Raph Engle Concepts Limited v SCL Industries Limited Partnership

[2013] NZHC 2732

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV 2013-404-004452

[2013] NZHC 2732

BETWEEN

RAPH ENGLE CONCEPTS LIMITED

Plaintiff

AND

SCL INDUSTRIES LIMITED PARTNERSHIP

Defendant

Hearing:

17 October 2013

Appearances:

B R Latimour and A Steel for the Plaintiff

J S Cooper and A W Nicoll for the Defendant

Judgment:

18 October 2013

[ORAL] JUDGMENT OF WYLIE J

RAPH ENGLE CONCEPTS LIMITED v SCL INDUSTRIES LIMITED PARTNERSHIP [2013] NZHC 2732

[18 October 2013]

Introduction

[1] The plaintiff, Raph Engle Concepts Limited, has filed proceedings under the Limited Partnerships Act 2008. It asserts that the defendant limited partnership is unable to pay its debts and it seeks that the defendant should be put into liquidation.

[2] The proceedings were filed on 11 October 2013. At the same time, the plaintiff filed a without notice application seeking the appointment of an interim liquidator. The proceedings were served on a Pickwick basis, on the defendant, and on receivers who had been appointed. The receivers indicated that they wished to be heard on the application. The plaintiff was content to proceed on an inter partes basis, providing undertakings were given by the receivers. The receivers were not, however, prepared to give the undertakings sought. The plaintiff was nevertheless content for the matter to be called before me at short notice, and for the receivers and the defendant to be given the opportunity to be heard. In the event, an affidavit was filed by one of the receivers, a Mr Wilgermein, and Ms Cooper appeared on behalf of the defendant.

Background

[3]   The  background  is  set  out  primarily  in  affidavits  filed  by  a  Mr  Engle. Mr Engle is a director of the plaintiff.

[4] On 13 September 2013, Lang J ordered that judgment be entered for the plaintiff against the defendant in the sum of Euro 515,295.02. At current exchange rates, the judgment sum is in excess of NZ $790,000.

[5] On 19 September 2013, the plaintiff’s solicitors made demand by way of letter on the defendant for the judgment debt. No reply was received to that letter.

[6]    On 25 September 2013, the plaintiff’s solicitors served a notice to liable party on the defendant’s solicitors. Under r 17.10, the defendant was required by that notice to serve a statement of means within 10 working days.

[7] Also on 25 September 2013, the plaintiff obtained an interim charging order from a Deputy Registrar of this Court, charging the defendant’s interest in a conveyor which Mr Engle had seen at the defendant’s business premises. Mr Engle thought that the conveyor belonged to the defendant, although Mr Wilgermein in his affidavit suggests that that may not be the case.

[8]   On 8 October 2013, the plaintiff became aware that Mr Wilgermein and a Mr Cammish, both chartered accountants of Auckland, had been appointed as receivers of the defendant. The plaintiff became aware of this because a copy of a letter sent by solicitors for the receivers to the Registrar was made available to it. In that letter, the solicitors had advised that no statement of means would be served on the plaintiff and asked that no order for examination be made by the Court.

[9] The plaintiff’s solicitors wrote to the legal firm, asking for a copy of the security documentation under which the receivers had been appointed. The legal firm refused to provide the documentation.

[10] The plaintiff was then advised by another creditor of the defendant that the receivers had been appointed under general security agreements provided by the defendant in favour of an entity known as SCL Holdings Limited, and another entity known as Wallace Corporation Limited.

[11] Mr Engle deposed that SCL Holdings Limited has an interest in the general partner of the defendant limited partnership — SCL Industries Management Limited, which entity holds a 50 percent interest in the defendant. The other 50 percent is held by a nominee company. He queried in his affidavit whether Wallace Corporation Limited may have had an indirect interest in the defendant.

[12] Although Mr Engle initially deposed that the security documents under which the receivers had been appointed had not been registered in the Personal Properties Security Register, it now appears that this assertion was incorrect. The securities were registered. The security in favour of Wallace Corporation Limited was registered on 10 May 2012, and the security in favour of SCL Holdings Limited on 5 March 2013.

[13] Mr Wilgermein has deposed that the security documents were entered into pursuant  to  facility  agreements  between  Wallace   Corporation   Limited   and SCL Holdings Limited respectively, as lenders, and the defendant as the borrower. He says that the facility agreements were signed on 22 December 2011.

[14] It seems from an affidavit filed by a Mr Peagram that the defendant has also failed to make payment of monies owing to another creditor, Total Solutions Limited. Two amounts are claimed by that company, namely $83,630 and $26,649.

[15]    In addition, the plaintiff seeks to recover against the defendant a further

$338.944 which it asserts the defendant holds on trust for it, as well as a further

$467,540, expected to be received by the defendant on the plaintiff’s behalf, which the plaintiff also asserts will be held on trust for it. Proceedings have been issued seeking an account in relation to these funds. The proceedings are under number CIV 2013-404-3145. The plaintiff has registered its claimed interest as a security on the Personal Property Security Register and the defendant has applied to have this removed in separate proceedings CIV 2013-404-3965.

The Receivers and the Securities

[16] As noted, the receivers were appointed on 4 October 2013, by two parties who are related to the defendant.

[17]    The first appointor is SCL Holdings Limited.  It is related to the defendant as it is a 50 percent shareholder in the general partner of the defendant, SCL Industries Management Limited.  SCL Holdings Limited and the defendant also have a director in common —  a  Mr  Kevin  Vince.  Mr  Vince  is  also  the  sole  director  of SCL Industries Management Limited and Systems Trustees Limited, which company is one of the two limited partners in the defendant.

[18] Wallace Corporation Limited is related to the defendant as it is the second limited partner in the defendant.

[19] Both security agreements were executed relatively recently and both after the defendant had advised the plaintiff that it had concerns about its ability to meet its debts as they fell due.

[20]    The security given to SCL Holdings Limited has the following features

(a)The credit facility agreement, pursuant to which it is said the security was given, is dated 22 December 2011. No details have been given as to what advances were made under this loan facility. It was repayable in December 2013 or on demand. No details have been given as to whether or not demand has been made.

(b)As  I have  already noted,  the  general  security agreement  is  dated 5 March 2013.

[21] The security given to Wallace Corporation Limited is dated 19 September 2013. Again, it is said that it was given pursuant to a credit facility agreement. The credit facility agreement is dated 22 December 2011. Again, no details have been given to the Court of any advances made under that loan facility. It appears the defendant resolved to enter into the general security agreement on 6 March 2013, but that document was only signed on 19 September 2013, which is the same day as the plaintiff made demand on the defendant.

[22] The credit facilities themselves do not clearly confer any power to appoint a receiver.

[23] The receivers have directed the defendant to continue to trade, with liability only accepted by them for post-receivership supplies, and then only to the extent of any assets under their control. The relevant letter reads as follows:

…

Pending our investigation into the Partnership’s affairs to  determine  the likely outcome of the receivership, we are permitting the Partnership to continue in business.

During this period all deliveries and supplies to the Partnership are only to be made against an order signed by the receivers.

In respect of any such order, the personal liability of the receivers is limited to that of the Partnership’s assets within their control, at the time payment is due.

You should open a new account in the name of SCL Industries LP (In Receivership). The supply of goods or services after  our  appointment, cannot be set off against any debt due to you by the Partnership, as at the date of our appointment. All orders so placed or confirmed and any goods or services supplied are subject to these terms.

The Application

[24] As I have noted, the plaintiff has applied for the appointment of an interim liquidator, in order to investigate and maintain the value of the defendant’s assets, pending the resolution of its application to liquidate the defendant.

[25] The Limited Partnerships  Act 2008 puts in place a similar process for liquidations to that which applies to companies. Any provisions not specifically provided for are imported from Part 16 (liquidations) of the Companies Act 1993.

[26]   The Court may appoint a liquidator of a limited partnership on the application of a creditor on the grounds that the limited partnership is unable to pay its debts. Moreover, the Court has jurisdiction to appoint an interim liquidator under s 246 of the Companies Act 1993, which provision is applicable to a limited partnership, pursuant to s 92 of the Limited Partnerships Act.

[27]    Section 246(1) of the Companies Act 1993 provides as follows:

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.

…

[28] The words “necessary” and “expedient” are alternatives. The word “expedient”  has  been  considered  to  import  a  low  threshold  of  convenience  or

desirability. I refer to Carter Holt Harvey Limited v Timbalock New Zealand Limited,1 where Chisholm J noted as follows:

An indication of the s246 threshold is provided by the use in that section of the word "expedient" as an alternative to the word "necessary". In its usual sense that word "expedient" means "fitting, suitable, desirable or convenient" thereby conveying a relatively low threshold. It is sufficient if can be satisfied that it is expedient for an interim liquidator to be appointed for the purpose of maintaining the value of the defendant's assets.

[29] Counsel also referred me to a judgment of Associate Judge Osborne, making orders on a without notice basis appointing an interim liquidator, in Truck & Trailer Holdings Limited v Skelly Holdings Limited.2 Judge Osborne summarised  the relevant principles 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.

(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 are safeguarded.

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

Analysis

[30]   I now turn to consider whether or not the plaintiff has met the pre-conditions to the appointment of an interim liquidator.

[31] First, the plaintiff has filed an application to place the defendant into liquidation.

1       Carter Holt Harvey Limited v Timbalock New Zealand Limited (1997) 11 PRNZ 435 (HC).

2       Truck & Trailer Holdings Limited v Skelly Holdings Limited HC Christchurch, CIV 2012-409- 541, 11 May 2012.

[32] Secondly, on the materials available to date, it is clear to me that there is a good likelihood that the application will be successful. I say this for the following reasons:

(a)Receivers have been appointed;

(b)The plaintiff’s judgment debt has not been satisfied;

(c)The defendant has failed to provide a statement of means as required by the notice to liable party;

(d)Another creditor, Total  Solutions Limited, has made demand which has gone unsatisfied; and

(e)Ms Cooper, appearing for the defendant, accepted that it was unable to pay its debts.

[33] Thirdly, I must consider whether the circumstances are urgent, and whether they justify the appointment of an interim liquidator.

[34] Ms Cooper argued that the appointment of an interim liquidator is unnecessary, because the receivers are in custody and control of the defendant’s assets. She submitted that the receiver’s entitlement is superior to that of an interim liquidator and that there is no valid basis on which it can be asserted that the assets of the defendant are in jeopardy.

[35] Mr Latimour, for the plaintiff, submitted that there are doubts about the receiver’s appointment and the validity of the security documents under which those appointments have been made. He referred to the letter from the receivers which I have noted above, indicating that the defendant can continue to trade. He argued that the defendant’s assets are in jeopardy and that the status quo should be maintained.

[36] In my view, there is prima facie cause for concern about the validity of the security documents under which the receivers have been appointed. As I have noted, they were appointed by Wallace Corporation Limited and SCL Holdings Limited,

both of which are related parties to the defendant. Given the timing, it must be arguable that the securities are voidable under s 293 of the Companies Act. They have both been given within the preceding two-year period, and at a time when, prima facie, it appears the defendant was unable to pay its debts. If the security documentation is avoided, then it is likely that the receivers have not been validly appointed.

[37] There is also concern about the defendant’s assets. First, the receivers have advised that they are permitting the defendant limited partnership to continue in business. The appointment of receivers does not bring the directors’ role to an end. Secondly, the stance taken by the receivers to date has been unfortunate. They did not give the plaintiff copies of their notice of appointment and the security instruments. While they claim to have been acting pursuant to their normal practice, in the circumstances, that refusal is surprising. Thirdly, the receivers advised that the defendant would not be complying with the notice to liable party, and asked that no order for examination should be made by the Court. On the face of it, there was nothing to stop a representative of the defendant answering the notice for liable party. Appointment of the receivers did not relieve the directors of the defendant from their duties. They could and should have complied with the notice. Fourthly, the receivers did not provide an undertaking sought to the plaintiff. While that is perhaps understandable, it was to be expected that the plaintiff’s concern would be heightened.

[38] As matters stand at present, the receivers are free to deal with the defendant’s assets as they see fit with no oversight, in circumstances where there is a question about the validity and nature of the securities pursuant to which they have been appointed. The receivers, of course, have duties under the Receivership Act and there is no reason to suppose that they will not abide by the provisions of that Act. However, I note that s 18(2) of the Act provides that a receiver must exercise his or her powers in a manner he or she believes, on reasonable grounds, to be in the best interests of a person in whose interests he or she was appointed. That is their primary responsibility.

[39] In the circumstances, it seems to me appropriate that an interim liquidator should be appointed. An interim liquidator will be able to act as a watchdog, on behalf of the Court, and on behalf of all creditors, to ensure that the defendant’s assets are protected for the benefit of all creditors. They will be able to maintain the status quo, and if necessary, seek orders from the Court to stop any dealing with the assets they consider inappropriate or detrimental to the creditors as a whole.

[40]    Consents to act as interim liquidator have been filed by a Mr McCullagh and a Mr Lawrence, both of PKF Corporate Recovery and Insolvency (Auckland) Limited.

[41] In my view, it is appropriate to appoint Messrs McCullagh and Lawrence as interim liquidators until further order of the Court.

[42] The Act gives me the power to vary the rights and powers of an interim liquidator as I see fit, but otherwise, an interim liquidator has the rights and powers of a liquidator to the extent necessary or desirable to maintain the value of the assets owned or managed by the company which he or she is appointed.

[43]    In the present case, I direct as follows:

(a)To the extent that it is necessary, having regard to the appointment and actions of the receivers, the interim liquidators are:

(i)to get in and preserve all the assets of the defendant, and to meet or continue all expenses necessary to preserve the value of the defendant’s assets;

(ii)to obtain the books and records from the general and limited partners of the defendant and its offices and any other person.

(b)The interim liquidators are to assess whether any security granted by the defendant was given within the specified time, as defined in the Companies Act 1993, and whether prior to, or immediately after, the

granting of the security, the limited partnership was unable to pay its due debts;

(c)The interim liquidators may examine on oath as required under ss 265 and 266 of the Companies Act 1993;

(d)The interim liquidators are to prepare a report for the Court within 10 working days, or within such longer period as the Court may, on application, allow, providing the following information:

(i)A summary of the securities granted by the defendant over its assets and whether any such securities or any of them were granted by the defendant within the specified period as defined in the Companies Act 1993 and whether prior to, or immediately after, the giving of such securities, the defendant was unable to pay its debts;

(ii)A summary of the assets of the defendant;

(iii)A summary of the liabilities of the defendant, including estimates in respect of contingent liabilities; and

(iv)Whether the interim liquidators consider an order for liquidation desirable, and if so, why.

(e)The interim liquidators are entitled to be remunerated for their reasonable costs and expenses by reference to the time, difficulty and degree of responsibility involved and by reference to the ordinary hourly rates charged by the interim liquidators, which rates are detailed in the consent which has been filed and which is dated 14 October 2013.

(f)The interim liquidators, the defendant, the receivers, and the general and limited partners of the defendant, are given leave to apply to the Court to vary these orders on 48 hours’ notice.

[44]  As required by s 246, I record that this order has been made at 9.27 am on 18 October 2013.

[45] There is one additional matter I should record. Ms Cooper submitted that no undertaking as to damages has been given by the plaintiff. She is correct in that regard.

[46] Where an application is made for an interim injunction under r 7.53, an undertaking as to damages must, in terms of the rules, be given.3 Here, however, there is no equivalent rule where the appointment of an interim liquidator has been sought on a without notice basis. In a number of cases, an undertaking as to damages has been sought and commentators have suggested that such an undertaking is appropriate or even necessary in the circumstances.

[47]    I note as follows:

(a)Even in the context of an interim injunction, the authorities suggest that the Court can, in appropriate circumstances, dispense with the giving of an undertaking as to damages.

(b)The plaintiff is a creditor of the defendant. The plaintiff holds judgment against the defendant and that judgment has not been challenged.

(c)The interim liquidators are being appointed as officers of the Court. They owe duties to the Court and not to the plaintiff. They are answerable to the Court.

(d)This matter has proceeded, effectively on notice, and as a defended interlocutory application.

3       Rule 7.54.

[48]     Accordingly, I am not requiring the plaintiff to provide an undertaking as to damages in the present case.

Wylie J