Orion International Limited (in liq) v Horne and Crichton HC CHCH CIV 2009-409-002178

[2009] NZHC 2458

IN THE HIGH COURT OF NEW ZEALAND

CHRISTCHURCH REGISTRY

CIV-2009-409-002178

BETWEEN  ORION INTERNATIONAL LIMITED (IN

LIQUIDATION) Applicant

ANDKEIRAN ANNE HORNE DAVID CRICHTON Respondents

Hearing:         6 November 2009

Appearances:  D Lester for Appellant

D J Chisholm for Respondents

Judgment:      3 December 2009

RESERVED JUDGMENT OF HON. JUSTICE FRENCH

Introduction

[1]      When a company goes into liquidation, time limitation periods on claims against the company stop running (unless, of  course,  they  have  already  expired). This is a well established principle which has been consistently followed since 1872.

It   applies   whether   the   appointment   of   the   liquidator   is   by   Court   order   or shareholders’ resolution.

[2]      The issue in this proceeding is  whether  the  appointment  of  an  interim

liquidator has the same effect.

[3]      The issue arises against the following factual background.

ORION INTERNATIONAL LIMITED (IN LIQUIDATION) V HORNE AND ANOR HC CHCH CIV-2009-

409-002178  3 December 2009

[4]      On  26  November  2008,  this  Court  appointed  Ms  Horne  and  Mr  Crichton (Horne/Crichton)  interim  liquidators  of  a  company  called  Erueruiti  Investments Limited.  The application had been made by the Commissioner of Inland Revenue.

[5]      On 18 May 2009 Erueruiti was placed into liquidation, the interim liquidators

Horne/Crichton being appointed liquidators.

[6]      On 27 July 2009 the applicant in this proceeding, Orion International Limited (itself  in  liquidation)  lodged  a  creditor’s  claim  with  Horne/Crichton. The  claim arises out of events said to have taken place on 24 December 2002.

[7]      Horne/Crichton have rejected Orion’s claim  on  the  grounds  it  is  statute barred, the six year limitation period under the Limitation Act 1950 having expired

on 24 December 2008, being a date before the liquidation commenced on 18 May

2009.

[8]      Orion,  however,  contends  that  time  under  the  six-year  limitation  period stopped running or was suspended on the appointment of Horne/Crichton as interim liquidators  in  November  2008.   If  that  is  correct,  it  means  that  when  Erueruiti subsequently went into liquidation in May 2009,  the claim was still within the six year period and so in time.

Discussion

[9]      Unfortunately, there does not appear to be any authority directly on point.

[10]     That being so, I have found it helpful to first consider the purpose of an interim  liquidation,  the  differences  between  interim  liquidations  and  liquidations, and then examine the underlying rationale for the rule about time limitation periods

to see if that rationale applies with equal force to interim liquidations.

The purpose of interim liquidations and the role of an interim liquidator

[11]     An interim liquidator can only be appointed by the Court, and then only if an application for a liquidation order has been filed disclosing good grounds for putting the  company  into  liquidation.           Generally speaking, the essential purpose of an interim liquidation is to preserve the status quo pending the hearing of the application for the liquidation order, there being concern that if the company remains in  the  control  of  the  directors  and  shareholders  its  assets  may be  dissipated  in  the meantime. In  determining  whether  there  is  a  need  for  an  interim  liquidator,  the Court  will  consider  such  factors  as  whether  the  company’s  assets  are  in  jeopardy, whether  there  is  a  need  for  urgency  and  whether  the  interests  of  the  creditors  are safeguarded: see Shen v  Ann Ying Group Limited (No. 3) (2006) 3 NZCCLR 351; Carter Holt Harvey Limited v Timbalok NZ Limited (1997) 11 PRNZ 435.

[12]     The appointment of an interim liquidator  is  regulated  by  s  246  of  the

Companies Act 1993 and the High Court Rules.

[13]     Section 246 provides:

246     Interim liquidator

(1)If  an  application  has  been  made  to  the  Court  for  an  order  that  a company be put into liquidation, the Court may, if it is satisfied that it is necessary or expedient for the purpose of maintaining the value of  assets  owned  or  managed  by  the  company,  appoint  a  named person,  or  an  Official  Assignee  for  a  named  district,  as  interim liquidator.

(2)      Subject to subsection (3) of this section, an interim liquidator has the rights and powers of a liquidator to the extent necessary or desirable

to maintain the value of assets owned or managed by the company.

(3)      The Court may limit the rights and powers of an interim liquidator in such manner as it thinks fit.

(4)      The appointment of an interim liquidator takes effect on the date on which,  and  at  the  time  at  which,  the  order  appointing  that  interim liquidator is made.

(5)      The Court must record in the order appointing the interim liquidator the date on which, and the time at which, the order was made.

(6)If any question arises as to whether on the date on which an interim liquidator was appointed an act  was  done  or  a  transaction  was

entered into or effected before or after the time at which the interim liquidator was appointed, that act or transaction is, in the absence of proof to the contrary, deemed to have been done or entered into or effected, as the case may be, after that time.

[14]     An interim   (or   “provisional”)   liquidator   is   an   officer   of   the   Court. Accordingly,  he  or  she  does  not  represent  any  creditor  or  class  of  creditors  but operates under the direction of the Court.  The High Court Rules empower the Court in  appointing  the  interim  liquidator  to  limit  the  rights  and  powers  of  the  interim liquidator in any manner it thinks just (r 31.23).

[15]     The primary duty of an interim liquidator is to preserve the status quo, i.e. to preserve and protect the company’s property for distribution in the event a liquidator

is  subsequently  appointed:  Shen v  Ann  Ying. It has also been  said  that  the provisional liquidator must carry out his or her role “with the least possible harm to

all  concerned  so  as  to  enable  the  Court  to  decide  after  a  proper  and  final  hearing whether or not the company should be wound up”: Re Dry Docks Corp (1888) 39 ChD 306 at 312. A similar statement was approved in Re Chateau Hotels Limited [1977] 1 NZLR 381 at 383.

[16]     Unlike  a  liquidator,  an  interim  liquidator  does  not  have  the  power  to distribute assets or determine creditors’ rights.  The company continues to exist and the  identity  and  character  of  the  company  is  unchanged. Further,  the  fact  the company is subject to interim liquidation does not of itself result in the termination of  the  company’s  contracts:  see  Keay,  McPhersons  Law  of  Company  Liquidation (2001) at 6.19.

[17]     On  the  other  hand,  the  appointment  does  have  the  effect  of  displacing  the directors.           The  interim  liquidator  assumes  control  of  the  company’s  property  and operations: see Elders Pastoral Holdings Limited v New Zealand Ostriches Limited HC Rotorua M2/99;M3/99;M4/99, 8 February 1999, Williams J.

[18]     Previously, under the 1955 Companies Act, there was an express provision to the effect that on liquidation or where a provisional liquidator had been appointed,

no action or other civil proceeding against the company could be commenced except

by leave of the Court: see s 226.

[19]     The purpose of having a stay provision in the case of interim liquidations was

to prevent a company which was facing possible liquidation from having its assets wasted in litigation.

[20]     As regards liquidation proper, a stay of proceedings serves a second purpose, namely,  to  oblige  all  claimants  to  submit  to  the  procedural  scheme  established  in winding up so there can be an orderly and inexpensive process.

[21]     The  position  is  not  changed  under  the  1993  Companies  Act  in  so  far  as liquidations  are  concerned. Section  248(1)(c)  states  that  one  of  the  effects  of commencement of liquidation is that a person must not continue or commence legal proceedings against the company unless the liquidator agrees or the Court so orders. However, there is no longer any express provision requiring leave in order to be able to  bring  a  claim  against  a  company  in  interim  liquidation  as  there  was  under  the 1955 legislation.

[22]     It is a curious omission and what significance should attach to it was a matter

of some debate at the hearing before me. There appears to be no explanation for the change in any of the relevant papers leading to the enactment of the 1993 Act, while the relevant Law Commission report says the law regarding interim liquidators is to stay the same: New Zealand Law Commission Company Law: Reform and Restatement (NZLC R9 1989) para 663. Those facts prompted Mr Lester, for Orion, to contend the omission was not deliberate, it was simply the result of a different drafting style. He pointed out that the sort of “extreme circumstances” that warrant the appointment of an interim liquidator are the very sorts of circumstances where a claim against a company would not be appropriate. In his submission, Parliament must have intended that the appointment of an interim liquidator should result in a stay of proceedings, as it did under the previous legislation.

Liquidation and the effect of a liquidation order

[23]     The starting point for consideration  of  this  issue  is  s248  of  the  Companies

Act 1993 which provides:

248     Effect of commencement of liquidation

(1)With   effect   from   the   commencement   of   the   liquidation   of   a company,—

(a)The  liquidator  has  custody  and  control  of  the  company's assets:

(b)      The  directors  remain  in  office  but  cease  to  have  powers, functions, or duties other than those required or permitted to be exercised by this Part of this Act:

(c)Unless the liquidator agrees or the Court orders otherwise, a person must not—

(i)       Commence or continue legal proceedings against the company or in relation to its property; or

(ii)      Exercise   or   enforce,   or   continue   to   exercise   or enforce, a right  or remedy  over  or  against  property of the company:

(d)      Unless the  Court orders otherwise, a  share  in  the  company must not be transferred:

(e)An alteration must not be made to the rights or liabilities of a shareholder of the company:

(f)A   shareholder   must   not   exercise   a   power   under   the constitution  of  the  company  or  this  Act  except  for  the purposes of this Part of this Act:

(g)      The constitution of the company must not be altered.

(2)Subsection (1) of this section does not affect the right of a secured creditor, subject to section 305 of this Act, to take possession of, and realise or otherwise deal with, property of the company over which that creditor has a charge.

[24]     As noted in Keay, McPhersons Law of Company Liquidation (2001) at 7.01 the beginning of winding up means that a collective process is ushered in.  Individual rights  are  surrendered as  far  as  creditors  are concerned  and  in exchange  a right to share in the assets of the company is given.   This is done so that there is an orderly winding-up  process  and  the  creditors  will  be  paid  pari  passu,  that  is  equally  and rateably.

[25]     Judicially,  liquidation  or  winding  up  has  been  described  as  “a  process  of collective  enforcement  of  debts”:  In  Re  Lines  Bros  Limited [1983] Ch 1 at 20 per Brightman LJ.

[26]     This statement was endorsed by Lord Hoffman in Wight v  Eckhardt Marine GmbH [2004] 1 AC 147 (PC) where his Lordship further explained:

26.      … It is first necessary to remember that a winding up order is not the equivalent of a judgment against the company which converts the creditor’s claim into something juridically different, like a judgment debt. Winding up

is,  as  Brightman  LJ  said  in  In  re  Lines  Brothers  Ltd  [1983] Ch 1, 20, “a process of collective enforcement of debts”. The creditor who petitions for a winding up is “not engaged in proceedings to establish the company’s liability or the quantum of the liability (although liability and quantum may be put in issue) but to enforce the liability”.

27.      The winding up leaves the debts of the creditors untouched.  It only affects the way in which they can be enforced. When the order  is  made, ordinary proceedings against the company are stayed (although the stay can

be enforced only against creditors subject to the personal jurisdiction of the court).  The creditors are confined to a collective enforcement procedure that

results in pari passu distribution of the company’s assets.   The winding up does not either create new substantive rights in the creditors or destroy the

old ones.  Their debts, if they are owing, remain debts throughout.  They are discharged  by  the  winding  up  only  to  the  extent  that  they  are  paid  out  of dividends.   But  when  the  process  of  distribution  is  complete,  there  are  no further assets against which they can be enforced.  There is no equivalent of the discharge of a personal bankrupt which extinguishes his debts.  When the company is dissolved there is no longer an entity which the creditor can sue.

The rationale of the rule that time limitation periods cease to run on liquidation

[27]     The   origins   of   the   rule   that   limitation   periods   stop   running   on   the commencement of a winding up is usually attributed to the 1872 decision of In re General Rolling Stock Co. (1872) L.R. 7 Ch.App. 646.

[28]     In  General Rolling Stock, the rule was justified  on two  grounds.   First, the existence of the statutory scheme of  distribution  that  arises  on  liquidation,  and secondly the existence of a statutory provision staying actions against a company in liquidation.  As regards the latter, it is clear the Court considered it would be unjust if time continued to run even although the proceeding was stayed.

[29]     If the only reason why time stops running is because claims are stayed and can only be pursued with the leave of the Court, then the issue of whether the New

Zealand   Parliament   intended   to   change   the   law   in   1993   relating   to   interim liquidations and stays would obviously assume critical importance.

[30]     However, it has not proved necessary for me to resolve that issue, because I have come to the view that the existence of a stay is only a subsidiary consideration. Or,   to   put   it   another   way,   even   if   I   accepted   Mr   Lester’s   argument   that notwithstanding the absence of  any express provision in the 1993 Companies Act, claims are stayed on the appointment of an interim liquidator, I would still find time does not stop running.

[31]     In  my  view,  the  primary  rationale  for  the  rule  is  the  liquidator’s  duty  of distribution,  the special  statutory method  of  proving the  claim  and  the  liquidator’s duty to  decide  claims.   Those  are  not  the  functions  of  an  interim  liquidator.   The latter’s duty is one of preservation. The statutory scheme only comes into being on the making of the liquidation order and not before.

[32]     The fact there may be a stay on litigation against the company in the event of interim  litigation  does  not  have  as  its  necessary  corollary  that  time  should  stop running.   The  stay  is  only  a  procedural  bar.   The  prospective  litigant  can  always apply  for  leave. I  accept  that  the  fact  of  a  stay  has  been  invoked  in  the  past  to support the justice of the rule, but in my view it is not the reason for its existence.

[33]     A  further  argument  advanced  by Mr Lester was that it is  commercially sensible to  require  time  to  stop  running on an interim  liquidation when it is inevitable the claims will be stayed on liquidation. I accept it has been held that the appointment of an interim liquidator is “to a large degree… a pre-judgment on the winding up application itself”:  Elders  Pastoral  at  6  per  Williams  J. However, legally the appointment of an interim liquidator is not the beginning of a winding up. A winding  up  order  may  never  be made. A provisional liquidation is  a  separate administration to the liquidation.

[34]     I  am  reinforced  in  the  conclusion  I  have  reached  by  consideration  of  the authorities.

[35]     First,  while  as  I  have  said  there  is  no  authority  directly  on  point,  any formulation of the rule in the case law and in company law textbooks always appears to  be  limited  to  liquidation. There  is  no  suggestion  to  be  found  anywhere  that  it applies equally to interim liquidations.   Interim liquidations are never mentioned in connection with the rule in any of the texts cited to me by counsel.

[36]     Nor does  there appear  to be  any express mention of interim liquidations  in textbooks on limitation.  Mr Lester referred me to a passage in Franks Limitation of Actions  (1959)  at  page  28  which  says  “Where  property  is  in  court  or  in  the possession of a receiver appointed by the court, this may stop time running against the persons entitled to it.”  Mr Lester argued that by analogy this must also apply in principle to interim liquidations.   However, in my view, that is to draw too long a bow.   The passage appears to be concerned with cases involving a specific item of property  or  sum  of  money  in  dispute. Again,  interim  liquidations  do  not  rate  a mention in any of the cases cited or in the textbook itself.

[37]     Further,  there  are  at  least  two  decisions  where  it  is  clear  the  Judge  has assumed   time   would   continue   to   run,   notwithstanding   the   appointment   of   a provisional  liquidator  and  notwithstanding  the  existence  of  legislative  provisions requiring the leave of the Court in order to continue a proceeding.

[38]     The first of these is an Australian case Re Summit Design and Construction Pty Limited (1999) 33 ACSR 301. It concerned an application for leave to proceed against a company subject to interim liquidation. Significantly, at para 23 of the decision the Judge states:

As to the risks and prejudice of the applicant, my attention was drawn to s 17

of  the  Act,  under  which  proceedings  in  respect  of  a  debt  cannot  be  taken under an Act more than 12 months after the debt  becomes payable. In the present case the company is only in provisional liquidation. It  may be that some  events  may  occur  which  will  bring  the  provisional  liquidation  to  an end. It would be unfair to the applicant, if that were to occur, that the time taken  for  the  working  out  of  the  provisional  liquidation  meant  that  it  had become statute-barred under s 17.

[39]     I acknowledge the passage is of limited value because the decision was delivered “ex tempore” and without any detailed discussion of the effect of liquidation on limitation periods. However, it is  not  without  some  significance,

especially when  combined  with  the  assumptions  that  appear  to  be  made  in  all  the leading textbooks.

[40]     The second decision is an English  case  called  Re  Cases  of  Taffs  Well  Ltd

[1992] Ch 179. The issue in Taffs  Well  was  whether  time  ceases  to  run  on  the presentation of the winding up petition or the making of the winding up order, there being a provision in the relevant company legislation deeming the commencement of the liquidation to be the date the petition is filed.   There was no interim liquidation involved. For  present  purposes,  however,  the  significance  of  the  decision  is  a passage at 193, which reads as follows:

The  consequences  [of  filing  a  winding  up  petition]  can  be  summarised  as follows.  (1) There can be no valid disposal of the company’s assets without the  leave  of  the  court.  (2)  Proceedings  against  the  company  may  be restrained   and   if   a   provisional   liquidator   has   been   appointed   such proceedings cannot be commenced without leave.   (3) In some cases it has been  held  that  a  creditor’s  right  to  set  off  ceased  to  be  available  after  the presentation of the petition, although later cases suggest that it survives until the date of the winding up order.   (4) Until the recent changes in the rules, creditors could not prove for interest on debts after the date of the petition. (5)  Disposals by way of  fraudulent  preference  and  the  creation  of  floating charges during a period determined by the date of the petition are liable to be set aside.   (6) Attachments, sequestrations, distress and executions become void on the presentation of the petition.

All  those  matters,  as  I  see  it,  are  designed  to  ensure  that  the  company’s assets are preserved and in some cases recovered, so as to be available for realisation and distribution by the liquidator in due course to those entitled to them under the statutory scheme.   The stopping of time against creditors at the date of the presentation of the petition does not serve any such purpose. Does  justice  require  it?      A  positive  answer  would  be  required  if  the presentation of the petition prevented creditors about to be time barred from taking steps to stop time running.   But save where a provisional liquidator has been appointed, a creditor can issue a writ as of right, even though the action may thereafter be stayed; and even where a provisional liquidator has been appointed, the creditor could no doubt obtain leave to issue a writ to protect his position.  I reject the suggestion that justice requires the stopping of time.

[41]     In my view, it is implicit in this passage that time does not stop running in the event of a provisional liquidation even although the creditor may not be able to issue

a writ as of right.

[42]     In relying on this passage, I have not overlooked the fact that elsewhere in the decision,  the  Judge  held  that  on  liquidation  the  creditor’s  cause  of  action  is destroyed.  That analysis was held to be wrong in a subsequent Court of Appeal case where it was said the correct position is that the cause of action remains as it was before  the  liquidation:  see  Financial  Services  Compensation  Scheme  Limited  v Larnell (Insurances) Ltd (in liquidation) [2005] EWCA Civ 1408 (CA). However, I do not consider the particular passage I have quoted from Taffs Well is dependent on the  creditor’s  action  being  regarded  as  destroyed.  Moreover,  the  Court  of  Appeal itself in Financial Services reaffirmed the General Rolling Stock principle in terms of the liquidator’s duty of distribution:

18       It  seems  to  me  that  Lord  Hoffmann’s  analysis  is  correct  and  that Judge  Paul  Baker  QC  was  wrong  to  describe  a  creditor’s  rights  under  a contract  (or  in  tort)  as  being  converted  into  a  trust.  In  so  far  as  it  is necessary  to  ascertain  what  the  creditor’s  rights  are,  they  have  to  be established in contract, tort or otherwise as the case may be.  The creditor’s cause of action remains as it was before, so that, for example, the claimant correctly sues in tort in the present case.  It is only as regards giving effect to those  rights  in  the  insolvency  that  the  rights  are  subjected  to  the  statutory trust  resulting  from  the  duty  of  distribution  imposed  on  the  liquidator  or trustee in bankruptcy.  Correspondingly, it is as regards giving effect to those rights  in  that  way  that,  by  virtue  of  the  principle  established  in  [General Rolling Stock], the period of limitation ceases to run when the liquidation or bankruptcy commences. [emphasis added]

[43]     Two other authorities the combined effect of which inferentially support the conclusion I have reached are the decisions of Re AH Hodge & Sons Limited (1984)

2 ACLC 707 cited in Brooker’s Insolvency Law and Practice at para CA246.04 and Joshua Shaw & Sons Limited [1989] BCLC 362. In Joshua, it was confirmed that the appointment of receivers does not result in time ceasing to run, while Hodge held that the appointment of an interim liquidator is unlikely to be made if a receiver and manager of the company’s assets is already in place.   As Mr Chisholm pointed out, this exposes a significant weakness in Orion’s argument because it would mean the suspension of time was dependent upon whether or not the company’s assets were already  being  protected  by  an  alternative  administration,  which  would  be  a  most unusual result.

[44]     My conclusion is that under the rule in General Rolling Stock time only stops running on the making of the liquidation order and not before.

Outcome of hearing

[45]     This  case  has  been  well  argued  on  both  sides.     However,  after  careful consideration of all the submissions, I have come to a clear view that time did not stop running on the appointment of Horne/Crichton as interim liquidators.

[46]     Orion’s application challenging the decision of the liquidators is accordingly dismissed.

[47]     As regards costs of the proceeding, my expectation is that the parties will be able to reach agreement.   If, however, that does not prove possible and the parties require me to make an award, I direct the respondent is to file submissions first, with the applicant filing submissions in reply ten working days thereafter.

Solicitors:
Layburn Hodgins, Christchurch
(Counsel: D Lester, Christchurch)
Mortlock McCormack Law, Christchurch 8141