Needham v Nayacakalou
[2021] NZHC 398
•5 March 2021
IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY
I TE KŌTI MATUA O AOTEAROA KIRIKIRIROA ROHE
CIV-2020-419-000209
[2021] NZHC 398
UNDER The Companies Act 1993 IN THE MATTER OF
PAUANUI MOUNTAIN ESTATE LIMITED (IN LIQUIDATION)
BETWEEN
GREGORY ABE NEEDHAM
Plaintiff
AND
KELERA LUVU NAYACAKALOU
Defendant
Hearing: 11 February 2021 Appearances:
S McAnally for Plaintiff D Hayes for Defendant
Judgment:
5 March 2021
JUDGMENT OF ASSOCIATE JUDGE P J ANDREW
NEEDHAM v NAYACAKALOU [2021] NZHC 398 [5 March 2021]
Introduction
[1] The plaintiff was the former sole director of Pauanui Mountain Estate Ltd (in liquidation) (PMEL). He makes application for leave to apply for the following relief under s 284 of the Companies Act 1993 (Companies Act):
(a)A declaration that the defendant, Kelera Nayacakalou, was not validly appointed as liquidator of PMEL, or if she was, the office of liquidator became vacant in May 2018 when the defendant ceased acting as liquidator due to incapacity;
(b)A declaration that the actions the defendant has purported to take as liquidator are of no effect;
(c)An order that the decision of the defendant, purportedly as liquidator of PMEL, to retain $100,000 for her own remuneration and expenses, be reversed;
(d)An order that Mr Simon Dalton and Mr Matthew Kemp, insolvency practitioners of Auckland, be appointed to act jointly and severally as liquidators of PMEL;
(e)In the event that the Court declines to make the orders at [a] – [c] above, an order fixing the remuneration of the defendant, as liquidator, to a reasonable amount.
Factual background
[2] PMEL was incorporated on 18 July 1990. Mr Needham has been the sole director since 2006. At the time of liquidation in 2014, the shares of PMEL were owned by Mr Needham’s wife (as to 50 per cent) and the trustees of the Pecunia In Posterum Institutum Trust (being at that time, Mr and Mrs Needham, and Mr Anthony Banbrook, who has since died) (PIT Trust).
[3] PMEL owned a large piece of land at Pauanui. In 2012, that land was transferred to a new company, Pauanui Dream Estate Ltd (PDEL). That transfer was a consequence of an arrangement entered into by PMEL with a company called Samy Trustee Ltd.
[4] PDEL is owned as to 60 per cent by Samy Trustee Ltd. Its sole director is Mr John Samy. That position was only established after litigation in this Court. Immediately after incorporation of PDEL, Mr Needham registered a transfer of 550 shares to himself so as to become the majority shareholder. He then caused himself to be appointed as the director and later (in May 2015) to have a relative, Mr Richard Needham, likewise appointed.1
[5] Both the transfer and the appointments were challenged in proceedings in this Court in 2016. In Samy Trustee Ltd v Pauanui Dream Estate Ltd,2 Fogarty J held that the merits were overwhelmingly “in favour of the plaintiff, Samy Trustee Ltd” and that the defendant’s argument “was hopeless”. Fogarty J ordered Samy Trustee Ltd had legal title to the 550 shares concerned and that Mr Richard Needham had not been validly appointed as director and that Mr Gregory Needham was validly removed as a director in September 2015. In the result, Samy Trustee Ltd was confirmed as PDEL’s 60 per cent shareholder with the balance of the shares held by the Needhams.
[6] Having transferred the land to PDEL, in early 2014 the shareholders of PMEL decided to place it into liquidation. Mr Needham contacted Mr Nicholas Hayes at Liquidateit, Liquidations and Accountancy services. Mr Nicholas Hayes provided Mr Needham with a quote of $5,000 to act as liquidator of the company.
[7]On 9 April 2014, the defendant signed a consent to act as liquidator.
[8] A first liquidator’s report prepared in the name of the defendant was dated 23 April 2014.
[9] On 3 December 2014, in the High Court at Hamilton, Mr Nicholas Hayes was adjudicated bankrupt.
[10] The defendant formed the opinion that the transfer of land from PMEL to PDEL had been at under-value and for that reason, in December 2017, she commenced proceedings against PDEL, Samy Trustee Ltd and the trustees of the PPI Trust (CIV- 2017-404-2938).
1 The background is set out in the recent judgment of Muir J in Samy Trustee Ltd v Pauanui Dream Estate Ltd [2020] NZHC 2118 at [5]–[10].
2 Samy Trustee Ltd v Pauanui Dream Estate Ltd [2016] NZHC 569.
[11] In June 2019, PDEL and PMEL signed a deed of settlement of that litigation whereby PDEL would pay PMEL $100,000. Samy Trustee Ltd subsequently made arrangements to borrow $100,000 from the ASB Bank to on-lend to PDEL for it to be able to make the settlement payment to PMEL and the defendant.
[12] On 29 July 2020, the defendant filed a final liquidator’s report. The report noted that the settlement sum of $100,000, a liquidation fee of $5,000 paid by Mr Needham and a council refund was applied to liquidation and legal fees of $50,182.02 and $57,560.53 respectively.
[13]Mr Needham has objected to the removal of PMEL from the Register.
Relevant legal principles
[14] In Trinity Foundation (Services No 1) Ltd v Downey,3 the Court of Appeal approved the approach of Lang AJ, as he then was, in this Court who held that an applicant for leave to proceed under s 284 of the Companies Act must show that it has an arguable case.4 The two aspects of that test are that the case must have both a credible factual basis and there must be a reasonable likelihood that, if the claim is established, the Court will disturb the act or decision in question.5
[15] It is clear from Trinity that s 284 provides a filtering mechanism designed to ensure that leave to challenge the acts and decisions of liquidators is only given in appropriate cases.6
[16]In a recent decision 100 Investments Ltd v Walker,7 Johnson AJ held:
[65] It appears to me that of s 284, as explained in the cases and commentary, is generally applied so as to give creditors who, when the outcome of the liquidation is known, have a legitimate grievance as to the way in which it has been conducted and can demonstrate that if it had been conducted otherwise the outcome may have been more advantageous for them an opportunity to examine whether their concerns are well founded. In such circumstances, creditors are entitled to insist on a retrospective review in the form of an audit of the company’s affairs and the liquidator’s actions. The leading authorities such as Re Ocean Shipping Ltd (in liq) all involve applications after the liquidator or liquidators have filed
3 Trinity Foundation (Services No 1) Ltd v Downey (2006) 3 NZCCLR 401 (CA).
4 At [31].
5 At [23].
6 At [23].
7 100 Investments Ltd v Walker [2020] NZHC 1947.
their final reports and such information is available to the Court and interested parties.
(emphasis added; citations omitted)
Analysis and decision
[17]There are two critical issues to address:
(a)Does the application have a credible factual basis; and, if so,
(b)Is there a reasonable likelihood, that if the claim was established, the Court will disturb the acts or decisions in question?
(a) Credible factual basis Invalid appointment
[18] In a further affidavit sworn and filed shortly before the hearing the defendant has attached a consent to act as liquidator dated 9 April 2014. On the face of it, the mandatory requirement of s 282 of the Companies Act (there must be consent in writing) has been established.
[19] The principal submission for Mr Needham is that despite having signed a consent to act, the defendant’s appointment was invalid because it was always intended that it was to be Mr Nicholas Hayes and not the defendant who would in fact be the actual liquidator. It is argued that this “sham” is borne out by the fact that the defendant herself took no steps as a liquidator from the time of liquidation in April 2014 until at least December 2015.
[20] In contending for a sham, Mr McAnally, for Mr Needham, submitted that there was a sham (an arguable sham) in the colloquial sense, although perhaps not in the legal sense. For that proposition, he relied upon the following passage in Ah Toy v Registrar of Companies (NT), a decision of the full Federal Court of Australia:8
In relation to the description “deceptive sham”, it is fair to say that what was done, in respect of both the provisional liquidation and the liquidation, was a sham in the colloquial sense although perhaps not in the legal sense … Mr Ah Toy held the offices of provisional liquidator and liquidator but he did not act in those offices. Instead he allowed others to act, making decisions and fulfilling functions which he ought to have undertaken himself.
8 Ah Toy v Registrar of Companies (1986) 10 FCR 356 at 364.
[21] The Court held that under the Companies Act (NT) a liquidator may delegate specific tasks which for one reason or another he is not able to undertake but neither that provision nor any other part of the legislation permitted the type of “wholesale” delegation of the liquidator’s functions as occurred in that case with the agent performing most of the work of the liquidation.9
[22] Mr Needham contends that there was unauthorised “wholesale” delegation in this case, with the defendant essentially playing no role in the liquidation until at least December 2015.
[23] It is apparent from the evidence before me that the arrangements relating to the defendant’s appointment (and for which she is responsible) were far from satisfactory. They were arguably very loose and arguably, did not meet professional standards. It is arguable that the defendant did not intend in fact to assume the office of liquidator other than in name only and that the real intention was that the liquidation would be conducted in substance by Mr Nicholas Hayes. That finding is supported by the following evidence:
(a)The email from Mr Nicholas Hayes to Mr Needham dated 17 April 2014, in which he notes:
I will be handling the liquidation for you, however my associate Kelera [the defendant] will have her name on the liquidation papers.
(b)The invoice sent by Mr Nicholas Hayes to the plaintiff’s company dated 27 May 2014, which tends to indicate both that Mr Nicholas Hayes would be primarily responsible for the liquidation and that it was anticipated that it would be a straightforward task (given the relatively small fee);
(c)Mr Nicholas Hayes and the defendant were associates in a shared business premises;
(d)It was Mr Nicholas Hayes who contacted the company’s accountants for copies of its records on or about 17 September 2014;
9 At 361.
(e)The “interim” liquidator’s report of 27 October 2014 was prepared in the name of Mr Nicholas Hayes and invited creditors to contact him (the report is not signed as such);
(f)When the defendant became involved with the liquidation on or about 15 December 2015, she referred to herself as “taking over” from Mr Nicholas Hayes and had to familiarise herself with events to that point.
[24] In the circumstances, I find that there is an arguable case that the defendant’s appointment was invalid. It matters not, as Mr McAnally submitted, that the defendant signed the consent; on the evidence there is an arguable case that there never was any intention by her to act as liquidator and that she did not do so until she “took over” (the defendant’s own words) the role in December 2015. In terms of the principles of Ah Toy, there is arguably an improper and “wholesale” delegation of the liquidator’s responsibilities, from the outset, to Mr Nicholas Hayes.
[25] I accept the submission of Mr D Hayes, counsel for the defendant, that it is not uncommon or improper for a liquidator to delegate tasks, but it is arguable, in this case, that there was far more than routine delegation with the defendant essentially playing no role at all for the first 20 odd months of the liquidation.
[26] I accept that the evidence falls short of establishing an arguable case of dishonesty or a “sham” in the legal sense of a deceit. However, the evidence does raise some “uncomfortable” questions as Mr McAnally submitted.
Vacancy
[27] It is clearly arguable that because the defendant’s appointment was invalid that there was a vacancy in the office of liquidator (s 283(5) of the Companies Act).10
[28] I also find that even if the initial appointment of the defendant as liquidator was valid, then there is an arguable vacancy arising from the fact that the defendant was incapacitated in May 2018 and for a considerable period of time. This constitutes
10 Minister of Education v Nayacakalou [2020] NZHC 1874 at [28].
a vacancy that arises “for any reason other than resignation” under s 283(5) of the Companies Act.11
[29] The evidence (which is far from clear or complete) suggests the defendant was still unwell in early 2019, having had surgery in May 2018 for a ruptured arteriovenous malformation in her brain.
[30] In her affidavit evidence the defendant says that in 2018 she had asked Mr David Hayes to act on her behalf but she did not permit him or require him to make any decisions and that she was aware of what was happening in the liquidation and that responsibility for it lay with her. However, I accept the submissions for Mr Needham that that says very little and sits uneasily with what is recorded in the following passage from Minister of Education v Nayacakalou:12
In an updating memorandum dated 11 September 2018, Ms Nayacakalou’s counsel advised that she suffered a major health issue in 2018, and was unable to return to her role as liquidator in any event. Her counsel repeated the advice that she had volunteered when the proceeding was commenced.
[31] I acknowledge the defendant’s health issues would have caused significant problems for her but it is arguable (and that is the test I am applying) on the evidence before me (as yet untested) that the defendant should have resigned and made arrangements for her replacement. As the Federal Court held in Ah Toy,13 if a liquidator is so disabled in some way that she cannot perform the duties to which she has been appointed, her duty is not to appoint an agent but to seek leave to resign her office.
Quantum of fees
[32] As liquidator, the defendant could not charge more than was reasonable remuneration for carrying out her duties and exercising her powers as liquidator.14
11 See Zhang v Kamal [2017] NZHC 1943, Heath J, at [51][a]. See also s 49(5) of the Insolvency Practitioners Regulation (Amendments) Act 2019, which amended s 283(5) on 29 September 2020.
12 Minister of Education v Nayacakalou, above n 10, at [11], a separate proceeding in which the Minister of Education, as plaintiff, sought the removal of Ms Nayacakalou as liquidator of Osborne Building 2000 (in liquidation).
13 Ah Toy v Registrar of Companies, above n 8, at 361.
14 Section 276(1) of the Companies Act.
[33] Furthermore, the defendant could not, as part of her remuneration, charge any allowance in respect of a third party performing any ordinary duties required by the Act to have been performed by the liquidator. That is the effect of reg 30 of the Companies Act 1993 Liquidation Regulations 1994.
[34] As the plaintiff submitted, the remuneration charged was, more or less, half of the value of the asset recovered in the litigation settlement (and the legal fees also charged against the company accounted for the other half) which make this a “tier 3” case.15 That places a heavier burden upon the defendant to provide sufficient information to justify her remuneration.
[35] The challenge to the defendant’s remuneration is not wholly without merit – and it would have been of assistance to the Court if she had explained in further detail the 16 hours spent on drafting pleadings (being the time entry on 7 March 2016). However, she has provided to the Court her timesheets and has noted that the litigation required extensive attention by her because it was vigorously opposed by the defendant. The charge-out rate of $400 per hour is within the band of rates approved by the Court and, in any event, she did not invoice for all of the total time costs incurred of $67,740.00. There was a significant discount.
[36] In the absence of sufficient evidence, it is of course very difficult for the Court to make any assessment about the significant costs incurred in relation to the litigation and whether the defendant was justified in spending significant sums for a recovery which did not really advance the financial position of the company. However, it seems clear that the plaintiff, Mr Needham, was aware and informed of various steps in the litigation which I note, also included related caveat issues. Furthermore, it is not uncommon for liquidation litigation to produce a modest outcome; a liquidator, with no prior involvement with the company, must acquaint herself with company’s affairs as best she can and decisions whether to pursue litigation can be challenging.
[37] The threshold of a credible factual basis for challenging the reasonableness of the liquidator’s remuneration is not made out.
15 See Re Roselea Path Ltd [2013] 1 NZLR 207 at 224,247.
(b)Reasonable likelihood that the Court would disturb acts or decisions in question?
[38] The question whether to grant leave under s 284 is ultimately one of discretion. In determining whether to exercise that discretion the critical and decisive issue in this case is the prospect of any successful claim giving rise to relief by the Court.
[39] I acknowledge the importance of holding liquidators to account when there are arguable claims that a liquidation has been conducted unlawfully or improperly. However, the fundamental problem for Mr Needham is that it is far from clear that he truly has a legitimate grievance as to the conduct of the liquidation such that if it had been conducted otherwise, the outcome might have been more advantageous for him.
[40] Mr Needham submitted that the settlement of the litigation was a “soft” one. There are suggestions that there was conduct that was not bona fide (whether by both liquidator and her legal representatives) but there is no proper evidential foundation to support that claim. The claim is more in the nature of speculation and Mr Needham must establish more than just dissatisfaction with the settlement.
[41] Mr McAnally acknowledged that these proceedings are ultimately all about the land that was the subject of the litigation settlement. I note that the related s 174 of the Companies Act proceedings in Samy Trustee Ltd v Pauanui Dream Estate Ltd are still on foot and Mr Needham and his wife are 40 per cent shareholders who will not agree to the alienation of the land by PDL (s 129 of the Companies Act).
[42] Even if the Court were to conclude that the decision of the defendant, as liquidator, to retain $100,000 for her own remuneration and expenses should be reversed, there is, in my view, no realistic prospect that the PIT Trust, as creditor, would receive any financial benefit. There is a preferential company debt in favour of the IRD for unpaid GST of $34,673.12. Furthermore, the defendant, as liquidator, in the event that an order is made reversing the retention of funds, would be able to make a claim for restitution as an unsecured creditor.16 On the evidence before me, the initial pursuit of litigation seems to have been a sound one and even if there should be some reduction in the defendant’s fee, it seems clear that she still would be entitled, on a restitutionary basis, to a substantial fee. I also note that the effect of reg 36 of the
16 Fatupaito v Harris [2019] NZAR 192.
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 that he or she acted in good faith).17 That all means that there would be very little funds available to justify the appointment of new liquidators to investigate the defendant’s conduct and to take any steps to re-visit the settlement. In short, there is little likelihood of a court disturbing the impugned decisions of the defendant; there are insufficient funds in the liquidation to justify such relief.
[43]For all these reasons, I find that the applications should be dismissed.
Result
[44] The applications by the defendant for leave under s 284 of the Companies Act 1993, dated 24 August 2020, are dismissed.
[45] As to costs, I am of the preliminary view that having succeeded, the defendant is entitled to costs, and on a 2B basis. If costs cannot be agreed, then brief written submissions are to be filed and served within 14 days (no more than three pages each).
Associate Judge P J Andrew
17 Minister of Education v Naycakalou l, above 10, at [27], per Smith AJ; see also Zhang v Kamal, above n 11, at [50] and [51].
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