THE COMMISSIONER OF INLAND REVENUE V KECAMAHO HAULAGE LIMITED NOW KNOWN AS LONDON TRADERS LIMITED HC PMN CIV 2008-454-58

THE COMMISSIONER OF INLAND REVENUE V KECAMAHO HAULAGE LIMITED NOW KNOWN AS LONDON TRADERS LIMITED HC PMN CIV 2008-454-58 2 April 2008IN THE HIGH COURT OF NEW ZEALAND PALMERSTON NORTH REGISTRY CIV 2008-454-58IN THE MATTER OF the Companies Act 1993 BETWEEN THE COMMISSIONER OF INLAND REVENUE Plaintiff AND KECAMAHO HAULAGE LIMITED NOW KNOWN AS LONDON TRADERS LIMITED Defendant Hearing: 1 April 2008 Appearances: C.A. Sweet - Plaintiff G. Paine - Defendant Judgment: 2 April 2008REASONS FOR DECISION OF ASSOCIATE JUDGE D.I. GENDALLSolicitors: Inland Revenue Department, PO Box 33-150, Auckland Hucker & Associates, PO Box 3843, Auckland[1] On 1 April 2008 I made the following orders on the plaintiff's application to place the defendant company into liquidation: a) An order was made placing the defendant company into liquidation. b) Kenneth Peter Brown and Thomas Lee Rodewald were appointed liquidators. c) Costs were awarded to the plaintiff on a Category 2B basis together with disbursements as fixed by the Registrar. d) The order was timed at 11.15 am on 1 April 2008. [2] In that 1 April 2008 decision I indicated that my detailed reasons for the decision would follow. I now set out those reasons.Background[3] On 10 December 2007 the plaintiff served the defendant company with a statutory demand requiring payment of $133,016.20 for outstanding goods and services tax, income tax, PAYE deductions and student loan deductions. [4] The defendant company did not respond to the statutory demand and on 31 January 2008 the plaintiff filed a statement of claim in this Court to instigate the present liquidation proceeding. The notice of proceeding, statement of claim and verifying affidavit were served on the defendant company on 20 February 2008. [5] Advertising of the liquidation application occurred in both the Manawatu Standard and in the New Zealand Gazette on 13 March 2008. [6] The notice of proceeding provided for a hearing of this liquidation application at 10.00 am on 31 March 2008.[7] In the meantime, after service of these proceedings upon the defendant company, the shareholders of the company purported to pass a resolution placing the company into liquidation. That resolution stated that it was passed at 10.30 am on 18 March 2008 and purported to appoint Roderick Thomas McKenzie ("Mr. McKenzie") a chartered accountant of Palmerston North as liquidator of the company. [8] In the meantime it seems that officers of the defendant company registered documents at the Companies Office to change its name from Kecamaho Haulage Limited to London Traders Limited. Before me counsel for the plaintiff also indicated that at roughly the same time, shareholders of the defendant incorporated a new company under the name Kecamaho Haulage 2008 (Limited). [9] Initially when this matter was called on 31 March 2008 Mr. Paine who appeared as counsel both for the defendant company and for Mr. McKenzie contended that this matter should be adjourned and the plaintiff should be required to file a formal application to have the shareholders' resolution appointment of Mr. McKenzie as liquidator set aside. [10] At that time I adjourned this matter to a call at 10.45 am on 1 April 2008 for further argument on the issue. [11] When the matter was recalled on 1 April 2008, Mr. Paine indicated that Mr. McKenzie was happy to resign and withdraw as liquidator of the defendant company and that orders on the plaintiff's application could now be made effectively by consent. On this basis the orders outlined at para. [1] of this judgment were made. I now set out my reasons for doing so.My Decision[12] The issue now before the Court relates to a proper interpretation of S. 241AA(2) Companies Act 1993. This sub-section restricts the appointment of a liquidator by shareholders under s.241(2)(a) Companies Act 1993 to a 10 working day period after service of an application to the Court under s. 241(2)(c).[13] S. 241 Companies Act 1993 provides:"241 Commencement of Liquidation(1) A company may be put into liquidation by the appointment as liquidator of a named person or of an Official Assignee for a named district. [(2) A liquidator may be appointed by— (a) special resolution of those shareholders entitled to vote and voting on the question; or (b) the board of the company on the occurrence of an event specified in the constitution; or (c) the Court, on the application of— (i) the company; or (ii) a director; or (iii a shareholder or other entitled person; or (iv) a creditor (including any contingent or prospective creditor); or (v) if the company is in administration, the administrator; or (vi) the Registrar; or (d) a resolution of the creditors passed at the watershed meeting held under section 239AT.] (3) An Official Assignee may be appointed liquidator of a company only — (a) If the special resolution passed in accordance with paragraph (a) of subsection (2) of this section is passed by reason of the Official Assignee exercising voting rights attaching to shares in the company of— (i) A person who has been adjudged bankrupt; or (ii) Another company of which the Official Assignee is liquidator; or (b) By the Court. (4) The Court may appoint a liquidator if it is satisfied that— (a) The company is unable to pay its debts; or(b) The company or the board has persistently or seriously failed to comply with this Act; or (c) The company does not comply with section 10 of this Act; or (d) It is just and equitable that the company be put into liquidation. [(5) The liquidation of a company commences on the date on which, and at the time at which, the liquidator is appointed.][14] S. 241AA provides:"241AA - Restriction on appointment of liquidator by shareholders or board after application filed for Court appointment(1) This section applies if an application has been filed for the appointment of a liquidator of a company by the Court under section 241(2)(c). (2) A liquidator of the company may only be appointed under section 241(2)(a) or (b) if the liquidator is appointed within 10 working days after service on the company of the application. (3) If a liquidator is appointed under section 241(2)(a) or (b), the creditor who filed the application referred to in subsection (1) may apply to the Court under section 283(4) for the review of his or her appointment as if the words "successor to a liquidator" in section 283(4) read "liquidator". (4) Subsection (2) does not apply once the application has been finally disposed of."[15] In the present case, it is clear that the purported appointment of Mr. McKenzie as liquidator by special resolution on 18 March 2008 fell outside the 10 working day period provided for in s. 241AA(2). The creditor's application to the Court was served on the defendant on 20 February 2008. It is the plaintiff's submission that this purported appointment is therefore invalid from the outset and that no application is required by the plaintiff creditor to set it aside. [16] Before me Mr. Paine in his submissions for both the defendant and Mr. McKenzie took a contrary view. He suggested that in cases such as this, a formalapplication was required by a creditor plaintiff in terms of s. 241AA(3) Companies Act 1993 before the shareholders appointment of a liquidator could be set aside. [17] Mr. Paine went on to indicate that a decision of this Court on that issue was of general importance although in the present case he acknowledged that the orders by the Court for liquidation of the defendant set out at paragraph [1] of this judgment could be made effectively by consent. To that extent Mr. Paine effectively proceeded here on the basis that if a formal application was required by the present plaintiff in terms of s. 241AA(3) Companies Act 1993 then it could be regarded as having been made on an oral basis. Notwithstanding that conclusion, it is this question of whether a formal application is indeed required by a creditor plaintiff in terms of s. 241AA(3) Companies Act 1993 before a shareholder's resolution appointing a liquidator can be set aside to which I now turn. [18] S. 241AA Companies Act 1993 was enacted in 2006 as part of the Companies Amendment Act 2006. It came into force on 1 November 2007. [19] Before me counsel indicated that only one decision on s. 241AA has recently been given by this Court. This is Commissioner of Inland Revenue v Castor Bay Villas Limited High Court, Auckland, 22 November 2007, CIV 2007-404-3715, Associate Judge Sargisson. [20] From my enquiries it appears that a further decision on s. 241AA has recently been given in this Court. This is Foster & Ors v Pakuranga Earthmovers Limited (in liquidation) High Court, Auckland, 18 February 2008, CIV 2007-404-5622, Associate Judge Sargisson. [21] Both of these decisions, however, related to the issue whether the amending legislation introducing s. 241AA had retrospective effect. In each of these cases, if the 10 working day time limit in s. 241AA was to apply, the time available to the shareholders to appoint a liquidator would have expired in the case of the Castor Bay Villas case some time in July 2007 and in the Pakuranga Earthmovers case on 27 September 2007. Both these dates predated the 1 November 2007 commencement date fixed for s. 241AA.[22] In each case Associate Judge Sargisson held that the shareholders' resolutions were valid because s. 241AA did not have retrospective effect. [23] Notwithstanding this, in Castor Bay Villas Limited at paragraph 15(b) Associate Judge Sargisson in considering S.241AA, commented:"(b) S. 241AA indicates that Parliament intended that the right of appointment should continue but that it should be restricted by the imposition of a time limit in cases where the Court has been asked to appoint a liquidator and the company has had notice of the application. This is the effect of s.s. 241AA(1) and (2)."[24] In discussing the purpose of s. 241AA, Brookers Insolvency Law & PracticeVolume 2 at para. CA241AA.01 states in part:"S. 241AA addresses the concern that a company may seek to pre-empt the Court's appointment by appointing a liquidator partisan to the company. While the section preserves the right of the company's shareholders and its board to appoint a liquidator following the filing of an application by a creditor for the company's winding up, it substantially reduces the potential for "game playing" by shareholders or the company's board. It will be no longer possible to defer the appointment of a liquidator by the shareholders or by the board until just before the Court is due to consider the winding up application by one or more of the company's creditors. In addition, even where the shareholders or the company board act to appoint a liquidator within the 10 working day period following the filing in Court of the winding up application, it is now open to a creditor to apply to the Court to have the appointment of the liquidator reviewed."And Brookers in its synopsis of the section states:"The shareholders of a company and the board of a company cease to have power to appoint a liquidator if an application to the Court to appoint a liquidator under s. 241(2)(c) has been made and 10 working days or morehave passed since notice of that application has been served on the company."[25] The effect of s. 241AA has also been addressed in an article by Scott Barker entitled "Insolvency Law Reform: Everything Else You Wanted To Ask" in [2008] CSLB12. In that article the learned author states:"The perception among many creditors whose applications for liquidation have been trumped by last minute special resolutions has been, rightly or wrongly, that shareholders nominees for a liquidator will look after the directors rather than the creditors. Directors and creditors associated with insolvent companies have thus been able to avoid investigation and potential litigation through the exercise of that shareholders' right. The new restrictions brought in by s. 241AA apply if an application for the appointment of liquidators by the court has already been lodged. The first restriction is that shareholders may only exercise their right to place the company into liquidation by special resolution within ten days after service on the company of the court application. The second is that, if the shareholders do appoint a liquidator within that ten day window, then the creditor who filed the application has standing to apply to the court to review the appointment by the shareholders. Were shareholders either deliberately or accidentally (not having been informed of the liquidation application) to pass a resolution to place their company into liquidation after the ten-day window had closed, then the question arises whether such resolution would be valid. In the only judgment to consider s. 241AA, CIR v Castor Bay Villas Ltd (High Court, Auckland CIV 2007-404-3715, 22 November 2007, Associate Judge Sargisson), the plaintiff sought to argue that the shareholders' resolution was invalid, because it had been passed only two days before the hearing, and thus, well past the ten-day window. The argument failed because the legislation was held not to have retrospective effect.On the other hand, Rodewald v Aqua-Agriculture Forms Ltd [2002] 3 NZLR 501(CA) concerned s. 241A(1)(a), which provides that a special resolution appointing a liquidator "must" record the time of appointment. No consequence for non-compliance is provided for in that section either. The Court declined to invalidate an appointment which failed to comply with this provision, reasoning that the "uncertainty and possibly dire consequences visited upon liquidators and creditors if the appointment were held invalid would appear to be out of all proportion to any mischief which may come from a failure to include the time in the record", and that the effect of non- compliance was not expressly provided for. Sections 241A and 241AA distinguished Holding an appointment invalid for falling outside the ten-day window in s 241AA is unlikely to occasion the same uncertainty and possibly dire consequences as referred to by the court in Rodewald. Unlike the omission of recording the time of appointment, a shareholders' appointment is going to be noticed immediately and will be challenged before the liquidation process goes very far. Also, the mischief which is addressed by s 241AA(2) is arguably greater. The mischief which has been specifically legislated against is the concern that a company may seek to pre-empt the Court's appointment by appointing a liquidator partisan to the company (see Brooker's Insolvency Law and Practice, cited in Castor Bay Villas). Refusing to hold invalid an appointment contrary to s 241AA(2) undermines the purpose of the provision. Whether the right to apply for review of the appointment (which places the burden on the creditor) adequately addresses the mischief legislated against is questionable. Moreover, it seems clear that the purpose of s 241AA(3) is to provide creditors with a right to review appointments made within the ten day window (Brooker's Insolvency Law and Practice, cited in Castor Bay Villas). Effect of no express consequences uncertain Section 241AA(2) provides that the liquidator "may only be appointed" within 10 days of service on the company of the application, but other than that does not specify any consequences for non-compliance. However, thatthe appointment be made within ten days appears, from the words "may only", to be an essential and indispensable condition of the appointment, and thus any express provision stating that an appointment made otherwise is of no effect would seem superfluous. On the other hand, s 241A requires that time "must" be recorded, and the Court in Rodewald held that this was not enough. The Court in that case did feel that, in contrast, the words used in s 282 ("of no effect") were sufficient in themselves and did not need to be accompanied by express consequences. Whether the words "may only" are sufficient in themselves is ultimately uncertain; simple interpretation would suggest that they are, but Rodewald suggests otherwise. My conclusion is that a resolution passed outside the ten-day window should be treated as invalid and the reasoning in Rodewald may be distinguished as explained above." [emphasis added][26] I respectfully agree with the conclusion reached by Scott Barker in his article as noted in the preceding paragraph. [27] I differ however from the learned author in his suggestion that the decision in Rodewald might have a direct application here when considering the application of s.241AA Companies Act 1993. It need hardly be mentioned that the decision inRodewald predated s. 241AA. That decision also dealt with a simple omission on the part of the shareholders to record the time at which their resolution was passed in terms of s. 241A(1)(a) Companies Act 1993 rather than the effect of the resolution which was passed. In the present case, however, in my view s. 241AA(2) is quite specific when it provides that a liquidator of the company may only be appointed by shareholders or board resolution if the liquidator is appointed within 10 working days after service on the company of a Court application. It must follow, in my view, that any shareholders' resolution purporting to be passed in contravention of s. 241AA(2) is of no effect. [28] As I see the position this conclusion is supported by the broad comments made by Associate Judge Sargisson in Castor Bay Villas Limited which I have notedat paragraph [23] above and the comments of Scott Barker in his article referred to at paragraph [25] above and particularly those comments to which I have given emphasis. [29] And, in my view, this conclusion accords with synopsis of the section and the general purpose of s.241AA which Brookers Insolvency Law & Practice records as I have noted at paragraph [24] above. [30] In a further article by Scott Barker in 2007 – this one written for the New Zealand Law Society Business Insolvency Intensive Seminar dated April 2007 - at page 83 of the Seminar Booklet, he deals with the position of a liquidator who has proceeded in reliance upon a shareholders' resolution which appears later to have been made outside the 10 day window. On this he states:"A liquidator appointed by shareholders outside the 10 day window should enjoy the protection of Regulation 36 of the Companies Act 1993 Liquidation Regulations 1994. This provides that no defect or irregularity in the appointment of a liquidator shall invalidate any act done by him or her in good faith (re: Nikau Enterprises Limited: re: Rodewald [2001] 9 NZCLC 262,751). Such a person will also be entitled to claim his or her remuneration under Regulation 35 of the Companies Act 1993 Liquidation Regulations 1994, if removed by the Court on a review application."[31] Although Mr. Barker, in his (presumably later) article at [2008] CSLB12, referred to at para. [25] above, appeared to take a different view that a liquidator"appointed" by shareholders outside the 10 day window may not enjoy the protection of Regulation 36 because such a provision can only operate to protect a liquidator if the appointment of the liquidator was not a nullity (Best v Watson[1979] 2NZLR 492 (CA)), in my view, although I need not determine this issue here, the better view is that expressed initially by Mr. Barker in his April 2007 comment noted at para. [30] above. That, however, must be a matter for another day.Conclusion[32] From the matters I have outlined above it will be apparent that, in my judgment, the effect of s.241AA(2) Companies Act 1993 is such that any purported appointment of a liquidator by shareholders' resolution which is made outside 10 working days after service on the company of a Court application for liquidation is invalid and of no effect. The shareholders and directors cease to have power to appoint a liquidator under s. 241(2)(a) or (b) after the 10 day period has elapsed. It must follow that in a case such as the present it is not necessary in my view for a plaintiff creditor to apply to the Court under s.241AA(3) Companies Act 1993 for the review of this "appointment" before that plaintiff's liquidation application can be considered by the Court. [33] A corollory of this finding, as I see the position, is that the provisions of s. 241AA(3) Companies Act 1993 apply only to applications by a creditor to review those appointments of a liquidator by shareholders or directors' resolution which are made within the ten working day period from the time a Court application is served. [34] The orders made earlier and set out at para. [1] of this judgment are confirmed.'Associate Judge D.I. Gendall'