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.
Importance of updating company address details on the Companies Register
It is important to keep the company’s address details on the Companies Register updated at all times. Yet, we often come across situations where this does not happen, and what seems like a small omission may lead to serious consequences. For example, important legal documents can be missed, and consequently, judgment can be entered into against the company without the company’s knowledge. Further, there can be personal consequences for company directors under the Companies Act 1993 (“the Act”) if the registered address is unmanaged.
Requirement under the Act
A company must always have:
A physical registered office in New Zealand. This is the address where the company’s records (described under s 189 of the Act) are stored.
A physical address for service in New Zealand, which can be the same as the registered office or another place. This is the address where legal documents are served.
The registered office and address for service of a company at any particular time are the places that are described as those on the Companies Register at that time. This information is publicly available on the Companies Register website.
Subject to the company’s constitution, the Board of the Company can change the registered office or addresses for service at any time. If the registered office or address for service change, then notice of that change (in the prescribed form) must be given to the Registrar of Companies. Otherwise, the registered office or address for service will remain in the previous place specified on the Companies Register.
Also, s 188 of the Act allows the Registrar of Companies to require a company to change its registered office by notice in writing. In such a case, a company will have two options: change its registered office by the date stated in the notice; or appeal to the Court. Failure to comply with s 188 is an offense and renders every director of the company liable on conviction to a fine not exceeding $5,000.
If the company’s records are moved to a location other than the registered office, a notice of this must be given to the Registrar of Companies within 10 working days. If the company fails to comply with this requirement, the company and every director personally commit an offense and are liable on conviction to a penalty not exceeding $10,000.
Risks of not updating address details
Section 387 of the Act prescribes how documents in legal proceedings are to be served on New Zealand registered companies. There are several options to serve, however, service by leaving the documents at the company’s registered office or address for service are the most commonly used options. If the office is closed, the documents in question can simply be affixed to the front door.
As a result, if the company’s office or address for service is not updated, the company may risk missing essential legal documents, notices, and deadlines and be subjected to a judgment entered against them or, worse, liquidation proceedings. In our experience, unfortunately, this is common. While in certain circumstances it could be possible to reverse judgment or order that was entered into without the company knowing it, this process is expensive and procedurally complicated as an application to Court would be required.
If any of the addresses are in a building with other businesses, it is equally important to provide full details of the address, such as the level of the building, office number, and/or name. If no details are provided, the service of documents could be conducted anywhere in the building. This could again result in the essential documents being unnoticed by the company.
If the company suffers a detriment as a result of the addresses not being properly maintained on the Companies Register, the director could be personally liable for breach of his director duties.
It is also important to ensure that the address that is stated as the company’s office or the address for service is checked regularly. Some documents, such as statutory demands, when served, have a very strict and short timeframe for compliance, or making an application to set it aside. If that time lapses, the consequences could be serious as there is a risk that the company will be liquidated. If the address is not checked regularly (for example, staff usually work offsite), it is recommended that the registered office and/or address for service are at another location, such as the accountant’s or solicitor’s office.
Our expert receivership lawyers assist clients to navigate this process throughout New Zealand. There are many pitfalls if implemented incorrectly.
Please refer to our People for more information on who we are, our experience, and how we can help you.
Most commonly, receiverships commence when a secured creditor appoints a receiver to a company in cases where the company owes funds but fails to pay on time, or the company is in another kind of default to the secured creditor. The Court can also appoint a receiver in certain circumstances but this does not occur as often in practice.
Once appointed, a receiver may take possession of, manage, and sell some or all of the company’s assets.
Appointment of a Receiver
A secured creditor’s right to appoint a receiver is purely contractual; it will depend on the wording of the security agreement. It should be noted, however, that in practice most security agreements include the power to appoint a receiver. Likewise, the receiver’s powers are not only set out within legislation but also under an underlying contract allowing the receiver to be appointed in the first place.
Most of these security agreements require that a formal demand of any outstanding debt is made before an event of default that triggers the right to appoint a receiver occurs.
It is important to review these documents once a company shows signs of financial distress and enforcement options are considered. At Norling Law, our experts are experienced in dealing with receiverships and offer aFREE 30-minute Legal Consultation where they can discuss the issues and add strategic value.
Status of Receivership
The appointment of a receiver does not change the legal status of the company; the company is still the same legal entity as it was prior to the receivership. Generally, the legal rights of the company in receivership are not limited by a receivership. The company can still commence or continue legal proceedings and its contractual and property rights are generally unaffected.
Some contracts with third parties, however, expressly provide for termination of the contract if one of the contracting parties is placed into receivership. Subsequently, it is important to review all contracts to see if they are potentially affected by a receivership of either of the contracting parties.
Powers of a Receiver
The security agreement itself is usually the fundamental source of the receiver’s powers. However, these powers are also supplemented by the provisions of s 14(2) of the Receiverships Act 1993 (“the Act”). These statutory powers are subject to the deed or agreement or the order of the court by or under which the appointment was made.
It is advised that all powers that are intended to be granted to a receiver are expressly included in the security agreement, as some powers, such as the power of sale, are not expressly included under the Act.
Likewise, it is advised that powers that are not intended to be granted to a receiver are expressly excluded in the security agreement if they have been statutorily included under s 14(2) of the Act.
Examples of powers usually granted to a receiver are:
Power to collect and sell the debtor company’s assets;
Power to operate the debtor company’s business;
Power to restructure the debtor company’s affairs;
Power to borrow for the purpose of the receivership;
Power to execute all necessary documents on behalf of the debtor company;
Power to commence and conduct legal proceedings in the name of the debtor company;
Power to apply to Court for directions in relation to any matter arising in connection with the performance of the functions of a receiver; and
Power to take remuneration and indemnity.
The basic function of a receiver is to take control of the assets in receivership and to generate cash through profitable trading, or more commonly, the sale of all or some of the assets and pay the proceeds to the appointing creditor.
Duties of a Receiver
The receiver must exercise his or her powers in a manner he or she believes, on reasonable grounds, to be in the best interests of the appointing creditor (s 18(2) of the Act). Although a receiver must exercise his or her powers in good faith and for a proper purpose (s 18(1) of the Act), a receiver may not always act in the best interests of the company or other creditors, to the extent that s 18(3) of the Act applies. Subsequently, this means that a receiver’s primary duty is to the appointing creditor, and a subservient secondary duty is to have reasonable regard to the interests of the debtor company and its other creditors.
Receivers also have reporting obligations that they must abide by. Not later than 2 months after the appointment, a receiver must prepare a report on the state of affairs with respect to the property in receivership including:
Particulars of the assets comprising the property in receivership; and
Particulars of the debts and liabilities to be satisfied from the property in receivership; and
The names and addresses of the creditors with an interest in the property in receivership; and
Particulars of any encumbrance over the property in receivership held by any creditor including the date on which it was created; and
Particulars of any default by the grantor in making relevant information available; and
Such other information may be prescribed.
The report must also include details of:
The events leading up to the appointment of the receiver so far as the receiver is aware of them; and
Property disposed of and any proposals for the disposal of property in receivership; and
Amounts owing, as at the date of appointment, to any person in whose interests the receiver was appointed; and
Amounts owing, as at the date of appointment, to creditors of the grantor having preferential claims; and
Amounts likely to be available for payment to creditors other than those referred to in paragraph (c) or paragraph (d).
The grantor and any person whose interests the receivers were appointed are entitled to receive the report. Furthermore, any creditor, director, or surety of the grantor, or any person with an interest in any of the property in receivership may request a copy of the report.
Receivers must also, no later than 2 months after each period of 6 months after their appointment, or the date on which the receivership ends, prepare a report summarising the state of affairs with respect to the property in receivership, including all amounts received and paid during the period that the report relates to.
This report must include details of:
Property disposed of since the date of any previous report and any proposals for the disposal of property in receivership; and
Amounts owing, as at the date of the report, to any person in whose interests the receiver was appointed; and
Amounts owing, as at the date of the report, to creditors of the grantor having preferential claims; and
Amounts likely to be available as of the date of the report for payment to creditors.
Summary
Receiverships are notoriously contentious; in every receivership, there are emotional and frustrated parties. It can be an arduous process to navigate for all parties involved. Whether you are a creditor wanting to enforce a security agreement to appoint a receiver, a receiver managing the assets of a company, or a director of a debtor company, Norling Law can assist you to ensure that a commonly stressful, contentious process is made smoother.
Our expert receivership lawyers assist clients to navigate this process throughout New Zealand. There are many pitfalls if implemented incorrectly.
Please refer to our People for more information on who we are, our experience, and how we can help you.
