Toon v Quinn
[2021] NZCA 696
•17 December 2021 at 10 am
| IN THE COURT OF APPEAL OF NEW ZEALAND I TE KŌTI PĪRA O AOTEAROA |
| CA249/2020 [2021] NZCA 696 |
| BETWEEN | VICTORIA TOON (AS LIQUIDATOR OF INVESTACORP HOLDINGS LIMITED) |
| AND | CLIVE ANTHONY QUINN AND PHILIP SAMSON WELLS (AS TRUSTEES OF THE CA QUINN TRUST) |
| AND | BRUCE JAMES THOMPSON |
| AND | CAROLINE MARY THOMPSON AND STEWARTCO TRUSTEE SERVICES LIMITED (AS TRUSTEES OF THE CM THOMPSON TRUST) |
| AND | PAMELA ISABEL QUINN |
| Hearing: | 10 August 2021 |
Court: | Cooper, Brown and Courtney JJ |
Counsel: | G P Blanchard QC and T Nelson for Appellant |
Judgment: | 17 December 2021 at 10 am |
JUDGMENT OF THE COURT
A The appeal is allowed.
B The High Court judgment is set aside.
C Ms Toon’s remuneration is approved at $101,729. She is entitled to her legal expenses as incurred.
DThe High Court’s costs order is set aside. Ms Toon is entitled to costs in that Court on a 2B basis.
E Ms Toon is also entitled to costs in this Court for a standard appeal on a band A basis, plus usual disbursements. We certify for second counsel.
____________________________________________________________________
REASONS OF THE COURT
(Given by Courtney J)
Table of Contents
| Para No. | |
| Introduction | [1] |
| Issues on the appeal | [7] |
| Background | |
| A brief historical overview | [10] |
| The 2011 derivative proceedings and complaint to the Institute of Chartered Accountants | [15] |
| The s 174 proceedings and the settlement agreement | [18] |
| Ms Toon accepts appointment as liquidator | [20] |
| The liquidation – April to June 2018 | [23] |
| The liquidation – July to August 2018 | [36] |
| Ms Toon responds to Mr Quinn’s application and reaches a final view on the fees issue – late August 2018 to December 2018 | [47] |
| Relevant principles | [57] |
| Issue 1: did the Associate Judge err in his finding as to the extent to which Ms Toon was entitled to investigate Mr Thompson’s claims? | |
| The Associate Judge’s findings | [66] |
| Was there error in these findings | |
| Was it necessary to consider the correct legal position as to the effect of the settlement agreement? | [76] |
| The effect of the legal advice | [80] |
| Issue 2: did the Associate Judge err in his finding as to the effect of Ms Toon’s investigation on the liquidation? | |
| The Associate Judge’s finding | [89] |
| Were these findings erroneous? | [94] |
| Issue 3: did the Associate Judge err in disallowing Ms Toon’s legal expenses? | [110] |
| Result | [112] |
Introduction
In March 2018 Investacorp Holdings Ltd (IHL), a private, solvent company, was placed in liquidation. Victoria Toon was appointed as liquidator by the High Court. The liquidation order and Ms Toon’s appointment were made by consent as part of the settlement of a claim brought by a minority shareholder, Bruce Thompson, against the majority shareholders, Clive and Pamela Quinn, and interests associated with them.
One of the complaints in the litigation was that the Quinn interests had charged IHL excessive professional, directors’ and management fees. The settlement agreement encompassed “all matters at issue in, arising out of, or relating to” the proceeding. Notwithstanding the settlement agreement, Mr Thompson asked Ms Toon to investigate the fees issue that had been raised in the litigation. Ms Toon considered that she was entitled to investigate. Mr Quinn, however, contended that the settlement agreement precluded any further inquiry.
Mr Quinn was anxious to expedite the winding up and Ms Toon’s investigation held up the distribution of IHL’s assets. In August 2018 the trustees of the CA Quinn Trust (Quinn Trust), a shareholder associated with Mr and Mrs Quinn, applied under ss 286 and 284 of the Companies Act 1993 for a declaration that Ms Toon had breached her professional duties to the company and directions that she cease investigating the matters raised by Mr Thompson and complete the liquidation.[1] By December 2018 Ms Toon had decided that action against the Quinns to recover the fees would not be cost-effective. Nevertheless, the Quinn Trust maintained its application.
[1]Although the Thompson interests were named as respondents in the application, they did not take steps in the High Court or in this Court.
In March 2019, having distributed most of the company’s assets, Ms Toon applied to the High Court under ss 276(2) and 284(1)(e) of the Companies Act for approval of her fees. The initial claim of $82,940[2] plus GST and expenses was subsequently amended to $101,729 plus GST and expenses and further legal expenses of $63,158 plus GST.[3]
[2]Comprising $698,876.36 plus a further $14,000 to complete the liquidation and attend to legal matters.
[3]By an amended application filed on 9 August 2019.
Associate Judge Bell determined both applications together. He held that Ms Toon had breached her duties to collect and distribute the company’s assets reasonably and efficiently.[4] Specifically, he held that Ms Toon’s decision to pursue her investigation of Mr Thompson’s complaints was a “wrong turn” and led to the liquidation costs being higher than they ought to have been.[5] He made the directions sought by the Quinn Trust.[6] In relation to Ms Toon’s application, the Associate Judge fixed the remuneration to which Ms Toon was entitled at $28,000 plus GST together with an allowance of $4,000 plus GST for accounting fees saved and $4,000 plus GST for legal fees.[7]
[4]Quinn v Toon [2020] NZHC 816 at [147].
[5]At [125].
[6]At [148]–[149].
[7]At [146].
Ms Toon appeals.
Issues on the appeal
The Associate Judge approached his decision by reference to the following questions:
(a)In light of the settlement agreement made in 2017, should Ms Toon have investigated Mr Thompson’s complaints?
(b)What were the effects of Ms Toon enquiring into Mr Thompson’s complaints?
(c)How much should Ms Toon receive for her remuneration?
The Associate Judge’s conclusions on (a) and (c) are inconsistent and the parties disagree over exactly what the Associate Judge held. Further, the parties framed the issues quite differently, putting different emphasis on whether the legal effect of the settlement agreement was in issue and, if so, whether the Judge had erred in his conclusion.
It is, however, evident that the central issue is whether Ms Toon acted reasonably in pursuing Mr Thompson’s complaint as she did. The respondents accept that if this Court concludes Ms Toon’s conduct was justified, she will be entitled to her claimed fee of $101,729. We therefore find it convenient to reframe the issues as follows:
(a)Did the Associate Judge err in his finding as to the extent to which Ms Toon was entitled to investigate Mr Thompson’s claims?
(b)Did the Associate Judge err in his approach to fixing the amount of remuneration to which Ms Toon was entitled?
(c)Did the Associate Judge err in disallowing Ms Toon’s claim for legal expenses?
Background
A brief historical overview
IHL was incorporated by Mr R J Thompson in 1947. At the time relevant to this litigation the shareholders were Mr Thompson’s children Bruce Thompson, Pamela Quinn and Elizabeth Bakker, together with Pamela Quinn’s husband, Clive Quinn, and trusts associated with Mr Thompson and Mr and Mrs Quinn. Mr and Mrs Quinn controlled the company. They held 50.27 per cent of the shares and, following Mr Thompson’s removal as a director in 2015, were the only directors. Bruce Thompson held 36.37 percent of the shares and Mrs Bakker 13.37 per cent.
The company owned a commercial building in Nelson St, in central Auckland, which was sold in 2013 for $3.25 million. The proceeds were invested partly in cash deposits and partly in shares. The company also owned a half-share in a commercial building in Papatoetoe, in partnership (the Kolmar Rd Partnership) with a company associated with Mr Quinn. That building was still owned by the Kolmar Rd Partnership as at the date of IHL’s liquidation but was sold shortly afterwards for $1.55 million.
Mr Quinn was a chartered accountant by occupation and practised as Quinn Chartered Accountants Ltd (QCAL). QCAL occupied part of the Kolmar Rd premises until November 2014 and continued to pay rent until March 2015 when Mr Quinn retired. QCAL provided accounting services to IHL, for which it charged commercial rates.
Relations between the Quinns and Mr Thompson were acrimonious and had been so for years. Mr Thompson held a long-standing view that Mr Quinn used his position as the company’s accountant to benefit himself and his wife at the expense of other shareholders. Conversely, Mr and Mrs Quinn felt that Mr Thompson failed to appreciate Mr Quinn’s efforts to manage the company’s affairs and did little to assist in that work.
A sense of the acrimony can be had from the minutes of the special meeting of IHL held on 19 January 2015 at which a resolution removing Mr Thompson as a director was passed. The minutes stated that the board “has been dysfunctional for the last 20 years”. Mr Thompson was described as, among other things, “not trustworthy [and] divisive”. The minutes recorded that “[t]he Quinn shareholders consider [Mr Thompson] to be a delinquent and hostile Director looking only after his personal agenda at the expense of the other Shareholders” and described the relationship between him and Mr and Mrs Quinn as “unworkable, unhealthy and intolerable”.
The 2011 derivative proceedings and complaint to the Institute of Chartered Accountants
In 2011 Mr Thompson brought a derivative proceeding against Mr and Mrs Quinn alleging breaches of fiduciary duty and receipt of unauthorised remuneration.[8] He also alleged that QCAL had paid inadequate rent for the Kolmar Rd premises. The former claims failed but the claim for rent succeeded and the Quinn interests had to repay the company $291,358.[9]
[8]Companies Act 1993, ss 131, 133 and 161.
[9]Investacorp Holdings Ltd v Quinn [2014] NZHC 2389.
There was a year between the hearing and the release of the judgment. Pending the decision, Mr Thompson made a complaint about Mr Quinn to the New Zealand Institute of Chartered Accountants (NZICA). The Disciplinary Tribunal of the Institute found that, by providing accounting services to the Kolmar Rd Partnership and IHL when he was a director and shareholder of both, Mr Quinn had breached the Institute’s code of ethics. In reliance on undertakings offered by Mr Quinn, the penalty imposed was censure and a costs award. Mr Quinn’s undertakings included that neither he nor his practice would prepare the year-end financial statements for either entity and that he would undertake routine accounting and administration work for them without charge for the following 24 months.
Despite Mr Thompson’s objections, Mr Quinn arranged for Mayston Partners Ltd, in which Mr Quinn’s daughter and son-in-law were accountants, to assume responsibility for accounting services to the Kolmar Rd Partnership and IHL.
The s 174 proceedings and the settlement agreement
In 2016 Mr Thompson brought proceedings under s 174 of the Companies Act alleging prejudicial and oppressive conduct by Mr and Mrs Quinn. He claimed that since 2013 Mr and Mrs Quinn and QCAL had charged IHL excessive professional and management fees and that Mr and Mrs Quinn had charged excessive directors’ fees. The only specific relief sought was an order for the liquidation of the company. Mr and Mrs Quinn did not oppose this outcome — but they wanted liquidation to be postponed until after March 2018 to allow for the use of tax losses.
The parties reached a settlement during the course of the trial in May 2017. Although a party in the proceeding, IHL was not a party to the settlement agreement. The settlement agreement was drafted by Mr Thompson’s lawyer and Mr Thompson understood that it would not preclude him pursuing his concerns about the fees through the liquidator. The settlement agreement provided that the parties would agree to seek various consent orders immediately upon entry into the agreement, including the appointment of a liquidator by 1 April 2018. On the condition the consent orders were made the parties agreed:
(a)To settle all matters at issue in, arising out of, or relating to the Proceeding, including the manner in which Investacorp is to be wound up and its assets distributed;
…
(g)The Quinns will not charge any sums to Investacorp for their work (of any description including without limitation directors work, property maintenance or management, leasing or sale commissions) on company matters or matters relating to the Kolmar Rd partnership after 31 March 2017, through Quinn Consultants Ltd (QCL)[10] or otherwise.
Ms Toon accepts appointment as liquidator
[10]QCAL later changed its name to Quinn Consultants Ltd (QCL).
Mr Quinn approached Ms Toon to accept appointment as the liquidator of IHL. Ms Toon is an experienced insolvency practitioner with a speciality in solvent liquidations. She was prepared to consider appointment. Mr Quinn sent Ms Toon an email together with brief background notes which contained the essential information about the company. The only reference to the circumstances surrounding the liquidation was the statement that:
All shareholders of Investacorp have signed a settlement agreement to resolve claims made by the Thompsons under s 174 of the Companies Act, 1993.
Ms Toon agreed to accept appointment and sent a letter of letter of engagement dated 12 June 2017. She noted that, for the purposes of estimating costs, the liquidation was not a straightforward solvent liquidation. She commented that:
I also do not know what the terms of the settlement agreement are but the distribution to nine shareholders could be complicated, or not. I will also need to confirm whether I will correspond solely with only the directors or all shareholder groups which, from experience, can add significantly to the time involved if there is any acrimony (double checking etc).
Ms Toon estimated the fees involved at approximately $5,000–$7,000. All the shareholders agreed that Ms Toon should be appointed. Mr and Mrs Quinn signed the letter of engagement on 1 March 2018 and continued to provide Ms Toon with financial information about the company. The liquidation order and Ms Toon’s appointment as liquidator were made on 27 March 2018.
The liquidation — April to June 2018
The sale of the Kolmar Rd property settled within days of the liquidation. Ms Toon was therefore dealing with assets comprising cash (about $2.55 million) and shares (about $1 million). There were virtually no creditors.
On 12 April 2018 Ms Toon met with Mr Thompson and his wife. Mr Thompson wanted to discuss his concerns about the way that the company had been managed, including the level of fees charged by Mr and Mrs Quinn. About a fortnight later, Ms Toon met with Mr and Mrs Quinn. She told him about Mr Thompson’s concerns but Mr Quinn said that the fees issue had been settled. The tone of this meeting, and of other interactions between Ms Toon and Mr and Mrs Quinn, were recalled and described differently by the parties. The differences in perceptions reflect the difficult dynamics that plagued the relationship between Ms Toon and Mr and Mrs Quinn from an early stage.
At this point in the liquidation, the end of April 2018, Ms Toon’s accrued fees were $11,327.[11]
[11]The monthly accrued figures of Ms Toon’s fees were provided by expert witness Mr Parsons who undertook a full analysis of the time sheets.
In May 2018 there were communications between Mr Quinn and Ms Toon regarding shares that the Quinn interests wished to take in specie. Mr Quinn was already concerned about progress. He viewed the liquidation as a straightforward matter of distributing the cash and shares. He pressed Ms Toon to explain the delay in making an interim distribution. Ms Toon pushed back. It is apparent from her email to Mr Quinn of 21 May 2018, copied to Mr Thompson, that she felt under pressure from both Mr Quinn and Mr Thompson:
As liquidator I have an obligation to satisfy both myself and all shareholders that all assets have been accounted for correctly. …
We believe that some fees have been charged in excess of the court ruling but are still confirming this. We will advise you as soon as possible but I must again remind you that you are not the liquidator. You have no authority to dictate to me how I run this liquidation or when I make the distributions.
I am very aware that the shareholders are litigious and I have advised you both that I will be following the letter of the law in this liquidation and will not be bullied by either side. I hope that I am now clear. Your continual emails are only adding to the cost of the liquidation.
A week later, on 28 May 2018, Mr Quinn emailed Ms Toon again complaining that the delays were causing loss to the shareholders and asking when the liquidation would be completed and funds distributed. Ms Toon advised the shareholders that the company’s stockbroker had been instructed to distribute the shares Quinn interests had requested in specie and to sell the remainder, the proceeds of which would form an interim distribution of cash to the Thompsons and Mrs Bakker. An interim distribution of approximately $1.8 million was made on 11 June 2018.
Ms Toon also emailed Mr Quinn on 29 May 2018 with her concerns about the fees that the Quinns had charged IHL. She advised that she had reviewed the NZICA disciplinary determination and said that:
I had to be satisfied that there is some substance to [Mr Thompson’s] queries before I passed them on. I have not formed a conclusive opinion on these matters as I wanted to be able to put them to you and hear your response first.
We have also carried out some analysis on the fees and expenses you have charged Investacorp since the High Court [judgment] dated [1] October 2014. I have attached our workings where you will see that we have calculated a reasonable percentage of fees according to the [judgment]. We note that your fees are considerably more than what we have calculated and we would be pleased to receive your comments and justification for the excess.
For the 2015 and 2016 years you had previously agreed not to charge fees as per the NZICA agreement. It seems that instead of charging management fees you charged directors fees for those periods instead. From the ruling it seems that NZICA wanted to ensure that you did not personally benefit from any services to the company.
The accounting firm Mayston Partners was set up in the month following the ruling. At the time of the ruling Tim [Mayston] was a director of the Quinn Mayston firm and should have been advised by you of the ruling. From reading the decision I think NZICA intended for the accounting to be undertaken by an independent accountant, not your son-in-law and daughter. [Mr Thompson] has provided a letter from Tim dated 18 January 2016 advising you that he does not feel he has an obligation to report to [Mr Thompson] and his wife. In fact, all Chartered Accountants have obligations to all shareholders of a client company. An independent accountant would have no problem reporting on the business to [Mr Thompson] if all matters were transparent.
Attached to that email were emails from Mr Thompson to Ms Toon about the claim of overcharging. They were couched in strong terms and alleged serious misconduct by the Quinns in relation to the fees they had been charging the company and the engagement of Mayston Partners to take over preparation of IHL’s financial statements.
On 31 May 2018 Mr Quinn emailed Ms Toon. He declined to answer the issues she had raised. His main reason for declining to respond to these issues was that they had been settled by the settlement agreement.
At this point, the end of May 2018, Ms Toon’s accrued fees stood at $20,074.
The next day, 1 June 2018, Mr Quinn’s lawyer wrote to Ms Toon advising that the complaints by Mr Thompson were subject to the settlement agreement and that Ms Toon had no justification for reinvestigating them. A formal notice pursuant to s 286 of the Companies Act was attached, alleging failure by Ms Toon to comply with her duties as liquidator by failing to complete the liquidation and distribute the assets in a reasonable and efficient manner and requiring compliance within five days, failing which proceedings would be commenced.
Ms Toon had previously mentioned the settlement agreement to her lawyer, Mr Taylor. On 6 June she sent him a copy and he advised that it was not binding on the company. Mr Taylor’s invoice and corresponding time sheet were produced at trial showing two units (12 minutes) relating to research. Ms Toon’s own time records show five entries for “investigations and legal” which presumably related to the fees issue.
Otherwise, only a limited amount of work was undertaken during June 2018. Ms Toon received and reviewed the updated 2018 accounts from Mr Mayston. Most of the other work done during that month was recorded by Ms Toon’s associate, Ms Borrie and related to administrative work (described as management), taxation and asset realisation. Ms Toon was overseas towards the end of the month.
At the conclusion of June 2018 Ms Toon’s accrued fees stood at $23,395.
The liquidation — July to August 2018
There was much more activity in July 2018. In response to a query by Mrs Bakker, Ms Toon advised that the liquidation could not be completed until the 2018 and 2019 accounts had been filed and that could not happen until Mr Quinn responded to Ms Toon’s email of 29 May. Mrs Bakker’s response did not express any concern about Ms Toon’s actions regarding the fees but merely asked to see the draft 2018 accounts. Mr Quinn continued to press Ms Toon for progress.
In mid-July Ms Toon was ill for several days, which accounted for a delay in her responses to Mr Quinn during the second week of July. On 16 July 2018, Mr Quinn requested a meeting of shareholders pursuant to s 258(2)(c) of the Companies Act. Ms Toon responded on 19 July 2018 by email, attaching a letter to the shareholders dated 18 July 2018 advising that “[a]fter considerable investigation I cannot approve the [draft 2018 financial statements] as they stand.” She reiterated that Mr Quinn had not responded to the queries she had raised on 29 May 2018. She also attached her calculations showing a suggested amount of $106,545 written back in relation to fees charged by Mr Quinn and said that “[o]nce this credit has been processed we can proceed to finalise the financial statements and tax returns and a further distribution can be made to shareholders in the next few weeks.” Ms Toon concluded with suggested dates for the shareholders’ meeting.
Mr Quinn’s response of the same day was short; he completely denied the “baseless allegations” and proposed 3 August 2018 for the shareholders’ meeting. In subsequent emails Mr Quinn advised of issues he wished to have added to the agenda for the meeting, including the settlement agreement.
In a separate letter also dated 19 July 2018 Ms Toon made a demand for all of the company records for the preceding five years. Mr Quinn saw no reason that records going back five years should be needed. Ms Toon’s response of 24 July 2018 was brief and assertive: she did not need a reason. She also pointed out the criminal consequences of non-compliance with her demand. In a covering email she referred again to her queries relating to the financial statements that were not subject to the High Court proceedings.
On 26 July 2018 Ms Toon supplied a cash position statement showing total realisations of $3,623,078.14 and, after the 11 June distribution, funds on hand of $1,785,597.41. The next day Mr Quinn sent a lengthy response to the matters that Ms Toon had raised in her letter of 18 July 2018. There appears not to have been a direct answer to that letter.
As at the end of July 2018 Ms Toon’s accrued fees stood at $27,304.
On 1 August 2018 Mr Quinn wrote in response to Ms Toon’s letter of 24 July 2018. He asserted again that the issues raised in the s 174 proceedings were fully and finally settled by the settlement agreement.
The shareholders meeting was held on 3 August 2018. Ms Toon had Mr Taylor with her. Mr and Mrs Quinn objected to him being there and they both left immediately. There was discussion about Mr Quinn’s fees. After Mrs Bakker had also left, the minutes record Ms Toon’s advice that “if the shareholders could all agree to leave the professional expenses charged as they were then she would begin to finalise the liquidation. If they could not agree then she would have to consider her next steps. [Mr Thompson] advised that he was not content to overlook the charges which he believed were excessive.”
On 7 August 2018 the Quinns commenced proceedings against Ms Toon.
On 17 August 2018 Ms Toon made a further distribution of $1 million.
To that point, Ms Toon’s accrued fees stood at $33,849.
Ms Toon responds to Mr Quinn’s application and reaches a final view on the fees issue — late August 2018 to December 2018
Ms Toon filed an affidavit in opposition to Mr Quinn’s application on 27 August 2018. She set out the steps she had taken in the liquidation in some detail and identified the matters still to be completed. These included obtaining the records necessary to complete the 2018 financial statements, accounting for the proceeds of the Kolmar Rd sale (it appeared that $30,000 was still being held by Mr Quinn), finalising the 2018 financial statements for the Kolmar Rd Partnership, preparing the 2019 financial statements and attending to a final tax return before requesting that the company be removed from the Companies Office Register and filing a final report with the Companies Office.
As at the end of August 2018 her accrued fees were $39,517.
There was little activity in September 2018 because of Ms Toon’s personal circumstances; her brother died on 7 September 2018 and she then became ill and was not back in the office until the end of September. As a result, Ms Toon could not attend to correspondence from Mr Quinn and documents sent by him, including documents from the s 174 proceeding. As at the end of September 2018 Ms Toon’s accrued fees were $42,560.
Normal work associated with the liquidation, attending to statutory requirements, banking, tax matters and administration continued through October 2018. But it is evident that a substantial amount of time was spent on the legal proceedings. Towards the end of the month Ms Toon asked Mr Quinn to account for some $30,000 held from the sale of the Kolmar Rd property. Mr Quinn’s response was to advise that he was awaiting the financial statements and a GST return in respect of the Kolmar Rd Partnership and on receipt of the latter would pay out the money held. This he did on 30 October 2018. At the end of October 2018 Ms Toon’s accrued fees stood at $47,216.
Only a small amount of work was undertaken during November 2018. This included correspondence with Mr Quinn and Mr Mayston regarding the 2018 financial statements. Time was also spent on the legal proceedings. At the end of November 2018 the accrued fees were $50,187.
In October 2018 Mr Parsons, an independent accountant who later gave evidence in support of Ms Toon’s application, conducted a routine practice review with Ms Toon. He expressed the view that Ms Toon should not still be holding $800,000 and that the $106,545 at issue in relation to the fees was not material. Ms Toon had taken the view that the amount in issue, while not particularly large when viewed against the company’s assets, might nevertheless be regarded by Ms Bakker, whose financial position was more modest than the other shareholders, as substantial. However, Mr Parson’s advice prompted Ms Toon to reconsider her position regarding the fees that Mr Quinn had charged. She wrote to the shareholders indicating she hoped to make further distribution before Christmas. On 20 December 2018 Mr Taylor wrote on behalf of Ms Toon advising that, after further consideration of the fees issue and notwithstanding her view that Mrs Bakker’s entitlement to the amount at issue would be material to her, she had concluded that it would not be cost effective to take court proceedings to recover the fees. The same day Ms Toon made a further interim distribution of $639,578.
On 24 December 2018 Ms Toon provided her second report and Statement of Realisations and Distributions as at 26 September 2018. She noted the matters delaying completion of the liquidation as resolution of Mr Quinn’s proceeding against her, finalisation of the partnership affairs, finalisation of the 2018 and 2019 financial statements and tax returns, IRD assessments and clearance.
To the end of December 2018 Ms Toon’s accrued fees stood at $57,008.
The early part of 2019 seems to have been taken up largely with the 2019 financial statements. These had not been finalised by 8 February 2019 when Mr Mayston resigned. Ms Toon took over the responsibility of producing those financial statements, which she said was costly because the data had to be reformatted and Mr Quinn had queries. In addition, Kolmar Rd Partnership accounts, which had not been quoted for as part of the liquidation, had to be reviewed along with the relevant tax returns. Likewise, for the IHL 2019 financial statements and tax returns more time was required because Mr Mayston’s work papers had not been provided, nor had the company’s tax files. The 2020 tax returns would also need to be drafted and filed and, depending on the IRD’s time frame, a further liquidator’s report could have been needed.
The draft accounts for the 11 months to 28 February 2019 were circulated to shareholders on 1 March 2019. They showed $40,911 spent on legal expenses. This prompted requests by Mr Quinn for information. Mr Quinn was not satisfied with the response he received and advised that he did not accept the liquidator’s claim for fees. Ms Toon provided information about the fees incurred on 22 March 2019. On 29 March she filed her application for approval of fees of $68,940 together with disbursements and further estimates of $4,000 for fees to complete the transaction and $10,000 to cover the legal costs of responding to Mr Quinn’s application, which was still on foot.
Relevant principles
The principal statutory duty of the liquidator is to realise and distribute the company’s assets, or the proceeds thereof, in a reasonable and efficient manner.[12] The liquidator also owes fiduciary duties, which include acting impartially and in the interests of all the shareholders.[13]
[12]Companies Act, s 253.
[13]Mason v Lewis HC Auckland CIV-2010-404-8 at [27]–[29].
Under s 286 certain persons, including shareholders, may give notice to the liquidator requiring compliance with the liquidator’s duties and, if the liquidator fails to comply, may apply to the court for orders. If the court is satisfied that there is or has been a failure to comply, it may relieve the liquidator of the duty to comply wholly or in part, order the liquidator to comply, remove the liquidator from office or make a prohibition order.[14] While the discretion to remove a liquidator from office is unfettered, factors relevant to its exercise include the liquidator’s independence, the liquidator’s resources, the wishes of the creditors and shareholders and the speed with which the liquidation can be carried out.[15]
[14]Companies Act, s 286(3).
[15]Newman v Norrie [2014] NZHC 648, [2014] NZCCLR 15 at [50]–[51], citing Jacobsen Creative Surfaces Ltd v Smiths City Ltd [1994] MCLR 28 at 32.
The basis on which liquidators are remunerated is set out in ss 276–278 and 284 of the Companies Act. Section 276 provides:
276 Remuneration of liquidators
(1)Subject to section 284(1)(e), every liquidator, not being an Official Assignee, appointed under paragraph (a) or paragraph (b) of subsection (2) of section 241 is entitled to charge reasonable remuneration for carrying out his or her duties and exercising his or her powers as liquidator.
(2)Unless the court otherwise orders, every Official Assignee who is appointed a liquidator under paragraph (a) of subsection (2) of section 241 and every liquidator appointed under paragraph (c) of that subsection shall charge remuneration either—
(a)of an amount equal to the amount fixed under section 277; or
(b)at, or in accordance with, such rate or rates as may be prescribed under that section.
The liquidator’s expenses and remuneration are payable out of assets of the company.[16] The rates of remuneration are prescribed by regulation.[17] These include hourly rates for work undertaken by different classes of people, rates prescribed by reference to the net value of the assets realised and rates prescribed in respect of particular functions or powers. No issue arises in this case as to the hourly rates Ms Toon charged for herself and her staff.
[16]Companies Act, s 278.
[17]Section 277.
As part of the Court’s supervisory function over liquidations, s 284 allows the Court to fix the liquidator’s reasonable remuneration and to order the refund of remuneration held to be unreasonable. Relevantly, s 284 provides:
284 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) are in addition to any other powers a court may exercise in its jurisdiction relating to liquidators under this Part, 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.
…
(Emphasis added.)
The principles applying to the fixing of liquidators’ remuneration have been the subject of extensive consideration in the High Court in Re Medforce Healthcare Services Ltd (in liq)[18] and Re Medforce Healthcare Services Ltd (in liq) (No 2)[19] and, more recently, in Re Roslea Path Ltd (in liq).[20] Those decisions canvassed the basis for the remuneration of liquidators generally, including retrospective applications to approve fees made under s 284(1)(e) (under which Ms Toon applied) and applications for a refund of fees unreasonably retained under s 284(1)(f) (the nature of the Quinns’ application). The same approach applies to both types of applications; the court’s function in either approving a claim for remuneration or ordering a refund of fees paid is to determine the reasonableness of the remuneration claimed.[21]
[18]Re Medforce Healthcare Services Ltd (in liq) [2001] 3 NZLR 145 (HC).
[19]Re Medforce Healthcare Services Ltd (in liq) (No 2) [2001] 3 NZLR 158 (HC).
[20]Re Roslea Path Ltd (in liq) [2013] 1 NZLR 207 (HC).
[21]At [101] and [170]–[172].
In Re Roslea Path a Full Court of the High Court (Heath and Venning JJ) observed that:
[102] In fixing a liquidator’s remuneration, the Court is making a determination of the fairness and the reasonableness of what has been charged when measured against the work undertaken and the result achieved. Fair and reasonable remuneration reflects the value of the services rendered to the creditors of the company and, if a surplus were achieved, its shareholders. “Value” is an elusive concept which goes beyond mathematical application of hourly rates to hours spent by individuals involved in administering the company’s affairs.
The Court approved the approach taken in previous cases of treating the assessment of liquidators’ remuneration as analogous to a challenge to solicitors’ fees. It referred as an example to Gallagher v Dobson, where the High Court discussed the factors for identifying costs which were then set out in the New Zealand Law Society’s Costing and Conveyancing Practice Manual.[22] These factors were:
(a)the skill, specialised knowledge and responsibility required;
(b)the time and labour expended;
(c)the value or amount of any property or money involved;
(d)the importance of the matter to the client and the results achieved;
(e)the complexity of the matter and the difficulty or novelty of the questions involved;
(f)the number and importance of the documents prepared or perused;
(g)the urgency and circumstances in which the business is transacted; and
(h)the reasonable costs of running a practice.
[22]At [103], referring to Gallagher v Dobson [1993] 3 NZLR 611 (HC) at 615.
The assessment of reasonable remuneration requires careful consideration of the proportionality of the remuneration claimed to the nature, complexity and extent of the work undertaken.[23] Another aspect of proportionality, that of the information required by the court to justify the claim to the remuneration claimed, is also to be considered but does not arise as an issue in this case.[24] The focus in this case is whether the amount was reasonable having regard to the nature of the liquidation.
Issue 1: did the Associate Judge err in his finding as to the extent to which Ms Toon was entitled to investigate Mr Thompson’s claims?
The Associate Judge’s findings
[23]At [108].
[24]At [108].
Ms Toon’s argument that the Associate Judge had erred proceeded on the basis that the Associate Judge had found that she was not entitled to investigate Mr Quinn’s conduct at all. Mr Bryers submitted on behalf of the Quinn Trust that the Associate Judge had accepted that Ms Toon was entitled to investigate but held that she should have concluded at an early stage that no further action could be taken.
Analysis of the judgment shows that, in considering whether Ms Toon was entitled to investigate Mr Thompson’s complaint, the Associate Judge concluded that she was not.[25] But when considering what remuneration was reasonable, the Associate Judge concluded that she was entitled to investigate to the point of obtaining legal advice and allowed 18 hours for that.[26]
[25]Quinn v Toon, above n 4, at [103].
[26]At [128] and [132].
The Associate Judge started from the position that:
[78] … A liquidator faced with differences between shareholders needs to know whether they have been resolved. If they have been, the liquidator does not have to deal with them. …
[79] … In a liquidation that is reinforced by the liquidator’s principal duty under s 253 of the Companies Act to get in the assets of the company and to distribute them to creditors, then to shareholders “in a reasonable and efficient manner”. It is not reasonable or efficient to investigate disputes that have already been resolved.
The Associate Judge had the benefit of expert evidence from Mr Bethell, who gave evidence for the Quinn Trust, and Mr Parsons. He referred to that evidence in considering whether Ms Toon should have investigated Mr Thompson’s complaints:
[80] … [Mr Bethell and Mr Parsons] differed on whether the settlement agreement meant that Ms Toon did not have to investigate Mr Thompson’s complaints. Mr Parsons assumed that the settlement agreement did not apply but did not give reasons, perhaps recognising that that involved questions of law and was not a matter on which he could give expert opinion evidence. On the other hand, Mr Bethell accepted that the settlement agreement applied, although he gave his opinion after having taken advice from in-house counsel. Neither suggested that the liquidator should completely ignore the shareholder making the complaint. Some preliminary inquiries would be required to see what the complaint was and whether it was covered by an earlier agreement. Nor did Mr Parsons suggest that a liquidator was entitled to press on with an investigation of a complaint, even if it had already been resolved in a settlement agreement.
(Emphasis added.)
The Associate Judge then set out his own view of what a liquidator would understand to be the effect of the settlement agreement, which was that it resolved all matters and would not allow further steps to be taken:
[82] A liquidator reading the agreement would understand that the matters that the parties had been litigating had now been resolved. Because this was a settlement agreement, earlier differences were not to be pursued anymore. …
[83] If the liquidator were provided with a copy of the pleadings in the s 174 proceeding, they would see that the matters the Thompsons had put in issue in that proceeding were now resolved. …
[84] Having worked that out, the liquidator would understand that in carrying out the liquidation they would not need to inquire into Mr Thompson’s grievances because he had agreed not to pursue them anymore. Instead the liquidator could get on with getting the assets in and distributing them to shareholders. In response to Mr Thompson’s complaints, the liquidator could explain that those issues were now dead.
Ms Toon’s position was that she was entitled to investigate the complaint because IHL was not party to and therefore not bound by the settlement agreement. The Associate Judge rejected this submission on the basis that, as a matter of law, the settlement agreement acted as a bar to any action the liquidator might take against the Quinns. Relying on the decision in Re Duomatic Ltd, the Associate Judge held that because all the shareholders had agreed not to pursue Mr Quinn in respect of the fees, Mr Quinn would have a defence to any claim brought by the company.[27] The Associate Judge discussed the application of Re Duomatic in New Zealand and also considered whether the settlement agreement could be treated as a decision of the company itself and whether any claim by Ms Toon and the company against Mr Quinn would be an abuse of process on the ground of res judicata. He considered that:
[102] The shareholders’ consent to the release of claims against the Quinns, the company’s release by the shareholders’ resolution and the abuse of process by Ms Toon in claiming against the Quinns over the matters settled in the agreement all give legal reasons why she cannot say that she was free to investigate possible breaches of duty by the Quinns and get them to accept adjustments to their distributions on account of Mr Thompson’s complaints. Ms Toon is not a lawyer and cannot be expected to know the legal rules on which these reasons are based. But a competent insolvency practitioner would have recognised that the shareholders had settled their differences and therefore she did not have to deal with those differences in the liquidation. If she had obtained legal advice, I expect a competent lawyer would advise her that the matters settled by the shareholders did not need to be reopened. She says she did consult a lawyer, but she did not give evidence what that advice was. For all I know, she may have required the lawyer to support her in decisions she had already made. If she received inadequate advice from her lawyer, she can take it up with him.
(Emphasis added.)
[27]At [88], referring to Re Duomatic Ltd [1969] 2 Ch 365 (Ch) at 373, and [93].
We note at this point that the Associate Judge’s remarks towards the end of these passages were unfounded. They suggest that there was doubt over whether Ms Toon had, in fact obtained legal advice. But her evidence that she did so was not challenged. It was also incorrect to say that Ms Toon had not given evidence as to nature of the advice, when she clearly did and was not challenged on it. Finally, there was no basis at all on which to suggest that Ms Toon might have pressured her lawyer into giving advice that would support her position.
Concluding his discussion on whether Ms Toon was entitled to investigate Mr Thompson’s complaints, the Associate Judge said:
[103] … I accept that there was no fraud or lack of good faith, but it must have been clear to Ms Toon at the outset that nothing good could come of reopening Mr Thompson’s complaints when all the shareholders had made a formal agreement to bury the hatchet. She cannot say she did not know. Mr Quinn made it clear that he relied on the settlement and that she did not have to investigate Mr Thompson’s complaints. Her explanation for disregarding him, that the company was not bound by the agreement, is unsound. … As she could not hope to recover anything by investigating what had already been settled, it was unreasonable and inefficient for her to take the matter any further once she knew of the settlement. No competent liquidator would have taken the matter up. It was against common sense.
[104] Ms Toon’s lawyer’s letter of 20 December 2018 explains that she would no longer pursue the Quinns for the proposed adjustment as it would not be economic to do so. While that is correct, it does not excuse her earlier decision to open her investigation into Mr Thompson’s complaints. By December 2018 her investigation had already run up considerable costs and tainted the liquidation.
To this point, therefore, the Associate Judge had expressed the firm view that Ms Toon ought not to have taken any steps to investigate Mr Thompson’s complaint. Later, however, when assessing what reasonable remuneration would be, the Associate Judge allowed 18 hours for dealing with Mr Thompson’s complaints and commented that a liquidator not only could, but should, consider the complaints:
[132] A liquidator was required to consider Mr Thompson’s complaints and the settlement agreement, and to check whether his complaints were covered by the agreement. That would include obtaining information about the claims in the s 174 proceeding, obtaining legal advice, telling Mr Thompson that the liquidator would take no further steps on his complaint and deal[ing] with any response from Mr Thompson. If Mr Thompson had been told clearly that he could not revive complaints that he had settled, he would not have taken the matter any further.
On the basis of these latter statements, the finding must be treated as being that Ms Toon was entitled to consider Mr Thompson’s complaint and the settlement agreement to satisfy herself that the agreement precluded any further action.
Was there error in these findings?
Was it necessary to consider the correct legal position as to the effect of the settlement agreement?
The Associate Judge’s findings were largely driven by his view, reached after lengthy legal analysis, that the settlement agreement precluded any claim against the Quinns for the fees said to have been overcharged. Mr Blanchard QC, for Ms Toon, argued that the correct legal position was not in issue and the Associate Judge erred in undertaking an extensive analysis of the legal position. We agree.
The Associate Judge was not required to determine the correct legal position but, rather, to make an evaluative judgment as to what remuneration was reasonable in the context of the liquidation. To do that he had to decide whether the steps that Ms Toon took were those that a reasonably competent liquidator would have taken.
The Associate Judge had before him evidence from two experienced liquidators. The effect of their evidence was that, in deciding whether the settlement agreement precluded investigation of Mr Thompson’s complaint, a reasonably competent liquidator would have sought legal advice. Mr Bethell agreed in cross‑examination that a reasonable liquidator in Ms Toon’s situation, facing contentious parties with strongly held views and a history of litigation, would have taken legal advice. He said that, had he been in that position, he would have reviewed the settlement agreement, sought the view of his in-house legal advisor and would have consulted an external lawyer.
For this reason, although we heard extensive submissions on the Associate Judge’s analysis of the effect of the settlement agreement, we do not see this as relevant to determination of the appeal and therefore do not consider it. We mean no disrespect to counsel, who, understandably, felt obliged to address the substance of the Associate Judge’s findings on this issue.
The effect of the legal advice
The Associate Judge’s conclusion at [132] that a liquidator in Ms Toon’s position was entitled to “[obtain] legal advice [and tell] Mr Thompson that the liquidator would take no further steps on his complaint” was clearly predicated on the erroneous assumption that any legal advice a liquidator received in those circumstances would have justified declining to take further steps. As discussed, however, the evidence was that Ms Toon’s lawyer had advised her that the settlement agreement was not binding on the company, with the result that she was entitled to proceed further. As a result of this error, the Associate Judge failed to direct his attention to the question of what was reasonable for Ms Toon to do, having regard to the legal advice she had actually received.
Mr Bryers argued that the legal advice was of limited importance because Ms Toon had not, in fact, relied on it and, as a matter of law, Ms Toon was not entitled to seek remuneration on the basis that she had relied on legal advice.
As to the first argument, Mr Bryers pointed out the Mr Taylor’s advice was not referred to in evidence until Ms Toon was examined orally. The lack of reference to the legal advice in the affidavit evidence is not significant because it was not apparent as an issue in either application and when Ms Toon gave evidence about consulting her lawyer it was not suggested to her that she had not relied on the advice she received. Mr Bryers also suggested that if Ms Toon wished to rely on legal advice as a reason for doing what she did, it was incumbent on her to produce the advice. But given that Ms Toon’s evidence was not challenged, and she was not asked to waive privilege in respect of it, that submission is not sustainable.
Mr Bryers also suggested that the quality of the legal advice ought to be viewed cautiously because Mr Taylor’s time records suggested that he had only spent a short time on the matter. He accepted, however, that it was difficult to assert that Ms Toon ought not to have relied on the advice simply because her lawyer did not spend very much time considering the issue.
Mr Bryers’s second argument in relation to the legal advice was that Ms Toon ought not to be entitled to claim remuneration on the basis that she acted on legal advice. However, the cases on which he relied for this submission are not apt.
In Re Windsor Steam Coal Co (1901) Ltd the liquidator, having consulted the solicitors of a major shareholder, settled a claim against the company that turned out to be invalid.[28] The Court held that by declining either to apply to the Court for directions or to obtain an extraordinary resolution of the shareholders sanctioning the payment, the liquidator “acted entirely on his own judgment” and was therefore liable to repay the money.[29] This was not a case that involved the liquidator seeking advice from their own lawyer and acting on it.
[28]Re Windsor Steam Coal Co (1901) Ltd [1929] 1 Ch 151 (CA).
[29]At 160.
Re Home and Colonial Insurance Co Ltd also involved a liquidator settling a claim against the company that turned out to be invalid.[30] While the liquidator had consulted his lawyers, they were never asked to consider the particular question at issue and were not informed of key facts.[31] In these circumstances the Court held, understandably, that the liquidator could not escape liability on the basis that his solicitors failed to give him a warning.[32] Again, this is not comparable to the present case.
[30]Re Home and Colonial Insurance Co Ltd [1930] 1 Ch 102 (Ch).
[31]At 123–124.
[32]At 126.
Finally, in Austin Securities Ltd v Northgate & English Stores Ltd a claim was commenced against a company and then not pursued for over two years.[33] In the meantime, the company went into liquidation. Although the liquidators were aware of the claim, they failed to deal with it. When the claim was subsequently revived, the company applied to stay it for want of prosecution. This application was ultimately unsuccessful. Although the company’s solicitors had advised the liquidator that the creditor’s claim was not pursued, the Court of Appeal of England and Wales held that the liquidators had nevertheless “woefully fallen down in their statutory duty”.[34] Even if the solicitors had advised them wrongly, “they could not shield themselves behind that mistake”.[35]
[33]Austin Securities Ltd v Northgate & English Stores Ltd [1969] 1 WLR 529 (CA).
[34]At 535.
[35]At 535.
By contrast, Ms Toon sought specific advice from her own lawyer, at the outset of the liquidation, about whether she should investigate a potential claim on behalf of the company. The expert evidence was that it was reasonable for her to have done so. It must also, therefore, have been reasonable for her to have acted on the advice she received. In these circumstances, the relevance of the legal advice cannot be discounted. But nor can it be the sole determining factor as to whether it was reasonable to take action. That question also depends on the question of materiality.
Issue 2: did the Associate Judge err in his finding as to the effect of Ms Toon’s investigation on the liquidation?
The Associate Judge’s finding
The expert evidence to the effect that a reasonably competent liquidator would have taken legal advice meant that the real question for the Associate Judge was whether the steps that Ms Toon took after receiving legal advice were reasonable, having regard to the questions of value and proportionality on which any assessment of remuneration would be based. However, the Associate Judge did not proceed directly to that question. Instead, he explored the effect that Ms Toon’s decision to investigate Mr Thompson’s complaint had on the liquidation generally on the basis that these effects could not be separated from other aspects of the liquidation.[36] His subsequent assessment of what remuneration was reasonable reflected his view that Ms Toon’s wrong approach had affected many aspects of the liquidation.
[36]Quinn v Toon, above n 4, at [105].
The Associate Judge was highly critical of Ms Toon. He said, among other things:
[106] Ms Toon bought into Mr Thompson’s complaints. While she went through the motions of giving the Quinns the opportunity to reply to her findings, she did not show any interest in [Mr Quinn’s] responses, including his reliance on the settlement agreement and his answers on the substance of Mr Thompson’s complaints. She did not read the materials about the s 174 proceeding sent to her by the Quinns’ counsel. She had decided that the Quinns should accept the adjustment she had proposed and dragged the chain in making distributions to put some pressure on the Quinns to do what she wanted. …
[107] She viewed Mr Quinn with suspicion and as someone not to be trusted. That soured the liquidation. …
[108] She took a fault-finding approach when the circumstances did not call for it. …
The Associate Judge rejected the suggestion that the Quinns may have acted too aggressively, noting that a shareholder has few formal remedies when concerned about a liquidation and that Mr Quinn had tried both a notice under s 286 and a shareholders’ meeting, with no success.[37]
[37]At [110].
The Associate Judge concluded that:
[113] The litigation with its associated effort, time and expense is also a consequence of Ms Toon’s wrong turning at the outset.
[114] In summary, the effects of Ms Toon taking up Mr Thompson’s complaint and wrongly pressing the Quinns to accept her proposed adjustment were extensive, led to a lack of co-operation, strained relationships between Ms Toon and the Quinns, extra work that could have been avoided and added enormously to the costs of the liquidation.
Later, in determining what reasonable remuneration would be, the Associate Judge observed that:
[124] Ms Toon’s remuneration claim is too high because she spent time on unnecessary work, investigating Mr Thompson’s complaints, and that had other effects on the liquidation which added to its length and the time spent on it. It led to differences with the Quinns, pursuit of a fruitless claim against them, increased correspondence, the notice under s 286 of the Companies Act, the shareholders meeting, the application under s 286, requests for unnecessary documents, digging into past transactions that had nothing to do with the liquidation (the sale of Nelson St), delays in completing accounts and delays in distributions. None of this was reasonable or efficient. Nor did it give value to the shareholders. She should not be paid for it.
[125] In some cases fixing liquidators’ remuneration, it is possible to separate the good from the bad and to make deductions for those parts where the claim is excessive. But that is not possible here. Ms Toon took a wrong turn early in the liquidation and that affected much of what followed. Instead, I assess the matter afresh based on what a competent liquidator would likely charge.
(Footnote omitted.)
Were these findings erroneous?
Mr Bryers supported the Associate Judge’s conclusions and argued that there were good reasons Ms Toon ought not to have pursued the fees write back, notwithstanding the legal advice. Essentially, they were that the history of Mr Thompson’s complaints ought to have shown that there was no basis on which to pursue them and that Ms Toon’s assessment of the amount involved in the directors’ and management fees issue was flawed.
Mr Bryers described Mr Thompson as having been obsessed with the fees charged by Mr Quinn to IHL for some two decades prior to the liquidation but, when given the opportunity to justify his complaints in the derivative action, he was unsuccessful. The s 174 proceeding had ended in the settlement agreement that purported to settle both past and future remuneration, with the Quinns agreeing not to take further fees for the management of the company. In these circumstances it ought to have been apparent that a court was unlikely to find merit in the complaints.
Mr Bryers submitted that the basis on which the liquidator assessed the value of any potential claim was flawed because it assumed that the directors’ fees and management fees that could be charged were limited by the High Court’s decision in the derivative action,[38] which assumption was incorrect. In relation to the years ended March 2015 to March 2017, Ms Toon’s assessment was based on an assumption that the Quinns were not entitled to any payment for directors’ fees or management fees because of the undertaking given by Mr Quinn to the NZICA Disciplinary Tribunal, but this was incorrect too because the Tribunal’s jurisdiction was limited to accounting work and fees and the undertaking was given in that context. Moreover, it was not for IHL to enforce the undertaking; at best it could have complained to the Tribunal.
[38]Investacorp Holdings Ltd v Quinn, above n 9.
Any assessment of past actions risks hindsight analysis. Care must be taken to ensure that what is learned from the eventual outcome does not affect the assessment of the liquidator’s actions.[39] We accept Mr Blanchard’s submission that the criticisms levelled at Ms Toon rested to a significant degree on hindsight.
[39]Re Windsor Steam Coal Co (1901) Ltd, above n 28, at 159.
There is nothing in the evidence to suggest that Ms Toon had any warning about the level of animosity that existed between Mr and Mrs Quinn and Mr Thompson. Mr Quinn’s initial letter of 8 June 2017 said nothing about the historical relationship between the parties. The accompanying background notes said only that “[a]ll shareholders of Investacorp have signed a settlement agreement to resolve claims made by the Thompsons under s.174 of the Companies Act, 1993.” Ms Toon could not possibly have discerned from this statement the long history of extreme mistrust and acrimony that existed between the Quinns and Mr Thompson. That she did not appreciate it is obvious from her letter of engagement in which she noted that she would need to confirm whether she would be corresponding solely with the directors or all the shareholder groups “which, from experience, can add significantly to the time involved if there is any acrimony”.[40]
[40]Emphasis added.
As a result, the first indication of difficulties between the shareholders came from Mr Thompson’s approach to Ms Toon in April 2018. Although Mr Thompson had approached Ms Toon prior to her appointment he said that this was simply to satisfy himself that she would act independently. That approach may have given Ms Toon some inkling that there had been disagreements between the shareholders but could in no way have signalled the depth of the animosity that existed between the parties.
Following the meeting between Ms Toon and Mr and Mrs Quinn on 26 April 2018, Mr Quinn provided a number of documents including copies of shareholder minutes from 2015. It does not appear that the minutes of the special resolution referred to earlier was among those documents. It would, however, have been obvious to her that there was some tension between the parties. Mr Quinn’s response to the issues Mr Thompson had raised was to simply say that any increase in costs resulting from Mr Thompson should be billed to him directly. In fairness to Mr Quinn, his response undoubtedly reflected a genuine belief that all matters had been settled.
For his part, Mr Thompson continued to press Ms Toon to pursue the matters he had raised. Her evidence was that she felt threatened by the way he kept reminding her of her duties as liquidator. At this stage there was no way for Ms Toon to know whether there was substance to Mr Thompson’s complaints and, if so, what the likely amount involved was likely to be.
At the end of May 2018 Ms Toon had Mr Thompson’s complaints, the High Court’s decision in the derivative action and the NZICA decision. That information did not indicate that investigating the complaints would be a complete waste of time. To the contrary, the NZICA’s finding might reasonably have her caused her some concern. Ms Toon advised Mr Quinn in her email of 29 May 2018 of the basis on which she considered that there had been overpayments to the Quinns but expressly said that she had not formed a conclusive opinion and wanted to hear his response first. At that point her calculation was that fees of $80,305 had been overcharged.
Mr Quinn could have addressed what he saw as flaws in Mr Toon’s workings but elected not to. He was not obliged to respond but the fact that he did not meant that Ms Toon had no reason to think that her assessment might be wrong. This proved unhelpful in the circumstances. When Mr Quinn served Ms Toon with a notice under s 286 of the Companies Act a few days later, she was caught between complaints that appeared worthy of investigation and Mr Quinn’s refusal to engage with her about them. It was at that point that Ms Toon sought legal advice on the effect of the settlement agreement. Even on the Associate Judge’s finding, Ms Toon acted reasonably up to then. In our view, the various matters that Mr Bryers relies on, such as the long history of Mr Thompson’s complaints and his obsession with the fees charged by Mr Quinn, were not sufficiently known to Ms Toon when she began investigating the complaints and her actions cannot be judged as if she had that knowledge.
When Ms Toon wrote to the shareholders on 18 July 2018 setting out her view regarding the overpayment of fees, which she now assessed at $106,545, Mr Quinn still did not take the opportunity to correct what he saw as flaws in Ms Toon’s approach. He did not do so until 27 July 2018, shortly before the shareholders’ meeting. It was only with the benefit of Mr Quinn’s letter of 27 July 2018 that Ms Toon had sufficient information to review and reconsider the value to the company in pursuing this matter further. Only then could she have had a real sense of Mr Quinn’s position and made the assessment as to whether her calculation on the fees issue was correct and, even if it was, whether it was worth pursuing. However, the shareholders’ meeting did not proceed as planned because Mr and Mrs Quinn did not remain and within a few days Mr Quinn had started proceedings.
The circumstances as we see them can be summarised as follows. Ms Toon was appointed without prior knowledge of the extent of animosity between the shareholders. One shareholder made serious complaints against a director regarding fees charged to the company. That director had previously been the subject of censure by the NZICA in connection with fees charged to the company. Review of the company’s financial statements suggested that fees totalling more than $106,000 had been overcharged. On one view the amount was not significant in the context of the company’s assets. On another view, one of the shareholders was in a more modest financial position than the others and her share of the disputed amount might be regarded as material to her. That shareholder had not indicated that she wished Ms Toon to relinquish the issue. The director declined to engage on the basis that the settlement agreement precluded that matter being investigated. But Ms Toon had legal advice that the settlement agreement did not bind the company. The director also threatened legal proceedings. Eventually the director did provide a detailed response to Ms Toon’s questions. But within days the legal proceedings had been commenced.
In our view the Associate Judge wrongly assessed Ms Toon’s conduct with the benefit of hindsight and, as a result, came to unwarranted conclusions. In particular, Ms Toon did not take a wrong turn at the outset. The increasingly fractious relationship between her and Mr Quinn is not to be sheeted home to errors made by Ms Toon. Rather, we see the way the liquidation unfolded as an unfortunate legacy of Mr Quinn’s and Mr Thompson’s dealings with one another over a very long time, and Ms Toon was caught between them.
In our view Ms Toon was entitled to investigate Mr Thompson’s complaint until she had sufficient information to satisfy herself that pursuing it would not be cost effective. It was not until she received Mr Quinn’s detailed explanation at the end of July 2018 that Ms Toon could have been expected properly to review the merits of the complaint against him. But Mr Quinn had issued proceedings in the first week of August 2018 and she was entitled to give priority to responding to them.
Ms Toon’s affidavit was filed at the end of August 2018. As discussed, little occurred in September 2018 because of Ms Toon’s personal circumstances. It would therefore have been reasonable for Ms Toon to have reviewed her conclusion and reached a view as to the materiality of the amount and the cost-effectiveness of pursuing it by mid-October 2018. Ms Toon did not reach her view until December 2018. However, the delay of six weeks or so did not add materially to the cost of the liquidation. Whenever the decision was made it would still have required the letter to shareholders that Mr Taylor sent on 20 December 2018.
Finally, we note that some of the legal costs in this case are the result of Mr Quinn’s decision to pursue his s 286 application even after Ms Toon signalled that the fees issue would not be pursued. The reasonableness of Ms Toon’s remuneration could have been challenged in the context of her application for approval. Mr Quinn’s application made additional, serious allegations against Ms Toon, including that she had breached her duty to act impartially between the shareholders, was “rude and aggressive”, “very critical” and “emotional about the issue”. The potential for reputational damage from such allegations meant that sustained opposition to the application was inevitable. For the reasons we have given, Ms Toon has been vindicated in her opposition.
Issue 3: did the Associate Judge err in disallowing Ms Toon’s legal expenses?
The Associate Judge held that the $63,158 Ms Toon claimed for legal expenses was not properly incurred. He considered that a “careful liquidator” would have obtained legal advice to check that Mr Thompson’s complaints had been resolved by the settlement agreement, and that the lawyer may also have been required to deal with any responses from Mr Thompson, and allowed $4,000 (excluding GST) for that.[41] This conclusion reflects the same erroneous assumption discussed above at [80] that any legal advice Ms Toon received would be to the effect that the company was bound by the settlement agreement.
[41]Quinn v Toon, abve n 4, at [141]–[142].
Since we have held that Ms Toon acted reasonably in investigating Mr Thompson’s complaints, it follows that the legal expenses she incurred in doing so were also properly incurred and are payable out of the assets of the company.[42]
Result
[42]Companies Act, s 278.
The appeal is allowed.
The High Court judgment is set aside.
Ms Toon’s remuneration is approved at $101,729. She is entitled to her legal expenses as incurred.
The High Court’s costs order is set aside. Ms Toon is entitled to costs in that Court on a 2B basis.
Ms Toon is also entitled to costs in this Court for a standard appeal on a band A basis, plus usual disbursements. We certify for second counsel.
Solicitors:
Heaney & Partners, Auckland for Appellant
McVeagh Fleming, Auckland for First Respondents
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