Smart v Photonic Innovations Limited (in liquidation)
[2021] NZHC 972
•4 May 2021
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE
CIV-2020-409-628
[2021] NZHC 972
UNDER the Companies Act 1993 IN THE MATTER
of the liquidation of PHOTONIC INNOVATIONS LIMITED
BETWEEN
LYNDA JANE SMART and GEOFFREY
SEBASTIAN ERIC BROWN, as liquidators of PHOTONIC INNOVATIONS LIMITED (IN LIQUIDATION)
Applicants
AND
PHOTONIC INNOVATIONS LIMITED (IN LIQUIDATION)
Respondent
Hearing: 22 April 2021 Appearances:
S J Jamieson and J A Higby for the Applicants
S J Jones for Named Parties (ORCA Haber LP and P Preena)
Judgment:
4 May 2021
JUDGMENT OF ASSOCIATE JUDGE LESTER
This judgment was delivered by me ON 4 May 2021 at 3.00 pm pursuant to Rule 11.5 of the High Court Rules
Registrar/Deputy Registrar 4 May 2021
SMART v PHOTONIC INNOVATIONS LIMITED (IN LIQUIDATION) [2021] NZHC 972 [4 May 2021]
[1] The applicant liquidators apply to bring to an end their appointment as liquidators of Photonic Innovations Limited (the company). Should that application be granted, an order appointing a director of the company will be required, all directors having resigned prior to liquidation. The liquidators also seek an order validating the acts they took during their liquidation.
Context
[2] The liquidators consider they were not properly appointed pursuant to s 241(2)(a) of the Companies Act 1993 (the Act).
[3] The liquidators were approached in mid-May 2020 as to their preparedness to act as liquidators and the costs such would involve. At the end of May 2020, the liquidators confirmed they were willing to act and in early June 2020 they were provided with details of the shareholders of the company.
[4] The liquidators prepared a draft special resolution to appoint themselves as liquidators which required 75 per cent of those shareholders entitled to vote, to vote in favour in order for the resolution to be passed. The shareholders of the company purported to pass the special resolution on 9 June 2020. As far as the liquidators were concerned, they had been properly appointed and they entered into their office.
[5] The liquidators’ initial instructions disclosed that patents held by the company were likely its only real assets, but enquiries showed that patent renewal fees due some months before had not been paid. A deadline for their payment was 21 June 2020, with such not being extendable.
[6] The liquidators approached the company’s shareholders and creditors as to their preparedness to fund the preservation of the patents.
[7] Given the imminent deadline for the preservation of the patents, funding arrangements were entered into, essentially just in time to meet the 21 June 2020 deadline. I refer to the status of these arrangements below.
[8] However, a few days earlier, and after the liquidators issued their first report on 16 June 2020, it was brought to the liquidators’ attention that there was a secured creditor of the company called ORCA Haber LP (ORCA). At the same time as seeking to raise finance to meet the patent renewal costs, the liquidators sought consent from the secured creditor to deal with the assets subject to its security.
[9] The liquidators understood they had consent to deal with the assets granted to them by a company called NZVIF Investments Limited, which a check of the Personal Properties Securities Register showed to be a joint security holder with ORCA.
[10]Accordingly, the patent rights were preserved.
[11] The liquidators’ attempts to contact ORCA bore fruit in late June 2020 when Mr Preena, director of ORCA, got in touch but ORCA’s position in respect of its security remained uncertain.
[12] It was only on 25 August 2020, some months into the liquidators’ discussions with the secured creditors, that ORCA’s solicitors alleged the liquidators had been invalidly appointed by virtue of rights provided to ORCA pursuant to the Convertible Note Agreement, the General Security Deed, the Shareholders’ Agreement and the company’s constitution. In short, ORCA’s Convertible Note Agreement with the company entitled ORCA to vote in any resolution of the company with voting rights equivalent to holding 25.34 per cent of the shares in the company. As ORCA had not been informed of the special resolution and as it controlled over 25 per cent of the shares, the purported special resolution appointing the liquidators was not valid.1
[13] By the time the liquidators learnt of this in late August 2020, they had already been acting as liquidators since 9 June 2020. They had taken steps to renew the company’s patents, had terminated the remaining employees of the company (albeit
1 The date at which the liquidators should have been aware of this issue is disputed by Mr Preena but need not be resolved for the purposes of this judgment. As ORCA’s entitlement to shares was not recorded on the share register, it was not entitled to vote on the resolution. Minister of Education v Nayacakalou [2020] NZHC 1874 at [23]. However, the resolution appointing the liquidators was not passed by 75 per cent of Photonic’s shareholders by number and this is noted by Mr Preena’s counsel as being an independent ground of invalidity. The liquidators’ counsel did not dispute this.
neither had been paid for several months), the company’s lease had been disclaimed and the company’s few physical assets had been sold realising less than $500 inclusive of GST.
[14] No agreement could be reached with ORCA as to a replacement liquidator or to validate the existing liquidation. The liquidators found they were in a no man’s land where they had embarked on the process of liquidation where they considered themselves obliged to preserve the company’s assets but at the same time were subject to the uncertainty arising from the invalidity of the special resolution.
[15] Accordingly, the liquidators commenced this application to have matters resolved.
[16] Directions as to service were made by Associate Judge Paulsen. Of the parties served, only Mr Preena and ORCA have taken active steps. Other parties have either confirmed that they will abide the decision of the Court or not taken any steps.
[17]The situation for the liquidators cannot remain as it is.
Submissions in support of the application
[18]The liquidators rely on s 250 of the Act which relevantly provides:
250 Court may terminate liquidation
(1)The court may, at any time after the appointment of a liquidator of a company, if it is satisfied that it is just and equitable to do so, make an order terminating the liquidation of the company.
(2)An application under this section may be made by -
(a)the liquidator …
(3)The court may require the liquidator of the company to furnish a report to the court with respect to any facts or matters relevant to the application.
(4)The court may, on making an order under subsection (1), or at any time thereafter, make such other order as it thinks fit in connection with the termination of the liquidation.
(5)Where the court makes an order under this section, the person who applied for the order must, within 10 working days after the order was made, deliver a copy of the order to the Registrar for registration.
(6)Where the court makes an order under subsection (1), the company ceases to be in liquidation and the liquidator ceases to hold office with effect on and from the making of the order or such other date as may be specified in the order.
(7)Every person who fails to comply with subsection (5) commits an offence and is liable on conviction to the penalty set out in section 373(2).
[19] The liquidators’ position is that despite the invalidity of the appointment, the company is nonetheless in liquidation and an order of the Court is therefore necessary to bring the liquidation to an end. The liquidators rely on Zhang v Kamal.2
[20] Zhang was a similar case to the present one, where the company had been put into liquidation, but the liquidators had been appointed through a faulty shareholders’ resolution.
[21] In Zhang, Heath J said that while the liquidator had been invalidly appointed, this “does not necessarily mean that the liquidation should be regarded as invalid from its inception”.3
[22] The application in Zhang was brought under s 284 of the Act, seeking a declaration as to the validity of the appointed liquidator. Heath J, pursuant to the discretion conferred by s 250 of the Act, considered the termination of the liquidation was more appropriate and ordered accordingly.
[23] Heath J’s approach was endorsed in Minister of Education v Nayacakalou, where Associate Judge Smith was asked to decide whether a declaration should be made that a company had been in liquidation since the date of the purported appointment of the liquidator, notwithstanding the invalidity of the liquidator’s appointment.4 Associate Judge Smith held the company had been put into liquidation despite the invalid appointment.
2 Zhang v Kamal [2017] NZHC 1943.
3 Zhang, above n 2, at [50].
4 Minister of Education v Nayacakalou, above n 1, at [27].
[24] In the current proceeding, the liquidators submit that notwithstanding the invalidity of their appointment, the company should be regarded as being in liquidation and the Court can therefore exercise its discretion under s 250 of the Act to terminate the liquidation.
[25] Heath J in Zhang considered other possibilities for the exercise of the discretion under s 250 where there might be prejudice to shareholders, including termination of the liquidation on conditions, or having the liquidation continue with the Official Assignee appointed liquidator. However, in that case, given the lack of prejudice to creditors, an order simply terminating the liquidation was made.
[26] The liquidators submit that having preserved the only assets of significance of the company and taken other steps that preserve the company’s position, it is appropriate that the company be removed from liquidation. If that step is taken, as I have said, the liquidators seek an order validating their actions during the liquidation.
Submissions on behalf of ORCA and Mr Preena
[27] ORCA and Mr Preena’s position is summed up at para 2 of counsel’s submissions, as follows:
[ORCA] and Mr Preena:
(a)do not oppose the termination of the liquidation;
(b)support the return of [the company] to the control of Mr Preena as director;
(c)do not oppose orders confirming that reg 36 applies to the specific actions identified by the Applicants, being the renewal of patents, termination of employment agreements for Amit Kumar and Shane Dowd and disclaimer of the lease for the company’s premises; and
(d)otherwise oppose further “validation” orders on the basis that they are unnecessary, inappropriate or not available in all of the circumstances.
[28] Accordingly, the real issue between the parties is the nature of “validation” sought by the liquidators.
[29] ORCA’s concern is that the circumstances in which the liquidators were appointed represent breaches of the Shareholders’ Agreement. ORCA’s counsel is
concerned to ensure that the relief granted minimises any actual or potential prejudice to ORCA’s rights arising from those breaches that might flow (inadvertently) from the orders sought by the liquidators.
[30] As to validation, ORCA does not oppose validation insofar as it relates to actions described in the first affidavit of Lynda Smart, the first-named applicant liquidator.
[31] The liquidators rely on reg 36 of the Companies Act 1993 Liquidation Regulations 1994 (the Regulations) which provides:
36 Defect in appointment not to invalidate acts of liquidator
No defect or irregularity in the appointment of a liquidator shall invalidate any act done by him or her in good faith.
[32] The actions ORCA accepts were taken in good faith for the purposes of reg 36 are the renewal of patents, termination of employment agreements and disclaimer of the lease. As to the realisation of assets, ORCA’s counsel said his client did not have enough information of the sale to come to a final view. ORCA does not oppose an order under s 250(4) of the Act confirming that reg 36 applied to these actions of the liquidators other than the asset sales.
[33] The concern of Mr Jones, counsel for ORCA, is that if the liquidators are seeking what amounts to a release from any potential liability in connection with the liquidation, then such goes too far. Mr Jones submits such would not be available had the liquidation been properly commenced.
[34] I accept ORCA’s submission that the Court is not able at this time to make an order in effect releasing the liquidators generally from any potential liability that they may have.
[35] The Court validating, or at least confirming, that reg 36 applies to specific action, is endorsing the liquidators’ authority to act. In doing so, the Court is not approving or sanctioning the quality and reasonableness of the actions undertaken but simply that they were taken in good faith and that the protection of reg 36 applies.
[36] The actions of the liquidators have been outlined at a general level. At face value, such appear to have been a reasonably standard approach to a liquidation. However, without the fullest of details the Court is not in a position to, in effect, release the liquidators from all liability. The actual order sought is an order validating the actions taken by the invalidly appointed liquidators. Such an order is appropriate, but is limited to confirming that the liquidators are not by virtue only of the invalidity of appointment liable in respect of those steps they took.
[37] Mr Higby, counsel for the liquidators, raised the issue of whether reg 36 would apply to omissions. He raised this point as, once the liquidators were aware of the invalidity of their appointment, they took no further steps.
[38] In my view, reg 36 would apply to the liquidators’ decision not to take further action in the liquidation given the challenge to the appointment. However, without knowing the circumstances in which the liquidators may have decided not to act and the impact of the same, it is not possible to comment further on this aspect of the liquidators’ concerns. As a hypothetical example, a decision by the liquidators not to act in circumstances where they should have acted may have caused loss to a third party who is not before the Court. Whether the liquidators’ actions or omissions in those circumstances were in good faith will turn on the particular circumstances that applied.
Conclusion and orders
[39] As indicated at the outset of this judgment, there was significant agreement between the parties, the only issue being whether the Court was in a position, in effect, to confer immunity on the liquidators in respect of their actions while they understood they were appointed as liquidators.
[40]I make the following orders:
(1)The liquidation of Photonic Innovations Ltd is terminated.
(2)Mr Poojitha Hafees Preena is appointed director of Photonic Innovations Ltd pursuant to s 154 of the Companies Act 1993.
(3)Without limiting the effect of reg 36 of the Companies Act 1993 Liquidation Regulations 1994, the Court directs that the following actions taken by the applicants and described at paragraphs [52]-[57] of the affidavit of Lynda Jane Smart sworn 18 December 2020 are valid, despite the invalidity of the resolution appointing the applicants as liquidators of Photonic Innovations Ltd:
(a)renewal of certain patents held by Photonic Innovations Ltd on 21 and 30 June 2020;
(b)termination of the employment agreements of Armit Kumar and Shane Dowd on 10 June 2020; and
(c)disclaimer of the lease agreement in respect of Photonic Innovations Ltd’s premises on 15 June 2020.
(4)The applicants are entitled to be paid:
(a)their reasonable costs incurred in maintaining Photonic Innovations Ltd’s email addresses and archives; and
(b)their reasonable remuneration for liquidation work in relation to Photonic Innovations Ltd for the period from 6 to 30 June 2020;
from the funds provided to the applicants by certain shareholders of Photonic Innovations Ltd for the purpose of meeting liquidation costs and remuneration.
(5)Leave is reserved to apply for any further directions arising from the shareholder advance obtained by the liquidators to fund the preservation of the patent rights.
(6)Leave is reserved generally to apply further.
(7)There is no order as to costs.
Associate Judge Lester
Solicitors:
Tavendale and Partners, Christchurch Russell McVeagh, Auckland
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