Rodewald v Aqua-Agriculture Farms Ltd

IN THE COURT OF APPEAL OF NEW ZEALAND

CA249/01

BETWEEN	THOMAS LEE RODEWALD
Appellant

AND	AQUA-AGRICULTURE FARMS LTD
First Respondent

AND	MALCOLM JAMES AND GILBERT JAMES
Second Respondents

AND	TIKAPA MOANA ENTERPRISES LTD
Third Respondent

Hearing:	13 August 2002
Coram:	Keith J Blanchard J Glazebrook J
Appearances:	C M Grice and M D Branch for Appellant No appearance for Respondents
Judgment:	22 August 2002

JUDGMENT OF THE COURT DELIVERED BY BLANCHARD J

Introduction

In April 1999 Parliament amended the Companies Act 1993 so that it now provides that the liquidation of a company commences on the date on which, and at the time at which, a liquidator is appointed (s241(5)). It was further provided, in a new s241A, that where a liquidator is appointed by a special resolution of shareholders, they must record “in the special resolution” the date on which, and the time at which, the resolution was passed (subs(1)); and that an act or transaction on the date of the appointment is, in the absence of proof to the contrary, deemed to have been done or entered into or effected after the time of the appointment (subs(2)).
In this case a Master has held that where there has been a failure by the shareholders to state the time in the resolution, the consequence is that the liquidator’s appointment is invalid. It follows, if this decision is correct, that the liquidation did not commence. Mr Rodewald has been acting as liquidator of Nikau Enterprises Ltd since 18 June 1999. He was named as such in a special resolution of the company’s shareholders bearing that date. But neither in the text of the resolution nor elsewhere in the minute recording the resolution is there a statement of the time at which it was passed. Mr Rodewald brings this appeal against the Master’s refusal to grant him a declaration that he was validly appointed. The respondents to his application in the High Court, certain creditors of the company who had received payments from it during the six months preceding the date of the resolution, have now reached a settlement with Mr Rodewald and have not appeared in this Court. Nevertheless, the issue remains important to Mr Rodewald and is likely to be important to many other liquidators. It is therefore appropriate that we should decide whether the Master was correct. It is to be noted also that the same issue may arise under parallel provisions inserted as part of the same legislative package into the Insolvency Act 1967, the Corporations (Investigation and Management) Act 1989 and the Reserve Bank of New Zealand Act 1989.

The relevant legislation

Sections 241 and 241A of the Companies Act 1993 are as follows:
241     Commencement of liquidation
(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—
(a)       Special resolution of those shareholders entitled to vote and voting on the question; or
(b)       The board of the company on the occurrence of an event specified in the constitution; or
(c)       The Court, on the application of the company, or a director or shareholder, or other entitled person, or a creditor of the company (including any contingent or prospective creditor), or the Registrar.
(3)       An Official Assignee may be appointed liquidator of a company only—
(a)       If the special resolution passed in accordance with paragraph (a) of subsection (2) of this section is passed by reason of the Official Assignee exercising voting rights attaching to shares in the company of—
(i)        A person who has been adjudged bankrupt; or
(ii)       Another company of which the Official Assignee is liquidator; or
(b)       By the Court.
(4)       The Court may appoint a liquidator if it is satisfied that—
(a)       The company is unable to pay its debts; or
(b)       The company or the board has persistently or seriously failed to comply with this Act; or
(c)       The company does not comply with section 10 of this Act; or
(d)      It is just and equitable that the company be put into liquidation.
(5)     The liquidation of a company commences on the date on which, and at the time at which, the liquidator is appointed.
241A   Commencement of liquidation to be recorded
(1)       If—
(a)       A liquidator is appointed under section 241(2)(a), the shareholders must record in the special resolution appointing the liquidator the date on which, and the time at which, the special resolution was passed; or
(b)       A liquidator is appointed under section 241(2)(b), the board of the company must record in the instrument appointing the liquidator the date on which, and the time at which, the liquidator was appointed; or
(c)       A liquidator is appointed under section 241(2)(c), the Court must record in the order appointing the liquidator the date on which, and the time at which, the order was made.
(2)       If any question arises as to whether on the date on which a liquidator was appointed an act was done or a transaction was entered into or effected before or after the time at which the 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.
Section 255(2)(a) requires a liquidator forthwith after being appointed or being notified of his or her appointment to give public notice of the date and time of the commencement of the liquidation. The words “and time” were inserted in 1999.
In contrast, s282, which has not been the subject of any amendment, provides expressly for the consequence of non-compliance with one of the steps required in the process of putting a company into liquidation:
282 Consent to appointment
The appointment of a person, other than an Official Assignee, as liquidator is of no effect unless that person has consented in writing to the appointment.

The history of the amendments

The genesis of these amendments was a discussion paper issued by the Reserve Bank in August 1996 in which it pointed out that existing insolvency law gave rise to difficulty for the introduction of real time gross settlement procedures because it created the potential for payments transactions that had been settled between banks to be unwound back to the commencement of the day on which a bank was put into liquidation or statutory management, with possible destabilising effect on the financial system. It would undermine the objective of payments finality and the consequent reduction in inter-bank exposures. The discussion paper pointed out an anomalous distinction concerning the time of commencement of liquidation depending upon how the liquidator was appointed. In a court ordered liquidation the existing law deemed that the liquidation commenced at the start of a calendar day regardless of the actual time at which a court determined that the entity was placed in liquidation. This was because of the general rule of law that such an act was taken from the earliest moment on which it was performed. There would be a reversal of transactions settled between the start of the day and the time the liquidation order was made, unless they were validated by the court. But that rule did not apply to voluntary liquidations – by shareholders’ resolution or decision of the directors – which were not the result of a judicial act. In such cases the liquidation commenced at the time at which the resolution appointing a liquidator was passed. But there was no explicit requirement on the directors or shareholders to record the time of day at which the resolution was passed, and if that were not done there could be uncertainty about the status of some payments.
The paper referred also to doubt about whether it was permissible to specify a commencement time in an Order in Council declaring a statutory management and about whether in the absence of a time specification it would be held to have commenced at the beginning of the day.
The paper proposed, in relation to the Companies Act:
An amendment to section 241 of the Companies Act 1993 to provide that:
(a)the liquidation of a company commences on the date on which, and the time of day at which, the liquidator is appointed; and
(b)there is an obligation on:
(i)the shareholders of the company in question passing a special resolution appointing a liquidator; or
(ii)the board of directors of the company appointing a liquidator on the occurrence of an event specified in the company’s constitution; or
(iii)the court appointing a liquidator;
to record the time of day at which the appointment of the liquidator was made.

It is to be observed that what was thought desirable was the making of a record of the time of day, not that it should appear in any particular place or be done in any particular way.

The accompanying draft of the proposed amendments prepared by the Bank and set out in an appendix to the paper did, however, specify that there should be a record “in the special resolution” or “in the order appointing the liquidator”, as s241A now does.
As introduced into Parliament, in cl5 of the Banking and Insolvency (Netting and Payments Finality) Bill, the provision which became s241A(2) omitted reference to “the date on which a liquidator was appointed”, thereby departing from the Bank’s draft. The problem this might cause was detected by the Commerce Committee of the House which recommended the text of that subsection as eventually enacted. The Committee commented:
Clause 5 amends section 241 of the Companies Act 1995 so that both the date and the time of liquidation must be recorded. There is a presumption that events occurred after liquidation if the time is not certain. The submissions argued that the bill should not create a presumption other than on the date of liquidation. They also argued that the time of liquidation should be recorded in minutes and/or seconds. We do not think that there should be any change in respect of units of time. We consider that clause 5 in the bill as introduced creates a presumption which was unintended. We have recommended an amendment to make it clear that the presumption regarding time applies only to the date of liquidation.
The enacted amendments took effect on 26 April 1999, a little less than two months before Mr Rodewald’s appointment as liquidator of Nikau Enterprises Ltd.

The extent of the problem

By leave of the Court, Ms Grice tendered some affidavits, mostly of an updating nature, which of course were not available to the Master. In his affidavit Mr Rodewald deposes that he first became aware of s241A in December 1999 when it was drawn to his attention by his solicitors. He has identified four active liquidations from 1999 where the resolutions did not record the time of his appointment. Funds are held on account of three of those companies. He referred also to three situations in which he has been appointed as liquidator by the High Court but in which the court order, no doubt following the minute made by a Master, does not record the time.
Mr Rodewald has also prepared a schedule of public notifications of liquidations in the New Zealand Gazette from 29 April 1999 to 23 September 1999. Only two out of 674 notices referred to the time of appointment. Mr Rodewald infers that there may well in many of these cases exist the problem which he is experiencing in relation to Nikau Enterprises Ltd.
A solicitor employed by the firm representing Mr Rodewald deposes to an examination of the liquidation notices in the Gazette from 9 May 2002 to 11 July 2002. He found 34 cases in which the notice omitted the time of appointment.
Mr Michael Whale, an Auckland solicitor specialising in insolvency law, refers in his affidavit to several recent examples which he has found of appointments by shareholders’ resolutions which do not record the time of appointment. He says also that he is advising liquidators in what he describes as a large and complex liquidation on voidable transaction issues. They were appointed by a special resolution of shareholders in early 2000. The resolution did not have the time of appointment recorded in it. The liquidators became aware of the possible significance of this only in May 2002. The administration of the liquidation was apparently substantially advanced. Most of the company’s assets had been realised. Most of the creditors’ claims, totalling millions of dollars, had been reconciled and agreed. A number of notices to set aside voidable transactions were about to be issued and proceedings against directors and other related parties were almost due for hearing. Mr Whale says that if the liquidation is a nullity then, because of the time which has elapsed, a subsequently appointed liquidator will be unable to pursue any of the transactions which, on the face of it, are voidable as they will have taken place earlier than two years before the date of appointment of the subsequent liquidator. The amount of voidable transactions involved, he says, could exceed $500,000.

The Master’s decision

In his judgment in the Tauranga Registry of the High Court on 2 October 2001, Master Kennedy-Grant set out a considerable number of sections of the Act in which the time of the commencement of a liquidation is of importance. He traversed the legislative history of ss241 and 241A and said that he had no doubt that the rejection of the liquidator’s application would have serious consequences for all parties who had been involved in the “liquidation” of Nikau Enterprises Ltd. He was also certain that a decision that the liquidator’s appointment was invalid would impact on other liquidations. He took the view, however, that these considerations could not weigh with the court in making his decision as to the proper interpretation of the Act. So far as the practical effects of a decision adverse to the liquidator on future liquidations was concerned, the Master said that they could easily enough be avoided by compliance with the requirements of the Act. He concluded that the appointment was invalid because of the shareholders’ failure to state the time of Mr Rodewald’s appointment in the special resolution appointing him.
The Master said that he did not believe that it was possible to differentiate between ss241 and 241A of the Act. In his view the sections had to be read together and their intent was clearly that the resolution or other means of appointing the liquidator of a company should state not only the date but also the time at which the resolution or other act took place. The fact that the requirement for the time to be stated may have been introduced for a particular purpose did not mean that it did not and could not apply across the board. There was nothing about the purpose of the amendments in 1999 which dictated or made it more likely that the requirement for the stating of the time of appointment was directory rather than mandatory. It was, he said, strongly arguable that a mandatory requirement fitted better with the purpose of the amendments. Certainty as to time was important even in the context of the original purpose of the amendments. There were a number of sections in the Act in relation to which the issue of time was highly relevant and which were not related in any way to the payments finality purpose of the amendments. Although there would be potentially serious effects on this and other liquidations, hard cases should not be allowed to make bad law. Regulation 36 of the Companies Act 1993 Liquidation Regulations 1994 (“No defect or irregularity in the appointment of a liquidator shall invalidate any act done by him or her in good faith”) would or might reduce the impact of the decision. The position could be safeguarded in future liquidations once it was appreciated what was required by the Act. Master Kennedy-Grant therefore declined the liquidator’s application.

Discussion

The words which Parliament has actually used in enacting s241(5) and s241A must be the real focus. But it is helpful to consider by way of background how, in legal and practical terms, a special resolution of shareholders may actually be passed in terms of the Act, observing before we do so that nothing in the 1999 amendments or in the legislative history suggests to us that the legislature was intending to make any more than a very slight change to existing procedures when it required the recording of the time at which a resolution appointing a liquidator took effect. It certainly does not appear that there was any intention to restrict or render unusable procedures otherwise available and required under the Act for the passing of special resolutions. The objective was simply to obtain in the case of each appointment a record of the time at which it occurred in order that it can more easily be ascertained whether a transaction has occurred before or after that event. The legislature itself recognised that there might still be uncertainty even if the time of the appointment were recorded. Hence the deeming provision in s241A(2).
There are two available methods by which the Act enables a resolution of shareholders, including a special resolution, to be passed. The first is by the passage of the resolution at a meeting of shareholders called under s121. Section 124 states that the provisions of the First Schedule to the Act are to govern proceedings at meetings of shareholders of a company except to the extent that the constitution of the company makes provision for the matters that are expressed in that schedule to be subject to the constitution of the company. Assuming that the constitution does not otherwise require, the following provisions of the First Schedule are relevant. Clause 2 requires written notice of the time and place of a meeting of shareholders to be sent to every shareholder entitled to receive notice of the meeting, as well as to every director and an auditor. This must be done not less than 10 working days before the meeting. The notice must state the nature of the business to be transacted and, of particular significance in the present case, it must also state the “text of any special resolution to be submitted to the meeting”. If, then, s241A is to be interpreted to require that the time of the resolution must appear in the text itself, which the section does not say expressly, there is an immediate problem. How can the person responsible for giving the notice possibly predict with any accuracy exactly when on the day of the meeting the chairperson will be able to declare that the resolution has been duly passed? That is something which can be known only after the event and recorded accordingly. Any attempt to stipulate an exact time in the notice of a proposed resolution would lead to obvious problems. Arguably, an attempt to meet the difficulty by the use of words in the proposed resolution such as “at the time at which the resolution is declared by the chairperson to have been passed” would not pass muster because, if passed in that form, the text of the resolution would not contain the actual time. Furthermore, under cl 4 the meeting can be adjourned to the same day in the following week at the same time and place, or to such other date, time and place as the directors may appoint, if a quorum is not present within 30 minutes after the time appointed for the meeting. Nothing in the Act suggests that this provision cannot apply to a special resolution for the appointment of a liquidator.
The next matter is the prescribed method of voting at the meeting. Unless a poll is demanded, voting can be by voice or by show of hands, as the chairperson determines (cl 5(1)). So s241A’s direction to the shareholders to make a record may have to be given application in a situation in which the shareholders themselves will have put nothing in writing. And, when a poll has been demanded so that the shareholders cast their votes in writing, there is no requirement that the voting papers must repeat the text of the resolution. Therefore it appears that all that is necessary is that the papers sufficiently indicate which resolution is being voted upon.

Further complication may arise from cl 6, which provides for proxy votes, and cl 7 which, subject to the constitution of the company, permits a shareholder to exercise the right to vote at a meeting by casting a postal vote.
The final matter of relevance in the First Schedule is the requirement in cl 8 that the Board must ensure that minutes are kept of all proceedings at meetings of shareholders. Minutes which have been signed correct by the chairperson of a meeting are prima facie evidence of the proceedings. The Act therefore recognises, and indeed requires, that, after a resolution has been passed by the meeting, a record will be made of that fact and the chairperson will sign that record.
The second method of passing a shareholders’ resolution is by what is known as a resolution in lieu of meeting (sometimes called a resolution by minute book entry). In relevant part s122 provides:
122     Resolution in lieu of meeting
(1)       Subject to subsections (2) and (3), a resolution in writing signed by not less than—
(a)       Seventy-five percent; or
(b)       Such other percentage as the constitution may require for passing a special resolution,—
whichever is the greater, of the shareholders who would be entitled to vote on that resolution at a meeting of shareholders who together hold not less than 75% or, if a higher percentage is required by the constitution, that higher percentage, of the votes entitled to be cast on that resolution, is as valid as if it had been passed at a meeting of those shareholders.
(2)       A resolution in writing that—
(a)       Relates to a matter that is required by this Act or by the constitution to be decided at a meeting of the shareholders of a company; and
(b)       Is signed by the shareholders specified in subsection (3) of this section—
is made in accordance with this Act or the constitution of the company.
…
(3A)     Any resolution in writing under this section may consist of one or more documents in similar form (including letters, telegrams, cables, facsimiles, telex messages, electronic mail, or other similar means of communication) each signed or assented to by or on behalf of one or more of the shareholders specified in subsection (3).
This second method, which in practical terms is confined to smaller companies, will be severely curtailed if the text of the resolution has to contain an accurate statement of the time at which it is passed. That would no doubt be possible if all signing shareholders were gathered in one room and the final form of the resolution were to be settled immediately before signatures were affixed. But the whole purpose of the resolution in lieu of meeting procedure is to avoid the need for such a gathering. Where, as is quite normal and recognised by subs(3A), each shareholder signs a separate copy of the resolution and transmits it by an approved means of communication, there will frequently be no way of knowing in advance when the last of the communications will be received and thus when the resolution can take effect and be said to be passed. It might be possible to specify a date and time in the resolution on the assumption that all copies will have been signed and transmitted before that time, but that process might be undesirable in circumstances of real urgency and would certainly be awkward where there is uncertainty about when the requisite proportion of shareholders may be able to respond.
Subsection (1)(a) of s241A, which deals with a shareholders’ resolution, says that the shareholders “must record in the special resolution appointing the liquidator” the date and time of its passage. But, for the reasons we have given, we would be reluctant to hold that the text of the resolution itself must mention the date and time, and, to be fair to the Master, he may not have intended to convey the impression that this was his view. The record of a resolution passed at a meeting is to be found in the minute which the chairperson is required to sign. We think, therefore, that s241A(1)(a) must be taken to be referring to the record constituted by the minute as signed by the chairperson rather than to the text of the resolution whose passage is thereby recorded and which may have been passed by a means other than writing; and that it is a sufficient compliance with the section that the chairperson records in the minute the date and time at which the resolution was actually passed. Where the resolution in lieu of meeting method is used it would be sufficient for the chairperson to record on a copy of the resolution in the minute book when it took effect. In participating in either manner in the voting process the shareholders must be taken to have authorised the making of the record in fulfilment of the obligation placed on them by the words of s241A(1)(a). We take a similar view of the requirement in s241A(1)(b) – which deals with a situation very rarely encountered in practice - where the decision is recorded in a directors’ resolution which will, if no further document is prepared, be capable of evidencing the appointment and of being an “instrument” of appointment. It would be sufficient in order to comply with subs(1)(c), for a court order appointing a liquidator to record the date and time of the court’s announcement of its decision even if, in making the announcement from the Bench, the Master or Judge did not actually mention the date and time of the decision.
This view is, we think, supported by the way in which the drafter has distinguished the passing of the resolution or making of the court order from the recording of that event. The statutory scheme is that s241 provides for the event of the appointment of a liquidator in certain circumstances, whilst s241A directs that a record must be made of that event. Section 241(5), stating the time of the commencement of a liquidation, is expressed in the present tense (“The liquidation commences …at the time…”). On the other hand, in speaking of the record which must be made s241A uses the past tense (“If a liquidator is appointed…the shareholders must record….the time at which the special resolution was passed…”). Sections 241 and 241A therefore recognise two separate events: the appointment and the making of the record of that appointment.
That sequence – first the appointment and later the record of it - is of particular importance as we now move to consider the significance of the failure of the chairperson of Nikau Enterprises Limited to record in the minute of the shareholders’ meeting on 18 June 1999 the time of the appointment of Mr Rodewald. Commercial considerations, including the object of upholding the process of real time banking settlements, require that the liquidator’s appointment should take effect immediately and should not be treated as in suspension pending the making of the record. Otherwise transactions could still take place, and be valid, despite the passing of the resolution or the court’s decision. It cannot then be the case that a resolution validly passed or a court order validly announced is subsequently to become of no effect because the chairperson responsible for signing the minute or the Registrar responsible for signing the order mistakenly omits to record the operative time. The making of the record may not happen immediately – possibly not for a day or two. If the appointment were to become invalid for that reason, what would be the effect of a subsequent correction or completion of the record to include a date and/or time of the resolution or court order? That might happen almost immediately, or be long delayed, depending upon when somebody pointed out to the chairperson or Registrar that the date and/or time had been omitted.
Our view is reinforced by the contrast between s241A, which states no consequence for non-compliance, and s282, also relating to the appointment of a liquidator, which expressly says that, except in the case of the appointment of an Official Assignee, the appointment is “of no effect” unless the person concerned has consented in writing to the appointment. In the unlikely event that Parliament had intended that non-compliance with s241A was also to render an appointment of no effect, it would surely have said so. No penalty provision was enacted but that would not have been appropriate where duties were cast on the body of the shareholders and on the court. Its absence does not suggest that Parliament was contemplating some other, unexpressed, sanction which would affect entirely innocent parties.
The uncertainty and possibly dire consequences visited upon liquidators and creditors if the appointment were held invalid – apparent from the extent of the problem outlined in paras [12] – [15] above – would appear to be out of all proportion to any mischief which may come from a failure to include the time in the record. In most instances, evidence is likely to be available to establish the actual time of the resolution or court order with some accuracy so that there will not be any practical problem or uncertainty. The complications and disproportionate consequences and uncertainty which would follow if the Master’s decision were affirmed support the view that the legislature did not intend that non-compliance with s241A was to invalidate the liquidator’s appointment.
We add that if the Master’s decision were correct, it would seem to follow that a record of a resolution containing a time which is shown to be incorrect would also cause invalidity with the same consequences. So if the chairperson’s watch was inaccurate by more than the tolerance of a minute, which the Commerce Committee sensibly thought to be an appropriate unit of time for the making of the record (see para [10] above), the liquidator would have to be held not to have been validly appointed. In our view, that would be an unacceptable result.
We are conscious that we have not had the benefit of submissions to this Court on behalf of the respondents but we have carefully considered the arguments which were advanced in their written submissions in the High Court and we have had the advantage of a comprehensive judgment from Master Kennedy-Grant. We are, however, persuaded by the submissions of Ms Grice that the Master reached the wrong conclusion.

Result

The appeal is accordingly allowed. There will be a declaration that Thomas Lee Rodewald was validly appointed as the liquidator of Nikau Enterprises Ltd (In Liquidation) on 18 June 1999. There will be no order for costs.

Solicitors:
Harkness Henry & Co, Hamilton for Appellant

[2002] NZCA 207

22 August 2002