The High Court has clarified the scope of directions under s 284(1)(a) of the Companies Act (the Act).
Liquidators are considered officers of the Court and operate under the Court’s supervision. Pursuant to s 284(1)(a) of the Act, a liquidator may apply to the Court for directions in relation to any matter arising in connection with the liquidation. Generally, if a liquidator has obtained directions from the Court, they will have immunity from claims when following those directions.
In Dalton v Mackley, the liquidators applied for directions under s 284(1)(a) of the Act, specifically, they requested directions that certain assets set out in a purchase order are owned by the company and delivered to the company by the respondent.
In this case, the liquidators say that the company owned the assets. They say that they were transferred from Mr Mackley to the company.
Mr Mackley disagreed. He said that the assets were not actually transferred as the transaction never completed.
As such, the ownership of the assets were in dispute.
Despite this dispute, the liquidators sought directions from the Court, declaring the assets to be owned by company in liquidation.
This essentially asks the Court to provide judgment, to determine ownership of the assets. Norling Law acted on this matter. It was our submission that it was inappropriate for the proceeding to be commenced under s284 of the Act. This is because s 284 of the Act is about either supervising liquidators or providing them with directions.
It is not about determining substantive property or contractual rights.
Where substantive rights are to be determined, a proper, full process is required. A process that will allow for:
- Proper pleading;
- The opportunity for discovery.
- The opportunity to interrogate.
- The opportunity to cross examine witnesses.
It was our view that this shortcut is inappropriate.
A handy starting point is the section itself:
S 284 Court supervision of liquidation
(1) On the application of the liquidator, a liquidation committee, or, with the leave of the court, a creditor, shareholder, other entitled person, or director of a company in liquidation, the court may—
(a) give directions in relation to any matter arising in connection with the liquidation:
(b) confirm, reverse, or modify an act or decision of the liquidator:
(c) order an audit of the accounts of the liquidation:
(d) order the liquidator to produce the accounts and records of the liquidation for audit and to provide the auditor with such information concerning the conduct of the liquidation as the auditor requests:
(e) in respect of any period, review or fix the remuneration of the liquidator at a level which is reasonable in the circumstances:
(f) to the extent that an amount retained by the liquidator as remuneration is found by the court to be unreasonable in the circumstances, order the liquidator to refund the amount:
(g) declare whether or not the liquidator was validly appointed or validly assumed custody or control of property:
(h) make an order concerning the retention or the disposition of the accounts and records of the liquidation or of the company.
(2) The powers given by subsection (1) are in addition to any other powers a court may exercise in its jurisdiction relating to liquidators under this Part, and may be exercised in relation to a matter occurring either before or after the commencement of the liquidation, or the removal of the company from the New Zealand register, and whether or not the liquidator has ceased to act as liquidator when the application or the order is made.
(3) Subject to subsection (4), a liquidator who has—
(a) obtained a direction of a court with respect to a matter connected with the exercise of the powers or functions of liquidator; and
(b) acted in accordance with the direction—
is entitled to rely on having so acted as a defence to a claim in relation to anything done or not done in accordance with the direction.
(4) A court may, on the application of any person, order that, by reason of the circumstances in which a direction was obtained under subsection (1), the liquidator does not have the protection given by subsection (3).
The purpose of s 284(1)(a) was considered by Associate Judge Paulsen in Dalton v Mackley in depth, stating that, prima facie, the Court had the power to make a wide variety of orders in its supervisory jurisdiction over liquidators.
This was the first fully reasoned consideration of s 284(1)(a) in this context in New Zealand.
Despite s 284(1)(a)’s broad wording, the Associate Judge confirmed the purpose and wording of the section, that is, to allow for expedient proceedings without particularised pleadings, or where there are no significant factual disputes.
Paulsen AJ further states that the text of s 284 and other indications provided by the Companies Act do not support the interpretation of making binding orders in the nature of judgments, rather, they support the view that the proper subject of directions should be confined to the manner in which a liquidation should be carried out under the control of the liquidator.
Further, Paulsen AJ considered s 284(3) of the Act, stating that the protection offered by the provision was concerned with the proper discharge of a liquidator’s functions, and that the protection was offered against allegations of breach of duty by creditors and shareholders. Accordingly, in the present scenario, it would not be of much use.
As there had been relatively little discussion as to the scope of the type of directions that can be sought under s 284(1)(a) in New Zealand, we referred his honour to Australian provisions under the corresponding legislation.
The position in Australian Courts is unambiguous. It has a long history.
The Australian position did not enable the Court to make binding orders in the nature of judgments when asked for directions by a liquidator.
The Associate Judge found comfort in relying more heavily on Australian authorities, noting that Kelly (Liquidator), in the matter of Halifax Investment Services Pty Ltd (in liq) v Loo (Kelly v Loo) was heard concurrently with Re Halifax New Zealand Ltd (in liq) v Loo, in the Federal Court of Australia and the High Court of New Zealand respectively, with the Federal Court emphasising the desirability in a consistency of approach between the two jurisdictions.
It is unfortunate that this matter needed to be litigated. It is of a modest amount.
In our practice, we see countless examples of modest claims being pursued by liquidators in the hopes of shaking money out of inexperienced or under resourced litigants. It can be tough for counterparts of liquidators to succeed given the resource imbalance.
This case demonstrates the risk to liquidators in taking short cuts. Sometimes those who take short cuts get cut short.
We welcome this clarification by the High Court, as this issue had not been previously examined in depth. We trust that this will ensure a clear boundary for liquidators moving forward.
Please refer to our People for more information on who we are, our experience, and how we can help you.
Our office is located on the North Shore in Auckland, New Zealand, or can have the consultation by phone.