ORMOND BRIAN STOCK (deceased) and HELENE PATRICIA STOCK s AND QUITE USEFUL COMPANY LIMITED (in liquidation) PAMELA ANNE REES

[2024] NZHC 2867

IN THE HIGH COURT OF NEW ZEALAND PALMERSTON NORTH REGISTRY

I TE KŌTI MATUA O AOTEAROA TE PAPAIOEA ROHE

CIV-2023-454-80

[2024] NZHC 2867

BETWEEN

ORMOND BRIAN STOCK (deceased) and HELENE PATRICIA STOCK
Plaintiffs

AND

QUITE USEFUL COMPANY LIMITED (in

liquidation) Defendant

PAMELA ANNE REES

Applicant

Hearing:

18 September 2024

Appearances:

K Dalziel for Plaintiffs J McGuire for Applicant

P Cornegé for Liquidator of the Defendant Company

Judgment:

3 October 2024

JUDGMENT OF ASSOCIATE JUDGE SKELTON

[1]    The defendant company was put into liquidation on 14 December 2023, unopposed. The applicant, who is a 48 per cent shareholder in the defendant, now applies to terminate the liquidation under ss 250, 288 and 289 of the Companies Act 1993.

[2]    The applicant’s primary ground for termination is that the liquidation is a nullity and the liquidation order should be set aside. If that is so, then the application under s 250 of the Companies Act may not be appropriate. However, the Court retains

STOCK v QUITE USEFUL COMPANY LIMITED (in liquidation) [2024] NZHC 2867 [3 October 2024]

an inherent jurisdiction to set aside a liquidation order to ensure there is no abuse of process causing an injustice.1

[3]    Therefore, it is necessary to consider first whether the liquidation is a nullity. If it is, then I need to consider whether I should exercise the inherent jurisdiction to set aside the liquidation. If it is not, then it will be necessary to consider whether it is just and equitable to terminate the liquidation under s 250 of the Companies Act.

Is the liquidation a nullity?

[4]The applicant argues that the liquidation is a nullity on a number of grounds.

[5]    First, the applicant contends that the statutory demands on which the application for liquidation was based were invalid and void because they were not proceeded by any demand to the company that it pay the debts.2 However, the evidence is that demands were made for payment of the shareholder current account debts on 14 March 2023, being the original statutory demands. These demands could not be used as the basis for an application for liquidation because the 30 working days under s 288(1) of the Companies Act expired before an application was made. However, the 14 March 2023 demands suffice as demands for payment. No particular form of demand is required.3 Further, the 14 March 2023 demands were made well in advance of service of the operative statutory demands dated 28 August 2023 which were the basis for the application for liquidation. The evidence, including an affidavit from counsel for the plaintiffs in the liquidation proceedings, is that the statutory demands dated 28 August 2023 were properly served by post on the registered office of the defendant and were deemed to be received by 4 September 2023 at the latest.4

[6]    Second, the applicant contends that the statutory demands did not comply with s 289(2)(d) of the Companies Act because the amounts demanded were inaccurate and

1      Goh v Ridgeway Properties Ltd (in liq) HC Auckland CIV 2009-404-002749, 29 May 2009; and

Re Samoana Press Co Ltd (1988) 4 NZCLC 64,119 (HC).

2      Counsel for the applicant refers to All Safe Scaffold Ltd v Coghlan [2016] NZHC 3106 at [13].

3 At [13].

4      See ss 388(1)(b) and 392(1)(b) of the Companies Act 1993. The statement of claim states that the company was served with “a statutory demand on 2 September 2023” when in fact there were two statutory demands, and they were deemed to be served on 4 September 2024. However, I do not consider that these typographical errors render the proceeding and the liquidation a nullity.

because the demands refer to the creditors as Ormond Stock and Helene Stock, but the subsequent statement of claim refers to the “plaintiff” in paragraph 7, and it is unclear which of the Stocks that means.  However, the evidence is that Mr Stock was owed

$269,024 (but claimed $267,294.57 in his statutory demand) and Mrs Stock was owed

$102,474 (but claimed $98,811.99 in her statutory demand). These minor inaccuracies with regard to the amounts claimed do not provide any basis for setting aside the statutory demands or treating the liquidation as a nullity as is clear from s 290(5) and

(6) of the Companies Act.5  Further, the plaintiffs are clearly stated in the intituling on

the cover of the statement of claim as Ormond Brian Stock and Helene Patricia Stock, and there is reference to “the plaintiffs” in paragraph 3; no confusion arises from the typographical error in paragraph 7. The applicant raises other alleged defects with the statutory demands including as to a different date of service being recorded in the statement of claim and in the minutes of a special general meeting of shareholders on 3 April 2023, but the applicant is clearly referring to service of the 14 March 2023 demands, not the statutory demands dated 28 August 2023 which were the operative demands for the application for liquidation.

[7]    Third, the applicant contends that she was unaware of any lending between the Stocks and the company and there is no evidence of an on-demand loan and a debt of

$366,106 as claimed in the statutory demands and the statement of claim. However, the annual reports for the company for 2016–2023 show the shareholder current accounts increasing incrementally, and as at 31 March 2023, the shareholder current accounts show amounts of $269,024 for Mr Stock and $102,474 for Mrs Stock. The applicant contends that the current account debts allegedly owed to Mr and Mrs Stock are shams. But there is no evidence put forward to substantiate this allegation. The evidence from the liquidator is that the initial shareholder advances were to assist with the purchase of a car for the applicant, who was an employee of the company, and subsequent advances seem to have been to support the financial position of the company to allow it to continue trading.

[8]    The balance sheets in the annual reports also show the liability that these shareholder advances created for the company. The applicant contends that incurring

5      Robyn Merrett and Stephen Revill Insolvency Law and Practice (looseleaf ed, Thomson Reuters, Wellington, 2022) at [CA290.06].

this level of liability (approximately $370,000) would have been a major transaction under s 129(2) of the Companies Act requiring approval of shareholders by special resolution. However, as submitted by Mr Cornegé, for the liquidator, the current account debts have increased incrementally over time as funds have been introduced to support the company rather than being a one-off transaction. The incremental increases are unlikely to have exceeded the threshold under s 129(2) of the Companies Act. Even if the shareholder advances constituted a major transaction entered into without a special resolution, this does not mean the advances are automatically invalid. It is possible for shareholders to later approve a major transaction. In this case, the evidence is that the annual reports and accounts showing the current accounts and balance sheet were provided to the applicant and approved and signed off by all shareholders (the applicant and Mr and Mrs Stock) up until the annual report for the year ended 31 March 2023, when the applicant refused to sign the report. The accounts for the year ended 31 March 2023 show only a relatively small increase in Mr Stock’s current account and no increase in Mrs Stock’s current account.

[9]The company purchased a property at 40 King Street, Marton in 2017 for

$140,000. The applicant contends that the reference in the statement of claim to this purchase being “helped with an ‘on demand’ loan from Mr and Mrs Stock for the sum of $366,106 (the loan)” is wrong because the purchase price was only $140,000. However, although it could have been more clearly expressed, it is apparent that the statement of claim is alleging that the purchase was “helped” by loans from the plaintiffs (totalling $366,106 at the time of the statement of claim), not that the total value of the incremental shareholder loans to the company up until 2023 was the purchase price of the property. The applicant also states that there is reference in the accounts to the purchase of the King Street property being funded by a loan from the Ormond Stock Trust. Therefore, the Trust should be the company’s debtor, not Mr and Mrs Stock. It is apparent from the evidence that the Ormond Stock Trust did loan money to the company in respect of the purchase of the property and remains an unsecured creditor for the sum of $38,601.85. However, this does not change the fact that Mr and Mrs Stock are also unsecured creditors of the company for the amounts referred to above, and were entitled to issue the operative statutory demands dated  28 August 2023.

[10]   Fourth, the applicant contends that Mr and Mrs Stock, as directors, breached  s 131 of the Companies Act (duty to act in good faith and in the best interests of the company). The applicant contends that they “abusively engineered the liquidation of their company” to avoid a substantial claim from the applicant, being a personal grievance filed with the Employment Relations Authority on or about 20 March 2023 following the termination of her employment in late December 2022. The applicant contends that there is no evidence that the company was insolvent at the time of liquidation except for the non-payment of the two statutory demands and the directors used non-payment of those demands by the company under their control as a “cynical pretext” to liquidate the company.

[11]   However, the evidence is that Mr and Mrs Stock and the applicant had a meeting on 7 December 2022 to discuss the loss of a major customer which left the company financially unable to continue. It was agreed that the applicant would contact customers to advise of the termination of services, and Mr Stock was to let the accountants know the business would be closed down, and he was to make enquiries about selling the King Street property. The evidence of the liquidator is that prior to the liquation of the company in December 2023, the company was unable to pay its debts as they became due and was insolvent.6 It is in this context, where the company had ceased trading, and was to be closed down, and was insolvent, that the original statutory demands were served on 14 March 2023 demanding payment of the current account loans, and the operative statutory demands were subsequently served in early September 2023. Mr and Mrs Stock, as directors, were unable to have the company put into liquidation by special resolution of shareholders because this requires a 75 per cent majority, and there is evidence that the applicant would not sign such a resolution. The applicant refused to attend a notified special general meeting of shareholders held on 3 April 2023 that was called to consider three resolutions: noting that statutory demands had been served; that the King Street property and other assets should be sold to meet those demands; and that the company then be wound up and remaining assets distributed to shareholders.  In the circumstances, it was  determined by Mr and   Mrs Stock that it would be necessary to make an application to the Court to put the

6      Counsel for the plaintiff appears to accept in his written submissions that the company was insolvent prior to December 2023. He submits that the directors were in breach of ss 135 and 136 of the Companies Act by allowing the company to trade while insolvent.

company into liquidation on the basis that the company was unable to pay its debts because of failure to comply with the operative statutory demands.

[12]   On the evidence before me, I am not satisfied that Mr and Mrs Stock “abusively engineered” the liquidation of the company or used the inability of the company to pay the current account loans on demand as a “cynical pretext” to liquidate the company, such that the liquidation should be regarded as a nullity. There is evidence that the company was insolvent and, given that the applicant would not sign a special resolution to put the company into liquidation, it was necessary to apply to the Court. As to the issue of whether any conduct by Mr and Mrs Stock prior to the liquidation involved a breach of directors’ duties, that is matter that is properly for investigation by the liquidator.

[13]   Fifth, Mr Stock died on 8 October 2023, prior to the hearing of the liquidation application on 14 December 2023. As noted, neither the applicant nor any other party opposed the application. The applicant now contends that there should have been an application for an order substituting another person for Mr Stock to enable the indirect continuation of his interest in the liquidation proceeding and as one of the company’s creditors. The applicant contends that the Court was not made aware of Mr Stock’s death, and the application for liquidation should have been adjourned until an applicant for substitution had obtained a grant of probate.7

[14]    Ms Dalziel, for Mrs Stock, concedes that no application was made for an order substituting another person for Mr Stock after he passed away. However, she submits that on the evidence the application for liquidation in fact proceeded on the instructions of Mrs Stock alone. Ms Dalziel submits that pursuant to r 1.5 of the High Court Rules 2016 any procedural irregularity in this regard does not render the liquidation a nullity.

[15]   I agree that the liquidation proceeding, and the liquidation, is not nullified by any procedural irregularity in this regard. As stated in the evidence of counsel in the liquidation proceedings (Mr Iorns), and recorded in the formal order putting the company into liquidation, the application for liquidation proceeded on the instructions of Mrs Stock as a plaintiff and creditor of the company.

7      Spencer-Marti v Crouch [2014] NZHC 3069 at [17].

[16]   Sixth, the applicant contends that, on the death of Mr Stock, and in the absence of a new parties order, Mrs Stock was reduced to a 26 per cent minority shareholder and the applicant, as a 48 per cent shareholder in the company, had the controlling interest. The applicant contends that the proceeding to place the company into liquidation was a major transaction under s 129(2) of the Companies Act and therefore required approval of shareholders by way of a special resolution, and Mrs Stock should have called another special meeting of shareholders after Mr Stock’s death.

[17]   However, as submitted by Mr Cornegé, a decision to place a company into liquidation is not typically treated as a major transaction. Rather, s 106 of the Companies Act provides that it is a power reserved to shareholders (separate from the power to approve major transactions), requiring a special resolution.

[18]   Mr Stock’s shares in the company vested in his estate on his death, so the applicant continued to be a minority shareholder and had no greater control or interest in the company. I do not agree with the applicant’s contention that Mrs Stock needed to call another special meeting of shareholders after the death of Mr Stock to obtain “the express support of the majority of shareholders” to proceed with the liquidation of the company. While a company may be put into liquidation by a special resolution of shareholders, in this case, as discussed above, Mr and Mrs Stock (ultimately only Mrs Stock) applied to the court as creditors for an order liquidating the company on the basis that it was unable to pay its debts. This did not require a special resolution of shareholders or the support of the majority of shareholders.8

[19]   Further, the applicant contends that Mrs Stock does not have standing in this proceeding to oppose the applicant’s application for termination. The applicant contends this is because once a company is put into liquidation the directors remain in office but lose most of their powers under s 248(1)(b) of the Companies Act.9 However, this argument is misconceived. Mrs Stock is a creditor of the company, and the company was put into liquidation by the Court on her application. The applicant applies for an order that the liquidation order obtained on the application of Mrs Stock

8      In any event, on the evidence, there was approval by the majority of shareholder to proceed to put the company into liquidation as a result of the resolutions passed by a 52 per cent majority at the special general meeting on 3 April 2023.

9      The applicant relies on Sisson v Commissioner of Inland Revenue [2016] NZHC 2367 at [14].

is invalid and should be set aside and/or that the liquidation should be terminated because it is just and equitable to do so. Clearly Mrs Stock as the plaintiff creditor in the liquidation proceedings is entitled to be heard on an application to set aside the liquidation order. She is also entitled, as a shareholder and creditor, to be heard on an application under s 250 of the Companies Act. The applicant acknowledged that  Mrs Stock has standing by naming her as a party to the application and by serving her with the amended application dated 14 August 2024.

[20]   Finally, the applicant contends that the liquidator was prohibited from being appointed because he provided professional services to the company within two years immediately prior to the commencement of the liquidation.10 The applicant says that the liquidator provided disqualifying professional services by advising Mr Stock to apply to the Court for an order putting the company into liquidation on the basis of the statutory demands. The applicant contends that therefore the liquidation should be terminated.11

[21]   However, the liquidator says he was contacted by Mr Stock to ask if he would consent to being appointed as liquidator of the company. In this regard, he brought to Mr Stock’s attention that a shareholder appointment would require a 75 per cent majority and suggested that, given the company’s financial position, and the fact that it had ceased trading, it would be appropriate to apply to the Court for an order. The liquidator says that he received no remuneration for these attendances. He says that these pre-liquidation attendances are disclosed in his first report to creditors. He states that such attendances do not result in a conflict that prohibits a practitioner from taking appointment as a liquidator. Rather, there is often a need for insolvency practitioners who are asked to consent to appointment as a liquidator to provide some advice on processes and options available to a company.

[22]   I do not consider that these attendances disqualify the liquidator from appointment. It seems to me that an insolvency practitioner who is asked to consent to appointment as a liquidator should point out any issues that might result in his or her appointment being invalid, for example, pointing out that any shareholder

10     Companies Act, s 280(2)(h)(i).

11     The applicant refers to Smart v Photonic Innovations Ltd (in liq) [2021] NZHC 972.

resolution appointing the liquidator will need to be a 75 per cent majority and, if necessary, suggest other options by which the practitioner might validly be appointed as liquidator. In Smart v Photonic Innovations Ltd (in liq), relied on by the applicant, the liquidators were approached as to their preparedness to act as liquidators and, after being provided with the details of the shareholders, actually prepared the draft special resolution to appoint themselves as liquidators. The liquidation was terminated (on the application of the liquidators) not because of any alleged disqualifying conduct in preparing the draft shareholder resolution for the company,12 but because the liquidators subsequently became aware that the special resolution was invalid because it was not passed by a 75 per cent majority of shareholders.

Conclusion

[23]   For the reasons set out above, I am not satisfied that the liquidation of the defendant company is a nullity. The liquidation order is valid. There has been no abuse of process.

Is it just and equitable to terminate the liquidation under s 250 of the Companies Act?

[24]   In most cases, the Court will only exercise its discretion to order termination of a liquidation if:13

1.All creditors had been paid in full, or satisfactory provision had been made for them to be paid in full, or they consented.

2.That the liquidator’s costs had been fully paid or secured.

3.That all the shareholders consented or would be no worse off than if the liquidation had proceeded to its conclusion.

[25]   However, it clear that these are not an exclusive set of criteria for the exercise of what is a broadly expressed power.14 The Court’s starting point is to consider

12 There is no reference in the judgment to any suggestion by the parties or the Court that this was disqualifying conduct under s 280(2)(h)(i) of the Companies Act.

13 Re Bell Block Lumber Ltd (in liq) (1992) 5 PRNZ 642 (HC) at 643. Another factor  for consideration is the public interest: see Moreton-Jones v Rodney Management Ltd (in liq) [2017] NZHC 125 at [10].

14 Foundation Securities (NZ) Ltd v Direct Labour Services Ltd (in liq) [2008] NZCCLR 1 (HC) at [21]–[22].

whether these criteria have been met and, if not, whether there are exceptional circumstances which warrant the making of an order even if the criteria are not fully satisfied.15 Exceptional circumstances may be, for example, where a liquidator’s appointment has been obtained by fraud,16 or potentially “procedural unfairness” in the obtaining of the order for liquidation.17 However, even if the order placing the company in liquidation may have been tainted by some error, that would not necessarily be decisive.18

[26]   In the present case, the evidence is that the criteria set out above have not been met. The creditors have not been paid in full, or satisfactory provision made for them to be paid in full, and no efforts appear to have been made by the applicant to obtain the consent of the creditors to the application. The liquidator’s costs have not been fully paid or secured (although the evidence is there are sufficient funds in the liquidation to permit the liquidator’s costs to be met). The application is opposed by the majority of shareholders (the estate of Mr Stock and Mrs Stock), and they would likely be worse off if the liquidation were terminated and did not proceed to its conclusion.

[27]   The issue then is whether the applicant has identified any exceptional circumstances that warrant an order terminating the liquidation because it is just and equitable. It is apparent that the matters relied on by the applicant as exceptional circumstances are the matters raised by the applicant above as the basis for contending that the liquidation is a nullity. I have considered and dismissed each of these matters. I am not satisfied that there are any exceptional circumstances in this case which warrant an order terminating the liquidation on the basis that it just and equitable to do so.

[28]   Rather, it is just and equitable and in the public interest for the liquidation to proceed to conclusion. If the applicant has genuine concerns about the management of the company and potential breaches of directors’ duties prior to the liquidation, then these issues should properly be raised with the liquidator as an independent third party

15     Bunting v Buchanan [2012] NZHC 766 at [47].

16     Bridon New Zealand Ltd v Tent World Ltd [1992] 3 NZLR 725 (HC).

17     Moreton -Jones v Rodney Management Ltd (in liq), above n 13, at [12]–[20].

18 At [25].

with relevant statutory powers, rather than the liquidation being terminated. Further, many of the issues raised by the applicant, for example her complaint that the liquidation has prevented her from pursuing her personal grievance with the Employment Relations Authority and/or that the liquidator has not accepted her claim in the liquidation, are matters for which there are procedures and remedies available to the applicant under the Companies Act within the context of the liquidation. For example, the applicant may potentially have recourse to the Court under s 248(1)(c) and/or s 284(1)(b) of the Companies Act.

Result

[29]   The application by Pamela Anne Rees for an order that the liquidation of Quite Useful Company Ltd be terminated is dismissed.

[30]   I have not heard fully from the parties on costs. The parties should endeavour to agree on costs. However, if agreement cannot be reached then memoranda may be filed (not exceeding three pages, excluding costs schedules) and costs will be determined on the papers.

Associate Judge Skelton

Solicitors:

Nielsen Law, Hamilton for Liquidator

Jeremy McGuire, Palmerston North for Applicant