Re HALIFAX NEW ZEALAND LIMITED (IN LIQUIDATION) [2020] NZHC 894

Re HALIFAX NEW ZEALAND LIMITED (IN LIQUIDATION) [2020] NZHC 894 [5 May 2020]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYCOMMERCIAL LISTI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV-2019-404-2049[2020] NZHC 894UNDER Section 284 of the Companies Act 1993, section66 of the Trustee Act 1956 and Part 19 of theHigh Court Rules 2016IN THE MATTER of HALIFAX NEW ZEALAND LIMITED (INLIQUIDATION)AND an application by MORGAN JOHN KELLYand PHILIP ALEXANDER QUINLANFirst Applicants/2Hearing: 3 April 2020Appearances: Halifax AU by AVL:A Leopold SC and E Holmes for ApplicantsD Hyde for Choo Boon LooB Hancock for Atlas Asset ManagementJ V Gooley for Elysium Business SystemsC Mitchell for J HingstonHalifax NZ by AVL:J Caird for Atlas Asset ManagementE L Smith for Whitehead GroupS Munro for Chen Wang and Fiona McMullinJ Knight for Interested PartyJudgment: 5 May 2020JUDGMENT OF VENNING JOn application for directionsThis judgment was delivered by me on 5 May 2020 at 11.30 am, pursuant to Rule 11.5 of the HighCourt Rules.Registrar/Deputy RegistrarDatean application by HALIFAX NEWZEALAND LIMITED (IN LIQUIDATION)Second ApplicantMORGAN JOHN KELLY and PHILIPALEXANDER QUINLANThird ApplicantsAND CHOO BOON LOOFirst RespondentELYSIUM BUSINESS SYSTEMS PTYLTDSecond RespondentJASON PAUL HINGSTONThird RespondentATLAS ASSET MANAGEMENT PTYLTD (as trustee for the Atlas AssetManagement Trust)Fourth RespondentFIONA McMULLINFifth RespondentANDREW PHILLIP WHITEHEAD andMARLENE WHITEHEAD (as trustees forthe Beeline Trust)Sixth RespondentANDREW PHILLIP WHITEHEADSeventh RespondentSolicitors: Russell McVeagh, AucklandTailored Legal Solutions Ltd, DargavilleAnderson Lloyd, ChristchurchSimpson Grierson, AucklandCopy to: K&L Gates, AustraliaProfessor KnightA Leopold SC, AustraliaGilbert + Tobin, AustraliaTurks Legal, AustraliaMaddocks, AustraliaMurdoch Clarke, AustraliaIntroduction[1] Mr Kelly and Mr Quinlan, in their capacity as liquidators of Halifax NewZealand Limited (in liquidation) and also as trustees, seek directions from the Courtconfirming they are justified in refraining from:(a) realising any and all extant investments (closing out) until thedetermination of all substantive issues in this proceeding, and In thematter of Halifax Investment Services Pty Ltd (in liquidation) (HalifaxAU) in NSD 2191 of 2018; and(b) applying to the Court for directions to the effect that closing out shouldproceed as soon as practicable, in advance of the final hearing of theproceeding.[2] In the substantive application the applicants seek directions as to the mannerin which, following the sale, closing out or realisation of extant investments, the fundsheld by Halifax NZ should be distributed to clients of Halifax NZ and/or Halifax AUtogether with related and ancillary orders. One of the related orders seeks directionsin relation to closing out.Relevant procedural history[3] There have been a number of case management conferences and interlocutoryhearings at which orders and interim directions have been sought by the liquidatorsand by other parties seeking to be joined to the proceeding.[4] At an earlier hearing on 18 February 2020 the applicants had sought a directionthat they were justified in not closing out before 3 April 2020. The Court declined tomake the direction. It noted that the liquidators had not made a decision about closingout but rather had postponed that decision. The Court also considered that it did nothave sufficient information to make the direction sought at that time. It was left openfor the applicants to renew the application and provide further information through thecourse of the proceedings.11 Minute/orders (8) dated 21 February 2020 at [31]–[33].[5] There have been a number of relevant developments since that decision. First,at that hearing four representative respondents were joined. Next, at a recent hearing,on 3 April 2020, a fifth respondent has been joined to both the Australian proceedingsand these proceedings to represent a further category of investors. Andrew PhillipWhitehead and Marlene Whitehead as trustees of the Beeline Trust and Andrew PhillipWhitehead (together the Whitehead interests) have also been joined in their personalcapacity to these proceedings.2[6] At the hearing on 3 April the applicants renewed and formalised the applicationfor directions in relation to closing out. They have now made a decision not to closeout in advance of the substantial hearing. They seek directions confirming thatdecision.[7] Mr Kelly has also provided a further affidavit dated 25 March 2020 whichaddresses the issue of closing out. Mr Kelly has set out the reasons the applicants havedecided the appropriate course is to refrain from closing out until determination of thesubstantives issues raised in the proceeding.[8] In a decision delivered on 23 April 2020 in the Australian proceeding Gleeson Jdeclined the application for directions by Mr Kelly and Mr Quinlan in their capacityas trustees. She considered that as there was a potential dispute between investors asto the proper administration of the extant investments it was not an appropriate casefor judicial advice under s 63 of the Trustee Act 1925 (NSW). However, Gleeson Jwas satisfied it was appropriate to make the directions sought by the liquidators unders 90-15 Insolvency Practice Schedule (Corporations), Schedule 2 to the CorporationsAct 2001 (Cth). I have had the advantage of considering that judgment and the reasonsfor it.Background to the issue of closing out[9] Since the appointment of the applicants to Halifax AU (on 23 November 2018)and Halifax NZ (on 27 November 2018) the applicants have continued to permitinvestors to close out open positions or to sell or realise investments in financial2 Minute/orders (10) dated 20 April 2020.products but have not entered into any new transactions or trades on behalf ofinvestors. That has enabled investors to convert investments to cash or to crystallisethe liability between the Halifax entity and the client. Since appointment a total of18,235 positions have been closed out by investors. There remain 22,645 openpositions.[10] From an early date the liquidators recognised that the issue of closing outwould be a matter of particular interest to investors. As noted, the original applicationraised the issue. In their notice to investors on 15 November 2019 the applicantsincluded a question asking investors to put forward their views in relation to theclosing out issue. Of the 68 investors who responded on the issue:(a) 49 did not want investor positions closed out;(b) eight did want investor positions closed out;(c) 11 did not express any clear view.[11] The reasons given by those investors who responded in support of closing outincluded:(a) the co-mingling of funds meant investors could not be dealt with on anindividual basis;(b) the costs of keeping the trading platforms operational;(c) the risks in a changing market;(d) finalisation of accounts would allow distribution decisions;(e) the ongoing costs of the liquidation;(f) some investors were reliant on the investments for their retirementneeds.[12] The applicants cannot proceed on the basis that no investor will be able to bedealt with individually. That issue can only be determined at the substantive hearing.At least two of the representatives appointed by the Court to represent the differentclasses of investors wish to argue that certain investments are traceable and should bedealt with on an individual basis. Jason Paul Hingston represents all clients of HalifaxAU and Halifax NZ who transferred shares into the trader work station (also knownas Halifax AU's IB Platform or Halifax NZ's IB Platform) from another stockbrokerand have not traded those shares. Fiona McMullin represents all clients of Halifax AUand Halifax NZ who invested before 1 January 2016 to propound the argument thatinvestments made before there was a deficient mixed fund are traceable.[13] Next, while the positions are open and exposed to the market, that cuts bothways. The value of client equity balances has fluctuated from the date of appointment.As Mr Kelly's evidence shows, even with the recent large downturns in the stockmarket as a result of the Covid-19 pandemic the total value of all investments is stillin excess of the figure as at the appointment of the liquidators. The total client equitybalance at 17 March 2020 of AUD 244,423,482 was still significantly ahead of theAUD 211,601,823 prior to the appointment of the liquidators.[14] A major premise underlying the reasons for closing out now as opposed to afterthe Court's decision on the substantive application appears to be that it will lead toearlier resolution of the liquidation, an earlier return of funds to investors and anattendant reduction in costs.[15] While there would be a saving in the costs of maintaining the trading platforms(Mr Kelly considers it could be as much as $1.4 million per year), the liquidation willnot be able to be completed and the liquidators will not be in a position to return fundsto investors in advance of the Court's determination of the substantive issues in thisproceeding. Also, while the costs of maintaining the investment platforms aresignificant, there would be other costs associated with a realisation of the investments.The costs of maintaining the investment platforms could possibly even be outweighedby the benefits of doing so. Further, the realisation process, at least in relation to theinvestments through the IB platforms, could take three to six months.[16] It is clear from the steps individual investors have taken and the responses tothe notice that there is a difference of opinion amongst investors, although on the basisof the information before the Court it seems that a majority favour the retention of theinvestments rather than closing out.The decision not to close out before the substantive hearing[17] At paras 71 to 80 of his affidavit Mr Kelly gave several reasons why theapplicants have now decided to refrain from closing out all extant investments untilthe determination by the Courts of the substantive issues. In summary, the reasonsinclude:(a) there are a number of advantages in retaining the ability to make an inspecie distribution to investors even in the event particular investmentsare not traceable;(b) some investors contend their investments are traceable and so theyshould not therefore share in the deficiency. Closing out at this stagewould preclude that argument;(c) one of the directions sought is whether pooling orders should be madein the administration of the companies. If the Court ultimately gavedirections or advice that pooling should not occur, closing out inadvance of the final hearing has the potential to frustrate that outcome;(d) the vast majority of the investors who have expressed a view on closingout oppose it;(e) even if a process of closing out was undertaken it is unlikely it wouldbe completed much before the hearings of the substantive applicationswhich are scheduled for two weeks from 30 November;(f) the reasons given by investors who support closing out are either basedon a misapprehension or a misunderstanding, or at least fail to takeaccount of all relevant background which the liquidators haveconsidered;(g) the points made by those investors who oppose closing out are, in theliquidators' opinion, more persuasive than the points advanced by thosewho support closing out.Legal basis for the directions sought[18] Section 66 of the Trustee Act 1956 provides:66 Right of trustee to apply to court for directions(1) Any trustee may apply to the court for directions concerning anyproperty subject to a trust, or respecting the management oradministration of any such property, or respecting the exercise of anypower or discretion vested in the trustee.(2) Every such application shall be served upon, and the hearing may beattended by, all persons interested in the application or such of themas the court thinks expedient.[19] Section 69 of the Trustee Act confirms that a trustee acting under a directionof the Court shall be deemed to have discharged his duty as trustee. In the absence offraud or bad faith a direction under s 66 effectively shields the trustee from futurerelated claims by beneficiaries and other parties.[20] One of the reasons the applicants seek the direction of the Court is that someinvestors have suggested in their responses that the applicants are acting improperlyby not closing out. Some have implicitly or even expressly threatened legalproceedings.[21] Despite that, none of the respondents before the Court expressed opposition tothe liquidators' decision. Mr Loo and Mr Hingston actively supported it.[22] In support of the application counsel submitted that whether to refrain fromclosing out was quintessentially a question involving the management oradministration of trust property. The extant investments are choses in action. Theproceeds from closing out will form part of a deficient co-mingled trust fund held onbehalf of investors by the trustees (Halifax AU, Halifax NZ and in respect of theFMCR Trust, Messrs Kelly and Quinlan).[23] In a recent decision FFP Trustee (NZ) Ltd v Peng Wylie J reviewed the relevantauthorities in relation to an application for directions under s 66 of the Trustee Act.3As Wylie J noted:[58] The jurisdiction under s 66 is intended essentially for private adviceby the Court to trustees where they are in doubt as to the proprietary of actionthat is contemplated. Questions of substance or importance, involving mattersin dispute or contest between trustees or allegations of breach of trust (eitherimplicit or explicit), do not lend themselves to applications under s 66. Thesection is not intended to be used where the rights of adversarial parties needto be determined. Rather, an application must be on agreed facts.[24] In Chambers v SR Hamilton Corporate Trustee Ltd the Court of Appealconfirmed that the High Court's jurisdiction under s 66 is not restricted to minor orprocedural issues but an application for directions will not usually be appropriatewhere important facts are contested.4 The Court of Appeal approved the followingsummary by Lord Oliver from Marley v Mutual Security Merchant Bank and Trust CoLtd:5A trustee who is in genuine doubt about the propriety of any contemplatedcourse of action in the exercise of his fiduciary duties and discretions is alwaysentitled to seek proper and professional advice and, if so advised, to protecthis position by seeking the guidance of the court.[25] In FFP Trustee (NZ) Ltd Wylie J cited with approval the four situationsdescribed by Robert Walker J and approved by the High Court in the United Kingdomin Public Trustee v Cooper as being appropriate for directions:6(a) whether a proposed action is within the applicant trustee's power;(b) where there is no doubt as to the extent and nature of the trustee'spower, but the trustee wishes to obtain the blessing of the Court forthe actions on which he/she has resolved because the decision isparticularly momentous.3 FFP Trustee (NZ) Ltd v Peng [2019] NZHC 3301.4 Chambers v SR Hamilton Corporate Trustee Ltd [2017] NZCA 131, [2017] NZAR 882.5 Chambers v SR Hamilton Corporate Trustee Ltd, above n 4, at [32] citing Marley v MutualSecurity Merchant Bank and Trust Co Ltd [1991] 3 All ER 198 (PC).6 FFP Trustee (NZ) Ltd v Peng, above n 3, at [60], citing Public Trustee v Cooper [2001] WTLR901 (HC).(c) where the trustee seeks to surrender a discretion vested in him or her;and(d) where the trustee has taken action and that action has been attacked asbeing either outside the trustee's power, or an improper exercise ofthe power.[26] There is no doubt the applicants, as trustees, have power to make the decisionto postpone the closing out of investments until the substantive hearing. The presentapplication falls into the second category. The applicants seek the Court's directionbecause of the importance of the decision.[27] The decision is a significant one, and is contentious to the extent thebeneficiaries (investors) take differing views. But I would not elevate the issues raisedby the investors who support closing out now to amount to an allegation of breach oftrust.[28] There can be no realistic suggestion that the applicants are in a position ofpersonal conflict of interest with the investors. Although reference has been made tothe ongoing costs being incurred by the liquidators during the course of the liquidationI am satisfied from the various hearings before this Court and the steps taken toadvance the matter by the liquidators they are acting to bring the matter to a conclusionas soon as reasonably possible.[29] The issue arises, and the applicants seek the advice, because the terminationclauses in the Client Services Agreements (CSAs) raise issues as to the powers of thetrustees and whether there could be an obligation to activate the termination clausesand close out.[30] The CSAs of both Halifax NZ and Halifax AU contain termination clauseswhich permit the companies to terminate the investor agreements following a shortperiod of notice.[31] Some of the Australian CSAs and all of the New Zealand CSAs impose on therelevant Halifax entity the obligation to close out all "contracts" (which appears tocover investments, including in relation to "securities"), upon termination. Mr Kellyis concerned it may be open for investors to argue that, having regard to thesurrounding circumstances (including but not necessarily limited to the effects ofCovid-19 on the stock market) the power to terminate was one which the applicantsshould have exercised in order to trigger the obligation to close out all the extantcontracts.[32] While applications under ss 66 will not usually be appropriate where importantfacts are contested, the facts here are not contested. Rather there is a difference ofopinion between some investors as to whether all investments should be closed out atthis time. But importantly, the decision to refrain from closing out is not adetermination of any of the investors' ultimate rights. Rather it is a decision in thecourse of the administration and management of the Trust.[33] For the reasons that Mr Kelly has set out he considers that the decision torefrain from closing out until the substantive hearing is the appropriate one but theapplicants seek the Court's approval (or blessing as it is put in some cases).[34] The applicants are entitled to look to the Court for judicial advice. I agree thatwhether the investments should be closed out is very much a question of managementor administration of the trust property, which is at the heart of the jurisdiction of theCourt for judicial advice.[35] Looking at the matter objectively I consider it is preferable to refrain fromclosing out at this stage and it would be impractical to attempt to resolve closing outas a preliminary issue.[36] For the above reasons I accept that it is appropriate to grant the direction soughtunder s 66 of the Trustee Act.Section 284[37] Section 284 of the Companies Act 1993 provides:284 Court supervision of liquidation(1) On the application of the liquidator, a liquidation committee, or, withthe leave of the court, a creditor, shareholder, other entitled person, ordirector of a company in liquidation, the court may—(a) give directions in relation to any matter arising in connectionwith the liquidation: (3) Subject to subsection (4), a liquidator who has—(a) obtained a direction of a court with respect to a matterconnected with the exercise of the powers or functions ofliquidator; and(b) acted in accordance with the direction—is entitled to rely on having so acted as a defence to a claim in relationto anything done or not done in accordance with the direction.(4) A court may, on the application of any person, order that, by reason ofthe circumstances in which a direction was obtained under subsection(1), the liquidator does not have the protection given by subsection(3).[38] The provision in s 284(1)(a) is broadly expressed and empowers the Court togive directions in relation to any matter arising in connection with the liquidation.[39] The Court has been prepared to give advice to liquidators concerning decisionswhich potentially have significant financial consequences. Recent examples include:(a) whether in order to save costs in the liquidation, the recovered assets ofa foreign exchange trader (that operated in practice as a Ponzi scheme)should be treated as forming a common pool available for distributionto both the company's unsecured creditors and its investors on a prorata pari passu basis, despite the existence of a trust over fundsdeposited with the company by those investors;7(b) how and on what basis an interim distribution should be made in theliquidation of a company (Ross Asset Management Limited) being acompany that operated a Ponzi scheme, including whether the generalunsecured creditors and the investors should be treated equally forranking purposes.87 Graham v Arena Capital Limited (in liq) [2017] NZHC 973.8 Re Fisk [2018] NZHC 2007.[40] A major constraint is that as a general rule the Courts have resisted givingdirections to liquidators, the effect of which is to curtail pre-existing contractualrights.9[41] But as noted, the individual investors' contractual rights to close out are notaffected by the liquidators' decision to postpone closing out. By contrast, if closingout was enforced now that would itself potentially close out some rights. Further, evenif the issue could be properly considered fully in advance of the substantive hearing(which I doubt) significant further expense would be incurred in doing so. The Courtmight well decline to make such a decision prior to the substantive hearing in anyevent.[42] The decision of the applicants to refrain from the closing out of investments atthis time is a matter properly arising in connection with the administration of theliquidation.[43] Again, for the above reasons I consider it appropriate to grant the liquidators'application.Result/orders[44] Order under s 66 Trustee Act 1956 confirming the applicants (in their capacityas trustees) are justified in refraining from:(a) realising any and all extant investments (closing out) until thedetermination of all substantive issues in this proceeding, and In thematter of Halifax Investment Services Pty Ltd (in liquidation) (HalifaxAU) in NSD 2191 of 2018; and(b) applying to the Court for directions to the effect that closing out shouldproceed as soon as practicable, in advance of the final hearing of theproceeding.9 Re HIH Casualty and General Insurance (NZ) Ltd HC Auckland CIV-2003-404-2838, 17December 2003; Madsen-Ries v Greenhill [2016] NZHC 3188 at [117].[45] Order under s 284(1) Companies Act 1993 directing that the applicants (asliquidators) are justified in refraining from:(a) realising any and all extant investments (closing out) until thedetermination of all substantive issues in this proceeding, and In thematter of Halifax Investment Services Pty Ltd (in liquidation) (HalifaxAU) in NSD 2191 of 2018; and(b) applying to the Court for directions to the effect that closing out shouldproceed as soon as practicable, in advance of the final hearing of theproceeding.__________________________Venning J