COMMENT A recent court ruling will therefore provide a powerful precedent for creditors and others seeking to review the actions of a “friendly” liquidator appointed by the shareholders of a company.
COMMENT
Liquidators often need to find out information about a company in liquidation as quickly and cheaply as possible.
As a result, the Companies Act gives a liquidator the power to require a wide range of people to produce documents or to be examined by the liquidator.
In a sweeping decision last month, Justice Paiul Heath emphasised the limits liquidators face in exercising their powers to examine witnesses and seek documents, particularly where they are acting for an ulterior purpose or oppressively.
In the decision, ANZ National Bank Ltd v Sheahan and Lock, Justice Heath also addressed a number of related issues, including the misuse of an examination transcript by liquidators and the ability of an overseas liquidator to examine a witness in New Zealand.
Background
The litigation concerned Cedenco NZ and Cedenco AU, which were processors and distributors of fruit and vegetable products.
In 2009, ANZ NZ appointed receivers to Cedenco NZ and ANZ AU appointed receivers to Cedenco AU.
The receivers continued to trade and ultimately sold the companies’ businesses and assets for significant sums. As a result, all secured and unsecured creditors were paid in full, with a surplus available for distribution to shareholders.
The liquidators, Messrs Sheahan and Lock, were subsequently appointed to Cedenco NZ by shareholder resolution. They were also appointed to Cedenco AU.
The liquidators are based in Australia, and have charged their Australian rates for the liquidation of Cedenco NZ, at $NZ1045 per hour (including GST).
Although it was the receivers who traded and sold the business, the liquidators of Cedenco NZ charged fees and expenses of $NZ2,393,719, plus GST, for the first 21 months of the liquidation.
Justice Heath observed that ordinarily, where creditors have been paid and liquidators’ costs are “spiralling upwards”, it would be appropriate to terminate the liquidation. That has not happened here.
Liquidators’ powers to examine witnesses and obtain documents
The liquidators of Cedenco NZ issued notices under the Companies Act seeking documents from ANZ and seeking to examine an ANZ bank employee. ANZ and its employee were both represented by Bell Gully.
In response to the notices, ANZ produced certain documents, but said that it would not produce internal bank documents. Likewise, the bank employee appeared for an examination, but did not answer questions seeking internal bank information.
The liquidators applied to the court for orders seeking the internal bank documents and that the bank employee be required to answer questions seeking internal bank information.
Justice Heath refused to make the order sought by the liquidators. He ruled that in the absence of a court order, a liquidator may only require a third party to provide the liquidator with documents that belong to the company in liquidation.
The liquidator cannot require delivery of a third party’s own documents, unless he or she obtains a court order.
Justice Heath refused to make such an order for the production of internal bank documents or for a further examination of the bank employee, ruling that “the factors weighing against examination far exceed these in favour”.
He ruled:
Liquidators’ misuse of the bank employee’s transcript
After taking the bank employee’s examination in the liquidation of Cedenco NZ, the liquidators provided the transcript to themselves in their capacity as the liquidators of Cedenco AU to use in Australian court proceedings for a purpose extraneous to the New Zealand liquidation.
Because the examination was private, the transcript should only have been used for the purposes of Cedenco NZ.
Justice Heath therefore ruled that the use of the transcript in Australia amounted to misconduct by the liquidators and issued a declaration that the liquidators had acted improperly.
Justice Heath also observed that the occasional tendency on the part of the liquidators and their advisers to conflate their discrete roles as liquidators of Cedenco NZ and Cedenco AU was unfortunate.
More generally, Justice Heath ruled that liquidators and witnesses must make individualised arrangements about the purposes for which an examination transcript and exhibits may be used, given the lack of any clear direction in the Companies Act.
Witnesses’ ability to seek payment of their costs
ANZ sought an order for the payment of its legal costs by the liquidators, under the Companies Act.
The court said the purpose of the provision allowing the payment of remuneration to witnesses under the Companies Act is to protect a self-employed person from losing earnings while assisting the liquidator, or to protect an employee who has to take leave to assist the liquidator.
It was not to reimburse an employer for remuneration paid to an employee while an employee is attending an examination, which was the case here.
In addition, Justice Heath said the provision allowing the payment of “travelling and other expenses” under the Companies Act does not include legal costs, and that ANZ could not claim its legal costs in complying with the notices because ANZ elected to incur those costs for its own benefit.
Justice Heath also ruled the bank was not entitled to the payment of its costs under its security documents, as a matter of interpretation and public policy.
Examinations under the Model Law
In their capacity as the liquidators of Cedenco AU, Messrs Sheahan and Lock sought to rely on the Model Law on Cross-border Insolvency to examine Ms Dekker in New Zealand.
Justice Heath referred to many of the same factors that apply to an examination by a New Zealand liquidator under the Companies Act, and concluded that the competing considerations were “finely balanced”.
He therefore sought further evidence as to whether the AU liquidators would be entitled to examine the bank employee if she were resident in Australia. This evidence was sought on the basis that it would be wrong to allow an Australian liquidator to examine in New Zealand in circumstances that would not be permitted in Australia.
All liquidators are officers of the court
Finally, the liquidators argued that because the Cedenco NZ liquidations were commenced voluntarily by its shareholder, the liquidators are not officers of the court and cannot be sanctioned for breach of their duties as officers of the court.
Justice Heath rejected earlier cases to the contrary and concluded the court has an inherent jurisdiction to supervise all liquidators, however appointed.
He observed that liquidators appointed by shareholders are more likely to require greater supervision, because in many cases they are seen as the shareholders’ protectors.
The court’s ruling will therefore provide a powerful precedent for creditors and others seeking to review the actions of a “friendly” liquidator appointed by the shareholders of a company.
Murray Tingey is a partner and David Friar a senior associate at law firm Bell Gully
