Tempest Litigation Funders Limited v Davies

[2020] NZHC 809

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2019-419-000200

[2020] NZHC 809

UNDER

the Companies Act 1993

IN THE MATTER OF

the liquidation of RAHMAN INVESTMENTS LIMITED (IN LIQUIDATION)

BETWEEN

TEMPEST LITIGATION FUNDERS LIMITED

Applicant

AND

KEVIN JOHN DAVIES

Respondent

Hearing:	20 March 2020
Appearances:	S M T Chambers for Applicant
Judgment:	24 April 2020

JUDGMENT OF ASSOCIATE JUDGE P J ANDREW

This judgment was delivered by Associate Judge Andrew on 28 April 2020 at 3.00 pm

pursuant to r 11.5 of the High Court Rules Registrar / Deputy Registrar Date………………………

TEMPEST LITIGATION FUNDERS LTD v DAVIES [2020] NZHC 809 [24 April 2020]

Introduction

[1]                  In February 2019, Rahman Investments Ltd (in liquidation) (RIL), a property development company, was placed into liquidation. The respondent, Mr Davies, was appointed liquidator.

[2]                  The applicant, Tempest Litigation Funders Ltd (Tempest), applies for a number of orders pursuant to s 284 of the Companies Act 1993 (the 1993 Act) and its related regulatory regime, seeking to impugn decisions and the conduct of Mr Davies at the first creditors’ meeting for RIL’s liquidation. Tempest contends that Mr Davies was not validly appointed; seeks to reverse decisions he made about votes and proxies; and seeks to remove him as a liquidator. It also applies for an order prohibiting Mr Davies from acting as a liquidator or receiver indefinitely.

[3]                  The director of Tempest is Mr Damien Grant. He attended the creditors’ meeting where a number of alleged creditors of RIL sought to have Mr Grant appointed as the liquidator. That did not happen. However, Tempest subsequently took an assignment of debt from the alleged creditors which sought Mr Grant’s appointment. Tempest thereby brings these current applications in its capacity, it claims, as a creditor. Mr Davies challenges Tempest’s standing to bring these applications.

[4]                  Mr Davies further contends that RIL is hopelessly insolvent, and that the applications against him are wholly without merit, brought only at the instigation of Mr Grant for improper and personal reasons.

Background facts

[5]                  RIL was incorporated for the purpose of undertaking a residential building project in Remuera. It was placed into liquidation by special resolution of its shareholders on 5 February 2019.

[6]                  On 14 February 2019, Mr Davies attempted to dispense with the creditors’ meeting pursuant to s 245 of the 1993 Act. However, one of the creditors called a

creditors’ meeting pursuant to s 243 and proposed that a Mr Grant Reynolds (not to be confused with Mr Grant) be appointed as liquidator.

[7]                  Mr Grant says he was also approached around mid-February to be a replacement liquidator by Clune Construction Ltd (Clune) and Ace-Tech Electrical (Ace-Tech), to which he was agreeable.

[8]                  On 21 February 2019, Mr Davies gave notice that a creditors’ meeting would be held on 1 March 2019. The agenda of the meeting was as follows:

(a)Discussion of the affairs of the company, including the liquidator’s first report;

(b)To confirm the appointment of the liquidator; or

(c)That Mr Grant Bruce Reynolds be appointed liquidator in place of   Mr Kevin John Davies; and

(d)Whether to appoint a creditors’ committee and select the members.

[9]                  Tempest says that prior to the creditors’ meeting a resolution had been presented to Mr Davies to replace him with Mr Grant and Mr Reynolds, as joint liquidators.

[10]              Essentially, what unfolded at that creditors’ meeting on 1 March 2019 is in dispute. Mr Davies was the chairman. Mr Grant and Mr Reynolds were in attendance, as representatives of Clune and Ace-Tech.

[11]The audio of the meeting was recorded, and minutes were also taken.

[12]              Tempest  says there were nine votes in favour of the resolution confirming  Mr Davies’ appointment as liquidator, and three against. That tally is recorded in the minutes. Mr Davies says that after removing the creditors who did not specify RIL as their debtor and recounting, there remained in fact 11 votes in favour of his appointment and only one against (namely, that of Dayle Timber Ltd). Mr Davies

claims that the votes of Clune and Ace-Tech should not have been counted because they were not creditors of RIL. Also, according to Mr Davies, in the confusion of the meeting the votes were wrongly counted and recorded as nine votes in favour and three against. Tempest was suspicious that three of the five proxy votes in favour of retaining Mr Davies as liquidator were from one of RIL’s directors and their two children. Mr Davies says there is no basis for such suspicion and that even if their votes were excluded, that still would have left eight votes in favour and one against (based on Mr Davies’ original calculation of 11 votes in favour and one against).

[13]              Following the creditors’ meeting, Mr Davies conducted an interview under oath with one of the directors of RIL, Mr Rahman, pursuant to s 265 of the 1993 Act.

[14]              On 12 June 2019, Mr Davies entered into a settlement deed with both directors of RIL, Mr Rahman and Ms Mohammed, whereby they both had to pay RIL the sum of $31,722 by 12 July 2019. They have not paid that sum.

[15]              Subsequent to the assignments of debt to Tempest (said to be owed by RIL to Ace-Tech and Clune), Tempest requested from Mr Davies the minutes and recording of the creditors’ meeting. In a letter to Tempest dated 25 June 2019, Mr Davies took issue with Clune and Ace-Tech’s claimed status as creditors; sought evidence of the assignment of their alleged debts to Tempest; and claimed that both Clune and Ace- Tech had carried out defective building work on the building project in Remuera.

[16]Tempest filed this current application on 5 July 2019.

[17]              On 9 September 2019, Tempest served Mr Davies with what it says was a notice of failure to comply pursuant to ss 285 and 286 of the 1993 Act. Tempest says that Mr Davies has not taken heed of that notice.

[18]              In his reporting as liquidator, Mr Davies sets out the reasons for RIL’s failure. He says the project had been poorly managed with substantial cost overruns and multiple disputes with trades people. At the time of his appointment, the construction of the property was incomplete, with a sizeable number of creditors owed hundreds of thousands of dollars.

[19]              RIL has no assets other than the property in Remuera. Mr Davies reports that there are visible leaks in the building with mould and fungal growth evident in the carpet.

[20]              The property was recently sold for $665,000. The first mortgagee is owed in excess of $1.5m and the second mortgagee in excess of $300,000.

[21]              Both directors of RIL petitioned for their own bankruptcy on 31 July 2019 before proceedings could be served on them. They are now living in Australia.

[22]              On 6 August 2019, Mr Davies lodged a complaint against the two directors with the Registrar of Companies and the National Enforcement Unit of the Companies Office. In his letter of complaint, Mr Davies noted that RIL had traded insolvently (both in terms of cash flow and its balance sheet) for over two years, causing serious loss to its creditors and mortgagees.

The application

[23]Tempest applies for the following orders:

(a)For leave to apply for orders (as a creditor), pursuant to s 284(1)(b), (d) and/or (g) of the 1993 Act, against the liquidator, Mr Davies;

(b)Confirming, reversing or modifying Mr Davies’ decision to include certain  creditors’ votes/proxies at the creditors’ meeting pursuant to   s 284(1)(b);

(c)Requiring Mr Davies to produce the accounts and records of the liquidation for audit, pursuant to s 284(1)(d);

(d)Declaring whether or not Mr Davies was validly appointed or had validly  assumed  custody  or  control  of  the  property,  pursuant  to  s 284(1)(g);

(e)Removing Mr Davies as liquidator of RIL and an order that he should not be entitled to his remuneration, pursuant to Reg 24(2) of the Companies Act 1993 Liquidation Regulations 1994;

(f)Prohibiting Mr Davies from acting as a liquidator or a receiver of any company indefinitely, pursuant to s 286(5);

(g)Setting aside the resolution confirming the appointment of Mr Davies as liquidator, an order that a new meeting be held to consider and vote in a resolution to replace the liquidator, and an order that related creditors must not vote in the resolution to replace the liquidator, pursuant to s 245(a) of the 1993 Act; and

(h)That Mr Davies provide a list of the creditors that have filed in liquidation of RIL.

Relevant legal principles

[24]Section 284 of the 1993 Act reads:

Court supervision of liquidation

(1)        On the application of the liquidator, a liquidation committee, or, with the leave of the Court, a creditor, shareholder, other entitled person, or director of a company in liquidation, the Court may –

(a)Give directions in relation to any matter arising in connection with the liquidation:

(b)Confirm, reverse, or modify an act or decision of the liquidator:

(c)Order an audit of the accounts of the liquidation:

(d)Order the liquidator to produce the accounts and records of the liquidation for audit and to provide the auditor with such information concerning the conduct of the liquidation as the auditor requests:

(e)In respect of any period, review or fix the remuneration of the liquidator at a level which is reasonable in the circumstances:

(f)To the extent that an amount retained by the liquidator as remuneration is found by the Court to be unreasonable in the circumstances, order the liquidator to refund the amount:

(g)Declare whether or not the liquidator was validly appointed or validly assumed custody or control of property:

(h)Make an order concerning the retention or the disposition of the accounts and records of the liquidation or of the company.

(2)        The powers given by subsection (1) of this section are in addition to any other powers a Court may exercise in its jurisdiction relating to liquidators under this Part of this Act, and may be exercised in relation to a matter occurring either before or after the commencement of the liquidation, or the removal of the company from the New Zealand register, and whether or not the liquidator has ceased to act as liquidator when the application or the order is made.

(3)Subject to subsection (4) of this section, a liquidator who has –

(a)Obtained a direction of a Court with respect to a matter connected with the exercise of the powers or functions of liquidator; and

(b)Acted in accordance with the direction –

is entitled to rely on having so acted as a defence to a claim in relation to anything done or not done in accordance with the direction.

(4)        A court may, on the application of any person, order that, by reason of the circumstances in which a direction was obtained under subsection (1) of this section, the liquidator does not have the protection given by subsection

(3) of this section.

[25]Section 286 of the 1993 Act reads:

Orders to enforce liquidator's duties

(1)An application for an order under this section may be made by –

(a)a liquidator:

(b)a person seeking appointment as a liquidator:

(c)a liquidation committee:

(d)a creditor, shareholder, other entitled person, or a director of the company in liquidation:

(e)a receiver appointed in relation to property of the company in liquidation:

[(f) if the liquidator is a qualified statutory accountant (within the meaning of section 5(1) of the Financial Reporting Act 2013), a member of the governing body of the association of accountants of which the qualified statutory accountant is a member:]

(g)if the liquidator is a barrister and solicitor or a solicitor, the President of the New Zealand Law Society:

(h)an Official Assignee:

(i)not in force.

(2)        No application may be made to a court by a person other than a liquidator in relation to a failure to comply unless notice of the failure to comply has been served on the liquidator not less than 5 working days before the date of the application and, as at the date of the application, there is a continuing failure to comply.

…

[(5) If the Court is satisfied that a person is unfit to act as a liquidator by reason of persistent failures to comply or the seriousness of a failure to comply, –

(a)the Court must make a prohibition order; and

(b)the period of the order is a matter for the discretion of the Court but the Court may make a prohibition period for an indefinite period.]

[26]              The Court’s jurisdiction under ss 284 and 286 of the 1993 Act to review acts and decisions by liquidators is a supervisory one, to be exercised only where the liquidator has acted fraudulently or in a way which no reasonable liquidator would have acted.

[27]              This principle was recognised in Gellert Developments Ltd (in liq) where Glazebrook J stated the following:1

The overall approach taken under the Companies Act 1993 is to allow liquidators to operate free from court supervision. Sections 284 and 286 do, however, allow the court to exercise supervisory powers if necessary. A court will, however, only interfere with a liquidator’s decision where there is fraud, where it can be demonstrated that the liquidator’s decision has not been exercised bona fide or where the liquidator has acted in a way in which no reasonable liquidator would have acted.

Analysis and decision

[28]There are two principal issues that arise for determination:

(a)The standing of Tempest to bring these applications – i.e. whether Tempest is a creditor for the purposes of s 284 of the 1993 Act; and

1      McCullagh v Gellert [2001] 9 NZCLC 26,714 at [26].

(b)If it is, whether the Court should grant leave to apply for the orders sought under s 284(1)(b), (d) and (g) – this includes an assessment of Tempest’s allegations of bad faith against Mr Davies and its claim that he acted in a way that no reasonable liquidator would have (thereby justifying the Court’s intervention).

Is Tempest a creditor for the purposes of s 284?

[29]              Mr Rice, counsel for Mr Davies, submitted that Tempest is the assignee of debts from companies which were not creditors of RIL. He contended the documentation Tempest relied upon does not establish a written contract between RIL and either Clune or Ace-Tech (the two alleged creditors); that the relevant invoices were issued to Mr Rahman personally rather than RIL; and that RIL has never made any payments to either alleged creditor. In addition, Mr Davies queried the proof of debt from both Clune and Ace-Tech and is yet to receive a response.

[30]              Tempest has provided no real explanation as to why it became the assignee of debts in a hopelessly insolvent company with virtually no prospect of recovery.2 Clune filed proof of debt in the liquidation, claiming $25,568.54; and Ace-Tech likewise, claiming a debt of $25,015.

[31]              Ms Chambers, counsel for Tempest, submitted that the fact the directors of RIL paid Ace-Tech and Clune with their own money is not determinative of the status of those two entities as creditors, but rather indicative of the directors’ poor financial management and incompetence in running a business. That claim of incompetence cannot be disputed.   Such financial mismanagement provides real challenges, as   Mr Davies has experienced here, in determining who might be a creditor. In my view, the better approach is simply to assume that standing has been established and turn to address the critical issue.

[32]              Therefore, despite the force of Mr Rice’s submissions, I find that for the purposes of this judgment, Tempest is a creditor of RIL and thus has standing under

2      The assignments occurred in March 2019 (after the creditors’ meeting) and in each case the consideration was $10.

s 284 of the 1993 Act. In the circumstances of this case, the real issue and therefore focus of this judgment is the question of whether leave should be granted under s 284. That point is decisive. There is little to be achieved by addressing the question of standing and the parties’ competing positions on that issue.

Should leave be granted under s 284?

[33]              In accordance with standard practice, I heard the application for leave together with the substantive application.3

[34]              In Trinity Foundation (Services No 1) Ltd v Downey, this Court held that a creditor seeking leave under s 284 must do more than merely demonstrate that its claim is sustainable (for instance, that the proposed claim is not statute barred or that it would survive a strike out application). A creditor must also show that it has an arguable case. An arguable case has two characteristics; first, it must have a credible factual basis; secondly, there must be a reasonable likelihood that, if the claim is established, the Court will disturb the act or decision in question.4 That second step acknowledges that liquidators should remain free to undertake their duties in a cost-effective and efficient manner without their everyday decisions being challenged.5

[35]              For the purposes of determining whether to grant leave and in considering the merits of Tempest’s claims, I have carefully read the transcript of the creditors’ meeting and also listened to the audio recording. I do not make any final determination about what occurred at that meeting, or the reasons why it was, as the parties agreed, somewhat chaotic. In the absence of a full testing of the evidence, it would be inappropriate to do so. However, the transcript and the audio recording have helped inform my assessment in determining Tempest’s application for leave.

[36]              It is important to note that the legislative and regulatory framework anticipates that creditors’ meetings of the kind here will on occasions present real challenges to

3      Arnerich v Vaco Investments (Lincoln Road) Ltd (in liq) [2018] NZHC 1974, see approach at [45]– [60].

4      Trinity Foundation (Services No 1) Ltd v Downey [2005] 9 NZCLC 263,917 (HC) at [21].

5      At [18]; this approach and test was affirmed on appeal in Trinity Foundation (Services No 1) Ltd v Downey [2006] 3 NZCCLR 401 (CA).

liquidators conducting those meetings.6 That might particularly be so in the case of a failed construction project such as the one here, where there was a distinct lack of accurate documentation and multiple “cash jobs” apparently by friends and relatives of the two directors, some of whom have returned to Bangladesh.

[37]              I also record commentary which observes that it is highly unlikely a liquidator will finally admit or reject a claim at or before the initial creditors’ meeting. Voting entitlements at the initial creditors’ meeting are likely to be settled by the chairperson at the meeting. It is also noted that because it is unlikely that more than five working days’ notice of the initial creditors’ meeting will be given, only minimal time is provided to creditors to file their claim forms and submit proxies.7

[38]              It may be that at the meeting Mr Grant and others present raised some legitimate concerns about Mr Davies’ failure to strictly adhere to the requisite regulatory standards. Nonetheless, in my view, there is no evidence to establish any bad faith by him or that he (for example) solicited proxies. Likewise, there is no probative evidence to suggest that he was less than impartial in dealing with the various alleged creditors. Not only was the meeting somewhat chaotic because of the manner in which RIL had been run by its previous directors, but Mr Davies’ task was made increasingly difficult by what appeared to be aggressive tactics by some of the parties present. It may be that Mr Davies’ relative lack of experience was a factor, but the evidence I have reviewed suggests he acted with considerable restraint and patience and was prepared to make compromises about the critical issue of the status of proxies and postal votes when challenged by some of the parties present. Whatever concerns Tempest might have had, in my view, litigation was an unnecessary and inappropriate way to try resolve them.

[39]              In relation to the issue of independence, Mr Davies had not, at the time of the creditors’ meeting, favoured Mr Rahman. As liquidator, Mr Davies clearly tried to treat the participants present in an even-handed and fair manner. His subsequent decision to complain to the authorities about Mr Rahman and Ms Mohammed

6      See, for example, s 304(3) of the 1993 Act which provides that if a liquidator subsequently considers that a claim has been wrongly admitted or rejected in whole or in part, he/she may revoke or amend that decision.

7      Company Law – A to Z of New Zealand Law (online ed, Thomson Reuters) at [CA2.4306(2)].

(including allegations of criminal conduct) clearly discredits Tempest’s claim that Mr Davies lacked independence.

[40]              As I have noted, RIL is hopelessly insolvent, its directors are bankrupt and now living in Australia. RIL’s sole asset, namely the property in Remuera, was recently sold for merely $665,000, while the secured mortgagee debt altogether is nearly $2m. The liquidation is  nearly  complete  and  importantly,  there  is  no  evidence  that Mr Davies has failed to pursue legitimate lines of enquiry to establish whether there are other assets of value. Likewise, there is not a shred of evidence to suggest that there might be any other assets. In all the circumstances, I find that there is no utility or any legitimate basis to grant leave to Tempest under s 284. It would be a complete waste of resource, and although Tempest might have an arguable case of irregularity in relation to how the creditors’ meeting was conducted, the evidence falls well short of demonstrating any serious issues of bad faith or material procedural irregularity justifying judicial enquiry. Again, as this Court held in Trinity Foundation, liquidators should remain free to undertake their duties in a cost-effective and efficient manner without their everyday decisions being challenged.8

[41]              My refusal to grant leave pursuant to s 284 means that I now need only deal with the orders sought at paras (e) – (h) of the application (the last four heads of claim set out above at [23]).

[42]              I also dismiss each of these applications. There is no evidential foundation to establish bad faith or any other serious misconduct by Mr Davies. There is simply no basis to justify making an order either; to remove Mr Davies as the liquidator; that he is not entitled to his remuneration; or to call a fresh meeting to consider a resolution to replace him. It also follows that it is unnecessary for Mr Davies to now provide a list of the creditors that have filed in liquidation of RIL.

[43]              The application pursuant to s 286(5) of the 1993 Act that Mr Davies be prohibited from acting as a liquidator or receiver of a company indefinitely, is simply misguided. The evidence falls well short of meeting the requisite threshold to justify

8      Trinity Foundation (Services No 1) Ltd v Downey, above n 4, at [18].

making  such an order.   The application also supports Mr Davies’ contention that Mr Grant has merely brought the proceedings for improper and personal reasons.

[44]              I also reiterate that Tempest filed these proceedings more than two months before it had served a failure to comply notice on Mr Davies, contrary to the requirements of s 286(2) of the 1993 Act. I therefore find there is no legitimate failure to comply notice that might properly found an application under s 286. This improper conduct, again, reflects poorly on Tempest.

[45]              In his affidavit in support of the application, Mr Grant made some very serious allegations against Mr Davies. At paragraph 3.15 of that affidavit, there is a heading which reads “Dishonestly declaring to have proxies and possible soliciting of proxies”.

[46]Further, at paragraph 3.14, Mr Grant has said:

On the face of it, it appears the proof of debts were fictitious or manufactured and ought not to have been accepted”. Mr Davies has not been able to provide

“Any supporting evidence that the claims were legitimate and enquiring into the matter should follow to ensure there was no fraudulent or dishonest behaviour occurring or at the very least that illegitimate proof of debts are not being accepted which will effectively reduce the recovery of legitimate creditors if a distribution is made on a pro rata basis”.

[47]At paragraph 3.17, Mr Grant has also stated:

At this point, it became clear that Mr Davies could not be trusted and that each and every proof of debt, proxy and postal votes needed to be verified prior to a vote being taken.

[48]              Lastly, Mr Grant also raised the issue of a potential conflict of interest in relation to the role of Mr Davies’ daughter, who is listed as an owner of the real estate agency which dealt with the Remuera property.

[49]              At the hearing, Ms Chambers, on behalf of Tempest, made it clear that it was not going to pursue its allegations of fraud and/or dishonesty and, instead, was focusing on what it said was Mr Davies’ unreasonable conduct at the creditors’ meeting. However, I accept the submission of Mr Rice that Mr Grant’s intemperate

and unsubstantiated allegations about dishonest conduct should never have been made.9

Result

[50]              Tempest’s application dated 5 July 2019 seeking orders under the 1993 Act and the Companies Act 1993 Liquidation Regulations 1994, is dismissed (except to the extent that leave has already been granted to commence by way of an originating application).10

[51]              As to costs, I am of the preliminary view that the respondent, Mr Davies, is entitled to increased costs (on the basis of an initial 2B starting point) in accordance with r 14.6 of the High Court Rules 2016. As I have recorded in this judgment, these proceedings should never have been brought, and Mr Grant’s allegations of fraud and dishonesty against Mr Davies should never have been made (and ultimately, were not even pursued).

[52]              If the parties cannot agree on costs, memoranda (no more than three pages) are to be filed and served within 14 working days.

Associate Judge P J Andrew

9      At the hearing, there was no cross-examination of the deponents of the various affidavits except for some very brief evidence from Mr Davies, who responsed to a question from me as to what his relevant experience and qualifications were. Ms Chambers indicated that the applicant was not pursuing allegations of fraud and/or dishonesty against Mr Davies in response to questions from me as to how I could properly determine such matters solely on the affidavits when Mr Davies firmly denied any conduct of the kind alleged. Even when there is an originating application, deponents of affidavits may be cross-examined: High Court Rules 9.74 and 19.4. For example, see New Zealand Lifecare Ltd v Official Assignee [2018] NZHC 17 at [2].

10 See paragraph 1(a) of the application dated 5 July 2019.