Rathmore Properties Limited v Hawk Packaging Limited [2020] NZHC 323

[2020] NZHC 323

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IN THE HIGH COURT OF NEW ZEALAND NAPIER REGISTRY

I TE KŌTI MATUA O AOTEAROA AHURIRI ROHE

CIV-2019-441-51

[2020] NZHC 323

BETWEEN

RATHMORE PROPERTIES LIMITED

Applicant

AND

HAWK PACKAGING LIMITED

Respondent

Hearing:	14 February 2020
Appearances:	D Bennington for applicant N Gray for respondent
Judgment:	28 February 2020

JUDGMENT OF ASSOCIATE JUDGE JOHNSTON

Introduction

[1]    The plaintiff, Rathmore Properties Ltd, seeks an order for the liquidation of the defendant, Hawk Packaging Ltd, pursuant to pt 16 of the Companies Act 1993. For its part, Hawk Packaging accepts that the relevant threshold requirements — that Rathmore Properties is a creditor and that it, Hawk Packaging, is unable to pay its debts — are satisfied, and therefore that Rathmore Properties is prima facie entitled to such an order. But it contends that the Court should exercise the discretion reserved to it by s 241(4) of the Act to decline to order a winding up.

[2]At issue is the circumstances in which the Court will exercise that discretion.

RATHMORE PROPERTIES LIMITED v HAWK PACKAGING LIMITED [2020] NZHC 323

[28 February 2020]

Background

[3]    Hawk  Group  Ltd  is  the  parent  company  and   sole   shareholder   of Hawk Packaging. Mr Timothy Combs is the sole director of both companies.

[4]    At least up until mid-January 2012, Hawk Packaging carried on business from premises in Hastings producing moulded fibre packaging. On the 17th of that month there was a major fire at the company’s premises. Not only did the fire cause severe damage to Hawk Packaging’s premises, plant and stock, it also spread to neighbouring properties causing damage to the premises, plant and stock of three other concerns, BBI Wood Products Ltd, ENZO Ltd and Rathmore Properties Ltd.

[5]    BBI, ENZO and Rathmore all sued Hawk Packaging alleging that it was liable to them in respect of damage caused by the fire and claimed substantial damages ($141,000 in the case of BBI; $571,000 in the case of ENZO; $1,700,000 in the case of Rathmore). All three claims were successful. Further, Hawk Packaging’s third party claim against its insurers for indemnity pursuant to its public liability policy was unsuccessful because the Court concluded that the company was in breach of the same. This Court’s judgment in this litigation has not been challenged by Hawk Packaging.1

[6]    The evidence is that between the date of the fire and the trial that concluded on 12 September 2018, there were attempts by the plaintiffs, Hawk Packaging and the insurers involved to settle the claims, including, it would appear, a mediation.

[7]    Hawk Packaging’s unchallenged evidence is that in the course of those attempts to settle the claims it disclosed not only that it was proposing to sell its business to its parent company, but also provided to the other parties details of its financial position, including relevant management accounts and financial statements, and related material, and reports and advice received from its accountants, PwC, and solicitors, J T Law.

[8]    Following this disclosure, further information was sought and Mr Combs and Hawk Group’s Group Financial Controller, Mr Michael Sanko, depose that nothing

1      T & G Processed Foods v Hawk Packaging Ltd [2019] NZHC 643.

sought was withheld so that the plaintiffs in the litigation, BBL, ENZO and Rathmore, and the insurers involved, were fully and fairly informed as to its intentions and financial position. Mr Sanko goes on to say that following disclosure of this material the plaintiffs or their insurers sought advice from Mr Murray Lazelle of Lazelle Associates.

[9]    It is fair to say that none of the reports or advice from PwC, J T Law and Lazelle Associates, all of which are before the Court, suggest any obvious basis for a challenge to the proposed transaction between the Hawk group companies.

[10]The parties’ attempt to resolve the litigation was unsuccessful.

[11]   The sale and purchase transaction between Hawk Group and Hawk Packaging was finalised in September 2015. Hawk Group and Hawk Packaging executed the sale and purchase transaction. Hawk Packaging’s unchallenged evidence is that the price paid by Hawk Group for its business exceeded its market value by some margin as it was calculated not so as to reflect the real value of the business but to enable the company to pay its existing secured and unsecured creditors. Its secured creditors were its bankers and Hawk Group.

[12]   The agreement between the parties is before the Court. The material clauses for present purposes are cls 7.4, 1.1 (definition of “ENZA litigation”) and 10.1.

[13]   Clause 7.4 identifies the obligations for which Hawk Group was assuming responsibility:

The Purchaser agrees to assume all of the obligations of the Vendor, with effect from Completion under each Business Contract but for the avoidance of doubt does not assume any obligation or liability that relates to the ENZA Litigation.

[14]In clause 1.1 the term “ENZA Litigation” is defined as:

… the litigation relating to a claim by ENZA Foods NZ Ltd [now ENZA Limited], Rathmore Properties Ltd and BBI Wood Products Ltd and/or their insurers (against the Vendor and/or its insurers) relating to a fire at the Vendor’s previous premises.

[15]Clause 10.1 concerns accumulated tax losses and provides:

The Vendor undertakes to do all things reasonably required by the Purchaser to make available to the Purchaser any income tax losses of the Vendor as permitted by the Income Tax Act 2007 including, but not limited to, filing the required loss off set elections with the Inland Revenue by the due dates to make such losses available, or as otherwise requested in writing by the Purchaser. Other than the allocated portion of the Purchase Price, no further amount is payable by the Purchasers for use of the Vendor’s tax losses. [CHECK QUOTES]

[16]   Thus, following the successful claim by the plaintiffs in the fire litigation, the situation was that Hawk Packaging was a non-trading company with no physical assets (having sold these and expended the proceeds of the sale of its business in discharging its then current debt) and having alienated its only other asset, namely the entitlement to take advantage of accumulated tax losses, on the face of it leaving the company unable to meet the judgment debts.

Rathmore’s proceeding

[17]Against that background, Rathmore seeks an order winding up the company.

[18]Materially, s 241 of the Companies Act provides:

(1)A company may be put into liquidation by the appointment as liquidator of a named person or of an Official Assignee for a named district.

(2)A liquidator may be appointed by—

…

(c)       the court, on the application of—

…

(iv)     a creditor …; or

…

(4)The court may appoint a liquidator if it is satisfied that—

(a)the company is unable to pay its debts; or

…

[19]   It is the “may” in s 241(1) that confers on the Court a residual discretion as to whether or not to make a winding up order, even where the criteria are met.

[20]   Here, as already said, there is no issue that Rathmore  is  a  creditor  and Hawk Packaging is unable to pay its debts, so that the issue is the exercise of that discretion.

Counsel’s submissions

[21]   Ms Bennington for Rathmore began her submissions by referring me to Greig J’s judgment in In Re Thames Freightlines Ltd in which the applicable principles were described in these terms:2

The principles which are applicable are well recognised and in the circumstances of these cases include the following:

1.   The petitioning creditor is entitled ex debito justitiae to a winding up order.

2.   There is an unfettered discretion as to whether a winding up order should be made.

3.   The Court will have regard to the wishes of the majority of the creditors and is bound to have regard to the value of the debts on each side.

4.   The fact that a majority of creditors oppose the petition is not, in itself, sufficient to compel the Court to decline the order.

5.   It is for the opposing creditors to show that there are reasons for a refusal of the winding up order.

6.   The Court will have regard to all the circumstances relevant to the company and its operations and among other things, the reasons for and against the winding up, the interests of other creditors and in the particular circumstances the weight to be attached to the opposition, in whole or in part, of the creditors.

7.   The fact that the assets of the debtor company have been mortgaged to an amount equal to, or in excess of the assets, or that the company has no assets is not sufficient in itself to justify refusal of the winding up order.

[22]   As Ms Bennington submitted, the particular points referred to from  paragraph 3 onwards of the judgment have no obvious application in this case. But the list does not purport to be an exhaustive one, and any attempt to develop an exhaustive list of such circumstances would run the risk of fettering the discretion which the legislature has conferred on the courts.

2      In Re Thames Freightlines Ltd 1981 1 NZCLC 98, 112.

[23]   Ms Bennington then referred me to Hanson J’s judgment in Re Feltex Carpets (in receivership). She summarised the Court’s conclusion in that case in the following terms:3

7.1A liquidator should normally be appointed if one of the available grounds is made out.

7.2The discretion to refuse to put a company into liquidation is to be sparingly exercised; and

7.3Even if it is unlikely that there will be any assets available for distribution to unsecured creditors, the Court regards the liquidator as serving useful functions in the investigation of the company’s affairs and acting as a guardian of the interests of unsecured creditors.

[24]Finally, Ms Bennington emphasised the Court of Appeal’s recent judgment in

90 Nine Ltd v Luxury Rental New Zealand Ltd where the Court said:4

We endorse the approach in Feltex Carpets. If a creditor elects to seek to recover a debt from the company by utilising the statutory demand process and the debtor fails to respond, then the creditor has the “standing” to apply to wind up the company.5

[25]   Later in the same judgment the Court observed that the usefulness of the statutory demand process would be undermined if debtors perceived that such demands could be ignored with impunity and continued:

Hence creditors must have available to them the ability to obtain liquidation orders when there is a failure to respond to a demand.6

[26]   Nevertheless, s 241 does reserve to the Court a residual discretion to decline to make winding up orders, even where the threshold criteria are made out. That discretion must be a meaningful one. The issue is the circumstances in which it should be exercised.

[27]   Mr Gray for Hawk Packaging referred me to Commissioner of Inland Revenue v Chester Trustee Services Ltd.7

3      Re Feltex Carpets (in receivership) (unreported) HC Auckland Hanson J 13 December 2006 at 38.

4      90 Nine Ltd v Luxury Rental New Zealand Ltd [2019] NZCA 424.

5 At [16].

6      At [22]

7      Commissioner of Inland Revenue v Chester Trustee Services Ltd [2003] 1 NZLR 395.

[28]   He referred first to the judgment of Baragwanath J to the effect that the courts should not attempt to develop an exhaustive list of circumstances in which its residual discretion will be exercised.8

[29]   He then turned to the judgment of Tipping J and particularly to the following passages:

I agree that if the company upon which the demand is served cannot show a substantial dispute concerning the debt, or that it has a qualifying cross-claim, the creditor is prima facie entitled to have the company put into liquidation. The creditor is not, however, entitled to liquidation as of right (ex debito justitiae as it was put in earlier times). To take that view would not be consistent with Parliament’s direction that there can be other grounds upon which the statutory demand may be set aside. Hence Parliament has contemplated that it may in some circumstances be inappropriate for a company which is undoubtedly insolvent to be placed in liquidation. Furthermore Parliament has not chosen to categorise what those circumstances are. While it is undoubtedly helpful to identify circumstances which have been held to qualify in the past, it is important not to regard those circumstances as comprising an exhaustive or exclusive list.9

I agree with Baragwanath J that the general policy of the Act that insolvent companies should be put into liquidation, if a creditor seeks such an order, should not be departed from lightly. To justify such departure there must be some other factor, be it policy, principle or simply the justice of the particular case, which outweighs the prima facie entitlement of the creditor to an order putting the insolvent company into liquidation. If the focus is on the justice of the particular case the discretion must always be exercised on a principled basis and not on some ad hoc perception of what individual justice might require. All cases involving s 290(4)(c) must in the end come down to a judgment by the Court as to whether the creditor’s prima facie entitlement is outweighed by some factor or factors making it plainly unjust for liquidation to ensue. The ground advanced by the insolvent company must be sufficiently compelling to overcome the general policy of the Act with regard to insolvent companies.10

[30]   Mr Gray also referred to the judgment of Associate Judge Osborne (as he then was) in Commissioner of Inland Revenue v Property Ventures Ltd (in rec)11 which reemphasised the importance of the discretion being an unfettered one.

[31]   Mr Gray submitted that at all times (Hawk Group and) Hawk Packaging “acted responsibly commercially”. As I understand this submission it is that Hawk Group

8 At [47].

9 At [1].

10 At [3].

11     Commissioner of Inland Revenue v Property Ventures Ltd (in rec) [2010] NZCCLR 33.

and Hawk Properties were open as to their objective of securing the advantage of the tax losses, the means by which they intended to do so and provided all other parties

— the plaintiffs in the litigation, and the insurers involved — with all information at their disposal as to Hawk Packaging’s financial position.

[32]   I accept that, throughout, Hawk Group and Hawk Packaging acted openly. However, as Ms Bennington submitted, that cannot dictate whether or not Rathmore is entitled to the order its seeks.

[33]   Mr Gray sought to take this argument a step further. He contended that as the advice which Hawk Group, Hawk Packaging and the group’s insurers had received from PwC and J T Law and the report which the plaintiffs and their insurers obtained from Lazelle Associates all concluded that there was nothing unlawful in the course of action proposed by Hawk Group and Hawk Packaging, so that in the event of a liquidator being appointed, there would be nothing for the liquidator to investigate. On that basis, he submitted that a winding up order here would be an exercise in futility. That submission appears to me to overstate the position. In my view, it would be contrary to principle for the Court to pre-empt a liquidator’s assessment and the conclusions that he or she might reach.

[34]   Mr Gray also advanced an argument that Rathmore’s proceeding constituted an abuse of process. His contention was that having regrd to the open approach that Hawk Group and Hawk Packaging have taken; given the amount of information provided by them; given the depth of analysis carried out by PwC, J T Law and Lazelle Associates, Rathmore cannot seriously think that a liquidator will challenge any aspect of the transaction meaning that the only possible motivation for seeking a winding up order is to put pressure on Hawk Group to pay the amount claimed. That, Mr Gray submitted, was an improper purpose because Hawk Group is not a party to this proceeding.

Discussion

[35]   As both Ms Bennington and Mr Gray observed, the parties are not very far apart as to the principles that apply, though not of course as to their proper application here.

[36]In my assessment, the applicable principles are relatively straight forward:

(a)If the plaintiff in winding up proceedings can establish that he, she or it is a creditor of the defendant, and that the defendant is insolvent in the sense that it cannot pay its debts, then an order will ordinarily follow;

(b)The Court does however retain a residual discretion and may refuse to make an order even where those threshold tests are met;

(c)That discretion is not one that the legislature has seen fit to impose constraints on, and nor should the Court fetter it by, for example, seeking to develop an exhaustive set of circumstances in which it will be exercised;

(d)The burden is on the party — invariably the defendant — contending for the exercise of the discretion to establish that the circumstances justify that;

(e)For several reasons, including the policy consideration that the liquidation process would be undermined if the Court were to exercise its discretion liberally, this discretion should be exercised sparingly;

(f)The proper exercise of the discretion requires the Court to have regard to all relevant considerations;

(g)In the most common case involving a company that is insolvent, the important factors are likely to include the following:

(i)public policy considerations such as that companies that are insolvent should not be permitted to maintain registration, and that it is in the public interest that there should be a proper level of scrutiny in relation to such companies conducted by a liquidator as an officer of the court;

(ii)any public policy considerations that may count against a winding up order such as a public interest that may be served by the company’s continued existence notwithstanding its solvency;

(iii)any particular factors justifying a winding up such as the nature and scope of the risk that the insolvent company’s ongoing existence is likely to pose to the public and existing or potential creditors;

(iv)Any particular factors that may count against a winding up order such as whether any risk to the public and existing or potential creditors can be mitigated or avoided or whether the company may be more valuable to shareholders or creditors if not wound up;

(v)the apparent reasons for the company becoming insolvent including whether the court perceives there to be any evidence of fraud or other unlawful activity on the part of those responsible for its governance or management;

(vi)the likely outcome on a winding up to the extent that this can be assessed;

(vii)the views of any creditors before the court.

[37]   Those factors appear to me to be more evenly balanced here than in the generality of cases.

[38]The public policy considerations favour winding up as is generally the case.

[39]   The importance of ensuring that insolvent companies do not trade and that an appropriate level of scrutiny is applied to the affairs of such companies apply here as much as they do in any other case. It is not obvious to me that there are any public

policy considerations that may count against the making of a winding up order and in favour of the exercise of the Court’s residual discretion.

[40]   On the other hand there are some particular features of this case which appear to me to weigh against the making of a winding up order.

[41]   If it were proposed that Hawk Packaging go on trading, then in my view the inherent risk to the public and current and potential creditors would be significant. But that is not what is being proposed. What Hawk Group has sought from the outset is to secure the value of Hawk Packaging’s accumulated tax losses for its use. It is for that purpose, and that purpose alone, that Rathmore Properties’ application is opposed. During the course of the argument I expressly enquired of Mr Gray whether Hawk Group would be prepared to consent to the Court making orders against it curtailing the use to which that company could put Hawk Packaging,  and  ensuring  that  Hawk Packaging would not trade and would ultimately be wound up. Mr Gray informed me that sent representatives of Hawk Group with appropriate authority were present in Court. He sought instructions and was very clear in indicating that the company would consent to such orders. That may enable the Court to make orders that effectively eliminate any risk associated with Hawk Packaging continuing in existence for a time. Ms Bennington raised the point that if the making of a order were to be deferred, this might preclude the liquidator from looking into the transaction between Hawk Group and Hawk Packaging as it might ultimately predate the commencement of the relation-back period. However, as Mr Gray submits, where the Court appoints a liquidator the relation-back period commences two years prior to the date of the application. Accordingly if an order were to be made now to come into effect on 1 April 2023 (allowing three years to enable Hawk Group to get the benefit of the accumulated tax losses it has paid for) the commencement date of the relation- back period would not be affected.

[42]   Furthermore, that would enable Hawk Group to secure the value of the accumulated tax losses.

[43]   As to the reasons for Hawk Packaging’s financial position, whilst it may be that there is scope for levelling criticism at its governance and management in some

respects — most particularly it would seem that the company was rather cavalier in the way it treated its insurers — no one suggests that there is any element of dishonesty causally related to the company’s insolvency.

[44]   This is a case in which there is better than the usual chance of predicting the outcome of a winding up. Effectively, unless the intercompany transaction can be challenged in some way that has not been obvious to any of the parties’ advisers, the outcome of a winding up will be that there will be a nil return to the only creditors, the three plaintiffs in the fire proceeding, BBI, ENZO and Rathmore. However, as already said, it would be wrong to pre-empt any liquidator and I have no concluded views as to this.

[45]   As to the views of creditors, the only creditor that has taken part in this litigation is Rathmore. Its views are very clear. It would probably not be unfair to infer that the other two plaintiffs in the proceeding have become ambivalent, or at least not sufficiently exercised to be prepared to expend any further funds in the matter.

[46]   It should be emphasised not only that Hawk Group and Hawk Packaging have proceeded openly in implementing their plans for the future, and there is no sense in which they have acted covertly to ensure that Rathmore and the other plaintiffs in the fire litigation were left without a remedy. Although Mr Gray did not focus on this point, it might also be said that the transaction whereby Hawk Group acquired Hawk Packaging’s business at what the parties appear to agree was an inflated price enabled the latter to pay all its existing creditors. Any criticism because Hawk Group was amongst those creditors is blunted because to that extent it was simply a money-go- round. By one means or another it was Hawk Group that financed the transaction so that any payment it received was effectively its own money.

[47]   Doing the best I can to balance all of those considerations, the view I have come to is that an order winding up the defendant should be made, but that the order should be tailored to meet the particular circumstances of the case.

[48]   That will involve deferring its operation for a significant period of time, which is unconventional, but which will enable Hawk Group to secure the contractual

entitlements it bargained for, whilst at the same time protecting the positions of the three likely creditors and the public.

Conclusion

[49]I make the following orders:

(a)On the application of Rathmore Properties Ltd I make an order pursuant to s 241 of the Companies Act 1993 appointing the Official Assignee for Hastings as the liquidator of Hawk Packaging Ltd;

(b)That order will come into force at 4.00 pm on 1 April 2023;

(c)In the meantime, and by consent, I make orders against Hawk Group Ltd, a non-party to this proceeding:

(i)Hawk Group Ltd is to retain ownership and control over Hawk Packaging Ltd, and not to alienate its shareholding in that company;

(ii)Hawk Group Ltd is to ensure that Hawk Packaging does not trade in any way between the date of this judgment and 1 April 2023, and continues to maintain registration only for the purpose of ensuring that Hawk Group Ltd is able to take advantage of the company’s accumulated tax losses, as provided for in the contract between the parties, during the financial years ending 31 March 2020, 2021, 2022 and 2023.

[50]   Costs are reserved. I expect counsel will be able to resolve costs issues. But, if they are unable to do so, they may come back to the Court by memorandum and they

will be dealt with on the papers.

Associate Judge Johnston

Solicitors:

Duncan Cotterill, Auckland for applicant

Sainsbury Logan & Williams, Napier for respondent