TOBEM HOLDINGS LTD v KID COUNTRY HOLDINGS LTD (IN LIQ) [2022] NZHC 2367

TOBEM HOLDINGS LTD v KID COUNTRY HOLDINGS LTD (IN LIQ) [2022] NZHC 2367 [16 September2022]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV-2020-404-000987[2022] NZHC 2367UNDER Section 248 of the Companies Act 1993BETWEEN TOBEM HOLDINGS LIMITEDPlaintiffAND KID COUNTRY HOLDINGS LIMITED (INLIQUIDATION)DefendantHearing: 7 September 2022Appearances: T Nelson for the PlaintiffA Botterill as liquidator for the DefendantJudgment: 16 September 2022JUDGMENT OF GORDON JThis judgment was delivered by meon 16 September 2022 at 12.30 pm, pursuant tor 11.5 of the High Court RulesRegistrar/Deputy RegistrarDate:Solicitors/Counsel:T Nelson, AucklandWaterstone Insolvency, AucklandIntroduction[1] The plaintiff, Tobem Holdings Ltd (Tobem), commenced proceedings againstthe first defendant, Kid Country Holdings Ltd (Kid Country), on 29 June 2020. Theproceedings concern alleged defaults on lease obligations by Kid Country, as lessee,to Tobem, as lessor.[2] On 31 May 2022, nine working days before the scheduled hearing,Kid Country was placed into voluntary liquidation.[3] Tobem now seeks leave under s 248(1)(c) of the Companies Act 1993 (the Act)to continue legal proceedings against Kid Country.[4] The appointed liquidators of Kid Country oppose the application.Background[5] In February 2019, Tobem purchased a commercial property fromVaco Investments (Henderson Project) Ltd (Vaco) with tenancies in place.[6] The most significant commercial tenancy was a lease agreement withKid Country, dated 23 November 2016, with an annual rent of $390,000.[7] Settlement was on 19 July 2019. Kid Country then contacted Tobem and saidit considered the lease agreement invalid because of various alleged acts or omissionsby Vaco, principally concerning representations as to the way in which rent would becalculated.[8] The lease agreement between Tobem and Kid Country commenced on18 August 2019. However, Kid Country did not make a single rental or OPEX1payment to Tobem. After repeated and unsuccessful efforts to engage withKid Country, Tobem cancelled the lease in June 2020.1 Operational expenditure.[9] On 29 June 2020, Tobem filed this proceeding against Kid Country and Vaco,seeking compensation for its losses. Vaco's sole director, Anthony Arnerich, wasjoined as a third party.2 Kid Country actively defended the proceeding and broughtcross claims against Vaco and Mr Arnerich.3 Briefs were served by both Tobem andKid Country. The trial was scheduled to start on 13 June 2022.[10] On 31 May 2022, Kid Country was placed into voluntary liquidation by aspecial resolution of its shareholders.4 The liquidation effectively stayed theproceeding to determine Tobem's claims.5 Adam Botterill and Damien Grant wereappointed as joint liquidators.[11] Tobem duly lodged a proof of debt claim of $234,135.35 with the liquidators,being the sum Kid Country is said to owe Tobem under the lease agreement. Otherclaims pursued by Tobem against Kid Country in the proceeding – involving financialloss – cannot be characterised as debt and are not sought as a debt claim.[12] Tobem moved to have the liquidators replaced but was outvoted. Tobem saysit was outvoted by two minor creditors with claims of $6,624.00 and $944.91respectively, each of which had given their proxy vote to the chair of the meeting.[13] As at 2 September 2022, the liquidators had received three proofs of debt. Theliquidators have not advised Tobem of the identities of the two other creditors. Theyhave provided Tobem with a bare assertion that "no related creditors were counted forvoting purposes" (at the hearing the Court was given a generic description of thetwo creditors). The liquidators have declined to consent to continuation of Tobem'sproceeding.2 On 14 July 2022, Tobem filed a notice of discontinuance in relation to its claim against Vaco andMr Arnerich, with no issue as to costs. The discontinuance was consented to by the liquidators ofKid Country.3 On 2 August 2022, Kid Country, through its liquidators, filed a notice of discontinuance in relationto its cross claims against Vaco and Mr Arnerich.4 Companies Act 1993, s 248(1).5 Companies Act, s 248(1)(c).Legal principles[14] The liquidation of a company commences at the date and time at which theliquidator is appointed.6 Once a company has been put into liquidation, proceedingsagainst it may only be continued or commenced with the leave of the court oragreement of the liquidator. Section 248 of the Act, which sets out the effect ofcommencement of company liquidation, provides, in part, that:(1) With effect from the commencement of the liquidation of a company,—(a) ...(b) ...(c) unless the liquidator agrees or the court orders otherwise, a personmust not—(i) commence or continue legal proceedings against the companyor in relation to its property; or(ii) exercise or enforce, or continue to exercise or enforce, a rightor remedy over or against property of the company:...[15] The purpose of s 248(1)(c) is to ensure that the assets of a company inliquidation are administered in an orderly fashion for the benefit of all creditors, andthat particular creditors are unable to obtain an advantage by bringing proceedingsagainst the company.7 New Zealand courts have emphasised that the key question iswhether the claim is more appropriately dealt with in the liquidation or byproceedings.8[16] The Act does not define the expression "legal proceedings". However, thecourts have interpreted the phrase broadly, having regard to the objectives ofs 248(1)(c).6 Companies Act, s 241(5).7 Steel & Tube Co of New Zealand Ltd v Barker & Pollock Ltd [1973] 2 NZLR 30 (HC) at 32,citing Langley Constructions (Brixham) Ltd v Wells [1969] 1 WLR 503 (EWCA Civ) at 508.8 See, for example, Satara Co-operative Group Ltd v Fus Ltd (in liq) HC Napier CIV-2008-441-856, 28 January 2010 at [9].[17] In determining whether to grant leave under s 248, the key question for thecourt is whether there are any circumstances which render it necessary that the legalproceedings should continue, or, to put it another way, whether the plaintiff's claim isnot one that can easily be dealt with in the liquidation.9 The onus is on the partyseeking leave to satisfy the court that leave should be given.10[18] The court's discretionary grant of leave under s 248 is likely to involveconsideration of:(a) Whether the proceeding will produce an advantage to a particularcreditor over other creditors;11(b) Whether the assets of the company in liquidation will be dissipated inwasteful litigation, particularly if there is a more convenient method fordetermining the claim;12(c) The amount and seriousness of the claim, the degree and complexity oflegal and factual issues and, if proceedings have already beencommenced, the stage they have reached;13 and(d) Whether the liquidator is likely to require the claim to be proved, findit difficult to determine and, accordingly, reject it.14[19] Leave should be declined for a proceeding which is "clearly not sustainable",but otherwise the court will not inquire into the merits of the proposed claim.159 Sharnick Holdings Ltd (in liq) v Sharnick Investments Ltd (in liq) (2003) 9 NZCLC 263,264 (HC)at [19]–[22]; Hook v Gulf Harbour Development Ltd HC Auckland CIV-2002-404-1931,23 November 2005 at [56]–[60].10 Fisher v Isbey (1999) 13 PRNZ 182 (HC) at [19(d)] (footnote omitted).11 Satara Co-operative Group Ltd v Fus Ltd, above n 8, at [12].12 Fisher v Isbey (1999), above n 10, at [19(c)] (footnote omitted).13 McPhail v Durbridge Developments Ltd (in liq) (1998) 8 NZCLC 261,610 (HC) at 261,612;Johnson v CBD Real Estate Ltd (in liq) (1999) 14 PRNZ 320,322 (HC) at[13]; Body Corporate81381 v Trebe NZ Ltd (in liq) CIV-2003-485-332, 13 May 2003 (HC) at [22].14 Clarence Holdings v Mt Albert TV (1993) Ltd (1999) NZCLC 262,072 (HC) at [4]; Hook v GulfHarbour Development Ltd (in liq), above n 9, at [56]–[60].15 Bastin Enterprises Ltd v Graham HC Auckland CIV-2008-404-4443, 4 November 2009at [27]; Satara Co-operative Group Ltd v Fus Ltd, above n 8, at [5]; Sieradzki v KahikateaManufacturing Ltd (in liq) (2000) 8 NZCLC 262, 241 (HC) at [7]–[8].Further, leave will usually be declined if the proceedings sought to be commenced,even if successful, are likely to be fruitless.16[20] The Act provides no guidance as to when the liquidator should agree to thecommencement or continuation of legal proceedings. Costs have been awardedagainst liquidators on the basis that the liquidator ought to have consented to thecontinuation of the proceeding and ought not to have put the applicants to the expenseof making the application.17Applicant's position[21] Tobem advances three key reasons why leave should be granted.[22] First, counsel for Tobem, Mr Nelson, submits that continuing the proceedingwould avoid undue delay. On the date liquidation commenced, Tobem had alreadywaited around two years for a hearing, briefs had been served by both parties and thematter was otherwise ready to proceed. Kid Country was placed in liquidation lessthan two weeks before trial. Given that both parties were ready to proceed, the claimcan now be progressed through the courts at relatively low cost to the parties. On theother hand, if the claim is determined through the liquidation process and is rejected,Tobem will then have to file new court proceedings to challenge the liquidators'decision.[23] Mr Nelson refers the Court to Nicholls v Tamariki Ltd (in liq), in which Lang Jdetermined that leave under s 248(1)(c) should be granted:18[9] When the proceeding was called before me on 19 August, counsel for theliquidators advised me that his clients did not consent to the continuation ofthe proceeding. He told me that the liquidators would prefer the plaintiffs tofile a claim in the liquidation in the usual way.[10] I did not consider this to be acceptable. The plaintiffs had waited formore than a year for their fixture. There could be no guarantee that theliquidators would accept their claim. If the liquidators rejected their claim,the plaintiffs would be required to file a fresh proceeding in this Court. That16 Johnson v CBD Real Estate Ltd (in liq), above n 13, at [13]; Birchall v Project Works ConstructionLtd (in liq) (2004) 9 NZCLC 263,547 (HC) at [24].17 Hoggart v Richworth Properties Ltd HC Auckland M146-IM03, 31 March 2003 at [17]–[19].18 Nicholls v Tamariki Ltd (in liq) (2008) NZCPR 615 (HC).would inevitably delay resolution of the plaintiffs' claim for a furthersubstantial period.[11] I considered that the interests of justice required the plaintiffs to bepermitted to proceed with their claim without further delay. [13] In the absence of any other explanation for the timing of theresolution, I view the shareholders' decision to place Tamariki in liquidationon the day before the commencement of the trial as a cynical act. It appearsto have been orchestrated so as to prevent the plaintiffs from having this matterbrought to a resolution.[24] With reference to Nicholls, Mr Nelson submits that the timing of theliquidation, and the failure to disclose the identities of the minor creditors who votedin favour of voluntary liquidation, is suspicious. As the liquidators have declined toconsent to the continuation of this proceeding, Mr Nelson submits there is a heightenedrisk that the liquidators will reject Tobem's claim.[25] Second, Mr Nelson submits that this Court is the most appropriate forum forthe determination of its claim, due to its complexity. This is not just a simple debt forwhich proof can be submitted in the liquidation. In particular, Tobem seekscompensation from Kid Country for three categories of loss: (a) the paymentsKid Country was required to make under the lease; (b) costs Tobem had to incur tofind a replacement tenant (totalling over $1,000,000); and (c) the difference betweenthe rent payable under the new lease and the lease with Kid Country. Tobem therebypursues substantial loss of bargain damages, which depend on factual and legalfindings as to the reasonableness of its conduct and expenses in mitigation. Tobemsays that the matter is further complicated by the backdrop of COVID-19.[26] More generally, Mr Nelson submits that the claim passes any threshold of"sustainability", to the extent that there is any such requirement. Kid Country did notapply to strike out Tobem's claims and was in fact preparing to defend them. Tobemsays that the merits of the claim have not been disputed by the liquidators.[27] Third, Mr Nelson submits that the impact on the other creditors of granting thisapplication will be minimal and unlikely to be disadvantageous in any meaningfulsense. Tobem has lodged a proof of debt for $234,135.35. There are only two otherdisclosed creditors which have made small respective claims of $6,624.00 and$944.91. Tobem will still have to establish its claim to the Court's satisfaction. Evenon a formal proof, the High Court does not simply "rubber stamp" the claim.[28] Finally, Mr Nelson submits that no evidence has been filed to indicate that theproceeding will be fruitless, even if successful. The mere fact that the relevantcompany is in liquidation will not be sufficient to justify such an inference.19Respondent's position[29] Mr Botterill, as one of the appointed liquidators of Kid Country, submits thatleave should be declined because the continuation of the proceedings may:(a) increase the time and cost of liquidation, reduce distributions availableto all creditors, dissipate and possibly waste Kid Country assets;(b) unduly advantage or prioritise Tobem's interests over other creditors'interests; the largest creditor does not take precedence and furtherclaims may yet be received; and(c) inhibit prospective claims against Vaco and Mr Arnerich and potentialfinancial recovery by making binding determinations on the lease.[30] Mr Botterill submits that Tobem's claim does not involve extraordinarilycomplex disputes in fact and law, as it merely relates to a breach of lease. Further, hesays the proceeding will likely be fruitless, as the liquidators are currently unable tomake distributions.[31] Mr Botterill distinguishes Nicholls v Tamariki Ltd (in liq). He says that theplaintiff in Nicholls had already obtained declarations from the Court that thedefendant company's purported cancellation of the agreements was invalid, and thedefendant company was non-cooperative. Here, Mr Botterill says that Kid Countryand the liquidators have not acted in a way to purposefully prejudice against any19 Chappel v Swindells [2018] NZHC 506 at [12].creditors. He says the liquidators declined to consent to the continuation of theproceeding because it is not the most effective method of actual recovery fordistribution to the creditors.[32] Mr Botterill submits that this Court will be unable to obtain the complete setof facts necessary to make a determination on the proceeding if the liquidators elect toabide the Court's decision, rather than defend the proceeding. He says that asliquidators have the powers to obtain all relevant information,20 including byexamining persons on oath,21 they are well-equipped to determine the claim.DiscussionDelay[33] I accept that a claim by Tobem in the liquidation could cause undue delay. Ithas already waited two years for a hearing. If the liquidators were to reject the claim,Tobem would then have to challenge the rejection in court. By contrast, theproceeding can continue at low cost. The case was ready for trial.[34] An example of just such a delayed process can be seen in JK Trading Ltd vRimpro-Tec Ltd (in liq)22 where the proceeding was set down for trial commencing on30 April 2018. Rimpro-Tec was put into voluntary liquidation on 21 March 2018.JK Trading made its claim for damages as an unsecured creditor in the liquidation.That claim was rejected by the liquidators. JK Trading then made an application on21 September 2018 for leave under s 248(1)(c) to continue its proceeding againstRimpro-Tec.[35] I accept the analogy Mr Nelson draws to Nicholls. There is at least a sense of"convenient timing" (to borrow the expression from Jagose J in JK Trading Ltd)23 inKid Country being put into liquidation so close to the trial date.20 Companies Act, s 261.21 Companies Act, ss 261(3)(c) and 265(1).22 JK Trading Ltd v Rimpro-Tec Ltd (in liq) [2019] NZHC 376.23 At [12].[36] I do not consider Nicholls can be distinguished in the way Mr Botterill seeksto do. The earlier declarations made in favour of the plaintiff against Tamariki forbreach were separate from the later proceeding that was before Lang J. The earlierdeclarations were mentioned in the judgment as part of the general background but didnot feature in the reasoning of the Judge granting leave under s 248(1)(c) in that case.Complexity of claim[37] The plaintiff's claim seeks three categories of damages against Kid Country:(a) The rent and OPEX payments Kid Country was required to make underthe lease;(b) Costs Tobem incurred to find a replacement tenant (totalling more than$1,000,000); and(c) The difference between the rent payable under the new lease and therent payable under the lease with Kid Country.[38] Tobem has filed a proof of debt in the liquidation relating to the first (debt)aspect of its claim above. But the rest of the claim has a degree of complexity moresuited to High Court proceedings.[39] Mr Botterill makes the submission that the dealings between Kid Country andVaco will be highly relevant to a finding whether Kid Country in fact breached theterms of the lease. Mr Botterill says the High Court will not have all the relevantinformation on that issue that the liquidators would be entitled to obtain under theirstatutory powers. Related to that submission, Mr Botterill says that if the liquidatorsdecide to bring proceedings against Vaco then any findings by this Court on Tobem'sclaim in relation to the terms of the lease may prejudice such later proceedings.[40] As to Mr Botterill's first point, a significant number of documents, includingsworn affidavits by the directors of Kid Country and Vaco,24 have already been filed24 Affidavit of Mr Arnerich, as sole director of Vaco, in support of Vaco's application for summaryjudgment against Tobem and Kid Country, sworn 16 September 2020; Affidavit of David Lowry,in this proceeding. That evidence may be used by Tobem in continuing theproceeding.25 But in any event Tobem will need to establish its claims to thesatisfaction of the Court.[41] Next, as to the prospect of a later proceeding by the liquidators against Vaco, Iobserve that the liquidators consented to Tobem discontinuing its claim against Vacoand Mr Arnerich. There was also a cross claim against Vaco which the liquidatorswithdrew. Mr Botterill did not have a satisfactory explanation as to why, in thosecircumstances, the liquidators may wish to proceed against Vaco and Mr Arnerich.Question of comparative advantage[42] Granting Tobem leave to continue proceedings does not give Tobem anyadvantage over other creditors, in and of itself. In Satara Co-operative Group Ltdv Fus Ltd, Gendall J held that granting the leave application would not produce anyadvantage to the plaintiff in that case, as the proceeding itself would simply prove ordisprove the plaintiff's claim as an unsecured creditor.26 As observed more recentlyby Jagose J in JK Trading, "No advantage in itself is obtained by bringing proceedingsor obtaining judgment".27[43] As the learned authors of Heath and Whale note:28It is rare that the institution of proceedings or recovery of judgment operatesto confer an advantage on a litigating creditor In most cases the court is likely to consider that the plaintiff should have theopportunity to establish his claim against the company by way of civilproceedings so that he or she can claim alongside the other unsecuredcreditors.[44] Tobem's proof of debt is for $234,135.35. There are only two other creditorsto date who have made small claims of $6,624 and $944.91. Given the size of thoseas director of Kid Country, in support of Kid Country's opposition to Vaco's summary judgmentapplication, sworn 16 October 2020. Numerous documents are annexed to both affidavits,including the Agreement to Lease between Vaco and Kid Country and legal correspondencerelating to the lease dispute which forms the background to the current proceeding.25 High Court Rules 2016, r 7.32.26 Satara Co-operative Group Ltd v Fus Ltd, above n 8, at [12].27 JK Trading Ltd v Rimpro-Tec Ltd (in liq), above n 22, at [7].28 Paul Heath and Michael Whale (eds) Heath and Whale on Insolvency (online ed, LexisNexis) at[21.4]claims, the granting of leave is unlikely to be disadvantageous to those creditors in anymeaningful sense.Would the proceeding be fruitless?[45] There is no evidence that the proceeding will be fruitless as no evidence hasbeen filed by the liquidator as to Kid Country's financial position. The mere fact thatthe company concerned is in liquidation will not be sufficient to justify an inferencethat the proceeding is likely to be fruitless.29Result[46] For all the above reasons I grant the application by Tobem and make thefollowing orders:(a) Leave is granted to continue the present proceeding againstKid Country Holdings Ltd as a company in liquidation;(b) The substantive proceeding is to be set down for a two hour formalproof hearing: the date to be allocated by the Court; and(c) Evidence in the proceeding may be given by affidavit under r 9.56(1)of the High Court Rules 2016.Costs[47] I reserve costs. Tobem, as the successful party is prima facie entitled to costs.If the parties are able to agree costs a joint memorandum is to be filed within20 working days of the date of this judgment. If costs cannot be agreed Tobem is tofile and serve its memorandum in support of an application for costs within fiveworking days of the date for the joint memorandum. The liquidators are to file andserve their response within five working days of the date of service of Tobem'smemorandum on them.29 Chappel v Swindells [2018] NZHC 506 at [12].[48] Costs memoranda should not exceed three pages (excluding any attachments).I will determine costs on the papers._____________________________Gordon J