Williams v Registrar of Companies
[2015] NZHC 3217
•15 December 2015
IN THE HIGH COURT OF NEW ZEALAND
AUCKLAND REGISTRY
CIV-2015-404-985
[2015] NZHC 3217
IN THE MATTER of an application to restore a company to New Zealand Register of Companies UNDER
the Companies Act 1993
BETWEEN
GAVIN WILLIAMS
First Applicant
JENNIFER LOWE
Second ApplicantAND
THE REGISTRAR OF COMPANIES
First Respondent
THE SECRETARY OF THE TREASURY
Second RespondentBORIS VAN DELDEN AND PERI FINNIGAN
Third Respondents
Hearing: 22 October 2015 Counsel
R P McCutcheon for applicants G Caro for first respondent
K W Fulton for third respondents
Judgment:
15 December 2015
JUDGMENT OF KATZ J
This judgment was delivered by me on 15 December 2015 at 4:00pm Pursuant to Rule 11.5 High Court Rules
Registrar/Deputy Registrar
Solicitors: Neilsons Lawyers, Auckland
Ministry of Business, Innovation and Employment Craig Griffin & Lord, Auckland
R P McCutcheon, Barrister & Solicitor, Auckland Counsel: K W Fulton, Barrister, Auckland
WILLIAMS v THE REGISTRAR OF COMPANIES & ORS [2015] NZHC 3217 [15 December 2015]
Introduction
[1] Gavin Williams and Jennifer Lowe1 seek to restore Westlowe Investments Limited (“Westlowe”) to the Companies Register, pursuant to s 329 of the Companies Act 1993 (“Act”). They submit that it is just and equitable for the company to be restored to the Register, so that it can pursue a claim in negligence against its former solicitors.
[2] The application is opposed by the Registrar of Companies (the first respondent) and the former liquidators of Westlowe (the third respondents). They say that the application is misconceived because, amongst other things, the applicants have an insufficient factual or legal nexus to Westlowe. In particular, they were not directors, shareholders or creditors of the company at the time it was removed from the register. As a result, they have no standing to seek a reversal of the final liquidator’s report. Such a reversal is essential if any restoration to the Register is to be effective.
[3]Against this background, the key issues I must determine are:
(a)whether a company can be restored to the Register without reversing
the first liquidator’s report;
(b)whether the applicants have standing to seek to reverse the final liquidator’s report; and, if they do
(c)whether Westlowe should be restored to the Register.
Facts
[1] The applicants were originally the shareholders and directors of Westlowe, which leased and operated the Airport Harbour View Motor Lodge, in Auckland. In 2008 Westlowe brought a claim against its landlord seeking to recover losses incurred as a result of flood damage to the motel premises caused by a series of burst pipes.
1 Mr Williams was originally the sole applicant. Ms Lowe was added as a second applicant at the outset of the hearing.
The landlord counterclaimed for the costs of remedial works he had carried out. He
argued that the relevant repairs were Westlowe’s responsibility, as lessee.
[2] In December 2009, the arbitrator found in favour of the landlord and ordered Westlowe to pay damages, interest and costs to its landlord in the sum of $231,600. An application for leave to appeal to the High Court against the arbitrator’s decision was declined by Venning J on 11 March 2010.2
[3] In April 2010, Westlowe obtained an opinion from a Queen’s Counsel, Bruce Stewart QC, as to the prospects of it obtaining leave to appeal to the Court of Appeal. Mr Stewart did not consider that an application for leave to appeal would succeed. He did, however, make various criticisms of the manner in which Westlowe’s solicitors had conducted both the arbitration and the leave application. Based on Mr Stewart’s opinion, it is Mr Williams view that Westlowe has grounds for a negligence claim against its former solicitors.
[4] Westlowe was unable to meet the damages awarded against it. As a result, on 4 August 2010, the third respondents (Peri Finnigan and Boris van Delden) were appointed as liquidators, by order of this court.
[5] Meanwhile, dissatisfied with the outcome of the arbitration, Mr Williams stripped a number of chattels from the motel, causing considerable damage in the process. This resulted in a criminal conviction, for which he was sentenced to a term of home detention.
[6] In October 2010, Mr Williams and Ms Lowe, who had personally guaranteed the obligations of Westlowe, were adjudicated bankrupt. Their shares in Westlowe vested in the Official Assignee as a result, and they were disqualified from being company directors.3
2 Westlowe Investments Ltd v Jujnovich HC Auckland CIV-2009-404-8064, 11 March 2010.
3 Companies Act 1993, s 151(2)(b).
[7] On 2 February 2012, the liquidators filed their final report and gave notice of their intention to remove Westlowe from the Register. No objections were made to that course and, on 19 March 2012, Westlowe was removed from the Register.
[8] Mr Williams and Ms Lowe were discharged from bankruptcy on 8 October 2013. In January 2014, however, Mr Williams was prohibited from being a company director for five years,4 on the basis of his criminal conviction for damage to the motel.
Can a company be restored to the Register without reversing the final liquidator’s report?
[9] The applicants seek an order that Westlowe not resume liquidation on restoration to the Register. Rather, the liquidators’ final report is only to be reversed, and the company returned to liquidation, after the proposed proceedings have been concluded and any proceeds distributed. This somewhat unusual request is aimed at preventing the liquidators from controlling Westlowe if it is restored. Mr Williams’ concern is that if the liquidators control Westlowe, rather than a party associated with him, they may elect not to pursue a negligence claim against its former solicitors.
[10] The first issue I must therefore determine is whether it is possible for the company to be restored to the Register in such a way that it is not in liquidation, as sought by the applicants. This would require that Westlowe be restored to the Register without the final liquidators’ report being reversed.
[11] It is rare for the Registrar to oppose a restoration application. She took an active role in opposing this application, however, because of what her counsel described as its “highly irregular” nature. Indeed counsel for the Registrar submitted that the course proposed by the applicants is simply not possible. Rather, if Westlowe is to be restored to the Register it has to be restored in liquidation.
[12] I accept the Registrar’s helpful and comprehensive submissions on this issue. Section 248 of the Act sets out the effects of the commencement of a liquidation. With effect from the commencement of the liquidation, the liquidator has custody and
4 Companies Act, s 382.
control of the company’s assets. The directors remain in office but cease to have powers, functions, or duties, other than those required or permitted under the Act.
[13] The principal duties of the liquidator are set out in s 253 of the Act. They include the duty to take possession of, protect, realise, and distribute the assets of the company to its creditors, in accordance with the Act. If there are surplus assets remaining, the liquidator is required to distribute them in accordance s 313(4) of the Act, in a reasonable and efficient manner.
[14] Once a liquidator has completed that duty, the liquidation must be completed. Section 257(1) provides that, as soon as practicable after completing his or her duties in relation to the liquidation, the liquidator must prepare and send to every creditor whose claim has been admitted, and every shareholder, the final report and statement of realisation and distribution in respect of the liquidation. This must be accompanied by a statement that confirms that:
(a)all known assets have been disclaimed, or realised, or distributed without realisation; and
(b)all proceeds of realisation have been distributed; and
(c)the company is ready to be removed from the New Zealand Register.
[15] In addition, a summary must be provided of the grounds on which a creditor or shareholder may object to the removal of the company from the Register under s 321.
[16] The liquidator’s final report and accompanying statements must be sent to the Registrar for registration. A liquidation is completed and the liquidator ceases to hold office once the final report and notice of intention to remove have been delivered to the Registrar for registration. In this case the relevant documents were registered on 2 February 2012.
[17] The registration of the relevant documents does not bring about the immediate removal of the company, however. Rather, it triggers the removal process. The Registrar must remove the company once the period for objections to removal has expired.5 For the period from completion of the liquidation until removal, the company still exists but that existence is for one purpose only, namely to allow a period for objections to removal. As Fisher J said in Re Ocean Shipping Limited:6
It does appear that following the completion of the liquidation brought about by the filing of the final report ... there is a status in which the company is no longer in liquidation but awaits removal from the Register.
Control of the company does not revert to the directors and shareholders while a company is in that status.
[18] Occasionally, after the liquidator has ceased to hold office, it is discovered that there is a further asset for the liquidator to deal with or some other step that the liquidator needs to take. Often that occurs after the company has been removed from the Register. In either case it is necessary to return the liquidator to office to give him or her power to deal with that asset or take that step. This occurs via an application under s 284(1)(b) to reverse the filing of the final report. That is what occurred in Re Ocean Shipping. Fisher J said:7
If I reverse the filing of the final report which did de facto take place in this case that in turn would seem to abrogate the completion of the liquidation.
[19] In that case his Honour made orders restoring the company to the Register and reversing the filing of the final liquidation report.
[20] Re Ocean Shipping was approved by the Court of Appeal in Registrar of Companies v Body Corporate 307730.8 In that case Associate Judge Doogue had restored a company to the Register but, instead of reversing the filing of the final liquidation report, had appointed new liquidators under s 241 of the Act. As a result there was purportedly a whole new liquidation. In the Court of Appeal, French J
5 Companies Act, ss 318(1)(e) and 320(4).
6 Re Ocean Shipping Limited HC Auckland M348/96, 16 July 1996 at 2.
7 At 2.
8 Registrar of Companies v Body Corporate 307730 [2013] NZCA 659; [2014] 2 NZLR 623.
explained the process leading to the removal of the company and why it was necessary to reverse the filing of the final report as follows:9
[14] The process of liquidation begins with the appointment of a named person or an Official Assignee as liquidator. One of the ways the liquidation comes to an end or is completed is when the liquidator provides his or her final report to the Registrar together with certain other specified documentation. On the filing of the final report and the other documentation, the liquidator is discharged from office and the Registrar is required to remove the company from the Register. Pending removal from the Register, the status of the company is that it is no longer in liquidation but is awaiting removal.
[15] As Associate Judge Doogue recognised, the fact the company is not in liquidation at the point of removal means that a restoration order on its own will not result in the restored company automatically resuming its former status as a company in liquidation. The restoration order must be accompanied by other orders to achieve that result if it is considered desirable, as it was in this case.
[16] Under s 284(l)(b), the court has the power to reverse an act or decision of the liquidator on the application of a prospective creditor (such as the owners in this case). The power may be exercised after a company has been removed from the Register. The filing of a final report is an act of the liquidator and therefore the reversing of a final report is within the scope of the s 284 power. As noted in Re Ocean Shipping Ltd, reversing the filing of a final report has the effect of abrogating the completion of the liquidation. Thus, the combined effect of a restoration and a reversal order is that the company is restored to the Register still in liquidation and the former liquidator resumes office. The liquidation is reinstated.
[17] In this case, the Associate Judge did not reverse the final report, which meant the original liquidation remained completed. Instead he appointed a new liquidator under s 241. On the face of it, that course of action would appear to be authorised by s 241 (2)(c)(viii), which empowers the court to put a company that has been removed from the Register into liquidation on restoration. However, we agree with the Registrar that this power does not apply to a company that has already been liquidated prior to its removal. Otherwise, the company would effectively be put into liquidation twice - once before removal and once after restoration.
[18] Such a result is unprecedented and problematic for a number of reasons.
[19] First, as already mentioned, the Registrar is under a statutory obligation to remove a company once a final report has been filed and the last date for objections to removal has expired. The predicament for the Registrar is that technically he would now appear to be required to remove Mount Lifestyles once again.
9 Registrar of Companies v Body Corporate 307730, above n 8, at [14] – [21].
[20] Secondly, the scheme of the Act is that liquidation is something that can only happen once because of its terminal consequences for the company. Two separate liquidations means two separate commencement dates for the liquidations and consequently two separate voidable transaction periods. There would also be two separate limitation periods for proceedings to be brought by the respective liquidators in the company’s name. Issues would also arise about the status of creditors and the right to prove in the second liquidation, with all that might entail for the equal treatment (pari passu) rule.
[21] All of these difficulties would have been avoided had the Associate Judge followed the approach of Fisher J in Ocean Shipping and ordered reversal of the final report under s 284(1)(b).
[21] Given that Westlowe owed over $300,000 to its creditors at the time of its removal from the Register, any attempt to restore it to the Register, other than in liquidation, would be entirely inappropriate, for the reasons outlined by French J. Further, as her Honour observed, if the final report is not reversed the Registrar will simply be required to remove the company again as soon as it is restored.
[22] Any order for restoration of Westlowe to the Register must therefore be accompanied by an order reversing the liquidator’s final report, so that the company can be restored to liquidation. As a result, the persons entitled to control Westlowe on its restoration to the Register would be its liquidators.
Do the applicants have standing to seek to reverse the final liquidator’s report?
[23] The next issue, therefore, is whether either Mr Williams or Ms Lowe have standing to apply to the Court to for an order that the liquidators’ final report be reversed.
[24] The court’s jurisdiction to reverse a liquidator’s final report derives from s 284 of the Act, which relevantly 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:
…
(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.
[25] Section 284(1) accordingly allows the liquidator and the liquidation committee to apply as of right. Creditors, shareholders, other entitled persons10 and directors must seek leave to apply. A director is defined as being “a person occupying the position of director of the company by whatever name called”.11
[26] In Official Assignee v Norris, Mallon J noted that s 284(1) is designed to ensure that challenges to the conduct of the liquidation are brought only by those with a sufficiently direct interest in the liquidation.12 Section 284 serves the related purposes of allowing liquidators, as of right, to seek directions from the Court as to their actions, while also allowing other directly interested parties, in certain circumstances, to invite the Court’s supervision of the liquidation. The Court’s supervision, however, is clearly intended to be exercised in a manner consistent with the overall purpose of liquidation, namely to deliver the greatest return reasonably possible to the creditors and shareholders of a company. To this end, Parliament has limited the class of persons who may seek the Court’s supervision and has provided that such applications by persons other than the liquidator may be granted only with leave.
[27] Directors of a company which is put into liquidation remain in office, under s 248(1)(b) of the Act, although they cease to have powers, functions or duties. In this case, however, the applicants ceased to be directors of Westlowe shortly after the liquidation process began, due to their being adjudicated bankrupt.
10 “Entitled person” is defined in s 2 of the Act as being a shareholder or a person on whom the constitution confers any of the rights and powers of a shareholder.
11 Companies Act, s 126(1).
12 Official Assignee v Norris [2012] NZHC 961, [2012] NZCCLR 10 at [18].
[28] The applicants are obviously not currently “directors of a company in liquidation” in terms of s 284(1), on a literal reading of that phrase. Westlowe no longer exists, in liquidation or otherwise. Mr McCutcheon submitted, however, that s 284(2) applies in the present circumstances, giving the meaning of “director” in s 284(1) an expanded scope, extending to former directors of a company. He relied on Hignett v Registrar of Companies in support of this proposition.13
[29] In Hignett the applicant was granted orders for the restoration of companies to the Register, for leave to apply to set aside the liquidators’ final report under s 284(1)(b) of the Act, and for the final reports to be set aside. The Court held that the applicant was eligible to make the application to reverse the final report “having been a director of the companies at the time they were removed from the register”.14 Hignett does not, however, assist the applicants in this case. Their situation differs to that in Hignett in that they were not directors of Westlowe at the time that it was removed from the Register, as a result of their bankruptcy. In addition, Mr Williams is currently prohibited from being a company director until 28 January 2019.
[30] The applicants are not “directors of a company in liquidation”, even on the expanded interpretation in Hignett, which takes into account the effect of s 284(2). They accordingly do not have standing to seek leave to reverse the liquidator’s final report.
[31] This interpretation is consistent, in my view, with the policy of the section, which is to restrict access to the Court’s supervisory jurisdiction to those who are directly involved in, and affected by the liquidation, whether as creditors, shareholders, directors, the liquidator or the liquidation committee. The applicants’ bankruptcy severed their link to the company, both as directors and shareholders. In these proceedings they seek, in effect, to unwind the effect of their bankruptcy and re- establish their links to the company, in order to attempt to recover damages from the company’s former solicitors, to restore them to their pre-bankruptcy position.
13 Hignett v Registrar of Companies [2014] NZHC 38.
14 At [4]. I note that in Hignett the applicant was also a creditor of the company and that the orders were unopposed.
[32] I accept the Registrar’s submission that, in the current circumstances, only the former liquidators can apply to reverse the final liquidators’ report as of right. The creditors of Westlowe could seek leave to apply, as could the Official Assignee, as shareholder. The applicants, however, have no standing to apply for leave to seek that the liquidator’s final report to be reversed under s 284.
[33] The applicants’ lack of standing to seek reversal of the liquidator’s final report is fatal to their application to restore the company to the Register, because there would be no point in restoring Westlowe to the Register without reversing the final liquidators’ report, for the reasons outlined above.
The broader merits of the application
[34] Even if I had not accepted the Registrar’s submissions on the issue of standing, I would have declined to restore Westlowe to the Register. The fact that the applicants have no current legal nexus to Westlowe raises much broader difficulties than simply that of standing.
[35] Mr Williams clearly feels deeply aggrieved by the outcome of the arbitration process between Westlowe and its landlord. He believes that Westlowe received poor legal advice from its (then) solicitors and, further, that they were negligent in their conduct of the arbitration and their application for leave to appeal to this Court. This is said to have resulted in losses to the company and, from Mr Williams’ perspective, an associated erosion in the value of his shareholding and, ultimately, the loss of his shares altogether. As Mr McCutcheon put it in his written submissions:
[Mr Williams] would like to do the best he can for himself in pursuing any remedies available against [the former solicitors], to get himself back into the position he was in before all this happened, at least to the greatest extent possible.
[36] As Mr McCutcheon recognised, however, simply restoring Westlowe to the Register would not achieve that goal. As a result, the applicants seek an extremely wide ranging suite of orders (under the guise of “terms and conditions” of the restoration order) aimed at restoring Mr Williams to his former position, so far as is possible. In particular, Mr Williams seek orders:
2. Restoring the Company to the Register, subject to the following terms to the extent considered necessary by the Court, whether as conditions of such orders or as constitutional rules of the Company:
(a) The restoration shall be for the sole purpose of conducting litigation against the law firm, Duncan Cotterill. Once that litigation has been concluded, the affairs of the Company will be wound up and it shall again be removed from the Register in an orderly manner.
(b) The Company shall not resume liquidation on a restoration to the Register, but the Company shall revert to liquidation and the final report of the former liquidators shall be cancelled on the Company obtaining any proceeds from the above litigation.
(c) Any costs awarded against the Company shall be personally payable by the applicant, not the Company.
(d) The “clock shall be wound back” to 19 March 2012 - the date of removal of the Company from the Register - for the Company, for the purposes of limitation periods.
(e) The creditors of the Company shall resume their position at the date of the final report of the former liquidators, but the clock shall not be “wound back” for them for limitation purposes, and interest shall not have compounded on their claims since that date of that final report.
(f) That the Company may enter into a contract for professional services with Peter McCutcheon, Barrister & Solicitor of Auckland, whereby he is entitled to an uplift of 50% on his normal hourly rate of $400.00 plus GST, up to a maximum of one-third of the litigation proceeds obtained by the Company, which shall be given priority in any subsequent or contemporaneous re-liquidation of the Company and/or shall not be voidable in such liquidation. The requirements of the Client Conduct Rules for Lawyers for such contracts shall be observed.
3. Appointing Peter McCutcheon, Barrister & Solicitor of Auckland, as the sole director of the Company, albeit he will be “interested” in the above contract for professional services.15
4. If necessary, ordering such allotment of shares to the applicant as shall be necessary to achieve the above.
5. Cancelling the former shares of the applicant and his ex-wife Jennifer Lowe now owned by the Official Assignee, and issuing new shares to them of the same type and in equal amounts.
15 This proposed order reflects that Mr Williams is currently prohibited from being a company director. Mr McCutcheon acknowledged at the hearing, however, that it would not be appropriate for him to assume control of the company. Rather, it was submitted that a friend of Mr Williams could undertake the role, although it was acknowledged that this could also give rise to difficulties due to the likelihood that Mr Williams would be perceived as directing events “behind the scenes”, despite his current ban on being involved in the management of a company.
6. If necessary, granting leave to the applicant to make an application to apply to revoke the liquidator’s final report dated 25 January 2012, and revoking that final report; and/or
7. Any other orders or variation of the above orders the Court considers just in the circumstances of this case.
[37] The key difficulty faced by the applicants is that, as a result of their being bankrupted, any nexus they had to Westlowe was severed (as shareholders, directors, creditors or otherwise). As a result, in order to achieve Mr Williams’ stated goal of getting himself back in the position he was in “before all this happened,” the normal legal consequences of personal bankruptcy and company insolvency would have to somehow be reversed. This is what, in effect, the draft orders seek to do. Under the guise of “terms and conditions” of a restoration order, the applicants seek to have the court override significant swathes of corporate and insolvency law, in order to surmount the following obstacles:
(a)If Westlowe is restored, but returned to liquidation, it will be under the control of its liquidators rather than the applicants. The liquidators may choose not to pursue a negligence claim against the company’s former solicitors.
(b)Even if the liquidators do choose to pursue proceedings, any recoveries would not be payable to the applicants but rather to Westlowe’s:
(i)liquidators and legal advisers, to cover costs;
(ii)creditors, namely its landlord ($315,000), preferential creditors ($3,926.00) and trade creditors ($12,419.00);
(iii)shareholder, being the Official Assignee.
(c)Any claims in negligence against Westlowe’s former solicitors are likely to be statute barred.
[38] In my view the only one of these hurdles that could potentially be overcome through “terms and conditions” of a restoration order would be the limitation issue.16 Even then, however, I would be reluctant to “turn back the clock” given that it is now five and a half years since Mr Stewart’s opinion was provided and no steps were taken to pursue a negligence claim (or to encourage the liquidators to pursue such a claim) prior to the company being removed from the Register.
[39] As for the “control” issue, for the reasons I have outlined at [12] to [21] above, if Westlowe were to be restored to the Register, it would need to be restored in liquidation. It would then be under the control of its liquidators. There is no legal basis for returning Westlowe to the control of Mr Williams, either directly or indirectly. That is particularly so given that Westlowe owed over $300,000 to its creditors (primarily its former landlord) when it was removed from the Register.
[40] Further, any recoveries, in the event that the liquidators did elect to pursue proceedings against Westlowe’s former solicitors, would have to be distributed in accordance with orthodox provisions of insolvency law. This would not result in Mr Williams receiving any proceeds, unless perhaps the liquidators were to enter into a funding arrangement with him in exchange for a share of any proceeds (or some similar arrangement). This would be entirely a matter for the discretion of the liquidators, although their lack of enthusiasm for the proposed litigation can be inferred from their opposition to this restoration application.
[41] In addition, there is no legal basis for depriving the Official Assignee of his legal and beneficial ownership in Westlowe’s shares, in order to bestow those shares on Mr Williams, as sought by him.
[42] Unfortunately for Mr Williams, it is simply not possible to turn back the clock in order to “get himself back into the position he was in before all this happened.” Events have moved on. There is no legal basis, even if Westlowe were restored, for Mr Williams to usurp the role of either the liquidators (as controllers of the company) or the Official Assignee (as shareholder).
16 See, for example, Re Saxpack Foods Ltd [1994] 1 NZLR 605.
[43] The application is misconceived. I would accordingly not have been willing to do make the orders sought, even if fundamental issues of standing had not existed.
Result
[44]The application is declined.
[45] Leave is reserved to file memoranda on costs if costs cannot be agreed between the parties. Any costs memoranda from the respondents are to be filed by 25 January 2016, with any response from the applicants to be filed by 2 February 2016.
Katz J
5