Minister of Education v Nayacakalou
[2020] NZHC 1874
•30 July 2020
IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY
I TE KŌTI MATUA O AOTEAROA KIRIKIRIROA ROHE
CIV-2017-419-311
[2020] NZHC 1874
UNDER THE
AND
Companies Act 1993 IN THE MATTER OF
the liquidation of Osborne Building 2000 (in liquidation)
BETWEEN
MINISTER OF EDUCATION
First Plaintiff
SECRETARY OF EDUCATION
Second PlaintiffBOARD OF TRUSTEES OF HILLCREST NORMAL SCHOOL
Third Plaintiff
Cont/…
Hearing: 5 June 2020 & further submissions 19 June 2020 Appearances:
W Potter for the Plaintiffs
No appearance for the First Defendant CG Danswan for the Second Defendant
Judgment:
30 July 2020
JUDGMENT OF ASSOCIATE JUDGE SMITH
This judgment was delivered by me on 30 July 2020 at 2.30pm pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Solicitors:
Meredith Connell, Auckland Hunwick Law Ltd, Hamilton
Cambridge Law Centre Ltd, Cambridge
Minister of Education v Nayacakalou [2020] NZHC 1874 [30 July 2020]
AND KELERA NAYACAKALOU
First Defendant
DARREL OSBORNE
Second Defendant
[1] This judgment concerns the validity of the appointment of the first defendant (Ms Nayacakalou) as liquidator of Osborne Building 2000 Limited (the company), on 1 June 2016.
[2] The appointment of Ms Nayacakalou as liquidator was purportedly effected by special resolution of the company’s shareholders under s 241(2) of the Companies Act 1993 (the Act), which requires a special resolution of the shareholders. Under the definition of “special resolution” in s 2 of the Act, the votes of 75 per cent of the shareholders are required.
[3] At the time of the purported appointment, Companies Office records showed that the company had the following shareholders:
(1)The second defendant (Mr Osborne), 49 per cent.
(2)Mr Osborne’s wife, Margaret Anne Osborne, 50 per cent.
(3)Fraser John Osborne, 1 per cent.
[4] Mr Osborne was the only one who signed the special resolution. He did so in respect of his own 49 per cent shareholding, and also the 50 per cent shareholding of Mrs Osborne. The problem is that Mrs Osborne had died in March 2010, and although she had left all her shares to Mr Osborne under her will, the company’s register of
shareholders had never been updated to record the transmission of her shares to Mr Osborne. Nor was the transmission of Mrs Osborne’s shares to Mr Osborne registered at the Companies Office. Under ss 39(2) and 84(1) of the Act, a share in a company is transferred by entering the name of the new shareholder in the company’s share register.
[5] If Mr Osborne was not entitled to use his late wife’s shares to vote in support of the special resolution appointing Ms Nayacakalou as liquidator, her appointment was invalid.
The proceeding to date
[6] The proceeding was commenced by a statement of claim filed in October 2017, in which the plaintiffs, who are creditors of the company, sought the removal of Ms Nayacakalou as liquidator, and the appointment of Henry David Levin in her place. However, the statement of claim did not rely on any alleged defect in Ms Nayacakalou’s appointment as liquidator, of the nature described above. That issue had not been picked up by the plaintiffs at that stage. Instead, the claim proceeded on the basis that Ms Nayacakalou had failed to comply with certain orders made by Wylie J in a judgment given on 27 April 2017 on an application by Ms Nayacakalou for directions.1
[7] Wylie J held that Ms Nayacakalou had failed to discharge her duties as liquidator of the company, by neither accepting nor rejecting the first plaintiff’s claim. She had also failed to call a meeting of creditors in response to a valid notice issued by the first plaintiff.
[8]Wylie J directed Ms Nayacakalou to:
(i)Accept or reject the first plaintiff’s claim, as required by s 304(3) of the Act;
1 Nayacakalou v Minister of Education [2017] NZHC 792.
(ii)Make an estimate of the amount of that claim, or refer the matter to the Court for decision pursuant to s 307 of the Act; and
(iii)Call a meeting of creditors pursuant to s 243(2) of the Act.
[9] In their statement of claim, the plaintiffs contended that Ms Nayacakalou failed to comply with the orders made by Wylie J. They said that she did not make an estimate of the amount of the first plaintiff’s claims, or refer that matter back to the Court, and she failed to convene a valid meeting of creditors. On those bases, they pleaded that Ms Nayacakalou remained in breach of her duties under the Act, and that she ought to be removed as liquidator of the company under s 286(4) of the Act.
[10] Neither defendant opposed the claims made in the statement of claim. By memorandum dated 11 December 2017, Ms Nayacakalou said she would abide the decision of the Court. The memorandum advised that Ms Nayacakalou had already been in communication with Mr Levin to take over as liquidator, and that she was prepared to resign on that basis.
[11] In an updating memorandum dated 11 September 2018, Ms Nayacakalou’s counsel advised that she suffered a major health issue in April 2018, and was unable to return to her role as liquidator in any event. Her counsel repeated the advice that she had volunteered to resign when the proceeding was commenced.
[12] Mr Osborne also filed a memorandum advising that he would abide the decision of the Court, on all issues except for costs, on which he reserved his position. Mr Osborne noted that there were no allegations in the statement of claim against him, and that he appeared to have been joined solely as a director and shareholder of the company.
[13] By Minute dated 9 February 2018, Whata J sought a response from the plaintiffs to the memoranda filed for the defendants. It appears that it was only at this point that the plaintiffs picked up the issue over whether the special resolution appointing Ms Nayacakalou as liquidator had been validly passed. Counsel for the plaintiffs raised the matter with the Court by memorandum dated 27 February 2018.
[14] There appears to have been little progress with the matter after that. Peters J made an order on 19 August 2018 directing that counsel file a formal application, with evidence in support if required, so that the matter could be progressed. Unfortunately, it appears that this Minute was not sent to counsel, although Mr Levin did swear an affidavit in support of the claims, and proposing that his colleagues Ms Vivien Madsen-Ries and Mr David Webb be appointed as liquidators in his place, on 7 September 2018.
[15] It was not until 11 March 2020 that the plaintiffs filed the formal application required by the direction given by Peters J.
The plaintiffs’ application
[16]The plaintiffs seek the following orders:
(a)a declaration confirming that [Ms Nayacakalou] was validly appointed liquidator of [the company].
(b)if (a) is granted:
(i)an order under s 286(4) of the Companies Act 1993 removing [Ms Nayacakalou] as liquidator of the company on the basis that she has failed to comply with Wylie J’s orders made under s 286(3);
(ii)an ancillary order appointing David Sean Webb and Vivien Judith Madsen-Ries as liquidators of the company; and
(iii)an order that [Ms Nayacakalou] pay the costs of and incidental to this application in her personal capacity.
(c)If (a) is not granted:
(i)a declaration that the company has nevertheless been in liquidation since the date of [Ms Nayacakalou’s] purported appointment as liquidator of the company;
(ii)an order under s 283(7) of the Act appointing David Sean Webb and Vivien Judith Madsen-Ries to fill the vacancy in the office of liquidator of the company; and
(iii)an order that [Ms Nayacakalou] pay the costs of an incidental to this application in her personal capacity.
The defendants’ responses
[17] A memorandum dated 28 May 2020 was filed for Ms Nayacakalou, confirming that she abides the decision of the Court on the application, save in respect of costs. The memorandum repeated the advice that she had offered to resign well before the application was filed. She contended that the application was unnecessary.
[18] A further memorandum was also filed for Mr Osborne, confirming that he would abide the decision of the Court, save as to issues of costs, on which he would wish to be heard.
Telephone conference 5 June 2020
[19] The case came before me by way of telephone conference on 5 June 2020. I heard briefly from Mr Potter on behalf of the plaintiffs, and I invited him to file a memorandum addressing two issues. That memorandum has since been filed.
The issues
[20]These issues arise:
(1)Was Ms Nayacakalou validly appointed as liquidator of the company?
(2)If the answer to Issue 1 is “yes”, should an order be made under s 286(4) of the Act removing Ms Nayacakalou as liquidator of the company on the basis that she has failed to comply with the orders of Wylie J made under s 286(3) of the Act?
(3)If Ms Nayacakalou was not validly appointed as liquidator of the company, should a declaration be made that the company has nevertheless been in liquidation since the date of the purported appointment of Ms Nayacakalou as liquidator?
(4)If the purported appointment of Ms Nayacakalou as liquidator was invalid, should the Court appoint David Sean Webb and Vivien Judith Madsen-Ries to fill the vacancy in the office of liquidator of the company?
Issue 1: Was Ms Nayacakalou validly appointed as liquidator of the company?
[21]As to jurisdiction, Section 284(1) of the Act provides:
284 Court supervision of liquidation
(1) On the application of the liquidator, a liquidation committee, or, with the leave of the court, a creditor, shareholder, other entitled person, or director of a company in liquidation, the court may—
…
(g)declare whether or not the liquidator was validly appointed or validly assumed custody or control of property:
…
[22] Although s 284(1) provides a list of powers that may be exercised by the High Court as part of its supervisory jurisdiction over liquidators, the Court may also invoke its inherent jurisdiction to supervise its officers. In ANZ National Bank Ltd v Sheahan and Lock,2 Heath J held that this jurisdiction extended to liquidators appointed other than by the Court.
[23] In my view Ms Nayacakalou was not validly appointed. Mr Osborne could vote in his own right as a shareholder but he could not cast votes in the names of his deceased wife. To be eligible to vote a shareholder must be registered as such in the register of shareholders. Section 96 of the Act says:
Meaning of shareholder
In this Act, the term shareholder, in relation to a company, means—
(a) a person whose name is entered in the share register as the holder for the time being of 1 or more shares in the company:
2 ANZ National Bank Ltd v Sheahan and Lock [2012] NZHC 3037, [2013] 1 NZLR 674 at paras [137]–[139]; also reported as Re Ex Ced Foods (formerly Cedenco Foods) (in liq) [2013] BCC 321.
(b) until the person’s name is entered in the share register, a person named as a shareholder in an application for the registration of a company at the time of registration of the company:
(c) until the person’s name is entered in the share register, a person who is entitled to have that person’s name entered in the share register under a registered amalgamation proposal as a shareholder in an amalgamated company.
[24] Mr Osborne was executor of his late wife’s estate and accordingly was entitled to have a transmission of his wife’s shares to himself as executor entered in the register. If he had done that, he could have voted as executor. But being entitled to have your name entered as a shareholder is not enough to qualify as a shareholder under s 96, except under (b) and (c), neither of which apply here. Accordingly his votes in the name of his wife do not count. His own votes were not enough for a special resolution. The resolution putting the company into liquidation was accordingly invalid. Ms Nayacakalou was not validly appointed.
Issue 2: If the answer to Issue 1 is “yes”, should an order be made under s 286(4) of the Act removing Ms Nayacakalou as liquidator of the company on the basis that she has failed to comply with the orders of Wylie J made under s 286(3) of the Act?
[25]In view of my answer to issue (1), there is no need to address this issue.
Issue 3: If Ms Nayacakalou was not validly appointed as liquidator of the company, should a declaration be made that the company has nevertheless been in liquidation since the date of the purported appointment of Ms Nayacakalou as liquidator?
[26]The plaintiffs refer to the following passage from the judgment of Heath J in
Zhang v Kamal:3
[50] There is no doubt that Mr Kamal was invalidly appointed, for the reasons I have given. I shall make an order to that effect and remove Mr Kamal from office. However, that does not necessarily mean that the liquidation should be regarded as invalid from its inception. Although, in this case, no external creditors will be affected by a declaration that the liquidation was unlawfully commenced, the same position is unlikely to pertain in other cases that may arise. That means there is a need for the Court to exercise caution in the way in which it restores the company’s affairs to the status quo that ought to have existed immediately before the invalid liquidation resolution was passed.
3 Zhang v Kamal [2017] NZHC 1943 at [50] – [51].
[51] There are two statutory or regulatory provisions that support that approach:
(a)The first is s 283(1) of the Act which deals with vacancies in the position of liquidator. While specific reference is made only to a vacancy arising out of resignation, death or disqualification,4 s 283(5) is expressed more broadly. It speaks of a vacancy arising “for any reason other than resignation”. Although it might be possible to interpret s 283 as referring only to the type of vacancy to which s 283(1) refers, I consider that a purposive approach requires any other form of vacancy to be covered. In this case, a vacancy arises out of the invalid appointment of the liquidator.
(b)The second is reg 36 of the Companies Act 1993 Liquidation Regulations 1994. That provides that no defect or irregularity in the appointment of a liquidator shall invalidate any act done by him or her in good faith. That suggests that if a liquidator were invalidly appointed he or she is, nevertheless, regarded as having been lawfully acting in that capacity.
[27] I agree with Heath J that the effect of Regulation 36 of the Companies Act 1993 Liquidation Regulations 1994 is that an invalidly appointed liquidator is still to be regarded as having acted lawfully in his or her capacity as liquidator (at least to the extent he or she has acted in good faith). The corollary is that the company is treated as in liquidation, notwithstanding the defect in the liquidator’s appointment. The answer to issue (3) is therefore “yes”.
Issue 4: If the purported appointment of Ms Nayacakalou as liquidator was invalid, should the Court appoint David Sean Webb and Vivien Judith Madsen- Ries to fill the vacancy in the office of liquidator of the company?
[28] As Ms Nayacakalou was not validly appointed, there is a vacancy in the office of liquidator. That is a vacancy in the wider sense recognised by Heath J in Zhang v Kamal. That is a vacancy “for any other reason other than resignation” in s 283(5) of the Act. In such a vacancy the court may appoint a liquidator under s 283(7):
If a vacancy occurs in the office of the liquidator, or a liquidator has been appointed under subsection (6), as the case may be, the court may, on the application of the company, or a shareholder or other entitled person, or a director or creditor of the company, or the Official Assignee for New Zealand, appoint any person who could
4 Section 283(1) of the Companies Act 1993 states that the “office of liquidator becomes vacant if the person holding office resigns, dies, or becomes disqualified”. The disqualification issue is linked to s 280 of the Act which does not apply in this case.
be appointed as liquidator under paragraph (a) or paragraph (b) or paragraph (c), as the case may be, of subsection (2) of section 241 to be the liquidator of the company.
[29] Ms Madsen-Ries and Mr Webb have given their written consent under s 282 of the Act to be appointed liquidators and have certified that they are not disqualified from being appointed. They are experienced insolvency practitioners and there is no reason why they should not be appointed. Accordingly, I appoint them liquidators of the company. I also approve their proposed rates of remuneration.
Costs
[30] In their statement of claim the plaintiffs sought a general order for costs and disbursements but did not specify who should pay the costs. In their submissions of 7 September 2018 they sought an order that Ms Nayacakalou should pay costs. They did not develop arguments why she should pay. Ms Nayacakalou’s only step in the proceeding has been to appear solely to be heard on costs, but she has not submitted on costs.
[31] The proceeding has been for the general benefit of creditors. That would suggest that the costs should be paid from company assets. That would be by analogy with the award of costs in trust cases.5 It is not however apparent that any such costs award would have any priority as a preferential claim under Schedule 7 of the Act. I take it that the plaintiffs will not be satisfied with that, because they are likely to be the major or only creditors and will carry the costs themselves.
[32] If the plaintiffs wish to continue their application for costs against Ms Nayacakalou personally, I ask them to file further submissions. They should address the following matters in their submissions:
(a)Conduct prior to the issue to the issue of a proceeding is irrelevant to fixing costs.6
5 Category 2 in Re Buckton [1907] 2 Ch 406.
6 Paper Reclaim Ltd v Aotearoa International Ltd [2007] NZSC 26, [2007] 3 NZLR 169, at [40].
(b)Ms Nayacakalou did not defend the proceeding, but filed an appearance advising that she would abide the decision of the court.
(c)The amount of costs and disbursements they are seeking.
[33] I ask Ms Nayacakalou to file submissions in response within two weeks of her receipt of the plaintiffs’ submissions.
Outcome
[34]In summary:
(a)I declare that Ms Nayacalou’s appointment as liquidator was invalid, but the company has still been in liquidation since 1 June 2016;
(b)I appoint David Sean Webb and Vivien Judith Madsen-Ries as liquidators and approve their rates of remuneration. They must apply for approval of their overall remuneration at the end of the liquidation.
(c)The plaintiffs’ costs, which have still to be fixed, may be paid out of the assets of the company.
(d)The plaintiffs’ claim for costs against Ms Nayacakalou is to be the subject of further submissions.
(e)Leave is reserved to apply for further orders.
Associate Judge Smith
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