BOULT v CAIN [2023] NZCA 542

BOULT v CAIN [2023] NZCA 542 [2 November 2023]IN THE COURT OF APPEAL OF NEW ZEALANDI TE KŌTI PĪRA O AOTEAROACA511/2022[2023] NZCA 542BETWEEN JAMES BOULT ANDBRENT ALFRED METTRICKAppellantsAND RHYS JAMES CAINRespondentHearing: 19 July 2023Court: French, Thomas and Moore JJCounsel: A R Galbraith KC and G J Ryan for AppellantsJ I Taylor and S M U Lee for RespondentJudgment: 2 November 2023 at 2.30 pmJUDGMENT OF THE COURTA The appeal is allowed. The decision of the High Court is quashed and anorder is made under s 284(1) of the Companies Act 1993 reversing therespondent's decision to permit inspection of the documents.B There will be no order as to costs.____________________________________________________________________REASONS OF THE COURT(Given by French J)Introduction[1] Section 256(1)(a) of the Companies Act 1993 (the Act) states:256 Duties in relation to records(1) The liquidator of a company must—(a) keep accounting records and other documents of theliquidation and permit those records, and the records andother documents of the company, to be inspected by—(i) any liquidation committee appointed undersection 314, unless the liquidator believes onreasonable grounds that inspection would beprejudicial to the liquidation; and(ii) if the court so orders, a creditor or shareholder; and[2] The focus of this appeal is s 256(1)(a)(i). It concerns applications for theinspection of documents made by a liquidation committee, as distinct fromapplications by an individual creditor or shareholder which are governed bys 256(1)(a)(ii).[3] The key issue for determination is whether, correctly interpreted, s 256(1)(a)(i)means a liquidation committee's purpose for seeking inspection cannot of itself be aground for declining the application. Under this interpretation, the liquidator can onlydecline the application if they have a reasonable belief the requested inspection wouldbe prejudicial to the liquidation. Otherwise, they are obligated to permit it.[4] The competing interpretation is that the right of inspection conferred onliquidation committees by s 256(1)(a)(i) is implicitly limited to requests made for apurpose connected with their statutory functions. Accordingly, a request made for acollateral purpose, outside the liquidation, is outside the scope of s 256(1)(a)(i) andmust be declined — even in the absence of prejudice to the liquidation.[5] The interpretation issue arises in the context of a decision by the respondentliquidator to allow a request made ostensibly on behalf of a liquidation committee toaccess court documents. At the time the request was made, the assets had all beenrealised and the liquidation was ready to be ended. All that remained was for theliquidator to provide his final report. Given the liquidation was all but completed, itis accepted on appeal that disclosure of the documents could not be said to beprejudicial to the liquidation.1[6] The court documents in question concerned a claim which the liquidator hadbrought against the directors of the company in liquidation and which had been settled.According to the directors, the purpose of the request for inspection was to allow amember of the liquidation committee to investigate whether his company could bringits own claim against the directors, outside the liquidation. And that, the directors say,was an improper use of s 256(1)(a)(i) which of itself meant the liquidator should havedeclined the application.[7] In the High Court, Associate Judge Paulsen rejected the directors' applicationto reverse the liquidator's decision to permit inspection.2 The Judge held that unders 256(1)(a)(i), liquidation committees have a right, not a power, to inspect documentskept by the liquidator, and that the only qualification on that right was if inspectionwould be prejudicial to the liquidation.3 There being no prejudice, the liquidator wasrequired to allow inspection.4[8] The Judge also found that in any event, on the facts, the purpose for whichinspection was being sought was a proper purpose.5[9] The appellants now appeal the Judge's decision on two grounds. Theychallenge his interpretation of s 256(1)(a)(i) and also say he was wrong on theevidence to find that the request was made on behalf of the liquidation committee andfor a proper purpose.1 This was made clear in oral submissions by counsel for the appellants.2 Boult v Cain [2022] NZHC 2402 [High Court judgment]. The application to reverse theliquidator's decision was brought under s 284 of the Companies Act 1993. Leave to bring theapplication, as required under s 284, was granted.3 At [49].4 At [58]–[60].5 At [55]–[57].Background[10] The respondent Mr Cain is the liquidator of Stonewood Homes Ltd andStonewood Homes New Zealand Ltd (together, Stonewood).6 The appellants,Messrs Merrick and Boult, were directors of Stonewood.7 Stonewood was put intoliquidation on 21 April 2016 by the High Court on the application of theInland Revenue Department.[11] At a meeting of Stonewood's creditors, held on 17 June 2016, those attendingelected a liquidation committee. The elected members were Messrs Lee,8 Ball andGilbert. All three were directors of companies which were owed money byStonewood.[12] In 2018 the liquidator issued proceedings against the appellants, allegingbreach of directors' duties to Stonewood. The claim was later settled in July 2021 andthe proceeding discontinued under a confidential settlement agreement.[13] On 22 September 2021, the liquidator met with Mr Gilbert and Mr Ball.He advised them the claim against the directors had been settled but that no moneywas available to unsecured creditors from the settlement. Mr Gilbert and Mr Ballasked the liquidator to provide the court documents relating to the claim but theliquidator told them he was not able to do that because of confidentiality. He suggestedthey make an application to the High Court.[14] Mr Ball then applied to the High Court for access to the court documents underthe Senior Courts (Access to Court Documents) Rules 2017. The application soughtaccess to all pleadings and affidavits that had been filed. The application stated thatMr Ball was the sole director of two companies (Hagley Building Products Ltd andHagley Kitchens Ltd — together, Hagley) that were unsecured creditors ofStonewood, one company being owed $1,273,903.20 and the other $27,006.54. The6 The respondent was originally appointed as joint liquidator with a Mr Logan, but the lattersubsequently resigned from the role.7 Mr Boult resigned as a director on 1 February 2016, shortly before Stonewood was put intoliquidation.8 Mr Lee's own company went into liquidation on 13 September 2018. It appears on the evidencethat although he never resigned from the committee neither he nor the liquidators of his companyplayed an active part at the time of the events in issue.application went on to say that Hagley intended to seek legal advice on whether theymight have a claim against the directors of Stonewood for breach of their duties underthe Act, and that they were aware other unsecured creditors were considering whetherto make a claim.[15] The application concluded by stating that if Hagley's application for accesswas successful, they would be prepared to agree to a condition not to disclose thedocuments to any third party, except Hagley's professional advisers.[16] On being notified of the application, Mr Boult filed a memorandum inopposition.[17] The contested application was then set down for hearing beforeAssociate Judge Paulsen on 24 March 2022. During the hearing, the Judge askedcounsel appearing for Mr Ball whether a request to inspect the liquidator's documentshad been made under s 256 of the Act. The hearing concluded on the basis that counselwould make inquiries and report to the Court within seven days, and also provide anycorrespondence between Hagley and the liquidator concerning requests for theliquidator's court file.[18] The day after the hearing, Mr Ball emailed the liquidator. The email referredto the previous discussion with the liquidator on 22 September 2021 and advised ofHagley's current application before the Court. The email went on to say that the Judgewanted confirmation Hagley had requested the documents from the liquidator and thatthe liquidator had said he could not provide them to Hagley. This information wassaid to be needed by next week. The email concluded by asking the liquidator toconfirm in writing as soon as possible whether or not the court documents would begiven to them.[19] On 28 March 2022, the law firm acting for Hagley wrote to the liquidator'slawyers. The letter stated the firm had recently been advised that Mr Ball was amember of the liquidation committee and went on to refer to the right of a liquidationcommittee to inspect Stonewood's records and documents. The letter concluded byadvising that Mr Ball was giving: formal notice that he wishes to inspect the liquidator's accounting recordsand other documents of the liquidation, and the records and other documentsof [Stonewood] including the [court documents that were the subject of theapplication], in accordance with s 256(1)(a)(i) of the Act.[20] Written confirmation that the liquidator would "allow Geoff Ball to inspect theabove documents in accordance with s 256(1)(a)(i)" was sought by midday30 March 2022.[21] Presumably in response to a query from the liquidator's lawyers, Mr Gilbertsubsequently emailed Hagley's counsel saying he was "confirming that the request toaccess documents under s 256 [sic] (in the attached letter dated 28 March 2022) ismade by the Liquidation Committee (by majority)."[22] On 31 March 2022, counsel for Hagley filed a memorandum in the High Courtenclosing a copy of Mr Ball's email to the liquidator. The memorandum advised theJudge that, in light of the discussion at the hearing about s 256 and the documentsavailable on the court file, counsel had obtained "further new information" fromHagley, which had resulted in Hagley instructing counsel to pursue a request for accessunder s 256. No specifics were given of the "further new information". However, weinfer given the terms of the letter to the liquidator's lawyers that it must have been theinformation that Mr Ball was a member of the liquidation committee.[23] Following receipt of this memorandum, Hagley's application under theSenior Courts (Access to Court Documents) Rules was adjourned.[24] Lawyers acting for the appellants then wrote to the liquidator's lawyersexpressing their clients' opposition to the liquidator allowing the liquidationcommittee to inspect the court documents. A key ground of opposition was that therequest was an improper use of the committee's powers under s 256(1)(a)(i).9 Theappellants contended that the request was clearly made on behalf of Mr Ball to assisthim to pursue a claim for his own benefit.9 Another ground was that disclosure would breach the terms of the settlement agreement. Thisargument was not advanced before us.[25] In a subsequent letter, the liquidator's lawyer advised that he had reached thepreliminary view that, with the exception of four affidavits, he was obliged to allowinspection of the court documents in his possession. In so far as the request wascouched in much wider terms and effectively sought inspection of all records anddocuments of the liquidation, and not just those relating to the court proceeding, theletter said that part of the request was unmanageably wide and required narrowingbefore it could be assessed.[26] As the letter made clear, the liquidator's provisional decision to permitinspection of the court documents rested on the view that under s 256(1)(a)(i) thepurpose for which the liquidation committee was seeking access to the documents didnot provide a basis to refuse inspection. The letter described s 256(1)(a)(i) as creatinga presumption in favour of disclosure with only one limited exception, being prejudiceto the liquidation. The prejudice to the liquidation exception was only relevant to thefour affidavits. They contained confidential and commercially sensitive materialrelating to third parties, disclosure of which might expose the liquidator or Stonewoodto claims. Allowing access to the other court documents would not prejudice theliquidation.[27] After receiving and considering further correspondence from the variouslawyers, the liquidator confirmed his preliminary decision that the liquidationcommittee would be permitted to inspect the court documents (excluding the fouraffidavits).10 The liquidator again noted the appellants' contention of impropriety andmisuse of powers but stated that the fact remained the request had been made by theliquidation committee, not Mr Ball personally. There was, in his view, no basis fortreating the request as a request made by a creditor.[28] Dissatisfied with that outcome, the appellants then applied to the High Courtfor an order under s 284(1) of the Act reversing the liquidator's decision andpreventing inspection.[29] The parties to the application were the appellants and the liquidator, the latterabiding the decision of the Court. Mr Ball was represented at the High Court hearing.10 Conditions were imposed on the inspection, which Mr Ball challenged.He also abided the decision of the Court, although his counsel filed submissionsindicating opposition to the application.[30] The Judge granted the appellants leave to bring the application but, as alreadymentioned, declined to grant the substantive application, prompting the currentappeal.11[31] At the hearing before us, the liquidator again appropriately took the positionthat he was indifferent as to whether he is required to allow inspection or not. His soleconcern is to act in accordance with s 256. His counsel did however file briefsubmissions explaining the reasoning behind the liquidator's decision, which accordedwith the reasoning of the Judge. Mr Ball did not take any part in the hearing.[32] We now turn to address the two issues at the heart of the appeal, the firstrelating to the interpretation of s 256(1)(a)(i) and the second concerning the Judge'sevidential findings regarding the propriety of the request.What is the correct interpretation of s 256(1)(a)(i)?The statutory functions of liquidation committees[33] Liquidation committees, or committees of inspection as they were once called,have been a feature of legislation regulating company liquidations for many years.12They are the creature of statute. The logical starting point of the analysis is thereforethe relevant legislative framework, and in particular the statutory functions ofliquidation committees under the Act. The key provisions are ss 314 and 315.[34] The decision to appoint a liquidation committee rests with the creditors andshareholders of the company in liquidation.13 Under s 314, at any time in the courseof the liquidation, the liquidator "shall", on their own motion or at the written requestof a creditor or shareholder, convene a meeting of either shareholders or creditors tovote on a proposal that a liquidation committee be appointed, and if so to choose the11 Leave to bring the application was required under s 284.12 See for example Companies Act 1955, s 248.13 Lynne Taylor and Grant Slevin Law of Insolvency in New Zealand (2nd ed, Thomson Reuters,Wellington 2021) at [25.2].members of that committee. The exact words used in s 314 about the proposal thatmust be put at the meeting is "a proposal that a liquidation committee be appointed toact with the liquidator".[35] As to membership, the committee must consist of not less than three personswho are creditors or shareholders (or their representative) of the company inliquidation.14 The intention is clearly that the members represent the collectiveinterests of creditors or shareholders. This is reinforced by the statutory powersconferred on liquidation committees, discussed below, and also case law which hasheld that a committee is in a fiduciary relationship with those who are entitled toparticipate in the assets on a winding up.15 It is noteworthy too that s 314 refers tothose who are elected at the meeting as taking "office".[36] The powers of the liquidation committee are set out at s 315(2). The powerslisted are, to:(a) call for reports from the liquidator on the progress of the liquidation;(b) call for a meeting of creditors or of shareholders;(c) apply to the court for an order asking the court to exercise itssupervisory jurisdiction over the liquidation, including orders toenforce liquidator's duties; and(d) assist the liquidator as appropriate in the conduct of the liquidation.[37] As will be apparent from the last-mentioned power and the wording of theproposal that leads to the establishment of the committee ("appointed to act with theliquidator"), a primary function of liquidation committees is to assist the liquidator.As to what the liquidator's functions are, their "principal duty", as expressed in s 253,is "to take possession of, protect, realise, and distribute the assets, or the proceeds of14 Companies Act 1993, s 315.15 Re The Standard Insurance Co Ltd (in liq) [1962] NZLR 762 (SC) at 763. See also EchoInvestments Ltd v Kingswood Investments Ltd (1993) 6 NZCLC 68,476 (HC); and Re CarpentersAuctions Ltd (in liq) HC Auckland M1517/92, 18 March 1993, relying on Re FT Hawkins & CoLtd [1952] Ch 881.the realisation of the assets, of the company to its creditors in accordance with [the]Act".[38] In addition to the role of assisting the liquidator, it is also clear from the listedpowers in s 315 (such as the power to call for reports from the liquidator) thatcommittees are intended to have an oversight function in relation to the liquidator.16[39] We turn now to examine s 256 (1)(a)(i).The text and purpose of s 256(1)(a)(i)[40] For convenience, we again set out the sub-section.256 Duties in relation to records(1) The liquidator of a company must—(a) keep accounting records and other documents of the liquidationand permit those records, and the records and other documentsof the company, to be inspected by—(i) any liquidation committee appointed under section314, unless the liquidator believes on reasonablegrounds that inspection would be prejudicial to theliquidation; and(ii) if the court so orders, a creditor or shareholder; and[41] As already indicated, s 256(1)(a) creates a distinction between two categoriesof applicants who are seeking access to the liquidator's records. One category ofapplicant — an individual creditor or shareholder — must make their request to theHigh Court for determination. The other category of applicant — a liquidationcommittee — is not required to obtain a court order but is entitled to seek permissiondirectly from the liquidator.[42] The leading authority on applications by individual creditors or shareholdersunder s 256(1)(a)(ii) is the decision of this Court in Levin v Lawrence.17 However, the16 Te Aka Matua o te Ture | Law Commission Company Law: Reform and Restatement (NZLC R9,1989) at [644].17 Levin v Lawrence [2013] NZCA 394, (2013) 11 NZCLC 98-018.present case represents the first occasion on which this Court has directly addressedthe scope of s 256(1)(a)(i).[43] Turning first to the text of s 256(1)(a)(i). Taken at face value, the wording ofs 256(1)(a)(i) appears unambiguous and supports the interpretation adopted by theJudge. The words used are "must permit" followed by an "unless" indicating anobligation to permit subject to only one ground for refusal. There is no mention ofany need for a separate inquiry into the purpose of the request.[44] The appellants acknowledge this but emphasise that liquidation committees arethe creature of statute and like all statutory bodies can only act within the scope oftheir powers and for the purposes of the relevant statute. As counsel Mr Galbraith KCput it, they cannot go off on a frolic of their own. In his submission, there was no needfor Parliament to specifically state the request must be made for the purposes of thecommittee's statutory functions. That went without saying. It was a fundamentalgiven.[45] Thus, according to the appellants' case, if the request is made for the purposesof the liquidation consistent with the committee's statutory functions, then thecommittee has a qualified right to view the records and the liquidator a reciprocalobligation. It follows that the correct approach to the "prejudice to the liquidation"exception is not to see it as all-encompassing, but more accurately to see it as an"add-on safeguard".[46] Mr Galbraith accepted there were statements in Levin quoting from aLaw Commission report saying the provision which ultimately became s 256(1)(a)(i)"permits disclosure of the liquidator accounts and records unless the liquidatorbelieves this to be prejudicial to the liquidation".18 However, he contended that theLaw Commission could only have been considering a liquidation committeeconforming with its statutory purposes and functions and would not havecontemplated, let alone endorsed, some ulterior collateral purpose for the request,outside of the statutory scheme.18 At [46], citing Law Commission, above n 16, at [673].[47] We find these arguments compelling. They are consistent with long establishedprinciples about statutory bodies and with the fiduciary obligations owed byliquidation committees. They are also not dependent on the characterisation of whatis conferred by s 256(1)(a)(i) as a power rather than a right, as the Judge appears tohave assumed.19[48] In our view, the arguments are further reinforced by the existence of the morerigorous process for applications by individual creditors or shareholders. Theexistence of a different process can only mean there is something about liquidationcommittees that differentiates them from the individuals whose collective intereststhey represent, something that persuaded the legislature to dispense with the need fora court order in their case. The something must be their special defined statutoryfunctions and a statutory role which, as we have seen, combines that of an assistantand a supervisor.[49] In this regard, it is noteworthy that although committees of creditors orshareholders have long been a feature of legislation regulating company liquidations,a provision exempting them — but not the individuals they represent — from the needfor a court order to gain access to the liquidator's records is new to the 1993 Act. Theinescapable inference is that s 256(1)(a)(i) represents a deliberate policy choice. Thatis confirmed by the Law Commission report that drove the reforms.20[50] The report notes that a major criticism of the 1955 Companies Act was thefrequency with which its provisions required liquidators to refer matters to the courtfor determination.21 It was considered desirable to reduce this significantly, but not atthe expense of protecting creditors and shareholders. The necessary protection wasseen as coming instead from the requirement that a liquidator had to be an experiencedinsolvency practitioner and from new provisions giving liquidation committees aneffective measure of supervision.22 Significantly for present purposes the19 High Court judgment, above n 2, at [49].20 See for example, Law Commission, above n 16, at [644] and [670]–[673].21 At [642].22 At [642] and [644].Law Commission cited as an example of one such measure a provision that was tolater become s 256(1)(a)(i).23[51] If further confirmation was needed, this legislative history confirms that therecan be no rational explanation for the difference between s 256(1)(a)(i) ands 256(1)(a)(ii) other than the representative character and statutory functions ofliquidation committees. The right of inspection without the need for a court order wasgiven for that reason, and Parliament can only have intended that it would be exercisedfor that purpose.[52] It follows that in so far as the Judge interpreted s 256(1)(a)(i) to mean that theliquidator can only ever refuse disclosure to a liquidation committee if he or shebelieves on reasonable grounds that it would be prejudicial to the liquidation,24 thenthat, in our view, was an error. In our view, the correct interpretation is that thecommittee's request must be made for the purpose of and in furtherance of its statutoryfunctions and powers. And if the request is not made for that purpose, inspectionshould be refused, regardless of whether inspection would not prejudice theliquidation. In short, the right to inspect documents conferred by s 256(1)(a)(i) isancillary to the powers of liquidation committees listed in s 315 and cannot be usedfor any other collateral purpose outside of the liquidation.[53] If therefore a request, albeit made ostensibly by the liquidation committee incircumstances where there could be no prejudice to the liquidation, was in substancea request by an individual creditor for their own benefit outside the liquidation, thefact that the individual happened to be a member of the liquidation committee wouldnot compel the liquidator to permit it. The proper course for that individual, inaccordance with the Act and their fiduciary obligations, would be to seek a court orderunder s 256(1)(a)(ii) and not, in effect, exploit their position as a member of theliquidation committee.[54] As this Court in Levin has made clear, were an application to be made unders 265(1)(a)(ii), the individual creditor would need to establish a good reason for the23 At [673].24 High Court judgment, above n 2, at [49].request.25 The "good reason" threshold test requires that, as a minimum, the applicantmust put forward some persuasive, tangible or concrete reason why inspection shouldbe granted.26 Fishing expeditions are not sufficient.27 The example given in the Levindecision as to what might constitute a good reason involves dereliction of a liquidator'sduties, but it is clear the categories of good reasons are not closed.28[55] Significantly since Levin, the High Court has held there was good reason unders 256(1)(a)(ii) for an individual creditor,29 a Body Corporate, to be permitted accessto the records of the company in liquidation for the purpose of investigating its ownrecovery options outside the liquidation for defective building workmanship.30 Theliquidation had only just started and it appeared from the liquidator's first report thatthere were insufficient funds for extensive litigation.31[56] Before turning to address the appeal ground regarding the Judge's factualfindings, we make two final points. The first is that our interpretation will not involveliquidators undertaking extensive inquiries into the purpose of liquidation committeerequests. Ordinarily that will be self-evident. The second and related point is that inthe vast majority of cases, the competing interpretations will not in any event makeany practical difference to the outcome of the application for inspection. An improperpurpose will usually be prejudicial to the liquidation.[57] It is only in the relatively unusual circumstances of this case that this waspotentially not the position.Were the Judge's factual findings supported by the evidence?[58] In the decision under appeal, the Judge held the liquidator was required to treatthe application as having been made by the liquidation committee.32 The Judge25 Levin, above n 17, at [29] and [53].26 At [53(c)].27 At [53(b)].28 At [53(c)]; and Steggall Nutrition Pty Ltd v Hayward [2015] NZHC 413, [2015] NZCCLR 11at [50].29 Technically the applicant was a contingent creditor, but the Judge accepted that a contingentcreditor was a creditor for the purpose of s 256(1)(a).30 Body Corporate 194481 v Mason [2016] NZHC 2858.31 At [8]–[9].32 High Court judgment, above n 2, at [55].pointed out that Messrs Ball and Gilbert had made the same request before and thatMr Gilbert had confirmed in his email the request at issue was made to the liquidatorby the committee.33 In the Judge's view, the committee was not disentitled to makeits own request just because Mr Ball independently sought the documents viathe court.34[59] The Judge went on to state that, because the claim against the directors hadbeen settled on terms that did not see the creditors receive any payment, there was astrong justification for the request.35 All other creditors could be expected to besimilarly interested, and depending on what the inspection revealed, there were severalpossible avenues the creditors might pursue to improve their position in theliquidation.36[60] We accept if that was the purpose of the request, it might qualify as a properpurpose. However, we are satisfied the finding that this was in fact Mr Ball's purposewas not justified on the evidence, especially given the surprising absence of anyaffidavit to that effect from Mr Ball or indeed from Mr Gilbert.[61] What evidence there is must be derived from the statements in Hagley'sapplication under the Senior Courts (Access to Court Documents) Rules and thecorrespondence between the law firms. The weight of that evidence suggests thatMr Ball was never looking to protect the interests of other creditors. Even his owncounsel, in a memorandum to the High Court, referred to Hagley as the applicant unders 256(1)(a)(i).[62] In our assessment, the weight of evidence suggests Mr Ball was at all timesacting in his own companies' interests and seeking information to advance a collateralseparate proceeding outside the liquidation for their benefit. That is further reinforcedby considering the stage the liquidation had reached. Any further steps were inevitablygoing to be outside the liquidation.33 At [55].34 At [55].35 At [56].36 At [56].[63] In our view the proper course of action for Mr Ball was to apply unders 256(1)(a)(ii) for a court order, not to circumvent that process by taking advantage ofthe happenstance of his membership of the liquidation committee.[64] It follows from all the above that we have decided to allow the appeal.[65] In the event the appeal was allowed, the appellants did not seek costs. Wetherefore make no award.Outcome[66] The appeal is allowed. The decision of the High Court is quashed and an ordermade under s 284(1) of the Companies Act 1993 reversing the respondent's decisionto permit inspection of the documents.[67] There will be no order as to costs.Solicitors:White Fox & Jones, Christchurch for AppellantsWynn Williams, Christchurch for Respondent