J D HARDIE V R D AGNEW AND ANOR HC AK CIV 2007-404-001224

J D HARDIE V R D AGNEW AND ANOR HC AK CIV 2007-404-001224 6 March 2008IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV 2007-404-001224UNDER S 250 of the Companies Act 1993 IN THE MATTER OF an application to terminate the liquidation of FINIS LIMITED BETWEEN JOHN DAVID HARDIE Applicant AND RICHARD DALE AGNEW AND VIVIAN JUDITH FATUPAITO Respondents Hearing: 6 March 2008 Counsel: J Hardie in person S J Cox for respondent liquidators Judgment: 6 March 2008 at 5.22pmORAL INTERIM JUDGMENT OF ASSOCIATE JUDGE ABBOTTSolicitors: Martelli McKegg Wells & Cormack, PO Box 5745, Auckland Also to: Mr J Hardie, PO Box 45110, Te Atatu, Waitakere City[1] Mr Hardie is the sole director and shareholder of Finis Limited (in liquidation), a company previously known as Agricare Limited. Finis ("the company") was put into liquidation by this Court on 20 April 2006, on the application of the Commissioner of Inland Revenue. [2] Mr Hardie applies for an order terminating the liquidation of the company on the grounds that sufficient funds have been received by the liquidators to pay the only creditor (the petitioning creditor, the Commissioner of Inland Revenue Department), the petitioning creditor's costs and the reasonable costs of the liquidators. [3] The liquidators oppose termination at this point. They say that they are unable to establish the source of the funds they have received. There is also an issue over the costs that they are claiming.Power to terminate[4] The Court's power to terminate liquidation is to be found in s 250 of the Companies Act 1993. The relevant parts of that section read:250 Court may terminate liquidation(1) The Court may, at any time after the appointment of a liquidator of a company, if it is satisfied that it is just and equitable to do so, make an order terminating the liquidation of the company. (2) An application under this section may be made by— (c) a director or shareholder of the company . (3) The Court may require the liquidator of the company to furnish a report to the Court with respect to any facts or matters relevant to the application. (4) The Court may, on making an order under subsection (1) of this section, or at any time thereafter, make such other order as it thinks fit in connection with the termination of the liquidation.[5] The principles which the Court applies in making its decision under s 250 are not in dispute (Brookers Company & Securities Law at CA 250.03): a) The Court has a discretion; b) The Court will only exercise that discretion in favour of termination if: i) All creditors have been paid in full or satisfactory provision has been made for them to be paid, or they have consented; ii) The liquidators' costs have been paid or secured; iii) The shareholders have given their consent, or will be in a no worse position than if the liquidation had proceeded to its conclusion. [6] The issues which the Court has to consider on this application are whether satisfactory provision has been made for the creditor to be paid, and whether it can be said that the liquidators' costs have been paid or secured.Provision made for payment of creditors[7] It is common ground that the liquidators received a bank cheque on 1 August 2006 for $100,000. The source of that money is in dispute. The liquidators say that they are unable to establish whether it derives from the company's own funds, or whether it comes from a third party source (Mr Hardie's own funds). The significance of establishing the source is that if it is from the company's funds the liquidators are free to apply the funds in the usual course. In that respect their own costs will have priority and, once those costs and the costs ordered as part of the liquidation have been paid, they know what funds are available to pay the dividend to the Commissioner. On the other hand, if the money is not that of the company, but comes from another source, the liquidators must be clear as to the terms on which the funds have been lodged and apply them in accordance with that or thoseterms. They say that they have been unable to obtain the necessary clarification from Mr Hardie. [8] Mr Hardie takes issue with the liquidators over this. He says that he has made it clear to them that the funds come from repayment of a mortgage held by the company. The mortgage originally secured a sum of $320,000. Mr Hardie says that that information has always been available to the liquidators as it is a matter of public record. However, that is not the significant information needed. The issue is whether the liquidator has received adequate evidence that that is the source of the $100,000, and whether there is any further amount still due. The reason the last point is significant is that there will still be a shortfall between the $100,000 received plus interest on it ($7,317.42 to date) and the sums payable in the liquidation. Those sums are: a) the debt to the Commissioner ($89,018.65); b) the Commissioner's costs as petitioning creditor ($2,861.64); c) the liquidators' fees (claimed in the amount of $20,163.50 plus GST) and disbursements; and d) costs on this application (approximately $850). [9] The liquidators have been seeking clarification of the source of funds since the application for termination was filed (12 March 2007), and possibly before that (counsel then acting for Mr Hardie first advised of his intention to apply for termination on 23 May 2006). In an email sent from the liquidators' office to Mr Hardie on 24 May 2007 an employee of the liquidators wrote:As advised earlier, the liquidators will continue their statutory duties in the liquidation until we receive further information regarding the termination of the liquidation. The solicitors for Abatal Limited have requested their client's mortgage to Agricare Limited to be discharged. Please immediately forward all documentation in your possession relating to the above mortgage. If we have not received substantive information fromyou within 7 days of this email we will issue a summons notice requiring you to attend at our offices. We have been advised that you received payment in respect of this mortgage in May 2006. Please provide details and account for all payments received by you in relation to the mortgage by 31 May 2007.[10] The point had not been resolved before the application came before the Court, effectively for the first time, on 7 June 2007. The day before that hearing the liquidators wrote again by email to Mr Hardie setting out their view of what the Court would wish to be satisfied of before an order would be made (essentially as set out in paragraph [5] above) and went on to state:Once these matters are satisfied, then the Liquidators will lend their support to the application, but there [sic] are not prepare [sic] to do so as matters stand. The reasons for this are: A You advise that Agricare is a mortgagee, but we do not have details regarding that security or the indebtedness it secures. The financial position of the company is therefore uncertain. This will be relevant if the liquidation investigation continues. B You say the company's "debt" to the IRD is disputed. The standing and legitimacy of the debt must be ascertained and settled. In other words, the debt must either be paid or provision made for it or the IRD's consent obtained on some other basis, before the liquidators will support termination of the liquidation. If the debt is admitted and paid, this may prejudice the Company's subsequent right to challenge the IRD's related rulings or assessments. Please confirm your position in regard to this. C You have placed us in funds, but this is insufficient to repay all creditors and the liquidators's costs. Further, you advise that the funds may be the property of Agricare, that is, they are payment or part payment of the above-mentioned mortgage. The liquidators will need to get to the bottom of the source of these funds and ensure they are applied appropriately in the liquidation.[11] Mr Hardie's application was adjourned on 7 June 2007 for four weeks to allow the liquidators to file and serve a report. That report was subsequently provided in the form of an affidavit of one of the liquidators (Vivian Judith Fatupaito) in which Mrs Fatupaito commented on various outstanding matters (at paragraphs 19-23) and in particular stated:22. The liquidators understand there is a mortgage agreement which remains in place for which Agricare is Mortgagee. The solicitors for the mortgagor, Abatal Limited, have requested that this mortgage be discharged.23. Because the Applicant has filed to provide any documentation for Agricare and as a consequence further investigation has been required by the liquidators to obtain details regarding the status and terms of the mortgage advance. The liquidators believe that the funds received from the Applicant and currently held in trust may be a payment made by Abatal Limited in relation to this mortgage.[12] Mr Hardie acknowledges that there is no specific evidence before the Court as to what he has or has not told the liquidators about the source of the funds. However, he contends that he has made known to the liquidators that the $100,000 given to them in the bank cheque came from the mortgagor Abatal. He referred to a receipt having been given to Abatal for those funds in May 2007, and his understanding that the liquidators had a meeting with Abatal in August 2007 at which he expected them to have obtained all the information that they needed. [13] Unfortunately there has been no evidence filed by either party since July 2007. Mr Cox, for the liquidators, informs me that the liquidators' position remains that set out in the email correspondence I have set out above and the affidavit of Mrs Fatupaito. Although these matters appear to be capable of resolution reasonably promptly, and with co-operation by both parties, I am unable to make any firm decision as to the source of funds held by the liquidators on the evidence now before the Court. I accept that the source of the funds needs to be established by the liquidators before they can say that satisfactory provision has been made for payment of the Commissioner in full. It may also be necessary to establish whether any further money is still due to the company and, if so, to recover that money from Abatal to satisfy the Commissioner's debt. [14] The second issue that needs to be addressed is Mr Hardie's challenge to the liquidators' fees. He challenges them both on the grounds of lack of detail to support quantum, and on the ground that the liquidators have not shown that all of the work was strictly necessary. [15] The liquidators have filed a memorandum at this hearing setting out a breakdown of hours engaged by the liquidators and staff, and the rates of remuneration applied to each. They have also provided a summary of the work undertaken by the liquidators or their staff at the different levels. This is in the usualform provided when seeking approval of fees at the conclusion of the liquidation. Such a general summary is usually sufficient for the Court to accept in the absence of any dispute. It may not be enough where there is a valid dispute. [16] Although the quantum of liquidators' fees is a matter for the Court, I accept that Mr Hardie is entitled to raise issues and have them considered by the Court. He pointed to various matters which he said gave him no confidence in the work having been undertaken. They all relate to the process of the liquidation: a) The first was that the company had not been served with a copy of the order for liquidation. That is a matter for the petitioning creditor not the liquidators; b) The second is late service of a summons to attend and provide information (and a subsequent criticism of him for failing to respond to that summons). Whilst accepting that the summons was served only the day before he was required to attend (14 March 2007), and the day after Mr Hardie had filed his application to terminiate the liquidation, I do not think that this bears on the justification or not of the liquidators' fees (although I observe equally that any criticism of Mr Hardie's failure to attend should have taken into account the background to, and the fact of, his application for termination); c) The last matter raised was that the liquidators filed a report to the Companies Office stating that they did not intend to file the six monthly statutory report, on the permitted ground that recovery in the liquidation was not likely to be more than .20c in the dollar. Again, I am not convinced that this necessarily justifies Mr Hardie's objection. That report appears to be justified having regard to the uncertainty at that point as to source of the $100,000 that had been received. [17] Although I do not find that there is anything in these specific reasons for querying these fees, nevertheless both in view of the overall dispute and as a matterof course, I need to be satisfied that the time charged by the liquidators was warranted. [18] Mrs Fatupaito has provided a breakdown of costs, and a general summary of work undertaken, but has not related one to the other. I imagine that the liquidators will have time records supporting the hours charged which will assist in showing what time was spent on what work. In light of the challenge being made by Mr Hardie, I think it appropriate to seek those time records before determining the reasonableness of the fees charged. [19] The second aspect of the challenge to the liquidators' fees (that work was unnecessary) stems, as I understand it, from the continuing uplift in fees being charged by the liquidators since the application for termination was raised by Mr Hardie and, more particularly, since it was filed. In my view this objection is answered satisfactorily by Mrs Fatupaito's evidence on the outstanding matters, as set out in paragraphs 19-23 of her affidavit, both in paragraphas 19-23 to which I have already referred and in paragraphs 28-30 of her affidavit where she identifies additional work required by the liquidators specifically as a consequence of delays by Mr Hardie in providing requested information. Although there is no evidence about increase of costs since the filing of that affidavit on 28 June 2007, I note that the increase in that time is relatively small (in the order of about $3,000). Although that should still be justified I can accept that there would be further costs incurred in ongoing enquiries (particularly in relation to the Abatal mortgage) and in dealing with this application.Decision[20] I am not prepared to exercise my discretion to terminate the liquidation today. I have accepted that the source of the $100,000 payment needs to be established with certainty, and that any further funds available to the company under that mortgage need to be investigated in light of the shortfall in sums payable to the Commissioner. Also, as I have just said, I require further information from the liquidators in support of their fees (in the form of timesheets or such other information as can help showwork undertaken on particular tasks) to help establish that the fees being sought are reasonable. [21] I adjourn this application to the Miscellaneous Insolvency List at 11.45am on 9 April 2008. I direct that the liquidators file and serve a further report by 4 April 2008 at the latest advising what further information they have been able to obtain in relation to the source of the $100,000, and any further sums payable to the company by the mortgagor, Abatal, and producing evidence in support of their fees.Addendum[22] Although I did not state this in Court, I will determine costs, if necessary, when I finally determine the application. I can indicate, however, that as matters stand I see no reason to make an order against the liquidators or to deny them recovery of their costs in the usual way._________________________Associate Judge Abbott