Waimate Investments Ltd (in liquidation) v O'Dea CA196/03
[2004] NZCA 438
•23 February 2004
IN THE COURT OF APPEAL OF NEW ZEALAND
CA196/03
BETWEENWAIMATE INVESTMENTS LIMITED (IN LIQUIDATION)
First Appellant
ANDBRUCE CARLAW RICHARDS AND JAMES GREGORY EDEN
Second Appellants
ANDMANAIA INVESTMENT COMPANY LIMITED (IN LIQUIDATION)
Third Appellant
ANDBRUCE CARLAW RICHARDS AND JAMES GREGORY EDEN
Fourth Appellants
AND GAVIN RICHARD O'DEA
Respondent
Hearing: 17 February 2004 Coram: Anderson P
Gendall J Doogue J
Appearances: R T Wilson for Appellants
D G Dewar for Respondent Judgment: 23 February 2004
JUDGMENT OF THE COURT DELIVERED BY DOOGUE J
Introduction
[1] The appellants are the plaintiffs in a proceeding commenced in the New Plymouth High Court registry, CP 2/03. The respondent is the defendant. The
WAIMATE INVESTMENTS LIMITED (IN LIQUIDATION) And Ors V GAVIN RICHARD O'DEA CA
CA196/03 [23 February 2004]
appellants applied for directions under s 258 of the Companies Act 1955 that the filing and prosecution of the proceeding represents a proper exercise of the powers of the second and fourth appellants as liquidators of the first and third appellants. The respondent, who is an accountant who managed the first and third appellants, opposed the application.
[2] In the High Court it was common ground that the purpose of the application to the Court was to give the liquidators immunity from an award of costs in the event that the appellants were unsuccessful in the proceeding. It was also common ground that the Court had a discretion as to whether to grant or refuse the application.
[3] Master Sargisson determined that the appellants’ purpose in seeking to obtain the Court’s sanction in order to afford protection for the liquidators against an order for costs if the proceeding against the respondent is unsuccessful was inappropriate and declined to exercise her discretion in favour of the appellants’ application.
[4] The appellants appeal from that decision and say the Master should have exercised her discretion in favour of the appellants.
Background
[5] As the Master noted, it is not necessary to go into the background in any great detail. What the appellants allege is that when the respondent was managing the first and third appellant companies he was responsible for them lending a large amount of money to various entities associated with him or members of his family. The loans were funded with monies advanced in part by the respondent’s own associates and family but also by a large number of small creditors, who were most upset about their loss when, as a result of the collapse of the bloodstock industry, it became clear that many of the loans were unlikely ever to be recovered. The liquidators allege that the two companies in liquidation traded while insolvent since at least 1992 and that the way the companies were operated allowed the respondent and his family members to claim large tax losses, thus potentially allowing personal tax savings of significant sums. The liquidators say that the only substantial assets
that the companies have are the claims against the respondent and wish to pursue those claims.
[6] By the time the application was heard by the Master the appellants had already filed a first amended statement of claim. It alleged, amongst other things, that the two companies breached various sections of the Companies Act 1955 when they were under the respondent’s control and that he breached his fiduciary duties.
[7] It needs to be noted in passing that in 1997 the first appellant issued a proceeding against the respondent in the High Court at New Plymouth which was not pursued. The respondent said and says that the earlier proceeding in part duplicated the 2003 proceeding. However, understandably, the Master put that aspect of the matter entirely to one side as by the time of her determination the earlier proceeding had been discontinued.
The judgment under appeal
[8] The Master’s decision first traversed the nature of the application and its background in almost identical terms to those set out above.
[9] The judgment then noted that the applications were correctly brought under s 258 of the Companies Act 1955. The Master accepted that the application appeared to come within the general wording of s 258(1)(a) or (b). If that was right, then it was clear the Court had a discretion as to whether or not to make the order sought by the appellants. She noted that the application appeared to be without precedent and counsel were unable to find an example of a similar application being granted under the Companies Act 1955 or the Companies Act 1993.
[10] The Master then summarised the contentions of the appellants. In particular, it was said that an order should be made because the companies had insufficient assets to satisfy an award of costs in the event that the proceeding was unsuccessful and because the numerical majority of creditors of the companies were elderly people, including some who had invested their entire life savings in the companies. The companies’ creditors were either reluctant or unable to indemnify the liquidators
in respect of costs. The “high value” creditors were most unlikely to provide an indemnity to the liquidators or the companies because of their close association with the respondent. Some play was made upon the alleged merits of the pleaded facts of the claim. It was further submitted that if the order sought was not made then it was unlikely that the liquidators could pursue the proceedings.
[11] The Master’s reasons for determining that it was inappropriate for the Court to exercise its discretion to grant the appellants’ application are admirably succinct and can be set out in full as follows:
[13] As I understand the plaintiffs’ purpose it is to obtain the Court’s sanction in order to afford protection for the liquidators against an order for costs if the action is unsuccessful. To that end, they are really requiring the Court to make an assessment of the substantive merits of the claim at an interlocutory stage. They have filed affidavit evidence in order to assist the Court to make the assessment.
[14] I do not think that is a proper exercise of the Court’s discretion. It is not appropriate in the absence of full evidence and cross-examination for the Court to make an assessment of the substantive merits of the claim at this stage. There are of course circumstances where the Court is required as far as is possible to endeavour to assess the merits and prospects of success. The Court’s task in dealing with an application for security for costs is a case in point. However, it is a somewhat different situation where the purpose of the application is an endeavour to limit the liquidators’ exposure for a costs award. Whether or not costs are justified on the substantive proceeding is a matter that ought to be determined when the substantive merits of the claim have been assessed in the normal way.
[15] Also, this application is akin, in some respects, to asking the Court for an endorsement to litigate. This really amounts to a request for advice. The Court is loath to proffer advice.
[16] It is for the liquidators and their legal advisers to determine the merits and risk of pursuing the plaintiffs’ case. If the case is strong, then there is little likelihood of their having to meet an award of costs. If the case is weak, then they need to think about whether it should be brought at all.
[12] The judgment went on to deal with a cross-application by the respondent which was also dismissed but in respect of which there has been no appeal. It is unnecessary to traverse any aspect of the cross-application.
Section 258 Companies Act 1955 and its predecessor
[13]The relevant portion of the section reads:
258 Court Supervision Of Liquidation
(1) On the application of the liquidator, a liquidation committee, or, with the leave of the Court, a creditor, member, 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:
….
(3)Subject to subsection (4) of this section, a liquidator who has—
(a) Obtained a direction of a Court with respect to a matter connected with the exercise of the powers or functions of liquidator; and
(b)Acted in accordance with the direction,—
is entitled to rely on having so acted as a defence to a claim in relation to anything done or not done in accordance with the direction.
(4) A Court may, on the application of any person, order that, by reason of the circumstances in which a direction was obtained under subsection (1) of this section, the liquidator does not have the protection given by subsection
(3) of this section.]
[14] Section 258 was inserted in the Companies Act 1955 as a result of the 1993 amendments to that Act which took effect from 1 July 1994. A similar provision was inserted in the Companies Act 1993.
[15] As has been noted by most commentators, the changes brought about by the 1993 amendments to the Companies Act were designed in this area to limit the extent to which directors had to apply to the Court for direction but retaining the right of interested parties or the liquidators to apply for directions where they seemed necessary.
[16] The appellants place some reliance upon the long-standing provision which previously existed in s 240 Companies Act 1955 and earlier New Zealand and United Kingdom legislation. The previous s 240(1)(a) Companies Act 1955 read:
240. Powers of Liquidator—
(1) The liquidator in a winding up by the Court shall have power, with the sanction either of the Court or of the committee of inspection,—
(a) To bring or defend any action or other legal proceeding in the name and on behalf of the company:
The appeal
[17] The appeal is brought against the exercise of a discretion. As a result, the appellants must show either that the Master is clearly wrong or that she acted contrary to principle or took into account irrelevant considerations or failed to take into account relevant considerations.
[18]The appeal proceeds upon the basis:
1. That it is a proper exercise of the High Court discretion under s 258(1)(a) and (b) to give directions concerning whether liquidators should prosecute third party proceedings and that the Master was wrong in not doing so;
2. The basis upon which the discretion should be exercised is that the Court should enquire into the strengths and weaknesses of the case and determine whether there is a case in which proceedings can responsibly be issued;
3.That in this case the Court should give the direction sought.
[19] The appellants now seek to resile from the acknowledgement before the Master that the purpose of the application to the Court was to give the liquidators immunity from an award of costs in the event that the appellants were unsuccessful in the proceeding. It is now said that was the main but not sole purpose of the application. However, that acknowledgement was in accord with the reasons given for the application to the Court in counsel’s accompanying memorandum: paragraph
6. The appellants now acknowledge that the direction sought could not protect them from an ultimate order for costs by a trial Judge. Nevertheless they continue to submit that the main purpose of the application is to protect them against any personal liability for costs if the proceeding is unsuccessful. Effectively they seek assurance from the Court, rather than counsel, that the proceeding is an appropriate one.
[20] Pertinently the appellants do not suggest the application is brought to protect the creditors. It is brought in the hope it will protect the liquidators, even though the appellants now accept it is the interests of the creditors that are paramount.
[21] The appellants, in developing their submission that the Master was wrong with respect to her approach to whether it is appropriate to make the order sought in the present case, first seek to gain support from what occurred under s 240(1)(a) of the Companies Act 1955 before it was amended in 1993. Under that provision proceedings in the name of the company could only be brought with the leave of the Court or the committee of inspection of the company in liquidation. The appellants, with reference to certain High Court decisions, submit that when the Court was required to exercise its jurisdiction it would consider the strengths and weaknesses of a case and determine whether there was a case in respect of which a proceeding could responsibly be issued.
[22] Without looking at the reasons for that state of affairs, the appellants go on to argue that, if up until 1994 liquidators could not prosecute proceedings on behalf of the company without the approval of a Court or a committee of inspection, it would seem strange that subsequent to 1994 a liquidator could not obtain directions of the Court concerning such proceedings when the liquidator sought such directions. From this doubtful premise it is submitted that it is clear that, if the liquidator wishes to seek directions from the Court regarding proceedings not only by the company but by the liquidators, he or she is entitled to receive the direction of the Court and the Court must give such direction in the exercise of its supervisory function. This submission is made without any reference to authority and without any reference to the reasons why the Legislature previously provided for the liquidator to have the approval of either the Court or committee of inspection to proceedings issued in the name of the company and then changed the law. The appellants further failed to acknowledge that the practice in respect of obtaining leave of the Court under s 240(1)(a) Companies Act 1955 was an ex parte practice which did not involve the prospective defendant or defendants being heard. Indeed, one of the High Court decisions upon which the appellants place some reliance specifically held to that effect: Re Benchmark Jewellery Co (NZ) Ltd (In Liquidation) (1992) 6 PRNZ 642.
[23] The appellants go on to submit that, by analogy with applications for directions by trustees under s 66 of the Trustee Act 1956, it is appropriate for liquidators to have the assistance and advice of the Court as to whether proceedings should be issued and pursued. Once again the appellants’ submissions fail to address the purpose for such applications and the practice adopted to obtain the advice.
[24] The appellants also submit that there are a number of situations where the Court makes an assessment of the substantive merits of proceedings at an interlocutory stage. However, in none of the examples to which the appellants point is there any situation where the Court’s interlocutory determination gives a party any protection in respect of costs.
[25] Nevertheless the appellants submit that the liquidators’ reasons for seeking the directions are irrelevant. They submit that, so long as the liquidator is in genuine doubt as to whether to proceed, the liquidator should be entitled to the direction of Court without the Court enquiring into the motive for seeking directions.
[26] It is submitted that in the present case the Court should have made directions as to whether or not the proceedings should be prosecuted having regard to the following factors:
1. The proposed litigation involves allegations of equitable fraud (breach of fiduciary duty).
2.The litigation will be lengthy and costly.
3. Two sets of previous liquidators have failed or declined to issue such proceedings.
4. It is unlikely the liquidators would receive appropriate indemnities from the numerous creditors.
[27] Although recognising that certain recent cases in the High Court dealing with the funding of litigation liquidation are not directly on point, the appellants submit that just as it is appropriate for the Court to enquire into the merits and give directions where a funding agreement is involved, it is also appropriate for the Court
to carry out the same exercise when the liquidators seek guidance in the absence of a funding arrangement.
[28] For reasons which shortly appear, it is unnecessary for us to traverse the submissions for the respondent, who supports the judgment under appeal and submits that the appellants’ application is misconceived, confusing the Court’s role both in respect of the supervision of liquidations and in respect of the costs incurred by liquidators in relation to proceedings brought on behalf of a company. In particular, it is submitted it is entirely inappropriate that there should be a pre-trial determination of the merits of proposed litigation with a view to protecting those who seek to pursue the litigation should they ultimately be unsuccessful.
Consideration of appeal
[29] We agree with the respondent’s submissions that the appellants’ position is totally misconceived. The very absence of any authority to support the appellants’ argument given the lengthy history of legislation relating to incorporated companies was a clear warning to the appellants that their position would be difficult to sustain.
[30] The fundamental purpose of s 240(1)(a) Companies Act 1955 was not to protect a liquidator against the costs of the defendant against whom the proceeding was being brought, or any hypothetical liability for the company’s costs, but to ensure that there was a justifiable case for the liquidator to bring on behalf of the company for the apparent benefit and not detriment of the creditors of the company. The Benchmark Jewellery Co (NZ) Ltd (In Liquidation) case on which the appellants rely is itself an example of this approach.
[31] Underlying that approach is the basic premise that the company in liquidation will be liable for the costs of the litigation and will not be able to obtain protection from the costs of a successful defendant. In such litigation the company is the plaintiff and the liquidator normally could not be at risk in respect of costs as the liquidator is not the party to the proceeding.
[32] It has long been the law that an action by a company in liquidation should be brought in the name of the company and not in the name of the liquidator: Re Tongariro Hemp Company Ltd (1909) 12 GLR 7. In respect of such proceedings, absent exceptional circumstances, the liquidator will not be responsible for the costs of the company, let alone the costs of a successful defendant to the proceeding: In Re Anglo-Moravian Hungarian Junction Railway Company, Ex parte Watkin (1875) 1 ChD 130. It has equally long been the law that applications to the Court in a winding up are made by or against the liquidator personally and in such cases the liquidator may be ordered to pay costs personally as the liquidator is the party to the proceedings: Re Wilson Lovatt & Sons Ltd [1977] 1 All ER 274 and Hart v Stiassny (1998) 12 PRNZ 240.
[33] Nowhere in any of the cases to which we have been referred is there the slightest suggestion that a company in liquidation or its liquidator is entitled to receive protection for its costs or for his or her costs by seeking a pre-trial ruling based on the merits of the litigation. It is for the trial to determine the merits of the litigation. In the past the applications by liquidators to obtain the sanction for the proceedings by the company were to assess the reasonableness of the proposed proceeding from the perspective of the creditors and were never an attempt to pre- judge its outcome. Nor has there ever been the suggestion that the determination of such an application could protect the company in liquidation from an order for costs. Such an approach flies in the face of the principle that it is for the trial to determine the merits of the proceeding and for the costs of the proceeding to be determined following that outcome.
[34] Contrary to the earlier law, the Legislature in 1993 gave the liquidator power to determine whether proceedings should be issued. For the Court to entertain applications seeking to revert to the old position would fly in the face of the 1993 amendments.
[35] We are therefore of the opinion that the Master’s approach to the application was entirely correct. It was not for the Master to proffer advice, or give an assurance, or determine that the proceeding is proper. It is for the liquidators to make their own determination on legal advice.
[36] That is not to say that it may never be appropriate for a liquidator to apply for directions as to proposed litigation by the company. It may be appropriate, for example, where there is a difference of view based on conflicting opinions from counsel as to the benefits of the proposed litigation or opposition by creditors to the proposed litigation based on a conflicting opinion from counsel. However, such an application would be entirely different from the present one. It would relate to the situation where there is a genuine conflict as to the best interests of the creditors to be resolved. The practice of the past might then be appropriate, but not an application on notice to the defendant or proposed defendant. In any event it would apply only to proceedings to be brought on behalf of the company and not to proceedings to be brought by the liquidator personally. Where the liquidator is acting personally, the liquidator must take his or her own advice and make his or her own decision. The Court cannot be asked to second guess the outcome of proposed litigation with a view to protecting one party vis-à-vis another.
[37] For the purpose of completeness we would add that none of the allegedly analogous situations upon which the appellants placed some reliance are at all analogous. None of them involves protecting the litigant from the cost outcomes of that litigant’s proceeding. They all address quite different situations.
Result
[38] The appeal is and must be dismissed. The respondent is entitled to his costs in the sum of $3,000 together with his reasonable disbursements to be fixed by the Registrar if not agreed.
Solicitors:
Till Henderson King, New Plymouth, for Appellants Thomas Dewar Sziranyi Druce, Lower Hutt, for Respondent
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