Southbury Insurance Limited (In receivership) v Black

[2012] NZHC 1316

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2012-404-3100 [2012] NZHC 1316

UNDER  Part 19 of the High Court Rules and

Sections 280 and 286 of the Companies Act

1993

IN THE MATTER OF     SOUTHBURY INSURANCE LIMITED (In Receivership)

BETWEEN  WILLIAM GUY BLACK AND ANDREW JOHN GRENFELL Applicants

Hearing:         On the papers

Counsel:         M D Arthur/J A McMillan for Applicants

Judgment:      12 June 2012

JUDGMENT OF ASSOCIATE JUDGE R M BELL

This judgment was delivered by me on ...12 June 2012... at ...4:00pm

pursuant to Rule 11.5 of the High Court Rules.

...................................

Registrar/Deputy Registrar

Solicitors:

Chapman Tripp, P O Box 2206 Auckland 1140 for Applicants

Email:   [email protected] / [email protected]

SOUTHBURY INSURANCE LTD v BLACK AND  GRENFELL HC AK CIV-2012-404-3100 [12 June 2012]

[1]      Mr Black and Mr Grenfell apply for an order permitting them to be appointed as  liquidators  of  Southbury  Insurance  Ltd,  notwithstanding  that  they  would otherwise be disqualified from acting as liquidators by reason of ss 280(1)(c), (ca) and (cb) of the Companies Act 1993.

Procedural matters

[2]      They have applied by originating application and seek leave under r 19.5. These applications are conventionally dealt with by originating application.  Leave is granted accordingly.

[3]      They have applied without notice and propose that any court order and this application be served on creditors at the same time and in the same manner as the liquidators’ first report under s 250 of the Companies Act and reserve leave to creditors to apply.  That is a standard approach in cases under s 280 and there are no reasons for not following it in this case.

Background

[4]      Mr Black  and  Mr Grenfell  are experienced  insolvency practitioners with McGrathNicol.   They have conducted a number of complex and high profile receiverships and liquidations.  In particular, Mr Black is one of the liquidators of the New Zealand companies in the HIH Group, a group of insurers.

[5]      On  31  August  2010,   Mr  Black   and  another  experienced  insolvency practitioner with McGrathNicol, Mr Kerryn Downey, were appointed receivers of South Canterbury Finance Ltd and of the “Charging Group” (other companies in the South Canterbury Finance stable) by Trustees Executors Ltd under a debenture trust deed of April 1976.

[6]      Southbury Insurance Ltd is one of the charging group, as it had given a cross- guarantee of South Canterbury Finance Ltd’s liability to the debenture holders under the securities held by Trustees Executors Ltd.  Southbury Insurance Ltd was one of

the South Canterbury Finance Ltd companies that was placed in receivership on 31

August 2010.

[7]      Under the Crown Retail Deposit Guarantee Scheme, the government paid out approximately $1.6b to the debenture-holders of South Canterbury Finance Ltd and replaced Trustees Executors Ltd as secured creditor.  Under that scheme, Southbury Finance Ltd is now liable to the Crown as secured creditor in place of Trustees Executors Ltd for the full amount paid to debenture holders.

[8]      South Canterbury Finance Ltd has since been re-named “FCS Loans Ltd”.

[9]      Southbury Insurance Ltd carried on business as an insurer of personal finance obligations,  typically  single  premium  short-tail  consumer  insurance  policies  for South Canterbury Finance consumer finance agreements.

[10]     After Southbury Insurance Ltd went into receivership, it continued to issue insurance policies – approximately 2,425.  It has now stopped writing insurance.  It is in run-off mode.   The last policy is expected to expire in August 2016.   The receivers engaged actuaries to make a report as to the projected solvency of Southbury Insurance Ltd.   The actuaries’ report indicates that, given certain assumptions, by 31 July 2016 cash assets of about $1.083m may be expected.  The actuaries’ report also considered certain pessimistic scenarios.  Some of these more extreme scenarios showed Southbury Insurance Ltd running out of cash and needing to rely on the Government bond to help pay claims and refunds, but the report advises that these are unlikely scenarios.   The actuaries’ report contains a strong recommendation that Southbury Insurance undertake six  monthly reviews where projected cash-flows can be compared to emerging experience so that model assumptions can be recalibrated to take account of the recent claims, refunds experience  and  expectations  of  future  expenses.    While  the  actuaries’  report  is suitably qualified, it gives confidence that by the end of the run-off period, there will be surplus funds available after meeting claims.

[11]     On 1 June 2012, the receivers completed the sale of the bulk  of FCS’s

remaining assets to Crown Asset Management Ltd.  Under this sale, all the shares in

Southbury  Insurance  Ltd  were  transferred  to  Crown  Asset  Management  Ltd. Trustees Executors Ltd, as trustee under the trust deed of April 1976, has agreed to release Southbury Insurance Ltd from its obligations as guarantor and to release the security under the trust deed.   On that release, Southbury Insurance Ltd would no longer be part of the charging group of FCS companies and its receivership will come to an end.

Proposed liquidation

[12]     It is now proposed that Southbury Insurance Ltd be put into liquidation by shareholders’ resolution and that Mr Black and Mr Grenfell be appointed liquidators. They are disqualified from acting as liquidators under s 280(1) unless the Court orders otherwise.   Under s 280(1)(c), Mr Black has been receiver of the company within  the  two  years  immediately  before  the  start  of  the  liquidation.    Under s 180(1)(ca),  McGrathNicol   has   provided   professional   services   to   Southbury Insurance  Ltd  under  the  receivership  of  Mr  Downey  and  Mr  Black.  Under s 180(1)(cb),  McGrathNicol  has  had  a  continuing  business  relationship  with Southbury Insurance Ltd during the two years immediately before the liquidation. That continuing business relationship is the receivership.

[13]     A liquidator is a statutory agent with responsibilities to perform obligations under the Companies Act to distribute property divisible among creditors in accordance with the priorities under the Companies Act.  The liquidator is required to act impartially and in the interests of the whole body of shareholders and the whole body of creditors.   The restrictions under s 280 of the Companies Act are directed at ensuring the independence of the liquidator and the avoidance of any conflict of interest.  The liquidator must be, and must appear to be, both independent and impartial.

[14]     Under an application for leave under s 280, an important issue is whether there is a risk that the proposed liquidator’s independence and ability to carry out his or her task professionally and effectively could be compromised in the particular

circumstances of the case.[1]

[1] Re Blanchett HC New Plymouth, CIV-2008-443-485, 3 October 2008 Associate Judge Abbott.

[15]     Mr Black points to his detailed knowledge of Southbury Insurance Ltd and the advantages of continuity with associated speed and efficiency in administering the liquidation of the company.   Undoubtedly,  there will be savings  as a fresh insolvency practitioner will not be required to come up to speed with the affairs of Southbury Insurance Ltd.  However, these considerations should not be allowed to outweigh risks to the liquidator’s independence and ability to act professionally being compromised.  The real enquiry is to establish the extent of the risk, if any, and whether there are adequate safeguards in place to address it.

[16]     In my judgment, in this case the risk is minimal because of the following considerations.

[17]     First, Mr Black and Mr Grenfell are experienced insolvency practitioners.  It is reasonable to assume that they value their reputation.  They will be mindful that, as liquidators, they are officers of the court and will be subject to the supervision of the court.  It is reasonable to assume that they will act with integrity.

[18]     Second, the report by the actuaries gives good ground for believing that this will be a solvent liquidation.  There is usually less ground for concern in cases of a solvent liquidation, even where the proposed liquidator has a connection with shareholders.

[19]     Third, the success of the liquidation will turn on proper management  of claims under the insurance policies during the run-off period.   There is additional protection for policy-holders in the Insurance (Prudential Supervision) Act 2010. The Reserve Bank has granted a provisional licence to the receivers under s 244 of that act.  That licence is subject to a number of conditions.  They require six-monthly reports to the Reserve Bank, which must include a comparison of the actual financial performance of Southbury Insurance with the actuaries’ projections.  The receivers must notify the Reserve Bank if it is believed that Southbury Insurance may not be able to pay its claims in full.   They must not make payments to creditors under registered  charges  without  prior  consultation  with  the  Reserve  Bank.     That provisional  licence  was  granted  to  the  company  in  receivership.    Mr  Black’s evidence is that there have been discussions with the Reserve Bank which indicate

that similar arrangements will continue during the liquidation.  Mr Black says that the Reserve Bank has been provided with a notice of the change of control of Southbury Insurance from the receivers of FCS to Crown Asset Management Ltd. The Reserve Bank is also required to approve in writing any appointment of a liquidator.   Mr Black says that the bank has already indicated its approval of the appointment.   Given the prudential supervision by the Reserve Bank, I have confidence that the interests of policy-holders will be protected during the run-off period.

[20]     Fourth, the only preferential creditor, the Commissioner of Inland Revenue, has already been paid.  Mr Black says that from his receivership of the company he is not aware of any trade creditors.   Given that Southbury Insurance Ltd was apparently trading solvently before receivership, I accept that there are unlikely to be any pre-receivership trade creditors remaining.

[21]     As  for  liabilities  to  trade  creditors  incurred  during  the  receivership,  the receivers would presumably have met those as part of the costs of the receivership and have indemnified themselves out of the assets of the company.  Similarly, if any expenses are incurred in the course of the liquidation, the liquidators would meet them as part of the costs of the liquidation.

[22]     In the light of these considerations, the risks to policy-holders and trade creditors arising out of the appointment of Mr Black and Mr Grenfell as liquidators are  so  remote  that  they  ought  not  stand  in  the  way  of  their  appointment  as liquidators.

Disposition

[23]     I make these orders:

[a]       Leave is granted to apply by originating application.

[b]      Williams Guy Black and Andrew John Grenfell may be appointed liquidators of Southbury Insurance Ltd, notwithstanding ss 280(1)(c), (ca) and (cb) of the Companies Act 1993.

[c]      This order and the application are to be served on creditors at the same time and in the same manner as the liquidators’ first report under s 255 of the Companies Act 1993.

[d]      Leave is reserved to any creditor to apply to vary or set aside the

court’s orders within 20 working days after service of these orders.

R M Bell

Associate Judge