JF MANAGH AS LIQUIDATOR OF TITAN BUILDING (HB) LIMITED (IN LIQ) V NJ CURRIE HC NAP CIV-2010-441-756

JF MANAGH AS LIQUIDATOR OF TITAN BUILDING (HB) LIMITED (IN LIQ) V NJ CURRIE HC NAP CIV-2010-441-756 25 February 2011IN THE HIGH COURT OF NEW ZEALANDNAPIER REGISTRYCIV-2010-441-756BETWEEN JOHN FRANCIS MANAGH ASLIQUIDATOR OF TITAN BUILDING(HB) LIMITED (IN LIQ)ApplicantAND NICHOLAS JOHN CURRIERespondentHearing: 17 February 2011(Heard at Napier)Counsel: M MacFarlane - Counsel for ApplicantSC Cowan - Counsel for RespondentJudgment: 25 February 2011 15:30:00JUDGMENT OF ASSOCIATE JUDGE D.I. GENDALLThis judgment was delivered by Associate Judge Gendall on 25 February 2011 at 3.30 pm under r 11.5 of the High Court Rules.Solicitors: Sainsbury, Logan & Williams, Solicitors, PO Box 41, NapierBramwell Grossman, Solicitors, PO Box 500, Hastings 4156Introduction[1] The applicant, Mr John Managh (Mr Managh) as liquidator applies for an order pursuant to s 266 of the Companies Act 1993 that the respondent, Mr Nicholas Currie (Mr Currie), be examined and produce documents relating to the company in liquidation, Titan Building (HB) Limited (Titan Building (HB)) and (the company). In particular, the applicant seeks all invoices recording sales made by HomePlus Hawkes Bay (HomePlus) from 1 April 2008 until 31 July 2010 to Titan Building (HB), monthly or other statements of account recording the dealings between the two companies, and any other documents showing payment of money to or from Titan Building (HB) in that period.[2] The application is opposed on the basis that it is claimed Mr Currie does not fall within the category of persons to which s 261 Companies Act 1993 applies because he is nothing more than a creditor of the company.Background[3] Mr Managh was appointed as liquidator by shareholders' special resolution on 8 July 2010. The liquidation of Titan Building (HB) arose out of a directors' deadlock. The company's controlling director, Mr Lans Hasselman (Mr Hasselman) was said by the other director, Mr Graeme Jeremy Higgie (Mr Higgie) to be paying company monies to creditors of another company controlled by Mr Hasselman, called Titan Buildings Limited (TB Ltd). TB Ltd apparently continues to trade.[4] Mr Managh says that, since his appointment, Mr Hasselman has refused todeliver up company plant and chattels, or to produce the company's records. Fromthe bank statements that he has been able to obtain, however, he has identified a number of "significant payments" made to various parties by the company. He maintains there are no records to show what goods or services were supplied in exchange for these payments, or what the reason may have been for the payments. Mr Managh says that a number of those recipient parties appear to be associates of Mr Hasselman. He says that he has been able to establish three incidents of suchpayments made by Titan Building (HB) (per Mr Hasselman) where the recipients advised that they had not in fact dealt with the company.[5] The present application is largely concerned with a payment of $16,833.38 to NJ and SR Currie Limited trading as HomePlus Hawkes Bay on 30 April 2010 some 2 months before liquidation. The respondent, Mr Currie, is the manager and principal of this company. It appears that enquiries of Mr Currie pursuant to s 261 of the Actwere left unanswered. In fact, Mr Managh states that Mr Currie "has gone to extraordinary lengths to avoid providing me with information". Mr Higgie, the otherdirector of Titan Building (HB), has provided evidence of a telephone conversationin which Mr Currie is alleged to have said that Mr Hasselman gave him "good business" and was "a mate". Mr Currie denies that he is a friend or an associate ofMr Hasselman. He says that Mr Hasselman is simply a customer of his business. However, he does not state anywhere in his affidavit filed in this proceeding that HomePlus Hawkes Bay was a creditor of Titan Building (HB).[6] According to Mr Managh, it is essential to find out why the payment in question was made; whether it was for goods or services in fact supplied; what, if any, taxation consequences there were or might be; and whether or not there were any related parties involved.[7] The company's only creditors are said to be a Trust operated by Mr Higgie($36,758.00) and the company's former accountants, Gregor Valley ($1,687.50).The Law[8] Section 266 Companies Act 1993 allows for applications to the Court by a liquidator seeking enforcement of a s 261 notice or, alternatively, examination before the Court or production of documents in terms of subs (2). S. 266 states:266 Powers of Court(1) The Court may, on the application of the liquidator, order a person who has failed to comply with a requirement of the liquidator under section 261 of this Act to comply with that requirement.(2) The Court may, on the application of the liquidator, order a person to whom section 261 of this Act applies to—(a) Attend before the Court and be examined on oath or affirmation by the Court or the liquidator or a barrister or solicitor acting on behalf of the liquidator on any matter relating to the business, accounts, or affairs of the company:(b) Produce any books, records, or documents relating to the business, accounts, or affairs of the company in that person's possession or under that person's control.[9] Importantly, these orders under s 266 are only available against persons to whom s 261 is applicable. Section 261 provides:261 Power to obtain documents and information(1) A liquidator may, from time to time, by notice in writing, require a director or shareholder of the company or any other person to deliver to the liquidator such books, records, or documents of the company in that person's possession or under that person's control as the liquidator requires.(2) A liquidator may[, from time to time,] by notice in writing require—(a) A director or former director of the company; or(b) A shareholder of the company; or(c) A person who was involved in the promotion or formation of the company; or(d) A person who is, or has been, an employee of the company; or(e) A receiver, accountant, auditor, bank officer, or other person having knowledge of the affairs of the company; or(f) A person who is acting or who has at any time acted as a solicitor for the company—to do any of the things specified in subsection (3) of this section.(3) A person referred to in subsection (2) of this section may be required—(a) To attend on the liquidator at such reasonable time or times and at such place as may be specified in the notice:(b) To provide the liquidator with such information about the business, accounts, or affairs of the company as the liquidator requests:(c) To be examined on oath or affirmation by the liquidator or by a barrister or solicitor acting on behalf of the liquidator on any matter relating to the business, accounts, or affairs of the company:(d) Assist in the liquidation to the best of the person's ability....[10] Mr Managh submits that this case raises an important practical point for liquidators faced with a lack of records from the subject company: Can a liquidator compel production of and explanation regarding relevant documents from a recipient of company money in suspicious circumstances? In essence, the issue is who fallswithin the category of "other person[s] having knowledge of the affairs of thecompany" in s.261(2) (e) and, more specifically, whether Mr Currie is such a person. None of the other paragraphs in subs (2) are applicable to Mr Currie.[11] Before me, counsel referred to a number of cases that are relevant to the interpretation of s. 261(2)(e). The first is Deuchrass and Nellis v BP Oil New Zealand Ltd HC Christchurch M327/01, 3 July 2003, where Master Christiansen (as he then was) refused an application under s 266 for examination of a creditor of the company. The liquidator sought production of a statement of receipts and of correspondence exchanged between the company and the respondent BP Oil. The Judge found that the documents were not "documents of the company" within the meaning of subs (1), and then concluded that "[e]ven if they were the documents of the company", subss (2) and (3) would not be applicable because they did not applyto creditors:[13] ... I do not consider that the phrase "or other person" used in s 261(2)(e) applies to a creditor, even a significant creditor. The meaning of the words "other person" [is]qualified by reference to the category of persons listed in the paragraph and, secondly, must be ascertained by reference to the other types of person referred to in thesubsection. The words "receiver, accountant, auditor, bank officer" indicate a genusand, accordingly, the ejusdem generis principle applies. The genus refers to persons involved in the financial administration of the company. They owe duties to the company and have responsibility to act in the interests of the company. They do not have an arms length trading relationship with it.[12] To the extent that Associate Judge Christiansen may have suggested that the powers contained in subss (2) and (3) were somehow secondary to subs (1), I note at the outset that I respectfully disagree with that assessment. Subsection (1) providesfor the delivery up of "documents of the company", in order to "enable the liquidatorto obtain possession of the original books, records and documents of the company sothat he/she may make inquiry into the company's affairs in accordance with his/her statutory responsibilities" (at [9]; see also Buddle Findlay v Isaac CA51/95, 3 April 1996). Subsection (3), on the other hand, provides for a range of requirements,including provision of "such information about the business, accounts, or affairs ofthe company as the liquidator requests" in para (3)(b) (emphasis added). Similarly,the Court has the power to order production of "any books, records, or documentsrelating to the business, accounts, or affairs of the company" in s 266(2)(b)(emphasis added).[13] If subs (1) was satisfied here, Mr Managh would not need to rely on subs (2)(e) for production of documents, because Mr Currie would simply fall under thecategory "any other person". Arguably, subsection (1) is not applicable because thedocuments that are sought here are clearly not documents that "belong" to the company, in the sense that Mr Currie could be asked to completely and permanently surrender them. They are his company's records, and therefore that company'sproperty. This does not mean, however, that these records cannot be caught by subs (2)(e) or s 266(2)(b), which apply more widely to documents about or relating to the company.[14] In relation to Associate Judge Christiansen's further conclusion that the phrase "or other person" in s 261(2)(e) could not apply to a creditor, Mr Managh submits that the learned Associate Judge fell into error in holding that the "genus"(the words "receiver, accountant, auditor, bank officer") referred to persons involved in the financial administration of the company. He submits that receivers, accountants and bank officers are not necessarily involved in the financial administration of a company and may owe no duty to the company at all, and that anaccountant or bank officer may well have an arm's length trading relationship withthe company.[15] I consider that there is considerable merit in this submission. In my view, there is simply no need to constrain the scope of para (e) artificially. In my view, the"genus" is provided in the section itself, in the limiting words "having knowledge of the affairs of the company". While I agree that the meaning of the term "or other person" would be coloured by the preceding identification of receivers, accountants,auditors or bank officers, as persons who are effectively assumed to have knowledge of the affairs of the company, it is my view that the narrow categorisation of the identified persons - as persons involved in the financial administration of the company who owe duties to the company - is not justified on the wording of theprovision. However, unlike a receiver, accountant, auditor or bank officer, a person such as a creditor would not typically have relevant knowledge of the affairs of a company.[16] Whilst it may be said that knowledge of arm's length transactions of thecompany does not necessarily constitute knowledge of "the affairs of the company",particularly when compared with the type of knowledge that bankers or accountants generally would have, in my view, the degree of involvement or knowledge of the third parties in question is to be determined on the particular facts or circumstances of each case.[17] Associate Judge Christiansen, however, found support for his view in the changes that had been made from the statutory predecessor to s 261(2), s 262(1) of the Companies Act 1955, which included broader references to any person "indebted to the company" and to "any person whom the Court deems capable of givinginformation concerning the promotion, trade, dealings, affairs or property of thecompany". Section 262(1) Companies Act 1955 provided:The Court may, at any time after the appointment of a provisional liquidator or the making of a winding-up order, summon before it any officer of the company or person known or suspected to have in his possession any property of the company or supposed to be indebted to the company, or any persons whom the Court deems capable of giving information concerning the promotion, formation, trade, dealings, affairs or property of the company.[18] The learned Associate Judge considered that it was noteworthy that the reference to a person "indebted to the company" had been removed and had not been replaced by the term "creditor", and he concluded that, had Parliament intended to subject creditors to the invasive inquisitorial powers conferred by subs (3), it could easily have said so.[19] Counsel for Mr Managh before me submitted that the learned AssociateJudge again fell into error here, because the omitted words "supposed to be indebted to the company" clearly refer to a debtor and not a creditor of the company, andthere was therefore no deliberate removal of creditors from the scope of the section. I agree with this submission. However, this does not change the general thrust of theJudge's observation that there appears to have been a move away from a generallyworded, broad section, providing for examination of debtors and any person capable of giving relevant information, to a section that he thought was more narrow in its application.[20] In the end, Associate Judge Christiansen concluded that s 261 "must be strictly construed", referring to the following passage by Greig J in Re Communication & Energy Workers Union Incorporated (1996) 7 NZCLC 261,264 at 261,257 to 261,268:I consider that the sections have to be construed strictly on the question of the scope of the authority and the entitlement to exercise the powers thereunder. As has been said by me on an earlier occasion:"This has been said on many occasions to be an extraordinary sectiongiving extraordinary powers of an inquisitorial nature which enables a liquidator and stranger to the affairs of the company to enquire into and obtain the information he may need to carry out his duties on behalf of the general body of creditors and contributories. Because of the very wide scope of the powers exercisable under the section the courts have been concerned to ensure that they are not usedoppressively, vexatiously or unfairly."[21] The applicant liquidator in Re Communication had applied for examination of a bank, seeking production of debit records and bank statements. Greig J determined that the bank or the bankers concerned did not fall within any category of persons towhich s 261 applied because they could not be said to "have knowledge of the affairs of the company". However, knowledge of the affairs of the company was theprerequisite to the liquidator's (or the court's) entitlement to exercise the powers. Inthis case, the bankers were not the bankers of the company, which led Greig J toconclude that they could "have no direct knowledge of the affairs of [the company]".[22] Greig J did note an earlier statement by Eichelbaum CJ in ANZ Banking Group (NZ) Ltd v Official Assignee of Wrapz Marketing Ltd (in liq) (1987) 2 BCR 397 that the legislative intent of the section required a broad rather than a restrictive interpretation. However, Greig J considered that this did not apply to the question whether the person to be examined fell within the category of those who were to besubjected to s 261. Moreover, regard had to be had to the "deliberate change" inscope from s 262 of the 1955 Act:There is, I believe, a further indication of the limitation of the application of this section. Under the previous legislation the scope of s 262 of the 1955 Act was a gooddeal wider. It applied to "any person who the Court deems capable of givinginformation concerning the promotion, formation, trade, dealings, affairs or propertyof the company." That, I think would have covered an indirect association with thecompany ... The current legislation has been altered. Instead of the very wide scope there has been more detailed specification of the people who may or may not fall within the section and rather than the general concern concerning the affairs of the property of the company it is limited to those who have knowledge of the affairs of the company. That must be a deliberate change and which I believe is intended to limit the ambit of the section and the exercise of the powers.[23] Counsel for Mr Managh submits that Greig J's use of the word "direct" addsa gloss to the requirement of knowledge that is not supported by authority. He also argues that, despite the changes effected to the section with the introduction of the1993 Act, the "key message" remains "knowledge of the affairs of the company",and the changes cannot be used to support a supposed restrictive approach to identification of the persons to whom para (e) applies. The applicant maintains that the new section recognises that different tests apply to the different categories of persons in paras (a) to (d), para (e) and para (f). Persons referred to in paras (a) to (d) are internal to the company, while para (e) covers persons external to the company who fulfil the additional requirement of having knowledge of the affairs of the company. According to the applicant, this additional requirement removes the risk of oppressive, vexatious or unfair use of s 261.[24] Whether s 261 is more limited in scope than its predecessor, or whether s 261(2)(e) does in fact require a strict interpretation, in my view, are issues that do not need to be resolved on the present application. In some ways, labels such as"strict" or "broad" interpretation might prove unnecessarily confusing. What isclear, as I see it, is that the operative requirement in para (e) remains that of"knowledge of the affairs of the company". It was this requirement that Greig J considered was not fulfilled in Re Communication, although the respondent there was a banker and thus one of the persons identified as ordinarily satisfying the requirement. The banker did not have knowledge of the affairs of the company because the company was not a customer of the bank. Instead, the applicant sought access to bank statements held in the name of another entity, the purchaser and on-sale vendor of one of the company's assets, in order to trace the destination of the funds obtained as a result of the on-sale. Clearly, in these circumstances the bankercould not be said to have knowledge of the company's affairs.[25] Before me, counsel for Mr Carrie submitted that para (e) cannot be interpreted so widely as to include a "mere recipient of money". In my view, however, a "strict" approach to para (e) does not contradict my previous conclusionthat persons such as creditors cannot be generally excluded from the provision, given that the focus should be on the respondent's knowledge of the affairs of the company as opposed to the respondent's role. And, in any event, each case must turn on its own facts.[26] Mr MacFarlane for the applicant also referred me to Wedding Earthmovers Ltd and IH Wedding & Sons Ltd v Rock & Concrete Mobile Crushing Ltd (in liq) HC Auckland CIV-2005-404-5397, 24 July 2008 and Re International Direct Ltd (in liq)HC Wellington CIV-2006-485-2020, 17 November 2006 as further examples of applications under subs 2(e). In the latter case, I found that a barrister who had represented the company in court proceedings prior to liquidation had knowledge ofthe company's affairs, and was therefore an appropriate person to be the subject of as 261 notice. I concluded that this was within the broad intention behind s 261, and that legal advisers and barristers acting on behalf of a company prior to liquidation would clearly fall within the section. In these circumstances, the liquidator was entitled to a level of cooperation from the respondent.[27] In Wedding Earthmovers Ltd, the liquidator had sought an order pursuant to s 266 against a contractor of the company, in order to establish what payments had been made by the respondent to the company in respect of contract sums due for payment at the date of liquidation. The application was unopposed and an order was made accordingly. The cited judgment, which deals with a subsequent application for costs by the respondent, does not address the issue of whether the contractor fell within the scope of para (e).The Present Case[28] The applicant's position here is that the payment of $16,833.38 to HomePlus may have been a payment for the debts of a company other than Titan Buildings (HB), that other company being one controlled by Mr Hasselman. He submits that the proper payment of a company's money in satisfaction of its obligations trulyowed to the recipients of that money forms part of the affairs of the company, particularly within the relation back period for preference purposes. He points out that there is no evidence from Mr Currie, and also no documentary evidence, that HomePlus was a creditor of Titan Buildings (HB).[29] The respondent, on the other hand, submits that he does not have the requisiteknowledge of the affairs of Titan Building (HB) because he is a "mere recipient ofmoney" from it.[30] Having regard to the purpose of s 261, which is to provide liquidators with critical and detailed information needed in the discharge of their duties, I have come to the conclusion that knowledge of the nature of the payments from Titan Buildings(HB) to Mr Currie's company is relevant knowledge of the company's affairs for thepurposes of para (e). This knowledge generally may not be as expansive as that of an accountant or a bank officer, but it is directly material to the liquidator's concernshere. Mr Currie must be assumed to know why the payment was made, and more particularly whether it was made in exchange for specific goods or services.[31] The next issue to be determined is whether this is a case for the exercise of the Court's discretion under s 266. The respondent argues that it is not, because thedirectors of Titan Building (HB) have failed to comply with s 194 of the Act, and the request for invoices issued to Titan Building (HB) should therefore be directed to the company's directors instead. The respondent submits that the proceedings amount to "vexatious and oppressive behaviour". Reference is made here to Re Pepi Holdings Ltd HC Christchurch M170/98, 4 June 1998, where the liquidator sought an order for examination of the directors and shareholders of the company. Relevant factors to be taken into account under s 266 were the availability of an alternative legal procedure, the degree of involvement which the person had with the company prior to liquidation, and the probable significance of the information sought by the liquidator. The Court considered that there was aneed to balance the reasonable requirements of the liquidator in seeking to discharge his functions and duties, against the need to avoid making an order which is unreasonable, unnecessary or oppressive to the person concerned.[32] The respondent submits that s 261 provides Mr Managh with ample redress to obtain the information needed elsewhere, by way of examination of Mr Hasselman, and that there are other avenues under the Companies Act 1993 and the Tax Administration Act 1994 which could be pursued to compel the directors to provide the necessary information.[33] In response, Mr Managh states in his affidavit filed in this proceeding, that he had made attempts to obtain the required records and information from Mr Hasselmanm, but that these attempts were unsuccessful. He submits that, in light ofthis situation, it was a "commonsensical" step to approach Mr Currie on behalf of his company, the "person on the other side of the transaction". I am satisfied thatreasonable efforts have been made to obtain the information that is now sought from Mr Currie. Also, I take the view, that the applicant's request is not in any way unreasonable, unnecessary or oppressive so far as Mr Currie is concerned. The information that is requested is relatively confined, and counsel for Mr Currie has not referred to any reasons, other than the possibility of obtaining the information byother means, why Mr Managh's request would be "unreasonable, unnecessary or oppressive". The likely significance of the information, on the other hand, should notbe underestimated. On the basis of the material which has been placed before the Court, I consider that there is a justified suspicion that the payment to HomePlus might not have been payment of a debt due from the company.[34] Finally, I should briefly note that the respondent Mr Currie also places reliance on Island View Estates Ltd (in liq) v Mainline Contracting Ltd (in liq) HC Auckland CIV-2008-404-3840, 30 November 2010, where Associate Judge Bell noted, in a costs judgment, that the liquidators had gone too far in seeking disclosure of financial statements of two (apparently unrelated) companies, because these were not company records under s 261 and 266. The applicant, Mainline Contracting Ltd, had applied for production of records of the company by a director and a former solicitor. The application was later withdrawn. In my view, no weight can beattached to Associate Judge Bell's observation, which is entirely distinguishable from the circumstances of the present case. It appears that the application was made under s 261(1) and that, in any event, the documents sought were not documents relating the company.Conclusion[35] For these reasons, Mr Managh's application pursuant to s 266 is successful.An order is now made in terms of para 1 of the application that the respondent Mr Currie comply with the requirement of the liquidator under s 261 of the Companies Act 1993 that he be examined and bring documents in terms of the notice of requirement served upon him and dated 1st November 2010, and that such examination take place on oath and in the Court by way of a barrister or solicitor acting on behalf of the applicant, and there produces all invoices recording sales made by HomePlus Hawkes Bay from 1 April 2008 until 31 April 2010 to Titan Building (HB) Limited and monthly or other statements of account recording the dealings between the company (Titan Building (HB) Limited) and HomePlus Hawkes Bay and any other documents showing payment of money to or from the company in that period.[36] In submissions, made before me, Mr MacFarlane for the applicant sought a further order requiring production of all invoices and statements of account for Titan Buildings Limited, a company controlled by Mr Hasselman. I consider that such an order would be outside of the scope of ss 261 and 266, because the information sought is not information about or relating to the business, accounts or affairs of the company.[37] It is noted that the respondent is able to apply for "reasonable remuneration and travelling and other expenses" pursuant to s 261(5) Companies Act 1993 if he wishes to do so. The wording of the section would suggest that the Court cannot make such an order of its own motion.[38] As to costs on the present application, they are reserved. If counsel are unable to agree on this issue between themselves, they may file memoranda (sequentially) and I will decide the question of costs based upon the material before the Court.'Associate Judge D.I. Gendall'