Managh v Morrison HC Napier CIV-2009-441-000522
[2011] NZHC 1066
•5 September 2011
IN THE HIGH COURT OF NEW ZEALAND NAPIER REGISTRY
CIV-2009-441-000522
UNDER The Companies Act 1993 and the Property
Law Act 2007
IN THE MATTER OF The liquidation of Dandelion Limited
BETWEEN JOHN FRANCIS MANAGH AS LIQUIDATOR OF DANDELION LIMITED (IN LIQUIDATION) Applicant
AND CHRISTOPHER WILLIAM MORRISON
& GREGORY MICHAEL MORRISON AS THE TRUSTEES OF THE C W MORRISON FAMILY TRUST
First Defendants
AND CHRISTOPHER WILLIAM MORRISON
& PETER CLENNELL FENWICKE AS THE TRUSTEES OF THE C W MORRISON 1996 BUSINESS TRUST Second Defendants
Hearing: 6 July 2011
Appearances: K P Sullivan for Applicant
M Kelly for Defendants
Judgment: 5 September 2011 at 4:15 PM
JUDGMENT OF COURTNEY J
This judgment was delivered by Justice Courtney on 5 September 2011 at 4:15 pm
pursuant to R 11.5 of the High Court Rules.
Registrar / Deputy Registrar
Date………………………
MANAGH V MORRISON HC NAP CIV-2009-441-000522 5 September 2011
[1] In 2008, a year before its liquidation, Dandelion Ltd (in liquidation) assigned causes of action against a firm of solicitors and a real estate agent to a trust that existed for the benefit its former director, Christopher William Morrison and his family (the Family Trust). Under the assignment the proceeds of the causes of action would be split between the Family Trust and another trust also established for the benefit of Mr Morrison and his family (the Business Trust). As Dandelion was insolvent at the time of the assignment the liquidator asserted that the assignment was a voidable transaction and that Dandelion was still entitled to pursue the causes of action. With the expiration of the limitation period imminent the liquidator and the trustees of the Trusts (the defendants in this proceeding) both commenced proceedings in the High Court at Wellington asserting the assigned causes of action.
[2] The liquidator has applied under s 292(2)(b) of the Companies Act 1993 for an order setting aside the assignment. This will determine whether it is Dandelion or the trustees who have the right to pursue the causes of action. Because I have concluded that the assignment is a voidable transaction I have not gone on to consider the liquidator’s alternative application for a declaration under the Property Law Act 2007 that the assignment is a nullity.
[3] The liquidator had also sought an order setting aside the assignment of a general security agreement and any interest secured over the assets and undertakings of Dandelion granted by Dandelion in favour of the Business Trust or the Family Trust. At the commencement of the hearing, however, Mr Kelly, for the trustees, advised that they accepted that the general security agreements were voidable and consented to an order setting those agreements aside.
[4] In addition, the trustees seek leave to apply under s 284(1) of the Companies Act 1993 for directions. Although several directions were identified in their application only two were pursued in argument, these being that they be advised of the costs of the liquidation and that they be accorded priority under clause 1(1)(e) of Schedule 7 of the Companies Act 1993.
The causes of action
[5] The defendants in the Wellington proceedings are a firm of solicitors, Izard Weston, and two related firms of real estate agents, Tremain Commercial Ltd and Tremain Real Estate Ltd (together Tremain). The allegations are of negligence, breach of contract and breach of fiduciary duty arising from the sale of the following properties in Napier:
9 Humber Street owned by the Business Trust
7 Humber Street owned by Dandelion
The leasehold interest in 39 Pandora Road owned by Dandelion.
[6] In 2003 the Business Trust and Dandelion agreed that all three properties would be sold. In 2004 they entered into a sale and purchase agreement to sell 7 and
9 Humber Street to Globe Holdings Ltd (Globe). The leasehold interest in
39 Pandora Road was not part of that agreement. Tremain was engaged as the real estate agent on the sale and Izard Weston as the solicitors.
[7] The Globe agreement was conditional on the purchaser obtaining consent regarding the height of the intended construction on or before 16 September 2004. Consent was not obtained by that date and Globe did not seek an extension. Another party (Nicholls) was, by then, interested in purchasing both 7 and 9 Humber Street and also the leasehold interest in 39 Pandora Road. This would have been a better outcome because Dandelion wanted to sell both the Humber St and Pandora Rd properties.
[8] On 23 September 2004 Dandelion and the Business Trust instructed Izard Weston that they wished to conclude an agreement with Nicholls. They were not advised that the Globe contract would have to be formally cancelled before they could do so. The same day they instructed Tremain that they wished to conclude an agreement with Nicholls and that Tremain should cancel the Globe contract. At 9:54 am on 24 September 2004 Tremain emailed Globe recording an earlier conversation
that Globe’s interest in 7 and 9 Humber Street were at an end. Almost immediately, at 10:59 am, Globe’s solicitors responded waiving the special condition and declaring the Globe contract unconditional.
[9] On Izard Weston’s advice that Dandelion and the Business Trust could enforce the cancellation of the Globe contract, they executed an agreement to sell all three properties to Nicholls (subject to cancellation of the Globe contract). Tremain’s email had not, however, validly cancelled the Globe contract because under the terms of the contract, email was not an effective means of giving notice. As a result, Dandelion and the Business Trust were committed to the Globe contract and lost the Nicholls contract. The Globe contract was for $4m to purchase 7 and 9
Humber Street and the Nicholls contract was for $5m to purchase 7 and 9 Humber
Street and also the leasehold interest in Pandora Road.
[10] Subsequent efforts to sell the Pandora Road lease were unsuccessful. In late
2004 Dandelion borrowed $500,000 from Davidson Armstrong & Campbell Solicitors Nominee Company Ltd (DAC), with Mr Morrison guaranteeing the debt. The Pandora Rd property did not sell. Dandelion could not pay the ground rental and the lease was forfeited to the lessor. Dandelion could not repay the DAC loan; its only assets of significance were the causes of action against Izard Weston and Tremain. But Dandelion could not fund the necessary litigation and could not reach an agreement with DAC under which DAC would fund the litigation.
[11] In March 2008, with Mr Morrison and his interests locked in litigation with DAC and Dandelion admittedly insolvent, Mr Morrison executed the assignment of the causes of action. Dandelion’s inability to repay the DAC debt (which now exceeds $700,000) eventually led to Dandelion’s liquidation in 2009 and Mr Morrison’s bankruptcy.
Is the assignment a voidable transaction?
[12] If a transaction is an insolvent transaction as that is defined under s 292(2) of the Companies Act it is voidable by the liquidator.[1] Section 292(2) defines an insolvent transaction as:
[1] s 292(1) Companies Act 1993
An insolvent transaction is a transaction by a company that:
(a) Was entered into at a time when the company is unable to pay its due debts; and
(b) Enables another person to receive more towards satisfaction of a debt owed by the company than the person would receive, or would be likely to receive, in the company’s liquidation.
[13] Mr Kelly argued that, on the wording of s 292(2)(b), the liquidator must show that the transaction will result in a greater recovery than would otherwise be the case. He submitted that, on the available evidence, the liquidator could not show that the Family Trust will achieve a net return from the assignment and therefore cannot show that the assignment enabled it to receive more than it would or would be likely to receive in the liquidation. I do not accept that argument.
[14] On its ordinary meaning “enable” relevantly means:[2]
a. Give power to; strength; make adequate or competent b. Make able, give the means to be or to do something
[2] Shorter Oxford Dictionary (5th ed Oxford University Press, Oxford 2002) at 819.
[15] I consider that “enable” in s 292(2)(b) only requires that the creditor is given the means to improve its position over that of other creditors, not that it will necessarily succeed in doing so. Section 292(2)(b) does not connote certainty of outcome and the liquidator is, therefore, not required to prove what the outcome of the litigation will be.
[16] However, although it is obvious that the assignment of the causes of action provided the means to advance the litigation, there is a threshold expressed in the words “would receive or would be likely to receive”. These words suggest a threshold akin to the standard of the balance of probabilities. They require an assessment of the value of the cause of action that is not dissimilar to the assessment of a loss of chance. Mr Kelly argued that the fact that the parties presently wish to pursue the litigation does not mean that a recovery will result or that the Court can conclude that the litigation has a determinable value. As a result, it is not possible to be satisfied that the assignee would receive more than it would be likely to receive in
the liquidation. I consider, however, that that the affidavit evidence does allow for an assessment of the kind envisaged by s 292(2)(b).
[17] The assignment was on the following terms:
The director of DF [sic- Family Trust] and the trustees of CMFT [Christopher Morrison Family Trust] agree that all rights in any proceedings against a party sued for Negligence relating to DL’s failed property sale at 39
Pandora Road, Napier in 2004 be assigned to CMFT for the sole benefit of that party, consideration being full funding of any litigation, expected to commence in March 2009.
The estimated litigation costs is $100,000.
It is further agreed that upon any settlement being achieved that CMFT will rebate to DL any net proceeds after the following have been settled:
1. All legal expenses.
2. The next $500,000 is payable to CMFT.
3. Any residual balance will be due to the C W Morrison 1996
Business Trust, a joint claimant in this matter, up to a maximum of
$1m.
4.Any amount in excess of the above will be split evenly between the parties to this agreement.
[18] As at the date of the assignment, the Family Trust was a creditor to the extent of only $3,820. It now asserts that it is owed a good deal more than this and intends to file proof of debt with the liquidator. For present purposes, however, I proceed on the basis of the facts that existed in March 2008 when the debt owing to the Family Trust was very small. In comparison, even at that stage, the debt owing to DAC (the only other creditor of significance) was over $500,000. As I have already noted, Dandelion’s claims against Izard Weston and Tremain represented the company’s only significant asset.
[19] The affidavits clearly disclose evidential support for the allegations made in the respective statements of claim. Mr Sullivan advised me that the substance of the defence being advanced is denial of negligence on the basis that the second agreement had not been formally signed at the time notice was to be given cancelling the first agreement. There is also an issue as to quantum based on the fact that the first contract was GST exclusive and the second contract GST inclusive. On the available information I consider that there is sufficient substance in the claim to
conclude that the Family Trust would be likely to receive more from the litigation than it would from the liquidation.
[20] In reaching this conclusion I am have not overlooked that, under the assignment the Family Trust would fund the litigation. I do not accept Mr Kelly’s argument that, because of this the assignment had no deleterious effect on Dandelion. For the purposes of this application I assume that the claim will succeed; in that event the net costs to Dandelion would be significantly reduced by the inevitable award of costs that would follow.
[21] I have also taken into account the fact that not all the proceeds from the litigation would have gone to Dandelion in any event. The claim is quantified as the difference between the purchase prices on the two agreements together with consequential losses. The difference in the purchase prices was $1m. The claim for consequential losses of slightly over $2m brings the total of the damages claimed to more than $3m. But not all of the losses claimed were sustained by Dandelion; because the Business Trust owned one of the Humber Road properties a proportion of the losses would have accrued to that entity, though the exact split is impossible to identify.
[22] I cannot put an exact value on the causes of action but my assessment, for the purposes of this application, is that Dandelion will make a recovery. Because the DAC debt is so much greater than the debt owed to the Family Trust at the relevant time, the assignment enables the Family Trust to receive more towards its debt than it would have been likely to receive in the liquidation. It is, therefore, a voidable transaction for the purposes of s 292.
Application by defendants for leave under s 284 of the Companies Act 1993
[23] The trustees seek leave to apply under s 284(1) for directions. Under section
284(1) a creditor may apply for directions on any matter arising in connection with the litigation only with the leave of the Court. The object of the current legislation is to enable liquidators to be free to undertake their duties in a cost-effective and efficient manner. That objective would be undermined if creditors were able to
challenge any act or decision of a liquidator.[3] As a result, the Court will only move to interfere with a liquidator’s decision if is wrong or unreasonable[4] and I approach the issue of leave with that in mind.
[3] See eg CIR v Hulst; CIR v Oriana Finance Ltd (2000) 19 NZTC 15,693.
[4] Trinity Foundation (Services No 1) Ltd v Downey & Anor CA193/05, 15 November 2006
[24] The first direction that the trustees wish to have made is that the liquidator provides a report to all creditors, all shareholders and the Registrar of Companies on the liquidation setting out the costs of the liquidation to date and how they have been incurred (including a breakdown between the liquidator’s costs and legal costs). Apart from the submission that the trusts are interested in and affected by the costs and might be able to assist in future negotiation, no specific reason is offered as to why in this case the liquidator should be directed to give such disclosure which would, as Mr Sullivan pointed out, more than is required by statute.
[25] I am not satisfied that there is any reason to allow the defendants to apply for this direction. If, ultimately, the Trusts are accepted as creditors of Dandelion then they will be entitled to inspect the books kept by the liquidator. But proofs of debt are yet to be filed; there can be no utility in such an application at this point and no reason for the liquidator to incur the cost of dealing with such an application.
[26] The second direction that the trustees wish to have made is that they are entitled to priority in the liquidation under cl 1(1)(e) of Schedule 7 of the Companies Act 1993, which provides that:
(1) The liquidator must first pay, in the order of priority in which they are listed: – …
(e) To any creditor who protects, preserves the value of, or recovers assets of the company for the benefit of the company’s creditors by the payment of money or the giving of an indemnity, –
(i) The amount received by the liquidator by the realisation of those assets, up to the value of that creditor’s unsecured debt; and
(ii) The amount of the costs incurred by that creditor in protecting, preserving the value of or recovering those assets.
[27] Whether the trustees should have leave to apply for such direction depends on whether they have demonstrated a reasonable likelihood that such a direction would be made. In Trinity Foundation (Services No 1) Ltd v Downey & Anor Lang J described the principles to be applied as follows:[5]
[5] HC Auckland CIV-2005-404-003180, accepted in Trinity Foundation (Services No 1) Ltd v Downey
& Anor CA193/05, 15 November 2006.
[21] I take the view that s 284 provides a filtering mechanism, and is designed to ensure that leave to challenge the acts and decisions of a liquidator is only given in appropriate cases. A creditor seeking leave under s 284 therefore needs to do more than merely demonstrate that its claim is sustainable. Instead, the creditor will need to show that it has an arguable case. In this context an arguable case will have two characteristics. First, it must have a credible factual basis. Secondly, there must be a reasonable likelihood that, if the claim is established, the Court will disturb the act or decision in question. The Court is likely to take this step only if the act or decision is unreasonable.
[22] If this standard is applied, the object of the legislation will be met, because meritorious claims will be granted leave. Leave will not be granted, however, in circumstances where, even if the claim is established, it is unlikely that the Court would interfere with the act or decision in question. In this way the section strikes a balance between preserving the rights of meritorious claimants, whilst at the same time ensuring that the assets of a company in liquidation are not frittered away as a result of claims that are unlikely to succeed.
[28] The defendants maintain that they have expended money in advancing the litigation against Izard Weston and Tremain and should therefore to be treated as creditors who have protected or preserved the value of the company’s asset for the benefit of the company’s creditors. That proceeding was, of course, commenced by the defendants pursuant to the assignment that I have held to have been a voidable transaction. Significantly, the proceedings brought by the trustees and those brought the liquidator were filed within a short time of one another when the trustees knew that the liquidator claimed the benefit of the causes of action. As a result, the liquidator has itself protected the cause of action by meeting the cost of the company’s proceeding. It is, therefore, difficult to see how the actions of the trusts can be regarded as protecting or preserving the value of the asset.
[29] Moreover, it is apparent that the existence of these parallel sets of proceedings has, in fact, increased the costs to both parties and enabled the
defendants in both to raise the defences of abuse of process and the assignment respectively which would not otherwise have been available.
[30] In these circumstances I am not satisfied that the trusts have a reasonably arguable case for entitlement to priority under Schedule 7 such as to justify granting leave to apply under s 284.
Result
[31] The plaintiff’s application is granted and I make the following orders:
(a) In accordance with [4] above, an order setting aside the general security agreement and any interest identified at paragraphs 1.3 and
1.4 of the liquidator’s application 7 March 2011 as voidable transactions;
(b) An order setting aside the assignment of the causes of action against
Izard Weston and Tremain as a voidable transaction.
[32] The defendants’ application for leave to apply under s 284(1) CA is dismissed.
[33] The issue of costs may be addressed by memoranda filed on behalf of the plaintiff by 16 September 2011 and by the defendants by 23 September 2011, with
any response by the plaintiff by 30 September 2011.
P Courtney J
Solicitors: Nowland Gordon & Associates, P O Box 70, Wellington 6011
Fax: (04) 499-5181
Counsel: K P Sullivan, P O Box 5817, Wellington 6145
Fax: (04)499-4059
M Kelly, P O oxz 5844, Wellesley Street, AucklandFax: (09) 377-0361
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