Logan v Bishop
[2024] NZHC 46
•16 February 2024
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2023-404-904
[2024] NZHC 46
BETWEEN LARISSA HELEN LOGAN and RHYS
JAMES CAIN as liquidators of BF7 Trading Limited
ApplicantsAND
SPENCER MCKENZIE GILLINGHAM BISHOP
First Respondent
RAYMOND VINCENT BISHOP
Second Respondent
Hearing: 23 November 2023 Appearances:
AJ Steel for the Applicants
RB Hucker and MW Swan for the Respondents
Judgment:
16 February 2024
JUDGMENT OF ASSOCIATE JUDGE SUSSOCK
This judgment was delivered by me on 16 February 2024 at 4 pm pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Solicitors:
Martelli Yaqub Lawyers Limited, Auckland Molloy Hucker, Wellington
LOGAN v BISHOP [2024] NZHC 46 [16 February 2024]
TABLE OF CONTENTS
Introduction [1]
Factual background [9]
Section 266 of the Companies Act 1993 [27]
Is there jurisdiction in this case? [35]Are Spencer and Raymond people described in s 261? [36] Does the proposed examination or production of documents relate to BF7's business, accounts or affairs? [38]
Does the Trusts Act 2019 prevent the orders sought? [40]
Respondents’ submissions [40]Discussion [48]
Should the discretion be exercised to order production or examination or both?
[77]
Are the orders sought reasonably necessary for the discharge of the liquidators’
functions and duties? [78]
Would the orders impose unnecessary and unreasonable burdens on the respondents? [80]
Are there alternative legal procedures which are available to the liquidator? [82] What is the nature of the proposed proceedings (if any are contemplated) and would the respondents be more vulnerable to future claims as a result? [87] Are the respondents former officers or employees of BF7? [90]
What is the nature and significance of the information sought and the public
interest in the information? [91]
Conclusion on exercise of discretion [94]
Result [97]
Costs [98]
Introduction
[1] The liquidators of BF7 Trading Limited (in liq) (BF7) have applied for orders against Spencer and Raymond Bishop for the production of documents relating to the indebtedness of the trustees of the Bishop Family Trust (Trust) to BF7 and the names and details of the trustees, and for examination before a court.
[2] The Court has the power under s 266 of the Companies Act 1993 to make production and examination orders on the application of liquidators against people to whom s 261 of the Companies Act applies. Orders may only be made however where the information or documents sought relates to any matter "relating to the business, accounts, or affairs” of the company in liquidation, here BF7.
[3] There is no question that Spencer and Raymond are people to whom s 261 applies as Spencer is a director and both Spencer and Raymond are shareholders of
BF7.1 However, they oppose the liquidators’ application on the basis that the documents and information sought do not relate to BF7 but instead the Trust and that even if they do, the Trusts Act 2019 and privacy concerns ought to prevent orders being made.
[4] The liquidators submit in response that the orders clearly relate to the affairs of BF7 as BF7’s records show that loans owed by BF7’s shareholders in 2019 were journalled to become a loan owed by “the Bishop Family Trust” of $314,933. The liquidators have prepared a statement of claim to recover the loan but submit that they are “legally paralysed” as without the trustees’ names they are not able to file or serve proceedings.
[5] The notice of opposition has nineteen grounds of opposition many of which overlap. The liquidators submit the grounds amount to two arguments:
Jurisdiction
(a)The Court cannot grant the orders because the Bishops do not own the information or the documents – the trustees do, and the Court has no power over those; and
Privacy
(b)Requiring the Bishops to disclose the trustees’ names would unfairly infringe their right to privacy.
[6] The liquidators describe the first defence as specious, as the liquidators are not seeking documents or information belonging solely to the trustees. The liquidators say instead they are seeking material “relating to the… affairs” of BF7 which is information subject to s 266.
[7] The liquidators accept the privacy argument at least warrants discussion and that the courts ought to protect peoples’ reasonable anonymity. However, the liquidators submit a balance is needed between inappropriate intrusion and using privacy to facilitate debtors escaping the payment of a significant debt. In the liquidators’ submission there is no legislation or authority that supports the
1 I refer to the Bishops by their first names to avoid confusion. I intend no disrespect in doing so.
respondents’ submission that orders should not be made asking the respondents who owes BF7 the debt of $314,933 only because those people are trustees.
[8]The issues are:
(a)Do the documents and information sought relate to the business, accounts or affairs of BF7?
(b)If so, should the court exercise its discretion to order examination or production or both?
Factual background
[9] BF7 was incorporated on 7 September 2016. Roy Bishop was BF7's first director but was replaced by Spencer, the first respondent, on 22 March 2017. The Companies Register records that Spencer remains the sole director and holds 51 per cent of the shares. Raymond, the second respondent, holds the remaining 49 per cent.
[10] On 28 September 2021, Larissa Logan and Rhys Cain were appointed liquidators on the application of the Commissioner of Inland Revenue in respect of a debt for unpaid GST and PAYE, totalling $479,593.
[11] Ms Logan has affirmed an affidavit on behalf of the liquidators in support of this application and annexes a letter dated 22 July 2019 from BF7's accountants, PWC, to BF7's shareholders. The letter records that PWC reduced the shareholder current account balances originally reflected in Xero to "nil" balances for the 2018 and 2019 years in accordance with the shareholders' instructions. In addition, PWC records that, again on shareholders' instructions, loan balances due from Roy as originally reflected in Xero had been reduced to "nil" in the 2018 and 2019 income years. The PWC letter explains that both these adjustments were made on the basis advised, that the Trust had borrowed the full value of the year end balances and on-lent these funds to the shareholders and to Roy to reduce their current account and loan balances to nil.
[12]The letter further records:
The above mentioned adjustments to the shareholder current account balances and related party loans are material and are disclosed in notes 5 and 6 in the financial statements. This being the case, it is important that the affected parties and the Trustees of the Trust fully understand the impact of these adjustments. In this regard we understand that the Trustees will take legal advice on this so to ensure what has been recorded in the 2018 and 2019 financial statements has legal effect and are committed to having the lending documented by a solicitor.
[13] The PWC letter does not refer to the names of the trustees but records that the shareholders had advised that the shareholders and Roy are beneficiaries of the Trust.
[14]BF7's financial accounts for 2019 record a loan to the Trust totalling $314,993.
[15] Spencer has sworn an affidavit on both his and Raymond's behalf. He records that he is aware of the PWC letter as a copy of it was provided to him by the liquidators but that he disagrees with Ms Logan's conclusion in her affidavit that the loans owed by BF7's shareholders had been "journalled" to become loans owed by the Trust. He does not however provide further details.
[16] In her affidavit Ms Logan describes the liquidators’ unsuccessful attempts to identify the trustees of the Trust and to obtain any documentation in relation to the loan. She confirms that BF7's bank does not know the identity of the trustees.
[17] On 20 October 2021, Ms Logan interviewed Spencer under s 261 of the Companies Act and asked him to identify the trustees. A copy of the liquidators' file note of the interview is annexed to Ms Logan's affidavit. The file note records that on advice from his lawyer, Spencer declined to answer questions regarding the Trust because he had not had time to view the documents. Spencer’s lawyer, Mr Hucker, asked the liquidators to put their questions to Spencer in writing. Spencer's affidavit records he had not been provided with the PWC letter in advance and that the detailed questions were beyond his knowledge at the time. Spencer accepts that he told the liquidators that he "would assist with making enquiries to endeavour to obtain documentation the Liquidators may be entitled to".
[18] Ms Logan confirms that the liquidators emailed copies of their questions to Spencer and Hucker & Associates, but no replies were received.
[19] On 16 November 2021, the liquidators sent a letter to Spencer advising that their investigations had identified a claim against the Trust in respect of the loan and that the letter was a formal demand for these funds to be repaid to the company by the Trust. The letter then refers to the Company's balance sheet and PWC letter previously provided to Spencer, recording that the shareholder current amount balances had been reduced to nil on the basis that the Trust borrowed the full values of the year end balances and on-lent these funds to the shareholders. On this basis the letter demanded repayment of the loan plus interest from the shareholders.
[20]No reply was received to the demand.
[21] On 30 May 2022, the liquidators’ solicitor sent a s 261 notice to Spencer and Raymond requiring them to confirm the trustees’ identities. The letter records that the trustees of the Trust have a current account liability of $351,719 to BF7 so “it is axiomatic that the trustees' identities relate to BF7's business or affairs”.
[22]Spencer replied on 13 June 2022 saying:
We have requested that our Lawyers send you through the legal trust deed and it should be to you shortly, sorry on the delayed response.
Is there anything else you need from me?
[23] The liquidators’ solicitor, Mr Martelli, replied confirming that there was nothing else at this stage, that he looked forward to hearing from their solicitors and asked Spencer to email back the solicitor’s name.
[24] No further correspondence was however received from Spencer, Raymond or their lawyers.
[25] Mr Martelli followed up on 15 July 2022 and again on 2 November 2022, saying at that stage that if Spencer did not provide the names of the trustees by
3 November 2022, he would recommend that the liquidators summon him “to be examined (and produce the trust deed)”.
[26] Again no response was received. This application was then filed on 27 April 2023.
Section 266 of the Companies Act 1993
[27]Section 266 of the Companies Act relevantly provides:
266 Powers of Court
(1)The court may, on the application of the liquidator, order a person who has failed to comply with a requirement of the liquidator under s 261 of this Act to comply with that requirement.
(2)The court may, on the application of the liquidator, order a person to whom section 261 applies to—
(a)attend before the court and be examined on oath or affirmation by the Court or the liquidator or a barrister or solicitor acting on behalf of the liquidator on any matter relating to the business, accounts, or affairs of the company:
(b)produce any books, records, or documents relating to the business, accounts, or affairs of the company in that person's possession or under that person's control.
[28] The application in this case is pursuant to s 266(2) as the orders sought are not for the respondents to comply with the s 261 notice, as provided for in s 266(1), but instead to attend before the Court for examination and to produce documents as provided for in s 266(2). I am not required therefore to determine whether the respondents have complied with the requirements of the liquidator pursuant to s 261 before making the orders sought. However, the liquidators include the failure to comply with a requirement of the liquidator under s 261 as one of the grounds for the orders sought so it may be relevant to the exercise of my discretion as discussed further below.
[29] The liquidators refer to the discussion of the equivalent provision in Re Rolls Razor Ltd by the English High Court where Megarry J held:2
2 Re Rolls Razor Ltd (No 2) [1970] Ch 576 at 591–592.
The [s 266(2) equivalent] process … is needed because of the difficulty in which the liquidator in an insolvent company is necessarily placed. He usually comes as a stranger to the affairs of a company which has sunk to its financial doom. In that process, it may well be that some of those concerned in the management of the company, and others as well, have been guilty of some misconduct or impropriety which is of relevance to the liquidation. Even those who are wholly innocent of any wrongdoing may have motives for concealing what was done. In any case, there are almost certain to be many transactions which are difficult to discover or to understand merely from the books and papers of the company. Accordingly, the legislature has provided this extraordinary process so as to enable the requisite information to be obtained. The examinees are not in any ordinary sense witnesses, and the ordinary standards of procedure do not apply. There is here an extraordinary and secret mode of obtaining information necessary for the proper conduct of the winding up.
[30] In Finnigan v Ellis, the Court of Appeal reviewed English and Australian authorities. Despite similar legislation, the Court of Appeal commented that the exercise of discretion by each jurisdiction had been “remarkably different.”3 These differences include that the Australian Courts have extended the interpretation of the relevant statutory provisions to permit examination of a prospective defendant on their ability to meet a money judgment.4 The English Courts have only gone so far as to permit examination of a prospective defendant on facts relevant to proof of a prospective case against them.5 The Court of Appeal explained that this was allowed on the basis that liquidators were strangers to the company’s affairs, and so they may not have known of information relevant to proving a company’s claim.6
[31] The Court of Appeal noted that the courts in both jurisdictions had proceeded on the basis that their equivalent s 266 powers are broad and subject only to the exercise of the Court’s discretion.7 The Court of Appeal instead considered that the correct approach was first to decide whether s 266 authorised the proposed examination or production of documents, approaching this as a matter of jurisdiction. If there was jurisdiction, the Court’s second task was to decide whether to exercise its discretion to make the orders sought.8
3 Finnigan v Ellis [2017] NZCA 488, [2018] 2 NZLR 123 at [47]. See also discussion from [21]–[46].
4 At [31].
5 At [31].
6 At [41].
7 At [47]. See also discussion from [21]–[46].
8 At [47].
[32] In Finnigan v Ellis the information in issue was information from a former director about his financial position. The Court of Appeal held that such information could not be construed as “any matter relating to the company’s ‘affairs’” and so there was no jurisdiction to make the s 266 order sought.9 The Court said that while information about a director’s acts or omissions when acting in their former office falls into that category, information about their judgment worthiness does not. The Court went on:10
The plain purpose of the examination powers is to enable the liquidator to determine whether there is a sufficient evidential basis for a claim to recover assets of the company from a third party or parties. In our judgement, express words would be required before the provisions could be read as extending to the financial worth of a defendant.
[33] The Court of Appeal further confirmed that had they found that there was jurisdiction, privacy concerns would have weighed against granting orders for the director to disclose information relating to their personal financial means.11
[34] Once a court has determined it has jurisdiction, factors which will be taken into account when deciding whether to exercise the discretion include:12
(a)whether the requirement of the liquidator is reasonably necessary for the discharge of his or her functions and duties;
(b)whether the requirement of the liquidator would impose unnecessary and unreasonable burdens on the person the subject of the liquidator’s notice (mere inconvenience or additional work is not however sufficient reason to validly oppose the liquidator’s application);
(c)the alternative legal procedures which are available to the liquidator (bearing in mind that pre-trial discovery is now firmly part of the litigation process);
9 Finnigan v Ellis, above n 3, at [41].
10 At [41].
11 At [51].
12 Concrete Structures Ltd v NMHB Ltd (in liq) [2020] NZHC 1218, at [42].
(d)the nature of the proposed proceedings (if any are contemplated) and whether the person concerned would be made more vulnerable to future claims as a result;
(e)whether the person the subject of the notice or the proposed order is a former officer or employee of the company or someone else who has provided services to the company; and
(f)the nature and significance of the information sought and the public interest in the information.
Is there jurisdiction in this case?
[35] Applications under s 266 must be brought by liquidators as is the case here. Section 266(2) then creates two additional jurisdictional criteria:
(a)the respondents, Spencer and Raymond, are people described in s 261; and
(b)the production or examination relates to the business, accounts or affairs of BF7.
Are Spencer and Raymond people described in s 261?
[36]Section 261 relevantly provides:
261 Power to obtain documents and information
(1)A liquidator may, from time to time, by notice in writing, require a director or shareholder of the company or any other person to deliver to the liquidator such books, records, or documents of the company in that person's possession or under that person's control as the liquidator requires.
(2)A liquidator may, from time to time, by notice in writing require—
(a)a director or former director of the company; or
(b)a shareholder of the company; or
(c)a person who was involved in the promotion or formation of the company; or
(d)a person who is, or has been, an employee of the company; or
(e)a receiver, accountant, auditor, bank officer, or other person having knowledge of the affairs of the company; or
(f)a person who is acting or who has at any time acted as a solicitor for the company—
to do any of the things specified in subsection (3).
…
[37] Spencer is a director (s 261(2)(a)) and both Spencer and Raymond are shareholders (s 261(2)(b)). This criterion is therefore satisfied.
Does the proposed examination or production of documents relate to BF7's business, accounts or affairs?
[38]The orders sought by the liquidators are orders:
(a)directing the respondents to produce to the applicants and the court any books, records or documents relating to:
(i)the indebtedness of the trustees of the Trust to BF7;
(ii)the trustees' names and contact details;
(b)directing the respondents to attend before the court and be examined on oath or affirmation by the court, the liquidators or a barrister or solicitor acting for the liquidators relating to the trustees' names and indebtedness to BF7.
[39] A liquidator’s primary statutory duty is to take possession of, protect, realise and distribute the assets of the company in liquidation, or the proceeds of the realisation of those assets, to the company’s creditors in a reasonable and efficient way.13 The liquidators rely on BF7's accounts which record a loan owed by the “Bishop Family Trust” of $314,993. A trust is not a separate legal entity so legally the loan is owed by the trustees of the Trust. The loan is an asset of BF7 and so the names of the trustees
13 Companies Act 1993, s 253(a).
and the terms of the loan clearly relate to BF7’s affairs, as would any other indebtedness of the Trust.
Does the Trusts Act 2019 prevent the orders sought?
Respondents’ submissions
[40] The respondents submit that the Trusts Act 2019 (and, before its enactment, the inherent jurisdiction of the Courts) regulates access to records or documents of trusts and that s 266 was not intended to override those jurisdictions.
[41] As part of this submission, the respondents say that the liquidators seek to have Trust information provided to them on the basis that the respondents may be beneficiaries of the Trust. This submission is by reference to a paragraph in Ms Logan's affidavit. However that paragraph refers to the respondents as being beneficiaries only to support Ms Logan’s belief that the respondents will know the trustees’ identities, not as a basis for obtaining the information.
[42] The respondents further submit that the applicants have not demonstrated that the respondents have the power or ability to compel disclosure of documents or information of the Trust to the liquidators.
[43] The respondents submit that only in specific circumstances will disclosure of relevant trust documentation be made and as the Court of Appeal held in Erceg v Erceg, beneficiaries do not have an absolute right to disclosure of the trust documents.14
[44] The respondents say that here, the liquidators have not demonstrated any legal basis on which the Court could compel the respondents to obtain and disclose trust records and information to third parties (including the liquidators).
[45] Furthermore, the respondents point to the risk of the confidentiality of trust affairs being breached by the provision of documents and information to non-trustees
14 Erceg v Erceg [2016] NZCA 7, [2016] 2 NZLR 622 at [27]–[28]. Affirmed in Erceg v Erceg
[2017] NZSC 28, [2017] 1 NZLR 320.
or beneficiaries as being an expressly recognised ground for declining access to trust records and information to beneficiaries.
[46] The respondents question the liquidators’ submission that as beneficiaries are entitled to the names of trustees, alleged creditors of a trust should also be. The respondents say that the liquidators have not produced any authority to support this argument and that it is inconsistent with the decision of Hunt v Muollo where a judgment creditor was not entitled to documentation of a trust of which the judgment debtor was a beneficiary, with the Court holding:15
It is generally regarded as settled law that a discretionary beneficiary’s interest in a normal discretionary trust is no more than a mere expectancy. It is simply an expectation or hope … that the trustee's discretion may be exercised in the beneficiary's favour.
[47] The respondents submit that conventional trust and property law concepts cannot simply be cast aside, as the liquidators seem to be suggesting.
Discussion
[48] The Court of Appeal in Hunt v Muollo considered the different question of whether trust documents were properly directed to be produced when the examination was into the means of the examinee (under the predecessor to r 17.12 of the High Court Rules 2016). The Court held that if Mr Hunt was a wholly discretionary beneficiary of those trusts there would be no basis to order production of the trust documents as they would not be relevant to Mr Hunt’s assets or other means and they would equally be irrelevant even if they were within his possession or power.16 This was on the settled basis that a discretionary beneficiary has no interest, legal or equitable, in the assets of a trust. It is only on the making of a distribution to the discretionary beneficiary that the beneficiary obtains any interest in property.17
[49] This is not an application relating to the means of the respondents or the ability to repay the loan if proceedings were brought. The orders sought here are in relation
15 Hunt v Muollo [2003] 2 NZLR 322 (CA) at [11].
16 At [14].
17 At [11].
to the identity of the debtor and the terms of any loan or indebtedness owed to BF7 which s 266 clearly provides a power to seek.
[50] In a s 266 application the liquidators are only able to seek orders requiring Spencer and Raymond to produce documents that are in their possession or control.
[51] Contrary to the respondents’ submission, however, it is not a prerequisite to establish that a document is in the respondents’ possession or control before orders can be made. In the authority relied on by the respondents, ANZ National Bank Ltd v Sheahan, Heath J simply quotes from s 266 which limits the documents that can be ordered to be provided to those in the person’s possession or control.18 To require the liquidators to establish possession or control first would confine what is otherwise a broad power to circumstances where the liquidators have detailed knowledge of a transaction and the documents related to it, defeating the broad scope of s 266. If the respondents do not have documents in their possession or control they can simply say so in response to the orders made or in the examination. This would be implicit in the orders sought but I adjust the wording to clarify that this is all that is required to be provided.
[52] At this stage only one of the respondents has sworn an affidavit and it is very carefully worded. It does not say that he does not have any documents or knowledge relating to the identities of the trustees, or the terms of the loan owed, or any other indebtedness, and nor does he confirm whether he or the second respondent are beneficiaries.
[53] If Spencer and Raymond are beneficiaries, they are likely to be aware of the identities of the trustees because the Trusts Act provides a presumption that the trustees will provide “basic trust information” to beneficiaries.19 Basic trust information is defined to include the fact that a person is a beneficiary; the name and contact details of the trustees; the occurrence and details of each appointment, removal or retirement
18 ANZ National Bank Ltd v Sheahan [2012] NZHC 3037, [2013] 1 NZLR 674 at [36].
19 Trusts Act 2019, s 51(1).
of trustees as they occur; and the right of a beneficiary to request a copy of the terms of the trust or trust information.20
[54] Before giving the basic trust information trustees must consider the factors in s 53 of the Trusts Act and may decline to provide some or all of the basic trust information to some or all of the beneficiaries if the trustees reasonably consider that the information should not be made available to every beneficiary.21
[55]The s 53 factors are as follows:
…
(a)the nature of the interests in the trust held by the beneficiary and the other beneficiaries of the trust, including the degree and extent of the beneficiary’s interest in the trust and the likelihood of the beneficiary receiving trust property in the future:
(b)whether the information is subject to personal or commercial confidentiality:
(c)the expectations and intentions of the settlor at the time of the creation of the trust (if known) as to whether the beneficiaries as a whole and the beneficiary in particular would be given information:
(d)the age and circumstances of the beneficiary:
(e)the age and circumstances of the other beneficiaries of the trust:
(f)the effect on the beneficiary of giving the information:
(g)the effect on the trustees, other beneficiaries of the trust, and third parties of giving the information:
(h)in the case of a family trust, the effect of giving the information on—
(i)relationships within the family:
(ii)the relationship between the trustees and some or all of the beneficiaries to the detriment of the beneficiaries as a whole:
(i)in a trust that has a large number of beneficiaries or unascertainable beneficiaries, the practicality of giving
20 Trusts Act 2019, s 51(3).
21 Section 51(2).
information to all beneficiaries or all members of a class of beneficiaries:
(j)the practicality of imposing restrictions and other safeguards on the use of the information (for example, by way of an undertaking, or restricting who may inspect the documents):
(k)the practicality of giving some or all of the information to the beneficiary in redacted form:
(l)if a beneficiary has requested information, the nature and context of the request:
(m)any other factor that the trustee reasonably considers is relevant to determining whether the presumption applies.
[56] None of this however prevents orders under s 266 of the Companies Act being made in respect of documents or information that relate to the business, accounts or affairs of BF7 that may also fall within the definition of trust information.
[57] The respondents may already have the documents or information sought in one of several capacities — as affected parties in respect of the journalling of the loan, as directors or shareholders, or as trustees or beneficiaries. But no matter what capacity the documents are held in they would be required to be provided if orders are made and they are in their possession or control.
[58] The respondents dispute this, submitting that a person can only be ordered to produce documents over which he has control in the capacity in which he is sued.
[59] However, there is no restriction in s 266 on the capacity in which the information is held. A similar submission was made in Concrete Structures v NMHB Ltd (in liq) by solicitors against whom s 266 orders were sought.22 The solicitors submitted that the documents sought were the property of another of its clients, a third party, and so there was no power to make the orders.23 The Court held that it had the power to order production of the documents sought and exercised its discretion to do so. In reaching that decision, Associate Judge Andrew (as his Honour then was)
22 Concrete Structures v NMHB Ltd (in liq), above n 12.
23 At [5].
recorded that the test in s 266 is not one of ownership of the documents in issue, the legislation expressly includes documents in the respondents’ possession or control.24
[60] Furthermore, the fact that those that may be examined include at 261(2)(e) “other person having knowledge of the affairs of the company” is inconsistent with such a capacity limitation. Such a limitation would make s 266 unworkable as although a jurisdictional limitation based on capacity may be possible for capacities such as directors or shareholders, it would not be for those in the “other people having knowledge of the affairs of the company” category as included in s 261(2)(e).
[61] Therefore, if the respondents hold the documents as trustees or beneficiaries, rather than as directors or shareholders (the s 261 categories), it does not impact on either:
(a)whether s 266 orders can be made in the first place; or
(b)whether the respondents are required to produce the documents.
[62] If the respondents are trustees, for example, they will be required to produce documents which identify the trustees and the details of any loan or indebtedness of the Trust to BF7.
[63] The respondents refer to Finnigan v Ellis where they submit the Court of Appeal was careful to recognise that a company is a distinct legal entity and that there are jurisdictional boundaries that are required to be recognised.25
[64] I agree but record that the Court of Appeal held that the purpose of s 266 was to “enable the liquidator to determine whether there is a sufficient evidential basis for a claim to recover assets of the company from a third party.”26 The documents or information that can be directed to be provided therefore includes documents or information BF7 ought to have been aware of as creditor.
24 Concrete Structures v NMHB Ltd (in liq), above n 12, at [34].
25 Finnigan v Ellis, above n 3, at [39]–[40].
26 At [41].
[65] In Finnigan v Ellis, the information sought was in relation to a former director’s financial position to assist with ascertaining whether he could meet any money judgment obtained. The liquidators’ evidence here is clear that they are seeking information on the identity of the trustees and in relation to the Trust’s indebtedness to BF7. In one email to Spencer, Mr Martelli did refer to Spencer producing the trust deed but the trust deed is not expressly referred to in the orders sought. I accept that the whole of the trust deed for the Trust may not fall within the jurisdictional limits but at least the names of the trustees themselves do. This is because a debtor’s identity will clearly be within the boundaries of a s 266 application and it is the trustees who will legally owe any alleged debt. Any further information in the trust deed is unlikely to relate to any loan owed or the indebtedness of the Trust to BF7 and can be redacted. There may be other examples in the documents where some of the information clearly relates to “the affairs” of BF7 as this has been interpreted and other parts relate to the internal workings of the Trust or the position between BF7’s shareholders personally and the Trust. Any such private information can properly be redacted. However, this does not provide a basis for not making orders at all.
[66] In terms of the orders sought for examination, the Court can control the questions asked to ensure they relate to the identities of the trustees at the relevant time and the terms of any loan owed or other indebtedness to BF7 and do not stray into private matters relating to the Trust, its trustees or beneficiaries.
[67] The respondents emphasised that the Court cannot order someone to do something which is beyond the person’s legal power to achieve.
[68] Counsel for the respondents drew on the similar terminology to “possession and control” used for general discovery, referring to Lonhro Ltd v Shell Petroleum Co Ltd where Lord Diplock held that the expression "power" in the discovery context means a presently enforceable legal right to obtain inspection of the document from whoever actually holds it, without the consent of anyone else.27
27 Lonhro Ltd v Shell Petroleum Co Ltd [1980] 1 WLR 627 (HL) at 635.
[69] The respondents submit that as the liquidators are unable to demonstrate the respondents have a presently enforceable legal right to obtain inspection of the trust deed from whoever actually holds it, without the consent of anyone, they are unable to establish that the documents are within the respondents’ possession or control to enable the court to make the orders sought.
[70] As already discussed, the liquidators do not have to establish that the documents sought are in the respondents’ possession or control before orders can be made. In circumstances where they are clearly not in their possession or control rendering any orders pointless, the Court may exercise its discretion not to make orders but that is not the case here. In the circumstances of a family-owned company and a family trust, there are likely to be overlapping capacities and possession of the relevant documents and information.
[71] Furthermore, Spencer says in correspondence with the liquidators’ solicitor that he has requested that his lawyers send through a copy of the trust deed. The liquidators rely on this to submit it is likely he knows the identities of the trustees.
[72] The respondents submit that the liquidators’ reliance on the first respondent’s acknowledgement in relation to the trust deed is inadmissible by operation of s 267 of the Companies Act. However, s 267 only prevents answers in ss 261 or 266 examinations being admissible in criminal proceedings (and not in relation to a charge of perjury).28 Section 267 cannot therefore be relied on in these civil proceedings to exclude this evidence.
[73] Finally, counsel for the respondents refers to Levin v Ikuia to submit that even where the liquidated company has been a trustee of a trading trust (not the case here) liquidation of the trustee company does not confer any right beyond those rights the company had as a trustee.29
[74] I accept that where the company in liquidation is a trustee of a trust, any application under s 266 would have to relate to the affairs of the trustee company and
28 Companies Act, s 267(2).
29 Levin v Ikuia [2010] 1 NZLR 400 (HC) at [116]–[127] confirmed on appeal in Levin v Ikuia [2010] NZCA 509, [2011] 1 NZLR 678.
that this would not necessarily extend to the affairs of the trust. However, here it is the identity of the trustees themselves and the details of any indebtedness owed by the trustees to the liquidated company that is being sought. To make an order requiring disclosure of this information would not offend against the principles discussed in Levin v Ikuia.
[75] In my view, the provisions of the Trusts Act do not prevent orders being made requiring any documents or information in the respondents’ possession or control to be provided as long as they relate to the business, accounts or affairs of BF7 as that has been interpreted. That would include the identities of the trustees and the details and terms of any indebtedness, information that it would be expected BF7 would have.
[76] As Andrew J held in Concrete Structures, to the extent that there are legitimate concerns about the breadth of the orders sought, they can properly be controlled by the Court in the exercise of its discretion.30 I turn therefore to consider whether to exercise my discretion to make the orders sought.
Should the discretion be exercised to order production or examination or both?
[77] I go through each of the factors referred to in the discussion of legal principles above to decide whether to exercise the discretion.
Are the orders sought reasonably necessary for the discharge of the liquidators’ functions and duties?
[78] As discussed above, the primary duty of the liquidators is to collect or realise the liquidated companies’ assets for distribution first to the creditors and then if there is any surplus in accordance with the Companies Act.
[79] The financial accounts clearly show a substantial loan owing by the Trust and the liquidators’ evidence establishes that they have taken other available steps to obtain the information but have so far been unsuccessful. The liquidators are not able to file any proceedings to recover the loan without the names of the trustees and obtaining
30 Concrete Structures v NMHB Limited (in liq), above n 12, at [31].
the details of any loans owed or other indebtedness prior to filing proceedings would greatly improve efficiency. The orders sought therefore appear reasonably necessary.
Would the orders impose unnecessary and unreasonable burdens on the respondents?
[80] The terms of the orders sought may technically extend to internal trust documents which relate to any loan or indebtedness to BF7 which may be matters that would not have been known to BF7. There does not appear to have been an intention to obtain internal trust documents but I have amended the terms of the orders in an attempt to make this clear.
[81] As amended, the orders would require the respondents to produce limited documents and information. They do not require information as to the Trust’s assets or its beneficiaries but only in relation to the loan owing to BF7 or other indebtedness. I do not consider therefore that the orders sought would be oppressive and there is no evidence that they would impose unnecessary or unreasonable burdens on the respondents.
Are there alternative legal procedures which are available to the liquidator?
[82] The liquidators have confirmed in their evidence that they have been unable to obtain the information sought from other sources or pursuant to s 261 notices or examination.
[83] The respondents submit that the liquidator ought instead to apply for pre-trial discovery orders. Difficulties would however arise as the liquidators do not know the identities of the trustees so could not seek such orders against the trustees. The relevant rule, r 8.20 of the High Court Rules 2016, allows an intending plaintiff to seek orders against parties that may not be the intended defendant but r 8.20(3) requires the application to be on notice and to be served on the intended defendant.
[84] Furthermore, r 8.20 only relates to documents and not information that the respondents may have as to the trustees’ identities. If the respondents do not have (or have not previously had) a copy of the trust deed, a discovery order may be pointless.
[85] In addition, the Court may only make such an order if it is impossible or impracticable for the intending plaintiff to formulate its claim without reference to the documents or group of documents sought,31 there are grounds for believing the documents may have been in the respondents control,32 and the order is necessary at the time the order is made.33 These requirements may be difficult to satisfy given the power of liquidators to apply for orders pursuant to s 266 and because the key information that the liquidators require is the identity of the trustees. There may not be sufficient evidence that the respondents have physical documents revealing this information.
[86] Rule 4.3(4) of the High Court Rules allows a plaintiff who is in doubt as to the appropriate defendant to joint multiple defendants with a view to the proceeding determining which, if any, is liable and to what extent. This would require the liquidators essentially to guess who are the trustees which would not be an efficient way of proceeding. As a consequence I do not consider that r 4.3(4) is of assistance either.
What is the nature of the proposed proceedings (if any are contemplated) and would the respondents be more vulnerable to future claims as a result?
[87] The proposed proceedings are attached in draft to Ms Logan’s affidavit and are currently simply to recover the loan allegedly owed by the Trust through its trustees. The loan is for a significant sum and appears properly to be the focus of the liquidators’ actions given the liquidators’ primary duty. It may make the respondents more vulnerable to future claims but primarily because of the current information imbalance between the liquidators and the respondents. The liquidators are not seeking access to information that BF7 is not entitled to, the legal identity of a party to whom BF7 has lent money and the terms on which that money was lent. As Associate Judge Smith held in Dalton v Hong, the fact that the documents may indirectly lead to the liquidators taking action on behalf of BF7 against the respondents may be “exactly in
31 High Court Rules 2016, r 8.20(1)(a).
32 Rule 8.20(1)(b).
33 Rule 8.20(4).
step with the legislative intent”.34 Liquidators often bring proceedings against directors or shareholders to vindicate the rights of creditors.
[88] Counsel for the respondents made much of privacy concerns in relation to the documents and information sought. It is clear from the liquidators’ evidence that they are seeking the relevant details of the loan owing or any other indebtedness which ought to have been information known to BF7. There are not therefore the same privacy concerns as were discussed in Finnigan v Ellis because providing the documents or information sought will not reveal any information as to the likelihood of recovery or other advantage in the litigation other than the identities of the trustees and the terms of the loan owed which are matters which ought to have been known to BF7.
[89] Therefore, although the orders may make the respondents more vulnerable to future claims, that is not necessarily a sufficient reason to decline to make them in the circumstances of this case.
Are the respondents former officers or employees of BF7?
[90] The first respondent is a director of the company and both are shareholders. In terms of any prejudice suffered by them, it is more appropriate to obtain information from the respondents rather than more distant parties.
What is the nature and significance of the information sought and the public interest in the information?
[91] The significance of the information is that without at least the identities of the trustees, the liquidators will be unable to take steps to recover the loan. The terms of any loan may be able to be revealed in discovery once the proceedings are commenced but it would be more efficient for the liquidators to know those terms in advance so they can make appropriate decisions in relation to any proceedings, including properly drafting the statement of claim in advance.
34 Dalton v Hong [2018] NZHC 2266 at [64].
[92] The liquidators’ evidence is that there is a public interest aspect in BF7’s claim against the trustees as the information appears crucial for the Commissioner of Inland Revenue to be able to recover tax owed by BF7. I agree.
[93] In addition, there appears to be a further public interest factor in that if the Court does not exercise its power pursuant to s 266 to make these orders then shareholders could easily avoid any obligations to a company owing in the shareholders’ current accounts by transferring those obligations to available trusts prior to liquidation without sufficient details so that recovery by liquidators is difficult — if not impossible.
Conclusion on exercise of discretion
[94] Taking all these factors into consideration, I consider it is appropriate to exercise my discretion to make orders for production of any documents in the possession or control of the respondents in relation to the identity of the trustees of the Trust and any indebtedness to BF7 and for examination of the respondents in relation to the same matters. I amend the orders sought to clarify that the respondents are not required to produce documents or divulge information that BF7 would not have been aware of if all proper steps had been taken to document the loans or any debts owed to BF7 by the Trust.
[95] As discussed in the hearing, I allow for production of the documents first, prior to any examination, as examination may prove unnecessary if documents are provided.
[96] Finally, I reserve leave to return to court if the orders require amendment or clarification or issues arise in relation to the categorisation of the documents themselves.
Result
[97] The liquidators have succeeded in their application and so I make the following orders:
(a)the respondents are to produce to the applicants and the Court by 15 March 2024 any books, records or documents in their possession or control relating to:
(i)the indebtedness of the trustees of the Trust to BF7; and
(ii)the trustees' names and contact details;
(b)the respondents are to attend before the Court and be examined on oath or affirmation by the court, the liquidators, or a barrister or solicitor acting for the liquidators, relating to the trustees' names and indebtedness to BF7 at a time to be confirmed by the Registry but no earlier than 19 April 2024;
(c)the orders in (a) and (b) do not require the respondents to produce documents or information that BF7 would not have been aware of if all proper steps had been taken to document any loans or other indebtedness owed by the trustees of the Trust to BF7; and
(d)leave is reserved to apply for clarification or amendment of the orders or to seek a determination in respect of particular documents.
Costs
[98] The liquidators have succeeded and so in the normal course are entitled to costs. I expect that the parties ought to be able to agree costs. I ask counsel to confer and, only if agreement is not possible, for memoranda of no more than three pages (excluding schedules) to be filed, on behalf of the liquidators within 15 working days of this judgment and the respondents a further 10 working days following service.
Associate Judge Sussock
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