Stephen Marr Management Limited v Boutique Hair & Beauty Limited (in receivership and in liquidation)
[2018] NZHC 341
•7 March 2018
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE
CIV-2017-409-000835 [2018] NZHC 341
UNDER the Companies Act 1993 IN THE MATTER
of the liquidation of BOUTIQUE HAIR & BEAUTY LIMITED (In Receivership & In Liquidation)
BETWEEN
STEPHEN MARR MANAGEMENT LIMITED
Plaintiff
AND
BOUTIQUE HAIR & BEAUTY LIMITED (In Receivership & In Liquidation) Defendant
CIV-2017-409-000880
UNDER Section 284(1)(g) of the Companies Act
1993
IN THE MATTER of an application for a declaration as to the validity of appointment of liquidators by
LYNDA JANE SMART and GEOFFREY SEBASTIAN ERIC BROWN as liquidators of Boutique Hair & Beauty Limited (In Rec
& In Liq) Applicants
Hearing: 28 February 2018 Appearances:
D Hoskin for Stephen Marr Management Limited
S D Munro and A L Davidson for Ms Smart and Mr Brown, Liquidators of Boutique Hair & Beauty Ltd (In Rec & In Liq) A S Botterill for Hansa Ltd (In Liq), Mr Grant and Mr Khov
Judgment:
7 March 2018
STEPHEN MARR MANAGEMENT LIMITED v BOUTIQUE HAIR & BEAUTY LIMITED (In Receivership
& In Liquidation) [2018] NZHC 341 [7 March 2018]
JUDGMENT OF ASSOCIATE JUDGE MATTHEWS
Introduction
[1] These cases arise as a consequence of the actions of one Paul Clifford Hibbs. They relate to the liquidation of Boutique Hair & Beauty Limited (BHBL) (which is also in receivership). The liquidators are Lynda Jane Smart and Geoffrey Sebastian Eric Brown. They were appointed as liquidators on 27 October 2017 by a special shareholders resolution of the sole shareholder of BHBL, Cameron Gladstone Commercial Limited (CGCL). Mr Hibbs owns 99 per cent of the shares in CGCL, and his wife Lisa Hibbs owns the remaining one per cent. The shareholders resolution was signed by Mrs Hibbs acting under a power of attorney given to her by CGCL.
[2] Prior to this appointment, however, the Court had made a freezing order in respect of the affairs of Mr Hibbs. Mr Hibbs is the first respondent in that proceeding. The three further respondents are companies under his control, but not CGCL or BHBL. Paragraphs 1.4-1.6 of the freezing order are relevant to the issues now before the Court and are in these terms:
1.4 This freezing order is made in respect of:
a The First Respondent’s assets, being:
(i) Shareholding in all companies owned by the First Respondent, including Cameron Gladstone Partners Limited (1380861), the Second Respondent, the Third Respondent, Haldon Range Holdings Limited (1922827), and Cameron Gladstone Commercial Limited (1405130);
(ii) All accounts and funds held in the First Respondent’s name with Forsyth Barr Limited; and
(iii) All other assets owned by the First Respondent. b The Second Respondent’s assets, being:
(i) Shareholding in all companies owned by the Second Respondent, including Apis Healthcare Limited (1073560); and
(ii) All accounts and funds held in the Second Respondent’s name with Forsyth Barr Limited; and
(iii) All other assets owned by the Second Respondent. c All assets owned by the Third Respondent.
d All assets owned by the Fourth Respondent.
1.5Subject to paragraph 6, this order restrains you from removing any of the assets listed in paragraph 4 from New Zealand, or from disposing of, dealing with, or diminishing the value of, those assets, whether they are in or outside New Zealand.
1.6This freezing order does not prohibit you from dealing with the assets covered by the order for the purpose of:
a Paying ordinary living expenses; or
b Paying legal expenses related to the freezing order; or
c Disposing of the assets, or making payments, in the ordinary course of your business, including business expenses incurred in good faith.
[3] In proceeding CIV-2017-409-880 Ms Smart and Mr Brown as liquidators of BHBL apply by originating application for an order under s 284(1)(g) of the Companies Act 1993 confirming the validity of their appointment as liquidators of BHBL.
[4] Hansa Limited (Hansa) (In Liquidation) and its liquidators oppose the orders sought by Ms Smart and Mr Brown. Hansa is another company in which Mr Hibbs held all the shares and of which he was sole director at the time it was placed into liquidation. It was Hansa and its liquidators who applied for the freezing order in relation to Mr Hibbs’ assets. Mr Hibbs is indebted to Hansa in a total sum of
$7,062,597.67 pursuant to a judgment of this Court dated 22 August 2017, the order being made pursuant to s 301 of the Companies Act. The liquidators of Hansa, Damian Grant and Stephen Khov say the appointment of Ms Smart and Mr Brown is invalid as it breaches the freezing order, and that the assets of BHBL will diminish as a result of its liquidation. In his affidavit in support of Hansa’s position Mr Grant says that although BHBL had been placed into receivership before the liquidation, there may still be residual assets at the end of the receivership which will be diminished as a result of any costs of the liquidation process including the fees of Ms Smart and
Mr Brown. Thus any sum which might ultimately be available to CGCL as shareholder of BHBL, and thence to Mr Hibbs as shareholder of CGCL, will be less than it might otherwise have been.
[5] In proceeding CIV-2017-409-835, Stephen Marr Management Limited (SMML), a creditor of BHBL, seeks appointment of liquidators to BHBL by the Court, and by way of interlocutory application on that proceeding seeks orders terminating the voluntary liquidation of BHBL, a review of the appointment of Ms Smart and
Mr Brown as liquidators pursuant to s 283(4) of the Companies Act, and appointment of alternative liquidators.
[6] Ms Smart and Mr Brown oppose the application by SMML, maintaining that their appointment does not breach the freezing order, they have no prior personal relationship with BHBL or its directors or shareholder, that they do not lack independence or impartiality and their appointment should not be set aside.
[7] In short, therefore, Ms Smart and Mr Brown say they should remain in office having been validly appointed, and SMML and Hansa, by its liquidators, say they should not. A ruling on these opposing views is derived from decisions on the following issues:
(a) Was the power of attorney granted by CGCL to Mrs Hibbs valid at the time she acted pursuant to that power of attorney to appoint Ms Smart and Mr Brown?
(b)Was the appointment of liquidators by CGCL a breach of the freezing order?
(c) If the answer to issue (b) is yes, does that invalidate the appointment?
[8] A chronology of the events relevant to these issues is:
• 15 December 2016 Freezing order granted in proceeding CIV-
2016-409-1214 against Mr Hibbs and three of his companies. This order was varied and extended on four subsequent dates,
27 February, 9 July and 16 August 2017, and 13 February 2018.
• 23 February 2017 BHBL placed into receivership.
•8 September 2017 CGCL appointed Mrs Hibbs to be its attorney pursuant to s 181 of the Companies Act (the Act).
• 9 October 2017 SMML filed an application in the High
Court at Christchurch to liquidate BHBL.
•11 October 2017 Mr Hibbs convicted of offences of dishonesty and thus disqualified from exercising director powers.
•24 October 2017 Mr Brown met Mrs Hibbs, received her power of attorney and the freezing order, and was asked to accept appointment as liquidator.
•24-27 October 2017 Mr Brown and Ms Smart took legal advice on accepting appointment.
•27 October 2017 Mrs Hibbs, acting as attorney for CGCL, passed a special shareholder resolution placing BHBL into voluntary liquidation and appointing Mr Brown and Ms Smart as liquidators.
Mr Brown and Ms Smart filed their application for a declaration as to the validity of their appointment as liquidators of BHBL (pursuant to s 284(1)(g) of the Act) in proceeding CIV-2017-409-880.
Appointment of Mr Brown and Ms Smart
[9] Mr Brown and Ms Smart are insolvency practitioners. They are directors of Rodgers Reidy Limited. Apart from one point, no criticism is directed in these cases at either Ms Smart or Mr Brown. It is not suggested that either of them is not qualified, experienced or competent to perform the role of liquidators. The criticisms raised are that it is unnecessary to appoint Ms Smart and Mr Brown as liquidators, and secondly, that in light of the freezing order and the appointment by Mrs Hibbs, there are serious questions to be tried as to whether Ms Smart and Mr Brown are able to carry out their duties and show the requisite objectivity and independence.
[10] Their appointment came about in this way. In mid-October 2017 Mr Brown was approached by Mr Hollis, the receiver of BHBL to enquire whether he would accept appointment as liquidator of BHBL. On 24 October he met Mrs Hibbs. At that time Mr Brown was aware that Mr Hibbs had been convicted of dishonesty offences
as he had learnt this from the news media. He was told that Mrs Hibbs intended to exercise her power of attorney for CGCL to appoint liquidators to BHBL.
[11] Mr Brown was given a copy of Mrs Hibbs’ power of attorney and the freezing order in relation to the assets of Mr Hibbs and other entities.
[12] Mr Brown decided to take legal advice on whether he and Ms Smart could lawfully accept appointment as liquidators. He consulted a firm of solicitors. As a consequence of the advice he received he and Ms Smart agreed to accept appointment, and Mrs Hibbs, as attorney for CGCL, passed a shareholders resolution appointing
Mr Brown and Ms Smart as liquidators of BHBL.
[13] Mr Brown was asked in cross examination whether he considered it appropriate to act or be appointed under the power of attorney when he knew that
Mr Hibbs had been convicted of dishonesty offences and was no longer eligible to hold office as a director of CGCL, on behalf of which Mrs Hibbs had purported to act as attorney. In response he said he took legal advice on this and on the freezing order. Had he not been advised that they could lawfully do so he and Ms Smart would not have taken the appointment. The reason they then decided to make an application under s 284(1)(g) for a declaration from the Court on whether they were validly appointed was to allow them to carry out their duties as liquidators in an effective and efficient way, ensuring that there were not any issues raised over their appointment, or challenges made at a later date. Accordingly on the same day as they were appointed they filed proceeding 880.
[14] Section 284 of the Companies Act provides that a liquidator may apply for a range of orders, one of which is a declaration on whether or not he or she was validly appointed. At the time Ms Smart and Mr Brown were approached to take office there were circumstances which would require them to exercise particular care in accepting office and conducting the liquidation, namely the fact that the appointment would be by an attorney passing a shareholders resolution in a company owned by Mr Hibbs when there was a freezing order in place which could affect both their appointment and execution of their duties once appointed. Further, this was in the context of the sole director of CGCL, Mr Hibbs, then being disqualified from holding that office.
Responsibly they took legal advice before accepting office and on accepting appointment they availed themselves of the right given to liquidators under s 284.
Power of attorney
[15] Section 181 of the Companies Act provides that a company may appoint a person as its attorney either generally or in relation to a specified matter. An act of an attorney carried out in accordance with the appointment binds the company. Sections
19 – 21 of the Property Law Act 2007 apply in relation to a power of attorney executed by a company to the same extent as if the company were a natural person, except that commencement of liquidation of a company is an event revoking a power of attorney given by a company.
[16] Section 20 of the Property Law Act 2007 provides that a power of attorney continues in force until notice of an event revoking the power is received by the attorney. A person dealing with an attorney may rely on a certificate of non-revocation of the power of attorney in the form set out in Schedule 1 of the Act as conclusive proof of the non-revocation of the power of attorney as at the date of the certificate, provided the person to whom the certificate is provided is dealing with the attorney in good faith and does not have actual notice of an event revoking the power of attorney. It is also necessary that the certificate is signed by the attorney, and is given immediately before or at any time after the act of the attorney in question.
[17] The evidence establishes that at the time of signing the shareholders’ resolution of CGCL to place BHBL into voluntary liquidation and appoint Ms Smart and
Mr Brown as liquidators, Mrs Hibbs held a valid power of attorney for CGCL and signed a certificate that the power of attorney had not been revoked. Ms Smart and Mr Brown were dealing with Mrs Hibbs in good faith. There is no evidence the power of attorney had been revoked before Mrs Hibbs acted on it, nor that she had notice of any revocation. Therefore the power of attorney was in force when Mrs Hibbs appointed Mr Brown and Ms Smart.
[18] Mr Hoskin submits that as Mr Hibbs, the sole director of CGCL, had been disqualified from acting as a director on 11 October, 16 days before the appointment of the liquidators under the power of attorney, the power of attorney was no longer
valid. His reasoning is that as sole director of CGCL Mr Hibbs himself would not have been able to exercise any power as director of CGCL, and that being the case any power of attorney granted by CGCL would no longer be valid.
[19] Mr Hoskin did not produce any authority in support of this proposition. Nor is it tenable. First, documents signed by a director (in this case, the appointment of Mrs Hibbs as attorney) do not become invalid by that director ceasing to hold office. Section 158 of the Companies Act provides:
The acts of a person as a director are valid even though –
(a) The person’s appointment was defective; or
(b) The person is not qualified for appointment.
[20] Therefore although Mr Hibbs had been disqualified from acting as a director by the time Mrs Hibbs acted on her power of attorney, the power of attorney itself was unaffected.
[21] In Clark v Libra Developments Ltd, the Court of Appeal considered the position of a director who had been adjudicated bankrupt. The Court said:1
[179] In our view, the combined effect of ss 158 and 126(1)(a) is that
Mr Hyslop remained a de facto director of Libra during the period of his bankruptcy notwithstanding disqualification as a director by his adjudication and the fact that under the Insolvency Act 1967, s 62, he was forbidden from so acting and was open to prosecution for continuing to so act … Despite his disqualification and the prohibitions statutorily imposed on him, he was still “occupying” the position as Libra’s director … Even if such may not apply generally, in our view it clearly applies to a company with only one director who is disqualified after appointment because s 128(1) requires a company’s business and affairs to be managed under the direction of its board and s 127(b) expressly defines a sole director as the company’s board. It was therefore Parliament’s intention that no company could operate without a board. Accordingly, Libra was required to act through Mr Hyslop and he as the sole occupant of the position of director, remained such despite his disqualification and the other impediments to his continuing in that role.
[22] Section 126(1)(a) of the Companies Act defines a director to include a person occupying the position of a director of the company by whatever name called.
1 Clark v Libra Developments Ltd [2007] 2 NZLR 709.
[23] The Court concluded that Mr Hyslop’s acts as a director after his bankruptcy were valid. In the present case the acts of Mr Hibbs after his disqualification are not in issue, but it follows from the above decision that Mr Hibbs’ earlier actions as a director of CGCL in directing that company to appoint Mrs Hibbs as its attorney remained valid and in particular that the power of attorney was not revoked by his subsequent disqualification.
[24] For these reasons I find that Mrs Hibbs as attorney for CGCL validly appointed
Mr Brown and Ms Smart as liquidators of BHBL.
The freezing order
[25] The relevant paragraphs of the freezing order are set out above.2 It is common ground that the shares Mr Hibbs owns in CGCL are subject to the freezing order.
[26] CGCL itself is not constrained by the terms of the order. The respondents, apart from Mr Hibbs, are Cameron Gladstone Investments Limited, Haldon Range Vineyards Limited and Containers Direct Leasing Limited. It is not suggested that any of these companies has taken any step relevant to the events under review.
[27] The issue, therefore, is whether Mr Hibbs has taken any steps within the description “disposing of, dealing with, or diminishing the value of” any asset owned by him. The only asset to which this can apply is his shareholding in CGCL. He did not own any shares in BHBL. They were entirely owned by CGCL.
[28] Mr Botterill argues that Mr Hibbs’ assets include not only his shares in CGCL, but also CGCL’s shares in BHBL, and all assets of BHBL as a wholly owned subsidiary of CGCL. In support of this proposition he relies on a passage from Lord Clarke in JSC BTA Bank v Ablyazov.3 Mr Botterill says that Lord Clarke found that the word “assets” is capable of having a wide meaning, and a freezing order can apply to assets in the broader range I have set out.
[29] However, the passage on which counsel relies does not support this proposition. Rather, his Lordship was referring to whether or not certain loan agreements were assets within the meaning of the extended definition of assets in paragraph 5 of the freezing order in question in that case. The passage is not a statement of general principle. Rather, the way the Court is to approach interpretation of a freezing order is this:4
The question is simply what the Freezing Order means. If it is desirable that a broader meaning should be given to it than is appropriate applying ordinary principles, the solution is not to give it a meaning which it does not have but to vary the order … appropriately for the future.
[30] His Lordship went on to note that counsel had agreed that whilst some flexibility may be applicable in construing a contract, that is not the case in construing a freezing order, which is an order of the court. His Lordship agreed with counsel’s description of the position:5
… the flexibility principle is that the court must be agile in this game of cat and mouse between claimants and defendants to make sure that it is making new orders to meet new avoidance measures, but that is not a justification for the expansive interpretation of an order which has already been made.
[31] The task of the Court, therefore, is to interpret the freezing order as it stands. In the present case the only asset to which the freezing order applies in its terms is
Mr Hibbs’ shares in CGCL. The only relevant action taken by Mr Hibbs was, in his capacity as a director of CGCL, to bring about the appointment by that company of an attorney. The order cannot be interpreted to include the broader range of assets asserted by Mr Botterill. He has not taken any step in relation to those shares. They remain his property. In terms of the freezing order, he has not disposed of them, nor has he dealt with them. Counsel argued that the appointment of a liquidator by CGCL to the assets of BHBL which CGCL owns would in itself diminish the value of the shares in CGCL. There was no evidence before the Court to support that contention, but even accepting that the liquidation of a subsidiary company could in principle diminish the value of the shares in the parent company, the evidence is that the subsidiary company BHBL had been in receivership for eight months when Mr Brown and Ms Smart were appointed, and its balance sheet as at 26 November 2017 prepared
by the receivers shows total assets of $495,888.51, but total liabilities of
$1,014,134.75. Not only was it manifestly insolvent, but it was also facing an application for appointment of liquidators by SMML, as recorded earlier. On the evidence before the Court therefore it is not established that CGCL’s shares in BHBL had any value at the date of liquidation of BHBL, nor therefore that the value of those shares diminished.
[32] For these reasons I find that it is not established that there has been a breach of the freezing order.
Two additional arguments
[33] Because of the findings I have made, the third issue I have identified in para [7] above need not be decided. I observe, however, that counsel opposing the appointment of Ms Smart and Mr Brown appeared to assume that if their appointment was in breach of that order, this would necessarily render it invalid. They did not refer to any authority to support that view. Beyond observing that the consequence of breach of an injunction is a proceeding for contempt of court, this issue need not be addressed further.
[34] A further submission was made that appointment of Ms Smart and Mr Brown as liquidators would add additional cost to BHBL at the expense of its creditors. Whilst there is a cost involved in the liquidation of a company, that does not of itself make it inappropriate to liquidate a company which is manifestly insolvent. I also observe that the application made on proceeding 835 by SMML in relation to the appointment of Ms Smart and Mr Brown is an interlocutory application on its own substantive proceeding to liquidate BHBL and appoint other liquidators. It is unclear what was intended to be achieved by this application in any practical sense, and counsel was unable to give me any reason why this application was necessary, particularly given the context of an insolvent company whose net position could only deteriorate by the additional cost necessitated by this application.
Validity of the appointment of Ms Smart and Mr Brown
[35] Because of the findings I have made in relation to Mrs Hibbs’ power of attorney, and the freezing order, the grounds on which the validity of their appointment was challenged fall away. It is necessary to make only brief further observations.
[36] As noted earlier, it was submitted that there is a serious question to be tried on whether Ms Smart and Mr Brown would be able to carry out their duties with the required standard of objectivity and independence the role of liquidator requires. There is no foundation for this submission. Ms Smart and Mr Brown had no knowledge of the affairs of BHBL prior to Mr Brown’s meeting with its receiver, and then Mrs Hibbs three days before their appointment. Their knowledge of the company at the time of appointment consisted of the information given by the receiver, such information as may have been given to them by Mrs Hibbs in Mr Brown’s meeting with her, and the advice they received before accepting appointment. Mr Brown and
Ms Smart are experienced liquidators. It is a matter on the record of this Court that they are frequently appointed as liquidators by the Court. There is no evidence that they are or could be under the influence of either Mr Hibbs or Mrs Hibbs in their role, or that they were under the influence of either of them in accepting it. They were appointed under a power of attorney which I have found to be valid, and they were aware of the freezing order. Responsibly, they took advice on both these issues before accepting appointment and, equally responsibly, now seek the confirmation of the court of their appointments.
[37] I reject the submission that they cannot act with objectivity and independence.
Outcome
[38] There will be the following orders:
(a) On proceeding CIV-2017-409-880 I make an order under s 284(1)(g) of the Companies Act 1993 confirming the validity of the appointment of Mr Brown and Ms Smart as liquidators of BHBL.
(b) The interlocutory application by SMML on proceeding CIV-2017-409-
835 is dismissed.
(c) Costs on both applications are reserved, save that costs will follow the event. If costs are not agreed, memoranda may be filed within five
working days.
J G Matthews
Associate Judge
Solicitors:
Steindle Williams Legal, Auckland
Agent: Young Hunter, Christchurch
Anderson Lloyd, ChristchurchWaterstone Insolvency, Auckland
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