Shed4 Trading Company Limited v Sanson

[2020] NZHC 2363

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2020-404-652

[2020] NZHC 2363

UNDER

the Companies Act 1993

IN THE MATTER OF

the liquidation of SOUTHERN MAN INVESTMENTS LIMITED

(IN LIQUIDATION)

BETWEEN

SHED4 TRADING COMPANY LIMITED

Applicant

AND

CRAIG ALEXANDER SANSON

and
DAVID BRIDGMAN as liquidators of SOUTHERN MAN INVESTMENTS LIMITED (IN LIQUIDATION)

Respondents

Hearing:	3 September 2020
Appearances:	Brent J Norling and Alice Alipour for the Applicant Murray Tingey and Terri S Gough for the Respondents
Judgment:	3 September 2020

ORAL JUDGMENT OF ASSOCIATE JUDGE R M BELL

Solicitors:

Norling Law (B J Norling/A A Alipour), Rosedale, Auckland, for the Applicant Martelli McKegg (J E M Lethbrige/M G P Martin), Auckland, for the Respondents

Counsel:
Murray Tingey, Auckland, for the Respondents

SHED4 TRADING COMPANY LIMITED v SANSON [2020] NZHC 2363 [3 September 2020]

[1]    There is a single point for decision in this case – whether Shed4 Trading Company Limited should provide unredacted copies of two deeds of assignment on which it relies for its claim in the liquidation of Southern Man Investments Ltd (in liq). Shed4 Trading has claimed in Southern Man’s liquidation as assignee of a debt that was originally owed to Tuatara Trading NZ Ltd. Tuatara assigned the debt to its director, Mr Sheddan, who in turn assigned the debt to Shed4 Trading, of which he is the director and shareholder. Shed4 Trading has provided copies of deeds of assignment but parts of the deeds have been blacked out. Southern Man’s liquidators want to see the entire documents. When Shed4 Trading refused to provide unredacted copies, the liquidators rejected its claim in the liquidation.

[2]    Shed4 Trading has applied under s 284 of the Companies Act 1993 to reverse the liquidators’ rejection of its claim and has also applied for review of the liquidators’ remuneration. In Shed4 Trading’s proceeding, the liquidators have made an interlocutory application seeking orders for production of unredacted copies of the two deeds of assignment. Their original application was made under ss 266 and 304 of the Companies Act 1993, but Associate Judge Andrew directed that their application could also be considered as a matter of procedural discovery.1 Shed4 Trading needs leave to apply under s 284 of the Companies Act. So far, leave has not been granted. I am satisfied that leave should be granted for its application to reverse the liquidators’ rejection of its claim. It is granted accordingly.

[3]    I do not grant leave at this stage for its application to review the liquidators’ remuneration. That does not mean that I refuse leave. Instead the leave question is deferred for the time being. There may be timing issues: whether the review should be during the liquidation or at its conclusion.

1      Minute of 19 June 2020, paragraph [10](a).

Facts

[4]    Southern Man operated a supermarket in Ellerslie, Auckland. It stopped trading in November 2013 when the business was sold. On an application by the Commissioner of Inland Revenue a liquidation order was made on 7 May 2014. Messrs Sanson and Bridgman were appointed liquidators. Tuatara was a creditor of Southern Man. It was an intermediary through which Southern Man sourced goods from Fonterra. Mr Anthony Alan Sheddan is Tuatara’s director. In March 2017, Tuatara lodged a claim for $224,971.26 in the liquidation of Southern Man. That was made up of a principal debt of $124,828.95 and a further $100,142.31 for interest and collection fees.

[5]    In May 2017, Southern Man’s liquidators served a voidable transaction notice under s 294 of the Companies Act 1993 on Tuatara for $480,509.54. Southern Man’s liquidators alleged that the proceeds of sale of the business had been paid to Tuatara and Tuatara received more than it would have received in the liquidation. Tuatara served a notice of objection. Norling Law acted for Tuatara in giving the objection.

[6]    On 9 August 2017, Mr Sheddan, as Tuatara’s shareholder, resolved that the company be put into liquidation. Mr Damien Grant and Mr Steven Khov of Waterstone Insolvency were  appointed  liquidators.  Mr  Khov  has  since  retired. Mr Grant remains Tuatara’s sole liquidator. The evidence shows correspondence between the two sets of liquidators as to how Southern Man’s voidable transaction claim was to be dealt with. The Southern Man liquidators filed a claim for the voidable transaction in Tuatara’s liquidation. The correspondence shows discussion whether an application under s 295 of the Companies Act 1993 was required.

[7]    In April 2018, Southern Man’s liquidators asked the Tuatara liquidators to substantiate Tuatara’s claim in Southern Man’s liquidation. In further correspondence, Tuatara’s liquidators accepted that the claim was for $124,828.95.2 The evidence shows that up to this stage Southern Man’s liquidators had dealt with Tuatara’s liquidators on the basis that Tuatara was a creditor of Southern Man. There was no

2      Waterstone Insolvency emails of 26 June and 2 July 2018.

suggestion that Tuatara had assigned its claim in Southern Man’s liquidation to anyone else.

[8]    That changed in February 2019. Shed4 Trading claimed in Southern Man’s liquidation for $224,971.26, the same amount that Tuatara had claimed for. Norling Law lodged the claim for Shed4 Trading. Copies of two notices of assignment were given with the letter advising of the claim, but the deeds of assignment were not provided at that stage.

[9]    The two deeds of assignment were sent later in response to requests from the lawyers for the Southern Man liquidators. Both deeds are dated 9 August 2017, the day that Tuatara went into liquidation. In the first deed, the parties are Tuatara and Mr Sheddan. The deed assigned is that owing by Southern Man and guaranteed by its director, Mr Simon McConnan. The deed has terms that would normally be expected in a deed of assignment. There are appropriate words of conveyance showing that the debt is assigned to Mr Sheddan absolutely. Parts of the deed have been blacked out. The amount of the consideration has been redacted, and clause 2 has been entirely blacked out.

[10]   The second deed is also dated 9 August 2017. The parties are Mr Sheddan and Shed4  Trading.  This  deed  is  similar  to  the  assignment  between  Tuatara  and Mr Sheddan. Again, the amount of the consideration has been blacked out and clause 2, which is shorter than in the other deed, has also been entirely blacked out.

[11]   As to the notices of assignment, the ones provided when the claim was originally made do not have an addressee. Later, in April this year another notice of assignment was given, this time addressed to Southern Man. There is no evidence that Southern Man was given any notice of any assignment of the Tuatara debt before February 2019.

[12]   Through their lawyers, the Southern Man liquidators made repeated requests for unredacted copies of both deeds of assignment. They offered an undertaking to keep any unredacted document confidential and to use the documents only for the liquidation. Norling Law, Shed4 Trading’s lawyers, declined to offer unredacted

copies of the deeds and required the liquidators to make a decision on Shed4’s claim. On 8 April 2020, the liquidators rejected the claim, saying that they would reconsider the matter if unredacted copies of the deeds were provided. On 11 May 2020, Shed4 Trading began this proceeding to challenge the rejection of the debt.

[13]   I was advised that in the liquidation of Tuatara, no assets have been realised. The claim in Southern Man’s liquidation may be Tuatara’s only asset. Reports by Tuatara’s liquidator show that unsecured creditor claims come to some $135,000. One report discloses that $9,200 was paid to cover the liquidator’s fees and disbursements.

[14]   Mr Sheddan’s affidavit in support of the originating application includes a copy of a letter from Mr Grant, stating that he has no problem with the validity of the assignment by Tuatara to Mr Sheddan. That was followed up with a late affidavit from Mr Grant. I accepted the affidavit although there are problems with it. Parts of the affidavit contain argument and opinion, although Mr Grant has not qualified himself as an expert. He touches on matters of law on which he is not qualified to speak. He does say that he has no problems with the assignment of the Southern Man debt to Mr Sheddan on 9 August 2017. While he says that he became aware of the assignment, he does not say when. I surmise that he may not have been aware of it in the early stages of the liquidation because his evidence shows that his office dealt with Southern Man’s liquidators on the basis that Tuatara remained the creditor in Southern Man’s liquidation. He confirms that in July 2019 the two sets of liquidators agreed that the amount of Tuatara’s claim in the liquidation would be $124,828.95.

[15]   It is curious though that Mr  Grant  was  not  aware  of  the  assignment  to Mr Sheddan, given that the assignment by Tuatara to Mr Sheddan took place on the day the company went into liquidation. As Tuatara’s director, Mr Sheddan could only have assigned the debt before the resolution putting the company into liquidation. As the Southern Man claim is the only asset in the liquidation, it is odd that Mr Grant did not enquire about it and has shown no curiosity about the assignment of the only asset of the company on the very day the company went into liquidation.

[16]   Mr Grant says that he reviewed the deed of assignment and came to the view that the deed was valid and that Tuatara had no claim in the liquidation. He claims

that as liquidator of Tuatara he would be more interested in the validity of the debt in the liquidation than Southern Man’s liquidators would be, and he is satisfied with it. For my part, I would have found his affidavit more helpful if he had said what was in the covered-up parts of the deed of assignment.

The grounds for the application

[17]   In seeking disclosure of the covered-up parts of the deeds of assignment, the Southern Man liquidators rely on s 266 of the Companies Act 1993:

266(2) The court may, on the application of the liquidator, order a person to whom s 261 of this Act applies to—

…

(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.

Section 266(2) refers to s 261. Under s 261(1), a liquidator can require “any person” to provide documents. That includes Shed4 Trading.

[18]Section 304 deals with claims by unsecured creditors:

304(1) A claim by an unsecured creditor against a company in liquidation must be made in the prescribed form and must—

(a)contain full particulars of the claim; and

(b)identify any documents that evidence or substantiate the claim.

(2)The liquidator may require the production of a document referred to in subsection (1)(b) of this section…

[19]   Finally, the liquidators rely on the Court’s powers to order discovery and production of documents. There is a broad distinction between procedural discovery and substantive disclosure. Under procedural discovery, a party to a proceeding may be required to disclose documents relevant to issues in the proceeding. That disclosure is only for the purpose of the proceeding. The extent of disclosure may be limited by considerations of reasonable search, relevance, proportionality and privilege. Disclosure of documents for the proceeding may be required, even if a party would otherwise want to keep those documents confidential and would not share them with

the public at large. Procedural discovery is not ordered in the absence of a proceeding (except perhaps in cases such as pre-commencement discovery under r 8.20 of the High Court Rules 2016).

[20]   In contrast, under substantive discovery, a person may be required to disclose documents and information, even if they are not suing for anything else and no proceeding is contemplated. The person seeking disclosure is entitled to have the documents and information as a matter of right, regardless of any claims they might want to make against anyone else. A common example is a trustee’s duty to supply information to beneficiaries under the principles laid down by the Supreme Court in Erceg v Erceg.3 There are substantive disclosure requirements in company law. Directors, for example, have a right of access to the records of the company and shareholders must be provided with certain information. Sections 261 and 266 of the Companies Act 1993 can be seen as rules of substantive disclosure. When there are rules of substantive disclosure, the courts can enforce them – as, for example, Erceg illustrates. So, in this case, the Southern Man liquidators are seeking both procedural discovery and substantive disclosure.

The procedural discovery application

[21]   Discovery is sought for the application under s 284, seeking a reversal of the liquidator’s rejection of Shed4’s claim to be assignee. Liquidators can only admit claims if they are legally enforceable.4 When a liquidator is considering a creditor’s claim, his role is quasi-judicial. He assesses whether on the information provided the creditor has shown an enforceable claim. The liquidator is required to act objectively, bearing in mind both the interests of the claimant and also the general body of creditors. That changes once the liquidator rejects the claim. This has been explained in a decision of the High Court of Australia, Tanning Research Laboratories Inc v O’Brien.5 Brennan and Dawson JJ said:

In such a proceeding, a liquidator who defends his decision to reject a proof of debt is no longer acting in a quasi-judicial capacity; he is cast in the role of an adversary, defending the assets available for distribution against a liability

3      Erceg v Erceg [2017] NZSC 28, [2017] 1 NZLR 320.

4      Government of India v Taylor [1955] AC 491 (HL) at 509.

5      Tanning Research Laboratories Inc v O’Brien (1990) 169 CLR 332 at 341.

which, according to the view he formed while acting quasi-judicially, is not legally enforceable. The liquidator may defend those assets against the creditor to a claim on any ground on which the company might have defended the claim had it been sued by the creditor.

[22]   It is also important to bear in mind that because a claim has to be legally enforceable, it has to be proved by evidence admissible in a court of law. Claims cannot be made on the basis of “You can trust us”. A liquidator needs to have enough information to show the claim is legally enforceable. A creditor cannot say, “It is for me to know and you to find out”. A failure to provide the information to show an enforceable claim may lead to rejection of the claim.

[23]   In a Queensland case, Re Gordon, Grant and Grant Pty Ltd,6 McPherson J, an authority on liquidation law, described the procedure by which a liquidator’s rejection of a proof of debt is reviewed:

What is substituted for liquidation in the ordinary form is a procedure by which a claimant lodges a verified proof of debt with the liquidator, who admits or rejects it, wholly or in part, and from whom an appeal lies to a Judge, who determines that appeal de novo primarily on affidavit material. … There can be no doubt that ordinarily such a procedure is, and is designed to be, much more expeditious and less expensive than ordinary proceedings by way of action. If this means that it occasionally has the consequence that the attainment of perfect justice is sacrificed to expedience, it may be justified by the circumstances that on appeal it is possible that under modern rules of procedure for the Judge in appropriate cases to make orders for discovery. …

[24]   In New Zealand, proceedings to reverse a liquidator’s rejection of a creditor’s claim are brought under Part 18 of the High Court Rules 20167 (under which there are standard pleadings and discovery) or with leave by originating application under  Part 19 (under which discovery is available only by leave and not as of right). But with those qualifications, McPherson J’s description broadly applies in New Zealand.

[25]   Because Shed4 has applied by originating application rather than under Part 18, discovery is available only in the court’s discretion rather than as a matter of standard direction. In a defended liquidation application, Commissioner of Inland Revenue  v  Elementary  Solutions  Ltd,8   Associate  Judge  Osborne  reviewed  the

6      Re Gordon, Grant and Grant Pty Ltd [1983] 2 Qd R 314 (Supreme Court of Queensland) at 316- 317.

7      High Court Rules 2016, r 18.1(b)(iii).

8      Commissioner of Inland Revenue v Elementary Solutions Ltd [2017] NZHC 2411 at [37].

principles for discovery in cases that fall outside the mainstream under Part 8 of the High Court Rules 2016, that is, in cases where the court orders discovery as a matter of discretion. Associate Judge Osborne held:

(a)The Court has a discretion to order discovery.

(b)The document sought must be capable of supporting the applicant’s case or adversely affecting the opponent’s case.

(c)Any orders for discovery should be subject to the proportionality and practicality requirements identified in r 82 of the Rules and should accord with the objective of “just, speedy, and inexpensive determination” under r 1.2 of the ‘Rules.

(d)The approach to discovery in originating applications should be conservative.

(e)Discovery will be appropriate in marginal cases where the party makes out an outline case but the Court encounters genuine difficulty in determining, without documentary evidence which is likely to assist, whether the threshold test is satisfied.

In Gibson v Official Assignee,9 the court noted that while discovery is far from routine, each case necessarily depends on its own facts.

[26]   Now for this case. The deeds of assignment are key documents for Shed4’s claim in the liquidation. It needs to prove that it is the creditor in place of Tuatara. It can only do that by pleading and proving that the debt has been assigned. For that it relies on the written deeds as absolute assignments under s 50 of the Property Law Act 2007. It is possible to assign debts in equity without writing, but Shed4 does not rely on that in this case. As it relies on written documents to show absolute assignments, it must put the deeds in evidence for the claim to be accepted. If Shed4 were to claim in the liquidation without putting the deeds in evidence, its claim would fail through lack of evidence.

[27]   So the question is whether Shed4 can cover up parts of the deed and require the liquidators to accept the assignments on trust. On discovery it is not uncommon for documents to be covered up. The standard practice is for the affidavit of documents to explain the covering-up – for example, the parts covered up are irrelevant or they are confidential. That is done as a matter of convenience. But here, when deeds of

9      Gibson v Official Assignee [2018] NZHC 1077 at [8].

assignment are relied on to support the claim to be a creditor, the documents should be disclosed in their entirety. The liquidator is entitled to see the entire document to make sure that it has the effect which the creditor claims. I asked Mr Norling what would happen in a defended hearing if he attempted to put in evidence the deeds in their redacted form. I would expect the Judge to give that proposition short shrift. Even if the liquidators did not want to take the point, the Judge would want to know for sure whether the documents had the effect that Shed4 claims.

[28]   At one stage a confidentiality claim was made. There was however no evidential foundation for the confidentiality of the information in the redacted parts.  I understand that at least some of the blacked-out parts go to the consideration paid for the assignments. While that might not be information which a party would wish to share with the world at large, for a claim in a liquidation, that information should be given to the liquidator. The ordinary rule in discovery is that information which would otherwise be confidential must still be disclosed. In appropriate cases the courts may set safeguards for the appropriate use of the information. I record that the liquidators have offered to keep the information confidential and not to use it for any purpose except the liquidation. That is consistent with their obligations under the High Court Rules 2016, r 8.30(4). Accordingly, I can see no basis on which Shed4 can justify not disclosing the blacked out parts of the deeds.

[29]   Mr Norling submitted that the liquidators did not need to see the blacked-out parts because second-hand information had been given about the effect of the deeds. The liquidators and the court were told that they would have to trust Mr Grant, that there was nothing adverse in the blacked out parts and they should be accepted without further question. Mr Sheddan’s evidence was to similar effect.

[30]   If all the parties were solvent, it might be understandable that there would be no further enquiry, and a creditor might accept notice of the assignments without delving further. But there are unusual features about this case. While the assignments were signed in August 2017, no notice of the assignments was given to the creditor until February 2019. The assignments took place on the very day that Tuatara went into liquidation. Oddly, if we are to believe Mr Grant’s affidavit, he was not told about

the assignment at the time and he carried on treating Tuatara as the creditor of Southern Man. He does not explain when he came to know of the assignment.

[31]   Mr Tingey suggested that there are other issues that bear on the matter. I record them as matters which might justify further enquiry. He pointed out that if Shed4 is the assignee of the Tuatara debt, it can claim in the liquidation of Southern Man and receive its pro rata share of the assets available for distribution to creditors. That may work differently if Tuatara remained a creditor. That is because of the voidable transaction claim by Southern Man against Tuatara. As I understand Mr Tingey’s submissions, Southern Man’s liquidators hold funds from which there could be a distribution. Funds that Tuatara would receive from that distribution may have to be paid back to Southern Man under the voidable transaction claim. That would provide further funds for distribution to all of Southern Man’s creditors. If the assignments are upheld, there would be no funds for the other creditors of Southern Man and Shed4, the shelf company Mr Sheddan established would take instead. Mr Norling rejected that as unnecessarily complicated, and as not being a cost-effective exercise. I note the point. I am not convinced that the matter is beyond resolution without lengthy and expensive litigation. At any rate, it is not a ground for ruling that Southern Man’s liquidators should not have documents at this stage to establish what the effects and implications of the deeds, once the covered-up parts are disclosed.

Disclosure under ss 304 and 266 of the Companies Act 1993

[32]   I dealt with the procedural discovery aspects because that is the narrowest basis on which disclosure can be ordered. Sections 304 and 266 of the Companies Act provide for wider powers of disclosure of documents. If disclosure can be ordered under the narrower ground, disclosure can also be required under the wider grounds as well.

[33]   As to s 304, a creditor is required to disclose documents. He is required to substantiate his claim in the liquidation and must identify documents that substantiate that claim. For Shed4, Mr Norling took the point that Shed4’s claim in the liquidation did not refer specifically to the deeds of assignment, but only to the notices of assignment. He said that was enough to substantiate the claim. Because the deeds of

assignment had not been identified in the claim, the liquidator did not have power to require the deeds to be produced under s 304(2).

[34]   The notices of assignment say: “Tuatara Trading NZ Ltd assigned and transferred absolutely all its rights, title and interests in all debts …” Because there was an absolute assignment, that is an implied reference to a written assignment under s 50 of the Property Law Act 2007. Even so, if the claim documents did not specifically refer to the deeds, that does not relieve Shed4 of the obligation to disclose. If it persists in its claim without producing the deeds it relies on, its claim may be rejected for not having been substantiated. Besides, s 304(1) imposes a duty of substantive disclosure. The word “must” is used. The court will, if necessary, enforce that substantive duty of disclosure. In short, if I had not made the order for procedural discovery, I would still require Shed4 to disclose the documents which are said to substantiate its claim.

[35]   Similarly, the documents come within s 266. That section is more commonly used at the investigative stages of a liquidation when the liquidators are trying to establish what assets the company may have and what avenues of recovery may be available. But it is not confined to that. I see no reason why it cannot be used in this case.

Result

[36]   Accordingly, I give orders directing Shed4 to produce the deeds of assignment of debt to the liquidators of Southern Man, disclosing the parts that have so far been redacted. I note that those documents are in the control of Shed4 as it has used them in its proof of claim. I direct it to do so by 18 September 2020.

[37]   I direct that this case be called on 25 September 2020 at 11:45am in the companies miscellaneous list. The purpose of that call will be to check that the deeds have been disclosed and, if not, to give further directions; to see whether the Southern Man liquidators have accepted Shed4’s claim; and to give further directions for this proceeding.

[38]   I will deal with costs on 25 September. I ask Mr Tingey to file his submissions for costs by 22 September 2020, and Mr Norling to file his by 24 September.

[39]Leave is reserved for further directions.

………………………………

Associate Judge R M Bell