Tobem Holdings Limited v Grant

[2023] NZHC 3473

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV 2023-404-001624

[2023] NZHC 3473

UNDER

Companies Act 1993 and Part 19 of the High Court Rules 2016

BETWEEN

TOBEM HOLDINGS LIMITED

Applicant

AND

DAMIEN GRANT and ADAM

STEVENSON BOTTERILL (as liquidators of KID COUNTRY HOLDINGS LIMITED)

Respondents

Hearing:	2 October 2023
Appearances:	D Bigio KC and T Nelson for the Applicant K A Cocks and L Z Rong for the Respondents
Judgment:	30 November 2023

JUDGMENT OF TAHANA J

This judgment was delivered by me on 30 November 2023 at 4.30pm Pursuant to Rule 11.5 of the High Court Rules

…………………………

Registrar/Deputy Registrar

Solicitors/Counsel:

Patel Nand Legal, Auckland

Waterstone Insolvency, Auckland Shortland Chambers, Auckland Bankside Chambers, Auckland

TOBEM HOLDINGS LIMITED v GRANT [2023] NZHC 3473 [30 November 2023]

Access to company records

[1]    Tobem Holdings Ltd (Tobem) is the principal creditor in the liquidation of Kid Country Holdings Ltd (KC Holdings) (in liquidation). The sum owing to Tobem currently amounts to more than 99.75 per cent of KC Holdings’ total indebtedness to creditors.

[2]    Tobem seeks access under s 256(1) of the Companies Act 1993 (the Act) to records of KC Holdings for the purpose of determining whether it should fund investigations into potential claims against the directors of KC Holdings. Tobem says the liquidators have failed to investigate, and have indicated there are insufficient funds to do so.

[3]    The liquidators oppose access in part. They say they have not acted unreasonably and that they are willing to investigate further but Tobem has refused to meet with them.

[4]    The Court may require a liquidator to provide a creditor access to documents if there are good reasons for doing so.1 Before considering whether there are good reasons, I first set out the relevant background, the categories of documents sought and the relevant law.

Relevant background

Tobem claims against KC Holdings

[5]    On 29 June 2020, Tobem filed a claim against KC Holdings claiming damages due to the cancellation of its lease at Lincoln Road, Henderson and claiming unpaid monies (for rent and operating expenses) under that lease.

[6]    The childcare business that was intended to operate out of the Lincoln Road premises was a wholly owned subsidiary of KC Holdings, KC Lincoln Road Ltd (KC Lincoln Road), which was incorporated on 17 April 2018.

1      Levin v Lawrence [2013] NZCA 394.

[7]    On 6 October 2020, KC Holdings resolved to remove its wholly owned subsidiary, Kid Country St Johns Ltd (KC St Johns) from the register and the company was removed on 15 October 2020. The business of KC St Johns was sold.

[8]    On 31 March 2022, KC Holdings resolved to remove another of its wholly owned subsidiaries, Kid Country Te Atatū Ltd (KC Te Atatū). The reason for this is unknown.

[9]    On 31 May 2022, less than two weeks prior to the scheduled hearing of Tobem’s claim, the shareholders resolved to place KC Holdings into liquidation. The respondents were appointed as joint liquidators.

Progress of the liquidation

[10]   On 8 June 2022, the liquidators issued their first report indicating they expected to complete their preliminary investigations within two months, and that KC Holdings’ assets and liabilities were unknown.

[11]   On 12 July 2022, at a creditors’ meeting, Tobem voted against the liquidators’ appointment, but was outvoted by two other creditors, who had each given their proxy to the chair. Those creditors had claims of $6,624.00 and $994.91 respectively.

[12]On 29 July 2022, Tobem lodged a proof of debt claim in the liquidation for

$234,125.35, which related primarily to unpaid rent and operating expenses. This was separate from the post-cancellation items claimed in the proceedings.

[13]   The liquidators did not consent to Tobem continuing its claims against KC Holdings. Tobem sought leave to continue, and this was subsequently granted.2 Tobem was unsuccessful in seeking costs against the liquidators personally.3

[14]   On 10 January 2023, the liquidators issued their second report indicating they had not realised any assets, that based on current realisations there would be no

2      Tobem Holdings Ltd v Kid Country Holdings Ltd (in liq) [2022] NZHC 2367.

3      Tobem Holdings Ltd v Kid Country Holdings Ltd (in liq) [2022] NZHC 3193.

distributions to creditors, and that they had not identified any assets to be realised. The report also noted that investigation into the affairs of the company was outstanding.

[15]   On 3 February 2023, I found in favour of Tobem in its claim by way of formal proof against KC Holdings and I awarded damages for the sum of $2,792,247.24.4

[16]   On 10 May 2023, Tobem requested information from the liquidators including financial records and details of any steps the liquidators had taken in their investigations. The liquidators responded on 18 May 2023 indicating they were open to investigating and pursuing claims however, the company “currently has no funds.” They suggested a meeting to discuss the affairs of the company.

[17]   On 26 May 2023, Tobem responded indicating that it was willing to fund a full investigation, but it will only do so in relation to liquidators who “have its confidence.” The letter said, “[w]ith respect, the current liquidators do not, and that will not change.” They invited the liquidators to resign. Tobem repeated its request for the information set out in its 10 May 2023 letter.

[18]   On 16 June 2023, the liquidators responded indicating that they were in the process of gathering information as part of the investigation. They declined Tobem’s request for information as they considered it would do little to assist in the liquidation.

[19]   On 4 July 2023, the liquidators issued a third report for the period from        1 December 2022 to 30 May 2023. The report notes that the liquidators are “continuing to correspond with creditors and investigate the affairs of the Company.”

Categories of documents

[20]   The liquidators agree to abide the Court’s decision on access to the following documents:

(a)all    financial,    accounting    and   tax   records   (including    financial statements, bank statements and tax returns);

4      Tobem Holdings Ltd v Kid Country Holdings Ltd (in liq) [2023] NZHC 98.

(b)all corporate governance records (including all board meeting minutes and resolutions); and

(c)all records of communications between the liquidators and KC Holdings’ directors and shareholders (including all emails, texts, letters and file notes).

[21]The liquidators oppose access to documents relating to:

(a)the circumstances leading to KC Holdings’ liquidation;

(b)any assets disposed of by KC Holdings within six years of the date of its liquidation;

(c)the affairs of KC St Johns, KC Lincoln Road, KC Te Atatū and any other related companies;

(d)the affairs of Kid Country Ltd, Kid Country Kumeu Ltd and Waipani4 Ltd;

(e)the removal of KC St Johns and KC Te Atatū from the companies register and any sale of their businesses;

(f)potential claims against the directors or third parties, the potential pooling of assets of related companies under s 271 of the Act, and any steps taken by the liquidators to investigate such claims; and

(g)any arrangement regarding the liquidators’ remuneration.

Relevant law

[22]   Under s 256(1)(a)(ii) of the Act the Court has discretion to require a liquidator to disclose documents to a creditor, as follows:

256     Duties in relation to records

(1)The liquidator of a company must—

(a)keep accounting records and other documents of the liquidation and permit those records, and the records and other documents of the company, to be inspected by—

(i)any liquidation committee appointed under section 314, unless the liquidator believes on reasonable grounds that inspection would be prejudicial to the liquidation; and

(ii)if the court so orders, a creditor or shareholder; …

[23]   The parties accept that the Court of Appeal decision in Levin v Lawrence is relevant and prescribes the test as to when access should be granted, as follows:5

[53]      Against that legislative background, we endorse the “good reason” test adopted by Toogood J, and ultimately not contested on this appeal. While no inflexible rules can or should be laid down, we think the “good reason” test can be elaborated to this extent:

(a)Mere suspicion or assertion by a creditor that a liquidator has not undertaken — or is not undertaking — the liquidator’s statutory task properly is not sufficient.

(b)It is not permissible for a creditor to apply merely in order to embark on a fishing expedition — in order to sift through the accounts and records of the liquidation to see if that might turn something up.

(c)As a minimum, the applicant must put forward some persuasive, tangible or concrete reason why inspection should be granted. An example might be where the creditor, from its own dealings with the company in liquidation, has a genuine concern about a particular aspect of the company’s affairs. If the liquidator declined to investigate this area, or declined to say whether it had been investigated, we think the s 256(1)(a)(ii) threshold would be crossed.

[24]   Any prejudice caused to the liquidation is also an “obvious factor in the exercise of the s 256(1)(a)(ii) discretion, but it is certainly not the sole criterion.”6

Is there good reason for granting Tobem access to the documents requested?

[25]   Tobem says it needs access to the documents to determine whether it will fund further investigations because there is a reasonable basis to suspect there are grounds for potential claims against the directors of KC Holdings and other parties.

5      Levin v Lawrence [2013] NZCA 394.

6 At [61].

[26]   In opposing access, the liquidators rely on the affidavit of Damien Grant, one of the liquidators. Mr Grant says that:

We indicated to Tobem that we were open to investigating and pursuing claims against the Company directors and said that we would be grateful for any assistance Tobem could provide in pursuit of these claim[s], whether that be some form of funding (given that the Company has no funds) or insight and information into these purported claims.

[27]   The liquidators requested Tobem to provide reasons for the information requested and case law to support the request. Tobem responded by saying it would only be willing to fund liquidators who have its confidence. Tobem requested their resignation which was rejected. Against that context, the liquidators say that Tobem is in effect saying that the liquidators have not performed their obligations and that is not a good reason to require access to documents.

[28]   Tobem refers to the absence of funds available to the liquidator and the fact that there is a basis for investigating potential claims against the directors as the reason for access. I do not understand the application to be predicated on any liquidator misconduct, although I accept that Tobem has expressed a lack of confidence in the liquidators so may also be motivated by that sentiment.

[29]   Mr Grant says on the current realisations, it is unlikely there will be any distribution to any creditor. He acknowledges that a potential avenue for recovery, which may be worth investigating, are transfers recorded by the shareholders to the company on the current account activity. The liquidators will be requesting further documentation from the shareholders to determine whether there was a transfer of value as this could result in a restatement of the current account balances.

[30]   At the hearing, Tobem provided a group structure chart indicating that KC Holdings was a holding company for three individual childcare centre businesses (KC St Johns, KC Te Atatū and KC Lincoln Road). KC Holdings resolved to wind up KC St Johns and KC Te Atatū after proceedings  were filed.  While the business of KC  St Johns was sold, it is unclear whether KC Holdings received any proceeds from that sale as sole shareholder of KC St Johns.

[31]   The reason for the winding up of KC Te Atatū is unknown. Tobem provided publicly available information regarding a childcare centre called The Fire Station at Waipani Road, Te Atatū which Tobem alleges is likely the business of KC Te Atatū. It shares similar branding to other Kid Country childcare centres.

[32]   Kid County Ltd is a 49 per cent shareholder in KC Holdings, and Waipani4 Ltd (Waipani4) is in turn a 49 per cent shareholder in Kid Country Ltd. Waipani4 was incorporated on 4 February 2020. Tobem says there is reason to suspect that KC Holdings removed KC Te Atatū from the register for the purposes of defeating Tobem’s claim.

[33]   Mr Grant says that the liquidators do not consider it suspicious that the two wholly owned subsidiaries were removed from the register because there are no known inter-company loans or indebtedness between the companies, and at the time, Tobem had not yet succeeded in its claim. It cannot therefore be inferred that the removal was for the purpose of defeating Tobem’s interests.

[34]   I disagree. It is the fact of proceedings (and not the outcome) that gives rise to suspicion because by that time, KC Holdings was aware it was facing potential liability in excess of $3 million. I accept Tobem’s argument that this (together with the further information provided by Tobem) justifies investigating the removal of the two wholly owned subsidiaries.

[35]   The liquidators rely on United Civil Construction Ltd v Hayfield SHA Ltd7 to say that lack of dialogue may be a basis for denying access. In United Civil Construction Ltd, the Court of Appeal upheld the High Court’s decision not to order access because it did not consider that the documents sought would be of material assistance to the party seeking them.8 In that context, the Court of Appeal noted that United Civil Construction Ltd may have been better served by meeting with the liquidators rather than assuming that the funding agreements were relevant. There was no good reason for those documents to be made available.

7      United Civil Construction Ltd v Hayfield SHA Ltd (in liq) [2023] NZCA 377.

8 At [47].

[36]   I do not consider that Tobem’s failure to meet with the liquidator justifies declining access in circumstances where the liquidator says on the one hand it will investigate but on the other hand that it has insufficient funds. If the liquidators are intending to investigate, it is unclear how any investigation will be funded.

[37]   If any investigation is to proceed, it will need Tobem’s funds. It is not unreasonable for Tobem to request access to enable it to make an informed decision on whether to fund any investigation, especially in circumstances where it is owed

99.75 per cent of the debt.

[38]   I accept that Tobem distrusts the liquidators. I do not however, consider that the liquidators have acted unreasonably or contrary to their obligations. It appears that the inaction to date in investigating potential claims arises from the lack of funds and the liquidators’ view that there is no basis for investigating the removal of the wholly owned subsidiaries.

[39]   The liquidators also say Tobem’s request is too general, insufficiently focused and appears to be driven by a desire to second guess their professional decisions. The liquidators refer to Willeston Ventures Ltd v Scutter9 and say the Court should be slow to intervene because the matter concerns an assessment of commercial matters and whether claims should be pursued, which is a matter within the liquidators’ domain.

[40]   In Willeston Ventures Ltd, Ellis J declined to grant access because of concern that the applicant was second guessing the professional decisions of the liquidator. The Court considered that the orders would unnecessarily delay the liquidation and cause further loss to the creditors. Here, Tobem is the largest creditor (by a significant margin) so there is no risk of loss to other creditors nor risk of unnecessary delay. Further, there is evidence that the liquidators do not have funds to investigate and are not inclined to investigate the removal of the wholly owned subsidiaries.

[41]   Counsel for the liquidators also refer to Levin v Lawrence where the Court of Appeal noted that the application for access had been brought out of distrust in relation to the liquidators’ discharge of their statutory duties and that submissions had been

9      Willeston Ventures Ltd v Scutter [2016] NZHC 3146.

made alleging incompetence without any proper basis.10  Here, while there is clearly a level of distrust of the liquidators there is also the reality of insufficient funds for any investigation. Tobem will be required to fund any investigation so it is not unreasonable for it to have access in order to determine whether it should do so or not.

[42]   Unlike in Levin v Lawrence, this application is not a fishing expedition. Two wholly owned subsidiaries were removed after proceedings were filed against KC Holdings. While there may be legitimate reasons for that, the public information provided by Tobem gives rise to a suspicion that the business of KC Te Atatū is still operating, and it is therefore unclear why KC Te Atatū was removed. That raises a reasonable basis for investigating further.

[43]   The liquidators also say they have not acted unreasonably in declining to provide access. They refer to their professional obligations to preserve confidential, commercially sensitive and/or private information, and to not disclose documents unless there is a legal or professional obligation to do so.

[44]   Tobem is willing to agree to any necessary orders to protect confidentiality and privilege, so access can be provided without offending those obligations. Further, it is not necessary to find a breach of the liquidators’ duties in order to justify granting access if there is evidence that the liquidators are unlikely to investigate without any funds to do so.

[45]   “Good reason” does not require that the applicant establish that the liquidators have acted unreasonably. Access has previously been provided to a creditor when a liquidator has had insufficient funds and a creditor is wanting access to consider possible claims against the directors of the company.11 In that case, it appeared from the liquidators’ first report that they did not have enough funds to undertake extensive litigation. Here, the liquidators have communicated to Tobem that there is a lack of funds.

10     Levin v Lawrence [2013] NZCA 394.

11     Body Corporate 194481 v Mason and Mason-Thomas [2016] NZHC 2858 at [9].

[46]   In Re Ocean Shipping Ltd (in liq), Fisher J held “there is a very strong presumption that the creditors of a failed company are entitled to a full and thorough investigation of the financial history and status of the company” and that “is especially the case where they are prepared to fund the exercise.”12

[47]   In relation to activities of other related companies, the liquidators argue that the documents regarding the affairs of Kid Country Ltd, Kid Country Kumeu Ltd and Waipani4 Ltd have either been disclosed by way of the liquidators’ statutory reports or the records are not those of KC Holdings. Any orders for access will only apply to documents within the control of the liquidators as a result of the liquidation of KC Holdings so do not extend to documents within the control of any third party related company.

[48]   I consider that to enable Tobem to determine whether to fund further investigations into potential claims, it is appropriate that it be provided with access to the documents sought, except those relating to the liquidators’ remuneration. That is not relevant in circumstances where the liquidators have confirmed that the company “currently has no funds.” I also decline to require the liquidators to provide the documents by way of affidavit. This is not discovery.

Result

[49]   I am satisfied that the liquidators should permit inspection of the documents and/or records sought in Tobem’s application except for those captured by 1.1(d)(vii) of the application.

[50]   I order the liquidators to provide access to Tobem subject to the following conditions:

(a)they are not required to make available any document and/or record that is not in their possession and/or control as a consequence of the liquidation of KC Holdings;

12     Re Ocean Shipping Ltd (in liq) HC Auckland M348/96, 16 July 1996 at 2 to 3.

(b)they are not required to make available for inspection documents and/or records for which they or KC Holdings can claim privilege;

(c)they are not required to make available for inspection confidential and/or commercially sensitive documents and/or records other than to the professional advisers of Tobem for the sole purpose of advising Tobem in relation to the liquidation and the issue of whether to fund any further investigation; and

(d)Tobem is to pay the liquidators’ actual and reasonable costs of compiling and providing the documents and/or records.

[51]   I grant leave to apply for further directions if the parties are unable to agree on disclosure of further documents reasonably requested by Tobem’s forensic accountant for the purpose of advising Tobem on the liquidation and the issue of whether to fund any further investigation.

Costs of this application

[52]   Tobem has been successful in this application. My preliminary view is that Tobem is entitled to costs on a 2B basis. If the parties cannot agree costs, memoranda are to be filed.

Tahana J