Zhang v Kamal
[2017] NZHC 1943
•15 August 2017
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV 2017-404-773 [2017] NZHC 1943
UNDER Section 284 of the Companies Act 1993 IN THE MATTER OF
the liquidation of ELT RECYCLING (NZ) LIMITED (IN LIQUIDATION)
BETWEEN
JUN ZHANG AND ORS Applicants
AND
IMRAN MOHAMMED KAMAL First Respondent
PETER GEORGE ADAMS Second Respondent
CORPORATE & PRESTIGE LTD Third Respondent
ROD OTTER Fourth Respondent
Hearing: 21 July 2017 Counsel:
S W Greer for Applicants
P G Adams, in person, Second Respondent
P G Adams, as director, and with leave, for Third Respondent
No appearance by or on behalf of First and Fourth RespondentsJudgment:
15 August 2017
JUDGMENT OF HEATH J
Solicitors:
Solv Law Ltd, Auckland Norling Law Ltd, Albany Copy to:
P Adams, Second Respondent
ZHANG AND ORS v KAMAL [2017] NZHC 1943 [15 August 2017]
Introduction
[1] ELT Recycling (NZ) Ltd (ELT Recycling) was incorporated as a limited liability company on 2 October 2015. It was designed to be a corporate vehicle through which Mr Jun Zhang, Mr Weidong Li, Mr Changlong Jiang and Mr Peter Adams could use intellectual property that Mr Adams was developing for tyre and battery recycling. Mr Adams had been working for some time on developing systems that would promote an environmentally sound approach to recycling of that type.
[2] On incorporation, Mr Zhang and Mr Adams were appointed as the first directors of ELT Recycling. Mr Zhang held 35 per cent of the shares. Mr Li, Mr Jiang and Mr Adams held 30 per cent, 10 per cent and 25 per cent respectively. Mr Zhang and Mr Adams live in Auckland. Mr Zhang does not speak English fluently, and is often out of New Zealand on business. Mr Li and Mr Jiang are resident in China and Australia respectively.
[3] The initial intention was that Mr Zhang, Mr Li and Mr Jiang (collectively, the Zhang interests) would together contribute $112,500 as working capital. Mr Adams was to pay $37,500. The Zhang interests paid $112,500 into the company, but Mr Adams did not make any monetary contribution.
[4] In the period between incorporation and April 2016, relationships between the Zhang interests and Mr Adams soured. Viewed from the perspective of the Zhang interests, Mr Adams had failed to pay his working capital contribution of
$37,500. Viewed from his perspective, Mr Adams believed that the Zhang interests were well aware that he was not able to contribute that sum until later, and his contribution in developing intellectual property was undervalued by them. Having heard from Mr Adams, I have no doubt that he sincerely holds that view.
[5] Things came to a head on 20 April 2016 when Mr Adams’ company, Corporate & Prestige Ltd (Corporate & Prestige), issued an invoice in the sum of
$36,732. This was claimed as remuneration for his personal services. The amount is marginally less than the sum of $37,500 that the Zhang interests had expected Mr Adams to contribute working capital.
[6] The Zhang interests refused to pay. For all practical purposes, the parties have been unable to work together for common benefit from that time. Mr Adams took a series of steps to protect his interests. Having regard to the fact that no witnesses were cross-examined before me, I accept for present purposes that Mr Adams genuinely (but, in my view, misguidedly) believed he was entitled to proceed as he did.
[7] The end result of Mr Adams’ actions was a “resolution” to put ELT Recycling into liquidation. This was “achieved” through what Mr Adams believes was a valid “special resolution” of shareholders passed on 6 April 2017. That “resolution” purported to appoint Mr Imran Kamal as liquidator of the company.
The applications
[8] The Zhang interests seek leave to apply under s 284(1)(g) of the Companies Act 1993 (the Act) for an order declaring that Mr Kamal’s appointment as liquidator is invalid. Consequential orders are also sought to regularise the position of the various parties as directors and shareholders of ELT Recycling. They include rectification of the share register of ELT Recycling, and an order to compel Mr Adams to pay to the company the sum of $22,963.25 to reimburse the company for payment of Mr Kamal’s costs. Those orders are necessary if the Zhang interests were correct in their underlying assertion that Mr Kamal’s appointment as liquidator was invalid. Mr Adams opposes all applications.
[9] When the applications were called before Hinton J, on 8 May 2017, counsel appeared for Mr Kamal and indicated that he would abide the decision of the Court. In order to avoid any argument over whether Mr Kamal was entitled to receive payment for his services as liquidator (if his appointment were declared invalid), the Zhang interests and Mr Adams agreed that, subject to the Court’s ability to require one or more of them to reimburse ELT Recycling, Mr Kamal would receive a sum of
$22,963.25 as remuneration. That amount has been paid out of funds held on behalf of ELT Recycling. When I heard the substantive applications on 21 July 2017, no appearance was entered on behalf of Mr Kamal.
[10] At present, the sum of $88,313.42 (plus accrued interest) is held by a firm of solicitors, as a stakeholder, pending further order of the Court. That fund represents the totality of ELT Recycling’s assets. There are no external creditors.
[11] I am satisfied that it is necessary to consider the substantive merit of the complaints advanced by the Zhang interests on their s 284(1)(g) application. For that reason, I grant leave to the Zhang interests, as shareholders, to apply for orders under s 284(1)(g) of the Act.
Competing positions
[12] Mr Greer, for the Zhang interests, submits that Mr Adams embarked on a series of steps designed to protect his personal interests, to the prejudice of the Zhang interests. Those steps, Mr Greer submitted, were illegal. They included a purported issue of shares in favour of Corporate & Prestige,1 which were used for voting purposes when critical resolutions were passed.
[13] Mr Greer also refers to steps purportedly taken to remove Mr Zhang as a director, to confer the status of a secured creditor on Corporate & Prestige without any basis for that, to use that (purported) secured status to put ELT Recycling into voluntary administration, and to use Corporate & Prestige’s additional shares to pass the liquidation resolution. Mr Greer submits that all of those acts should be reversed, so that the status quo is restored.
[14] Mr Adams appeared in person and, with leave, for Corporate & Prestige in his capacity as a director. In substance, he contended that Mr Zhang, by his own actions, had abdicated his role as a director of ELT Recycling and, for all practical purposes, had abandoned his rights to act as a director. As a result, Mr Adams saw himself as having the legal right (and ability) to:
(a) assume control of ELT Recycling,
(b) issue shares on behalf of the “board”,
1 See para [5] above.
(c) confer “secured creditor” status on Corporate & Prestige,
(d) use Corporate & Prestige’s “secured creditor” status to put ELT
Recycling into voluntary administration; and
(e) use new shares issued to Corporate & Prestige to pass a special resolution putting ELT Recycling into liquidation.
[15] It is clear from the written and oral submissions made by Mr Adams that he believes, sincerely and strongly, that the intellectual property he has developed has the potential to minimise environmental hazards arising out of the dumping of tyres after their useful life. Similarly, he expressed the view that unemployment and other social issues, particularly in Northland, have arisen out of an inability to “unblock” “commercial value lying latent in gullies and landfills around the country”. Mr Adams’ submitted that those goals could best be achieved “through the development of efficient systems that facilitate collection, transport and processing”.
Purported validation by a “Court”
[16] Mr Adams believes that his actions have been confirmed by what he referred to as “the Maori Land Court”. However, (leaving aside its lack of power to do so) the Maori Land Court did not purport to validate his actions. The document to which Mr Adams refers, which is signed with the “seal” of “Nga Uri Whakatupu o Ngati Hine Maori Incorporation Registry” on 1 November 2016 has no legal effect.
[17] In submissions to me, Mr Adams said:
There is no denying the Treaty of Waitangi features strongly throughout New Zealand culture and legislation. There are copious contemporary examples and precedents of its application and influence in our society and our system of justice.
The Te Ture Whenua Maori Land Act 1993 and amendments binding the crown are relevant to this case as it has already been heard in a Maori Land Court as a matter of tikanga. This is a matter of significant importance to the land and its people.
(Emphasis added)
[18] The first of two purported “orders” is dated 1 November 2016. The second is dated 5 April 2017. They are annexed to this judgment as Schedules A and B respectively. The 1 November 2016 “order” deals specifically with issues arising in the present case. This purports to exercise jurisdiction conferred on the Maori Land Court. Those who drafted this “order” have endeavoured to format the document in a manner that closely resembles those used in the Maori Land Court.
[19] Mr Adams referred to the order of 1 November 2016 in these terms:
During October 2016, the Maori Land Court was presented with sufficient material and understanding of matters relating to the mismanagement of ELT to recognise it was in their jurisdiction as a matter of tikanga. They found Mr Zhang had prevented ELT’s participation in working to achieve the aforementioned outcomes.
On 1 November 2016 they released a Court Order stating Mr Zhang “is therefore irresponsible and delinquent in his fiduciary responsibility in respect of the affairs of ELT Recycling (NZ) Ltd”. Further to this they were of the opinion Mr Zhang was in breach of the provisions of the Companies Act 1993 due to his lack of action in respect of any response to the Notice of Special Meeting of 22 July 2016, and the second Notice of Special Meeting of 4 August 2016.
[Mr Adams’ emphasis]
[20] The “order” of 1 November 2016, purports to qualify the body making the “order” as a “Court … at Law”. In the operative part of the “order” the “Court” seeks to determine disputes between Mr Adams and ELT Recycling, as well as those between Mr Adams and Mr Zhang. I hold, as a matter of law, that the body that made these decisions had no jurisdiction to do so. It was a bogus “court”. No recognition can be given to it.
[21] The “order” of 5 April 2016, purports to create a kai tiaki trust. The term “kaitiaki” is defined by s 4 of Te Ture Whenua Maori Act 1993 as meaning “guardian”. Section 217 of that Act provides jurisdiction for the Maori Land Court to create a kai tiaki trust. The term “court” in s 217(1) is defined, in s 4(1) of that Act, as the Maori Land Court. The body to which Mr Adams refers, purporting to act under s 217, is doing no more than pretending to exercise lawful judicial functions conferred on the Maori Land Court.
[22] Mr Adams has been misled by those responsible for making the “orders” into believing that his stance is justified. He and those who have sought to persuade him to that view, are legally wrong. Steps must be taken to stop those who purport to exercise powers conferred on properly constituted Courts from attempting to do so.
[23] I direct the Registrar to forward a copy of this judgment to the Solicitor- General. That will enable appropriate investigations to be made into the circumstances in which powers conferred upon the Maori Land Court are being misused by persons who are not entitled, as a matter of law, to exercise them: see Schedules A and B to this judgment.
Analysis
(a) Chronology of relevant events
[24] Having disposed of any suggestion that some validly constituted Court has approved the steps taken by Mr Adams to put ELT Recycling into liquidation, I now consider whether a liquidation was lawfully commenced by reference to the provisions of the Act.
[25] On 1 July 2016, Mr Adams sent an email to the Zhang interests in which he alluded to an alternative joint venture project involving the intellectual property and expressed some dismay that Mr Zhang had not responded to his offer to buy Mr Zhang’s shares. Mr Adams stated that he believed Mr Zhang’s “inaction” would “jeopardise ELT’s chance to very quickly become the dominant force in NZ for collections and processing of scrap tyres”. In setting out his position, Mr Adams added:
·I am not prepared to allow this to happen as I have invested a considerable amount of time and resources to get us into this position. You will be aware that my invoice of $36,732.31 issued on
20/04/16 remains unpaid, there is an un-billed amount of time and expense of around $34,000 and the logistics solution that I have
valued at $50,000 is outstanding to me – a total of $120,732.31.
[26] Mr Adams advised that at 10am on 4 July 2016 he proposed to initiate “garnishee action” to take over ELT Recycling’s assets on behalf of his “consulting company”, Corporate & Prestige. He continued:
… I deem these assets to be the company structure at its cost price of
$566.05 and the ELT bank account with current funds of $110,912.59. However, this only comes to $111,478.64 leaving a shortfall of $9,253.76
[from the $120,732.31 previously said to be owing to Mr Adams].
[27] No “garnishee” action was taken. Instead, on 22 July 2016, Mr Adams sent an email to Mr Zhang purporting to call a special meeting of ELT Recycling, under s 121 of the Act. As part of the “notice” of meeting, Mr Adams advised that a previous offer to purchase Mr Zhang’s shareholding was withdrawn.
[28] Mr Adams began by referring to notice given on 1 July 2016 of an “intent to take decisive action to resolve the substantive debt owed for consultancy services”. He then set out a series of comments that were designed to show that:
(a) ELT Recycling did not have enough money to pay the debt claimed by
Corporate & Prestige, $120,732.31;
(b) Corporate & Prestige had “become a secured creditor and [had]
appointed an Administrator to resolve matters”;
(c) The “Administrator” was entitled to exercise powers conferred by
s 239V of the Act; and
(d)The Administrator intended to negotiate a compromise settlement on behalf of Corporate & Prestige.
[29] In the “notice” of meeting of 22 July 2016, Mr Adams expressed the
“compromise” sought by Corporate & Prestige as follows:
…
1.To pay that portion of the debt outstanding of $36,732.31 as invoice to ELT on 20/04/2016 plus costs incurred.
2.To reach a compromise settlement as regards the balance outstanding for the development of the logistical solution and additional work to secure the national collections of ELTs as an exclusive arrangement in a joint venture for the foreseeable future.
3.This compromise settlement has been prepared so as to provide sufficient mandate for the company to function. It will take the form
of issuance of a parcel of 225 shares in ELT Recycling NZ Ltd to
Corporate & Prestige Ltd (or nominee) and give an effective total of
75% of the company’s shares.
4.Peter Adams to relinquish his shareholding, however to hold the position of sole director for the best interests of the company and its stakeholders.
5.The number of shares currently held by other shareholders will remain unchanged as at the date of issue: James Zhang 35 shares, Weidong Li 30 shares, Jason Jiang 10 shares.
[30] At the conclusion of the notice, Mr Adams added some comments. Then, the
“Notice of Motions” were set out as follows:
(1) That the shareholders [of ELT Recycling] agree to accept the appointment of an Administrator to initiate such actions as required to breach the impasse and commence trading. My vote: Accepted Rejected
(2) That the short notice given for voting on these matters is accepted.
My vote: Accepted Rejected
(3) Discussions or texting prior to voting are to be held on Wechat in lieu of a face to face meeting by special arrangement. My vote: Accepted Rejected
(4) That voting on these motions will be accepted by email at anytime up to closing date of Wednesday 27 July 2016 at 4pm NZDT using the format outlined. My vote: Accepted Rejected
(5) That inaction to vote by any shareholder prior to the closing date of Wednesday 27 July 2016 at 4pm NZDT on one or all motions will represent acceptance of the actions proposed in this email. Votes received after the closing date are invalid. My vote: Accepted Rejected
(Emphasis added)
[31] There was no response to this email. Mr Adams, as foreshadowed in resolution 5 above, treated the motions as having been passed.
[32] Following the purported appointment of an “Administrator”, Mr Adams registered a number of documents with the Registrar of Companies. These purported to record that:
(a) On 5 August 2016, 225 shares had been issued to Corporate & Prestige to extinguish the debt owing to that company. That
arrangement was said to have occurred as a result of a “compromise settlement … arranged by Administrator”. The date of “approval” was given as 4 August 2016.
(b)On 8 August 2016, Mr Zhang ceased to be a director of ELT Recycling. Mr Zhang knew nothing of this.
(c) On 25 August 2016, in “Compromise Documents” presented for registration, Mr Adams purported to show that Mr Rod Otter (the man purportedly appointed as an administrator)2 had approved a compromise between ELT Recycling and Corporate & Prestige “that will have the effect of breaching the [ELT Recycling] internal impasse and enable it to commence trading”. A document signed by Mr Otter
was dated 16 July 2016.
[33] The form of the “compromise” recorded in Mr Otter’s document indicates how Mr Adams had created a situation in which, after 16 July 2016, he felt able to implement arrangements designed to allow him to take control of ELT Recycling. Under the heading “Proposed Compromise”, Mr Otter stated:
I have worked with Peter Adams as director of both [Corporate & Prestige Ltd] and [ELT Recycling] to reach the following compromise that will have the effect of breach the ELT internal impasse and enable it to commence trading:
(1) The administrator has agreed the following with [Corporate & Prestige]:
(a) To accept full payment of their invoice for $36,732.31 plus any reasonable costs for resolving this matter.
(b) To accept a compromise settlement representing the issuance of
225 ELT Recycling NZ Ltd (fully paid) shares in the name of
Corporate & Prestige Ltd (or nominee) to extinguish the
[remainder] of the debt of $84,000.
(2) Peter Adams to relinquish his personal shareholding of 25 shares to take effect on 8/08/16
2 Mr Otter was named as a party to this proceeding but did not appear. The Registrar of Companies may wish to investigate his role in this charade. I leave it to the solicitors for the Zhang interests to refer this issue to the Registrar, if they think fit to do so.
(3) James Zhang to be removed as a company director effective 8/08/16 at 4pm.
(4) Peter Adams as sole director to continue to develop the joint venture relationship and take any reasonable steps deemed necessary to remove the company from administration and commence trading.
Peter Adams has agreed to discharge his duties as a director of ELT to notify their shareholders of this compromise in accordance with the Companies Act.
[34] Following Mr Zhang’s purported removal as a director of ELT Recycling, a letter was sent to ANZ Bank, on behalf of the Zhang interests, disputing his dismissal and requesting that the bank not allow the company account to be operated pending agreement among all parties. The bank implemented that request. As a result, nothing could be done to draw on company funds pending an agreement to the contrary.
[35] On 11 April 2017, Mr Adams purported to give notice of a resolution under s 122 of the Act, appointing a liquidator. That “notice”, which was written by Mr Adams, stated:
…
Notice Dated 11 April 2017
Notice of shareholder resolution pursuant to Section 122 of the
Companies Act 1993
Preamble
During the week of 6 April 2017 I was unable to meet with Jun Zhang in a final effort to resolve the dispute so I could access funds suspended by ANZ and move forward to get the company trading.
I was informed that Mr. Zhang was not in the country and would not return for at least 3 months. Further to this a document for him to sign was presented to Mrs Zhang, however I was informed it could apparently not be emailed to him.
This exhausted my patience and all hope of a positive outcome for the company. I have consulted with a range of parties and the only viable alternative remaining was to liquidate the company by invoking S. 122 of the Companies Act.
This allows for a resolution in lieu of meeting signed by not less than 75% of the shareholders entitled to vote. As there is a compromise agreement in place that gives Corporate & Prestige Ltd a 75% shareholding I exercise the right to propose and accept the following resolution:
Resolution
That the company appoints Imran Kamal of Liquidation Management Ltd to liquidate the company effective 6 April 2017 at 3pm.
Motion approved on behalf of Corporate & Prestige Ltd
[36] Mr Kamal registered notice of his “appointment” as liquidator and lodged a first report, as required by the Act.3 He described the pre and post-liquidation events in his report dated 12 April 2017. Mr Kamal wrote:
3. EVENTS LEADING TO THE APPOINTMENT OF [LIQUIDATOR]
…
The business was established for the purpose of scrap tyre collection and recycling, to be operating out of Auckland. There were ongoing shareholder disputes regarding the direction of the company.
A creditor’s compromise was undertaken in July 2016 under Section 229 of
the Companies Act 1993, the Administrator being Rod Otter.
Peter Adams, the Director, had claims for unpaid work done on behalf of the company totalling $132,959.00. As such, he accepted, in lieu of full payment, a majority shareholding in the company. The shareholding was altered as a result of the compromise and the documents were accordingly registered with the Companies Office to reflect.
ANZ Bank subsequently froze the bank accounts, due to the ongoing disputes between the shareholders.
A potentially lucrative long term arrangement had been arranged with local iwi to clear the land of scrap tyres and this enabled the matter to be heard in the Maori Appellate Court.
ANZ Bank refused to accede to the to the resultant Court Order and denied
access to the company’s capital.
The Director tried to resolve matters and ensure that the business became operational, however, the issues were too great to overcome and the Director decided that the best [course] of action was to put the company into liquidation. The company was never able to commence trading.
POST APPOINTMENT EVENTS:
The Liquidator has received correspondence and notice from a Lawyer appointed to represent the minority shareholders.
The Lawyer has alleged that the creditor’s compromise was invalid and
seeking reinstatement of the company. The Liquidator has responded that he
3 Companies Act 1993, s 255(2)(c).
is validly appointed and is taking a neutral position. The Liquidator will investigate as part of his investigations into the company shareholding.
Funds from ANZ Bank have been recovered and are being held in the Liquidator’s Trust Account. The Liquidator has provided an undertaking to the lawyer that these funds will not be disbursed prior to resolution of the concerns.
…
[37] On 10 April 2017, Mr Greer of Solv Law Ltd, representing the Zhang interests, wrote to Mr Kamal expressing concern about his purported appointment as liquidator of ELT Recycling. On behalf of the Zhang interests, whom he described as the “majority shareholders”, Mr Greer advised:
(a) The Zhang interests had not consented to Mr Kamal’s appointment as
liquidator;
(b)Mr Adams had appointed an administrator and altered the Register of Companies without lawful justification, in relation to the removal of Mr Zhang as a director and the increase in shareholding for Corporate
& Prestige; and
(c) Confirming what they believed to be the true position in relation to directorship and shareholding, and the invalidity attaching to the purported appointment of an administrator and the compromise.
[38] Mr Greer concluded his letter by stating:
…
Accordingly, I advise:
4. The appointment of you as liquidator of ELT is invalid;
5.No further steps should be taken by you as liquidator of ELT until these matters have been considered by the Court;
6. Under no circumstances should you access the funds you have
removed from ELT’s bank accounts; and
7.An urgent application is being prepared and will be filed with the Court to remove you as liquidator and return ELT’s funds to its bank accounts.
I invite you to contact me urgently to discuss a process for your resignation. I anticipate that the application will be filed late tomorrow, accordingly I will await until midday tomorrow to hear from you before filing the application.
….
[39] Mr Kamal responded on 11 April 2017. In his response, he advised that:
(a) On the information available to him, it appeared that he had been validly appointed by Corporate & Prestige, as holder of 75 per cent of the shares in ELT Recycling;
(b)He would not oppose an application to challenge his appointment as liquidator; and
(c) Given that he has taken a neutral position and had a basis for believing his appointment was valid, no costs should be sought against him.
[40] The present proceeding was issued on 19 April 2017. As indicated earlier, arrangements were made to have all funds of ELT Recycling held by a stakeholder pending determination of the present application and Mr Kamal abides the decision of the Court. By consent, his fees have been paid. The only issue is whether there should be any adjustment to enable the Zhang interests to recover their share of the liquidator’s costs from Mr Adams or Corporate & Prestige.
(b) Legal validity of changes to corporate status made by Mr Adams
[41] Two of the steps taken by Mr Adams can be considered at the same time. Both involve the question whether meetings of shareholders were validly called. They concern the alleged “special resolutions” passed by ELT Recycling in relation to the appointment of an administrator and liquidator respectively.
[42] Special meetings of shareholders are convened under s 121 of the Act. That provides:
121 Special meetings of shareholders
A special meeting of shareholders entitled to vote on an issue—
(a) may be called at any time by—
(i) the board; or
(ii) a person who is authorised by the constitution to call the meeting:
(b) must be called by the board on the written request of shareholders holding shares carrying together not less than 5% of the voting rights entitled to be exercised on the issue.
[43] In terms of s 121(a) of the Act, no board resolution was passed to convene either meeting. At the time that the “meeting” to appoint an administrator was purportedly convened, 1 July 2016, Mr Zhang (on any view) remained a director of ELT Recycling. There is no evidence of any request being made by Mr Adams to the board to convene a meeting, so s 121(b) does not apply. On the second occasion, when the liquidator was purportedly appointed, 11 April 2017, Mr Zhang had neither been removed as a director nor resigned. In those circumstances, no special meeting was validly called and both resolutions were invalid and of no effect.
[44] That conclusion is reinforced by:
(a) The failure of Mr Adams to comply with the prerequisites for calling a meeting of shareholder, under Schedule 1 to the Act.4
(b)The need for a board resolution to appoint an administrator.5 There was no such resolution. Nor was there any agreement between ELT Recycling and Corporate & Prestige to confer secured status on the latter in respect of the disputed debt involving Mr Adams’ claim for
remuneration. No security was ever held by Corporate & Prestige.6
4 The procedures to be followed when a liquidator is appointed were discussed by the Court of
Appeal in Rodewald v Aqua-Agriculture Farms Ltd [2002] 3 NZLR 501 (CA).
5 Companies Act 1993, s 239I(1).
6 Ibid, s 239K(1).
(c) The need for a special resolution of those shareholders entitled to vote and voting on the question whether to appoint a liquidator.7
[45] With regard to the resolution of shareholders in relation to the purported appointment of a liquidator, there is no evidence that the Zhang interests were given notice in accordance with Schedule 1 to the Act. For that reason, the purported passage of a resolution in lieu of a meeting of shareholders could not save the position, even if the board had legitimately called the meeting.
[46] Neither Mr Adams nor Corporate & Prestige had any power to remove Mr Zhang as a director or to issue shares of such a quantity as to transform Corporate & Prestige’s interest from minority to majority shareholder.
(c) Consequences of invalid actions
[47] In my view, orders are required to unwind the consequences of the unlawful actions of Mr Adams. The starting point is to consider how to do so in the context of the appointment of Mr Kamal as liquidator. Only after cessation of the liquidation can the correct position as to shareholding and directorship be restored.
[48] Mr Greer invites me to make an order under s 284(1)(g) of the Act. That states:
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—
…
(g) declare whether or not the liquidator was validly appointed or validly assumed custody or control of property:
….
[49] Although s 284(1) provides a list of powers that may be exercised by the High Court as part of its supervisory jurisdiction over liquidators, the Court may also invoke its inherent jurisdiction to supervise its officers. In ANZ National Bank Ltd v
Sheahan and Lock, I held that this jurisdiction extended to liquidators appointed other than by the Court.8
[50] There is no doubt that Mr Kamal was invalidly appointed, for the reasons I have given. I shall make an order to that effect and remove Mr Kamal from office. However, that does not necessarily mean that the liquidation should be regarded as invalid from its inception. Although, in this case, no external creditors will be affected by a declaration that the liquidation was unlawfully commenced, the same position is unlikely to pertain in other cases that may arise. That means there is a need for the Court to exercise caution in the way in which it restores the company’s affairs to the status quo that ought to have existed immediately before the invalid liquidation resolution was passed.
[51] There are two statutory or regulatory provisions that support that approach:
(a) The first is s 283(1) of the Act which deals with vacancies in the position of liquidator. While specific reference is made only to a vacancy arising out of resignation, death or disqualification,9 s 283(5) is expressed more broadly. It speaks of a vacancy arising “for any reason other than resignation”. Although it might be possible to interpret s 283 as referring only to the type of vacancy to which s 283(1) refers, I consider that a purposive approach requires any other form of vacancy to be covered. In this case, a vacancy arises
out of the invalid appointment of the liquidator.
(b)The second is reg 36 of the Companies Act 1993 Liquidation Regulations 1994. That provides that no defect or irregularity in the appointment of a liquidator shall invalidate any act done by him or her
in good faith. That suggests that if a liquidator were invalidly
8 ANZ National Bank Ltd v Sheahan and Lock [2012] NZHC 3037, [2013] 1 NZLR 674 at paras
[137]–[139]; also reported as Re Ex Ced Foods (formerly Cedenco Foods) (in liq) [2013] BCC
321.
9 Section 283(1) of the Companies Act 1993 states that the “office of liquidator becomes vacant if the person holding office resigns, dies, or becomes disqualified”. The disqualification issue is linked to s 280 of the Act which does not apply in this case.
appointed he or she is, nevertheless, regarded as having been lawfully acting in that capacity.
[52] In my view, the need to differentiate between the validity or otherwise of the appointment of a liquidator (on the one hand) and the liquidation process (on the other) means that the better approach is to use the discretion conferred by s 250 of the Act to terminate a liquidation. Section 250(1), (2), (3) and (4) provides:
250 Court may terminate liquidation
(1) The court may, at any time after the appointment of a liquidator of a company, if it is satisfied that it is just and equitable to do so, make an order terminating the liquidation of the company.
(2) An application under this section may be made by—
(a)
(b)
the liquidator; or
if the company has executed a deed of company
arrangement, the deed administrator; or (c)
a director or shareholder of the company; or
(d)
any other entitled person; or
(e)
a creditor of the company; or
(ea)
if the company is a financial markets participant, the FMA;
or
(f)
the Registrar.
…
(3) The court may require the liquidator of the company to furnish a report to the court with respect to any facts or matters relevant to the application.
(4) The court may, on making an order under subsection (1), or at any time thereafter, make such other order as it thinks fit in connection with the termination of the liquidation.
…
[53] I propose to treat the application as extending to one under s 250, made by validly appointed shareholders of the company.10 In my view, given the lack of any prejudice to creditors, an order terminating the liquidation should be made, with
consequential directions in relation to the need to restore the status quo that ought to have existed when the liquidation resolution was purportedly passed. In a case where there might be prejudice to creditors, the Court could either decide to keep the liquidation on foot with the vacancy being filled by the Official Assignee11 or terminate on conditions that cure any such prejudice. That approach is consistent with the collective nature of a liquidation process, and the need for the Court to
supervise liquidators to protect the interests of all involved in the process.
[54] In deciding to make an order terminating the liquidation, I have not overlooked this Court’s decision in Re Samoana Press Company Limited.12 In that case, Wylie J exercised the inherent jurisdiction of the Court to set aside a previous order of the Court that wound up that company and rescinded the appointment of the Official Assignee as provisional liquidator.13 In making those orders, the Judge was satisfied of material irregularities in the processes by which the winding up was ordered. He did not consider discretely whether an order terminating (or “staying” as it was called under the Companies Act 1955) the liquidation was preferable.
[55] In giving judgment, Wylie J did recognise the potential for prejudice if the winding up order were set aside. His Honour said:14
I do not overlook the serious and immediate consequences of a valid winding up order both in terms of the company itself and of creditors, contracting parties and members of the public. It may be that some inconvenience or even injustice in the short-term results from setting aside an order, but I cannot think that such inconvenience or injustice as might follow would be as great and as incapable of remedy as would be the injustice caused if a company is wrongly wound up and the process cannot be stemmed.
[56] In my view, the potential injustices that could result from an order that has the effect of setting aside a liquidation ab initio are better managed by making an order for termination which has the same practical effect. There may be some cases
11 Companies Act 1993, s 283(5) and (6).
12 Re Samoana Press Company Limited (1988) 3 NZCLC 64,119 (HC).
13 Ibid, at 64,125. As to the three different types of liquidation regime available under the Companies Act 1955, each of which was known by the term “winding up”, see Re Roslea Path Ltd (in liq) [2013] 1 NZLR 207 (HC) at para [22] and ANZ National Bank Ltd v Sheahan and Lock [2012] NZHC 3037, [2013] 1 NZLR 674 at paras [122]–[127]; also reported as Re Ex Ced Foods (formerly Cedenco Foods) (in liq) [2013] BCC 321.
14 Re Samoana Press Company Limited (1988) 3 NZCLC 64,119 (HC) at 64,124.
in which the type of order made in Samoana Press might be more appropriate, but whether that is so should await a case in which the point is determinative.
Result
[57] For those reasons:
(a) I grant leave for the Zhang interests to apply for an order under s 284(1)(g) of the Act, and make an order declaring that Mr Imran Kamal was invalidly appointed as the liquidator of ELT Recycling on
11 April 2017.15
(b)I make an order terminating the liquidation of ELT Recycling, with immediate effect.16
(c) I make orders:17
(i)Declaring that all resolutions of ELT Recycling and documents registered with the Registrar of Companies during the period 5 to 25 August 2016 are invalid and shall be removed from the Register of Companies.
(ii) Declaring that the appointment of Mr Otter as administrator of
ELT Recycling was invalid and of no effect.
(iii)Rectifying the Register of Shares for ELT Recycling by removing the issue of 225 new shares on 5 August 2016 to Corporate & Prestige.
(iv)Declaring that Corporate & Prestige holds no shares in ELT Recycling.
15 Ibid, s 284(1)(g).
16 Ibid, s 250(1).
17 Ibid, s 250(4).
(v)Declaring that Corporate & Prestige is not a secured creditor of ELT Recycling.
(vi) Declaring that Mr Zhang has not been removed as a director of
ELT Recycling.
(vii)Directing that Mr Imran Kamal return all property or company records belonging to ELT Recycling that are in his possession to the solicitors for the Zhang interests.
(d)I reserve leave for the Zhang interests to apply in the event that the Registrar of Companies requires any more formal declarations or orders in relation to the way in which that Register should be amended.
[58] From a practical perspective, the rights to property of ELT Recycling is now to be determined by Mr Adams and Mr Zhang as its directors. The validity of the debt claimed by Corporate & Prestige and/or Mr Adams from ELT Recycling shall be determined by the directors of ELT Recycling.
Costs
[59] While I suspect, based on the existence of the so called “orders” to which I have referred,18 that Mr Adams may have been lured into the misguided belief his actions were legitimate, the Zhang interests have been put to unnecessary costs as a result of the need for them to restore the correct legal position. I order that Mr Adams and Corporate & Prestige jointly and severally are liable to pay costs to the Zhang interests on a 2B basis, together with reasonable disbursements, both to be fixed by the Registrar. In addition, Mr Adams shall meet the one-half share of the costs of the liquidator that have been paid to date by the Zhang interests.
[60] I direct the Registrar to forward a copy of this judgment to the Solicitor-
General.19
P R Heath J
Delivered at 3.30pm on 15 August 2017
SCHEDULE A
SCHEDULE B
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