STEWART v FATUPAITO [2022] NZCA 21

STEWART v FATUPAITO [2022] NZCA 21 [18 February 2022]IN THE COURT OF APPEAL OF NEW ZEALANDI TE KŌTI PĪRA O AOTEAROACA483/2021[2022] NZCA 21BETWEEN EVAN KERRY STEWARTAppellantAND VIVIAN JUDITH FATUPAITO ANDELIZABETH HELEN KEENERespondentsHearing: 10 November 2021Court: Collins, Duffy and Dunningham JJCounsel: D K Quirk and K W Clay for AppellantM J Tingey and B Gambrill for RespondentsJudgment: 18 February 2022 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 Duffy J)[1] Eversons International Ltd (Eversons) is a company in liquidation. Therespondents are its liquidators. The appellant, Mr Stewart, is the company's soledirector and shareholder.[2] The respondents have obtained a judgment from Associate Judge Paulsengranting orders under s 266(2)(a) and (b) of the Companies Act 1993 (Act) forMr Stewart to:1(a) attend the High Court and be examined on oath or affirmation before aJudge or Associate Judge of that Court by counsel for the liquidators onany matter relating to the business, accounts or affairs of Eversons; and(b) produce to the liquidators any books, records or documents in hispossession or under his control that relate to the company's business,accounts or affairs.[3] Mr Stewart appeals against this judgment on the grounds there arecircumstances relevant to him and the company which place him outside the scope ofthe power to make such orders. In the alternative, he submits the Associate Judge hasfailed to lawfully exercise those powers. The relevant facts are helpfully set out in thejudgment of Associate Judge Paulsen.Background[4] Eversons was a profitable company importing and selling synthetic legal highproducts until these were banned on 7 May 2014, at which time it ceased trading.[5] In 2015, the Commissioner of Inland Revenue (the Commissioner) undertookan income tax audit for unpaid taxes and demanded payment of the assessed arrears,which were in excess of $3,700,000. Eversons could not pay the arrears; Mr Stewartplaced the company in liquidation and appointed Andrew Oorschot as liquidator.2 TheCommissioner appears to be Eversons' only creditor.[6] Eversons' accounts include reference to "Overseas Investments totalling$6,592k". Nothing else is said about those assets. Mr Oorschot subsequently1 Fatupaito v Stewart [2021] NZHC 1679 at [97].2 The company was placed into liquidation by special resolution pursuant to s 241(2)(a) of theCompanies Act 1993.identified 19 payments by cheque or transfer totalling $3,154,918 (the funds) fromEversons' bank account to Bionutrient Customs Ltd (Bionutrient).[7] Mr Stewart is also a director of Bionutrient. Mr Oorschot wrote to Mr Stewartas director of Bionutrient demanding repayment of the funds, which was notforthcoming. Instead Mr Stewart advised that Bionutrient was used as a vehicle tofacilitate transfer of funds to Australia, and he could not pay the demand. He did notexplain why the funds were transferred.[8] Mr Oorschot subsequently resigned as liquidator and was replaced by therespondents on 30 January 2020. They say Mr Oorschot has provided them withlimited material. They issued Mr Stewart with a notice under s 261 of the Act, whichrequired him to meet and provide them with documents and information aboutEversons' assets. There was no response from Mr Stewart.[9] The respondents' solicitors wrote to Bionutrient demanding repayment of$2,999,418. Mr Stewart, on behalf of Bionutrient, disputed the demand on the basisBionutrient was only the conduit through which the funds were transferred toAustralia. The respondents' solicitors then issued Bionutrient with a notice unders 261 of the Act for information, including documents showing the transfer fromBionutrient to the ultimate recipient as well as details of what the funds were used for.In response, Mr Stewart asserted that the respondents had all relevant documents.[10] The respondents then issued a statutory demand to Bionutrient for $2,999,418.There was no response. Liquidation proceedings were commenced againstBionutrient. The company took no steps within time to defend itself. Later it wasgiven leave to file a statement of defence out of time. The respondents did notcontinue with this litigation.[11] Next, the respondents issued Mr Stewart with a demand for payment of$2,074,876 relating to his Eversons' shareholders current account (the current accountdebt). This was followed by Eversons and the respondents issuing a claim againstMr Stewart for recovery of this alleged debt and a claim under s 310 of the Act formutual credit and set-off. The company and the respondents sought summaryjudgment against Mr Stewart in relation to the current account debt. Mr Stewartopposed summary judgment; he argued that the disputed sum of $2,000,000 wastransferred from Eversons' bank account to Mr Stewart's solicitor in Australia forinvesting on behalf of Eversons.[12] Summary judgment was declined. Associate Judge Paulsen was not satisfiedMr Stewart had no arguable defence.3 However, relevantly for this appeal theAssociate Judge also found Mr Stewart had not co-operated with the respondents, andthey had not been able to identify any overseas investments belonging to Eversons norhad they seen any documents to prove the existence of these investments.4 Thisproceeding remains live.[13] The respondents issued Mr Stewart with a further s 261 notice which requiredhim to provide them with all Eversons' books and records in his possession, includingdetails of the company's assets — in particular, the overseas investments.Mr Stewart's response was: (a) he no longer had this information; (b) everything hehad was now with Mr Oorschot; and (c) the overseas payments were made to his fatherin Australia and Eversons was "no longer the beneficial owner of these amounts."[14] On 21 January 2021, Mr Stewart and his solicitor attended the respondents'offices for examination, but Mr Stewart failed to provide the respondents with "anymeaningful information they could use to identify the overseas investments".5 Theexamples given by the Associate Judge include that Mr Stewart: (a) denied knowledgeor understanding of Eversons' accounts; (b) denied knowing who within Eversonsmanaged its investments; (c) denied knowing what various large sums paid fromEversons' bank accounts were used for; and (d) despite denying knowledge of theoverseas investments, said they had "flopped". The Associate Judge describes afurther example where Mr Stewart said that he and his father built residential units inAustralia as an investment, but he could not say in whose name the land titles wereregistered or how much was invested, give a street address for these units, or say whenthey were sold. Nonetheless, he could say they were sold at a loss. Further, during3 Eversons International Ltd (in liq) v Stewart [2020] NZHC 3188.4 At [40].5 Fatupaito v Stewart, above n 1, at [34].this examination Mr Stewart referred to an Australian solicitor who had receivedEversons' funds for investment but he could not remember her name or other detailsabout her. When this solicitor was identified and approached by the respondents, sheadvised them she was unaware of and did not act for Eversons and had no authority toprovide information to the respondents.[15] Mr Stewart offered to find further information. Accordingly, the respondentsadjourned the examination on the basis it would be resumed subsequently if noinformation was provided. The respondents also reserved their position regardingresort to an examination before the Court under s 266.[16] The s 261 examination was set to resume on 24 March 2021. Mr Stewart'ssolicitors wrote to the respondents complaining about how the examination processhad been conducted. He did not appear for examination at the resumption of thehearing. On 29 March 2021, the respondents wrote to his solicitors advising that theyintended to apply under s 266 for him to be examined before the Court and thecontested application then followed.Relevant law[17] Section 266 relevantly provides:266 Powers of court(1) The court may, on the application of the liquidator, order a person whohas failed to comply with a requirement of the liquidator under section261 to comply with that requirement.(2) The court may, on the application of the liquidator, order a person towhom section 261 applies to—(a) attend before the court and be examined on oath or affirmationby the court or the liquidator or a barrister or solicitor actingon behalf of the liquidator on any matter relating to thebusiness, accounts, or affairs of the company:(b) produce any books, records, or documents relating to thebusiness, accounts, or affairs of the company in that person'spossession or under that person's control.[18] As a director and shareholder of Eversons, Mr Stewart is someone to whoms 261(2) applies, and therefore he falls within the scope of s 266.Discussion[19] The scheduled meeting with the respondents on 21 January 2021 wasadjourned to enable Mr Stewart to supply the respondents with further information.The failure to attend the rescheduled meeting on 24 January 2021 is evidence of afailure to comply with a request of a liquidator made under s 261 of the Act. In suchcircumstances and given the inadequacy of the available company records, it isunderstandable that the respondents have now resorted to seeking an order by theCourt under s 266. Further, Mr Stewart's earlier conduct, which appearsuncooperative to us, warrants resort to the s 266 power.[20] However, Mr Stewart argues that the respondents' earlier engagement of legalprocesses against him means there is now no jurisdiction to makes orders under s 266.Alternatively, if there is still jurisdiction then those earlier processes tell against thediscretionary exercise of this jurisdiction. For the reasons given below, we reject thosearguments.Jurisdiction[21] There is no dispute that in principle Mr Stewart is a person against whom anorder under s 266 may be made. The respondents have already commenced legalproceedings that involve him: (a) the proceeding to trace and recover Eversons'overseas investment, which was brought against Bionutrient and has now beendiscontinued; and (b) the proceeding to recover the alleged current account debt heowes to Eversons, in which the respondents were unsuccessful in obtaining summaryjudgment against him. Mr Stewart argues that, having elected to pursue those legalprocesses, the respondents can no longer bring an application against him under s 266.[22] There is some support in the law of England and Wales for the notion that oncealternative legal processes are commenced against a potential examinee, use of thatjurisdiction's equivalent to the s 266 examination power is unavailable.6 However,this is done by refusal to exercise the statutory discretion to order examination rather6 See Finnigan v Ellis [2017] NZCA 488, [2018] 2 NZLR 123 at [32]–[33].than by confinement of the jurisdiction to order examination. Therefore, this case lawis not helpful to Mr Stewart's argument based on lack of jurisdiction.[23] There are similarities between the relevant legislation of England and Walesand s 266 of the Act. Section 266 is based on earlier domestic legislation, which inturn was based on English legislation. These similarities extend to the equivalentAustralian legislation as well. Yet each jurisdiction takes a somewhat differentapproach to the application of its legislation. This is discussed in some detail inFinnigan v Ellis.7 Put shortly, in Australia and in England and Wales the legislativeequivalents of s 266 are regarded by the courts as having a broad and untrammelledjurisdiction with control exercised through the powers' discretion. Comparatively, inNew Zealand the use of s 266 requires a two-step process that looks first at jurisdictionand then at the exercise of the discretion.8[24] Another difference is that in England and Wales, the courts now accept thereis jurisdiction to make the equivalent orders to s 266 even though other proceedingshave already been commenced against a proposed examinee, but generally in thosecircumstances the courts do not order examination.9 On the other hand, in Australiathe courts accept both jurisdiction to make examination orders in such circumstancesand they rarely hesitate to exercise this power.10[25] In the present case, the Associate Judge correctly commenced his decision bylooking first at jurisdiction. He was right to find there was jurisdiction to make ordersunder s 266. The orders sought directly fall within the language of s 266: they relatedirectly to the affairs of the company, and they are sought against someone to whomthat section clearly applies. Here, the overseas investments and the alleged currentaccount debt are the two most valuable assets of the company. The respondents wantto find out what has happened to those assets and whether they can be recovered. Ifeither can be recovered, that will enable the respondents to pay the tax owed to theInland Revenue Department, otherwise that debt will not be paid.7 At [19]–[36].8 At [47].9 At [33].10 At [34].[26] There is nothing in the language of s 266 that suggests Parliament intended itshould be read down and restricted in scope by removing its jurisdiction on occasionswhen a liquidator had earlier embarked on alternative legal processes against theproposed examinee. Nor is there any policy reason for doing so. We accept the wideinquisitorial nature of the s 266 powers are not to be used oppressively, vexatiously orunfairly, and that liquidators should not use them to obtain an unfair or improperadvantage in other litigation they may bring against an examinee.11 However, whenthe subject matter falls squarely within the language of s 266, as is the case here, theabove concerns are properly met by the exercise of the discretion. In this regard, thepresent case is quite different from Finnigan v Ellis, because in that case a properreading of s 266 did not allow the statutory language to be expanded beyond its naturalmeaning.12Exercise of discretion[27] The next question is whether the Associate Judge was wrong to exercise thes 266 jurisdiction in the circumstances of this case. We see no error in his approachand agree with the decision he reached.[28] The circumstances outlined in the judgment show Mr Stewart has notcooperated with the respondents. Further, given he was the sole director of Eversonsit is reasonable to expect he would know about what has happened to the company'sassets and how they might be recovered. Eversons could only act through its soledirector. Accordingly, the lack of knowledge Mr Stewart professes to have about thepresent whereabouts of the overseas investments is not plausible. Similarly, he shouldbe able to explain the current account debt he is alleged to owe. If as he contendsthose funds were used to acquire overseas investments for the company, he should beable to identify the investments and explain what has happened to them. It is onlybecause the company's records in relation to the overseas investments are so sparsethat the respondents need to make these enquires of him.11 At [35].12 At [48].[29] We see nothing oppressive in the fact there has been earlier litigation broughtby the respondents. The first proceeding, now discontinued, was brought againstBionutrient. Mr Stewart was involved only because he is also a director of Bionutrient.Absent that connection, he would not have been involved in this litigation. Hisinvolvement through his directorship of a separate company cannot be used to supportan argument that it would now be oppressive to make orders against him under s 266.[30] As to the second proceeding, the failure to obtain summary judgment is relatedto the recoverability of the alleged current account debt. The arguable defenceMr Stewart put forward was that the funds were used for investment on behalf ofEversons. That being the case, we consider it is only reasonable Mr Stewart now beobliged to inform the respondents about how they might locate this investment. Thereis nothing oppressive in this. The explanations Mr Stewart has offered the respondentsso far require elaboration. As Eversons' sole director he should know where fundsfrom the company's bank account have gone. His reluctance to respond adequately tothe respondents' requests under s 261 warrant his examination under s 266.[31] Further, we consider that, unlike in Finnigan v Ellis, this is a case where anapproach in line with that followed by Australian courts is appropriate. Weacknowledge that where possible the insolvency legislation of this country should beread in a way that is consistent with Australian law, given the close commercial tiesbetween the two countries.[32] In short, we consider the Associate Judge paid proper regard to all relevantmatters and he was plainly right to exercise the discretion in favour of making ordersunder s 266.Result[33] The appeal is dismissed.[34] The appellant must pay the respondents costs for a standard appeal on a bandA basis and usual disbursements.Solicitors:Layburn Hodgins Ltd, Christchurch for AppellantMartelli McKegg, Auckland for Respondents