COMMERCIAL FACTORS LTD v MELTZER [2018] NZCA 505

COMMERCIAL FACTORS LTD v MELTZER [2018] NZCA 505 [16 November 2018]IN THE COURT OF APPEAL OF NEW ZEALANDI TE KŌTI PĪRA O AOTEAROACA66/2018[2018] NZCA 505BETWEEN COMMERCIAL FACTORS LIMITEDAppellantAND JEFFREY PHILIP MELTZER, LLOYDJAMES HAYWARD AND ARRON LESLIEHEATHRespondentsHearing: 26 September 2018Court: Miller, Clifford and Williams JJCounsel: P J Dale and E Telle for AppellantA C Challis and D P Turnbull for RespondentsJudgment: 16 November 2018 at 2.30 pmJUDGMENT OF THE COURTA The appeal is dismissed.B The appellant must pay the respondents costs for a standard appeal on aband A basis and usual disbursements.____________________________________________________________________REASONS OF THE COURT(Given by Clifford J)Introduction[1] The appellant, Commercial Factors Ltd, agreed to fund the respondents,Messrs Meltzer, Hayward and Heath as the liquidators of Blue Chip New ZealandLtd,1 to obtain a legal opinion as to the merits of commencing proceedings againstBlue Chip's directors and auditors. Pursuant to the funding agreement betweenCommercial Factors, Blue Chip and the Liquidators recording those arrangements(the Agreement), Commercial Factors provided the agreed funding of $60,000(excluding GST) and the Liquidators obtained the legal opinion.[2] Proceedings were subsequently commenced by the Liquidators, but withoutlitigation funding support. The proceedings were unsuccessful and were discontinued.The costs involved were ultimately funded by unexpected recoveries in Blue Chip'sliquidation from unrelated litigation and from funds of the partners of Meltzer, Mason,Heath (including two of the Liquidators) paid into the Meltzer, Mason, Heath practiceaccount.[3] Commercial Factors then sued the Liquidators for monies it said were owingto it under the Agreement. In the High Court, Hinton J dismissed the claim.2Commercial Factors now appeals.[4] Two issues arise: the first is whether, under the terms of the Agreement, thecontractual circumstances which would entitle Commercial Factors to payment havearisen. If they have, the second is whether the Liquidators are themselves liable forthat payment and, if they are, whether they can avoid that liability by showing theydid not fail to act in good faith.BackgroundInitial steps[5] Blue Chip was put into liquidation by its Australian parent in 2008. It joinedsome 20 other related companies that had also been put into voluntary liquidation bytheir Australian owner. There were some 3,000 investors and creditors inNew Zealand who together had lost sums in excess of $80 million. Many of theinvestors lost a significant proportion of their lifetime savings in Blue Chip's collapse.1 Messrs Meltzer and Heath were at all material times partners in Meltzer, Mason, Heath.Mr Hayward was a consultant.2 Commercial Factors Ltd v Meltzer [2017] NZHC 3267.[6] Few, if any, funds were available to the Liquidators to investigate possibleavenues for recovery of creditors' funds. Third party funding would be required.[7] With funding provided from the Liquidation Surplus Account, the Liquidatorsinvestigated possible claims under the Securities Act 1978. Those inquiries came tonothing.[8] The Liquidators also considered the other option: suing the directors forreckless trading. By 2009 they had concluded they should obtain a legal opinion as tothe prospects for such proceedings. Funding was required. Mr Meltzer approachedMr Haydon, a director and shareholder of Commercial Factors.Commercial Factors funds an opinion[9] Commercial Factors was not a traditional litigation funder. Nevertheless, itagreed to provide funding of $60,000 to enable the Liquidators to obtain such anopinion: $50,000 for the legal advice, $10,000 for the Liquidators' expenses.Mr Haydon wrote to the Liquidators, outlining the proposal, on 18 May 2009:1) The advance to incur a fee of $15,000.00 as suggested by you and/or24.00% pa until repaid, whichever is the highest in dollar terms.2) The advance and interest to be treat [sic] as though it is a preferentialcreditors [sic] to the Liquidation regardless where receipts come from.3) In consideration for funding the explanatory opinions that we share2.5% of any recovery that is received from a claim against theDirectors and/or Auditors.4) That in considerate [sic] for funding this request[Commercial Factors] and/or its nominee be given the first right ofrefusal to any additional legal funding requirement for claims againstthe Directors and/or Auditors.5) A legal agreement be prepared between the parties covering the aboveand other terms seen as legally basic to the agreement.6) That if [Commercial Factors] declines or is unsuccessful in securingthe offer as in 5) then the successful funder will repay[Commercial Factors] its advance and interest as in 1).[10] Those proposals were reflected in the Agreement which was entered into,the Judge found, on 24 August 2009.3[11] As relevant the Agreement provided:3 Additional Sum and Repayment3.1 The Company (through the Liquidators) must pay[Commercial Factors] an additional amount of $18,000 or 24% perannum (calculated daily and compounding annually), whichever isgreater, at the time of repayment of the Funding.3.2 If the Liquidators decide that as a result of the Advice they willendeavour to obtain funding for proceedings against the partiesidentified in the Advice as having liability to the Company,the Company and the Liquidators will give [Commercial Factors] thefirst option to provide that funding on terms determined bythe Liquidators. If [Commercial Factors] within 10 days of receivingnotice of the funding requirements chooses not to fund the proceedingor does not respond:3.2.1 The Company will not enter a funding agreement with anotherparty on any less favourable terms without first re-offering thefunding opportunity to [Commercial Factors]; and3.2.2 If another party agrees to fund the proceedings, the Companywill procure the funder to repay to [Commercial Factors]the Funding and the Additional Sum before the proceedingsare filed or any funding for the proceedings is made availableto the Company or the Liquidators.3.3 If proceedings are commenced, whoever funds the proceedings,the Company will pay [Commercial Factors] 2.5% of net proceedsreceived from or on behalf of the defendants to those proceedings(whether those proceeds are received by way of settlement, by reasonof a Court ordered judgment or otherwise) within 10 working days ofreceipt of the proceeds by the Company or the Liquidators.3.4 If proceedings are not commenced and the Company receives anyamounts from other sources (other than funds directly obtained for thepurposes of funding investigations, legal advice or Court or otherproceedings), the Company will apply those amounts in the followingorder:3.4.1 to meet the Company's obligations to any party who fundedthe obtaining of those amounts, and to reimbursethe Liquidators' remuneration, costs and expenses inobtaining those amounts to the extent they were not funded;3.4.2 toward repayment to [Commercial Factors] of the Fundingand Additional Sum;3 Commercial Factors Ltd, above n 2, at [10].3.4.3 to meet any other obligations of the Liquidators, andoutstanding costs and expenses of the Liquidators, inconnection with the liquidations of the Company and itssubsidiaries (to the extent that no other funds are available forthis purpose); and3.5 For the avoidance of doubt, the Company's only obligation to repayto [Commercial Factors] the Funding and any Additional Sum are setout in clauses 3.1 to 3.5 inclusive. If following receipt of the Advicethe Company (through the Liquidators) decides not to proceed furtheror the Company is unable to obtain funding to proceed further,the Company has no obligation to repay the Funding or make anyother payment to [Commercial Factors] except as set out in cl 3.4(specifically clause 3.4.2).4 Liquidators' Decision Following Receipt of Advice and in Relationto any Proceedings4.1 [Commercial Factors] acknowledges that any decision to issueproceedings as a result of receipt of the Advice is that ofthe Liquidators in their absolute discretion. The Liquidators on behalfof the Company have the right to direct, conduct and conclude in suchmanner as they consider appropriate any proceedings that may beissued following receipt of the Advice.4.2 The Liquidators agree to regularly consult with [Commercial Factors]as to progress of obtaining the Advice and, if proceedings aresubsequently issued without funding from [Commercial Factors], tokeep [Commercial Factors] informed as to the progress of theproceedings.6 Exclusion of Personal Liability of the Liquidators6.1 The parties acknowledge that the Liquidators are entering into thisAgreement in their capacity as joint and several liquidators ofthe Company. The Liquidators will have no personal liability underor in connection with this Agreement except in circumstances wherethey fail to act in good faith.[12] As can be seen, the Agreement stipulated two sets of circumstances in whichCommercial Factors would be entitled to be repaid the litigation funding it hadprovided to the Liquidators (the Funding), and to be paid its fee (the Fee).Those circumstances were:(a) First (cl 3.2.2), where another party agreed to fund the proceedings,Blue Chip was to procure that party to repay the Funding and to paythe Fee.(b) Second (cl 3.4), where proceedings were not commenced, butBlue Chip received recoveries from other sources, those funds werethen to be applied to repay the Funding and to pay the Fee. As betweenthe Liquidators and Commercial Factors, payment of those amountswould be made — subject to liquidation expenses incurred in theirreceipt — before the rest of the liquidation expenses generally.[13] There was no provision for the repayment of the Funding or the payment ofthe Fee if Commercial Factors itself agreed to fund the substantive proceedings.It may be that matter was left for negotiation or it may be it was envisaged thatCommercial Factors would look to its 2.5 per cent of the net proceeds (cl 3.3) in thosecircumstances.[14] Neither does the Agreement explicitly address the situation that arose: namelythe Liquidators themselves taking the proceedings and funding them, partly asliquidators' expenses payable from the liquidation and partly from funds the Meltzer,Mason, Heath partners (including two of the Liquidators) paid personally into thepractice account.[15] Mr Brian Keene QC eventually provided an opinion on the prospects ofreckless trading and related proceedings against Blue Chip's directors and others on8 September 2010.[16] In an executive summary of his formal opinion Mr Keene stated his high-levelconclusions in the following terms:3. My view is that there is a good cause of action against the directors ofvarious entities in the Blue Chip Group. They have breached theirobligations under the Companies Act, such as to cause them to bepersonally responsible to the liquidators in respect of certain losses ofthe Group. These claims arise in the last quarter of 2004 and continuethrough to mid 2006.4. I am of the further view that BDO Spicer Chartered Accountants, whowere auditors of the Blue Chip Group, may have failed to meet theirduty of care to Blue Chip which caused it to incur creditors and sustainlosses which may be recoverable at law.[17] Mr Keene recommended that the claim be filed in the High Court as soon aspossible. He explained:8. In the formal Opinion, I have suggested that a claim be filed in theHigh Court as soon as possible. In relation to claims under ss 131,134, 135 and 136, of the Companies Act, losses relating to conduct bythe directors that occurred more than six years prior to proceedingsbeing issued will be barred by limitation. Effectively this means thatdeposits that are paid more than six years before the proceedings areissued will not be claimable as "losses". So the clock is ticking.[18] Any claim should, he said, be filed before the end of 2010. Thereafter, the firststep would be to collate and recreate the Blue Chip records. That would cost in theorder of $250,000. The second stage would be to brief company personnel and expertwitnesses. They were, however, only the first stages of what would be lengthy anddifficult litigation. Mr Keene explained:It will be difficult because of the expected degree of opposition bythe defendants (including the auditors). It will be lengthy because of thecomplex web of entities that form part of the Blue Chip Group and theirinterrelation with other companies that formed part of the Blue Chip Model oftrading.[19] But assessed overall, Mr Keene considered "there must be considerableoptimism" the Court would find the directors liable.Subsequent events[20] On 23 September 2010, Commercial Factors formally declined the opportunityto fund the proceedings. It asked the Liquidators to "keep us posted as perclause 3.2.2".[21] The Liquidators then looked for another litigation funder. On 7 October 2010they advised Mr Haydon they had "met with two of the three funders (other than[Commercial Factors]) who expressed a possible interest in funding the Blue Chiplitigation". Discussions were continuing.[22] Commercial Factors paid Mr Keene's account directly on 3 November 2010.The Liquidators rendered their claim for $10,000, plus GST, in February 2011.Mr Haydon, acknowledging receipt of the invoice, asked for an update as to thelikelihood of finding a funder and repayment to Commercial Factors. He asked if thatwas not going to happen when would the Liquidators draw the line so that cl 3.4 would"kick in" for Commercial Factors to be reimbursed. The Liquidators replied the searchfor a funder was ongoing; they had only received one definite "not interested" so far.They were reviewing the matter on a regular basis and if they felt no funder would beinterested at that point they would "call it quits". Their view was that it was unlikelythat funds would be "recovered for the benefit of funders unless proceedings[could] be commenced".[23] In response to a further inquiry from Commercial Factors they confirmed thatthey did not believe it likely that any other recoveries, that is beyond those thatproceedings against the directors and auditors might generate, would be available asanticipated by cl 3.4.[24] Commercial Factors paid the Liquidators' invoice directly to them on21 March 2011.[25] As events transpired, the Liquidators filed their statement of claim againstthe Blue Chip directors and auditors on 30 November 2011 in the High Court atAuckland. They had earlier provided a draft of that statement of claim to a number ofthe defendants, and had discussions with those parties as regards the foreshadowedproceedings. They took those steps, and subsequently filed the proceedings, to showthe defendants that they were serious about the claim and optimistic as to its prospects.They had not, however, obtained litigation funding. In fact, between May andOctober 2011 the Meltzer, Mason, Heath partners had together provided funds of$49,500 which were used to pay the further legal fees incurred in commencingthe proceedings.4 Those amounts were paid into the Meltzer, Mason, Heath practiceaccount, and from there were disbursed directly to the legal advisers involved.[26] From March 2012 onwards, and unexpectedly, proceeds began to be receivedin Blue Chip's liquidation as a result of the settlement of unrelated proceedings for therecovery of inter-company advances made by Blue Chip. By May 2012 a total of$307,961.19 had been received from that source. Those receipts were applied bythe Liquidators to fund their expenses in the liquidation and the ongoing legalexpenses they incurred in relation to their proceedings against the directors andauditors.[27] All attempts to obtain third party litigation funding for the Liquidators'proceedings failed. The Liquidators announced publicly on 1 February 2013 that theywere suspending the legal proceedings accordingly. In doing so, they noted they had"personally funded significant sums towards the investigations and legalproceedings".[28] The Liquidators issued their final report on 10 October 2014. That reportshowed, amongst other things, the receipt by Blue Chip in the liquidation of the$307,961.19, the payment of Liquidators' remuneration of $253,199 and the paymentof legal fees of $182,409.86.[29] Commercial Factors subsequently sought payment by the Liquidators ofthe Funding and the Fee. It said payment was due to it as a priority pursuant to cl 3.4,and in particular out of the $307,961.19. That is, Commercial Factors contended thatproceedings had not been commenced in the manner contemplated by the Agreement.The Liquidators did not agree and in mid-2016 Commercial Factors commencedproceedings for recovery of the monies. It pleaded the Liquidators were liable to itunder either of cls 3.4 or 3.2, or under certain stipulated implied terms. The point ofthose implied terms was to strengthen Commercial Factors' assertion that, under the4 The evidence as to when, and how much, the Meltzer, Mason, Heath partners funded theproceedings, both initially and over time, was not at all clear. In fact, Commercial Factors pointsto the lack of transparency in that area as a factor going to the Liquidators' liability. We haveendeavoured to clarify those facts: we cannot always be confident, however, that the amounts westipulate are completely accurate.terms of cl 3.4, proceedings had not, in fact, been commenced. In the alternative,the Liquidators were liable pursuant to cl 6.1 of the Agreement, as they had failed toact in good faith by procuring Blue Chip to pay their and their legal advisers' expenses,and thereby failing to procure the payment of the Funding and the Fee as a priority asprovided by cl 3.4.[30] The Liquidators applied unsuccessfully for strike-out or summary judgment.5The matter came before Hinton J in the High Court in July 2017.Judgment under appeal[31] Hinton J did not accept that proceedings had not been commenced.6 On a plainand ordinary meaning, a proceeding is commenced when it is filed (as here).7 Nor inall the circumstances were the stipulated terms to be implied.[32] However, cl 3.2 did apply. The Liquidators had — by virtue of their payingtheir own personal funds into the practice account to file the statement of claim —agreed to fund the proceeding.8 It did not matter that the funding was not from anindependent litigation funder.9 All that mattered was that funding (partial or full) wasprovided by a party other than Commercial Factors.10 Blue Chip was accordingly inbreach of cl 3.2.2 by not procuring the Liquidators to pay Commercial Factorsthe Funding and the Fees before the reckless trading proceedings were commenced.11[33] The question then was whether the Liquidators were personally liable.The Judge began by noting that decisions made by liquidators which are reasonableand made in good faith are generally unlikely to be overturned by the courts.12Here, there was a clause in the Agreement to that effect. The Judge consideredrelevant case law and held that, to find the Liquidators personally liable, the Courtneeded to "be satisfied either that the liquidators acted dishonestly or that they acted5 Commercial Factors Ltd v Meltzer [2017] NZHC 30, [2017] NZCCLR 7.6 Commercial Factors Ltd, above n 2, at [37].7 At [37].8 At [41].9 At [44].10 At [43].11 At [50].12 At [64], citing Young & Associates Ltd v Ruscoe [2012] NZHC 1438, [2012] NZCCLR 23 at [8].in a way no reasonable liquidator would have acted, for the liquidators to personallybe liable for the breach of cl 3.2.2".13 The Judge was satisfied that was not the case.[34] In the circumstances as a whole, and whilst the Liquidators had not engaged inbest practice, they were still entitled to the protection of cl 6.1 and were therefore notpersonally liable for the breach of cl 3.2.2.14This appealAppellant's submissions[35] There are essentially three strands to Commercial Factors' arguments in thisappeal.[36] First, Commercial Factors agrees with Hinton J that there has been a breach ofcl 3.2.2 of the Agreement. The Liquidators funded the proceedings. Blue Chip,through the Liquidators as its agent, should have procured payment toCommercial Factors. That was Blue Chip's breach. As agents of Blue Chip,the Liquidators were not saved by cl 6.1. This is a new argument. Shortly before thehearing of the appeal, Commercial Factors applied to amended their pleaded groundsby including this agency argument. Although counsel for the Liquidators were not ina position to consent, the appeal as argued and responded to included the agencytheory. Counsel for the Liquidators did not identify any prejudice from that approach.We therefore grant the application, although, as will be seen, in our view the agencyargument is fundamentally flawed.[37] Secondly, Commercial Factors maintains in the alternative that cl 3.4 applies.It challenges Hinton J's finding to the contrary. It says that the word "commenced"ought to be read as "commenced with sufficient funds to pursue the proceedings todetermination or resolution". Proceedings were not "commenced" in that sense here.Without funding, the Liquidators did not have the means to take the proceedingsfurther. Accordingly, cl 3.4 applies and, by virtue of the agreed priority, Blue Chipought to have paid Commercial Factors once it recovered inter-company advances.13 At [77].14 At [87].[38] Thirdly, and if its new agency argument failed, Commercial Factors argued thatthe Liquidators were in breach of their good faith obligations and therefore personallyliable for the breaches of cls 3.2.2 and 3.4. That is, the Liquidators misapplied ormisappropriated funds which should have been paid to Commercial Factors.The Liquidators should have appreciated that they were obliged to procure Blue Chipto repay Commercial Factors (under cl 3.2.2) or alternatively recognisedCommercial Factors' priority (under cl 3.4). Commercial Factors says the Liquidators'lack of good faith was evidenced by, in particular, their failure to act in a transparentmanner — as between themselves and Commercial Factors — in respect of:(a) the use of personal funds by the Meltzer, Mason, Heath partners tocommence the proceedings;(b) their subsequent use of the proceeds of the recovery of theinter-company advances — without advice to Commercial Factors —to meet their and their legal advisers' invoices;(c) as regards the monies, some $112,500 the Meltzer, Mason, Heathpartners paid personally in March and November 2013, andFebruary 2014, to meet the then outstanding costs of their legaladvisers, for which there were no funds available in the liquidation; and(d) the "late disclosure of an advance of a further $150,000 by Mr Meltzerin cross-examination".[39] There was also evidence of the irregular treatment of advances made bythe Liquidators to Blue Chip. Mr Dale for Commercial Factors went so far as tosubmit that the Liquidators had misappropriated funds comprising the proceeds ofthe liquidation.[40] Finally, and more generally, it is established that a liquidator must generallyact impartially and must not allow a conflict of interest and duty.15 By preferring their15 Re Charterland Goldfields (1909) 26 TLR 132.own interests ahead of those of a legitimate creditor, the Liquidators were not actingin good faith.Respondents' submissions[41] The Liquidators agree with Hinton J that cl 3.4 does not apply. On a plain andordinary reading of the clause, proceedings were commenced. There is no room toimply the terms suggested by Commercial Factors.[42] However, the Liquidators maintain that Blue Chip (through the Liquidators)was never required to repay the Funding and the Fee because the obligation in cl 3.2was never triggered. Clause 3.2.2 envisaged that the Liquidators would enter into afunding agreement with an independent third-party litigation funder. The parties'subsequent conduct was consistent with this.[43] Furthermore, and in any event pursuant to cl 6.1, the Liquidators could only bepersonally liable if they failed to act in good faith. The Liquidators submit that theydid not fail to act in good faith. They rely on Nation J's decision in Heli Holdings Ltdv The Helicopter Line Ltd.16 As Hinton J found, the Liquidators' honest belief wasthat the obligation to pay the Funding and the Fee to Commercial Factors had notarisen.[44] The Liquidators say Commercial Factors' agency argument is misconceived.While it was Blue Chip's obligation to repay Commercial Factors underthe Agreement, any repayment had to be from the Liquidators as Blue Chip's agents.The parties contracted on the basis that the Liquidators would not assume personalliability for failing to do so, unless they did not act in good faith. Clause 6.1 would berendered redundant if Commercial Factors' interpretation was correct.Overview[45] We will address the issues raised in this appeal in the following way.16 Heli Holdings Ltd v The Helicopter Line Ltd [2016] NZHC 976.[46] We will first consider the challenges to Hinton J's findings as to breach. Thatis, whether she:(a) erred in finding that cl 3.4 did not apply, because proceedings had beencommenced; and(b) erred in finding cl 3.2 did apply because the Liquidators were "anotherparty" who had agreed to fund the proceedings.[47] We uphold the Judge's decision as regards cl 3.4, but reach a differentconclusion as regards cl 3.2.2. That is enough to dispose of the appeal.The Liquidators did not breach the Agreement. Given that both were argued beforeus, however, we go on to consider Commercial Factors' agency argument and whetherthe Liquidators would, in any event, be liable for failing to act in good faith. We rejectboth of these arguments.[48] We therefore dismiss Commercial Factors' appeal.[49] At the outset, we think it is helpful to record what we understand to be theprinciples of liability of liquidators to creditors for debts which arise in a liquidation.[50] First, the basic proposition is that parties who contract with a liquidator asagent of a company in liquidation will be unsecured creditors of the company ifthe company's contractual obligations are not performed. The 1933 decision ofthe Kings Bench in Stead Hazel & Co v Cooper is a good example of the operation ofthat principle.17 A liquidator, Mr Cooper, asked a supplier of a company that had beenplaced in liquidation to continue to supply. The supplier agreed. When Mr Cooperdeclined to accept delivery, the supplier sued him alleging personal liability.Referring to the letter Mr Cooper as liquidator had sent to the supplier requestingcontinued supply, with payment to be made after delivery, Lawrence J observed:18I see nothing in the letter of June 20, 1930, to suggest that the defendantintended to undertake a personal liability, and even if that letter and itsacceptance by the plaintiffs constituted a new contract it was, in my judgment,17 Stead Hazel & Co v Cooper [1933] 1 KB 840.18 At 842.a contract which purported to be a contract by the liquidator as agent forthe company.[51] Judgment was given in favour of the liquidator accordingly, with the supplierleft as an unsecured creditor of the company.[52] Secondly, a liquidator may agree that monies owing under a contract enteredinto by the liquidator as agent of the company in liquidation will be a liquidator'sliability. In those circumstances the liquidator is, in effect, agreeing to treat anyamount that becomes owing to the contracting party as an expense of the liquidation,and therefore claimable by the liquidator as a first priority payment pursuant tocl 1(1)(a) of sch 7 of the Companies Act 1993.19 That is as part of "the Fees andExpenses properly incurred by the liquidator in carrying out the duties and exercisingthe powers of the liquidator". If issues arise, the High Court will determine whetherthe particular fees and expenses have been "properly incurred". The liquidator is anofficer of the court20 and explicitly subject to the court's jurisdiction pursuant to s 284of the Companies Act.[53] Were the court, in its supervisory jurisdiction, to conclude that particularexpenses had not been properly incurred, and therefore — contrary to the contractmade by the liquidator — not an expense of the liquidation, then the court may orderthe liquidator to repay the expenses pursuant to s 284 of the Companies Act.[54] Thirdly, a liquidator could agree to be personally liable to a party with whomhe contracted, notwithstanding that he did so in his capacity as liquidator. In that way,the liquidator would commit personal assets to discharge liabilities that arise. Thepossibility of such liability only has to be expressed to demonstrate that it would bean unusual liquidator indeed who accepted such a liability.19 Clause 1(1)–(5) of sch 7 establishes a range of creditor preferences in five descending categories.The first category, found in cl 1(1), applies generally to fees, expenses and costs incurred byvarious parties during the course of a liquidation. Where a creditor funds successful proceedingsagainst a company in liquidation, cl 1(1)(e) gives that creditor a priority claim to amountsrecovered. There was no suggestion that provision had any relevance here, Commercial Factorsnot being a creditor in the liquidation of Blue Chip and there being no recoveries.20 ANZ National Bank Ltd v Sheahan [2012] NZHC 3037, [2013] 1 NZLR 674 at [122].[55] As we have already mentioned, we think the better interpretation is that theobligations to pay the Funding and the Fee recorded in cl 3.4 would, if they eventuated,give rise to debts payable in the liquidation. That is, they would be expenses of theliquidation claimable by and payable to the Liquidators, and by them toCommercial Factors. Having said that, we agree with Hinton J that whilst cl 3.4clearly indicates a sch 7, cl (1)(i)(a) priority claim, the same cannot be said for cl 3.2.2.[56] We turn now to the issues for us to decide.BreachClause 3.4[57] Like Hinton J, we think that phrase "if proceedings are not commenced" meanswhat it says. We adopt her following analysis:21[37] I do not agree with [Commercial Factors]'s interpretation of the word"commenced". Applying the ordinary sense of the word, a proceeding wascommenced in this case when it was filed, and furthermore, it was not justsimply filed. There were a number of other steps taken, including filing andservice of statements of defence, filing of an amended claim, and filing of arequest for particulars. I also find as a matter of fact that the liquidators didnot issue the proceeding just as a formality. I accept their evidence that theyhoped to continue on with it. There was no evidence to the contrary.[38] To read the word "commenced" in clause 3.4 as meaning"commenced and followed through to an end", or "commenced and takensome distance" as [Commercial Factors] contends, would be to read aconsiderable amount into that clause, which I do not consider is correct orappropriate. At what point would a proceeding be "commenced" on thatlogic? [58] We do not need to add anything further.Clause 3.2[59] The Judge then found that under cl 3.2 another party had agreed to fund theproceeding: the three partners of Meltzer, Mason, Heath. The partners were anotherparty.22 Just as the Judge had been unwilling to read the words of cl 3.4 "up", in the21 Commercial Factors Ltd, above n 2.22 At [43].way Commercial Factors argued, so was she unwilling to read those words "down" inthe way the Liquidators contended for.[60] Whilst we see the force of the Judge's reasoning, in our view, and for onestraightforward reason, we do not consider that to be the proper interpretation of theclause. Again, we can express our view succinctly. It is based on the structure ofcl 3.2 as a whole.[61] Remember, the Liquidators acted as agent of Blue Chip. Any reference inthe Agreement to "the company" incurring an obligation of necessity includes areference to the Liquidators as agent of the company, with the authority under sch 6of the Companies Act to conduct the business of the company. In that context, we notethat:(a) it is "the company and [explicitly] the Liquidators" who are to giveCommercial Factors the first option;(b) it is the company, and hence implicitly the Liquidators, who agree notto enter a Funding Agreement "with another party" on any lessfavourable terms without first reoffering the funding opportunity toCommercial Factors; and(c) it is the company, and hence implicitly the Liquidators, who contract toprocure the funder to pay "before the proceedings are filed or anyfunding for the proceedings is made available to the company orthe liquidators".[62] In our view, therefore, when cl 3.2 refers to "another party" it is referring to aparty other than the company or the Liquidators. We place particular reliance on theopening words of cl 3.2 in reaching that conclusion. That is, it is the Liquidators whowill endeavour to obtain funding for proceedings and it is the Liquidators who, unders 301 of the Companies Act, actually take the proceedings. It would, in thosecircumstances, be unusual to regard the Liquidators as "another party" for the purposesof cl 3.2.2.[63] We think that conclusion is also supported by what we see as the fundamentalcommercial proposition underlying the cl 3.2 arrangements. That is, it is anindependent litigation funder who, by committing to fund the proceedings, inexchange for whatever share of the proceeds is agreed, ultimately, stands to benefitfrom the opinion that was initially obtained. The Liquidators, when they funded thecommencement of the proceeding, were not and could not be in the equivalentposition.[64] We acknowledge that this does indeed leave "gap" in the Agreement.That "gap" can be seen as working unfairly as regards Commercial Factors: after all,it had paid the amounts due from it under the Agreement and, albeit after thecommencement of the proceedings and unexpectedly, Blue Chip had receivedrecoveries that, if used at the time, could have repaid the Funding and the Fees.[65] We note Hinton J's point that the Liquidators were not identical to the threeindividuals who provided personal funds; two partners (Mr Meltzer and Mr Heath)were Liquidators, but the third partner (Ms Mason), was not. But in all thecircumstances, and given the joint and several liability of partners for the debts of afirm, we would not place the reliance on that factor that the Judge did.[66] Accordingly, we are satisfied that the Liquidators did not breachthe Agreement. Given the way in which the appeal was brought, we go on to considerCommercial Factors' agency and bad faith arguments.Agency[67] For Commercial Factors, Mr Dale's argument was that if there was a breach ofcl 3.2 or, for that matter, cl 3.4, then that was a breach by Blue Chip for which — as amatter of necessity as we understood the argument — the Liquidators were liable and,as sued, personally liable. Given our understanding of the basic principles, Mr Daledid not identify any legal basis for that personal liability. On the contrary, hissubmission appeared to take no account of the basic proposition that an agent isgenerally not liable for the obligations of the principal,23 and the very obvious23 Montgomerie v United Kingdom Mutual Steamship Association Ltd [1891] 1 QB 370.significance of that principle in the case of a liquidator acting as agent of an insolventcompany.[68] Rather, it was Mr Dale's basic proposition that it was "the Liquidators asthe company's agent" who were obliged to fulfil the obligations incurred under cls 3.2and 3.4. That is:(a) Blue Chip, through its liquidators as agents, should have procuredpayment to Commercial Factors;(b) that was Blue Chip's breach; and(c) as agents of Blue Chip, the liquidators are not saved by cl 6.1.[69] We simply do not follow that argument. It would transfer liability from theprincipal to the agent. But the law attributes the agent's actions to the principal (hereBlue Chip).[70] As we have said, that is the fundamental basis upon which liquidators ofinsolvent companies contract. Here, any procurement of payment toCommercial Factors was necessarily going to be by the Liquidators as agents. It wasin that context that cl 6.1 (which limits the Liquidators' liability unless they fail to actin good faith) was agreed. Clause 6.1 would be rendered meaningless if that agencytheory prevailed.[71] We are, for all those reasons, simply unable to accept the agency argument.Good faith[72] It was Mr Meltzer's evidence that cl 6.1 of the Agreement reflected standardliquidation practice. That is, liquidators contract on the basis that they are notpersonally liable unless, in the circumstances which lead to a creditor not receivingpayment, the liquidators act other than in good faith. In our view, the reference inthe Agreement to acting otherwise than in good faith is properly understood as areference to circumstances which, as a matter of law, may give rise to personal liabilityon the part of a liquidator. That is, a person who contracts with liquidators on suchterms may by enforcing the contract obtain relief which, under the Companies Act,would require the exercise of the court's supervisory jurisdiction. As regards theexercise of the court's supervisory jurisdiction, it is well established that the courtswill not interfere with matters of day-to-day administration, or hold a liquidatoraccountable for an error of judgement. Serious or obvious lapses in judgement on thepart of a liquidator must be shown before the courts will interfere.24[73] In arguing that in using the unexpected recovery of inter-company advances inthe way they did the Liquidators had failed to act in good faith, Commercial Factorsrelied in part on a lack of transparency between the Liquidators andCommercial Factors over time as to how the Liquidators, in fact, funded theproceedings. We have outlined the specific points of evidence Commercial Factorsrelies on at [38]. We accept, as the Judge did,25 that in recording and communicatingthose arrangements, the Liquidators did not act in accordance with best practice. Forthe appellants, Mr Dale was particularly critical of the inconsistencies in variousaccounts given by the Liquidators as to how their proceedings against the directorswere funded. That is Mr Meltzer's explanation in his affidavit for summary judgmentthat Blue Chip received "some funds" to issue proceedings; the narrative disclosed bythe Liquidators' report and their cashbook (including the personal advances); and,finally, and only at this point a complete picture, Mr Meltzer's evidence at trial as tothe amount he personally had paid at the end of the liquidation to settle the debts ofthe lawyers involved. The Liquidators might also be said to have failed to keepCommercial Factors informed, as they had contracted to do under the Agreement.[74] However, and essentially for the reasons the Judge found, we are satisfied thatthe Liquidators did not act otherwise than in good faith. That is:(a) First, the Liquidators had not filed the proceedings in order to cutCommercial Factors out of cl 3.4 — rather, the Liquidators had filedproceedings in order to resolve the claim and generate funds for24 Paul Heath and Michael Whale (eds) Heath and Whale on Insolvency Law in New Zealand(2nd ed, LexisNexis, Wellington, 2014) at [18.8].25 Commercial Factors Ltd, above n 2, at [84].the creditors (including Commercial Factors).26 At the timeproceedings were issued, it was not known that the $307,961.19 wouldbe forthcoming by way of the repayment of inter-company advances.27(b) Second, the Liquidators had acted honestly and reasonably in thinkingthat by personally funding the proceeding, they would not fall afoul ofcl 3.2. Mr Haydon did not suggest that cl 3.2.2 had been triggered andneither did Commercial Factors bring its claim in that way.28While the Liquidators ought to have reviewed the Agreement prior toissuing proceedings, that did not amount to a failure to act in goodfaith.29(c) Third, it was not a breach of good faith for the Liquidators to disbursethe funds received from the inter-company advances (including tothemselves) and not pay Commercial Factors. Once proceedings wereissued, Commercial Factors' recovery fell under cl 3.2 which did notgive Commercial Factors priority ranking in all circumstances.30[75] We make one final observation. From the outset, the Liquidators advisedcreditors that it was unlikely there would ever be a distribution. As Mr Keene advised,proceedings against directors and auditors would be complex, lengthy and expensive.Commercial Factors undertook the risk involved in funding the opinion in thosecircumstances. It could not be assured that, in the absence of litigation funding, itwould receive payment under the Agreement. At the end of the day, the Liquidatorswere "out of pocket" as were their solicitors. Any perceived unfairness toCommercial Factors caused by the inadequacies of the Agreement is to be seen in thatcontext. Moreover, and if the Liquidators had approached Commercial Factors withthe proposal that in the circumstances they would fund the issue of the proceedings asan interim step it seems most unlikely that they would have done so on the basis theywere, at that time, to pay Commercial Factors the Funding and the Fees. Whether or26 At [79].27 At [80].28 During the hearing of the appeal, counsel confirmed that the focus of the trial in the High Courthad been the pleaded breach of cl 3.4, and not cl 3.2.29 Commercial Factors Ltd, above n 2, at [82].30 At [85].not, in those circumstances, some amendment to the Agreement would have beenmade is a separate question.Result[76] The appeal is dismissed.[77] The appellant must pay the respondents costs for a standard appeal on a band Abasis and usual disbursements.Solicitors:Neilsons Lawyers, Auckland for AppellantMcElroys, Auckland for Respondents