Willeston Ventures Limited v Scutter
[2016] NZHC 3146
•20 December 2016
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
CIV-2016-485-412 [2016] NZHC 3146
BETWEEN WILLESTON VENTURES LIMITED
Applicant
AND
JOHN MARSHALL SCUTTER Defendant
Hearing: 31 October 2016 Counsel:
M Freeman for Applicant
K P Sullivan for DefendantJudgment:
20 December 2016
RESERVED JUDGMENT OF ELLIS J
I direct that the delivery time of this judgment is
10 am on the 20th day of December 2016
WILLESTON VENTURES LIMITED v SCUTTER [2016] NZHC 3146 [20 December 2016]
[1] Willeston Ventures Ltd (WVL) is a third party creditor of Fresco Advertising Limited (in liquidation) (Fresco). The respondent (Mr Scutter) is the liquidator of Fresco, having been appointed by Fresco’s shareholders.
[2] The other major creditor of Fresco is a family trust (the Trust) associated with Fresco’s directors, Sheridan Bruce and Fraser Carson. The Trust (through its trustees Ms Bruce and Mr Carson) holds 98 per cent of Fresco’s shares.
[3] WVL has applied to inspect all of Fresco’s accounts and financial records and
all accounts and records of the liquidation, pursuant to s 256 of the Companies Act
1993. The specific grounds for the application are that:
(a) WVL (through its director, Mr Galt) “wishes to carry out his own
investigations into [the] voluntary liquidation” of Fresco; and
(b) there are “good reasons” to permit access to the files, as articulated in
Mr Galt’s affidavit.
[4] Mr Scutter has deposed that he does not oppose the flow of information to creditors where they have a specific and genuine interest in seeing particular and identified books and records. He says that he has, in fact, been open and transparent with WVL and has kept Mr Galt informed about the steps he has taken in the litigation. But he opposes the present application on the grounds that it is too general, insufficiently focussed and appears to be driven by Mr Galt’s desire to second guess professional decisions he has taken as a liquidator.
Background
[5] As its full name suggests, Fresco was an advertising company. Until 2009 the company’s turnover was generated by designing and publishing various prospectuses and investment statements for finance companies. Following the GFC that work dried up. Fresco then sought to reinvent itself in a digital space. It created a shared digital platform known as Flightdec, which businesses pay to host their own websites. As well as this hosting service itself there are other, ancillary, benefits for the businesses using the platform.
[6] Since Fresco encountered financial difficulties Ms Bruce and Mr Carson have funded the business by borrowing personally from the bank and investing money in the company through their Trust. It seems that the Trust invested some $230,000 to provide working capital for the business of Fresco up until August 2015. This support from the directors enabled Fresco to continue trading and to reduce its expenditure.
[7] WVL was Fresco’s landlord.1 The lease with Fresco was in place when WVL purchased the 12th floor of Guardian Trust House at 15 Willeston Street, Wellington. The lease had a nine year term running from 1 November 2003. By the end of that term, the rent was approximately $16,000 per month.
[8] Fresco continued to meet its rental obligations until it vacated the Willeston Street premises in late 2011 or early 2012. Prior to that, the company had made extensive attempts to find a tenant to take over the lease. But when one could not be found, the company moved its office to its directors’ home and began to default on its rental obligations.2 The lease terminated on 30 October 2012.
[9] Eventually, WVL took steps to recover the outstanding rental by issuing a statutory demand and filing liquidation proceedings. The debt owed by Fresco to WVL includes rental and opex of $136,652 for the period 1 February 2012 to
30 October 2012. It also includes interest of $50,685 at 12 per cent per annum.
[10] Fresco then went into voluntary liquidation. Ms Bruce and Mr Carson have now set up a company known as Flightdec Ltd and continue to trade under that name.
[11] Mr Scutter was appointed as the liquidator of Fresco on 25 September 2015. It is not disputed that he is an experienced liquidator. Prior to his appointment he
had had no prior dealings with or knowledge of Fresco, or Ms Bruce and Mr Carson.
1 It was WVL who filed the liquidation proceedings.
2 Although it seems some payments were subsequently made: on 30 June 2013 there appears to have been a payment of $12,350; on 14 August 2013 a payment of $1,000; and on 27 September
2013 a payment of $1,150.
[12] After seeing a draft set of financial accounts Mr Scutter formed a preliminary view that there were likely to be some assets recoverable in the liquidation for creditors.
Fresco’s debts
The debt to ASB
[13] Immediately prior to the liquidation Fresco also had a debt to ASB comprising a $90,000 loan facility and an overdraft of approximately $14,000. This debt was unsecured; ASB had not taken out a GSA over Fresco’s assets. The borrowing was, instead, cross collateralised with personal borrowing by the Trust and was secured by a mortgage over Trust property, namely the Bruce/Carson family home in Kelburn.
[14] Prior to liquidation, Ms Bruce and Mr Carson sought to refinance their personal loan with ASB. As part of the refinancing they were required to repay Fresco’s loan and its overdraft. They therefore increased the Trust’s own facility with ASB by $119,000. On about 22 September 2015 (three days before Mr Scutter’s appointment) the sum of $15,326.29 was paid from ASB to the Trust’s Westpac account. The balance was used to repay Fresco’s overdraft facility of
$13,290.90 and the outstanding loan of $90,382.81. Ms Bruce and Mr Carson then took out a GSA over Fresco’s assets.
The debt to IRD
[15] Fresco’s other significant debt was arrears of GST and PAYE owed to Inland
Revenue (IR). Excluding penalties, this debt totalled approximately $63,000.
[16] Fresco had owed a debt to IR of $63,000 not including interest and penalties. The total amount owing was $100,000. The solicitors acting for the Trust negotiated a full and final settlement of the IR debt involving a one-off payment of $25,000. Mr Scutter’s understanding is that the payment to IR was funded by $5,000 from Fresco, $15,326 from the Trust’s ASB facility, with the balance paid by the Trust.
Fresco’s assets
The overdrawn current account
[17] The draft financial statements initially sighted by Mr Scutter indicated that the shareholders had an overdrawn current account of $77,000. The shareholders’ accountant, at Deloitte, sought to convince Mr Scutter that all of the expenditure coded as drawings should have been coded as part repayment of the debt to the Trust. It was Deloitte’s position that there was in fact no overdrawn current account.
[18] Mr Scutter did not accept this and he sought to distinguish any monies paid into the personal bank account of the shareholders from the monies that were paid to the Trust. It was also Deloitte’s position that any monies owing by the shareholders should be set off against the Trust debt.
[19] Mr Scutter’s position was that the debts were not mutual. His own analysis showed that approximately $47,000 appeared to have been paid to the shareholders’ bank account and could be treated as drawings. He negotiated with shareholders about repaying their current account. Those negotiations, which took into account the detailed financial information provided by the shareholders, resulted in a repayment of $15,000. Mr Scutter has deposed that he felt somewhere between a rock and a hard place on the issue because, if he declined to accept that amount, and issued proceedings for the full $47,000 he thought was owing, the shareholders had
said that they would spend the $15,000 on offer on legal fees defending the action.3
[20] On 8 March 2016, before accepting the reduced sum of $15,000, Mr Scutter wrote to WVL’s solicitors explaining the position in some detail. He did not receive a response for well over a month. On 21 April 2016 WVL’s lawyers wrote to Mr Scutter proposing that the debt instead be assigned to WVL. But by that time he
had accepted the $15,000 settlement offer.4
3 His evidence was that the shareholders strongly believed that they were entitled a set-off, or that the money was repayment of the Trust debt and not drawings.
4 He maintains that even had he been made aware of the assignment proposal at an earlier date he would not have agreed to it.
Flightdec
[21] Fresco’s other principal asset was the Flightdec platform it had developed. Mr Scutter undertook his own analysis and made enquiries about its marketability and value. He formed the view that the market for the platform was limited. The income stream produced by the fees paid to use the platform was modest. Notwithstanding the development money that has been spent creating the code and promoting the brand, he concluded that, as a standalone asset, the program itself would have a low market value.
[22] Mr Scutter therefore made arrangements to sell the Flightdec platform to the Trust for $55,000 plus GST (if any). He deposed that he has persuaded the trustees that they needed to make a significant contribution to the goodwill generated by the clients who are signed up to the platform as well as the revenue stream. At the time of the hearing before me, however, the sale had not settled. That is because before doing so the trustees wish to have confirmed whether they will receive a dividend in the liquidation and, if so, how much. Mr Scutter has said that the uncertainty caused by WVL challenging his decisions as liquidator and the resulting increased costs has meant that he has not been able to give that confirmation.
The application
[23] Section 256 of the Companies Act relevantly provides:
256 Duties in relation to accounts
(1) Subject to subsection (2) of this section, the liquidator of a company must—
(a) keep accounts and records of the liquidation and permit those accounts and records, and the accounts and records in the company, to be inspected by—
(i) …
(ii) if the court so orders, a creditor or shareholder; and
(b) retain the accounts and records of the liquidation and of the company for not less than 1 year after completion of the liquidation.
[24] In seeking an order under subs (1)(a)(ii) WVL relies on the decision in Levin v Lawrence.5 The default or starting position is that there is no inspection in the absence of the Court order, but there is no presumption against ordering inspection.6
The Court of Appeal adopted a “good reason” or “just” threshold, noting that there was little difference between the two.7 The Court of Appeal then elaborated the following further principles:8
(a) Mere suspicion or assertion by a creditor that a liquidator has not undertaken – or is not undertaking – the liquidator’s statutory task properly is not sufficient.
(b) It is not permissible for a creditor to embark on a fishing expedition in order to sift through the accounts and records of the liquidation to see if something might turn up.
(c) As a minimum, the applicant must put forward some persuasive, tangible or concrete reason why inspection should be granted. An example might be where the creditor, from its own dealings with the company in liquidation, has a genuine concern about a particular aspect of the company’s affairs. If the liquidator declined to investigate this area, or declined to say whether it had been investigated, the s 256(1)(a)(ii) threshold would be crossed.
[25] In the present case, WVL advanced two general reasons for seeking inspection.
[26] First, it submits that it has concerns about how the liquidation has been conducted. In particular, it says that Mr Scutter:
(a) appears to have accepted uncritically that the Trust could obtain priority in the liquidation by paying off company debts prior to the liquidation, transactions which WVL contends would have been voidable;
(b)accepted the Trust could obtain priority by the payment of the company tax debt which, WVL says, is a manipulation;
5 Levin v Lawrence [2013] NZCA 394, (2013) 11 NZCLC 98-018.
6 At [27].
7 At [52].
8 At [53].
(c) did not have good reasons (or sufficiently articulated reasons) for
accepting $15,000 in settlement of the director’s current account debt;
(d) should have obtained an independent assessment of the value of the
Flightdec platform before agreeing to sell it to Flightdec Ltd.
[27] The second ground upon which inspection is sought is that WVL says that there are reasonable grounds to investigate a possible breach by the directors of their duty not to trade while insolvent.
Discussion
[28] I do not accept that any of the matters advanced by WVL under the first ground are of sufficient concern to warrant making the order sought. I address them in turn.
[29] First, Mr Scutter’s alleged “uncritical” acceptance that the Trust had obtained priority by paying off Fresco’s debts to ASB and to IR prior to the liquidation and taking out a GSA over the company’s assets is not borne out by the facts.
[30] Mr Scutter has deposed that these events were, indeed, of concern to him. He said that after taking time to consider the issue and obtaining legal advice, he formed the view that the Trust did not have a valid secured creditor claim for the monies paid by it to ASB and IRD. When he raised his concerns with the solicitors acting for the Trust and said he was considering taking steps against the trustees, the trustees abandoned any reliance on the GSA.
[31] Accordingly the present position is that the Trust remains an unsecured creditor ranking equally with WVL, subject to a subrogated preferential claim by the Trust in relation to its $20,000 payment to IR (discussed below). Although WVL’s solicitors have nonetheless continued to urge Mr Scutter to issue notices of insolvent transaction against ASB, I accept that he has good reasons for refusing to do so, in the exercise of his professional judgment and after taking legal advice.
[32] More specifically, Mr Scutter’s evidence was that he considered whether the refinancing by the Trust created a preference in favour of ASB that it would not have received in the liquidation. But he formed the view (after taking expert advice) that it likely did not, and that the cost in taking voidable transaction proceedings against ASB outweighed any benefit in pursuing the matter.
[33] As Mr Scutter says, the reality is that ASB was always going to be repaid, either by the Trust refinancing the debt (as it did) or ASB taking steps to sell the Trust Property. The Trust really had little choice but to refinance as it did. The preference was not engineered by Fresco, but the result of the wider arrangements in place. The money the Trust borrowed from ASB to pay off Fresco’s debt to the bank would not ever have been available to WVL or the company’s other creditors.
[34] While I do not need or intend unequivocally to resolve the issue here, Mr Scutter’s view that the way in which the refinancing occurred did not constitute a payment of monies to ASB by Fresco or by another entity on its behalf is strongly arguable. And as I have said, his view was based on the advice he received from an experienced insolvency lawyer.
[35] Secondly, the $25,000 settlement with IR was made in a context where the total amount owing was in excess of $100,000. Presumably interest and/or penalties would have continued to accrue had the settlement not been reached. Moreover, the debt would have had preferential status in the liquidation. So regardless of whether the Trust’s payment of $20,000 of that amount gives rise to a subrogated preferential debt to the Trust (an issue I do not propose to traverse in this judgment) the settlement was very much in the company’s and WVL’s interests; the company has at least $75,000 less by way of preferential debts than it would had the settlement not been reached.
[36] Thirdly, I have set out above Mr Scutter’s explanation of the circumstances in which he chose to accept a payment of $15,000 in settlement of the directors’ current account debt. Notwithstanding his view that a greater amount was owing, his own cost/benefit analysis suggested the settlement offer should be accepted. Moreover he wrote to WVL’s solicitors fully explaining the situation and his thinking about it. It
was only the fact of their delayed response that meant that he did not have the opportunity to consider WVL’s alternative proposal. There is nothing in his conduct of this issue that gives rise to doubt about his competence. On the contrary, the evidence suggests that he has conscientiously kept WVL in the loop and acted in a way that, in his professional judgment, was consistent with its best interests.
[37] Fourthly, I am also unable to accept that Mr Scutter should have obtained an independent assessment of the value of the Flightdec platform before agreeing to sell it to the Trust. I accept his evidence that the product is unique and potentially difficult to value. Mr Scutter was entitled to take the view that the cost of an independent assessment would be outweighed by any benefit to the liquidation, particularly given that there was likely to be only one potential purchaser, namely the Trust, which I assume owns Ms Bruce’s and Mr Carson’s new company, Flightdec Ltd.
[38] In short, all of the matters raised by WVL under the first ground smack of Mr Galt wishing to second guess professional decisions made by Mr Scutter in the course of the liquidation. While I acknowledge that some of those decisions may be ones on which reasonable minds could differ, that does not constitute a good reason to permit Mr Galt to access and scrutinize the files. I agree with Mr Sullivan that Toogood J’s dicta in Levin v Lawrence seem apt: 9
… Without abrogating its supervisory obligations, the Court should be slow to intervene where matters of judgment and assessment on commercial matters are concerned. That includes assessing how far to investigate possible avenues of recovery of funds for distribution. Weighing the likely cost of pursuing such avenues against the prospects of success and the amount which may be recovered are matters for judgment which are squarely within a liquidator's domain.
(Footnotes omitted)
[39] There is, on the material before the Court, no reason to doubt either Mr Scutter’s professional judgment or his motivation. Not only is there no good reason for Mr Galt to inspect, I consider that an order in his favour would needlessly prolong the liquidation and, ultimately, to cause further loss to the creditors.
[40] The second ground upon which the application was advanced was Mr Galt’s view that there had been a possible breach by the directors of their duty not to trade while insolvent. WVL submitted that Fresco continued to trade three years after accruing the debt to WVL and that there was a reasonable inference that the directors derived remuneration during the time that Fresco was unable to repay the debt. WVL says it wishes to investigate the position, and may support a liquidator-led action against the directors or, alternatively, may contemplate bringing its own action under s 301 of the Companies Act.
[41] WVL complains that Mr Scutter’s response, when asked for his assessment of the potential breaches, was equivocal. Mr Scutter’s advice was simply that he had not shut the door on that possibility but was focussing on other avenues of recovery. WVL submits that this indicates he has not investigated the potential breaches of duty.
[42] It seems to me that this, too, is a matter that is quintessentially for Mr Scutter. Absent any evidence at all of incompetence or bias on his part the only conclusion to be drawn on this front is that Mr Galt wishes to second-guess him. Mr Scutter has not said that he will not investigate, simply that he has the matter under consideration. Moreover, if Fresco had liquidated the company in 2013, there would have been no assets to sell.10 Mr Galt’s wish to investigate this issue further does not constitute a good reason either.
[43] Lastly, and for the avoidance of doubt I record my agreement with Mr Sullivan that WVL’s position would undoubtedly have been improved had it chosen to be more specific about the documents it sought. I do not by any means suggest that even a tailored request would have been successful; I am far from certain that there are likely to be specific documents included in the company and liquidation files that would materially assist Mr Galt. But a tailored request would at least have avoided the obvious inference (based on both the breadth of the
application and the grounds advanced for it) that Mr Galt really does just wish to engage in a fishing expedition.11
[44] The application is dismissed for the reasons I have given.
[45] Mr Sullivan indicated that if Mr Scutter was successful in defending the application his instructions were to seek costs on an increased or indemnity basis. I am not prepared to entertain indemnity costs but will consider a claim for increased costs. If such a claim is to be pursued Mr Sullivan is to file a brief memorandum articulating his grounds within five working days of this judgment. Mr Freeman will have a further five working days to respond. If no such memoranda are filed WVL is to pay costs on a 2B basis.
“Rebecca Ellis J”
Solicitors: Thomas Dewar Sziranyi Letts, Lower Hutt, for applicant
Succeed Legal, Wellington, for respondent
Instructed counsel: K A Sullivan, Wellington
11 Like Levin v Lawrence, above n 5, where the application for inspection was declined. In that case, Mr Levin had access to some documents of the insolvent company but could not identify a particular concern that would justify an inspection order.
2