PR Law Queenstown no 1 Trustees Limited (in liquidation) v Norris
[2020] NZHC 1397
•18 June 2020
IN THE HIGH COURT OF NEW ZEALAND INVERCARGILL REGISTRY
I TE KŌTI MATUA O AOTEAROA WAIHŌPAI ROHE
CIV-2019-425-000066
[2020] NZHC 1397
BETWEEN PR LAW QUEENSTOWN NO 1
TRUSTEES LIMITED (IN LIQUIDATION)
ApplicantAND
S P M NORRIS
First Respondent
J S TAPPER-NORRIS
Second RespondentA K H YOUDA
Third RespondentK NORRIS BY HIS LITIGATION GUARDIAN J NORRIS
Fourth RespondentA L JOHNS
Fifth RespondentK8 TRUSTEES LTD
Sixth RespondentK9 TRUSTEES LTD
Seventh Respondent
Hearing: 4 June 2020 Counsel:
J W A Johnson and W L Porter for the Applicant J Crowther for the First Respondent
A J B Holmes for the Second Respondent G Blanchard for the Seventh Respondent
Judgment:
18 June 2020
FINAL JUDGMENT OF CULL J
PR LAW QUEENSTOWN NO 1 TRUSTEES LIMITED (IN LIQUIDATION) v NORRIS [2020] NZHC 1397 [18 June 2020]
[1] PR Law Queenstown No 1 Trustees Ltd (in liq) (the Company) seeks urgent directions under s 66 of the Trustee Act 1956, in its capacity as trustee to accept unconditionally an offer of sale of a company asset, namely a parcel of shares. Because the offer of sale expired on Friday 12 June 2020, I issued an interim judgment, together with an appendix containing the confidential commercial details of the proposed transaction. This is the final judgment, released for publication, with all details of the transaction anonymised and that appendix removed.
Background
[2] The Company is a corporate trustee of the Stuart Norris Family Trust (the Trust). In May 2017, Mr Norris, the settlor of the Trust, and the Company entered into a relationship property settlement agreement with Mr Norris’ former partner, Minimum standard Norris, under which Mr Norris and the Company jointly and severally agreed to pay Ms Norris $2,600,000 by 31 October 2017.
[3] Payment was not made. Ms Norris applied for an interim charging order over shares (the Verbena Shares) that the Trust owned in a company which I will refer to as Verbena Ltd (Verbena).1 This application was granted by the High Court in August 2018.
[4] On 4 April 2019, the Company was put into liquidation on the application of Ms Norris. She remains the Company’s principal creditor. The day before, Mr Norris emailed the chairman and legal counsel of Verbena asking them to transfer the Verbena Shares to another entity. They did not comply without further information being provided. On 9 April, Mr Norris’s then solicitors wrote to Verbena suggesting that another entity, K8 Trustees Ltd (K8 Trustees), be appointed trustee of the Trust.
[5] On 18 June 2019, the Company applied to this Court for directions under s 66 of the Trustee Act 1956 in its capacity as trustee relating to its ability to sell the Verbena Shares. The Company wanted to sell the Verbena Shares to meet the liabilities it had incurred in its capacity as trustee and to pay the costs of liquidation.2
1 This is a fictitious name to protect all commercial and confidential interests in this matter.
2 Under the Companies Act 1993, s 253.
[6] On 4 August 2019, Mr Norris purported to offer the Verbena Shares for sale on behalf of K8 Trustees. When this was brought to the Court’s attention, an urgent hearing was set down. Two days before the hearing, on 26 August 2019, Mr Norris filed an affidavit in which he conceded that K8 Trustees had not been correctly appointed and explained that he had earlier that day appointed K9 Trustees Ltd (K9 Trustees) as a trustee.
[7] The following day, the parties reached an agreement which was formalised by way of consent orders. In so far as they are relevant to the current issue, these orders are:3
(a)the appointment of K9 Trustees as a trustee on 26 August 2019 confirmed;
(b)K9 Trustees and the Company were confirmed as the current and valid trustees of the Trust;
(c)the Verbena Shares owned by the Trust could be released by the trustees for the purposes of meeting the Trust’s liabilities, including the liquidators’ fees, costs and disbursements;
(d)the sale process for the Verbena Shares was to be the joint decision of the trustees, including the price per share and the number of shares sold;
(e)the sale process of the Verbena Shares was to be conducted by the trustees in consultation with the management of Verbena and in accordance with the provisions of the Verbena constitution; and
(f)in the event of disagreement, leave to apply to the Court within 48 hours’ notice was reserved.
3 P R Law Queenstown No 1 Trustees ltd (in liq) v Norris HC Invercargill CIV-2019-425-66, 5 September 2019. The remaining orders concerned the issue of costs and directions that Mr Norris is not interfere with the sale process.
The first offer
[8] Further disagreement arose. Since the consent orders, the liquidators undertook a process to sell the Verbena Shares. They negotiated with Verbena to obtain relevant information, contacted existing shareholders and parties referred to them by Verbena, gauged the interest of large investment institutions, and contacted their colleagues overseas to try and find purchasers. The Company provided evidence to say that interest in the Verbena Shares has been very limited.
[9] On 26 February 2020 the Company received an offer from a prospective purchaser (the first offer) that was sufficient to discharge the Company’s liabilities in full, including the costs of liquidation. The Company’s co-trustee, K9 Trustees, did not agree to proceed with the first offer. K9 Trustees suggested that the trustees wait to receive an offer from a UK-based entity of which little is known. Despite suggestions that the UK offer was just around the corner, it was not made. The Company had until 31 March 2020 to obtain Court approval or the consent of K9 Trustees before the first offer expired.
[10] An urgent hearing was set down before me on 23 March 2020 to determine whether the first offer should be accepted. Initially, the Company sought an order that the trustees accept the first offer to allow the liquidators of the Company to pay its creditors and the costs of the liquidation. A decision needed to be made before 31 March 2020, which is when the Company was required to satisfy a condition with the prospective purchaser.
[11] After the filing of initial submissions for that hearing but before the hearing itself, the outbreak of COVID-19 occurred. The Company filed a further memorandum, dated 19 March 2020, seeking a wider order, that the Company and K9 Trustees sell the Verbena Shares on any terms that the liquidators certify are, in their view, the best terms that are reasonably obtainable in the circumstances. It submitted such an order was necessary because of the possibility that the purchaser may seek to change the terms of the offer in the current climate. The new memorandum also asked that, if the Court was satisfied the orders sought were appropriate, to make those orders as soon as possible, with reasons to follow.
[12] K9 Trustees was joined as a party to the proceeding.4 In the weekend prior to the hearing, Mr Norris and K9 Trustees filed a memorandum agreeing to the first offer for the sale of shares and set out the reasons as to why they were not able to agree to an earlier date. They opposed the amended order sought by the liquidators, identified at [10], on the grounds that, if granted, the wider order would allow the liquidators, being one of the two co-trustees of the Trust, to act in a unilateral manner without the need to involve or obtain the approval of K9 Trustees.
[13] Just prior to the hearing, the first offer was withdrawn by the prospective purchaser. The applicant filed a memorandum notifying the Court of the development and pressed for the wider orders.
[14] I issued a minute on 24 March 2020 indicating my provisional views at the time.5 I considered that the amended orders gave too wide a power to the liquidators, when they represented only one co-trustee and when the liquidators had a significant personal interest in recovering their fees, which were in excess of $400,000. Given the circumstances, I was minded to appoint an independent share valuer to provide the Court with a view on any future potential offer for the sale of shares. Counsel wished to obtain further instructions as to the appropriate course of action and indicated they would file memoranda by Friday 27 March. Following the COVID-19 response at alert level four on 25 March 2020, no further steps were taken.
[15] On 31 March 2020, the parties notified the Court that they agreed that advice should be sought regarding the value of the Verbena Shares before any offer is accepted. The joint memoranda noted that options were being actively explored by the parties and that should a further offer be made, the applicant will seek the advice of David Vance of Deloitte, if he were willing to accept the appointment. Given the rapidly changing environment under the COVID-19 pandemic restrictions, the parties sought leave to apply to the Court on 48 hours’ notice subject to the applicability of the pandemic levels of alert.
4 P R Law Queenstown No 1 Trustees Ltd (in liq) v Norris HC Invercargill CIV-2019-425-66, 11 March 2020, pursuant to High Court Rules 2016, r 4.56.
5 P R Law Queenstown No 1 Trustees Ltd (in liq) v Norris HC Invercargill CIV-2019-425-66, 24 March 2020.
Current application
The second offer
[16] The Company has since received a further offer of purchase for the Verbena Shares, from the same purchaser (the second offer). Again, the Company filed memoranda seeking an urgent hearing to determine the issues. The applicant seeks the following directions:
(a)the Company may accept the second offer unconditionally;
(b)the Company and K9 Trustees must give notice in accordance with Verbena’s constitution that the Verbena Shares are being offered on terms consistent with the second offer;
(c)if any offers arise from Verbena’s pre-emptive rights process on the same terms as the second offer, those offers must be accepted by the Company and K9 Trustees;
(d)the Company and K9 Trustees must take all steps required to give effect to the directions given by the Court;
(e)Mr Norris must not interfere with the process giving effect to the sale of the Verbena Shares and must take all necessary steps to give effect to the sale; and
(f)the proceeds received from the sale must be paid into a bank account controlled by the liquidators of the Company used to partially discharge the Company’s trustee indemnity in respect of the costs of liquidation of the Company and the costs the Company incurred in its capacity as trustee.
[17] The latter part of the order sought in (f) relied on the consent orders dated 5 September 2019 made by Nation J.6 In addition, the Company seeks an order that the interim charging order obtained by Ms Norris on 20 August 2018 be discharged.
[18] The Company submits each direction is required to address the procedural steps that must be undertaken to give effect to the sale of the Verbena Shares and the Company wishes to avoid having to seek further directions in relation to this process. Regarding the final direction sought, it was submitted that as Ms Norris is an unsecured creditor of the Company and ranks behind the liquidators in terms of the statutory priorities in schedule 7 of the Companies Act 1993, the interim charging order should be discharged to allow the second offer to proceed.
[19]The second offer is open until close of business on Friday 12 June.
[20] Mr Norris formally opposes the second offer being accepted but has taken no steps and appears to have withdrawn. However, Ms Norris, a non-party, has now instructed Counsel to appear to prevent the Verbena Shares from being sold at an undervalue. She opposes the sale of Shares by the liquidators for an amount which will recover little more than the liquidator’s own costs. Ms Norris also opposes the discharge of her charging order. K9 Trustees were not represented and did not appear at the hearing.
Share valuation
[21] In support of the Company’s urgent request for a hearing and in accordance with the process suggested by this Court and agreed by the parties, the value of the Verbena Shares have been independently assessed by David Vance, from Deloitte. Mr Vance filed affidavit evidence, annexing his valuation of the Company’s interest in Verbena and his opinion on the potential offer of sale of the Shares.
[22] Mr Vance’s view is that the second offer is at the top end of the range of the Verbena’s Share value, and it should be accepted. He provided a detailed valuation of the Verbena Shares which, because of its commercial sensitivity, is not repeated in its
6 See [7] of this judgment.
entirety in this judgment. The relevant information to assist the parties is summarised in Appendix I to this judgment, which will be confidential to the parties only.
[23] As the applicant has identified, the complicating factor is that Verbena is presently undertaking a capital raising process in an effort to weather the COVID-19 crisis. While this process may provide an opportunity to sell the Verbena Shares, there are risks involved in electing to pursue this rather than accepting the second offer, those being:
(a)if the capital raising process fails and Verbena is forced into liquidation, rendering the Verbena Shares valueless; or
(b)existing shareholder value may be diluted as part of the capital raising process.
[24] In his second affidavit, Mr Vance confirmed his initial position and added that a liquidator’s decision as to whether to sell assets must consider two aspects. First, there is a requirement to obtain the best price obtainable in the circumstances faced at the time an asset is being dealt with. This does not mean on the day of sale but around the time of sale. Importantly, it does not mean that a liquidator is required to hold an asset for a considerable time to get the maximum price that may be achieved. The important distinction is that the circumstances being faced by the liquidator must be considered. Second, a liquidator, where possible, should test the market for assets that are to be sold.
[25] In outlining what his approach would likely be in the situation, given his extensive experience as a liquidator, Mr Vance said:
13. In my opinion I would be satisfied to sell the shares having confidence that the market had been tested. In addition I would weigh up the benefit to selling the shares now in a hibernation, pre recapitalisation state against waiting at least two years to see firstly whether a recapitalisation was possible and then more importantly whether [Verbena] could be turned around profitably. Experience has confirmed that “a bird in the hand is better than two in the bush” in a financially stressed position and in the absence of any other information I believe that I would look to complete a sale now rather than wait for the outcome of the recapitalisation process or wait a further period to see if the turnaround is successful. If there was information that confirmed that the recapitalisation deal was secure and underwritten and
would provide the required Capital then I would still be looking to continue to sell now rather than risk the failure of [Verbena] from an unsuccessful turnaround.
14. I am not aware of such certainty existing around the recapitalisation. To protect against the position where this failed I would, should I be the liquidator, continue with securing a sale of the shares now.
[26] Ms Norris engaged Mr Roderick White, a financial analyst, to review and comment on the first two affidavits provided by Mr Vance. Mr White made the following comments:
(a)Mr Vance’s assessment is observational in nature and not a formal evaluation exercise. He had limited information from which he has carried out indicative calculations in order to assess an appropriate value. The assessment should be recognised for what it is – an indicative estimate based on limited information.
(b)Mr Vance’s key assessment is of an estimated issue price for the Verbena Shares, derived from estimates of equity requirements and a percent of shares purchased by a new shareholder at a certain percentage. Mr White says the estimate of equity requirements relied on is incorrect, and he is unclear as to the basis for the certain percentage figure Mr Vance adopts.
(c)Verbena issued a formal update to all shareholders updating them on the company’s recapitalisation efforts, including valuation. It records a “pre-money” value of the shares which in a range two to four times higher than which Mr Vance adopted.
Legal principles
[27] The Company initially sought the Court’s sanction of the sale of the Verbena Shares, as assets held by the trustees, to satisfy the trustee’s right to be indemnified for the costs it had incurred as a trustee, including the costs of liquidation.7 In this situation, the right of indemnity related to liabilities incurred but not yet paid. The
7 Trustee Act 1956, s 38(2); and Gibson v Norris & Ors [2019] NZHC 1348 at [20].
Company sought to pay the liabilities out of trust assets, through the sale of the Verbena Shares. It sought to be exonerated for those liabilities on the basis of the consent orders issued by Nation J in 2019 (outlined above at [6(c)]).
[28] Under s 66 of the Trustee Act 1956, a trustee may apply to the Court for directions concerning any property subject to a trust, or respecting the management or administration of any such property, or respecting the exercise of any power of discretion vested in the trustee. Section 66 is designed to remove doubts regarding the propriety of a course of action contemplated by a trustee and should be used only for relatively minor matters connected to the management of the trust.8 This Court has held that s 66 cannot be used to determine substantive issues, such as resolving a contest between the trustees.9
[29] While a number of authorities confirm that the section should not be used if the facts are unclear or a breach of trust is alleged, and that in such cases full proceedings should be initiated to determine the matters,10 there have been instances where the High Court has been prepared to resolve factual disputes on a s 66 application.11
[30] In Re Estate of Marshall, the trustees of a family trust made an application to the Court for the power to purchase a farm property.12 The application was made under another provision, which would have given the trustees unrestricted powers of investment. However, the Judge held that the proceedings should be reconstituted as an application for directions under s 66. The Court ruled that the proposed investment was prudent and reasonable, thus providing the trustees with maximum protection for their actions.
8 Neagle v Rimmington [2002] 3 NZLR 826 (HC) at [23].
9 Neagle v Rimmington, above n 8, at [23]-[24], citing Dal Pont and Chalmers (eds) Equity & Trusts in Australia and New Zealand (2nd ed, Law Book Co of Australasia, Pyrmont, 2000) at 667-669 and Melville v NRMA Insurance New Zealand Ltd & Ors HC Wellington CP70/01, 17 April 2002.
10 Neagle v Rimmington, above n 8; and Melville v NRMA Insurance New Zealand Ltd & Ors, above n 9.
11 Walker v Collins HC Christchurch CIV-2007-409-2209, 25 February 2009 at [75].
12 Re Estate of Marshall HC Christchurch M575/88, 12 December 1988.
Parties’ positions
Applicant’s position
[31] The Company’s view is that the prudent and reasonable course is to accept the second offer. It says that trustees with equitable liens, such as the Company, by analogy with liquidators, have no obligation to hold assets so long as they are sold on the best terms reasonably obtainable at the time of sale. 13 The second offer, it says, represents the best terms that are reasonably obtainable in the circumstances, as confirmed by Mr Vance. Therefore, it says the Company should be entitled to proceed with the second offer and asks that the Court make a direction to that effect.
[32] The Company submits that parallels can be drawn with the obligation on receivers and liquidators when selling a company’s assets. When disposing of a company’s assets, liquidators are under an obligation to obtain the best price reasonably obtainable at the time of sale.14 A court will not usually interfere with a liquidator’s discretion as to sale price unless it can be shown that the liquidator is not acting in good faith or is acting unreasonably.15 The Company submits that, like a liquidator acting in accordance with their duties, a trustee seeking to enforce its indemnity should be required to obtain the best price reasonably obtainable at the time of sale.
[33] Applying these principles, the Company submits that it has made a commercial decision that now is the appropriate time to sell the shares, and the Court should make a direction to that effect.
Non-party’s opposition
[34] Ms Norris opposes the directions sought. She says the Company appears to seek the orders to have the Court approve a sale at a price which will likely cover only
13 The equitable lien is said to arise because the Company has a right of indemnity for costs incurred as a trustee out of the property of the Trust, such as the Verbena Shares. The property of the Trust (the Shares) is charged with payment of the Trust’s liabilities, including the liquidators’ fees, costs and disbursements and the Company therefore has an equitable lien over the Verbena Shares to the extent of its liabilities.
14 Insolvency Law & Practice (Thomson Reuters, online ed) at [CA253.02(2)].
15 At [CA253.02(2)], citing Leon v York-o-matic Ltd [1966] 1 WLR 1450 (Ch).
the liquidator’s fees, in circumstances where they have chosen to proceed with a sale in the middle of a global pandemic. Ms Norris says she wishes to see the Verbena Shares sold but does not wish for them to be sold at an undervalue.
[35] Ms Norris does not accept that the valuation prepared by Mr Vance is accurate because Mr Vance’s assessment relies heavily upon the price in the second offer and a valuation carried out a third party for the purpose of recapitalisation of Verbena. Ms Norris says that Mr Vance has incorrectly assumed that the third party had valued the present value of the Verbena Shares, pre-capitalisation, at a certain value. She says the third party in fact valued the present value of the Verbena Shares higher, as a recent communication to the shareholders shows. She submits that Mr Vance needed to update his valuation accordingly.
[36] The Company filed a memorandum responding to Ms Norris’ concern. It stated that Mr Vance reviewed the shareholder update referred to by Ms Norris prior to providing his share valuation and, having since read Ms Norris’s memorandum, confirms he stands by his views expressed in his initial valuation. Mr Vance added that if he was in the same position as the liquidators of the Company, he would proceed to sell the Verbena Shares as outlined at [24] above.
Analysis
Sale of the Verbena Shares
[37] The Company has applied for directions under s 66 of the Trustee Act 1956 in its capacity as trustee. The Company has done so because their co-trustee, K8 Trustees, and later K9 Trustees, refused to sell the Verbena Shares to allow the Company’s debts to be paid. Due to opposition by Mr Norris and K9 Trustees, the Company was not able to accept the first offer which would have seen all of the Company’s creditors paid. Mr Johnson, Counsel for the Company, takes issue with Ms Norris’ challenge that this is an application by the liquidators of the Company. I accept Mr Johnson’s submission that the Company’s creditors have no standing in an application that relates to the Company’s recourse to trust assets in its capacity as trustee. For that reason, I did not permit Counsel for a creditor of the Company to take an active part in this proceeding.
[38] At the time that the Company received its first sale offer, Verbena was in a vulnerable financial position and there were questions raised by its auditors as to whether it could continue as a going concern. This was prior to the global pandemic of COVID-19.
[39] When the first offer was withdrawn on the morning of the hearing scheduled before me on 23 March 2020, I was concerned that the applicant had a significant personal interest in recovering their fees and that, before the Court could sanction any future proposed sale of the Verbena Shares, there should be independent advice as to the appropriate share price before the Court and an expert view expressed on the potential offer of sale of the Shares. As recorded above, these concerns were recorded in my minute.16 The applicant followed my provisional suggestions and obtained the advice of Mr Vance on the receipt of the second offer. This proceeding came before me as a matter of urgency and this decision is being delivered urgently before the second offer expires at close of business on Friday 12 June 2020.
[40] This application for directions under s 66 of the Trustee Act seeks this Court’s sanction on a course of action proposed by trustees, where there is no real doubt as to the nature of the trustees’ powers but because the decision is “momentous” the trustees wish to obtain the blessing of the Court before the proceeding.
[41] The English authorities confirm that “blessing orders” from the Court in these circumstances is available to trustees, but the Court ought not be asked to act upon incomplete information. It should be given all the material necessary to enable the Court to oversee or sanction the proposed course advanced by the trustees.
[42] In a helpful recent decision Re Honoris Trust, Fitzgerald J made directions under s 66, where the trustees considered a proposed distribution would be “particularly momentous” because it would result in a distribution of the entire trust estate.17 Fitzgerald J emphasised that where directions are sought for an “approval”
16 P R Law Queenstown No 1 Trustees Ltd (in liq) v Norris above n 5, at [6].
17 Re Honoris Trust [2017] NZHC 2957, [2018] 3 NZLR 160.
of a decision already made, the Court can make such direction only after “scrupulous consideration” of the evidence. The Judge stated:18
[55] The proper approach to applications such as the present one has been well-canvassed in English and other overseas decisions. Given the potential for disadvantages to beneficiaries resulting from “blessing” orders if improperly made, it is paramount that applicant trustees provide the court with all relevant facts, documents and information when making an application. Further, it is imperative that when considering such an application, a judge only make the orders sought after “scrupulous consideration” of the evidence. The court will not rubber stamp such applications, and if the court is left in doubt, then it may withhold its approval.
[56] Hart J in Public Trustee v Cooper stated that, when considering an application for blessing orders, the court should consider the following matters:
(a)First, has the trustee in fact formed the opinion which the court is asked to bless?
(b)Second, is the opinion formed one at which a reasonable body of trustees, properly instructed as to the proper meaning of any relevant provisions of the trust deed, could properly have arrived?
(c)Third, is the opinion vitiated by any conflict of interest under which any of the trustees might have been labouring?
[57] Millet J (as he then was) in Richard v Mackay sounded a note of caution in relation to the court’s approach to such applications, both in terms of the consequences of orders being made on them and the scope of the court’s role in relation to them:
It must be borne in mind that one consequence of authorising the trustees to exercise a power is to deprive the beneficiaries of any opportunity of alleging that it constitutes a breach of trust and seeking compensation for any loss which may flow from that wrong. Accordingly the court will act with caution in such a case when evaluating the possibility of risk and it will need to satisfied that the proposed transaction is not imprudent. But the appropriateness of the transaction is essentially for the trustees to decide, and different minds may have different views on what is appropriate in particular circumstances.
[43] I record that Mr Holmes, Counsel for Ms Norris, relied on the authority that all necessary information must be provided to the Court to enable that “scrupulous consideration” of the evidence.19 Here, he contends that Mr Vance’s valuation is inadequate and is not in the interest of the Trust’s creditors or beneficiaries. He warns
18 Footnotes omitted.
19 Marley and Ors v Mutual Security Merchant Bank and Trust Co Ltd [1991] 3 All ER 198 (PC) at 201.
that courts in commercial situations such as this cannot rely on an abstract value for the Verbena Shares because, in this case, Verbena is the only entity that has all the information. The position is constantly changing, and on that basis, Mr Holmes seeks that the Court does not make the directions and orders sought.
[44] I have carefully considered the evidence from Mr White and Mr Vance. The first issue is the basis upon which Mr Vance gave his advice. I had indicated that the Court should be provided with a view from an independent share valuer, whether it be a liquidator or otherwise, such as Mr Vance from Deloitte, to provide the Court with his view on any potential offer of sale of the Verbena Shares. Mr Vance has been cross-examined on his assumptions and the figures he used. He describes his assessment as an “indicative valuation exercise”. He candidly acknowledged in cross- examination by Mr Holmes:
I would have preferred to have more information than what I had, than what was provided, in that it would be easier or more straight forward if you had access to the Board and various financials to be able to be able to test various aspects.
He acknowledged that the third party who conducted the valuation of Verbena’s shares had more detailed information available to it in making its assessment than he did.
[45] Despite that, Mr Vance did not agree with the third party’s apparent conclusion that the shares in Verbena were valued two to four times more than the second offer. He gave his reasons, which were the illiquidity of Verbena and that the third party’s valuation is likely based on a 100 percent shareholding, which is not an insignificant amount such as the share parcel held by the Company. As such, it did not alter his figures for the value of Verbena Shares that the Trust holds, being a small parcel of Verbena’s overall shares. In addition, there was the uncertainty of the two major steps to be undertaken in respect of Verbena, namely the recapitalisation and the restructuring and recovery, with the projected date for the increase in share value to be some two or more years away. In his view, that would bring the current valuation closer to the second offer and his valuation.
[46] In relation to the estimate of equity requirements, Mr Vance took the figure in the third party overview and rounded it to the nearest million, which I considered was
a reasonable approach in the circumstances. In relation to the shareholding percentage figure he adopted, for a likely investor, Mr Vance explained that he used that figure because the description of the likely new investor would require at least that amount of shareholding or five percent lower. I accept that is a reasonable basis on which to approach the issue. Mr Vance acknowledged that if he used the alternative figures from the third party instead, the value of the Verbena Shares would increase at the margins, but the real question was when that figure would increase.
[47] Prior to this hearing commencing, a confidential affidavit was filed advising that with the recapitalisation of Verbena, there was likely to be a complete restructuring of the company. An offer was likely to be made to existing shareholders to sell their existing ordinary shares at the same price per share as contained in the second offer to the Company.
[48] When questioned by me, Mr Vance confirmed that the trustees should not wait, as there is risk that if the recapitalisation does not take place, or there was a fresh outbreak of COVID-19, or if Verbena announced that they will wait a year before it will undertake any further company business, the opportunity to sell the Verbena Shares will be lost. He was of the view that there is not likely to be any uplift on the current offer now and he did not recommend waiting “for a week or two or three or however long it takes to put this offer to shareholders and then just get exactly the same.” Given the risks of potential recapitalisation and the restructuring of the shares in Verbena, Mr Vance could see, from his experience as a liquidator, no “upside by waiting”. He acknowledged that after a year there may be more certainty but if the trustees do not sell now at the current share offer price, the recovery of value of the Verbena Shares will not be increased for another two years, in June 2022.
[49] Just prior to issuing this interim judgment, the Court was provided with further information that as recently as 6 June 2020, the trustees received a further shareholder update and shareholder presentation from Verbena. Mr Vance has confirmed that nothing in these documents necessitates a change in the evidence he had previously given. He remains of the same view that the second offer should be accepted.
[50] On the evidence before me, I am satisfied that the Company has reached its conclusion that the second share offer should be accepted on a reasonable and proper basis. As they did in respect of this second offer, it is a matter for the trustees to decide to further negotiate with the prospective purchaser to achieve a higher price.
[51] I approve the Company accepting the second offer of purchase, having considered the evidence before the Court and my own inquiries of Mr Vance as to the advisability of waiting for a better offer. He evidence was clear and I accept it. He was firmly of the view that “a bird in the hand is worth two in the bush” and correctly observed as was evident at the time I first heard this application, that “the bird” has already flown once before when, after delay by the Company, the first offer was withdrawn. The second offer has now been made and Mr Vance, with his considerable experience as a liquidator, advised the Court that he would grasp this sale. I consider that this is a wise and prudent course particularly in the circumstances post-COVID- 19 and the economic position Verbena currently is experiencing.
[52] I accept that the Company has taken reasonable steps to obtain the best price possible. The risks in waiting for something better are too high and the worst outcome is that there will be nothing if the sale is not made. I therefore conclude that the Company may accept the second offer on the current terms. The directions appear at the end of this interim judgment.
[53] I turn then to deal with the Company’s application that the proceeds received from the sale can meet the costs the Company incurred in its capacity as trustee and the costs of liquidation of the Company.
Costs
[54] During the hearing, I advised the parties that the Company’s application in respect of the costs of liquidation and the costs incurred by the Company as trustees would not be made as part of this hearing. This hearing was concerned with whether the trustees could proceed to accept the second offer and where the proceeds should be placed.
[55] The issue arising on the recovery of liquidators’ costs and fees when they are performing the duties of a trustee requires further and careful consideration. Edwards J in Camray Farms Ltd v BL (Nature Sunshine) Trustee Ltd reinforced the distinction to be drawn between the recovery of liquidators’ costs and fees under the Companies Act 1993 and the rules of equity that apply when a trust is wound up.20 The Judge observed:21
[72] Another consequence of recovery being “qua trustee” is that a liquidator will only be indemnified out of trust assets for costs and expenses if those costs and expenses are reasonably incurred. That is consistent with the limitations that exist generally on the trustee’s right of indemnity. Although the source of that obligation is in equity, it is, in any respect, consistent to with the recovery of liquidators’ costs pursuant to statute.
[56] For the above reasons, those issues should be addressed after any sale proceeds from the Verbena Shares are obtained and secured, until further order of the Court.
Interim charging order
[57] I now turn to deal with the Company’s application to discharge the charging order which Ms Norris obtained over the assets of the Trust. This is not a straight forward matter as the charging order, as I understand it, is over the assets of the Trust, not the trustee Company. Again, the question as to whether the Trust assets are the property of the Company in liquidation needs to be clarified before this Court makes any order that may prefer one party over other unsecured creditors or provide indemnity for the costs incurred by the Company as a trustee.
[58] As I have approved that the Company may sell the Verbena Shares, the interim charging order must be discharged for the purposes of enabling the second share offer to be accepted. In making that order however, I consider an order should be made for the preservation of the sale proceeds until further order. Rule 7.55 of the High Court Rules 2016 enables an order to be made for the preservation of any property. Accordingly, once the sale proceeds are paid into the bank account as directed, they should be secured by an order to preserve them until further order of the Court. I make such an order at the conclusion of this judgment.
20 Camray Farms Ltd (in liq) v BL (Nature Sunshine) Trustee Ltd [2019] NZHC 2536.
21 Footnotes omitted.
Directions and orders
[59] Accordingly, under s 66 of the Trustee Act I make the following directions and orders:
(a)the Company may accept the second offer unconditionally by giving the purchaser notice that the Court has directed that the Company may proceed;
(b)the Company and K9 Trustees (or any other person who is for the time being a co-trustee of the Trust) must give notice in accordance with Verbena’s constitution that the Verbena Shares are being offered on terms consistent with the second offer;
(c)if any offers arise from Verbena’s pre-emptive rights process on the same terms as the second offer, those offers must be accepted by the Company and K9 Trustees (or any other person who is for the time being a co-trustee of the Trust);
(d)the Company and K9 or any other person who is for the time being a co-trustee of the Trust) must take all steps required, and must sign any documentation including but not limited to a share transfer form, to give effect to the directions;
(e)Mr Norris must not interfere with the process giving effect to the sale of the Verbena Shares and must take all steps necessary, and must sign any documentation necessary, to give effect to the sale of the Shares;
(f)the proceeds received from the sale must be paid into a bank account controlled by the liquidators of the Company;
(g)the interim charging order over the Company’s Trust assets is discharged.
(h)to preserve the Trust property, the sale proceeds from the sale of the Verbena Shares shall be secured in the bank account controlled by the liquidators of the Company and shall not be removed, transferred or distributed without further order of the Court;
(i)the non-disclosure and confidentiality order, made on 4 June 2020, in respect of all material, affidavits, evidence and any documents produced or referred to in the hearings of 23 March and 4 June 2020, shall be extended to the further material filed on 8 June and all such material evidence and documents shall be used only for the purposes of this proceeding and not be disclosed to any third parties; and
(j)the Court file in this proceeding shall not be searched, copied or inspected without the leave of a Judge or an Associate Judge.
[60] Leave is granted to Counsel to seek amendments to the wording of the above directions/orders if they need further clarification or specificity in the circumstances. Leave is also granted to the parties to bring to the Court’s attention any inadvertent disclosure of confidential material in this judgment.
Cull J
Solicitors:
Wynn Williams, Auckland for the Applicant
Stainton Chellew Lawyers, Auckland, for the Second Respondent K3 Legal Ltd, Auckland for the Seventh Respondent
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