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.
Brent is the Director of Norling Law. He has a wealth of experience in the District Court, High Court, Court of Appeal and Supreme Court. Brent is passionate about negotiating favourable outcomes for his clients and able to implement this in his daily negotiations.
Lucia Krajancic
Lucia graduated from Victoria University of Wellington with a Bachelor of Laws and Bachelor of Arts majoring in Criminology and was admitted to the bar in October 2022.
Anna practices in the area of commercial litigation and has appeared as Counsel in the District Court, High Court and the Court of Appeal, having successes in all Courts. Anna has a special interest in corporate, insolvency and relationship property law.