Smartt Holdings Limited v DK Yeoman Limited (in liquidation)
[2017] NZHC 1545
•6 July 2017
IN THE HIGH COURT OF NEW ZEALAND ROTORUA REGISTRY
CIV-2017-463-25 [2017] NZHC 1545
BETWEEN SMARTT HOLDINGS LIMITED
Applicant
AND
DK YEOMAN LIMITED (IN LIQUIDATION)
First Respondent
MID ISLAND TRANSPORT LIMITED (IN LIQUIDATION)
Second Respondent
N & P BEATTIE TRANSPORT COMPANY LIMITED (IN LIQUIDATION)
Third Respondent
WAIPAPA LOGGING COMPANY LIMITED (IN LIQUIDATION) Fourt Respondent
Hearing: On the papers Counsel:
L Foley for Applicant
Judgment:
6 July 2017
JUDGMENT OF WHATA J
This judgment was delivered by me on 6 July 2017 at 3.00 pm, pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date: ………………………….
Solicitors: Le Pine & Co, Taupo
SMARTT HOLDINGS LIMITED v DK YEOMAN LIMITED (IN LIQUIDATION) [2017] NZHC 1545 [6 July
2017]
[1] This is an application for:
(a) leave to commence proceedings by way of originating application;
and
(b)an order vesting the shares held by the four respondent companies in the applicant company, pursuant to ss 269 and 324 of the Companies Act 1993.
Background
[2] The applicant, Smartt Holdings Ltd (Smartt), is a company incorporated on
29 September 1999. At its inception the shareholders were all companies or individuals involved in forestry operations in Murupara. Over time, many of the company shareholders ceased to operate in that area and the companies became deregistered or liquidated.
[3] Following the death of the former director, Michael McDonald, the current director, Owen Glynn, assumed daily control of the company. The company has cash assets of approximately $150,000 and wishes to make a dividend to its remaining shareholders.
[4] In order to make the dividend, the company must deal with shares owned by the companies which have now been liquidated, namely the four respondents.
DK Yeoman Ltd
[5] DK Yeoman Ltd was liquidated on 11 April 2005 and removed from the
register on 31 May 2008. The liquidator’s report by Rodewald Hart Brown, dated 15
April 2008, states:
All known assets have been disclaimed, or realised, or distributed without realisation and all proceeds of realisation have been distributed.
[6] The liquidator has since corresponded with the solicitor for the applicant. The liquidator records that all the records of the company were destroyed in 2010 and that they have no objection to the shares being vested in Smartt.
Mid Island Transport Ltd
[7] Mid Island Transport Ltd was liquidated and subsequently removed from the Companies Office Register in 2009. The report of the liquidator, Anthony Harris, dated 10 November 2009 records:
All known assets have been discharged, or realised or distributed without realisation.
[8] Mr Harris has corresponded with the solicitors for the applicant, accepting service of the documents in these proceedings and noting the following:
The proper process is:
1 Restoration of the company to the register (still in liquidation)
2 Vacation of the liquidators a final report
3 Receipt of the dividend(s) and any capital sum for the shares
4Distribution of the proceeds to the creditors of the company in liquidation
Our costs also need to be met within the process.
N. & P. Beattie Transport Company Ltd
[9] N. & P. Beattie Transport Company Ltd was liquidated in 2004 and subsequently removed from the register in 2011. As with the other companies, the liquidator’s report, in relation to this company, states:
All known assets have been disclaimed, or realised, or distributed without realisation.
[10] Correspondence with the liquidator also records that there is no objection to the application.
Waipapa Logging Company Ltd
[11] Waipapa Logging Company Ltd was liquidated in 2004 and subsequently removed from the Companies Office Register on 7 February 2007.
[12] The liquidator’s report in relation to this company records:
All known assets have been disclaimed, or realised, or distributed without realisation.
[13] The liquidator for the company also does not object to the application.
Treasury
[14] The Treasury was also served with the application. There is correspondence recording that there is no objection to the application and the Crown does not wish to take part in these proceedings.
Issues
Process
[15] Save in respect of the liquidator for Mid Island Transport Ltd, the process adopted and the substance of the applications are not opposed by the liquidators. The liquidator for Mid Island Transport Ltd raises an issue as to proper process, but an invitation to provide submissions in support of his position was not taken up.1
Given this, I am satisfied I can proceed by way of originating application.
Substantive Claim
[16] Ms Foley submits:
(a) The application is based on either ss 269 or 324 of the Companies Act
1993. Section 269 applies where onerous property has been disclaimed by a liquidator. The effect of s 324 is that property, not having been distributed or disclaimed, vests in the Crown with effect from the removal of the company from the register. A process may then be followed for the purposes of having the property vested in the applicant.
(b)The s 269 process is the preferred process as there is evidence on which the Court may infer that any share property has been
1 Minute of Associate Judge Sargisson dated 5 April 2017, and Teleconference Minute of Whata J
dated 21 June 2017.
disclaimed, referring to the various liquidators’ reports noted above at
[5] – [13].
(c) In respect of all four respondent companies, the Court can reasonably conclude that the shares in the applicant (which, at all material times, have been listed on the companies register) were “known” to the respective, competent, liquidators. Further, from the liquidators’ reports and correspondence, there is no evidence that the shares have been “realised or distributed without realisation”. The Court may therefore reach the inference that “all known assets have been disclaimed”.
(d)If the shares have been disclaimed, the applicant can apply under s 269(5) as a person who has suffered loss or damage as a result of this disclaimer and may apply to the Court for an order that the disclaimed property be delivered to or vested in that person. It has suffered loss in the following ways:
(i)it has lost the opportunity to purchase the shares at the time as is permitted by its constitution;
(ii) it cannot obtain unanimous shareholder resolutions;
(iii)it is suffering ongoing additional legal accounting fees dealing with the shares; and
(iv)the company would be frustrated in any attempt to be sold or wound up.
(e) In all the circumstances, it is just to make the order pursuant to s
269(6) for the purposes of the efficient administration of the company.
(f) Only the liquidator for Mid Island Transport Ltd has raised any objection or suggestion as to an alternate process, but has not
responded to the Court’s invitation to be formally involved and to
submit on the application.
(g)In the alternative, if s 324 applies, the property will have vested in the Crown with effect from the removal of the company from the register. Where property is vested in the Crown under this section, the person who would have been entitled to receive all or part of the property may apply to the Court for an order vesting all or part of the property in that person under subs (4).
(h)The Treasury has suggested a complicated and impracticable process in this regard. Statutory declarations by the directors of the company or companies are difficult if not impossible to obtain, notably because of absence of records and the disinterest of the liquidators. The requirement as to evidence that no other person may claim an interest in the shares is impracticable.
(i)For completeness, there is a process, pursuant to s 328, for restoration of the company. That was suggested by the liquidator for Mid Island Transport Ltd. But, as noted, the liquidator has not pursued or sought to pursue this claim, notwithstanding notice of these proceedings. Moreover, Ms Foley submits that the applicant does not have the ability to apply for restoration, as it is none of the parties listed in subs (2): shareholder, director, creditor or liquidator.
Assessment
Section 269
[17] Section 269 provides:
269 Power to disclaim onerous property
(1) Subject to section 270, a liquidator may disclaim onerous property even though the liquidator has taken possession of it, tried to sell it, or otherwise exercised rights of ownership in relation to it.
(2) For the purposes of this section, onerous property—
(a) means—
(i) an unprofitable contract; or
(ii) property of the company that is unsaleable, or not readily saleable, or that may give rise to a liability to pay money or perform an onerous act; or
(iii) a litigation right that, in the opinion of the liquidator, has no reasonable prospect of success or cannot reasonably be funded from the assets of the company; but
(b) does not include—
(i) a netting agreement to which sections 310A to 310O
apply; or
(ii) any contract of the company that constitutes a transaction under a netting agreement; or
(iii) a settlement instruction or a settlement under the rules of a settlement system that is declared to be a designated settlement system under Part 5C of the Reserve Bank of New Zealand Act 1989.
(3) A disclaimer under this section—
(a) brings to an end on and from the date of the disclaimer the rights, interests, and liabilities of the company in relation to the property disclaimed:
(b) does not, except so far as necessary to release the company from a liability, affect the rights or liabilities of any other person.
(4) A liquidator who disclaims onerous property must, within 10 working days of the disclaimer, give notice in writing of the disclaimer to every person whose rights are, to the knowledge of the liquidator, affected by the disclaimer.
(5) A person suffering loss or damage as a result of a disclaimer under this section may—
(a) claim as a creditor of the company for the amount of the loss or damage, taking account of the effect of an order made by the court under paragraph (b):
(b) apply to the court for an order that the disclaimed property be delivered to or vested in that person.
(6) The court may make an order under subsection (5)(b) if it is satisfied that it is just that the property should be vested in the applicant.
[18] Ms Foley’s primary position, that an order be made pursuant to s 269, relies on an inference being drawn that the liquidators of the four companies disclaimed the companies’ interests in the shares in Smartt. I am satisfied that this is a reasonable inference to draw from the liquidators’ reports, there being no evidence that the shares were realised or distributed without realisation. Moreover, as Ms Foley submits, the issue of whether the shares were onerous property capable of being disclaimed under s 269 is not before me.
[19] The central remaining issue therefore is whether the applicant qualifies as a person suffering loss or damage as a result of the disclaimer.
[20] No authority was cited by the applicant in relation to this provision. It is difficult to conceptualise the applicant as having suffered loss as a result of the disclaimer. The thrust of s 269(5) appears to be to provide an opportunity for affected creditors or other persons with interests in the company’s assets to make a claim in relation to those assets which has otherwise been lost because of the operation of s
269(3)(a). With respect to the diligent submissions of Ms Foley, it is not clear to me that the applicant has any right to the shares in this sense. Rather the applicant says it cannot order its affairs, including for the purpose of distributing dividends, on the liquidation of the shareholder companies. On that basis I do not consider that s
269(5) is triggered.
Section 324
[21] As to s 324, it states:
324 Property of company removed from register
(1) Property that, immediately before the removal of a company from the New Zealand register, had not been distributed or disclaimed, vests in the Crown with effect from the removal of the company from the register.
…
(4) Where property is vested in the Crown under this section, a person who would have been entitled to receive all or part of the property, or payment from the proceeds of its realisation, if it had been in the hands of the company immediately before the removal of the
company from the New Zealand register, or any other person claiming through that person, may apply to the court for an order—
(a) vesting all or part of the property in that person; or
(b) for payment to that person by the Crown of compensation of an amount not greater than the value of the property.
[22] Since I have found that the company shares were disclaimed prior to the removal of the companies from the register, I have not found it necessary to fully explore whether subs (1) applies, though it does not appear to be engaged. Second, it is also unclear whether the company qualifies under this heading. It was not entitled to receive the shares immediately prior to the liquidation.
Solution?
[23] It is intolerable to common sense to leave the applicant company in limbo and that could not have been the intention of Parliament. While I have not had the benefit of detailed submissions on this, it is tolerably clear that s 269(3) provides the most obvious solution. The shares having been disclaimed, s 269(3) extinguished the rights of the liquidated companies to claim dividends or to participate in the affairs of the applicant company. I consider the comments of Lord Nicholls in Hindcastle
Ltd apposite:2
The fundamental purpose of these provisions is not in doubt. It is to facilitate the winding up of the insolvent's affairs…
Equally clear is the essential scheme by which the statute seeks to achieve these purposes. Unprofitable contracts can be ended, and property burdened with onerous obligations disowned. The company is to be freed from all liabilities in respect of the property. Conversely, and hardly surprisingly, the company is no longer to have any rights in respect of the property. The company could not fairly keep the property and yet be freed from its liabilities.
Disclaimer will, inevitably, have an adverse impact on others: those with whom the contracts were made, and those who have rights and liabilities in respect of the property. The rights and obligations of these other persons are to be affected as little as possible. They are to be affected only to the extent necessary to achieve the primary object: the release of the company from all
2 Hindcastle Ltd v Barbara Attenborough Associates Ltd [1996] 1 All ER 737 (HL) at 745-746, per Lord Nicholls of Birkenhead. I note that nothing I say here bears on the situation which arose in Re David James & Co Ltd [1991] 1 NZLR 219, a case where there were third party interests in the property.
liability. Those who are prejudiced by the loss of their rights are entitled to prove in the winding up of the company as though they were creditors.
…
The simplest case is of a landlord and an insolvent tenant. No third parties are involved. Disclaimer operates to determine all the tenant's obligations under the tenant's covenants, and all his rights under the landlord's covenants. In order to determine these rights and obligations it is necessary, in the nature of things, that the landlord's obligations and rights, which are the reverse side of the tenant's rights and obligations, must also be determined. If the tenant's liabilities to the landlord are to be extinguished, of necessity so also must be the landlord's rights against the tenant. The one cannot be achieved without the other.
Disclaimer also operates to determine the tenant's interest in the property, namely the lease. Determination of a leasehold estate has the effect of accelerating the reversion expectant upon the determination of that estate. The leasehold estate ceases to exist. I can see no reason to question that this is the effect of disclaimer when the only parties involved are the landlord and the tenant.
[24] I raised this with the applicant and granted leave to make an oral application for the following declarations pursuant to s 269(3):
(a) the liquidated companies have no rights under the shares subject to this proceeding; and
(b)the applicant company is not obliged to pay dividends or otherwise deal with the shareholder companies as if they were shareholders of the applicant.
[25] The applicant, in making that application, adopted the observations of the
House of Lords in Hindcastle.
[26] Accordingly, I decline to make the orders first sought. But I make the declarations noted at [24].
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