Tobem Holdings Ltd v Kid Country Holdings Ltd (in liq)
[2022] NZHC 2367
•16 September 2022
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2020-404-000987
[2022] NZHC 2367
UNDER Section 248 of the Companies Act 1993 BETWEEN
TOBEM HOLDINGS LIMITED
Plaintiff
AND
KID COUNTRY HOLDINGS LIMITED (IN LIQUIDATION)
Defendant
Hearing: 7 September 2022 Appearances:
T Nelson for the Plaintiff
A Botterill as liquidator for the Defendant
Judgment:
16 September 2022
JUDGMENT OF GORDON J
This judgment was delivered by me
on 16 September 2022 at 12.30 pm, pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar Date:
Solicitors/Counsel:
T Nelson, Auckland
Waterstone Insolvency, Auckland
TOBEM HOLDINGS LTD v KID COUNTRY HOLDINGS LTD (IN LIQ) [2022] NZHC 2367 [16 September 2022]
Introduction
[1] The plaintiff, Tobem Holdings Ltd (Tobem), commenced proceedings against the first defendant, Kid Country Holdings Ltd (Kid Country), on 29 June 2020. The proceedings concern alleged defaults on lease obligations by Kid Country, as lessee, to Tobem, as lessor.
[2] On 31 May 2022, nine working days before the scheduled hearing, Kid Country was placed into voluntary liquidation.
[3] Tobem now seeks leave under s 248(1)(c) of the Companies Act 1993 (the Act) to continue legal proceedings against Kid Country.
[4]The appointed liquidators of Kid Country oppose the application.
Background
[5] In February 2019, Tobem purchased a commercial property from Vaco Investments (Henderson Project) Ltd (Vaco) with tenancies in place.
[6] The most significant commercial tenancy was a lease agreement with Kid Country, dated 23 November 2016, with an annual rent of $390,000.
[7] Settlement was on 19 July 2019. Kid Country then contacted Tobem and said it considered the lease agreement invalid because of various alleged acts or omissions by Vaco, principally concerning representations as to the way in which rent would be calculated.
[8] The lease agreement between Tobem and Kid Country commenced on 18 August 2019. However, Kid Country did not make a single rental or OPEX1 payment to Tobem. After repeated and unsuccessful efforts to engage with Kid Country, Tobem cancelled the lease in June 2020.
1 Operational expenditure.
[9] On 29 June 2020, Tobem filed this proceeding against Kid Country and Vaco, seeking compensation for its losses. Vaco’s sole director, Anthony Arnerich, was joined as a third party.2 Kid Country actively defended the proceeding and brought cross claims against Vaco and Mr Arnerich.3 Briefs were served by both Tobem and Kid Country. The trial was scheduled to start on 13 June 2022.
[10] On 31 May 2022, Kid Country was placed into voluntary liquidation by a special resolution of its shareholders.4 The liquidation effectively stayed the proceeding to determine Tobem’s claims.5 Adam Botterill and Damien Grant were appointed as joint liquidators.
[11] Tobem duly lodged a proof of debt claim of $234,135.35 with the liquidators, being the sum Kid Country is said to owe Tobem under the lease agreement. Other claims pursued by Tobem against Kid Country in the proceeding – involving financial loss – cannot be characterised as debt and are not sought as a debt claim.
[12] Tobem moved to have the liquidators replaced but was outvoted. Tobem says it was outvoted by two minor creditors with claims of $6,624.00 and $944.91 respectively, each of which had given their proxy vote to the chair of the meeting.
[13] As at 2 September 2022, the liquidators had received three proofs of debt. The liquidators have not advised Tobem of the identities of the two other creditors. They have provided Tobem with a bare assertion that “no related creditors were counted for voting purposes” (at the hearing the Court was given a generic description of the two creditors). The liquidators have declined to consent to continuation of Tobem’s proceeding.
2 On 14 July 2022, Tobem filed a notice of discontinuance in relation to its claim against Vaco and Mr Arnerich, with no issue as to costs. The discontinuance was consented to by the liquidators of Kid Country.
3 On 2 August 2022, Kid Country, through its liquidators, filed a notice of discontinuance in relation to its cross claims against Vaco and Mr Arnerich.
4 Companies Act 1993, s 248(1).
5 Companies Act, s 248(1)(c).
Legal principles
[14] The liquidation of a company commences at the date and time at which the liquidator is appointed.6 Once a company has been put into liquidation, proceedings against it may only be continued or commenced with the leave of the court or agreement of the liquidator. Section 248 of the Act, which sets out the effect of commencement of company liquidation, provides, in part, that:
(1) With effect from the commencement of the liquidation of a company,—
(a) ...
(b) ...
(c)unless the liquidator agrees or the court orders otherwise, a person must not—
(i)commence or continue legal proceedings against the company or in relation to its property; or
(ii)exercise or enforce, or continue to exercise or enforce, a right or remedy over or against property of the company:
...
[15] The purpose of s 248(1)(c) is to ensure that the assets of a company in liquidation are administered in an orderly fashion for the benefit of all creditors, and that particular creditors are unable to obtain an advantage by bringing proceedings against the company.7 New Zealand courts have emphasised that the key question is whether the claim is more appropriately dealt with in the liquidation or by proceedings.8
[16] The Act does not define the expression “legal proceedings”. However, the courts have interpreted the phrase broadly, having regard to the objectives of s 248(1)(c).
6 Companies Act, s 241(5).
7 Steel & Tube Co of New Zealand Ltd v Barker & Pollock Ltd [1973] 2 NZLR 30 (HC) at 32, citing Langley Constructions (Brixham) Ltd v Wells [1969] 1 WLR 503 (EWCA Civ) at 508.
8 See, for example, Satara Co-operative Group Ltd v Fus Ltd (in liq) HC Napier CIV-2008-441- 856, 28 January 2010 at [9].
[17] In determining whether to grant leave under s 248, the key question for the court is whether there are any circumstances which render it necessary that the legal proceedings should continue, or, to put it another way, whether the plaintiff's claim is not one that can easily be dealt with in the liquidation.9 The onus is on the party seeking leave to satisfy the court that leave should be given.10
[18] The court’s discretionary grant of leave under s 248 is likely to involve consideration of:
(a)Whether the proceeding will produce an advantage to a particular creditor over other creditors;11
(b)Whether the assets of the company in liquidation will be dissipated in wasteful litigation, particularly if there is a more convenient method for determining the claim;12
(c)The amount and seriousness of the claim, the degree and complexity of legal and factual issues and, if proceedings have already been commenced, the stage they have reached;13 and
(d)Whether the liquidator is likely to require the claim to be proved, find it difficult to determine and, accordingly, reject it.14
[19] Leave should be declined for a proceeding which is “clearly not sustainable”, but otherwise the court will not inquire into the merits of the proposed claim.15
9 Sharnick Holdings Ltd (in liq) v Sharnick Investments Ltd (in liq) (2003) 9 NZCLC 263,264 (HC) at [19]–[22]; Hook v Gulf Harbour Development Ltd HC Auckland CIV-2002-404-1931, 23 November 2005 at [56]–[60].
10 Fisher v Isbey (1999) 13 PRNZ 182 (HC) at [19(d)] (footnote omitted).
11 Satara Co-operative Group Ltd v Fus Ltd, above n 8, at [12].
12 Fisher v Isbey (1999), above n 10, at [19(c)] (footnote omitted).
13 McPhail v Durbridge Developments Ltd (in liq) (1998) 8 NZCLC 261,610 (HC) at 261,612; Johnson v CBD Real Estate Ltd (in liq) (1999) 14 PRNZ 320,322 (HC) at[13]; Body Corporate 81381 v Trebe NZ Ltd (in liq) CIV-2003-485-332, 13 May 2003 (HC) at [22].
14 Clarence Holdings v Mt Albert TV (1993) Ltd (1999) NZCLC 262,072 (HC) at [4]; Hook v Gulf Harbour Development Ltd (in liq), above n 9, at [56]–[60].
15 Bastin Enterprises Ltd v Graham HC Auckland CIV-2008-404-4443, 4 November 2009 at [27]; Satara Co-operative Group Ltd v Fus Ltd, above n 8, at [5]; Sieradzki v Kahikatea Manufacturing Ltd (in liq) (2000) 8 NZCLC 262, 241 (HC) at [7]–[8].
Further, leave will usually be declined if the proceedings sought to be commenced, even if successful, are likely to be fruitless.16
[20] The Act provides no guidance as to when the liquidator should agree to the commencement or continuation of legal proceedings. Costs have been awarded against liquidators on the basis that the liquidator ought to have consented to the continuation of the proceeding and ought not to have put the applicants to the expense of making the application.17
Applicant’s position
[21]Tobem advances three key reasons why leave should be granted.
[22] First, counsel for Tobem, Mr Nelson, submits that continuing the proceeding would avoid undue delay. On the date liquidation commenced, Tobem had already waited around two years for a hearing, briefs had been served by both parties and the matter was otherwise ready to proceed. Kid Country was placed in liquidation less than two weeks before trial. Given that both parties were ready to proceed, the claim can now be progressed through the courts at relatively low cost to the parties. On the other hand, if the claim is determined through the liquidation process and is rejected, Tobem will then have to file new court proceedings to challenge the liquidators’ decision.
[23] Mr Nelson refers the Court to Nicholls v Tamariki Ltd (in liq), in which Lang J determined that leave under s 248(1)(c) should be granted:18
[9] When the proceeding was called before me on 19 August, counsel for the liquidators advised me that his clients did not consent to the continuation of the proceeding. He told me that the liquidators would prefer the plaintiffs to file a claim in the liquidation in the usual way.
[10] I did not consider this to be acceptable. The plaintiffs had waited for more than a year for their fixture. There could be no guarantee that the liquidators would accept their claim. If the liquidators rejected their claim, the plaintiffs would be required to file a fresh proceeding in this Court. That
16 Johnson v CBD Real Estate Ltd (in liq), above n 13, at [13]; Birchall v Project Works Construction Ltd (in liq) (2004) 9 NZCLC 263,547 (HC) at [24].
17 Hoggart v Richworth Properties Ltd HC Auckland M146-IM03, 31 March 2003 at [17]–[19].
18 Nicholls v Tamariki Ltd (in liq) (2008) NZCPR 615 (HC).
would inevitably delay resolution of the plaintiffs’ claim for a further substantial period.
[11] I considered that the interests of justice required the plaintiffs to be permitted to proceed with their claim without further delay. …
…
[13] … In the absence of any other explanation for the timing of the resolution, I view the shareholders’ decision to place Tamariki in liquidation on the day before the commencement of the trial as a cynical act. It appears to have been orchestrated so as to prevent the plaintiffs from having this matter brought to a resolution.
[24] With reference to Nicholls, Mr Nelson submits that the timing of the liquidation, and the failure to disclose the identities of the minor creditors who voted in favour of voluntary liquidation, is suspicious. As the liquidators have declined to consent to the continuation of this proceeding, Mr Nelson submits there is a heightened risk that the liquidators will reject Tobem’s claim.
[25] Second, Mr Nelson submits that this Court is the most appropriate forum for the determination of its claim, due to its complexity. This is not just a simple debt for which proof can be submitted in the liquidation. In particular, Tobem seeks compensation from Kid Country for three categories of loss: (a) the payments Kid Country was required to make under the lease; (b) costs Tobem had to incur to find a replacement tenant (totalling over $1,000,000); and (c) the difference between the rent payable under the new lease and the lease with Kid Country. Tobem thereby pursues substantial loss of bargain damages, which depend on factual and legal findings as to the reasonableness of its conduct and expenses in mitigation. Tobem says that the matter is further complicated by the backdrop of COVID-19.
[26] More generally, Mr Nelson submits that the claim passes any threshold of “sustainability”, to the extent that there is any such requirement. Kid Country did not apply to strike out Tobem’s claims and was in fact preparing to defend them. Tobem says that the merits of the claim have not been disputed by the liquidators.
[27] Third, Mr Nelson submits that the impact on the other creditors of granting this application will be minimal and unlikely to be disadvantageous in any meaningful sense. Tobem has lodged a proof of debt for $234,135.35. There are only two other
disclosed creditors which have made small respective claims of $6,624.00 and
$944.91. Tobem will still have to establish its claim to the Court’s satisfaction. Even on a formal proof, the High Court does not simply “rubber stamp” the claim.
[28] Finally, Mr Nelson submits that no evidence has been filed to indicate that the proceeding will be fruitless, even if successful. The mere fact that the relevant company is in liquidation will not be sufficient to justify such an inference.19
Respondent’s position
[29] Mr Botterill, as one of the appointed liquidators of Kid Country, submits that leave should be declined because the continuation of the proceedings may:
(a)increase the time and cost of liquidation, reduce distributions available to all creditors, dissipate and possibly waste Kid Country assets;
(b)unduly advantage or prioritise Tobem’s interests over other creditors’ interests; the largest creditor does not take precedence and further claims may yet be received; and
(c)inhibit prospective claims against Vaco and Mr Arnerich and potential financial recovery by making binding determinations on the lease.
[30] Mr Botterill submits that Tobem’s claim does not involve extraordinarily complex disputes in fact and law, as it merely relates to a breach of lease. Further, he says the proceeding will likely be fruitless, as the liquidators are currently unable to make distributions.
[31] Mr Botterill distinguishes Nicholls v Tamariki Ltd (in liq). He says that the plaintiff in Nicholls had already obtained declarations from the Court that the defendant company’s purported cancellation of the agreements was invalid, and the defendant company was non-cooperative. Here, Mr Botterill says that Kid Country and the liquidators have not acted in a way to purposefully prejudice against any
19 Chappel v Swindells [2018] NZHC 506 at [12].
creditors. He says the liquidators declined to consent to the continuation of the proceeding because it is not the most effective method of actual recovery for distribution to the creditors.
[32] Mr Botterill submits that this Court will be unable to obtain the complete set of facts necessary to make a determination on the proceeding if the liquidators elect to abide the Court’s decision, rather than defend the proceeding. He says that as liquidators have the powers to obtain all relevant information,20 including by examining persons on oath,21 they are well-equipped to determine the claim.
Discussion
Delay
[33] I accept that a claim by Tobem in the liquidation could cause undue delay. It has already waited two years for a hearing. If the liquidators were to reject the claim, Tobem would then have to challenge the rejection in court. By contrast, the proceeding can continue at low cost. The case was ready for trial.
[34] An example of just such a delayed process can be seen in JK Trading Ltd v Rimpro-Tec Ltd (in liq)22 where the proceeding was set down for trial commencing on 30 April 2018. Rimpro-Tec was put into voluntary liquidation on 21 March 2018. JK Trading made its claim for damages as an unsecured creditor in the liquidation. That claim was rejected by the liquidators. JK Trading then made an application on 21 September 2018 for leave under s 248(1)(c) to continue its proceeding against Rimpro-Tec.
[35] I accept the analogy Mr Nelson draws to Nicholls. There is at least a sense of “convenient timing” (to borrow the expression from Jagose J in JK Trading Ltd)23 in Kid Country being put into liquidation so close to the trial date.
20 Companies Act, s 261.
21 Companies Act, ss 261(3)(c) and 265(1).
22 JK Trading Ltd v Rimpro-Tec Ltd (in liq) [2019] NZHC 376.
23 At [12].
[36] I do not consider Nicholls can be distinguished in the way Mr Botterill seeks to do. The earlier declarations made in favour of the plaintiff against Tamariki for breach were separate from the later proceeding that was before Lang J. The earlier declarations were mentioned in the judgment as part of the general background but did not feature in the reasoning of the Judge granting leave under s 248(1)(c) in that case.
Complexity of claim
[37]The plaintiff’s claim seeks three categories of damages against Kid Country:
(a)The rent and OPEX payments Kid Country was required to make under the lease;
(b)Costs Tobem incurred to find a replacement tenant (totalling more than
$1,000,000); and
(c)The difference between the rent payable under the new lease and the rent payable under the lease with Kid Country.
[38] Tobem has filed a proof of debt in the liquidation relating to the first (debt) aspect of its claim above. But the rest of the claim has a degree of complexity more suited to High Court proceedings.
[39] Mr Botterill makes the submission that the dealings between Kid Country and Vaco will be highly relevant to a finding whether Kid Country in fact breached the terms of the lease. Mr Botterill says the High Court will not have all the relevant information on that issue that the liquidators would be entitled to obtain under their statutory powers. Related to that submission, Mr Botterill says that if the liquidators decide to bring proceedings against Vaco then any findings by this Court on Tobem’s claim in relation to the terms of the lease may prejudice such later proceedings.
[40] As to Mr Botterill’s first point, a significant number of documents, including sworn affidavits by the directors of Kid Country and Vaco,24 have already been filed
24 Affidavit of Mr Arnerich, as sole director of Vaco, in support of Vaco’s application for summary judgment against Tobem and Kid Country, sworn 16 September 2020; Affidavit of David Lowry,
in this proceeding. That evidence may be used by Tobem in continuing the proceeding.25 But in any event Tobem will need to establish its claims to the satisfaction of the Court.
[41] Next, as to the prospect of a later proceeding by the liquidators against Vaco, I observe that the liquidators consented to Tobem discontinuing its claim against Vaco and Mr Arnerich. There was also a cross claim against Vaco which the liquidators withdrew. Mr Botterill did not have a satisfactory explanation as to why, in those circumstances, the liquidators may wish to proceed against Vaco and Mr Arnerich.
Question of comparative advantage
[42] Granting Tobem leave to continue proceedings does not give Tobem any advantage over other creditors, in and of itself. In Satara Co-operative Group Ltd v Fus Ltd, Gendall J held that granting the leave application would not produce any advantage to the plaintiff in that case, as the proceeding itself would simply prove or disprove the plaintiff’s claim as an unsecured creditor.26 As observed more recently by Jagose J in JK Trading, “No advantage in itself is obtained by bringing proceedings or obtaining judgment”.27
[43]As the learned authors of Heath and Whale note:28
It is rare that the institution of proceedings or recovery of judgment operates to confer an advantage on a litigating creditor …
In most cases the court is likely to consider that the plaintiff should have the opportunity to establish his claim against the company by way of civil proceedings so that he or she can claim alongside the other unsecured creditors.
[44] Tobem’s proof of debt is for $234,135.35. There are only two other creditors to date who have made small claims of $6,624 and $944.91. Given the size of those
as director of Kid Country, in support of Kid Country’s opposition to Vaco’s summary judgment application, sworn 16 October 2020. Numerous documents are annexed to both affidavits, including the Agreement to Lease between Vaco and Kid Country and legal correspondence relating to the lease dispute which forms the background to the current proceeding.
25 High Court Rules 2016, r 7.32.
26 Satara Co-operative Group Ltd v Fus Ltd, above n 8, at [12].
27 JK Trading Ltd v Rimpro-Tec Ltd (in liq), above n 22, at [7].
28 Paul Heath and Michael Whale (eds) Heath and Whale on Insolvency (online ed, LexisNexis) at [21.4]
claims, the granting of leave is unlikely to be disadvantageous to those creditors in any meaningful sense.
Would the proceeding be fruitless?
[45] There is no evidence that the proceeding will be fruitless as no evidence has been filed by the liquidator as to Kid Country’s financial position. The mere fact that the company concerned is in liquidation will not be sufficient to justify an inference that the proceeding is likely to be fruitless.29
Result
[46] For all the above reasons I grant the application by Tobem and make the following orders:
(a)Leave is granted to continue the present proceeding against Kid Country Holdings Ltd as a company in liquidation;
(b)The substantive proceeding is to be set down for a two hour formal proof hearing: the date to be allocated by the Court; and
(c)Evidence in the proceeding may be given by affidavit under r 9.56(1) of the High Court Rules 2016.
Costs
[47] I reserve costs. Tobem, as the successful party is prima facie entitled to costs. If the parties are able to agree costs a joint memorandum is to be filed within 20 working days of the date of this judgment. If costs cannot be agreed Tobem is to file and serve its memorandum in support of an application for costs within five working days of the date for the joint memorandum. The liquidators are to file and serve their response within five working days of the date of service of Tobem’s memorandum on them.
29 Chappel v Swindells [2018] NZHC 506 at [12].
[48] Costs memoranda should not exceed three pages (excluding any attachments). I will determine costs on the papers.
Gordon J
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