Protea Group Management Services LLC t/a International Aviation Support v Pacific Aerospace Limited

[2021] NZHC 158

IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY

I TE KŌTI MATUA O AOTEAROA KIRIKIRIROA ROHE

CIV-2021-419-000020

[2021] NZHC 158

BETWEEN

PROTEA GROUP MANAGEMENT SERVICES LLC t/a INTERNATIONAL AVIATION SUPPORT

Plaintiff

AND

PACIFIC AEROSPACE LIMITED

Defendant

Hearing:	On the papers
Counsel:	J MacGillivray for Plaintiff
Judgment:	12 February 2021

JUDGMENT OF ASSOCIATE JUDGE P J ANDREW

PROTEA GROUP MANAGEMENT SERVICES LLC v PACIFIC AEROSPACE LTD [2021] NZHC 158 [12

February 2021]

Introduction

[1]    The plaintiff, Protea Group Management Services LLC trading as International Aviation Support (IAS), makes application pursuant to s 246 of the Companies Act 1993 for the appointment of an interim liquidator. The application is made on a without notice basis in circumstances said to be urgent.

[2]    For the reasons that follow I grant the application and appoint Messrs Steven Khov and Kieran Jones, licensed insolvency practitioners, as interim liquidators of the defendant, Pacific Aerospace Ltd (PAL).

Background

[3]    PAL is a company based in Hamilton and is an aircraft manufacturing business. PAL is owned in equal shares by BIAC International (Hong Kong) Ltd, based in China, and Pacific Aerospace Group Ltd, a New Zealand-based company.

[4]    PAL’s directors, Jihong Lan, Ruiyi Li, Johnson Liu Murr and Xiao Xiao, are appointees of BAIC International (Hong Kong) Ltd. Johnson Liu Murr is the only New Zealand-based director, the other directors are domiciled in the People’s Republic of China.

[5]    PAL has obtained the following certification from the Civil Aviation Authority of New Zealand (CAA) in order to manufacture aircraft:

(a)The Design Organisation Certificate granted on 16 May 2018 pursuant to Civil Aviation Rule Part 146;

(b)The Maintenance Organisation Certificate granted on 25 May 2017 pursuant to Civil Aviation Rule Part 145; and

(c)The Manufacturing Organisation Certificate granted on 13 November 2020 pursuant to Civil Aviation Rule Part 148.

[6]    PAL supplied in excess of 300 aircraft to companies and other institutions around the world. In New Zealand, PAL has supplied aircraft to around 80 per cent of the topdressing industry.

[7]    PAL is said to have ongoing obligations to entities to which it has supplied aircraft. For example, aircraft in the topdressing industry are said to need parts on a weekly basis. It is claimed that if PAL is unable to fulfil these orders, those aircraft – and all PAL aircraft around the world – may be grounded by the CAA due to questions about the airworthiness because PAL will no longer be able to offer maintenance services or provide parts if the CAA revoked its certification. Operators of the aircraft will be unable to operate aircraft that do not comply with airworthiness directives, which include requirements for certification of parts and maintenance services.

PAL’s insolvency

[8]    IAS has a business in providing products and services in the aviation industry. IAS supplies parts to PAL.

[9]    As at 10 February 2021, PAL is indebted to IAS in the sum of NZ$1,388,221.80.

[10]   Mr Mark Crouch, the current chief executive of PAL, has filed an affidavit giving evidence that PAL is insolvent and is unable to pay its debts as they fall due. Mr Crouch says that PAL has no access to funds or further lines of credit and has exhausted its financial reserves. As at 10 February, he says it would be unable to pay staff wages. PAL owes $770,839.03 to Inland Revenue for PAYE.

[11]   In accordance with Civil Aviation Rules CAR 145.51(a)(1), CAR 146.51(a)(1) and CAR 148.51(a)(), Mr Crouch, as the chief executive of PAL must ensure that the activities undertaken by PAL can be financed and carried out in accordance with the requirements of the CAR.

[12]   Under s 12(4)(c) of the Civil Aviation Act 1990, PAL must provide sufficient resources to ensure compliance with the relevant prescribed safety standards and the conditions attached to the document (required under Rules). Mr Crouch says that he

is no longer able to provide the assurances required by the CAR and that on 10 February 2021 he wrote to the CAA advising them of this fact.

[13]   In his affidavit, Mr Crouch says the directors and shareholders have shown him that they are not interested in taking steps to either inject more cash into PAL or to liquidate the company. Mr Crouch is of the view that PAL needs to be taken away from the control of these inactive directors and shareholders.

Relevant legal principles

[14]Section 246(1) of the Companies Act 1993 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.]

[15]   In Raph Engle Concepts Ltd,1 this Court held that the relevant principles as to whether to appoint an interim liquidator are as follows:

[7]        Beyond the statutory criteria it has been recognised that there are three main pre-conditions to an interim liquidation:

(i)There must be a valid winding-up application underway.

1      Raph Engle Concepts Ltd HC Christchurch CIV-2001-409-541, 11 May 2012.

(ii)The application will in all probability succeed.

(iii)The circumstances must be not merely urgent, but also justify the appointment of an interim liquidator.

[8]The Court has recognised as three important factors:

(a)Whether the company assets are in jeopardy.

(b)Whether the status quo should be maintained.

(c)Whether the interests of creditors is safeguarded.

[9]        These various formulations are ways of measuring whether necessity or expediency are established. They are a “litmus test”, not exhaustive.

Decision

[16]   I find that the three main pre-conditions for the appointment of an interim liquidator have been made out:

(a)There is a valid winding-up application underway;

(b)In all probability, the winding-up application will succeed. It is clear from the evidence of Mr Crouch, the current chief executive officer of the defendant company, that PAL is insolvent;

(c)The circumstances are not only urgent but also justify the appointment of an interim liquidator:

(i)The company’s assets are in jeopardy. The main asset of PAL is the intellectual property to design and manufacture aircraft. The ability to use that asset is wholly reliant on the certification referred to above from the CAA. I have noted that Mr Crouch has already informed the CAA that PAL is in non-compliance of the CAA Rules governing the grant of the certification from the CAA to manufacture aircraft. Because the CAA has now been advised of PAL’s insolvency it is simply a matter of time before the CAA revokes the certification given to PAL. The plaintiff hopes that with the appointment of an interim liquidator, that the CAA may consider delaying the revocation of the certification for PAL to enable a sales process to proceed with the interim liquidator;

(ii)It is necessary on the evidence, that the status quo be maintained. As noted above, PAL has supplied in excess of 300 aircraft to companies and other institutions around the world. In New Zealand, PAL has supplied aircraft to around 80 per cent of the topdressing industry. PAL thus has ongoing obligations to entities to which it has supplied aircraft. If PAL is unable to fulfil these orders, those aircraft may be grounded by the CAA due to questions around their airworthiness because PAL will no longer be able to offer maintenance services or provide parts if the CAA revokes its certification. Operators of the aircraft will be unable to operate aircraft that do not comply with the airworthiness directives, which include requirements for the certification of parts and maintenance services;

(iii)Having the company in the control of the liquidators rather than control of non-acting directors and shareholders presents, in my view, the best likelihood to the creditors of a return to creditors.

[17]I therefore find that the application should be granted.

Result

[18]   The application by the plaintiff for the appointment of an interim liquidator is granted.

[19]   Pursuant to s 246 of the Companies Act 1993, I appoint Messrs Steven Khov and Kieran Jones, licensed insolvency practitioners, interim liquidators of Pacific Aerospace Ltd. The terms and conditions of their appointment and their rates of remuneration are as set out in their consent to act dated 12 Feb 2021.

[20]My orders are timed at 3.00 pm, Friday, 12 Feb 2021.

[21]Costs are reserved.

[22]   The proceedings are adjourned to the first call of the substantive application for winding-up scheduled for 12 April 2021 at 10.00 am.

[23]The interim liquidators are to file and serve a report on the liquidation by

1 April 2021.

Associate Judge P J Andrew