at inspection of the accounts and records of the company, rather than of the liquidation.[27] It follows that the repealed s 260 is the most helpful of the repealed provisions in the interpretation of s 256(1)(a)(ii) in respect of the present application.
[25]Above at [44].
[26]Above at [41].
[27]See above at n 1.
Section 260 enabled the Court to make “such order for inspection … as the Court thinks just”.[28] That suggests a wide discretion. The 1956 edition of Palmer’s Company Law commented, of s 260 of the 1955 Act, “the Court is invested by s 260 with a discretionary power to permit inspection by creditors or contributories”.[29]
[28]Companies Act 1955, s 260(1).
[29]L M Papps Palmer’s Company Law: New Zealand Edition (Legal Publications Ltd, Wellington, 1956) at 233 (footnote omitted).
We note that Mr Malarao’s theme (d), as set out in [34] above, is explained by the wording of the equivalent to s 256(1)(a) in the United Kingdom and Australian legislation. The current Australian provision is s 486 Corporations Act 2001 (Commonwealth):
The Court may make such order for inspection of the books of the company by creditors and contributories as the Court thinks just, and any books in the possession of the company may be inspected by creditors or contributories accordingly, but not further or otherwise.
(Our emphasis.)
The English provision, s 155 of the Insolvency Act 1986, is virtually identical, also giving the Court a discretion to make such order for inspection “as the Court thinks just”. These two overseas provisions are also very similar to the repealed s 260 of the Companies Act 1955.
But the New Zealand statutory scheme enacted in 1993 differs from the UK and Australian statutory schemes in an important way: there is a (qualified) right of inspection for liquidation committees under s 256(1)(a)(i). Such a right is not to be found in the United Kingdom or Australian legislation. In those jurisdictions the only way a creditor can gain access to the liquidator’s records is by application to the Court.[30] In New Zealand, there has been, as set out above at [45], a deliberate policy of reducing the role of the Court in the supervision of liquidations.
[30]In Australia, s 531 of the Corporations Act 2001 does allow creditors and contributories to inspect liquidator’s records “unless the Court otherwise orders”.
Although the five themes counsel have extracted from the overseas cases are helpful, we see no point in delving into the detail of what Judges in other countries where the statutory provisions are different have done in the different circumstances of the applications they were dealing with. Even if Toogood J had applied the themes to the application he was dealing with, he would still have needed to answer the question: was it just to grant the appellants’ application? We see little practical difference between “just” and “good reason” as a threshold for ordering inspection.
Against that legislative background, we endorse the “good reason” test adopted by Toogood J, and ultimately not contested on this appeal. While no inflexible rules can or should be laid down, we think the “good reason” test can be elaborated to this extent:
(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.
We record that Mr Malarao for the appellants also accepted this elaboration of the Judge’s “good reason” test.
We agree with Toogood J’s reasons in [57] of his judgment for dismissing the appellants’ application. Applying our elaborations of the Judge’s “good reason” test, we see three points counting against the Court permitting the appellants to inspect. First, as one of Personal’s liquidators, Mr Levin would – or certainly should – have had access to the same records covering Personal’s trading relationship with Waterman as the respondents had. Yet, from his own investigations, Mr Levin was unable to identify any aspect of concern in that relationship which might justify an order for inspection. This is significant because Mr Malarao confirmed that Personal’s claim is limited to the $789,725.87 referred to in [11](b) above.
Secondly, as Mr Malarao conceded in his oral submissions, the appellants have no basis beyond suspicion for applying for inspection. Mr Malarao explained this suspicion was born of three matters. First, FDL’s close relationship with Waterman. Second, the timing of FDL putting Waterman into liquidation: Mr Malarao told us it was 10 days after FDL had settled the appellants’ s 292 claim against FDL. Third, Waterman’s offer of $5,000 to settle the appellants’ s 292 claim against Waterman. Mr Malarao posed the question: why offer anything to settle if there was no substance in the claim?
Not even in combination do we consider these matters justify suspicion on the appellants’ part. Nothing, in our view, is to be made of the first two matters. As to the third, Mr Hughes pointed out that the liquidation of Waterman had cost FDL $15,632.75 for the period 21 June 2011 to 20 January 2012 (the date of the liquidators’ final report to the Court). His point was that the offer of $5,000 made ready commercial sense against anticipated costs of that order.[31]
[31]And $15,632.75 was presumably not the full cost of the liquidation, since Waterman was put into liquidation on 20 December 2010.
The third reason is that the appellants’ application was, almost admittedly, a fishing expedition. Worse, it was one born out of distrust on the appellants’ part of the respondents’ discharge of their statutory duties. That distrust emerges from this paragraph in Mr Levin’s affidavit in reply:
10.I believe that it is the right of any materially affected creditor of a failed company, such as Waterman, to test a liquidator’s conclusions. Mr Lawrence does not wish to cooperate with me in this exercise. The only alternative is for me to look at the documents he has collected (and equally, to consider what he has not collected) to satisfy myself that there is no recovery possible.
We agree with Toogood J that Mr Levin’s suggestions come close to alleging incompetence, if not impropriety, on the respondents’ part without providing any proper basis. Given that the respondents are professional men discharging statutory functions under the High Court’s supervision, we think the Judge was right to view those imputations as regrettable.
Issue 3: Error in failing to consider fiduciary principles and s 256(1)(a)(i)?
First, Mr Malarao submitted that the approach to be taken by a liquidator in dealing with an application under s 256(1)(a)(i) by a liquidation committee to inspect, should be that taken by the Court in dealing with an application under s 256(1)(a)(ii). So, the touchstone issue of whether there will be prejudice to the liquidation by the inspection was the appropriate threshold to apply when considering an application for inspection, whether under s 256(1)(a)(i) or under s 256(1)(a)(ii). Mr Malarao had put the same submission to the Judge who rejected it, in particular in this passage:[32]
… Permitting such parties to have access in any case where there was no likelihood of prejudice to the liquidation would make access the rule rather than the exception. If that had been Parliament’s intention, there would have been no need for a separate, differently-worded sub-paragraph to deal with the position of creditors and shareholders.
[32]High Court judgment, above n 2, at [37].
We agree with the Judge, and for the reason he gave. Any prejudice to the liquidation would be an obvious factor in the exercise of the s 256(1)(a)(ii) discretion, but it is certainly not the sole criterion.
The second aspect of this ground involved Mr Malarao drawing an analogy with the law of trusts, in particular the duties of trustees to beneficiaries. Mr Malarao’s starting point was that liquidators owe fiduciary duties to the company’s creditors and shareholders. On that basis he likened liquidators to trustees. He then argued that “just as beneficiaries are entitled to inspect a trust’s accounts and records, so should creditors be permitted to inspect a liquidated company’s accounts and records”. Again, this was an argument that Toogood J rejected as “untenable on a plain reading of the legislative wording”.[33]
[33]At [40].
Again, we agree with the Judge. Taken to its logical extreme, Mr Malarao’s analogy between liquidators and trustees renders s 256(1)(a) – with the exception of the duty to keep accounts and records – otiose. We accept that s 256(1)(a) should be interpreted and applied bearing strongly in mind that liquidators are fiduciaries for the company’s creditors and shareholders. But that is as far as the analogy can properly be taken.
Result
None of the appellants’ grounds of appeal has succeeded.
The appeal is accordingly dismissed. The appellants are to pay the respondents’ costs for a standard appeal on a band A basis with usual disbursements.
Solicitors:
Meredith Connell, Auckland for Appellants
Kensington Swan, Auckland for Respondents
208 Other duties of liquidator
(1) Without limiting section 207 [Primary duty of liquidator], the liquidator has the other functions and duties specified in this Act.
(2) Without limiting subsection (1), the liquidator must
…
(g)keep accounts and records of the liquidation and permit those accounts and records, and the accounts and records of the company, to be inspected by
(i)any committee of inspection appointed under section 241 [Meetings of creditors or shareholders], unless the liquidator believes on reasonable grounds that inspection would be prejudicial to the liquidation; or
(ii) if the Court so orders, any creditor or shareholder …
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