ORION INTERNATIONAL LIMITED (IN LIQUIDATION) V HORNE AND ANOR HC CHCH CIV-2009-409-002178

ORION INTERNATIONAL LIMITED (IN LIQUIDATION) V HORNE AND ANOR HC CHCH CIV-2009- 409-002178 3 December 2009IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY CIV-2009-409-002178BETWEEN ORION INTERNATIONAL LIMITED (IN LIQUIDATION) Applicant AND KEIRAN ANNE HORNE DAVID CRICHTON Respondents Hearing: 6 November 2009 Appearances: D Lester for Appellant D J Chisholm for Respondents Judgment: 3 December 2009RESERVED JUDGMENT OF HON. JUSTICE FRENCH Introduction[1] When a company goes into liquidation, time limitation periods on claims against the company stop running (unless, of course, they have already expired). This is a well established principle which has been consistently followed since 1872. It applies whether the appointment of the liquidator is by Court order or shareholders' resolution. [2] The issue in this proceeding is whether the appointment of an interimliquidator has the same effect. [3] The issue arises against the following factual background.[4] On 26 November 2008, this Court appointed Ms Horne and Mr Crichton (Horne/Crichton) interim liquidators of a company called Erueruiti Investments Limited. The application had been made by the Commissioner of Inland Revenue. [5] On 18 May 2009 Erueruiti was placed into liquidation, the interim liquidators Horne/Crichton being appointed liquidators. [6] On 27 July 2009 the applicant in this proceeding, Orion International Limited (itself in liquidation) lodged a creditor's claim with Horne/Crichton. The claim arises out of events said to have taken place on 24 December 2002. [7] Horne/Crichton have rejected Orion's claim on the grounds it is statute barred, the six year limitation period under the Limitation Act 1950 having expired on 24 December 2008, being a date before the liquidation commenced on 18 May 2009. [8] Orion, however, contends that time under the six-year limitation period stopped running or was suspended on the appointment of Horne/Crichton as interim liquidators in November 2008. If that is correct, it means that when Erueruiti subsequently went into liquidation in May 2009, the claim was still within the six year period and so in time.Discussion[9] Unfortunately, there does not appear to be any authority directly on point. [10] That being so, I have found it helpful to first consider the purpose of an interim liquidation, the differences between interim liquidations and liquidations, and then examine the underlying rationale for the rule about time limitation periods to see if that rationale applies with equal force to interim liquidations.The purpose of interim liquidations and the role of an interim liquidator[11] An interim liquidator can only be appointed by the Court, and then only if an application for a liquidation order has been filed disclosing good grounds for putting the company into liquidation. Generally speaking, the essential purpose of an interim liquidation is to preserve the status quo pending the hearing of the application for the liquidation order, there being concern that if the company remains in the control of the directors and shareholders its assets may be dissipated in the meantime. In determining whether there is a need for an interim liquidator, the Court will consider such factors as whether the company's assets are in jeopardy, whether there is a need for urgency and whether the interests of the creditors are safeguarded: see Shen v Ann Ying Group Limited (No. 3) (2006) 3 NZCCLR 351;Carter Holt Harvey Limited v Timbalok NZ Limited (1997) 11 PRNZ 435. [12] The appointment of an interim liquidator is regulated by s 246 of the Companies Act 1993 and the High Court Rules. [13] Section 246 provides:246 Interim liquidator(1) If an application has been made to the Court for an order that a company be put into liquidation, the Court may, if it is satisfied that it is necessary or expedient for the purpose of maintaining the value of assets owned or managed by the company, appoint a named person, or an Official Assignee for a named district, as interim liquidator. (2) Subject to subsection (3) of this section, an interim liquidator has the rights and powers of a liquidator to the extent necessary or desirable to maintain the value of assets owned or managed by the company. (3) The Court may limit the rights and powers of an interim liquidator in such manner as it thinks fit. (4) The appointment of an interim liquidator takes effect on the date on which, and at the time at which, the order appointing that interim liquidator is made. (5) The Court must record in the order appointing the interim liquidator the date on which, and the time at which, the order was made. (6) If any question arises as to whether on the date on which an interim liquidator was appointed an act was done or a transaction wasentered into or effected before or after the time at which the interim liquidator was appointed, that act or transaction is, in the absence of proof to the contrary, deemed to have been done or entered into or effected, as the case may be, after that time.[14] An interim (or "provisional") liquidator is an officer of the Court. Accordingly, he or she does not represent any creditor or class of creditors but operates under the direction of the Court. The High Court Rules empower the Court in appointing the interim liquidator to limit the rights and powers of the interim liquidator in any manner it thinks just (r 31.23). [15] The primary duty of an interim liquidator is to preserve the status quo, i.e. to preserve and protect the company's property for distribution in the event a liquidator is subsequently appointed: Shen v Ann Ying. It has also been said that the provisional liquidator must carry out his or her role "with the least possible harm to all concerned so as to enable the Court to decide after a proper and final hearing whether or not the company should be wound up": Re Dry Docks Corp (1888) 39 ChD 306 at 312. A similar statement was approved in Re Chateau Hotels Limited[1977] 1 NZLR 381 at 383. [16] Unlike a liquidator, an interim liquidator does not have the power to distribute assets or determine creditors' rights. The company continues to exist and the identity and character of the company is unchanged. Further, the fact the company is subject to interim liquidation does not of itself result in the termination of the company's contracts: see Keay, McPhersons Law of Company Liquidation(2001) at 6.19. [17] On the other hand, the appointment does have the effect of displacing the directors. The interim liquidator assumes control of the company's property and operations: see Elders Pastoral Holdings Limited v New Zealand Ostriches LimitedHC Rotorua M2/99;M3/99;M4/99, 8 February 1999, Williams J. [18] Previously, under the 1955 Companies Act, there was an express provision to the effect that on liquidation or where a provisional liquidator had been appointed, no action or other civil proceeding against the company could be commenced except by leave of the Court: see s 226.[19] The purpose of having a stay provision in the case of interim liquidations was to prevent a company which was facing possible liquidation from having its assets wasted in litigation. [20] As regards liquidation proper, a stay of proceedings serves a second purpose, namely, to oblige all claimants to submit to the procedural scheme established in winding up so there can be an orderly and inexpensive process. [21] The position is not changed under the 1993 Companies Act in so far as liquidations are concerned. Section 248(1)(c) states that one of the effects of commencement of liquidation is that a person must not continue or commence legal proceedings against the company unless the liquidator agrees or the Court so orders. However, there is no longer any express provision requiring leave in order to be able to bring a claim against a company in interim liquidation as there was under the 1955 legislation. [22] It is a curious omission and what significance should attach to it was a matter of some debate at the hearing before me. There appears to be no explanation for the change in any of the relevant papers leading to the enactment of the 1993 Act, while the relevant Law Commission report says the law regarding interim liquidators is to stay the same: New Zealand Law Commission Company Law: Reform and Restatement (NZLC R9 1989) para 663. Those facts prompted Mr Lester, for Orion, to contend the omission was not deliberate, it was simply the result of a different drafting style. He pointed out that the sort of "extreme circumstances" that warrant the appointment of an interim liquidator are the very sorts of circumstances where a claim against a company would not be appropriate. In his submission, Parliament must have intended that the appointment of an interim liquidator should result in a stay of proceedings, as it did under the previous legislation.Liquidation and the effect of a liquidation order[23] The starting point for consideration of this issue is s248 of the Companies Act 1993 which provides:248 Effect of commencement of liquidation(1) With effect from the commencement of the liquidation of a company,— (a) The liquidator has custody and control of the company's assets: (b) The directors remain in office but cease to have powers, functions, or duties other than those required or permitted to be exercised by this Part of this Act: (c) Unless the liquidator agrees or the Court orders otherwise, a person must not— (i) Commence or continue legal proceedings against the company or in relation to its property; or (ii) Exercise or enforce, or continue to exercise or enforce, a right or remedy over or against property of the company: (d) Unless the Court orders otherwise, a share in the company must not be transferred: (e) An alteration must not be made to the rights or liabilities of a shareholder of the company: (f) A shareholder must not exercise a power under the constitution of the company or this Act except for the purposes of this Part of this Act: (g) The constitution of the company must not be altered. (2) Subsection (1) of this section does not affect the right of a secured creditor, subject to section 305 of this Act, to take possession of, and realise or otherwise deal with, property of the company over which that creditor has a charge.[24] As noted in Keay, McPhersons Law of Company Liquidation (2001) at 7.01 the beginning of winding up means that a collective process is ushered in. Individual rights are surrendered as far as creditors are concerned and in exchange a right to share in the assets of the company is given. This is done so that there is an orderly winding-up process and the creditors will be paid pari passu, that is equally and rateably. [25] Judicially, liquidation or winding up has been described as "a process of collective enforcement of debts": In Re Lines Bros Limited [1983] Ch 1 at 20 per Brightman LJ.[26] This statement was endorsed by Lord Hoffman inWight v Eckhardt Marine GmbH [2004] 1 AC 147 (PC) where his Lordship further explained:26. It is first necessary to remember that a winding up order is not the equivalent of a judgment against the company which converts the creditor's claim into something juridically different, like a judgment debt. Winding up is, as Brightman LJ said in In re Lines Brothers Ltd [1983] Ch 1, 20, "a process of collective enforcement of debts". The creditor who petitions for a winding up is "not engaged in proceedings to establish the company's liability or the quantum of the liability (although liability and quantum may be put in issue) but to enforce the liability". 27. The winding up leaves the debts of the creditors untouched. It only affects the way in which they can be enforced. When the order is made, ordinary proceedings against the company are stayed (although the stay can be enforced only against creditors subject to the personal jurisdiction of the court). The creditors are confined to a collective enforcement procedure that results in pari passu distribution of the company's assets. The winding up does not either create new substantive rights in the creditors or destroy the old ones. Their debts, if they are owing, remain debts throughout. They are discharged by the winding up only to the extent that they are paid out of dividends. But when the process of distribution is complete, there are no further assets against which they can be enforced. There is no equivalent of the discharge of a personal bankrupt which extinguishes his debts. When the company is dissolved there is no longer an entity which the creditor can sue.The rationale of the rule that time limitation periods cease to run on liquidation[27] The origins of the rule that limitation periods stop running on the commencement of a winding up is usually attributed to the 1872 decision of In re General Rolling Stock Co. (1872) L.R. 7 Ch.App. 646. [28] In General Rolling Stock, the rule was justified on two grounds. First, the existence of the statutory scheme of distribution that arises on liquidation, and secondly the existence of a statutory provision staying actions against a company in liquidation. As regards the latter, it is clear the Court considered it would be unjust if time continued to run even although the proceeding was stayed. [29] If the only reason why time stops running is because claims are stayed and can only be pursued with the leave of the Court, then the issue of whether the NewZealand Parliament intended to change the law in 1993 relating to interim liquidations and stays would obviously assume critical importance. [30] However, it has not proved necessary for me to resolve that issue, because I have come to the view that the existence of a stay is only a subsidiary consideration. Or, to put it another way, even if I accepted Mr Lester's argument that notwithstanding the absence of any express provision in the 1993 Companies Act, claims are stayed on the appointment of an interim liquidator, I would still find time does not stop running. [31] In my view, the primary rationale for the rule is the liquidator's duty of distribution, the special statutory method of proving the claim and the liquidator's duty to decide claims. Those are not the functions of an interim liquidator. The latter's duty is one of preservation. The statutory scheme only comes into being on the making of the liquidation order and not before. [32] The fact there may be a stay on litigation against the company in the event of interim litigation does not have as its necessary corollary that time should stop running. The stay is only a procedural bar. The prospective litigant can always apply for leave. I accept that the fact of a stay has been invoked in the past to support the justice of the rule, but in my view it is not the reason for its existence. [33] A further argument advanced by Mr Lester was that it is commercially sensible to require time to stop running on an interim liquidation when it is inevitable the claims will be stayed on liquidation. I accept it has been held that the appointment of an interim liquidator is "to a large degree a pre-judgment on the winding up application itself": Elders Pastoral at 6 per Williams J. However, legally the appointment of an interim liquidator is not the beginning of a winding up. A winding up order may never be made. A provisional liquidation is a separate administration to the liquidation. [34] I am reinforced in the conclusion I have reached by consideration of the authorities.[35] First, while as I have said there is no authority directly on point, any formulation of the rule in the case law and in company law textbooks always appears to be limited to liquidation. There is no suggestion to be found anywhere that it applies equally to interim liquidations. Interim liquidations are never mentioned in connection with the rule in any of the texts cited to me by counsel. [36] Nor does there appear to be any express mention of interim liquidations in textbooks on limitation. Mr Lester referred me to a passage in Franks Limitation of Actions (1959) at page 28 which says "Where property is in court or in the possession of a receiver appointed by the court, this may stop time running against the persons entitled to it." Mr Lester argued that by analogy this must also apply in principle to interim liquidations. However, in my view, that is to draw too long a bow. The passage appears to be concerned with cases involving a specific item of property or sum of money in dispute. Again, interim liquidations do not rate a mention in any of the cases cited or in the textbook itself. [37] Further, there are at least two decisions where it is clear the Judge has assumed time would continue to run, notwithstanding the appointment of a provisional liquidator and notwithstanding the existence of legislative provisions requiring the leave of the Court in order to continue a proceeding. [38] The first of these is an Australian case Re Summit Design and Construction Pty Limited (1999) 33 ACSR 301. It concerned an application for leave to proceed against a company subject to interim liquidation. Significantly, at para 23 of the decision the Judge states:As to the risks and prejudice of the applicant, my attention was drawn to s 17 of the Act, under which proceedings in respect of a debt cannot be taken under an Act more than 12 months after the debt becomes payable. In the present case the company is only in provisional liquidation. It may be that some events may occur which will bring the provisional liquidation to an end. It would be unfair to the applicant, if that were to occur, that the time taken for the working out of the provisional liquidation meant that it had become statute-barred under s 17.[39] I acknowledge the passage is of limited value because the decision was delivered "ex tempore" and without any detailed discussion of the effect of liquidation on limitation periods. However, it is not without some significance,especially when combined with the assumptions that appear to be made in all the leading textbooks. [40] The second decision is an English case called Re Cases of Taffs Well Ltd[1992] Ch 179. The issue in Taffs Well was whether time ceases to run on the presentation of the winding up petition or the making of the winding up order, there being a provision in the relevant company legislation deeming the commencement of the liquidation to be the date the petition is filed. There was no interim liquidation involved. For present purposes, however, the significance of the decision is a passage at 193, which reads as follows:The consequences [of filing a winding up petition] can be summarised as follows. (1) There can be no valid disposal of the company's assets without the leave of the court. (2) Proceedings against the company may be restrained and if a provisional liquidator has been appointed such proceedings cannot be commenced without leave. (3) In some cases it has been held that a creditor's right to set off ceased to be available after the presentation of the petition, although later cases suggest that it survives until the date of the winding up order. (4) Until the recent changes in the rules, creditors could not prove for interest on debts after the date of the petition. (5) Disposals by way of fraudulent preference and the creation of floating charges during a period determined by the date of the petition are liable to be set aside. (6) Attachments, sequestrations, distress and executions become void on the presentation of the petition. All those matters, as I see it, are designed to ensure that the company's assets are preserved and in some cases recovered, so as to be available for realisation and distribution by the liquidator in due course to those entitled to them under the statutory scheme. The stopping of time against creditors at the date of the presentation of the petition does not serve any such purpose. Does justice require it? A positive answer would be required if the presentation of the petition prevented creditors about to be time barred from taking steps to stop time running. But save where a provisional liquidator has been appointed, a creditor can issue a writ as of right, even though the action may thereafter be stayed; and even where a provisional liquidator has been appointed, the creditor could no doubt obtain leave to issue a writ to protect his position. I reject the suggestion that justice requires the stopping of time.[41] In my view, it is implicit in this passage that time does not stop running in the event of a provisional liquidation even although the creditor may not be able to issue a writ as of right.[42] In relying on this passage, I have not overlooked the fact that elsewhere in the decision, the Judge held that on liquidation the creditor's cause of action is destroyed. That analysis was held to be wrong in a subsequent Court of Appeal case where it was said the correct position is that the cause of action remains as it was before the liquidation: see Financial Services Compensation Scheme Limited v Larnell (Insurances) Ltd (in liquidation) [2005] EWCA Civ 1408 (CA). However, I do not consider the particular passage I have quoted from Taffs Well is dependent on the creditor's action being regarded as destroyed. Moreover, the Court of Appeal itself in Financial Services reaffirmed the General Rolling Stock principle in terms of the liquidator's duty of distribution:18 It seems to me that Lord Hoffmann's analysis is correct and that Judge Paul Baker QC was wrong to describe a creditor's rights under a contract (or in tort) as being converted into a trust. In so far as it is necessary to ascertain what the creditor's rights are, they have to be established in contract, tort or otherwise as the case may be. The creditor's cause of action remains as it was before, so that, for example, the claimant correctly sues in tort in the present case. It is only as regards giving effect to those rights in the insolvency that the rights are subjected to the statutory trust resulting from the duty of distribution imposed on the liquidator or trustee in bankruptcy. Correspondingly, it is as regards giving effect to those rights in that way that, by virtue of the principle established in [General Rolling Stock], the period of limitation ceases to run when the liquidation or bankruptcy commences. [emphasis added][43] Two other authorities the combined effect of which inferentially support the conclusion I have reached are the decisions of Re AH Hodge & Sons Limited (1984) 2 ACLC 707 cited in Brooker's Insolvency Law and Practice at para CA246.04 andJoshua Shaw & Sons Limited [1989] BCLC 362. In Joshua, it was confirmed that the appointment of receivers does not result in time ceasing to run, while Hodge held that the appointment of an interim liquidator is unlikely to be made if a receiver and manager of the company's assets is already in place. As Mr Chisholm pointed out, this exposes a significant weakness in Orion's argument because it would mean the suspension of time was dependent upon whether or not the company's assets were already being protected by an alternative administration, which would be a most unusual result. [44] My conclusion is that under the rule in General Rolling Stock time only stops running on the making of the liquidation order and not before.Outcome of hearing[45] This case has been well argued on both sides. However, after careful consideration of all the submissions, I have come to a clear view that time did not stop running on the appointment of Horne/Crichton as interim liquidators. [46] Orion's application challenging the decision of the liquidators is accordingly dismissed. [47] As regards costs of the proceeding, my expectation is that the parties will be able to reach agreement. If, however, that does not prove possible and the parties require me to make an award, I direct the respondent is to file submissions first, with the applicant filing submissions in reply ten working days thereafter.Solicitors: Layburn Hodgins, Christchurch (Counsel: D Lester, Christchurch) Mortlock McCormack Law, Christchurch 8141