Vlasic v Zelande Limited

[2019] NZHC 2152

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2019-404-000917

[2019] NZHC 2152

IN THE MATTER OF

the liquidation of TE TUMU MIERE LIMITED (IN LIQUIDATION)

BETWEEN

PAUL VLASIC and DEREK AH SAM

Applicants

AND

ZELANDE LIMITED

First Respondent

MĀORI TRUSTEE

Second Respondent

Hearing:

28 August 2019

Appearances:

J Burt for Applicants

B D Gustafson and B M Foster for First Respondent H L Quinlan for Second Respondent

Judgment:

30 August 2019

ORAL JUDGMENT OF ASSOCIATE JUDGE R M BELL

VLASIC v ZELANDE LTD & OR [2019] NZHC 2152 [30 August 2019]

[1]    This case has a fixture for one day on 30 October 2019. I am asked to decide a preliminary matter. That was put as a jurisdictional question, but in the event, it has become more a matter of case management. I will, however, address the issue of principle raised by Zelande Ltd.

[2]    Te Tumu Miere Ltd was in the honey business. It was established to produce, harvest and market manuka honey from Māori land blocks. The Māori Trustee is the sole shareholder. In August 2017 Te Tumu Miere Ltd made an agreement with Zelande Ltd, the first respondent, under which it purchased 1500 beehives. Zelande undertook to manage the hives on behalf of Te Tumu Miere Ltd. That was unsuccessful. In July 2018, Zelande Ltd gave notice terminating the management contract. Notwithstanding that termination, arrangements were made for Zelande Ltd to continue to manage the hives. That ran on up until the end of March 2019. In the meantime, in November 2018, the Māori Trustee, as shareholder, resolved that Te Tumu Miere Ltd should be put into liquidation. This is an insolvent liquidation. The applicants are the liquidators of Te Tumu Miere Ltd.  The Māori Trustee says that it is a secured creditor for some

$900,000 under a general security agreement.  Zelande Ltd says that it is owed about

$3 million. It has claimed for unpaid invoices. It says that it carried out salvage work for which it has been not been paid and it is also claiming loss of profits arising from the termination of August 2018. There are also some minor unsecured creditors, owners of Māori land who have claimed for unpaid licence fees for hives kept on their land. In the liquidation there is a contest between Zelande Ltd and the Maori Trustee as to the claim of Zelande Ltd and whether it has any priority because it claims a lien.

[3]    In May this year, the liquidators applied under s 284 of the Companies Act 1993 for directions:

(a)Whether work undertaken on beehives by a beekeeper gives rise to a lien at law;

(b)If direction (a) is answered in the affirmative, whether the first respondent (Zelande) in fact has a lien over hives owned by TTM;

(c)If direction (b) is answered in the affirmative, whether Zelande’s lien has priority over the second respondent’s security interest under a general security agreement dated 1 July 2015;

(d)If direction (b) is answered in the affirmative, what amount is secured by Zelande’s lien;

(e)If direction (b) is answered in the affirmative, whether the amount of Zelande’s lien is reduced or extinguished as a result of any:

(i)breach of contract by Zelande for failing to manage the hives properly or at all from 27 July 2018 to 1 October 2018;

(ii)breach of Zelande’s duty of care as bailee for failing to manage the hives properly or at all from 1 October 2018 to 7 January 2019;

(iii)breach of contract by Zelande for failing to manage the hives properly or at all from 7 January 2019 to 29 March 2019;

(iv)conversion by Zelande of bees and/or hiveware (including supers, brood boxes, honey boxes, honey frames, queen excluders and pallets) owned by Te Tumu Miere Ltd.

[4]    As the hearing developed, I came to appreciate that the directions sought under (a), (b) and (c) will be suitable for determination on affidavit evidence for a one-day hearing on 30 October 2019, but the matters under (d) and (e) involve contested factual issues which are unlikely to be determined in a one-day hearing. As a matter of practicality, I will only be able to deal with matters (a), (b) and (c) on 30 October 2019. A later hearing will be required to determine the other matters in the application. While there will be some factual matters to be decided under (a), (b) and (c), they are not going to be as complicated as the contested matters under (d) and (e) which are more typically the subject of standard proceedings for common law causes of action.

[5]    The liquidators have applied under s 284 of the Companies Act and have filed an originating application under Part 19 of the High Court Rules. Under r 19.4 of the High Court Rules they are entitled to file an originating application without first seeking leave of the Court. Zelande Ltd has challenged whether the matters under (e) can properly be determined by a proceeding under s 284 of the Companies Act. For reasons I will give, I am satisfied that the liquidators have properly come to the Court under s 284 of the Companies Act.

[6]    Zelande Ltd targeted the direction (e) in the application to say that it ought to be an ordinary common law proceeding brought separately in the name of the company, not an application under s 284 brought by the liquidators. That is the jurisdiction issue I am required to determine. Section 284 says:

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:

...

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

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

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

(b)acted in accordance with the direction –

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

(4)A court may, on the application of any person, order that, by reason of the circumstances in which a direction is obtained under subsection (1), the liquidator does not have the protection given by subsection (3).

[7]    Zelande Ltd accepts that (a), (b) and (c) are appropriate matters on which liquidators may seek directions under s 284(1)(a). One of the cases cited as authority is the Court of Appeal’s decision in Westpac Securities v Kensington.1 Zelande Ltd says, however, that (e) requires determination of matters that are the subject of a common law cause of action for damages. The Court will need to make findings whether there was a contract, whether there was a bailment, and what the terms of any contract and any bailment were, whether there was any breach of bailment or breach of contract, what losses there were, and what the measure of those losses are. It says, therefore, that the common law cause of action ought to be brought separately by the company as a standard proceeding, rather than brought by the liquidator under an application for directions under s 284 of the Companies Act.

[8]    It is helpful to consider the different functions of a liquidator. The liquidator is required to investigate the affairs of a company, to realise its assets and to distribute them to those claiming in the liquidation.2 The realisation of assets on the one hand and the consideration of claims and distributions to creditors on the other are distinct. As a general proposition, when a liquidator wishes to recover by legal proceedings assets for the company, the liquidator may bring an ordinary, common law proceeding. That is a general proceeding under the High Court Rules. Typically, the liquidator may bring an action for to recover a debt or may sue for damages or may claim that an asset in the hands of third parties properly belongs to the company. In other words, the liquidator having control of the company can exercise the company’s normal rights to take proceedings to enforce its property rights. That is all part of the realisation phase. The statement that proceedings by the liquidator are carried out in the name of the company is subject to some qualifications. For example, proceedings under s 295 to set aside voidable transactions are brought in the name of the liquidator, as are applications to recover transfers made at an under value under ss 297, 298 and 299 of the Companies Act. Equally, proceedings under s 301 of the Companies Act to enforce breaches of duty by directors and managers may be brought by a liquidator but are not brought in the name of the company.

1      Westpac Securities v Kensington [1994] 2 NZLR 555 (CA).

2      Companies Act 1993, s 253.

[9]    In this case, the claims against Zelande Ltd are not part of that asset realisation by the liquidators. It is common ground that Zelande Ltd claims to be a creditor of Te Tumu Miere Ltd, although the amount of the debt is in contention. Its ranking in relation to the Maori Trustee is in contention, as is its claim to have a lien over hives in its possession and the amount of its claim. Mr Burt says that there may be no debt at all. But in dealing with those matters, a liquidator is not concerned with getting in assets for the liquidation. It is concerned with other matters, the validity of the claim by Zelande Ltd in the liquidation, its ranking in relation to other creditors and how much the claim is for. Zelande’s claim is contested, not only as to security and priority, but also as to amount.

[10]   The liquidators query whether Zelande Ltd did perform services for the amounts for which it has billed and suggest that the work carried out was defective. Those are matters that can be taken into account in any decision to accept or reject Zelande’s claim. I can illustrate this by reference to analogous examples. Assume for a moment that the company is not in liquidation. If Zelande Ltd were to sue the company for non-payment of its invoices for the work it had carried out, Te Tumu Miere Ltd would be entitled to defend the proceeding by alleging that the work had been carried out defectively or had not been carried out at all and would be able to raise those matters in abatement of the price claimed. That is an application of the rule in Mondel v Steel.3 It could also be the subject of claims for set-off and counterclaim, but it would be sufficient for the company to say that the price has abated.

[11]   Now another situation. Zelande Ltd makes a claim in the liquidation. The liquidators decide not to accept the claim for the full amount for which Zelande Ltd has lodged its claim, but to make a deduction. Zelande Ltd does not accept the deduction made by the liquidators. In those circumstances, Zelande Ltd would apply to the Court to review the liquidators’ decision. That would be an application under  s 284(1)(b) of the Companies Act. On hearing the application, the Court would decide whether the liquidator was correct or not to trim the claim by Zelande Ltd. Such an application by the creditor to challenge the application by the liquidator could be made under Part 18 of the High Court Rules, which would involve a statement of claim and

3      Mondel v Steel (1841) 8 M & W 858.

notice of proceeding, or, with the leave of the Court, it could be brought under Part 19. Applications to review decisions of liquidators may be made under Part 19 where they do not involve too much procedural difficulty.

[12]   I refer to an Australian decision which discusses the Australian procedure for considering liquidators’ rejections of creditors’ claims: Re Gordon Grant & Grant Pty Ltd, a decision of McPherson J, a leading judge in liquidation law. He said:4

What is substituted for litigation in the ordinary form is a procedure by which a claimant lodges a verified proof of debt with the liquidator, who admits or rejects it wholly or in part, and from whom an appeal lies to a judge, who determines that appeal de novo primarily on affidavit material. … There can be no doubt that ordinarily such a procedure is, and is designed to be, much more expeditious and less expensive than ordinary proceedings by way of action. If this means that it occasionally has the consequence that the attainment of perfect justice is sacrificed to expedience, it may be justified by the circumstances that on appeal it is possible under modern rules of procedure for the Judge in appropriate cases to make orders for discovery even before the delivery of pleadings where it appears necessarily desirable to do so …

[13]   Complex matters can be decided on applications by creditors challenging a liquidator’s decision to reject their claims.5 In some cases a proceeding can proceed smoothly by an originating application under Part 19, but the proceedings can also be brought under Part 18. It is a matter of case management to decide which procedure is more appropriate. Under Part 19 the Court has the power to direct pleadings6 and to order discovery, although discovery is in the discretion of the Court rather than available as of right.7 The Court can order evidence to be given orally rather than by affidavit.8

[14]   That being the case where a liquidator’s decision is challenged, there seems to be little reason in principle why the same approach should not apply when the liquidator applies to the Court for a direction how to deal with a creditor’s claim rather than deciding and leaving the creditor to challenge the decision. The matter is a difference in procedure, which does not go to substance. It does not suggest that there should be different approaches according to whether a creditor applies to review or a

4      Re Gordon Grant & Grant Pty Ltd [1983] 2 Qd 314 at 316-7.

5      Re Mintago Investments Ltd, Depot Corporation Ltd v Hollis [2018] NZHC 100.

6      High Court Rules 2016, r 19.5A.

7      Commissioner of Inland Revenue v Elementary Solutions Ltd [2017] NZHC 2411.

8      High Court Rules 2016, r 19.13.

liquidator seeks directions on the creditor’s claim. There is a procedural difference in that a liquidator is entitled as of right to use the originating application procedure because of r 19.4; whereas the creditor may need to consider whether a Part 18 claim is more appropriate and will need leave under r 19.5 if the creditor wants to use the originating application procedure. That aside, the procedural matters are broadly the same. It really comes to a matter of case management and procedure. No issue of jurisdiction properly arises.

[15]   In this case, neither the Māori Trustee nor the liquidators contend that Zelande Ltd is a debtor of the company. Mr Burt confirmed that the liquidators are not seeking to wipe out the creditor’s claim and to seek recovery of damages on top (although the liquidators will put Zelande Ltd to proof on its claim). It is a matter of establishing what the amount of the claim is. In establishing the amount, insolvency set-off under s 310 of the Companies Act will apply. There is obvious mutuality. The liquidators might say on behalf of the company that the claim can be reduced because of abatement of price, statutory set-off, equitable set-off or counterclaim to establish a net indebtedness between the parties under s 310. Since the liquidators do not say that Zelande Ltd is a debtor, it would be odd to require the liquidators to bring a general proceeding to recover damages against Zelande Ltd, given the undoubted application of insolvency set-off under s 310, which is mandatory, substantive and self-executing.

[16]   This proceeding deals with the liquidators’ function of considering and accepting claims to work out how to distribute assets. That function falls squarely within the Court’s power to supervise the liquidators under s 284 of the Companies Act. It allows the liquidators to apply to the Court for directions where they are in doubt how to deal with a creditor’s claims. Accordingly, I find this proceeding was properly brought under s 284 of the Companies Act.

[17]   That leaves case management. At the hearing on 30 October 2019, the matters to be decided are (a), (b) and (c) in the application. There will not be a final determination of the amount of Zelande’s claim but it would be useful to have evidence as to the amount of Zelande’s invoices, what payments it has received and how much is left outstanding. Other matters under (d) and (e) will be the subject of another hearing later. Given the contested factual matters, there should be appropriate

pleadings to allow the issues to be properly identified and there should also be discovery. Mr Gustafson and Mr Burt were confident that they could confer and offer a memorandum as to case management directions. It may be appropriate to have the hearing on 30 October first and to give decisions after that, because that may assist counsel in working out the appropriate way forward from there.

[18]   Mr Burt has asked for costs. He submits that Zelande Ltd sought a determination that the proceeding was flawed in respect of direction (e) as being inappropriate under s 284 and I ruled against that submission. While I accept that point, the hearing really became an exercise in case management and I am happy to regard it as such. My practice with most case management conferences is to treat the costs as costs of the proceeding which can await determination of the final hearing. I accept the point that Zelande Ltd has failed on its argument that direction (e) could not be sought under s 284. The costs for today ought to be properly taken into account after the hearing on 30 October when I will decide costs generally for the proceeding.

Associate Judge R M Bell