New Zealand Tiny Homes (Tiny Homes) fell victim to liquidation on 15 November 2022. After its incorporation in 2020 this was a short, but most certainly not sweet, business affair for its director James Cameron of New Plymouth.
The liquidation of Tiny Homes was said to be linked to the liquidation of Tiny Town Projects Limited (Tiny Town) which was also liquidated on 15 November 2022, another of Mr Cameron’s companies incorporated in 2017.
Tiny Town and Tiny Homes were related companies. Tiny Homes held the intellectual property for the creation of building small properties in New Zealand, whereas Tiny Town was the company that actually attended to the building of these properties
The business of Tiny Homes and Tiny Town
Tiny Homes and Tiny Town were in the business of building small properties for consumers in New Zealand. The size of these properties allowed for a far more accessible fixed purchase price for home buyers.
At the time of liquidation of Tiny Homes and Tiny Town, there were a number of these homes that were virtually completed. The only hurdle being procedural matters of gaining compliance before title in the property could pass from Tiny Town to the purchaser.
It is important to note that each of these homes was customised and built on the purchaser’s instructions. A sale and purchase agreement was signed for each home and payment of the purchase price was paid to Tiny Town in instalments.
The first liquidator’s report of Tiny Town that the issues stemming from COVID-19, a spike in building costs and supply chain issues impacted the company’s ability to ‘fulfil fixed price contracts.’ This inability to fufil fixed price contracts led to both Tiny Town and Tiny Homes demise.
The liquidation
In November 2022, Tiny Town was placed into liquidation. At the point of liquidation there were 6 homes that were partially completed. Of the 6 purchasers of these homes, 3 had paid the full purchase price of their respective homes and were awaiting small changes to be made to be issued a code of compliance before the homes could be delivered. The remaining 3 purchasers had homes that were 40%-50% complete.
The first liquidators report for Tiny Town showed the company had very few assets, bar the 6 homes in question.
The liquidators filed proceedings in the High Court seeking directions on how to best deal with the 6 homes.
The proceedings
The case of Manginness v Tiny Town Projects Limited (In Liquidation) [2023] NZHC 494 (the Proceeding) was heard before Venning J on 20 February 2023 with the judgment being delivered on 14 March 2023.
One of the issues to be decided in the Proceeding was whether the 3 fully paid purchasers were entitled to take ownership of the homes, or whether they belonged to Tiny Town. There were also issues raised in relation to the Personal Property Securities Act 1993 (PPSA) as to whether an equitable lien was granted over all 6 homes.
When does property pass?
The first issue was whether property in the homes had passed to the 3 fully paid purchasers. Counsel for the purchasers argued that as the purchase price had been paid in full, the homes should pass to the purchasers. Counsel argued the compliance certificate should not be the decisive factor as in the liquidator’s evidence it was accepted delivery of the homes would occur when full payment was made, not when the compliance certificate was issued.
Venning J rejected this argument, stating that, property will only pass when the homes are ‘in a deliverable state.’ Venning J defined the deliverable state as when the compliance certificate was issued.
It was concluded on the first issue that property in the homes had not passed to the purchasers.
An equitable lien
Counsel for the purchasers argued that even though there was uncertainty on the property passing, that under section 53 of the PPSA the purchasers had an interest in the homes, whether by way of an equitable lien or a constructive trust.
An equitable lien is a form of equity which the Court can grant to give an indemnity or priority over other creditors. On the other hand, a constructive trust is a trust created whereby one person holds property for the benefit of another, it prevents someone holding property from unjustly benefitting from the holding of that property.
Venning J considered that section 53 of the PPSA did not apply here. However, His Honour’s view was different on the topic of an equitable lien. It was argued by counsel for the purchasers that an equitable lien should be granted to all purchasers over the homes based on the extent of money paid to Tiny Town by them.
A key argument is that these homes were identifiable to each purchaser, and had been built to their specifications. Counsel for the purchasers argued that “the purchasers’ equitable lien confirmed their in rem rights in the tiny homes that trumped any competing claim in the liquidation.”
Venning J submitted this was a difficult issue to ascertain based on the facts of this case. His Honour laid weight on the fact these homes were specified to each purchaser and could not reasonably have been sold by the liquidators to other parties. Venning J concluded there was an equitable lien over the 6 homes.
The next issue was whether the lien was subject to the PPSA, to which Venning J referred to it as being excluded under section 23(b) of the PPSA. His Honour’s full conclusion was “I conclude that the individual purchasers are entitled to equitable liens for the extent of the value of the purchase moneys paid by them and that their equitable liens sit outside and are not affected by the provisions of the PPSA.”
The result of the judgment was that the purchasers of the 6 homes were entitled to an equitable lien against the homes to the extent of the purchase moneys paid by them.
Summary
This judgment has been described as ‘ground-breaking’ and that certainly is the case. This judgment will change the way assets in liquidation are dealt with. The judgment gives rights to the purchasers in a situation where in the normal course of the liquidation it would be common for them to lose their assets.
This decision plays on the fairness of the justice system and emphasises the importance of natural justice in a situation where typically there really are no winners. Although it is arguable this ruling is to the disadvantage of other unsecured creditors in the liquidation, it is weighed on the balance of taking away homes from 6 individuals who in some cases may have been left homeless without this judgment.
The judgment will cast a positive light on the prospects of recovery in liquidations for some creditors, showing them the law of equity can assist in certain circumstances. However, it also results in some doubt for secured creditors whose position is ultimately worsened if equity prevails.
In this case it seems as If on the balance the correct decision was made, however this may not always be the case. If you require assistance on your position as a creditor in a liquidation or want some further information on your rights please do not hesitate to contact us for a free no obligation discussion.
Our lawyers at Norling Law can discuss the outcome of this case as part of our no obligation legal consultation. To book a free 30-minute consultation please click this link
There is no doubt that bankruptcy is never a position you expect to find yourself in. However, declaring bankruptcy is more common than one may think. In the wake of COVID -19, rising living costs, inflation and the devastation from natural events the prevalence of bankruptcy is more visible in the community, even though rates of bankruptcy are not as high as they once were.
The number of individuals who declared bankruptcy for the period of July 2021 to June 2022 was 528 in comparison with the figures from July 2016 to June 2017 where 1873 individuals were declared bankrupt.
Besides the clear decrease in number of bankruptcies occurring, the main difference between declaring yourself bankrupt in is the prevalence of conversations about insolvency and bankruptcy in general. New Zealanders are having to declare bankruptcy at no fault of their own, but rather as a victim of the circumstances of our current economic climate.
This article aims to inform you on what bankruptcy is, and what you need to be aware of if you are faced with debts which you are not able to manage.
The basics
Bankruptcy can occur when an individual is unable to pay their debts as they become due. If you are unable to pay your debts as they fall due you are insolvent. The typical length of a bankruptcy is three years from the date upon which you file your statement of affairs with the Official Assignee (OA) but can be extended in certain circumstances.
A person who owes debts can make a voluntary application for bankruptcy. This process is relatively easy and does not require legal representation. An ordinary layperson can make themselves bankrupt or can wait until a creditor adjudicates them bankrupt via the prescribed process at the High Court.
However, bankruptcy should not be viewed as an easy way out of paying debts as it can have significant and potentially long lasting consequences for the bankrupt. It is also important to note that bankruptcy does not wipe all of your debts, court ordered fines, orders of compensation for creditors and child support fees will be still viewed as due and owing by you.
Bankruptcy removes the control over your assets. You will no longer be able to live your life as your normally would, and are bound by a number of duties and restrictions which we will discuss in this article.
Voluntary Application
To enter bankruptcy a debtor must have debts greater than $1,000.00.
An application can be made on the insolvency.govt.nz website, a response by the OA should be received within 10 working days of making the application. It is up to the OA to decide whether the proposed bankrupt is accepted to bankruptcy.
It is also important to consider whether bankruptcy is the best option for a voluntary insolvency procedure. If you have not been made bankrupt before, have no assets of value and have debts of under $50,000.00 no assets procedure may be a more favourable option.
Creditor application
A creditor may also make an application to the High Court seeking that the debtor be adjudicated bankrupt.
The debtor must have committed an act of bankruptcy within the last 3 months before the filing of the application and the debt must be a liquidated sum of more than $1,000.00.
An act of bankruptcy is central to the creditor’s application. It must show an act of personal default by the debtor. There are 12 separate acts of bankruptcy, but the most common act alleged by a creditor is failure to comply with a bankruptcy notice.
Once the creditor makes an application there will be a hearing. the debtor does not have to attend the hearing. If they do not attend it is very likely the Judge will adjudicate the debtor bankrupt.
Responsibilities and restrictions under bankruptcy
When a debtor is made bankrupt they must first file a statement of the debtor’s affairs in the prescribed form. It is important this form is returned to the OA as the period of 3 years for bankruptcy does not begin until the statement of affairs is returned to the OA.
Once bankrupt, the property of the bankrupt vests in the OA. The definition of property is very wide in the Insolvency Act 2006. It might include any interests in trusts that can be defined as property. It may also include any interests in property (such as a 50% claim against the property of a spouse/de facto partner). Income earnt between the time of commencement of bankruptcy and discharge is also included as acquired property, so any income earnt by the bankrupt vests in the OA.
However, in most bankruptcies if the income is modest the OA will not take any steps as bankrupts have a right to retain earnings that are necessary to maintain themselves, their spouse and family to a reasonable standard. This includes necessary tools for trade, necessary household furniture and effects, motor vehicle worth up to $6,000.00 and in most cases, Kiwisaver funds.
The OA is entitled to look at transactions you have made in the years before your bankruptcy. These transactions can be deemed a voidable transaction, which is payment or transaction made whilst you were about to be made insolvent. The OA can reverse these transactions, therefore if you are considering going bankrupt disposing of assets is not recommended.
If a sole business owner is made bankrupt, there are serious consequences. The OA may shut down the business and any assets will be sold to pay creditors.
Other restrictions on the bankrupt include:
A bankrupt is unable to be a director of a limited liability company;
A bankrupt cannot incur credit of more than $1,000 without making the creditor aware that the bankrupt is bankrupt;
A bankrupt must not prevent, attempt to prevent or hamper the OA dealing with any property or assets;
A bankrupt must notify the OA whenever they change their name, address, employment or income/expenditure;
A bankrupt must not leave the country without consent of the OA;
A bankrupt cannot be employed by a relative or take part in the management or control of any business without consent of the OA; and
A bankrupt is prevented from employment in numerous professions such as auctioneers, officer of a charitable entity, motor vehicle trader and so on.
Bankruptcy considerations
In some communities, professions or circles, bankruptcy has a negative stigma attached to it. However, many individuals are adjudicated or volunteer themselves to bankruptcy and it does not necessarily have the same stigma attached as it once did. Life can continue beyond bankruptcy, and it does for many individuals in New Zealand
Being chased by creditors can be a substantial burden. Bankruptcy can be a good way to end that stress. However, the implications of bankruptcy can be long lasting in some cases and is not always a suitable solution. A debtor is considered bankrupt for a term of 3 years upon admission to this scheme and details of this are on the Insolvency Register for the entire term plus 4 years after discharge. In some cases, this term can be extended if the circumstances warrant an extension.
In many cases, there are alternatives to bankruptcy for debtors in financial turmoil. We have published a number of these articles on our website and encourage you to read these or book in for a consultation with us if you would like to discuss your options.
Sound, strategic advice is necessary to navigate the process or to navigate the alternatives to the process.
Before applying for bankruptcy, it is important to ensure you are fully informed of the process and the effect it will have on you and your day-to-day life.
If you would like a confidential no obligation discussion with one of our solicitors please book in here:
Creditors’ limited ability to pursue directors for breach of duties
The facts of Banks v Farmer [2021] NZHC 1922 will sound familiar to many. A gap in the market is identified and a business is set up to fill that gap. The issue many of these start-up businesses face is trying to convince investors to support them. Upon securing an investor there is subsequent pressure placed on the directors to make good on that investment. But sometimes everything might turn sour, with investors left trying to recover the money they put into these ventures.
The background of this case centres around a company named Mako Networks Holdings Limited (Mako), the company operated within the technology security market and the development of technological solutions for this area. Adam Banks (Mr Banks) was an investor in Mako, between 2011 and 2014 he had invested over $3.2 million in unsecured loans. Unfortunately, Mako was placed into liquidation and receivership when it owed creditors $34.5 million. Mr Banks brought these proceedings against the four directors of Mako (the Directors) on the basis they did not act in accordance with their obligations as directors.
Section 301 of the Companies Act 1993
Section 301 of the Companies Act 1993 (the Act) provides the High Court with the power to require a director (amongst other persons) to repay the money or return property of the company, or to make a contribution to the assets of the company by way of compensation. Under this section, liquidators, creditors, and shareholders are given the opportunity to make an application to the Court which is only triggered when the company in question is in liquidation.
An order made under this section will qualify as a judgment debt, therefore enabling liquidators, creditors, and shareholders to hold directors personally liable, resulting in the commencement of bankruptcy proceedings, if necessary, to enforce payment.
Application in Banks v Farmer
In the High Court decision, the third cause of action against the defendants was for a breach of their directors’ duties. Specifically, their failure to act in good faith and the best interests of the company, for carrying on business in a manner that was likely to create a substantial risk of serious loss to creditors, and for letting the company incur obligations that it was not able to perform and for their failure to exercise the care, diligence, and skill that a reasonable director would exercise in those circumstances.
Mr Banks relied on s 301(1)(c) of the Act to claim relief in the sum he advanced to Mako. In the alternative, Mr Banks sought the defendants restore or contribute $29,897,000.00 to Mako. He specifically referred to s 135 (reckless trading), s 136 (improperly incurring obligations), and s 137 (failing to exercise reasonable skill and care) as the directors’ duties that were breached.
In his discussion of the case, Moore J referred to the purpose of the Act regarding directors’ duties stating “Directors’ duties are not intended to prevent the taking of legitimate business risks or constrain genuine business judgment, but rather to protect shareholders and creditors against illegitimate abuses of directors’ power.” Moore J referenced that directors’ duties under ss 135 and 136 aim to protect shareholders and creditors from the directors taking big risks. These sections are intended to discourage directors from increasing their company indebtedness. Moore J also referenced that s 135 should only penalise illegitimate risk-taking. It was decided that there was no breach of s 135 before April 2014, and therefore this section failed.
Under s 136 it has to be established that when obligations were entered into a director of a company did not believe a company would be able to perform these obligations. Or that if there was a belief, it was an unreasonable one. Moore J also decided this section would fail as the defendants subjectively believed on reasonable grounds that Mako would be able to meet its obligation to Mr Banks as those obligations were due.
Section 137 relates to a duty of care. Moore J considered that by mid-2014, the Directors of Mako should have been aware of its looming cash flow issues. He considered that without a multi-million dollar contract coming into play, the company would not be able to meet its obligations. As such “at that point, a reasonable director, exercising due care, diligence, and skill, would have caused Mako to cease trading and go into liquidation” and it was concluded that a breach of s 137 was found.
Section 301 as a remedy for creditors
As s 137 was found to have been breached by the Directors, Moore J considered whether s 301(1)(c) could be used as a remedy with Mako no longer being at liquidation at the time of the trial.
Moore J held that s 301(1)(c) was unavailable as a remedy to Mr Banks as Mako was no longer in liquidation. At the time the proceedings were initiated, Mako was in liquidation, however, before the trial had begun, Mako was removed from the register. Moore J referred to the practical issues regarding the varying lengths of trials and securing a court date after an application has been filed. However, the law is clear, and the company must be in liquidation, otherwise, there will be no directors of a company to be held liable. It was noted that Mr Banks could have made an application under s 239 of the Act to restore Mako as a company. Yet, no applications were made.
The second consideration under this section was whether creditors could be personally compensated for a breach of directors’ duties. Moore J concluded that directors’ duties are owed to the company, not to specific creditors. As such, only a company is entitled to receive a remedy for a breach of directors’ duties. Moore J reviewed two conflicting decisions of the High Court on this issue. In Mitchell v Hesketh [1998] 8 NZLC 261,559 (HC), Master Venning was of the view there is a limit on the approach for creditors to obtain personal compensation. Where the claim was for “negligence, default, or breach of duty or trust about the company, the Court may only award relief by ordering that the director pay compensation to the company under s 301(1)(b)(ii).”
In the alternative decision, in Marshall Futures Ltd (in Liq) v Marshall [1992] 1 NZLR 316 (HC), Tipping J was of the view s 301(1)(c) permits creditors to be personally compensated in limited circumstances. Tipping considered whether “moneys which are the subject of the declaration of personal responsibility are payable to the company…for the benefit of the creditors of the company as a whole or whether they are payable directly to the creditor.” His conclusion was that monies would be payable if the claim was payable to the creditor directly, without needing the liquidator to be involved. However, this authority was not helpful to Mr Banks, as the liquidator would have had to be notified of the claim, which did not occur.
Conclusion of Moore J – what it means for creditors
In the decision Moore J decided in favour of the defendants, holding that Mr Banks was unable to recover directly under s 301(1)(c). Section 301(1)(c) allows the Court to order directors to pay or transfer money or property directly to applicant creditors. However, a relief under this section can only be ordered where a director has misappropriated specific funds or property. This was not the case in this case so there could be no relief ordered to Mr Banks. In this case, the directors were found in breach of directors’ duties, but not misappropriation.
Section 301(1)(b) allows for relief where there has been a breach of director duties (as was the case here), however, this section provides for such relief to be paid to the company (as opposed to directly to the creditor) and then liquidators could make distributions to creditors. Section 301(1)(b) allows for the pool of assets in a liquidation to increase as the Court can order a person to repay or restore money or property with interest, or to contribute a sum to the assets of the company by way of compensation. However, at the time of the trial, Mako was no longer in liquidation and had been struck off the companies register. As such, Mr Banks was not able to utilise s 301 as a creditor as there was no company in existence that could receive the payment.
This decision highlights the importance of having security over your investments in a company. In this case, Mr Banks was left without any proper avenue for recourse under s 301.
The ins and outs of creating a shareholders agreement
The start of a new business venture is an exciting opportunity. One would hope all involved parties only have the best intentions in mind. In our experience, although these relationships start on a positive note external factors and influences can create a shift in position. This can turn the business relationship sour virtually overnight. In these situations, a robust shareholders agreement will be of indisputable value.
A business is like a marriage
It is imperative to have good communication skills and the ability to resolve and manage conflicts in both business and marital relationships. Without these skills, it will be difficult for all parties to build and maintain trust and confidence in one another, especially when it comes to overcoming challenges. A successful relationship needs clearly defined boundaries, goals, and a mutual understanding of what’s working, and what isn’t, and how to better collaborate to ensure these goals are met.
People often get caught up by the excitement of a new opportunity and rush into business relationships without first setting a strong and stable foundation. Without careful thought into the business or relationship it will be more susceptible to tough periods.
Disputes are inevitable
Shareholder disputes are inevitable. In our experience shareholder disputes in declining companies are just as common as disputes in successful companies. Arguably, it is more common for successful companies to have shareholder disputes. Rapid growth and high cash flow can cause shareholders to have a shift in perspective, leading to a potential conflict of interest as to how the company should be run in this new and exciting stage.
The taste of success or the prospect of doom can affect even the humblest of business partners and cause a dispute. However, it will be how you handle said dispute that will determine the solution.
If you fail to prepare, prepare to fail.
It is better to be safe than sorry, especially in situations where money and reputation are on the line.
Our past clients will tell you that it’s easier to agree on set rules and boundaries when the relationship is good, rather than in the face of a dispute. When a business relationship turns sour trust can be fleeting resulting in more time and money spent on negotiating a mutually agreeable outcome. If there are more than two shareholders involved the situation can evolve into an exercise of whose side to pick.
A simple sit-down conversation at the beginning of a business relationship has helped our prior clients:
Learn more about the character, beliefs, and general position of their (potential) business partner(s);
Communicate with their (potential) business partner(s) what is fundamentally important to them;
Realise what needs to be documented to help safeguard the best interests of the parties and the company moving forward; and
Sometimes, decide not to be involved with the other person(s) in business.
In saying this, great care needs to be taken when it comes to creating the shareholders agreement itself. Unlike other legal documents, a standard template will not be of value. Each shareholder agreement must be the product of the circumstances and the discussions of the individual shareholders.
A good shareholders agreement is a ‘living’ document. A well drafted agreement will encompass a wide range of possible scenarios and will provide solutions/guidance on each occasion. Shareholders agreement can also be regularly updated with the consent of all participating parties. In comparison, a standardised document will not be of use when push comes to shove. The upfront cost of preparing robust documentation is easily justified if a business relationship sours and lawyers are called in to fight.
If it all goes wrong
Sometimes, even with good documentation, disputes are inevitable and Court intervention may be required.
This is where our innovative solutions for shareholder disputes provide clients with the most value.
We are specialist lawyers who resolve commercial disputes and can help you strategically navigate any commercial dispute or Court action quickly and efficiently. If you want to talk, schedule a no obligation 30-minute consultation with our experts here:https://norlinglaw.co.nz/consultation/
Overall, the key takeaways are:
Shareholder disputes are extremely costly to resolve.
They can be avoided if you have a robust, well-drafted, and well-considered shareholders agreement put in place.
Unfortunately, there is some upfront cost for this, but that is easily justified when a dispute arises, or shareholders wish to part ways.
Sometimes Court intervention is unavoidable. For the best result, you should engage transparent expert commercial lawyers who can tackle your problems strategically and efficiently.
The recent decision of Bassett 43 Limited (In Receivership) v Montgomerie [2022] NZCA 483 from the Court of Appeal reinforces the powers the Receiverships Act 1993 (the Act) instills in appointed receivers of failing companies. In that case, Damien Grant (the Receiver) as receiver of Basset 43 Limited (In Receivership) (Bassett) was successful in his argument that Andrew Montgomerie (Mr Montgomerie), the director of Bassett, was obligated to provide the Receiver with all the books, records, and documents of Bassett in his possession or control. This Court of Appeal’s decision has overturned the decision of the High Court which wrongly held that the Court had no jurisdiction to grant the orders sought by the Receiver because Mr Montgomerie was an adjudicated bankrupt at the time of the Receiver’s application.
Receivership – a brief explanation
Receiverships typically commence when a secured creditor appoints a receiver to a company. This can be caused by the company failing to pay owing funds to the secured creditor or through other event of default committed by the company.The Court also has powers to appoint a receiver, although this is less common in practice.
A receiver’s role is to take control of the assets in receivership and to generate cash either by profitable trading and/or by selling some or all of the assets and distributing the proceeds to the appointing creditor.
Receiver’s powers can usually be located in the security agreement between the company and secured creditor, however, s 14(2) of the Act also sets out the powers of a receiver. Such powers include powers to inspect, at any reasonable time, books or documents which relate to the property in receivership, and that are in the possession or under control of the grantor. In order to fulfil their position as a receiver, it is imperative a receiver exercises their powers to inspect all the relevant company documents.
The Receivership of Bassett
Bassett was incorporated in 2017 as a company specialising in the building of residential flats, home units, and apartments. The sole director of the company was Mr Montgomerie. During its trading period, Bassett had plans to build a hotel on Hobson Street in Auckland. In anticipation of this project, Bassett borrowed $21 million from FE Investments Limited (in Receivership and in Liquidation) (FE). This hotel was never built.
On 6 April 2020, the Receiver was appointed by First Light Capital Limited as per the powers within a security agreement dated 22 November 2017. The Receiver then began his investigation into where the $21 million from FE had been used, as it had not been used to build a hotel as anticipated.
The Receiver, on a number of occasions, requested Mr Montgomerie, as director of Bassett, to provide him with information of the property and affairs of Bassett. Section 12(1) of the Act provides that every director of the grantor must “make available to the receiver all books, documents and information relating to the property in receivership in the grantor possession or under the grantor’s control.”
These requests were subsequently ignored, and the Receiver relied on ss 12(2) and 14 of the Act, making an application to the High Court for an order that Mr Montgomerie was to produce books, records, and documents of Bassett.
The High Court decision
The argument of Mr Montgomerie in response to the Receiver’s application to the High Court was that before the Receiver had made the application under s 12(2) of the Act, Mr Montgomerie was adjudicated bankrupt. Upon the commencement of bankruptcy, an individual may not carry-on business as a director of a company. As such, Mr Montgomerie argued as he was no longer director of Bassett, he had no obligation to provide the documents requested by the Receiver as s 12(2) applied only to the acting directors.
The High Court agreed with Mr Montgomerie, holding that the s 12(2) application was outside of their jurisdiction as Mr Montgomerie was no longer a director of Bassett at the time of the Receiver’s application. The judge also dismissed an argument raised under s 34 of the Act, that this section provides for receivers to obtain directions from the High Court in order to perform their functions properly.
This decision caused a grey area. How could a receiver be expected to carry out their receivership of a company, acting in the best interests of their appointer, if there is a loophole where the director of a company in receivership can adjudicate themselves bankrupt and be excused of any obligation to disclose documents?
The Court of Appeal decision
The Receiver did not accept the decision of the High Court and appealed to the Court of Appeal. Mr Botterill, on behalf of the Receiver, argued that ss 12 and 14 of the Act give the Receiver powers to obtain any relevant documents that relate to the property in receivership. Mr Botterill also argued that s 34 should be read broadly, in order to allow the Court to make orders against Mr Montgomerie.
Goddard J of the Court of Appeal rightly stated “the term “director” includes both current and former directors. If it did not include former directors, that would undermine the purpose of s 12 and of the Receiverships Act more generally.” The Court of Appeal heavily investigated the context and purpose of ss 12 and 14 of the Act.
The Court referred to the nature of small businesses in New Zealand, emphasising the commonality of directors holding all company records and having their home addresses listed as the company’s address for service. The Court held that it would “frustrate the purpose of s 12 of the Receiverships Act if the term “director” did not extend to former directors.” Goddard J further emphasised the grey area the High Court decision created, stating that purely because a former director of the company in question enters bankruptcy, this does not negate the requirement for receivers to gain access to information on the company they have been appointed to. Due to the nature of small businesses in New Zealand, a receiver will not be well-versed in the affairs of a company without having access to all the relevant documents and property.
The Court referred to arguments made by counsel for Mr Montgomerie that this decision would impose obligations on all former directors even if they held office many years ago. Goddard J simply reminded counsel that all relevant documents should have been passed to the current director.
Mr Montgomerie also argued that he did not have any relevant documents to provide and as such, no orders should be made. The Court did not agree with his assertion, emphasising his duty as a director to keep proper records of Bassett.The Court made an order requiring Mr Montgomerie to “provide to the Receiver all books, records, and documents of Bassett 43 Ltd in his possession or control.” The court also awarded costs to the Receiver.
Takeaways from the case
This case emphasises the Court’s unwillingness to allow business owners to use insolvency procedures as an escape from duties. The decision has overturned the controversial decision of the High Court and reinforces the fact that every director, whether former or current, holds obligations and duties to the company and its creditors.
This decision also highlights the importance of understanding the intended purpose of each statute in New Zealand. In this case, the purpose of the Act shows that all receivers have duties to their appointers and if they are prohibited from conducting their receivership in the proper way, this will undermine the purpose of receivership and deduct from its usefulness.
