Sargison v McCabe
[2012] NZHC 3194
•29 November 2012
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV 2012-404-003300 [2012] NZHC 3194
BETWEEN PAUL GRAHAM SARGISON AND SIMON DALTON
Applicants
ANDDAVID ALLEN MCCABE First Respondent
ANDMEGAN RENEE MCCABE Second Respondent
ANDMICHAELA BLESER Third Respondent
Hearing: 12 November 2012
Appearances: S McAnally and B Hojabri for the Applicants
R B Hucker for the First and Third Respondents
No Appearance for the Second Respondent
Judgment: 29 November 2012
[RESERVED] JUDGMENT OF WYLIE J
This judgment was delivered by Justice Wylie
On 29 November 2012 at 3.30 pm
Pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Date:
Distribution:
S McAnally: [email protected]
R B Hucker: [email protected]
SARGISON & ANOR V MCCABE & ORS HC AK CIV 2012-404-003300 [29 November 2012]
Introduction
[1] The applicants, Mr Sargison and Mr Dalton, are the liquidators of Club Crow Bar Ltd (“Club Crow”). They have sought orders, by way of originating application, requiring the respondents to:
(a) attend Court and be examined on matters relating to the affairs of
Club Crow; and
(b) to produce all documents of Club Crow in their possession or control. [2] The application is opposed by the first and third respondents — Mr McCabe
and Ms Bleser. The second respondent, Ms McCabe, has not been served. She is overseas, possibly in the United States, and the applicants have been unable to locate her. She was adjudicated bankrupt on 1 September 2011 on the petition of another entity.
[3] There are some preliminary issues that should be recorded.
(a) Messrs Sargison and Dalton sought leave to commence this proceeding by way of originating application. When the matter was first called before the Court on 20 July 2012, Associate Judge Sargisson noted that the applicants and the first and third respondents agreed that the matter should proceed as an originating application. The only issue reserved related to costs. When the matter was called before me, Mr McAnally, appearing for Messrs Sargison and Dalton, accepted that the application should be treated as an interlocutory application for costs purposes.
(b)There were two late affidavits filed. The first was an affidavit from the third respondent, Ms Bleser, dated 7 November 2012. The other was an affidavit in reply sworn by Mr Dalton, dated 9 November
2012. There was no opposition by either Mr McAnally, or Mr Hucker for Mr McCabe and Ms Bleser, to the late filing of the affidavits,
although Mr Hucker did suggest that aspects of Mr Dalton’s affidavit
in reply were inadmissible.
Backgrounds
[4] Club Crow was incorporated on 16 April 2009. The company’s sole director and shareholder was the second respondent, Ms McCabe. The company got into financial difficulties, and Messrs Sargison and Dalton were appointed joint liquidators of the company by the Court on 3 June 2011.
[5] Messrs Sargison and Dalton initially sought to obtain Club Crow’s financial records. They tried to get in contact with Ms McCabe for this purpose, but without success. Eventually, they managed to speak with Ms Bleser by telephone. She told them that she had been the accounts manager at Club Crow. Messrs Sargison and Dalton asked Ms Bleser to provide them with all of the company’s financial records. It is common ground that no records were made available pursuant to that request.
[6] According to Ms Bleser, she told the liquidators that she did not have the authority to provide the company’s financial records to them, and that Ms McCabe was out of the country. She suggested they ought to put their request in writing by email, either to her or to Ms McCabe. She provided them with her and Ms McCabe’s email addresses.
[7] On 13 June 2011, Messrs Sargison and Dalton gave formal notice pursuant to s 261(1) of the Companies Act 1993 to Ms McCabe and Ms Bleser via the email addresses that had been supplied to them. The notices required Ms McCabe and Ms Bleser to deliver to the liquidators all of the company’s financial records. Mr Dalton has filed an affidavit attaching copies of the emailed notices. Ms Bleser has deposed that she did not receive the notice sent to her, but that both email accounts were active and emails were being received on both accounts.
[8] Mr McCabe is the father of Ms McCabe. The liquidators believed that he might have knowledge of Club Crow’s affairs, even though he was not a director of
the company. On 21 May 2012, they issued a s 261 notice to him via his solicitors,
requiring him to deliver to them all of the company’s financial records.
[9] Mr Dalton deposes that there has been no response to the notices which have been issued. He notes that he and Mr Sargison were appointed liquidators of Club Crow some considerable time ago, but that they have yet to receive proper accounting records from the company. They record that the present state of affairs is compromising the liquidation and their ability to wind up the company in a proper fashion.
The Application
[10] The application is made pursuant to s 266 of the Companies Act. Relevantly, it provides as follows:
266 Powers of court
(1) The court may, on the application of the liquidator, order a person who has failed to comply with a requirement of the liquidator under section 261 to comply with that requirement.
(2) The court may, on the application of the liquidator, order a person to whom section 261 applies to—
(a) attend before the court and be examined on oath or affirmation by the court or the liquidator or a barrister or solicitor acting on behalf of the liquidator on any matter relating to the business, accounts, or affairs of the company:
(b) produce any books, records, or documents relating to the business, accounts, or affairs of the company in that person's possession or under that person's control.
…
[11] As can be seen, the section provides that a liquidator may apply to the Court for one of two types of order. Either the liquidator can seek an order that a person who has failed to comply with the requirements of s 261(1) notice comply with that notice, or alternatively, the liquidator can seek an order that a person to whom s 261 applies, attend the Court for examination, and produce any books, records, or documents relating to the business or affairs of the company in liquidation that are in that person’s possession or control.
[12] In the present case, the liquidators seek orders pursuant to s 266(2) requiring the first and third respondents to attend for examination, and also requiring them to produce books, records and documents in their possession or control.
[13] Mr Hucker submitted that the application is unclear and that it is, in effect, both an application under s 266(1) seeking to enforce the s 261(1) notices and an application under s 266(2) seeking an order for examination.
[14] I disagree. In my view, the application as filed is clear. It seeks orders under both s 266(2)(a) and (b). Section 266(2) is, however, subject to a jurisdictional threshold. The Court may only make orders in respect of persons to whom s 261 applies. I consider this threshold below.
[15] If the threshold is met, the Court has a discretion as to whether or not to make orders under s 266(2). As is noted in Brookers Companies and Securities Law,1 in the past, the Courts have been hesitant in exercising the discretion conferred on them by the section too readily for the benefit of a liquidator. The Courts have sought to introduce various tests, the satisfaction of which determined whether an order would be made.
[16] The principal tests were discussed by McGechan J in Re Northrop Instruments and Systems Ltd.2 The Court was there considering the section that was in place prior to the enactment of s 266. It was in substantially the same terms as s 266, and the Court’s observations are apposite in the present context. McGechan J noted that the section gave the Court a wide and unfettered discretion, involving the need to balance on the one hand the desirability of facilitating the provision of
information in company liquidations, and on the other, fairness in proceedings, so that there is no oppression of the person sought to be examined. He described this as the “traditional test”.3 He went on to note a then recent decision of the English Court of Appeal — Clover Bay Ltd v Bay of Credit and Commerce International SA,4
where it was suggested that the equivalent section in the United Kingdom is aimed at
1 Brookers Companies and Securities Law (online looseleaf, Thomson Reuters) at [CA 266.02].
2 Northrop Instruments & Systems Ltd (in rec and in liq) [1992] 2 NZLR
361 (HC).
3 Ibid, at 363.
4 Clover Bay Ltd v Bay of Credit and Commerce International SA [1991] 1 All ER 894 (CA).
the provision of information sufficient to put the liquidator in the same position as the directors so far as knowledge of the company’s affairs are concerned. This was described as the “reconstitution test”. McGechan J considered that while the traditional test was still the proper approach, it might also be proper to approach the question as to whether the purpose of the application was “to reconstitute the company’s knowledge”, rather than better equipping a liquidator for litigation. He observed that on the facts before him, a similar result was achieved whichever
approach was taken.5 McGechan J did however caution that while the Court will
endeavour to assist a liquidator in performing public interest functions, for example, to facilitate inquiring into company collapses, there is a countervailing concern to restrain liquidators from excess, however well intentioned.6
[17] The appropriate tests to apply were also discussed by Heath J in Carrow
Holdings Ltd (in liq) v Sadiq.7 He observed as follows:8
There are two bases on which information or production of documents for examination can be considered. They were referred to by McGechan J in Northrop as “the traditional approach” or the “Cloverbay approach”. The latter term derives from an approach articulated in Cloverbay Ltd v Bank of Credit and Commerce International SA [1991] 1 All ER 894 (CA).
The traditional approach turns on whether the liquidator is taking a bona fide step in the liquidation to obtain information for genuine purposes. If the information were sought as a genuine investigative step to enable a liquidator to reach an informed decision on what to do, the examination and production of documents is likely to be approved.
On the Cloverbay approach, the Court is directed to consider what is required to put the liquidator into the same position as the directors, so far as knowledge of the company’s affairs are concerned. This has been referred to as a “re-constitution” of the company’s knowledge.
In reality, both approaches work together. It is equally important for the liquidator to re-constitute knowledge of directors of the company as it is for him or her to make informed decisions about what steps to take for the benefit of creditors. In that context, it must be remembered that a liquidator usually has limited funds with which to work and it is in the public interest that he or she ascertains relevant information with as little expense as possible and in the most expeditious manner. …
5 Ibid, at 364.
6 Ibid, at 365.
7 Carrow Holdings Ltd (in liq) v Sadiq HC Auckland CIV 2007-404-2855, 5 June 2008.
8 Ibid, at [29]–[32].
[18] The Court of Appeal in Re Smith (a bankrupt)9 considered s 68 of the Insolvency Act 1967. That section is the statutory equivalent in the bankruptcy context of s 266. The Court described the exercise of its discretion as being:10
…one of balance between the rights of the Official Assignee to acquire information, and such right of silence or privacy as may exist in the person sought to be examined.
Analysis
[19] I deal first with the threshold question, and then with the exercise of the discretion.
[20] As noted, the Court can only make an order under s 266(2) against a person to whom s 261 applies. Section 261 applies to the following:
261 Power to obtain documents and information
…
(2) A liquidator may, from time to time, by notice in writing require—
(a) a director or former director of the company; or
(b) a shareholder of the company; or
(c) a person who was involved in the promotion or formation of the company; or
(d) a person who is, or has been, an employee of the company;
or
(e) a receiver, accountant, auditor, bank officer, or other person having knowledge of the affairs of the company; or
(f) a person who is acting or who has at any time acted as a solicitor for the company—
to do any of the things specified in subsection (3).
…
[21] Mr McCabe has deposed that he has never been a director of Club Crow. It
is, however, acknowledged by Mr Hucker on his behalf, that there “could be” a
9 Re Smith (a bankrupt) [1992] NZFLR 241 (CA).
10 Ibid, at 245.
sufficient connection between Mr McCabe and Club Crow to mean that he is a person caught by s 261(2)(e).
[22] I am satisfied that there is sufficient connection and that Mr McCabe is a person caught by s 261(2)(e). As noted, Mr McCabe is Ms McCabe’s father. Since she was adjudicated bankrupt, he has replaced her as a director of one of the group companies not in liquidation, namely Green Grass Ltd. The liquidators have commenced proceedings against Green Grass Ltd, and Mr McCabe has filed an affidavit in those proceedings in which he acknowledged that Green Grass Ltd was supplying goods to Club Crow. So has Ms Bleser. Mr McCabe disclosed that he was aware of the reason for these supplies. It seems from Ms Bleser’s affidavits filed in the Green Grass proceedings that Green Grass Ltd was not only supplying Club Crow, it was also paying the wages of Club Crow’s staff, meeting its cleaning and administrative expenses, and paying its creditors. It is reasonable to infer that Mr McCabe must have been aware of this. Mr McCabe also deposed that he was told by Ms Bleser that Club Crow’s landlord was denying Club Crow access to the premises occupied by it. He stated that he called and spoke with the principal of the real estate firm concerned regarding this issue. Again, this is confirmed by Ms Bleser in affidavits she has filed in the Green Grass proceedings. These matters compel the conclusion that Mr McCabe has at least some knowledge of Club Crow’s affairs.
[23] Further, Mr McCabe is the sole director of another entity known as Performance Ohakune Ltd. According to an affidavit filed by Ms Bleser in the Green Grass proceedings, it was also paying suppliers to Club Crow, and various payments were made to Performance Ohakune Ltd by Club Crow. Again, it is reasonable to infer that Mr McCabe must know what these payments related to, and why Club Crow was making them.
[24] A creditor can be a person with knowledge of the affairs of a company.11
Although Mr McCabe is not personally a creditor, he is the director of creditors of
11 See Official Assignee v Grant Thornton [2012] NZHC 2145 at [18]; Managh v Currie (2011) NZCLC 264,841 at [25].
Club Crow. I am satisfied that Mr McCabe is a person who has at least some knowledge of the affairs of Club Crow.
[25] Ms Bleser was an employee either of Club Crow, or of some other entity involved in what she described as the “McCabe family interests”. She states in her affidavit that she was Club Crow’s office manager when it was trading. She is either caught by s 261(2)(d), or by s 261(2)(e). As the office manager of the company, she must have knowledge of its affairs. It is clear from the affidavits she has filed in the Green Grass proceedings that she was aware of various payments Club Crow was making to Green Grass Ltd and to Performance Ohakune Ltd.
[26] It follows that in both cases, the Court has jurisdiction to make orders under s 266(2).
[27] Both Mr McCabe and Ms Bleser assert that their knowledge of the affairs of Club Crow is limited, and that they do not have within their possession custody and/or control any documents belonging to Club Crow.
[28] These assertions do not advance matters. It is not for Mr McCabe and Ms Bleser to decide if they can help the liquidators by giving them some insight into the affairs of Club Crow. Rather, it is for the liquidators to explore with them their knowledge of Club Crow’s affairs, through appropriate and proper examination.
[29] Mr Hucker submitted that the application is, in effect, “a fishing expedition”. He argued that the liquidators have already commenced proceedings against Green Grass Limited, and that they are simply seeking to advance their position in those proceedings.
[30] Mr McAnally confirmed that proceedings have been commenced. They seek to recover funds paid or transferred from Club Crow to Green Grass Ltd for no or no adequate consideration. They have reached the discovery stage.
[31] An application made by a liquidator will not necessarily be declined simply because either a firm decision has been made to issue proceedings against the
proposed examinee, or even where proceedings have already been issued.12 Rather, the Court recognises that liquidators will often need orders to equip them with the same information that was available to the company in liquidation prior to their appointment. Examination can be ordered to ensure that the liquidator is able to meet the opposing litigant on equal terms.
[32] On balance, I am satisfied that it is appropriate to make an order under s 266(2) directing Mr McCabe and Ms Bleser to attend before the Court and to be examined on oath or affirmation by a barrister or solicitor acting on behalf of the liquidators. I take into account the following:
(a) Mr Dalton deposes that the present state of affairs is compromising the liquidation. The liquidators have little information at present. There is a public interest in ensuring that the liquidation proceeds in a proper fashion. The liquidators must be entitled to seek knowledge of Club Crow’s affairs from those persons who might reasonably be expected to have that knowledge. I am satisfied that the proposed examinations are appropriate, so that the liquidators can properly discharge their functions and duties.
(b)There is nothing to suggest that properly conducted examinations will impose unnecessary and unreasonable burdens on either Mr McCabe, or Ms Bleser. It is important that the examinations should relate to the affairs of Club Crow, and that they should not trespass into the private affairs of either Mr McCabe or Ms Bleser. The extent of the examinations can readily be supervised by the Court, and it can intervene if they exceed proper limits. To this end, I intend to direct that the examination should take place before a Judge or Associate Judge.
(c) While discovery is available in the context of the Green Grass proceedings, any discovery is limited to the matters in issue in those
12 Re Smith, above n 9, at 245–246; see also Carrow Holdings Ltd (in liq) v Sadiq, above n 7.
proceedings. The liquidators are seeking more than that. They are seeking knowledge of the affairs of Club Crow overall.
(d)The Green Grass proceedings are already on foot, and there is nothing in the application to suggest that Mr McCabe might become more vulnerable to future claims if an order for examination against him is made. Nor is there anything to suggest that any claims could be made or are contemplated against Ms Bleser.
(e) As a former accounts manager of Club Crow, Ms Bleser should properly provide to the liquidators such information as she has, in relation to Club Crow’s affairs. There is nothing oppressive in requiring her to disclose such information as she gleaned in her position as the company’s accounts manager.
[33] I now turn to consider whether or not it is appropriate to order the production of documents in the possession or power of Mr McCabe and/or Ms Bleser.
[34] Mr Hucker submitted that both have deposed that they hold no documents or other records. He argued that unless it is alleged that they have lied on oath, their depositions are the end of the application insofar as it relates to the production of documents and records.
[35] In my view, there are grounds for suspicion in relation to whether or not Mr McCabe, and in particular Ms Bleser, have disclosed all documents in their possession or control.
(a) Mr McCabe has some knowledge of the affairs of Club Crow. It is noteworthy that he does not say that he obtained that information from oral discussions with either Ms McCabe or Ms Bleser. It is open to the Court to infer that he came to know about the affairs of Club Crow from perusing its records. Further, Mr Dalton has deposed that Mr McCabe has been able to source records and information relating
to Club Crow when it has suited him in the context of the proceedings the liquidators have commenced against Green Grass Ltd.
(b) Ms Bleser has sworn affidavits in the Green Grass proceedings dated
14 December 2011 and 8 March 2012, which had annexed to them a large number of documents that on the face of it, would appear to have belonged to Club Crow. The affidavits were sworn after Ms Bleser had left the employment of Club Crow and/or the McCabe family, and after she said that she had lost access to Club Crow’s records. It is also noteworthy that when she was first contacted by the liquidators, she did not say that she did not have any documents or records. Rather, she said that she had no authority to release them.
[36] In my view, it is also appropriate to also order that both Mr McCabe and Ms Bleser produce any books, records or documents relating to the business, accounts or affairs of Club Crow in their possession or under their control. There is no prejudice to them in this regard. If they continue to maintain that they do not have any records, then they can say so, and this assertion can be tested when they are examined.
[37] Accordingly, I make orders as follows:
(a) Mr McCabe and Ms Bleser are to attend before the Court when required by the Registrar to do so. They are to be examined on oath or affirmation before a Judge or Associate Judge by counsel for Mr Sargison and Mr Dalton on matters relating to the business, accounts and affairs of Club Crow Bar Ltd (in liquidation); and
(b)That not later than five working days before the date appointed for such examination, Mr McCabe and Ms Bleser are to produce to Mr Sargison and Mr Dalton all books, records or documents of Club Crow Bar Limited (in liquidation) as may be in their possession or under their control including, but not limited to, the following:
(i)All chequebooks, cheque butts and deposit books of the company and details of any bank reconciliations undertaken;
(ii) All debtor/creditor invoices, statements and receipts;
(iii)All GST, PAYE and income tax returns filed by the company and the working papers demonstrating those submissions;
(iv)All timesheets, payroll books, wages information and employee information;
(v)All till/point of sale reports, receipts and information including daily sales reports and reconciliations of cash takings;
(vi)All stock control, stock count and stock audit reports and information;
(vii)Copies of all lease arrangements, contracts, undertakings or deeds entered into by the company;
(viii)All documentation surrounding the liquor licence under which the company was operating;
(ix) Details of all fixed assets of the company and any acquisitions or disposals in the two years prior to its liquidation on 3 June
2011;
(x) An electronic backup of the company’s MYOB accounting software and any other accounting software used by the company;
(xi) An electronic backup of any payroll software used by the company; and
(xii) Copies of all spreadsheets, word processed documents and any other electronic files used in the operation of the company.
[38] The liquidators are entitled to their costs and reasonable disbursements in relation to this application. Costs are to be fixed on a 2B basis. In the event that there is any dispute about the payment of disbursements, then the same is to be referred to the Registrar. Mr McCabe and Ms Bleser are jointly and severally liable
for the payment of the costs and disbursements so fixed.
Wylie J
8